-----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, BfBLSZ4QgctujRoPYsIxnomuZ0sPLzWlSjaiWNnfb7IEVrJGoephF4uPiIWjG40E c1O1SAXF3RjlhZCbAo1elw== 0000711393-99-000003.txt : 19990331 0000711393-99-000003.hdr.sgml : 19990331 ACCESSION NUMBER: 0000711393-99-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99578643 BUSINESS ADDRESS: STREET 1: 265 FRANKLIN ST 15TH FL CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174398141 MAIL ADDRESS: STREET 1: 265 FRANKLIN STREET 15TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 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, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ______ to _______ . Commission File Number: 0-17151 PAINEWEBBER/CMJ PROPERTIES LP -------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-2780288 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 265 Franklin Street, Boston, Massachusetts 02110 - -------------------------------------------------------------------------------- (Address of principal executive offices) (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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|. State the aggregate market value of the voting stock held by non-affiliates of the registrant. Not applicable. DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference - --------- ------------------- Prospectus of registrant dated Part IV May 25, 1983, as supplemented PAINE WEBBER/CMJ PROPERTIES, LP 1998 FORM 10-K TABLE OF CONTENTS Part I Page Item 1 Business I-1 Item 2 Properties I-3 Item 3 Legal Proceedings I-3 Item 4 Submission of Matters to a Vote of Security Holders I-3 Part II Item 5 Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters II-1 Item 6 Selected Financial Data II-1 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations II-2 Item 8 Financial Statements and Supplementary Data II-8 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure II-8 Part III Item 10 Directors and Executive Officers of the Partnership III-1 Item 11 Executive Compensation III-2 Item 12 Security Ownership of Certain Beneficial Owners and Management III-3 Item 13 Certain Relationships and Related Transactions III-3 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1 Signatures IV-2 Index to Exhibits IV-3 Financial Statements and Supplementary Data F-1 to F-79 This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Partnership's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in Item 7 in the section entitled "Certain Factors Affecting Future Operating Results" beginning on page II-6 of this Form 10-K. PART I Item 1. Business Paine Webber/CMJ Properties, LP (the "Partnership") is a limited partnership formed in December 1982 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing in a portfolio of local limited partnerships owning apartment projects which received governmental assistance in the form of low interest rate mortgages and rent subsidies. The Partnership sold $8,745,000 in Limited Partnership units (8,745 units at $1,000 per unit) from May 1983 to April 1984, pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933 (Registration No. 2-81003). In addition, the Initial Limited Partner contributed $1,000 for one unit (a "Unit") of Limited Partnership Interest. Limited Partners will not be required to make any additional capital contributions. As of December 31, 1998, the Partnership owned, through local limited partnerships, interests in six apartment properties as set forth in the following table: Percent Name of Local Interest in Limited Partnership Date of Local Limited Name of Property Acquisition Partnership Location Size of Interest (1) (2) - -------- ----- ----------- ----------- Fawcett's Pond Apartments Company Village at Fawcett's Pond 100 6/30/83 95% Hyannis, Massachusetts units Quaker Meadows Apartments Company Quaker Court and The Meadows 104 6/30/83 95% Lynn, Massachusetts units South Laurel Apartments Limited Partnership Villages at Montpelier 520 6/30/83 85% Laurel, Maryland units Marvin Gardens Associates Marvin Gardens 37 7/29/83 95% Cotati, California units Colonial Farms Ltd. Colonial Farms 100 7/29/83 95% Modesto, California units Holbrook Apartments Company Ramblewood Apartments 170 8/30/83 85% Holbrook, Massachusetts units (1) The Partnership owns limited partnership interests in the local limited partnerships owning the apartment properties and improvements. (2) See Notes to the Financial Statements filed with this Annual Report for current outstanding mortgage balances and a description of the long-term mortgage indebtedness collateralized by the operating property investments of the local limited partnerships and for a description of the local limited partnership agreements through which the Partnership has acquired these real estate investments. The Partnership's original investment objectives were to invest the net cash proceeds from the offering of limited partnership units in rental apartment properties receiving various forms of federal, state or local assistance with the goals of providing: (1) tax losses from deductions generated by investments; (2) capital preservation; (3) potential capital appreciation; and (4) potential future cash distributions from operations (on a limited basis), or from the sale or refinancing of the projects owned by the local limited partnerships, or from the sale of interests in the local limited partnerships. The Partnership has generated tax losses since inception. However, the benefits of such losses to investors have been significantly reduced by change in federal income tax law subsequent to the organization of the Partnership. The Partnership continues to retain an ownership interest in all six of its original operating investment properties. As of December 31, 1998, all of the properties are generating sufficient cash flow from operations to cover their operating expenses and debt service payments, and all of the properties are generating excess cash flow, a portion of which is being distributed to the Partnership on an annual basis in accordance with the respective regulatory and limited partnership agreements. Due to improvements in cash flow and the strong operating performances of the investment properties, management had instituted a program of regular quarterly distributions in 1994 at an annual rate of 2% on original invested capital. During 1996 distributions to the Partnership from the local limited partnerships declined, causing management to suspend distributions effective for the fourth quarter of 1996. In the future, to the extent there is distributable cash flow from the properties after the payment of Partnership management fees and operating expenses, the Partnership plans to make an annual distribution payment. Because of ongoing capital expenditure requirements at the properties, the Partnership did not make an annual distribution payment to the Limited Partners in 1997. Based on improved cash flow from the properties in 1998, the Partnership made an annual distribution payment in November 1998 at an annual rate of 2% on original invested capital. The ability to make future distributions of operating cash flow will continue to be assessed on an annual basis in the fourth quarter of each year. The Partnership's success in meeting its capital appreciation objective will depend upon the proceeds received from the final sales of its investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot presently be determined. Because of the government restrictions on rental revenues and the related capital expenditure reserve requirements and cash flow distribution limitations, there are a limited number of potential buyers in the market for government subsidized, low-income housing properties the Partnership has invested in. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Accordingly, management does not expect the General Partners of the local limited partnerships, which receive management fee revenues from the properties, to attempt to sell any of the properties in the near term. As discussed further in Item 7, as a limited partner in the local limited partnerships, the Partnership's ability to influence major business decisions, including any decision to sell the properties, is restricted under the terms of the agreements. All of the properties owned by the local limited partnerships in which the Partnership invested are located in real estate markets in which they face competition for the revenues they generate. The Partnership's apartment complexes, all but one of which are currently government-assisted, low-income housing facilities, compete with several projects of similar type generally on the basis of price, location and amenities. The sixth property had been partially subsidized until July 1997 when the subsidy agreement expired. This property has transitioned to a 100% market rent facility and now competes with other non-subsidized properties in its local sub-market. The tenants at the Partnership's subsidized apartment properties are not as likely to be candidates for single-family home ownership as tenants of non-subsidized properties would be. Therefore, competition from the single family home market is not a significant factor. The Partnership is engaged solely in the business of real estate investment, therefore, presentation of information about industry segments is not applicable. The Partnership has no real estate investments located outside the United States. The Partnership has no employees; it has, however, entered into an Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"), which is responsible for the day-to-day operations of the Partnership. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated (PWI), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber"). The Managing General Partner of the Partnership is PW Shelter Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser. The associate general partner is Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. The terms of transactions between the Partnership and affiliates of the Managing General Partner of the Partnership are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions. Item 2. Properties The Partnership has acquired interests in six operating properties through investments in local limited partnerships. The local limited partnerships and related properties are referred to under Item 1 above to which reference is made for the description, name, location, and ownership interest in each property. Occupancy figures for each quarter during 1998, along with an average for the year, are presented below for each property: Percent Occupied At -------------------------------------------- 1998 3/31/98 6/30/98 9/30/98 12/31/98 Average ------- ------- ------- -------- ------- Village at Fawcett's Pond Apartments 100% 100% 100% 100% 100% Quaker Court and The Meadows 100% 98% 100% 100% 99% Villages at Montpelier Apartments 96% 94% 96% 92% 94% Marvin Gardens Apartments 100% 97% 100% 100% 99% Colonial Farms Apartments 100% 99% 100% 99% 99% Ramblewood Apartments 100% 98% 100% 100% 99% Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters At December 31, 1998 there were 844 record holders of Units in the Partnership. There is no public market for the Units, and it is not anticipated that a public market for Units will develop. Upon request, the Managing General Partner will endeavor to assist a Unitholder desiring to transfer his Units and may utilize the services of PWI in this regard. The price to be paid for the Units will be subject to negotiation by the Unitholder. The Managing General Partner will not redeem or repurchase Units. See Item 6 below for the amount of cash distributions paid to the Limited Partners during 1998. Item 6. Selected Financial Data Paine Webber/CMJ Properties, LP (In thousands, except per Unit data) Years Ended December 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Revenues $ 294 $ 147 $ 98 $ 244 $ 179 Expenses $ 365 $ 288 $ 280 $ 288 $ 268 Partnership's share of local limited partnerships' income $ 209 $ 184 $ 157 $ 174 $ 186 Net income (loss) $ 138 $ 43 $ (25) $ 130 $ 97 Cash distributions per Limited Partnership Unit $ 20.00 - $ 20.00 $20.00 $10.00 Net income (loss) per Limited Partnership Unit $ 15.58 $ 4.85 $ (2.82) $14.75 $11.01 Total assets $ 383 $ 520 $ 415 $ 486 $ 525 (a) The above selected financial data should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report. (b) The above per Limited Partnership Unit information is based upon the 8,746 Limited Partnership Units outstanding during each year. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information Relating to Forward-Looking Statements - -------------------------------------------------- The following discussion of financial condition includes forward-looking statements which reflect management's current views with respect to future events and financial performance of the Partnership. These forward-looking statements are subject to certain risks and uncertainties, including those identified below under the heading "Certain Factors Affecting Future Operating Results", which could cause actual results to differ materially from historical results or those anticipated. The words "believe," "expect," "anticipate," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which were made based on facts and conditions as they existed as of the date of this report. The Partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Liquidity and Capital Resources - ------------------------------- The Partnership offered limited partnership interests to the public from May 1983 to April 1984 pursuant to a Registration Statement filed under the Securities Act of 1933. The Partnership received gross proceeds of $8,746,000, and after deducting selling expenses and offering costs, the Partnership invested approximately $6,960,000 in six local limited partnerships owning housing projects that received various forms of federal, state or local assistance and that could be classified as "low-income housing" under the Internal Revenue Code. The Partnership does not have any commitments for additional capital expenditures or investments. The Partnership continues to retain an ownership interest in all six of its original operating investment properties. As of December 31, 1998, all of the properties are generating sufficient cash flow from operations to cover their operating expenses and debt service payments, and all of the properties are generating excess cash flow, a portion of which is being distributed to the Partnership on an annual basis in accordance with the respective regulatory and limited partnership agreements. Due to improvements in cash flow and the strong operating performances of the investment properties, management had instituted a program in 1994 which provided for the payment of regular quarterly distributions at an annual rate of 2% on original invested capital. During 1996, distributions to the Partnership from the local limited partnerships declined, causing management to suspend distributions effective for the fourth quarter of 1996. In the future, to the extent there is sufficient distributable cash flow from the properties after the payment of Partnership management fees and operating expenses, the Partnership plans to make an annual distribution payment. Because of ongoing capital expenditure requirements at the properties, the Partnership did not make an annual distribution payment to the Limited Partners in 1997. As discussed further below, based on improved cash flow from the properties in 1998, the Partnership made an annual distribution payment to the Limited Partners at a rate of 2% on original invested capital in November 1998. During 1998, the Partnership received distributions totalling $460,000 from all six local limited partnership investments. During 1997 the Partnership received distributions totalling $370,000 from five of the six local limited partnerships. The amounts received in 1997 and 1998 represent the cash flow available for distribution as of December 31, 1996 and 1997, respectively, as determined by the general partners of the local limited partnerships in accordance with the partnership, financing and regulatory agreements. Total distributions from the Partnership's investments increased in the current year due to increases in distributions from three of the local limited partnership investments and the receipt of $66,000 from The Villages at Montpelier partnership in 1998. No distributions were received from this partnership in 1997. As previously reported, during the second quarter of 1997 management of the Partnership completed a detailed review of each property with the affiliate of the operating general partners which manages the day-to-day operations of the investment properties. As a result of such review, management determined that the Partnership should not make an annual distribution to the Limited Partners for 1997. Based on the existing environment of rising property operating expenses and capital improvement costs, as well as the restrictions on distributable cash flow from the properties, there was not sufficient cash flow to support the payment of a distribution by the Partnership for 1997. Based on the amounts of the 1998 distribution payments from the local limited partnerships, management believed that there was sufficient cash flow to make a distribution for the current year. Accordingly, the Partnership made an annual distribution to the Limited Partners on November 23, 1998 at a rate of 2% on original invested capital. Such distribution totalled approximately $175,000, or $20 per original $1,000 investment. The ability to make future distributions of operating cash flow will continue to be assessed on an annual basis in the fourth quarter of each year. As of December 31, 1998, five of the Partnership's six operating investment properties were receiving rental subsidy payments from the federal government under Section 8 of the National Housing Act for 100% of the rental units. The government subsidy payments range from 65% to 81% of the total revenues of the related local limited partnerships. As discussed previously, the subsidy agreement covering The Villages at Montpelier Apartments expired in July 1997. The subsidy agreements covering the other five operating investment properties do not expire for another 3-to-5 years. Due to the limited availability of government subsidized housing, these properties consistently achieve occupancy levels of 99% to 100%. Cash flow from these five properties is restricted by the Department of Housing and Urban Development ("HUD") and other applicable state housing agencies, which set rental rates for low-income units and require significant cash reserves to be established for future capital improvements. In addition, a substantial amount of the revenues generated by these properties comes from the rental subsidy payments made by federal or state housing agencies. These features, which are characteristic of all subsidized low-income housing properties, significantly limit the pool of potential buyers for these real estate assets. Furthermore, the uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Accordingly, the general partners of the local limited partnerships, which receive management fee revenues from the properties through an affiliated management company, were not expected to initiate efforts to sell any of the properties in the near term. As a limited partner of the local limited partnerships, the Partnership does not control property disposition decisions. The partnership agreements state that the limited partner may cause the sale of the assets of the local limited partnerships subsequent to June 30, 1995, but not earlier than one year after it has given written notice to the operating general partner of its intent to cause such sale, and only if, during such one-year period, the operating general partner does not cause the sale of such assets. If the operating general partner has not caused the assets of the partnership to be sold within such one-year period, the limited partner may cause such sale, but only after it has offered to sell such assets to the operating general partner, and either the operating general partner does not accept such offer within 90 days of receiving it, or the operating general partner does not complete the sale in accordance with such offer after accepting the terms. In October 1998, the Partnership gave the written notice described above to the operating general partner of all six local limited partnerships after meeting with representatives of the operating general partner to discuss the Partnership's desire to liquidate its investments in the near term. The Partnership must now wait for the one-year notification period to lapse or for the possible earlier receipt of an acceptable liquidation proposal from the operating general partner. In light of the decision by the Partnership to initiate this action under the terms of the limited partnership agreements, it is currently contemplated that the disposition of the Partnership's investments and a liquidation of the Partnership could be completed by the end of calendar year 1999. There are no assurances, however, that the disposition of the remaining assets and a liquidation of the Partnership will be completed within this time frame. The average occupancy level at The Villages at Montpelier Apartments was 94% for the year ended December 31, 1998, compared to 92% for the prior year. As previously reported, prior to July 1997, 80% of the apartments at The Villages at Montpelier were rented at market rates while 20% received government subsidies under the Section 8 rental assistance program. With the expiration of the subsidy agreement in July 1997, the property management team began the process of converting the former subsidized units at the property to market rent units during the third quarter of 1997. As expected, the conversion resulted in a decline in occupancy at the property as a number of subsidized tenants vacated the property and their units were prepared to be re-leased. Subsequent to the expiration of the Section 8 contract, the average occupancy level at the property fell to 88% for the third quarter of 1997 but rebounded to 90% for the fourth quarter of 1997 and stabilized by the first quarter of 1998. Cash flow from operations at The Villages at Montpelier is comparable to the previously subsidized level now that the occupancy rate at the property has been stabilized. If the market for conventional multi-family apartment properties remains strong in the near term, the expiration of the rental subsidy agreement at The Villages at Montpelier Apartments could enhance the property's marketability for a potential sale by increasing the pool of interested buyers. However, there are no assurances that such market conditions will remain strong, and the ability of the Partnership to cause a sale of the property remains restricted by the terms of the limited partnership agreement discussed further above. At December 31, 1998, the Partnership had available cash and cash equivalents of approximately $341,000, which it intends to use for its working capital requirements and distribution to the partners. The source of future liquidity and distributions to the partners is expected to be from cash generated from the operations of the Partnership's real estate investments and from the proceeds received from the sale or refinancing of the properties owned by the local limited partnerships or from the sale of the Partnership's interests in the local limited partnerships. Such sources of liquidity are expected to be sufficient to meet the Partnership's needs on both a short-term and long-term basis. As noted above, it is possible that the Partnership could be liquidated prior to the end of calendar year 1999. Notwithstanding this, the Partnership believes that it has made all necessary modifications to its existing systems to make them year 2000 compliant and does not expect that additional costs associated with year 2000 compliance, if any, will be material to the Partnership's results of operations or financial position. Results of Operations 1998 Compared to 1997 - --------------------- For the year ended December 31, 1998, the Partnership reported net income of $138,000, as compared to net income of $43,000 for 1997. This increase in the Partnership's net income was mainly attributable to a $145,000 increase in other income from local limited partnerships and a $25,000 increase in the Partnership's share of local limited partnerships' income which were partially offset by a $77,000 increase in general and administrative expenses. As discussed in the notes to the financial statements, in accordance with the equity method of accounting the Partnership records distributions received from investments in limited partnerships with carrying values of zero as other income from local limited partnerships. The increase in other income from local limited partnerships is largely due to a $66,000 increase in distributions from The Villages at Montpelier investment and an increase of $64,000 in the portion of the distributions from the Holbrook investment being applied to other income after that investment reached a zero carrying value in the current year. Under the equity method of accounting for limited partnership interests, losses in excess of the investment in individual local limited partnerships are not recognized currently, but rather, are offset against future earnings from such entities. As a result, the Partnership's share of local limited partnerships' operations for both the current and prior years represent only the allocable portions of the operations of the Ramblewood and Fawcett's Pond partnerships. The Partnership's share of income from Fawcett's Pond increased by $30,000 for 1998 primarily due to a reduction in mortgage interest expense and property operating expenses. Mortgage interest expense decreased due to the reduction in the mortgage principal balance resulting from scheduled principal repayments. Property operating expenses decreased at Fawcett's Pond due to additional repairs and maintenance expenditures incurred during 1997. The Partnership's share of income from Ramblewood decreased by $5,000 for the current year primarily due to an increase in real estate taxes which was partially offset by a reduction in repairs and maintenance expenses. Overall, the combined net operating results of the six local limited partnerships changed from a net loss of $34,000 for 1997 to net income of $65,000 for the current year. This favorable change of $99,000 resulted primarily from a $76,000 increase in rental revenues and a $36,000 decrease in combined interest and mortgage insurance expense. Combined property rental revenues increased primarily due to an increase in the rental rates and average occupancy level at The Villages at Montpelier Apartments. Combined interest and mortgage insurance expense decreased mainly due to the reduction in the outstanding principal balances of the partnerships' mortgage loans resulting from the scheduled monthly principal payments. General and administrative expenses increased in 1998 mainly due to additional professional fees incurred for an evaluation of potential disposition strategies for the Partnership's investments and an independent third party valuation of the local limited partnership interests performed during the current year. 1997 Compared to 1996 - --------------------- For the year ended December 31, 1997, the Partnership reported net income of $43,000, as compared to a net loss of $25,000 for 1996. This favorable change in the Partnership's net operating results was attributable to a $41,000 decrease in the Partnership's operating loss and a $27,000 increase in the Partnership's share of local limited partnerships' income. The decrease in the Partnership's operating loss was attributable to an increase in other income from local limited partnerships of $37,000 and an increase in interest income of $12,000. An increase in general and administrative expenses of $8,000 partially offset these favorable changes in operating income. As discussed further above, the Partnership accounts for its investments in local limited partnerships using the equity method. In accordance with the equity method, the Partnership does not record losses for those limited partnership investments whose equity method basis has been reduced to zero and recognizes future income from these entities only when it exceeds the previously unrecorded losses. Distributions received from investments in limited partnerships whose basis has been reduced to zero are recorded as other income from the local limited partnerships. Other income from the local limited partnerships in 1997 represents distributions from Quaker Meadows, Colonial Farms and Marvin Gardens while the 1996 amount represents distributions from Quaker Meadows, Colonial Farms and Fawcett's Pond. Overall, other income from local limited partnerships increased by $37,000 due to a $41,000 increase in distributions from Quaker Meadows, a $4,000 distribution from Marvin Gardens, which did not make a distribution in 1996, and an $8,000 reduction attributable to Fawcett's Pond. Although the distribution from the Fawcett's Pond partnership remained unchanged from 1996 to 1997, other income from local limited partnerships decreased because the entire distribution from Fawcett's Pond was recorded as a reduction of the equity method carrying value of the investment in 1997. The increase in interest income resulted from an increase in invested cash reserves due to the suspension of the Partnership's quarterly distributions during the fourth quarter of 1996 and an increase in distributions from local limited partnerships in 1997. The increase in general and administrative expenses was mainly due to increases in certain required professional services during 1997. At December 31, 1997, only two of the six local limited partnerships, The Holbrook Apartments Company (Ramblewood Apartments) and the Fawcett's Pond Apartment Company, had positive equity method carrying values. The Partnership's share of income from the Ramblewood Apartments for 1997 and 1996 totalled $154,000 and $141,000, respectively, while the Partnership's share of income from the Fawcett's Pond Apartments for 1997 and 1996 totalled $30,000 and $16,000, respectively. The favorable change in the Partnership's share of local limited partnerships' income attributable to the Fawcett's Pond partnership resulted from a portion of the income from Fawcett's Pond ($55,000) being allocated to offset previously unrecorded losses in 1996. As a result, only $16,000 of the $71,000 income allocable to the Partnership in that year was recognized by the Partnership in its share of local limited partnerships' income. In 1997, the entire $30,000 of Fawcett's Pond income allocable to the Partnership was recognized in its share of local limited partnerships' income. The favorable change in the Partnership's share of income from the Ramblewood partnership resulted mainly from an increase in total revenues and decreases in real estate taxes and interest expense which were partially offset by an increase in incentive management fees and property operating expenses. In the aggregate, total revenues increased or remained the same at five of the six local limited partnerships due to stable occupancy levels which averaged in the 99% to 100% range during 1996 and 1997. The Villages at Montpelier Apartments was the only local limited partnership to experience a notable decline in occupancy which resulted in a 1% decline in rental revenues for 1997. Average occupancy at The Villages at Montpelier Apartments declined from 95% in 1996 to 92% for 1997 due to the expiration of the government subsidy agreement in July 1997, as discussed further above. Despite the decline in rental revenues, the net operating results of The Villages at Montpelier partnership improved by $192,000 during 1997, mainly due to a $214,000 reduction in property operating expenses, which was principally due to lower repairs and maintenance costs. Total expenses at the other five local limited partnerships increased in 1997 mainly due to increases in repairs and maintenance expenses at Colonial Farms, Fawcett's Pond, Quaker Meadows and Marvin Gardens, a reimbursement of subsidy payments required at Colonial Farms and an increase in incentive management fees at Ramblewood and Quaker Meadows. 1996 Compared to 1995 - --------------------- For the year ended December 31, 1996, the Partnership reported a net loss of $25,000, as compared to net income of $130,000 for 1995. This unfavorable change in the Partnership's net operating results of $155,000 was attributable to a $138,000 increase in the Partnership's operating loss and a $17,000 decline in the Partnership's share of local limited partnerships' income. As noted above, in accordance with the equity method of accounting for limited partnership interests, the Partnership does not record losses from investment properties when losses exceed the Partnership's equity method basis in these properties, and future income is recognized only when it exceeds the previously unrecorded losses. Five of the Partnership's six investments had an equity method basis of zero as of December 31, 1996 and 1995. The Holbrook Apartments Company (Ramblewood Apartments) was the only remaining investment with a positive equity method carrying value as of December 31, 1996 and 1995. The Partnership's share of income from the Ramblewood Apartments for 1996 and 1995 totalled $141,000 and $174,000, respectively. This unfavorable change in the net operating results of the Ramblewood partnership resulted mainly from an increase in property operating expenses. Property operating expenses increased as a result of sidewalk repairs, exterior painting, and the replacement of playground equipment, which occurred in 1996. During 1996, cumulative income allocations to the Partnership from the Fawcett's Pond investment exceeded previously unrecorded losses. As a result, the Partnership recognized a portion of the 1996 income allocation from the Fawcett's Pond partnership ($16,000) in its share of local limited partnerships' income in 1996, which partially offset the decline in income from the Ramblewood partnership. Distributions from the Fawcett's Pond partnership were recorded as reductions to the investment carrying value to the extent of the income recognition in 1996 which reduced the carrying value of the investment to zero as of December 31, 1996. Overall, the combined net operating results of the six local limited partnerships improved from a net loss of $6,000 in 1995 to net income of $17,000 in 1996. This favorable change resulted from an increase in combined revenues of $67,000, which exceeded the increase in combined expenses of $44,000. The Partnership's operating loss increased due to a $146,000 decrease in total revenues, which was partially offset by an $8,000 decrease in Partnership general and administrative expenses. The major portion of the decrease in total revenues was attributable to a $137,000 decline in other income from local limited partnerships. As discussed further in Note 2 to the financial statements, distributions from the local limited partnerships are recorded as other income for those investments for which the Partnership's equity method carrying value has been reduced to zero. With the exception of Fawcett's Pond, distributions from which remained unchanged, distributions from the five local limited partnerships with carrying values of zero declined by varying amounts in 1996 generally due to rising operating expenses and increases in capital expenditures. In addition, as discussed further above, a portion of the distributions received from the Fawcett's Pond partnership in 1996 were recorded as reductions to the investment's carrying value. Also contributing to the decrease in total revenues was a $9,000 decline in interest income on invested cash reserves. The decline in general and administrative expenses for 1996 was mainly due to decreases in certain required professional services. Certain Factors Affecting Future Operating Results - -------------------------------------------------- The following factors could cause actual results to differ materially from historical results or those anticipated: Risks of Government-Assisted Housing Complexes. In certain respects government-assisted housing complexes differ from conventional housing complexes. These include (a) greater financing leverage than is usual in conventional complexes, (b) review of compliance with construction and other standards and (c) various contingency reserves required in connection with such government assistance programs. Government-assisted housing is also subject to special conditions and risks including, but not limited to, (a) general surveillance by the appropriate governmental assistance agency, which may include the application of rental and other guidelines affecting tenant eligibility, operating costs and rental levels, (b) maintenance of a reserve fund for replacements in an amount paid concurrently with amortization of the mortgage and in addition to payments of principal and interest, restricted such that withdrawals from the fund are subject to the prior approval of the appropriate governmental assistance agency, (c) compliance with the United States Department of Housing and Urban Development ("HUD") regulations regarding management of the premises, (d) limitations on salability, as contained in regulatory agreements with the appropriate governmental assistance agency, (e) limitations on rent increases, and (f) the uncertain effects of changes in complex rules and regulations governing such government-assisted programs, or changes in the manner in which those regulations are interpreted. Government assistance payments may be reduced in the event that a project rents less than 100% of its units eligible for rental subsidies to qualified low income tenants. HUD generally elects to reduce subsidies only in the event that occupancy levels for qualified tenants drop below 95% for a period of two years. Finally, HUD commitments are subject to HUD's appropriation of federal funds sufficient to meet its obligations in any given year. At the present time, certain legislative initiatives and governmental budget negotiations could result in a reduction of funds available for the various HUD-administered housing programs and could also result in new limitations on subsidized rent levels. This in turn could adversely impact the net operating income generated by the Partnership's properties. Real Estate Investment Risks. Real property investments are subject to varying degrees of risk. Revenues and property values may be adversely affected by the general economic climate, the local economic climate and local real estate conditions, including (i) the perceptions of prospective tenants of the attractiveness of the property; (ii) the ability to retain qualified individuals to provide adequate management and maintenance of the property; (iii) the inability to collect rent due to bankruptcy or insolvency of tenants or otherwise; and (iv) increased operating costs. Real estate values may also be adversely affected by such factors as applicable laws, including tax laws, interest rate levels and the availability of financing. Effect of Uninsured Loss. The local limited partnerships carry comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to their properties with insured limits and policy specifications that management believes are customary for similar properties. There are, however, certain types of losses (generally of a catastrophic nature such as wars, floods or earthquakes) which may be either uninsurable, or, in management's judgment, not economically insurable. Should an uninsured loss occur, the Partnership could lose both its invested capital in and anticipated profits from the affected property. Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances on, under, in or migrating from such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The Partnership is not aware of any notification by any private party or governmental authority of any non-compliance, liability or other claim in connection with environmental conditions at any of its properties that it believes will involve any expenditure which would be material to the Partnership, nor is the Partnership aware of any environmental condition with respect to any of its properties that it believes will involve any such material expenditure. However, there can be no assurance that any non-compliance, liability, claim or expenditure will not arise in the future. Competition. The financial performance of the Partnership's real estate investments will be impacted by the competition from comparable properties in their local market areas. Due to the limited availability of low-income housing programs like the ones that cover five of the Partnership's six investment properties, the competitive pressures faced by these properties are much less than for non-subsidized, market rate facilities. Nonetheless, the occupancy levels achievable at the properties and the rental rates at the non-subsidized property are largely a function of supply and demand in the markets. In many markets across the country, development of new multi-family properties has increased significantly over the past two years. Existing apartment properties in such markets could be expected to experience increased vacancy levels, declines in effective rental rates and, in some cases, declines in estimated market values as a result of the increased competition. There are no assurances that these competitive pressures will not adversely affect the operations and/or market values of the Partnership's investment properties in the future and, in particular, subsequent to the expiration of the existing subsidy agreements. Impact of Local Limited Partnership Structure. The ownership of the Partnership's investments through local limited partnerships could adversely impact the timing of the Partnership's planned dispositions of its remaining assets and the amount of proceeds received from such dispositions. It is possible that the general partners of the local limited partnerships could have economic or business interests which are inconsistent with those of the Partnership. Given the limited rights which the Partnership has under the terms of the local limited partnership agreements, any conflict between the partners could result in delays in completing a sale of the related operating property and could lead to an impairment in the marketability of the property to third parties for purposes of achieving the highest possible sale price. Availability of a Pool of Qualified Buyers. The availability of a pool of qualified and interested buyers for the Partnership's remaining assets is critical to the Partnership's ability to realize the fair market values of such properties at the time of their final dispositions. Demand by buyers of multi-family apartment properties is affected by many factors, including the size, quality, age, condition and location of the subject property, potential environmental liability concerns, the existing debt structure, the liquidity in the debt and equity markets for asset acquisitions, the general level of market interest rates and the general and local economic climates. In addition, because of the government restrictions on rental revenues and the related capital expenditure reserve requirements and cash flow distribution limitations, there are a limited number of potential buyers in the market for government subsidized, low-income housing properties such as the Partnership has invested in. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. Inflation - --------- The Partnership completed its fifteenth full year of operations in 1998. To date, the effects of inflation and changes in prices on the Partnership's operating results have not been significant. In the future, with regard to the local limited partnerships, contract rental rates under "Section 8" agreements may be increased at the discretion of the Department of Housing and Urban Development in response to inflationary pressures to cover increases in operating expenses due to inflation. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data are included under Item 14 of this Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Principal Executive Officers of the Partnership The Managing General Partner of the Partnership is PW Shelter Fund, Inc., a Delaware corporation which is a wholly-owned subsidiary of PaineWebber. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. The Managing General Partner has overall authority and responsibility for the Partnership's operation, however, the day-to-day business of the Partnership is managed by the Adviser pursuant to an advisory contract. (a) and (b) The names and ages of the directors and principal executive officers of the Managing General Partner of the Partnership are as follows: Date Elected Name Office Age to Office ---- ------ --- --------- Bruce J. Rubin President and Director 39 8/22/96 Terrence E. Fancher Director 45 10/10/96 Walter V. Arnold Senior Vice President and Chief Financial Officer 51 10/29/85 David F. Brooks First Vice President and Assistant Treasurer 56 12/10/82 * Thomas W. Boland Vice President and Controller 36 12/1/91 * The date of incorporation of the Managing General Partner (c) There are no other significant employees in addition to the directors and executive officers mentioned above. (d) There is no family relationship among any of the foregoing directors and/or executive officers of the Managing General Partner of the Partnership. All of the foregoing directors and executive officers have been elected to serve until the annual meeting of the Managing General Partner. (e) All of the directors and officers of the Managing General Partner hold similar positions in affiliates of the Managing General Partner, which are the corporate general partners of other real estate limited partnerships sponsored by PWI, and for which PaineWebber Properties Incorporated serves as the Adviser. The business experience of each of the directors and principal executive officers of the Managing General Partner is as follows: Bruce J. Rubin is President and Director of the Managing General Partner. Mr. Rubin was named President and Chief Executive Officer of PWPI in August 1996. Mr. Rubin joined PaineWebber Real Estate Investment Banking in November 1995 as a Senior Vice President. Prior to joining PaineWebber, Mr. Rubin was employed by Kidder, Peabody and served as President for KP Realty Advisers, Inc. Prior to his association with Kidder, Mr. Rubin was a Senior Vice President and Director of Direct Investments at Smith Barney Shearson. Prior thereto, Mr. Rubin was a First Vice President and a real estate workout specialist at Shearson Lehman Brothers. Prior to joining Shearson Lehman Brothers in 1989, Mr. Rubin practiced law in the Real Estate Group at Willkie Farr & Gallagher. Mr. Rubin is a graduate of Stanford University and Stanford Law School. Terrence E. Fancher was appointed a Director of the Managing General Partner in October 1996. Mr. Fancher is the Managing Director in charge of PaineWebber's Real Estate Investment Banking Group. He joined PaineWebber as a result of the firm's acquisition of Kidder, Peabody. Mr. Fancher is responsible for the origination and execution of all of PaineWebber's REIT transactions, advisory assignments for real estate clients and certain of the firm's real estate debt and principal activities. He joined Kidder, Peabody in 1985 and, beginning in 1989, was one of the senior executives responsible for building Kidder, Peabody's real estate department. Mr. Fancher previously worked for a major law firm in New York City. He has a J.D. from Harvard Law School, an M.B.A. from Harvard Graduate School of Business Administration and an A.B. from Harvard College. Walter V. Arnold is a Senior Vice President and Chief Financial Officer of the Managing General Partner and Senior Vice President and Chief Financial Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in 1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice President and Controller since 1978, and where he continued until joining the Adviser. Mr. Arnold is a Certified Public Accountant licensed in the state of Texas. David F. Brooks is a First Vice President and Assistant Treasurer of the Managing General Partner and a First Vice President and an Assistant Treasurer of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974 to February 1980, the Assistant Treasurer of Capital for Real Estate, which provided real estate investment, asset management and consulting services. Thomas W. Boland is a Vice President and Controller of the Managing General Partner and a Vice President and Controller of the Adviser which he joined in 1988. From 1984 to 1987 Mr. Boland was associated with Arthur Young & Company. Mr. Boland is a Certified Public Accountant licensed in the state of Massachusetts. He holds a B.S. in Accounting from Merrimack College and an M.B.A. from Boston University. (f) None of the directors and officers were involved in legal proceedings which are material to an evaluation of her or his ability or integrity as a director or officer. (g) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the officers and directors of the Managing General Partner, and persons who own more than ten percent of the Partnership's limited partnership units, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten-percent beneficial holders are required by SEC regulations to furnish the Partnership with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, the Partnership believes that, during the year ended December 31, 1998, all filing requirements applicable to the officers and directors of the Managing General Partner and ten-percent beneficial holders were complied with. Item 11. Executive Compensation The directors and officers of the Partnership's Managing General Partner receive no current or proposed remuneration from the Partnership. The Partnership is required to pay certain fees to the Adviser, and the General Partners are entitled to receive a share of cash distributions and a share of profits or losses. These items are described under Item 13. The Partnership paid distributions to the Unitholders on a quarterly basis at a rate of 2% per annum on original invested capital from June 30, 1994 to September 30, 1996. The Partnership's quarterly distributions were suspended effective for the quarter ended December 31, 1996 due to an unexpected decline in the cash flow distributions from the local limited partnerships in which the Partnership has invested. Subsequent distributions, based on management's assessment of distributable cash, are expected to be made on an annual basis. No distributions were made during 1997, and an annual distribution at a rate of 2% on original invested capital was made in 1998. In addition, the Partnership's Units of Limited Partnership Interest are not actively traded on any organized exchange, and no efficient secondary market exists. Accordingly, no accurate price information is available for these Units. Therefore, a presentation of historical Unitholder total returns would not be meaningful. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) The Partnership is a limited partnership issuing Units of limited partnership interest, not voting securities. All the outstanding stock of the Managing General Partner, PW Shelter Fund, Inc., is owned by PaineWebber. Properties Associates, the Associate General Partner, is a Massachusetts general partnership, general partners of which are also officers of the Adviser and the Managing General Partner. Properties Associates is also the Initial Limited Partner of the Partnership and owns one Unit of limited partnership interest. No limited partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership. (b) Neither officers and directors of the Managing General Partner nor the general partners of the Associate General Partner, individually, own any Units of limited partnership interest of the Partnership. No officer or director of the Managing General Partner, nor any general partner of the Associate General Partner, possesses a right to acquire beneficial ownership of Units of limited partnership interest of the Partnership. (c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership. Item 13. Certain Relationships and Related Transactions The General Partners of the Partnership are PW Shelter Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated (the "Adviser"). Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. In addition, the Managing General Partner and the Adviser are reimbursed for their out-of-pocket expenses relating to the offering of Units, the administration of the Partnership and the acquisition and operation of the Partnership's real property investments. Distributable cash, as defined, if any, for each fiscal year shall be distributed annually in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds will be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, taxable income or tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income or tax loss from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partner and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss. Under the advisory contract, the Adviser has specific management responsibilities, to administer the day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser earns a basic management fee of .5% of invested assets for these services. Invested assets is the sum of the amount invested by the Partnership in each local limited partnership plus a proportionate interest in the mortgage debt initially incurred by the local limited partnerships. The Adviser earned management fees of $199,000 for the year ended December 31, 1998. Accounts payable - affiliates at December 31, 1998 consists of management fees of $99,000 payable to the Adviser. In connection with the sale of each property, the Adviser may receive a disposition fee in an amount equal to 1% based on the selling price of the property, subordinated to the payment of certain amounts to the Limited Partners. An affiliate of the Managing General Partner performs certain accounting, tax preparation, securities law compliance and investor communications and relations services for the Partnership. The total costs incurred by this affiliate in providing such services are allocated among several entities including the Partnership. Included in general and administrative expenses for the year ended December 31, 1998 is $37,000, representing reimbursements to this affiliate for providing such services to the Partnership. The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $2,000 (included in general and administrative expenses) for managing the Partnership's cash assets during the year ended December 31, 1998. Fees charged by Mitchell Hutchins are based on a percentage of invested cash reserves which varies based on the total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI. See Note 3 to the accompanying financial statements of the Partnership for a further discussion of certain relationships and related party transactions. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report: (1) and (2) Financial Statements and Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements at page F-1. (3) Exhibits: The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this report. (b) No reports on Form 8-K were filed during the last quarter of 1998. (c) Exhibits See (a) (3) above. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements at page F-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PAINE WEBBER/CMJ PROPERTIES, LP LIMITED PARTNERSHIP By: PW Shelter Fund, Inc. ----------------------- Managing General Partner By: /s/ Bruce J. Rubin ------------------ Bruce J. Rubin President and Chief Executive Officer By: /s/ Walter V. Arnold -------------------- Walter V. Arnold Senior Vice President and Chief Financial Officer By: /s/ Thomas W. Boland -------------------- Thomas W. Boland Vice President and Controller Dated: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Partnership and in the capacities and on the dates indicated. By: /s/ Bruce J. Rubin Date: March 30, 1999 ------------------- -------------- Bruce J. Rubin Director By: /s/ Terrence E. Fancher Date: March 30, 1999 ----------------------- -------------- Terrence E. Fancher Director ANNUAL REPORT ON FORM 10-K Item 14(a)(3) PAINE WEBBER/CMJ PROPERTIES, LP INDEX TO EXHIBITS
Page Number in the Report Exhibit No. Description of Document Or Other Reference - ----------- ----------------------- -------------------------- (3) and (4) Prospectus of the Partnership Filed with the Commission pursuant to dated May 25, 1983, as Rule 424(c) and incorporated herein by reference to the Restated supplemented, with particular reference. Certificate and Agreement of Limited Partnership. (10) Material contracts previously Filed with the Commission pursuant to filed as exhibits to registration Section13 or 15(d) of the Securities Act statements and amendments thereto of 1934 and incorporated herein by reference. of the registrant together with all such contracts filed as exhibits of previously filed Forms 8-K and Forms 10-K are hereby incorporated herein by reference. (13) Annual Reports to Limited Partners. No Annual Report for the year ended December 31, 1998 has been sent to the Limited Partners. An Annual Report will be sent to the Limited Partners subsequent to this filing. (22) List of subsidiaries. Included in Item 1 of Part 1 of this Report Page I-1, to which reference is hereby made. (27) Financial Data Schedule. Filed as the last page of EDGAR submission following the Financial Statements required by Item 14.
ANNUAL REPORT ON FORM 10-K Item 14(a) (1) and (2) and 14(d) PAINE WEBBER/CMJ PROPERTIES, LP INDEX TO FINANCIAL STATEMENTS Paine Webber/CMJ Properties, LP Reference --------- Independent Auditors' Report F-4 Balance sheets at December 31, 1998 and 1997 F-5 Statements of operations for the years ended December 31, 1998, 1997 and 1996 F-6 Statements of changes in partners' capital (deficit) or the years ended December 31, 1998, 1997 and 1996 F-7 Statement of cash flows for the years ended December 31, 1998, 1997 and 1996 F-8 Notes to financial statements F-9 Fawcett's Pond Apartments Company Independent Auditors' Report F-20 Balance sheets at December 31, 1998 and 1997 F-21 Statements of operations for the years ended December 31, 1998, 1997 and 1996 F-22 Statements of partners' deficit for the years ended December 31, 1998, 1997 and 1996 F-23 Statements of cash flows for the years ended December 31, 1998, 1997 and 1996 F-24 Notes to financial statements F-26 Quaker Meadows Apartments Company Independent Auditors' Report F-30 Balance sheets at December 31, 1998 and 1997 F-31 Statements of operations for the years ended December 31, 1998, 1997 and 1996 F-32 Statements of partners' deficit for the years ended December 31, 1998, 1997 and 1996 F-33 Statements of cash flows for the years ended December 31, 1998, 1997 and 1996 F-34 Notes to financial statements F-36 South Laurel Apartments Limited Partnership Independent Auditors' Report F-40 Balance sheets at December 31, 1998 and 1997 F-41 Statements of operations for the years ended December 31, 1998, 1997 and 1996 F-42 Statements of partners' deficit for the years ended December 31, 1998, 1997 and 1996 F-43 Statements of cash flows for the years ended December 31, 1998, 1997 and 1996 F-44 Notes to financial statements F-46 Marvin Gardens Associates Independent Auditors' Report F-50 Balance sheets at December 31, 1998 and 1997 F-51 Statements of operations for the years ended December 31, 1998, 1997 and 1996 F-52 Statements of partners' deficit for the years ended December 31, 1998, 1997 and 1996 F-53 Statements of cash flows for the years ended December 31, 1998, 1997 and 1996 F-54 Notes to financial statements F-56 Colonial Farms, Ltd. Independent Auditors' Report F-60 Balance sheets at December 31, 1998 and 1997 F-61 Statements of operations for the years ended December 31, 1998, 1997 and 1996 F-62 Statements of partners' deficit for the years ended December 31, 1998, 1997 and 1996 F-63 Statements of cash flows for the years ended December 31, 1998, 1997 and 1996 F-64 Notes to financial statements F-66 Holbrook Apartments Company Independent Auditors' Report F-70 Balance sheets at December 31, 1998 and 1997 F-71 Statements of operations for the years ended December 31, 1998, 1997 and 1996 F-72 Statements of partners' deficit for the years ended December 31, 1998, 1997 and 1996 F-73 Statements of cash flows for the years ended December 31, 1998, 1997 and 1996 F-74 Notes to financial statements F-76 All schedules have been omitted since the required information is not applicable, or because the information required is included in the financial statements, including the notes thereto. INDEPENDENT AUDITORS' REPORT The Partners of Paine Webber/CMJ Properties, LP We have audited the accompanying balance sheets of Paine Webber/CMJ Properties, LP (a Limited Partnership) as of December 31, 1998 and 1997, and the related statements of operations, changes in partners' capital (deficit), and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Paine Webber/CMJ Properties, LP at December 31, 1998 and 1997, and the results of its operations, changes in partners' capital (deficit), and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman ------------------------------ REZNICK FEDDER & SILVERMAN Baltimore, Maryland February 10, 1999 PAINE WEBBER/CMJ PROPERTIES, LP BALANCE SHEETS December 31, 1998 and 1997 (In thousands, except per Unit amounts) ASSETS 1998 1997 ---- ---- Investments in local limited partnerships, at equity $ 42 $ 27 Cash and cash equivalents 341 493 ------- ------- $ 383 $ 520 ======= ======= LIABILITIES AND PARTNERS' CAPITAL Accrued expenses and accounts payable $ 18 $ 16 Accounts payable - affiliates 99 199 ------- ------- 117 215 Partners' capital: General Partners: Capital contributions 1 1 Cumulative net losses (68) (69) Cumulative distributions (7) (5) Limited Partners ($1,000 per Unit; 15,000 Units authorized; 8,746 Units issued and outstanding): Capital contributions, net of offering costs 7,679 7,679 Cumulative net losses (6,727) (6,864) Cumulative distributions (612) (437) ------- ------- Total partners' capital 266 305 ------- ------- $ 383 $ 520 ======= ======= The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP STATEMENTS OF OPERATIONS For the years ended December 31, 1998, 1997 and 1996 (In thousands, except per Unit amounts) 1998 1997 1996 ---- ---- ----- Revenues: Interest income $ 28 $ 26 $ 14 Other income from local limited partnerships 266 121 84 ------- ------ ------ 294 147 98 Expenses: Management fees 199 199 199 General and administrative 166 89 81 ------- ------ ------ 365 288 280 ------- ------ ------ Operating loss (71) (141) (182) Partnership's share of local limited partnerships' income 209 184 157 ------- ------ ------ Net income (loss) $ 138 $ 43 $ (25) ======= ====== ====== Net income (loss) per Limited Partnership Unit $ 15.58 $ 4.85 $(2.82) ======= ====== ====== Cash distributions per Limited Partnership Unit $ 20.00 $ - $20.00 ======= ====== ====== The above net income (loss) and cash distributions per Limited Partnership Unit are based upon the 8,746 Limited Partnership Units outstanding during each year. The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the years ended December 31, 1998, 1997 and 1996 (In thousands) General Limited Partners Partners Totals -------- -------- ------ Balance at December 31, 1995 $ (72) $ 536 $ 464 Cash distributions (2) (175) (177) Net loss - (25) (25) ------- -------- ------- Balance at December 31, 1996 (74) 336 262 Net income 1 42 43 ------- -------- ------- Balance at December 31, 1997 (73) 378 305 Cash distributions (2) (175) (177) Net income 1 137 138 ------- -------- ------- Balance at December 31, 1998 $ (74) $ 340 $ 266 ======= ======== ======= The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1997 and 1996 Increase (Decrease) in Cash and Cash Equivalents (In thousands)
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 138 $ 43 $ (25) Adjustments to reconcile net income (loss) to net cash used in operating activities: Other income from local limited partnerships (266) (121) (84) Partnership's share of local limited partnerships' income (209) (184) (157) Changes in assets and liabilities: Accrued expenses and accounts payable 2 (5) (1) Accounts payable - affiliates (100) 67 132 ------- ------- ------- Total adjustments (573) (243) (110) ------- ------- ------- Net cash used in operating activities (435) (200) (135) ------- ------- ------- Cash flows from investing activities: Distributions from local limited partnerships 460 370 310 ------- ------- ------- Net cash provided by investing activities 460 370 310 ------- ------- ------- Cash flows from financing activities: Distributions to partners (177) - (177) ------- ------- ------- Net cash used in financing activities (177) - (177) ------- ------- ------- Net (decrease) increase in cash and cash equivalents (152) 170 (2) Cash and cash equivalents, beginning of year 493 323 325 ------- ------- ------- Cash and cash equivalents, end of year $ 341 $ 493 $ 323 ======= ======= =======
The accompanying notes are an integral part of these financial statements. PAINE WEBBER/CMJ PROPERTIES, LP NOTES TO FINANCIAL STATEMENTS December 31, 1998 1. Organization and Nature of Operations ------------------------------------- Paine Webber/CMJ Properties, LP (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in December 1982 for the purpose of investing in a portfolio of interests in local limited partnerships owning apartment projects which received governmental assistance in the form of low rate mortgages and rent subsidies. All of the properties owned by the local limited partnerships were developed by Corcoran, Mullins, Jennison, Inc. ("CMJ") or its affiliates. The initial capital was $2,000, representing capital contributions of $1,000 by the General Partners and $1,000 for one unit (a "Unit") by the Initial Limited Partner. The Partnership authorized the issuance of a maximum of 15,000 Partnership Units of which 8,745 were subscribed and issued between May 25, 1983 and April 30, 1984. The Partnership originally invested the net proceeds of the public offering, through local limited partnerships, in six apartment projects which receive governmental assistance in the form of low interest rate mortgages and rent subsidies. The Partnership's original investment objectives were to invest the net cash proceeds from the offering of limited partnership units in rental apartment properties receiving various forms of federal, state or local assistance with the goals of providing: (1) tax losses from deductions generated by investments; (2) capital preservation; (3) potential capital appreciation; and (4) potential future cash distributions from operations (on a limited basis), or from the sale or refinancing of the projects owned by the local limited partnerships, or from the sale of interests in the local limited partnerships. The Partnership has generated tax losses since inception. However, the benefits of such losses to investors have been significantly reduced by changes in federal income tax law subsequent to the organization of the Partnership. The Partnership continues to retain an ownership interest in all six of its original operating investment properties. As of December 31, 1998, all of the properties are generating sufficient cash flow from operations after covering their operating expenses and debt service payments, and all of the properties are generating excess cash flow, a portion of which is being distributed to the Partnership on an annual basis in accordance with the respective regulatory and limited partnership agreements. Due to improvements in cash flow and the strong operating performances of the investment properties, management had instituted a program of regular quarterly distributions in 1994 at an annual rate of 2% on original invested capital. Effective for the fourth quarter of 1996, due to an unexpected decline in the level of cash flow distributions from the local limited partnerships, distributions to the partners were suspended. In the future, to the extent there is distributable cash flow from the properties after the payment of Partnership management fees and operating expenses, the Partnership plans to make an annual distribution payment. An annual distribution totalling approximately $175,000, or $20 per original $1,000 investment, was made to the Limited Partners in 1998. No distributions were paid in 1997. The Partnership's success in meeting its capital appreciation objective will depend upon the proceeds received from the final sales of its investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot presently be determined. Because of the government restrictions on rental revenues and the related capital expenditure reserve requirements and cash flow distribution limitations, there are a limited number of potential buyers in the market for government subsidized, low-income housing properties which includes five of the six local limited partnerships that the Partnership has invested in. Furthermore, the current uncertainty regarding potential future reductions in the level of federal government assistance for these programs may further restrict the properties' marketability. The Partnership is currently pursuing potential disposition strategies for the six investments in its portfolio. As discussed further in Note 4, during 1998 the Partnership initiated the formal process prescribed in the local limited partnership agreements for liquidating the Partnership's interests in the local limited partnerships. Accordingly, it is currently contemplated that the sales of the remaining assets and a liquidation of the Partnership could be accomplished prior to the end of calendar year 1999. There are no assurances, however, that the sale of the remaining assets and the liquidation of the Partnership will be completed within this time frame. 2. Use of Estimates and Summary of Significant Accounting Policies --------------------------------------------------------------- The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of December 31, 1998 and 1997 and revenues and expenses for each of the three years in the period ended December 31, 1998. Actual results could differ from the estimates and assumptions used. The accompanying financial statements include the Partnership's investments in six local limited partnerships which own operating properties. The Partnership accounts for its investments in local limited partnerships using the equity method. Under the equity method, the investment is carried at cost adjusted for the Partnership's share of the local limited partnerships' earnings and losses and distributions. In accordance with the equity method of accounting for limited partnership interests, the Partnership does not record losses for those limited partnership investments whose equity method basis has been reduced to zero, recognizing future income from these entities only when it exceeds the previously unrecorded losses. Distributions received from investments in limited partnerships whose basis has been reduced to zero are recorded as other income in the Partnership's statement of operations. See Note 4 for a description of the local limited partnerships. For purposes of reporting cash flows, cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less when acquired. The Partnership's cash reserves are invested in financial instruments which potentially subject the Partnership to concentrations of credit risk. The Partnership currently invests primarily in investment-grade rated commercial paper with overnight maturities. Management believes that no significant concentration of credit risk exists with respect to these cash investments as of December 31, 1998. The carrying amount of cash and cash equivalents approximates their fair value as of December 31, 1998 due to the short-term maturities of these instruments. No provision for income taxes has been made, as the liability for such taxes is that of the partners rather than the Partnership. The cumulative difference between the book basis and tax basis of the Partnership's investment in local limited partnerships is approximately $18,660,000 as of December 31, 1998 due to the losses on investments recognized on the tax basis in excess of the book basis. Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. 3. The Partnership Agreement and Related Party Transactions -------------------------------------------------------- The General Partners of the Partnership are PW Shelter Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber") and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated (the "Adviser"). Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments. Distributable cash, as defined, if any, for each fiscal year shall be distributed annually in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds will be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement. Pursuant to the terms of the Partnership Agreement, taxable income or tax loss of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax loss arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income or tax loss from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partner and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss. Under the advisory contract, the Adviser has specific management responsibilities, to administer the day-to-day operations of the Partnership and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser earns a basic management fee of .5% of invested assets for these services. Invested assets is the sum of the amount invested by the Partnership in each local limited partnership plus a proportionate interest in the mortgage debt initially incurred by the local limited partnerships. The Adviser earned management fees of $199,000 for each of the three years in the period ended December 31, 1998. Accounts payable - affiliates at December 31, 1998 and 1997 consist of management fees of $99,000 and $199,000, respectively, payable to the Adviser. In connection with the sale of each property, the Adviser may receive a disposition fee in an amount equal to 1% based on the selling price of the property, subordinated to the payment of certain amounts to the Limited Partners. Included in general and administrative expenses for the years ended December 31, 1998, 1997 and 1996 is $37,000, $35,000 and $32,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership. The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins"), an affiliate of the Managing General Partner, for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $2,000, (included in general and administrative expenses) for managing the Partnership's cash assets during each of the three years ended December 31, 1998. 4. Local Limited Partnerships -------------------------- The Partnership has investments in six local limited partnerships. These local limited partnerships are accounted for on the equity method in the Partnership's financial statements. Condensed combined financial statements of these local limited partnerships follow: Condensed Combined Balance Sheets December 31, 1998 and 1997 (In thousands) Assets 1998 1997 ---- ---- Current assets $ 1,800 $ 1,779 Restricted deposits and funded reserves 2,127 2,001 Operating investment property, net 23,441 24,629 Other assets 963 1,004 -------- -------- $ 28,331 $ 29,413 ======== ======== Liabilities and Capital Current liabilities and tenant security deposits $ 1,280 $ 1,290 Due to general partner 2,509 2,508 Long-term mortgage debt, less current portion 31,663 32,279 Partnership's share of combined partners' deficit accounts (3,919) (3,511) Local partners' shares of combined partners' deficit accounts (3,202) (3,153) -------- -------- $ 28,331 $ 29,413 ======== ======== Condensed Combined Summary of Operations For the years ended December 31, 1998, 1997 and 1996 (In thousands) 1998 1997 1996 ---- ---- ---- Rental revenues, including government subsidies $ 10,039 $ 9,963 $ 9,949 Other income 114 130 112 -------- -------- -------- 10,153 10,093 10,061 Property operating expenses 5,847 5,834 5,733 Interest expense and mortgage insurance 2,868 2,904 2,964 Depreciation and amortization 1,373 1,389 1,347 -------- -------- -------- 10,088 10,127 10,044 -------- -------- -------- Net income (loss) $ 65 $ (34) $ 17 ======== ======== ======== Net income (loss): Partnership's share of operations $ 52 $ (37) $ 32 Local partners' share of operations 13 3 (15) -------- -------- -------- $ 65 $ (34) $ 17 ======== ======== ======== Reconciliation of Partnership's Share of Operations (In thousands) 1998 1997 1996 ---- ---- ---- Partnership's share of operations, as shown above $ 52 $ (37) $ 32 Losses in excess of basis not recognized by Partnership 157 221 278 Income offset with prior year unrecognized losses - - (153) -------- -------- -------- Partnership's share of local limited partnerships' income $ 209 $ 184 $ 157 ======== ======== ======== Reconciliation of Partnership's Investments (In thousands) 1998 1997 ---- ---- Partnership's share of combined partners' deficit accounts, as shown above $ (3,919) $ (3,511) Accumulated losses in excess of basis not recognized by Partnership 2,481 2,324 Cumulative distributions in excess of investment basis 1,465 1,199 Excess basis in local limited partnerships 15 15 -------- -------- Investments in local limited partnerships, at equity $ 42 $ 27 ======== ======== "Investments in local limited partnerships, at equity" is the Partnership's net investment in the local limited partnerships. These local limited partnerships are subject to regulatory agreements and partnership agreements which determine the distribution of available funds, the disposition of the limited partnership's assets and the rights of the partners, regardless of the Partnership's percentage ownership interest in the local limited partnership. As a limited partner of the local limited partnerships, the Partnership does not control property disposition decisions. The partnership agreements state that the limited partner may cause the sale of the assets of the local limited partnerships subsequent to June 30, 1995, but not earlier than one year after it has given written notice to the operating general partner of its intent to cause such sale, and only if, during such one year period, the operating general partner does not cause the sale of such assets. If the operating general partner has not caused the assets of the partnership to be sold within such one year period the limited partner may cause such sale, but only after it has offered to sell such assets to the operating general partner, and either the operating general partner does not accept such offer within 90 days of receiving it, or the operating general partner does not complete the sale in accordance with such offer after accepting the terms. In October 1998, the Partnership gave the written notice described above to the operating general partner of all six local limited partnerships after meeting with representatives of the operating general partner to discuss the Partnership's desire to liquidate its investments in the near term. The Partnership must now wait for the one-year notification period to lapse or for the possible earlier receipt of an acceptable liquidation proposal from the operating general partner. In light of the decision by the Partnership to initiate this action under the terms of the limited partnership agreements, it is currently contemplated that the disposition of the Partnership's investments and a liquidation of the Partnership could be completed by the end of calendar year 1999. There are no assurances, however, that the disposition of the remaining assets and a liquidation of the Partnership will be completed within this time frame "Investments in local limited partnerships, at equity" on the balance sheets is comprised of the following local limited partnership investments, at the balances indicated (in thousands): 1998 1997 ---- ---- Fawcett's Pond Apartments Company $ 42 $ 6 Quaker Meadows Apartments Company - - South Laurel Apartments Limited Partnership - - Marvin Gardens Associates - - Colonial Farms Ltd. - - Holbrook Apartments Company - 21 ------- ------- Investments in local limited partnerships, at equity $ 42 $ 27 ======= ======= The Partnership received cash distributions from the limited partnerships as set forth below (in thousands): 1998 1997 1996 ---- ---- ---- Fawcett's Pond Apartments Company $ 24 $ 24 $ 24 Quaker Meadows Apartments Company 99 90 50 South Laurel Apartments Limited Partnership 66 - - Marvin Gardens Associates 11 4 - Colonial Farms Ltd. 26 27 27 Holbrook Apartments Company 234 225 209 ------- ------- ------- $ 460 $ 370 $ 310 ======= ======= ======= The investments in Quaker Meadows Apartments Company, South Laurel Apartments Limited Partnership, Marvin Gardens Associates and Colonial Farms Ltd. at December 31, 1998 do not reflect accumulated losses therefrom of $1,288,000, $850,000, $188,000 and $155,000, respectively, because the equity method carrying values of such investments have been reduced to zero. Future income from these entities will not be recorded until it exceeds the previously unrecognized accumulated losses. A description of the local limited partnership properties and the terms of the local limited partnership agreements is summarized below: a) Village at Fawcett's Pond - Hyannis, Massachusetts -------------------------------------------------- On June 30, 1983, the Partnership acquired a 95% limited partnership interest in Fawcett's Pond Apartments Company, an existing Massachusetts limited partnership ("Fawcett's Pond"), that owns and operates a 100-unit housing project in Hyannis, Massachusetts. The Federal Housing Administration (FHA) contracted with the limited partnership under Section 8 of Title II of the Housing and Community Development Act of 1974 to make housing assistance payments to the limited partnership on behalf of qualified tenants. The agreement expires August 19, 2002. Total rent subsidies received by the limited partnership during 1998, 1997 and 1996 were $749,000, $752,000 and $756,000, respectively. Such amounts comprised approximately 77%, 76% and 77%, respectively, of the limited partnership's total revenues for such years. The aggregate investment by the Partnership for the 95% interest was $879,606, comprised of cash and notes payable to the seller (including an acquisition fee of $63,025 payable to the Adviser of the Partnership). The Partnership's interest is held subject to a permanent nonrecourse mortgage loan due April 1, 2024 from the Government National Mortgage Association (GNMA) with an outstanding balance at December 31, 1998 of approximately $4,179,000, payable in monthly installments of $30,746 including principal and interest at 7.5%. The partnership agreement generally provides that the Partnership will receive 95% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 5% of annual distributable cash flow. Cash distributions and incentive management fees are limited by agreements between the limited partnership and HUD to 6% of the initial equity investment. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $1,105,725 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. The remaining proceeds will be distributed to the local general partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners. The management fee is 5% of gross receipts. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $6,000 were paid to an affiliate of the local general partners for each of the three years in the period ended December 31, 1998. b) Quaker Court and The Meadows - Lynn, Massachusetts -------------------------------------------------- On June 30, 1983, the Partnership acquired a 95% limited partnership interest in Quaker Meadows Apartments Company, an existing Massachusetts limited partnership ("Quaker Meadows"), that owns and operates two apartment complexes in Lynn, Massachusetts. There are a total of 104 apartment units in the two complexes. FHA contracted with the limited partnership under Section 8 of Title II of the Housing and Community Development Act of 1974 to make housing assistance payments to the limited partnership on behalf of qualified tenants. The agreement expires in May 2002 and has two five-year renewal options. Total rent subsidies received by the limited partnership during 1998, 1997 and 1996 were $1,310,000, $1,313,000 and $1,320,000, respectively. Such amounts comprised approximately 81%, 81% and 82% of the limited partnership's total revenues in each of such years. The aggregate investment by the Partnership for the 95% interest was $1,358,925 (including an acquisition fee of $104,525 paid to the Adviser of the Partnership). The Partnership's interest is held subject to a permanent nonrecourse mortgage loan payable to the Massachusetts Housing Finance Agency (MHFA). The mortgage loan is due September 1, 2013 with an outstanding balance at December 31, 1998 of approximately $4,975,000, payable in monthly installments of $62,930 including principal and interest at 12.5%. The restated partnership agreement generally provides that the Partnership will receive 95% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 5% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and MHFA to the extent funds available for distribution as defined by MHFA. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $1,739,424 of proceeds from the sale or refinancing of the investment properties will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners. The management fee is 4% of gross receipts. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $77,000, $69,000 and $29,000 were paid to an affiliate of the local general partners for the years ended December 31, 1998, 1997 and 1996, respectively. c) Villages at Montpelier - Laurel, Maryland ----------------------------------------- On June 30, 1983, the Partnership acquired an 85% limited partnership interest in South Laurel Apartments Limited Partnership, an existing Maryland limited partnership ("South Laurel"), that owns and operates a 520-unit housing project in Laurel, Maryland. FHA contracted with the limited partnership under Section 8 of Title II of the Housing and Community Development Act of 1974 to make housing assistance payments to the limited partnership on behalf of qualified tenants for 20% of the rental units. The subsidy agreement expired on July 31, 1997, and management did not apply for an extension of the agreement. The units previously designated as low-income units have been re-leased at market rates which has kept the total revenues of the local limited partnership relatively unchanged from the previously subsidized level. If the market for conventional multi-family apartment properties remains strong, the expiration of the rental subsidy agreement at The Villages at Montpelier Apartments and the conversion of the property to 100% market-rate apartments could enhance the property's marketability for a potential sale by increasing the pool of interested buyers. However, there are no assurances that such market conditions will remain strong, and the ability of the Partnership to cause a sale of the property will remain restricted by the terms of the limited partnership agreement discussed further above. If conditions were to deteriorate, The Villages at Montpelier Apartments could experience extended declines in occupancy and revenues as a result of the expiration of the subsidy agreement. Total rent subsidies received by the limited partnership during 1997 and 1996 were $506,000 and $686,000, respectively. Such amounts comprised approximately 12% and 17%, respectively, of the limited partnership's total revenues for each of such years. The aggregate investment by the Partnership for the 85% interest was $2,446,135 (including an acquisition fee of $186,725 paid to the Adviser of the Partnership). The Partnership's interest is held subject to a permanent nonrecourse mortgage loan due December 1, 2023 with an outstanding balance at December 31, 1998 of approximately $11,691,000, payable to GNMA in monthly installments of $86,395 including principal and interest at 7.5%. The restated partnership agreement generally provides that the Partnership will receive 85% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 15% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and HUD to the extent of surplus cash, as defined by HUD. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributable in that year. Generally, the first $3,107,104 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners. The management fee is 5.25% of gross receipts. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $3,000 were paid to an affiliate of the local general partners for 1998. No incentive management fees were earned for the years ended December 31, 1997 and 1996. d) Marvin Gardens Apartments, Cotati, California --------------------------------------------- On July 29, 1983, the Partnership acquired a 95% limited partnership interest in Marvin Gardens Associates, an existing California limited partnership that owns a 37-unit apartment complex project in Cotati, California. The apartment complex operates under Section 8 of the National Housing Act and, therefore, receives monthly rental subsidies from the Federal Department of Housing and Urban Development (HUD). The agreement expires in July 2003 and has two five-year renewal options. Total rent subsidies received by the limited partnership during 1998, 1997 and 1996 were $309,000, $329,000 and $324,000, respectively. Such amounts comprised approximately 74%, 77% and 77%, respectively, of the limited partnership's total revenues for such years. The aggregate investment by the Partnership for the 95% interest was $379,581 (including an acquisition fee of $27,800 paid to the Adviser of the Partnership). The Partnership's interest was acquired subject to a permanent nonrecourse mortgage loan due June 1, 2013 with an outstanding balance at December 31, 1998 of approximately $1,560,000, payable to the California Housing Finance Agency (CHFA) in monthly installments of $15,310, including principal and interest at 8.15%. The restated partnership agreement generally provides that the Partnership will receive 95% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 5% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and CHFA to $20,151 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $462,336 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners who in turn hired an unaffiliated management agent to provide management services on their behalf. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $1,000 were paid to an affiliate of the local general partners for the year ended December 31, 1998. No incentive management fees were earned for the years ended December 31, 1997 and 1996. e) Colonial Farms - Modesto, California ------------------------------------ On July 29, 1983, the Partnership acquired a 95% limited partnership interest in Colonial Farms Ltd. an existing California limited partnership that owns a 100-unit apartment project in Modesto, California. The apartment complex operates under Section 8 of the National Housing Act and, therefore, receives monthly rental subsidies from the Federal Department of Housing and Urban Development (HUD). The agreement expires in July 2002 and has two five-year renewal options. Total rent subsidies received by the limited partnership during 1998, 1997 and 1996 were $531,000, $579,000 and $613,000, respectively. Such amounts comprised approximately 65%, 71% and 76%, respectively, of the limited partnership's total revenues for such years. The aggregate investment by the Partnership for the 95% interest was $623,351 (including an acquisition fee of $48,125 paid to the Adviser to the Partnership). The Partnership's interest is held subject to a permanent nonrecourse mortgage loan due June 1, 2013 with an outstanding balance at December 31, 1998 of approximately $2,629,000, payable to CHFA in monthly installments of $27,411, including principal and interest at 9.15% The restated partnership agreement generally provides that the Partnership will receive 95% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 5% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and CHFA to $35,299 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $800,928 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local venture partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners who in turn hired an unaffiliated management agent to provide management services on their behalf. An incentive management fee will also be paid to the affiliate of the local general partners on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $7,000 were paid to an affiliate of the local general partners for each of the three years in the period ended December 31, 1998. f) Ramblewood Apartments - Holbrook, Massachusetts ----------------------------------------------- On August 30, 1983, the Partnership acquired an 85% limited partnership interest in Holbrook Apartments Company, an existing Massachusetts limited partnership that owns and operates a 170-unit housing project in Holbrook, Massachusetts. FHA contracted with the limited partnership under Section 8 of Title II of the Housing and Community Development Act of 1974 to make housing assistance payments to the limited partnership on behalf of qualified tenants. The agreement expires July 1, 2001. Total rent subsidies received by the limited partnership during 1998, 1997 and 1996 were $1,574,000, $1,565,000 and $1,577,000, respectively. Such amounts comprised approximately 75%, 74% and 75% respectively, of the limited partnership's total revenues for such years. The aggregate investment by the Partnership for the 85% interest was $1,250,583, (including an acquisition fee of $94,500 paid to the Adviser of the Partnership). The Partnership's interest was acquired subject to a nonrecourse first mortgage loan due February 1, 2023 with an outstanding balance at December 31, 1998 of approximately $7,249,000, payable to GNMA in monthly installments of $54,207 including principal and interest at 7.5%. The restated partnership agreement generally provides that the Partnership will receive 85% of annual distributable cash flow payable annually and that the local partners will be entitled to receive 15% of annual distributable cash flow. Cash distributions are limited by agreements between the limited partnership and HUD to the extent of surplus cash, as defined by HUD. The agreement also provides that taxable income and tax loss in each year will be allocated, generally, in the same proportion as cash flow is distributed in that year. Generally, the first $1,571,956 of proceeds from the sale or refinancing of the investment property will be distributed to the Partnership. Remaining proceeds will be distributed to the local partners and the Partnership in accordance with the local limited partnership agreement. The local limited partnership entered into a property management contract with an affiliate of the local general partners. The management fee is 4.75% of gross receipts. An incentive management fee will also be paid on an annual basis in the event that the property's cash flow exceeds certain target amounts. Incentive management fees of $153,000, $146,000 and $134,000 were paid to an affiliate of the local general partners for the years ended December 31, 1998, 1997 and 1996, respectively. 5. Year 2000 Issue --------------- The Managing General Partner has assessed the Partnership's exposure to date sensitive computer software programs that may not be operative subsequent to 1999 and has implemented a requisite course of action to minimize year 2000 risk and ensure that neither significant costs nor disruption of normal business operations are encountered. However, because there is no guarantee that all systems of outside vendors or other entities affecting the Partnership's operations will be 2000 compliant, the Partnership remains susceptible to consequences of the Year 2000 Issue. [REZNICK FEDDER & SILVERMAN] [letterhead] INDEPENDENT AUDITORS' REPORT To the Partners Fawcett's Pond Apartments Company We have audited the accompanying balance sheets of Fawcett's Pond Apartments Company as of December 31, 1998 and 1997, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards requires that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fawcett's Pond Apartments Company as of December 31, 1998 and 1997, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ REZNICK FEDDER & SILVERMAN ------------------------------ REZNICK FEDDER & SILVERMAN Baltimore, Maryland February 4, 1999 FAWCETT'S POND APARTMENTS COMPANY BALANCE SHEETS December 31, 1998 and 1997 ASSETS 1998 1997 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 378,141 $ 353,884 Accounts receivable 2,647 2,011 Prepaid expenses 12,464 12,581 ----------- ----------- Total current assets 393,252 368,476 ----------- ----------- RESTRICTED DEPOSITS AND FUNDED RESERVES Tenants' security deposits 20,583 21,461 Mortgage escrow deposits 53,570 67,627 Reserve for replacements 286,880 265,204 ----------- ----------- 361,033 354,292 ----------- ----------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,344,695 and $2,192,094 3,298,592 3,378,778 DEFERRED FINANCING COSTS, net of accumulated amortization of $130,269 and $122,110 206,486 214,645 ----------- ----------- Total assets $ 4,259,363 $ 4,316,191 =========== =========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 57,459 $ 53,320 Accounts payable and accrued expenses 11,851 54,347 Accrued interest payable 26,120 26,453 Rent deferred credits 2,966 488 ----------- ----------- Total current liabilities 98,396 134,608 ----------- ----------- LONG-TERM LIABILITIES Mortgage payable, less current maturities 4,121,716 4,179,174 Due to general partner 277,400 277,400 Tenants' security deposits 19,850 20,447 ----------- ----------- Total liabilities 4,517,362 4,611,629 PARTNERS' DEFICIT (257,999) (295,438) ----------- ----------- Total liabilities and partners' deficit $ 4,259,363 $ 4,316,191 =========== =========== See notes to financial statements FAWCETT'S POND APARTMENTS COMPANY STATEMENTS OF OPERATIONS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Revenue Rental income, net $ 940,839 $ 941,478 $ 942,059 Financial revenue 17,448 25,534 19,420 Other income 16,596 16,701 16,066 ---------- ---------- ---------- Total revenue 974,883 983,713 977,545 ---------- ---------- ---------- Expenses Operating expenses Marketing 751 1,756 1,090 Administration 48,067 59,354 55,198 Utilities 27,464 30,591 33,018 Management fee 47,131 47,098 47,114 Maintenance and repairs 114,064 126,573 79,914 Salaries 92,736 76,232 85,196 Payroll taxes 8,111 7,648 7,252 Insurance 23,832 25,206 22,073 Real estate taxes 46,352 67,717 66,913 ---------- ---------- ---------- Total operating expenses 408,508 442,175 397,768 ---------- ---------- ---------- Nonoperating expenses Interest 315,296 319,161 322,748 Mortgage insurance premium 21,018 21,275 21,515 Depreciation and amortization 160,760 162,549 153,348 Incentive management fee 6,303 6,303 6,303 Miscellaneous financial expenses 345 625 633 ---------- ---------- ---------- Total nonoperating expenses 503,722 509,913 504,547 ---------- ---------- ---------- Total expenses 912,230 952,088 902,315 ---------- ---------- ---------- EXCESS OF REVENUE OVER EXPENSES $ 62,653 $ 31,625 $ 75,230 ========== ========== ========== See notes to financial statements FAWCETT'S POND APARTMENTS COMPANY STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1998, 1997 and 1996 General Limited Partner Partner Total ------- ------- ----- Partners' deficit, December 31, 1995 $ (74,453) $ (277,412) $ (351,865) Distributions (1,261) (23,953) (25,214) Excess of revenue over expenses 3,762 71,468 75,230 --------- ---------- ---------- Partners' deficit, December 31, 1996 (71,952) (229,897) (301,849) Distributions (1,261) (23,953) (25,214) Excess of revenue over expenses 1,581 30,044 31,625 --------- ---------- ---------- Partners' deficit, December 31, 1997 (71,632) (223,806) (295,438) Distributions (1,261) (23,953) (25,214) Excess of revenue over expenses 3,133 59,520 62,653 --------- ---------- ---------- Partners' deficit, December 31, 1998 $ (69,760) $ (188,239) $ (257,999) ========= ========== ========== Profit and loss sharing percentage 5% 95% 100% = == === See notes to financial statements FAWCETT'S POND APARTMENTS COMPANY STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Cash flows from operating activities Rental income received $ 942,681 $ 941,319 $ 942,011 Interest received 17,448 15,978 12,900 Other income received 16,596 16,600 15,939 Administrative expenses paid (96,205) (97,068) (88,517) Management fees paid (47,131) (47,098) (47,114) Utilities paid (30,782) (28,522) (32,268) Maintenance and repairs expenses paid (164,733) (171,100) (133,004) Real estate taxes paid (80,210) (33,859) (66,913) Payroll taxes paid (8,111) (7,648) (7,252) Property insurance paid (8,233) (8,275) (9,614) Other taxes and insurance paid (15,571) (16,038) (12,074) Interest paid on mortgage (315,629) (319,470) (323,035) Mortgage insurance paid (20,929) (21,193) (21,440) Miscellaneous financial expenses paid (345) (625) (633) Mortgagor entity expenses paid (6,303) (6,303) (6,303) (Increase) decrease in mortgage escrow deposits 14,057 (31,945) (858) Net security deposits received (paid) 281 3,745 (1,529) ---------- ---------- ---------- Net cash provided by operating activities 196,881 188,498 220,296 ---------- ---------- ---------- Cash flows from investing activities Additions to property and equipment (72,415) (78,343) (43,567) Deposits to reserve for replacements (22,092) (22,092) (21,948) Withdrawals from reserve for replacements 416 17,312 - ---------- ---------- ---------- Net cash used in investing activities (94,091) (83,123) (65,515) ---------- ---------- ---------- Cash flows from financing activities Repayment of mortgage payable (53,319) (49,479) (45,914) Distributions (25,214) (25,214) (25,214) ---------- ---------- ---------- Net cash used in financing activities (78,533) (74,693) (71,128) ---------- ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 24,257 30,682 83,653 Cash and cash equivalents, beginning 353,884 323,202 239,549 ---------- ---------- ---------- Cash and cash equivalents, ending $ 378,141 $ 353,884 $ 323,202 ========== ========== ========== See notes to financial statements FAWCETT'S POND APARTMENTS COMPANY STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Reconciliation of excess of revenue over expenses to net cash provided by operating activities Excess of revenue over expenses $ 62,653 $ 31,625 $ 75,230 Adjustments to reconcile excess of revenue over expenses to net cash provided by operating activities Depreciation 152,601 154,387 145,186 Amortization 8,159 8,162 8,162 Interest earned on reserve for replacements - (9,103) (6,520) Changes in assets and liabilities Increase in accounts receivable (636) (394) (399) Decrease in prepaid expenses 117 975 460 (Decrease) increase in mortgage escrow deposits 14,057 (31,945) (858) Increase (decrease) in tenants' security deposits - net 281 3,745 (1,529) (Decrease) increase in accounts payable and accrued expenses (42,496) 31,674 627 Decrease in accrued interest payable (333) (309) (287) Increase (decrease) in rent-deferred credits 2,478 (319) 224 ---------- ---------- --------- Net cash provided by operating activities $ 196,881 $ 188,498 $ 220,296 ========== ========== ========= See notes to financial statements FAWCETT'S POND APARTMENTS COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Fawcett's Pond Apartments Company (the Partnership) was formed as a limited partnership under the laws of the State of Massachusetts on June 30, 1983, for the purpose of constructing and operating a rental housing project under Section 221(d)(4) of the National Housing Act. The project consists of 100 units located in Hyannis, Massachusetts, and is currently operating under the name of Fawcett's Pond Apartments. All leases between the Partnership and the tenants of the property are operating leases. Annual cash distributions and incentive management fees are limited by agreements between the Partnership and the Department of Housing and Urban Development (HUD) to $31,517, which represents 6% of the initial equity investment, to the extent of surplus cash as defined by HUD. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash and repurchase agreements with maturities of three months or less when acquired, stated at cost which approximate fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. As of December 31, 1998, management does not believe that these are any current facts or circumstances that would indicate impairment of the rental property in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method which approximates the effective interest method. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Reclassifications - ----------------- Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentations. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1998 and 1997, the Partnership maintained tenant security deposits of $20,583 and $21,461 in interest-bearing escrow bank accounts and U.S. Treasury Bills. The investment in a U.S. Treasury Bill is held to maturity and is carried at cost which approximates fair value. The Partnership also has a reserve for replacements and mortgage escrow deposits totaling $340,450 and $332,831 at December 31, 1998 and 1997, respectively, on deposit with Reilly Mortgage Group, Inc. These funds are held in interest-bearing bank accounts and U.S. Treasury Bills, which are carried at cost and approximate fair value. NOTE C - PROPERTY AND EQUIPMENT - ------------------------------- Investment in property and equipment consisted of the following at December 31, 1998 and 1997: 1998 1997 ---- ---- Land $ 440,000 $ 440,000 Buildings and improvements 4,436,077 4,310,760 Furniture and equipment 767,210 160,152 ----------- ----------- 5,643,287 5,570,872 Less accumulated depreciation 2,344,695 2,192,094 ----------- ----------- $ 3,298,592 $ 3,378,778 =========== =========== NOTE D - MORTGAGE PAYABLE - ------------------------- The mortgage payable represents a permanent mortgage from the Government National Mortgage Association (GNMA) which is insured by the Federal Housing Administration (FHA) and is collateralized by a deed of trust on the rental property. The mortgage, which is due April 1, 2024, is payable in equal monthly installments of principal and interest totaling $30,746 and bears interest at a rate of 7.5%. Under agreements with the mortgage lender and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1998, are as follows: December 31, ------------ 1999 $ 57,459 2000 $ 61,920 2001 $ 66,727 2002 $ 71,907 2003 $ 71,489 Management believes that the carrying amount of the mortgage payable approximates fair value at December 31, 1998, as there is no significant difference in the market rate of interest for similar debt between that date and the date of the mortgage. NOTE E - HOUSING ASSISTANCE PAYMENT AGREEMENT - --------------------------------------------- The FHA contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants for all units. The agreement expires August 19, 2002. Total housing assistance payments received during 1998, 1997 and 1996 were $749,294, $751,930, and $755,658, respectively. NOTE F - RELATED PARTY TRANSACTIONS - ----------------------------------- Due to General Partners - ----------------------- At December 31, 1998 and 1997, due to general partner consisted of unpaid developer advances of $277,400. These advances are non-interest bearing and payable from proceeds upon sale or refinancing of the project after certain priority payments, as defined in the Partnership agreement. Management Fees - --------------- Management fees of 5% of gross receipts are paid to CMJ Management Company, Inc., an affiliate of the general partner, for its services as managing agent to the project pursuant to a management agreement approved by HUD. Such fees amounted to $47,131, $47,098 and $47,114 for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, CMJ Management Company received incentive management fees of $6,303 for the years ended December 31, 1998, 1997 and 1996. Reimbursed Costs - ---------------- CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting services, direct marketing and insurance costs) on behalf of the Partnership, which are reimbursed the following month. NOTE G - TAX BASIS INCOME (LOSS) - -------------------------------- The reconciliation of the excess of revenue over expenses reported in the accompanying statements of operations with the income (loss) reported on the Federal income tax basis follows: 1998 1997 1996 ---- ---- ---- Excess of revenue over expenses per statement of operations $ 62,653 $ 31,625 $ 75,230 GAAP to tax depreciation adjustment (137,101) (56,395) (65,916) Deferred rental income adjustment 2,248 328 224 --------- -------- -------- Income (loss) for Federal income tax purposes $(72,200) $(25,098) $ 9,538 ======== ======== ======== NOTE H - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances, including repurchase agreements and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risks exists with respect to these cash balances as of December 31, 1998. NOTE I - YEAR 2000 ISSUE - ------------------------ The general partner has assessed the Partnership's exposure to date sensitive computer software programs that may not be operative subsequent to 1999 and has implemented a requisite course of action to minimize year 2000 risk and ensure that neither significant costs nor disruption of normal business operations are encountered. However, because there is no guarantee that all systems of outside vendors or other entities affecting the Partnership's operations will be 2000 compliant, the Partnership remains susceptible to consequences of the Year 2000 Issue. NOTE J - CONTINUATION OF THE PARTNERSHIP - ---------------------------------------- The Partnership agreement allows the limited partner to cause the sale of the assets of the Partnership subsequent to June 30, 1995, but not earlier than one year after it has given written notice of its desire to cause such sale to the general partner, and only if, during such one-year period, the general partner does not cause the sale of the Partnership's assets. If the general partner has not caused the assets of the Partnership to be sold within such one-year period, the limited partner may cause such sale, but only after it has offered to sell the assets to the general partner, and either the general partner does not accept such offer within 90 days of receiving it, or the general partner does not complete the sale in accordance with such offer after accepting the terms. During October 1998, the limited partner gave the written notice described above to the general partner of the Partnership. In light of the decision by the limited partner to initiate this action under the terms of the Partnership agreement, it is currently contemplated that the disposition of the Partnership's assets and liquidation of the Partnership could be completed by the end of calendar year 1999. There are no assurances, however, that the disposition of the Partnership's assets and liquidation of the Partnership will be completed within this time frame. [REZNICK FEDDER & SILVERMAN] [letterhead] INDEPENDENT AUDITORS' REPORT To the Partners Quaker Meadows Apartments Company We have audited the accompanying balance sheets of Quaker Meadows Apartments Company as of December 31, 1998 and 1997, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quaker Meadows Apartments Company as of December 31, 1998 and 1997, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ REZNICK FEDDER & SILVERMAN ------------------------------ REZNICK FEDDER & SILVERMAN Baltimore, Maryland February 4, 1999 QUAKER MEADOWS APARTMENTS COMPANY BALANCE SHEETS December 31, 1998 and 1997 ASSETS 1998 1997 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 189,109 $ 215,117 Accounts receivable 49,264 43,303 Other receivables 381 48,428 Prepaid expenses 1,068 8,483 ---------- ---------- Total current assets 239,822 315,331 ---------- ---------- RESTRICTED DEPOSITS AND FUNDED RESERVES Tenant security deposits 18,685 18,113 Mortgage escrow deposits 12,742 13,369 Reserve for replacements 254,514 210,559 ---------- ---------- 285,941 242,041 ---------- ---------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $4,324,098 and $4,057,912 3,520,803 3,768,007 DEFERRED FINANCING COSTS, net of accumulated amortization of $66,591 and $62,526 63,560 67,625 ---------- ---------- Total assets $4,110,126 $4,393,004 ========== =========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 135,044 $ 119,880 Accounts payable and accrued expenses 46,245 40,379 Accrued interest payable 52,125 60,082 Rent deferred credits 3,658 4,013 ---------- ---------- Total current liabilities 237,072 224,354 ---------- ---------- LONG-TERM LIABILITIES Mortgage payable, less current maturities 4,839,950 4,974,964 Due to general partner 1,072,952 1,072,952 Tenants' security deposits 16,594 16,472 ---------- ---------- Total liabilities 6,166,568 6,288,742 PARTNERS' DEFICIT (2,056,442) (1,895,738) ---------- ---------- Total liabilities and partners' deficit $4,110,126 $4,393,004 ========== ========== See notes to financial statements QUAKER MEADOWS APARTMENTS COMPANY STATEMENT OF OPERATIONS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Revenue Rental income $1,594,319 $1,600,492 $1,592,837 Vacancies - (1,774) (6,464) Financial revenue 19,081 24,836 26,166 Other income 530 1,718 371 ---------- ---------- ---------- Total revenue 1,613,930 1,625,272 1,612,910 ---------- ---------- ----------- Expenses Operating expenses Administration 89,376 58,502 38,287 Management fees to affiliate 63,652 63,958 63,511 Utilities 130,386 136,254 125,632 Maintenance and repairs 167,879 220,781 162,266 Insurance 12,753 14,026 15,286 Real estate taxes 59,519 50,624 43,376 Salaries 130,272 125,272 158,372 ---------- ---------- ---------- Total operating expenses 653,837 669,417 606,730 ---------- ---------- ---------- Nonoperating expenses Interest 634,112 641,632 660,698 Depreciation and amortization 270,251 274,586 265,184 Incentive management fee to affiliate 76,627 68,655 29,375 Social services expenses 36,080 32,757 16,387 ---------- ---------- ---------- Total nonoperating expenses 1,017,070 1,017,630 971,644 ---------- ---------- ---------- Total expenses 1,670,907 1,687,047 1,578,374 ---------- ---------- ---------- EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSES $ (56,977) $ (61,775) $ 34,536 ========== ========== ========== See notes to financial statements QUAKER MEADOWS APARTMENTS COMPANY STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1998, 1997 and 1996 General Limited Partner Partner Total ------- ------- ----- Partners' deficit, December 31, 1995 $(331,607) $(1,389,261) $(1,720,868) Distributions (2,627) (49,914) (52,541) Excess of revenue over expenses 1,727 32,809 34,536 --------- ----------- ----------- Partners' deficit, December 31, 1996 (332,507) (1,406,366) (1,738,873) Distributions (4,753) (90,337) (95,090) Excess of expenses over revenue (3,089) (58,686) (61,775) --------- ----------- ----------- Partners' deficit, December 31, 1997 (340,349) (1,555,389) (1,895,738) Distributions (5,186) (98,541) (103,727) Excess of expenses over revenue (2,849) (54,128) (56,977) --------- ----------- ----------- Partners' deficit, December 31, 1998 $(348,384) $(1,708,058) $(2,056,442) ========= =========== =========== Profit and loss sharing percentage 5% 95% 100% = == === See notes to financial statements QUAKER MEADOWS APARTMENTS COMPANY STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Cash flows from operating activities Rental income received $1,588,003 $1,558,213 $1,591,659 Interest received 6,586 6,268 9,327 Other income received 530 16,194 - Administrative expenses paid (89,376) (91,259) (54,674) Management fees paid (63,652) (63,958) (68,922) Utilities paid (130,386) (137,125) (123,121) Maintenance and repair expenses paid (113,966) (202,054) (134,452) Real estate taxes paid (59,519) (50,624) (43,376) Property insurance paid (5,338) (12,724) (14,677) Interest paid on mortgage (642,069) (641,632) (660,698) Incentive fees paid (76,627) (68,655) (29,375) (Increase) decrease in mortgage escrow deposits 627 (595) 4,164 Net security deposits received (paid) (450) 529 1,947 Salaries and wages paid (130,272) (125,272) (158,372) Social Services expenses paid (36,080) (32,757) (16,387) ---------- ---------- ---------- Net cash provided by operating activities 248,011 154,549 303,043 ---------- ---------- ---------- Cash flows from investing activities Acquisition of land, building and equipment (18,982) (59,313) (32,288) Decrease (increase) in reserve for replacements (31,460) 58,103 (14,208) ---------- ---------- ---------- Net cash used in investing activities (50,442) (1,210) (46,496) ---------- ---------- ---------- Cash flows from financing activities Repayment of mortgage payable (119,850) (106,769) (94,935) Distributions (103,727) (95,090) (52,541) ---------- ---------- ---------- Net cash used in financing activities (223,577) (201,859) (147,476) ---------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (26,008) (48,520) 109,071 Cash and cash equivalents, beginning 215,117 263,637 154,566 ---------- ---------- ---------- Cash and cash equivalents, ending $ 189,109 $ 215,117 $ 263,637 ========== ========== ========== See notes to financial statements QUAKER MEADOWS APARTMENTS COMPANY STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Reconciliation of excess (deficiency) of revenue over expenses to net cash provided by operating activities Excess (deficiency) of revenue over expenses $ (56,977) $ (61,775) $ 34,536 Adjustments to reconcile excess (deficiency) of revenue over expenses to net cash provided by operating activities: Depreciation and amortization 270,251 274,586 265,184 Interest earned on reserve for replacement (12,495) (18,568) (18,345) Changes in assets and liabilities Decrease (increase) in accounts receivable 42,086 (26,255) 1,222 Decrease (increase) in mortgage escrow deposits 627 (595) 4,164 Decrease (increase) in tenants' security deposits - net (450) 529 1,947 Decrease in prepaid expenses 7,415 1,302 609 (Decrease) increase in accounts payable and accrued expenses (2,091) (14,901) 12,458 (Decrease) increase in rent deferred credits (355) 226 1,268 ---------- --------- --------- Net cash provided by operating activities $ 248,011 $ 154,549 $ 303,043 ========== ========= ========= See notes to financial statements QUAKER MEADOWS APARTMENTS COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------------------------- Quaker Meadows Apartments Company (the Partnership) was formed as a limited partnership under the laws of the State of Massachusetts on February 1, 1982, for the purpose of constructing and operating a rental housing project under Massachusetts Housing Finance Agency's (MHFA) housing program. The project consists of 104 rental units located in Lynn, Massachusetts, and is currently operating under the name of Quaker Meadows Apartments. All leases between the Partnership and tenants of the property are operating leases. Under a regulatory agreement with MHFA, the project is regulated as to cash distributions. Cash distributions, incentive management fees and resident council fees are limited to funds available for distribution as defined by MHFA. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash and repurchase agreements with maturities of three months or less when acquired, stated at cost which approximates fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. As of December 31, 1998, management does not believe that there are any current facts or circumstances that would indicate impairment of rental property in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121. Deferred Financing Costs - ------------------------ Deferred financing costs, which consist principally of financing fees are amortized by the straight-line method over the life of the related debt. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Reclassifications - ----------------- Certain amounts in the 1997 and 1996 financial statements have been reclassified in order to be consistent with the 1998 financial statement presentation. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1998 and 1997, the Partnership maintained tenant security deposits of $18,685 and $18,113, respectively, in interest bearing escrow bank accounts and U.S. Treasury Bills. The investment in a U.S. Treasury Bill is held to maturity and is carried at cost which approximates fair value. The Partnership also has a reserve for replacements and escrow funds totaling $267,256 and $223,928 at December 31, 1998 and 1997, respectively, on deposit with MHFA. These funds are held in interest bearing bank accounts which are carried at cost which approximate fair value. NOTE C - PROPERTY AND EQUIPMENT - ------------------------------- Investment in property and equipment consisted of the following at December 31, 1998 and 1997: 1998 1997 ---- ---- Land $ 46,363 $ 46,363 Buildings and improvements 7,051,645 7,051,645 Furniture and equipment 746,893 727,911 ----------- ----------- 7,844,901 7,825,919 Less accumulated depreciation 4,324,098 4,057,912 ----------- ----------- $ 3,520,803 $ 3,768,007 =========== =========== NOTE D - MORTGAGE PAYABLE - ------------------------- The mortgage payable represents a permanent mortgage from the Massachusetts Housing Finance Agency (MHFA), due September 1, 2013, and payable in equal monthly installments of $62,930 (principal and interest) at an interest rate of 12.5%. The terms of the permanent mortgage also require monthly escrow deposits for real estate taxes and a replacement reserve. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1998, are as follows: December 31, ------------ 1999 $ 135,044 2000 $ 151,877 2001 $ 170,808 2002 $ 192,098 2003 $ 216,043 Management believes it is not practical to estimate the fair value of the mortgage payable to MHFA because programs with similar characteristics are not currently available to the partnership. NOTE E - HOUSING ASSISTANCE PAYMENT AGREEMENT - --------------------------------------------- The Federal Housing Administration (FHA) has contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants. The agreement expires May 2002, and has two five-year renewal options. Total housing assistance payments received during 1998, 1997 and 1996 were $1,310,382, $1,312,610 and $1,319,893, respectively. NOTE F - RELATED PARTY TRANSACTIONS - ----------------------------------- At December 31, 1998 and 1997, due to the general partner consists of development advances totaling $1,072,952. These advances are non-interest bearing and payable from proceeds upon the sale or refinancing of the project as defined in the Partnership agreement. Management fees of 4% of gross receipts are paid to CMJ Management Company, Inc., an affiliate of the general partner, for its services as management agent to the project, pursuant to a management agreement approved by MHFA. Such fees amounted to $63,652, $63,958 and $63,511 for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, CMJ Management Company, Inc., received incentive management fees of $76,627, $68,655 and $29,375 for the years ended December 31, 1998, 1997 and 1996 respectively. CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE G - TAX BASIS (LOSS) INCOME - -------------------------------- The reconciliation of the excess (deficiency) of revenue over expenses reported in the accompanying statement of operations with the (loss) income reported on the Federal income tax basis follows: 1998 1997 1996 ---- ---- ---- Excess (deficiency) of revenue over expenses per statement of operations $ (56,977) $ (61,775) $ 34,536 GAAP to tax depreciation adjustment (143,496) 26,048 22,002 Deferred rental income adjustment 3,659 226 1,268 ---------- --------- --------- (Loss) income for Federal income tax purposes $ (196,814) $ (35,501) $ 57,806 ========== ========= ========= NOTE H - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances, including repurchase agreements and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risk exists with respect to these cash balances as of December 31, 1998. NOTE I - YEAR 2000 ISSUE - ------------------------ The general partner has assessed the Partnership's exposure to date sensitive computer software programs that may not be operative subsequent to 1999 and has implemented a requisite course of action to minimize year 2000 risk and ensure that neither significant costs nor disruption of normal business operations are encountered. However, because there is no guarantee that all systems of outside vendors or other entities affecting the Partnership's operations will be 2000 compliant, the Partnership remains susceptible to consequences of the Year 2000 Issue. NOTE J - CONTINUATION OF THE PARTNERSHIP - ---------------------------------------- The Partnership agreement allows the limited partner to cause the sale of the assets of the Partnership subsequent to June 30, 1995, but not earlier than one year after it has given written notice of its desire to cause such sale to the general partner, and only if, during such one-year period, the general partner does not cause the sale of the Partnership's assets. If the general partner has not caused the assets of the Partnership to be sold within such one-year period, the limited partner may cause such sale, but only after it has offered to sell the assets to the general partner, and either the general partner does not accept such offer within 90 days of receiving it, or the general partner does not complete the sale in accordance with such offer after accepting the terms. During October 1998, the limited partner gave the written notice described above to the general partner of the Partnership. In light of the decision by the limited partner to initiate this action under the terms of the Partnership agreement, it is currently contemplated that the disposition of the Partnership's assets and liquidation of the Partnership could be completed by the end of calendar year 1999. There are no assurances, however, that the disposition of the Partnership's assets and liquidation of the Partnership will be completed within this time frame. [REZNICK FEDDER & SILVERMAN] [letterhead] INDEPENDENT AUDITORS' REPORT To the Partners South Laurel Apartments Limited Partnership We have audited the accompanying balance sheets of South Laurel Apartments Limited Partnership as of December 31, 1998 and 1997, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Laurel Apartments Limited Partnership as of December 31, 1998 and 1997, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ REZNICK FEDDER & SILVERMAN ------------------------------ REZNICK FEDDER & SILVERMAN Baltimore, Maryland February 4, 1999 SOUTH LAUREL APARTMENTS LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1998 and 1997 ASSETS 1998 1997 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 322,501 $ 234,973 Accounts receivable 24,580 33,057 Other receivables - 11,258 Prepaid expenses 151,963 152,302 ---------- ---------- Total current assets 499,044 431,590 ---------- ---------- RESTRICTED DEPOSITS AND FUNDED RESERVES Tenants' security deposits 119,274 111,904 Mortgage escrow deposits 168,666 160,348 Reserve for replacement 143,468 115,619 ---------- ---------- 431,408 387,871 ---------- ---------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $7,331,024 and $6,871,824 8,129,744 8,546,454 DEFERRED FINANCING COSTS, net of accumulated amortization of $197,758 and $185,596 312,968 325,130 ---------- ---------- Total assets $9,373,164 $9,691,045 ========== ========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 165,533 $ 153,608 Accounts payable and accrued expenses 70,941 81,431 Accrued interest payable 73,068 74,028 Rent deferred credits 5,170 11,392 Deferred income - laundry 30,000 35,000 Due to affiliates 2,181 - ---------- ---------- Total current liabilities 346,893 355,459 ---------- ---------- LONG-TERM LIABILITIES Mortgage payable, less current maturities 11,525,378 11,690,911 Due to general partner 645,989 645,989 Tenants' security deposits 122,670 111,904 ---------- ---------- Total liabilities 12,640,930 12,804,263 PARTNERS' DEFICIT (3,267,766) (3,113,218) ---------- ---------- Total liabilities and partners' deficit $9,373,164 $9,691,045 ========== ========== See notes to financial statements South Laurel Apartments Limited Partnership STATEMENT OF OPERATIONS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Revenue Rental income $4,337,446 $4,298,989 $4,246,199 Vacancies (249,244) (306,701) (223,408) Financial revenue 22,548 18,629 16,422 Other income 119,662 109,369 98,411 ---------- ---------- ---------- Total revenue 4,230,412 4,120,286 4,137,624 ---------- ---------- ---------- Expenses Operating expenses Administration 420,403 483,602 448,578 Management fee 218,093 214,497 213,145 Utilities 510,907 485,153 505,851 Maintenance and repairs 920,248 810,622 1,031,681 Salaries 529,704 519,252 524,535 Insurance 39,108 44,875 47,056 Real estate taxes 252,279 260,632 259,349 ---------- ---------- ---------- Total operating expenses 2,890,742 2,818,633 3,030,195 ---------- ---------- ---------- Nonoperating expenses Interest 882,171 893,305 903,638 Mortgage insurance premium 58,812 59,553 60,243 Depreciation and amortization 471,362 479,869 467,072 Incentive management fee 2,985 - - Miscellaneous financial expenses 1,424 3,750 3,710 ---------- ---------- ---------- Total nonoperating expenses 1,416,754 1,436,477 1,434,663 ---------- ---------- ---------- Total expenses 4,307,496 4,255,109 4,464,858 ---------- ---------- ---------- EXCESS OF EXPENSES OVER REVENUE $ (77,084) $ (134,824) $ (327,234) ========== ========== =========== See notes to financial statements SOUTH LAUREL APARTMENTS LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1998, 1997 and 1996
Special Class A Class B General Limited Limited Limited Partners Partners Partner Partners Total -------- -------- ------- -------- ----- Partners' deficit, December 31, 1995 $(103,509) $(1,265,170) $ (776,520) $ (505,961) $(2,651,160) Excess of expenses over revenue (3,272) (13,089) (278,150) (32,723) (327,234) --------- ----------- ----------- ----------- ----------- Partners' deficit, December 31, 1996 (106,781) (1,278,259) (1,054,670) (538,684) (2,978,394) Excess of expenses over revenue (1,348) (5,394) (114,600) (13,482) (134,824) --------- ----------- ----------- ----------- ----------- Partners' deficit, December 31, 1997 (108,129) (1,283,653) (1,169,270) (552,166) (3,113,218) Distributions (775) (3,099) (65,844) (7,746) (77,464) Excess of expenses over revenue (771) (3,083) (65,522) (7,708) (77,084) --------- ----------- ----------- ----------- ----------- Partners' deficit, December 31, 1998 $(109,675) $(1,289,835) $(1,300,636) $ (567,620) $(3,267,766) ========= =========== =========== =========== =========== Profit and loss sharing percentage 1% 4% 85% 10% 100% = = == == ===
See notes to financial statements SOUTH LAUREL APARTMENTS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Cash flows from operating activities Rental income received $4,090,458 $4,011,723 $4,023,207 Interest received 19,878 15,309 13,441 Other income received 124,158 102,435 94,716 Administrative expenses paid (427,196) (483,602) (441,876) Utilities paid (514,815) (492,180) (516,504) Management fees paid (218,093) (214,497) (213,145) Maintenance and repairs expenses paid (916,171) (861,868) (1,032,327) Salaries paid (487,275) (474,215) (479,525) Real estate taxes paid (251,887) (260,467) (252,822) Payroll taxes paid (42,429) (39,245) (45,010) Property insurance paid (39,085) (44,875) (47,772) Mortgage insurance paid (58,812) (59,158) (60,243) Interest paid on mortgage (883,131) (894,196) (904,465) Miscellaneous financial expenses paid (1,424) (3,750) (3,710) Incentive management fees (2,985) - - Net security deposits received 3,396 3,088 1,129 Decrease (increase) in mortgage escrow deposits (8,318) 22,891 (24,153) ---------- ---------- ---------- Net cash provided by operating activities 386,269 327,393 110,941 ---------- ---------- ---------- Cash flows from investing activities Additions to property and equipment (42,490) (137,952) (141,563) Deposits to reserve for replacements (52,520) (52,520) (52,520) Withdrawals from reserve for replacements 27,341 85,111 88,357 ---------- ---------- ---------- Net cash used in investing activities (67,669) (105,361) (105,726) ---------- ---------- ---------- Cash flows from financing activities Mortgage principal payments (153,608) (142,542) (132,273) Distributions to partners (77,464) - - ---------- ---------- ---------- Net cash used in financing activities (231,072) (142,542) (132,273) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 87,528 79,490 (127,058) Cash and cash equivalents, beginning 234,973 155,483 282,541 ---------- ---------- ---------- Cash and cash equivalents, ending $ 322,501 $ 234,973 $ 155,483 ========== ========== ========== See notes to financial statements SOUTH LAUREL APARTMENTS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Reconciliation of excess of expenses over revenue to net cash provided by operating activities Excess of expenses over revenue $ (77,084) $(134,824) $(327,234) Adjustments to reconcile excess of expenses over revenue to net cash provided by operating activities Depreciation 459,200 467,707 454,910 Amortization 12,162 12,162 12,162 Interest earned on reserve for replacements (2,670) (3,320) (2,981) Changes in assets and liabilities Decrease (increase) in tenant accounts receivable 8,477 31,282 33,847 Decrease (increase) in accounts receivable - other 11,258 (1,934) 1,305 Decrease in prepaid expenses 339 6,351 12,513 Decrease (increase) in mortgage escrow deposits (8,318) 22,891 (24,153) (Decrease) increase in accounts payable and accrued expenses (10,490) (58,273) (11,299) Decrease in accrued interest payable (960) (891) (827) (Decrease) increase in rent - deferred credits (6,222) (11,845) (33,431) Decrease in deferred laundry income (5,000) (5,000) (5,000) Increase in due to/from affiliates - net 2,181 - - Tenants' security deposits received - net 3,396 3,087 1,129 --------- --------- --------- Net cash provided by operating activities $ 386,269 $ 327,393 $ 110,941 ========= ========= ========= See notes to financial statements SOUTH LAUREL APARTMENTS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- South Laurel Apartments Limited Partnership (the Partnership) was formed as a limited partnership under the laws of the State of Maryland on June 30, 1983, for the purpose of constructing and operating a rental housing project under Section 221(d)(4) of the National Housing Act. The project consists of 520 units located in Laurel, Maryland, and is currently operating under the name of Villages at Montpelier. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions are limited by agreements between the Partnership and HUD to the extent of surplus cash as defined by HUD. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash and repurchase agreements with maturities of three months or less when acquired, stated at cost which approximates fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. As of December 31, 1998, management does not believe that there are any current facts or circumstances that would indicate impairment of rental property in accordance with Statement of Financial Accounting Standards (SFAS) No. 121. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method, which approximates the effective interest method. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Reclassifications - ----------------- Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1998 and 1997, the Partnership maintained tenant security deposits of $119,274 and $111,904 in interest-bearing escrow bank accounts which are carried at cost and approximate fair value. The Partnership also has a reserve for replacements and escrow funds totaling $312,134 and $275,967 at December 31, 1998 and 1997, respectively, on deposit with Reilly Mortgage Group, Inc. These funds are held in interest-bearing bank accounts and a money market account which are carried at cost and approximate fair value. NOTE C - PROPERTY AND EQUIPMENT - ------------------------------- Investment in property and equipment consisted of the following at December 31, 1998 and 1997: 1998 1997 ---- ---- Land $ 140,756 $ 140,756 Buildings and improvements 15,149,544 15,107,054 Furniture and equipment 170,468 170,468 ----------- ----------- 15,460,768 15,418,278 Less accumulated depreciation 7,331,024 6,871,824 ----------- ----------- $ 8,129,744 $ 8,546,454 ============ ============ NOTE D - MORTGAGE PAYABLE - ------------------------- The mortgage is insured by the Federal Housing Administration (FHA) and collateralized by a deed of trust on the rental property. The mortgage, which is due December 1, 2023, is payable in equal monthly installments of principal and interest totaling $86,395 and bears interest at a rate of 7.5%. Under agreements with the mortgage lender and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of partnership assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1998, are as follows: December 31, ------------ 1999 $ 165,533 2000 $ 178,384 2001 $ 192,232 2002 $ 207,155 2003 $ 223,237 Management believes that the carrying amounts of the Partnerships mortgage approximates fair value at December 31, 1998, as there is no significant difference in the market rate of interest between that date and the date of the mortgage. NOTE E - HOUSING ASSISTANCE PAYMENT AGREEMENT - --------------------------------------------- FHA contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants for 20% of the rental units. The agreement expired July 31, 1997, and management has not applied for an extension of the agreement. Total housing assistance payments received during 1997 and 1996 were $506,366 and $686,293, respectively. NOTE F - RELATED PARTY TRANSACTIONS - ----------------------------------- Due to General Partner - ---------------------- At December 31, 1998 and 1997, due to general partner consists of unpaid development advances of $645,989. These advances are non-interest bearing and payable from proceeds upon sale or refinancing of the project after certain priority payments as defined in the Partnership agreement. Management Fees - --------------- The project is managed by CMJ Management Company, Inc., an affiliate of the general partner, under an agreement approved by HUD which provides for a management fee of 5.25% of monthly rental collections. Further, CMJ Management Company, Inc. is paid accounting and bookkeeping fees. Such fees amounted to $218,093 and $45,492, respectively. In addition, CMJ Management Company, Inc. received an incentive management fee of $2,985 for the year ended December 31, 1998. Reimbursed Costs - ---------------- CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE G - TAX BASIS LOSS - ----------------------- The reconciliation of the excess of expenses over revenue reported in the accompanying statement of operations with the loss reported on a Federal income tax basis follows: 1998 1997 1996 ---- ---- ---- Excess of revenue over expenses per statement of operations $ (77,084) $(134,824) $(327,234) Deferred rental income and laundry income adjustment (11,213) (16,844) (38,431) GAAP to tax depreciation adjustment (136,923) (166,665) (186,827) --------- --------- --------- Loss for Federal income tax purposes $(225,220) $(318,333) $(552,492) ========= ========= ========= NOTE H - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances, including repurchase agreements and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration of credit risk exists with respect to these cash balances as of December 31, 1998. NOTE I - YEAR 2000 ISSUE - ------------------------ The general partner has assessed the Partnership's exposure to date sensitive computer software programs that may not be operative subsequent to 1999 and has implemented a requisite course of action to minimize year 2000 risk and ensure that neither significant costs nor disruption of normal business operations are encountered. However, because there is no guarantee that all systems of outside vendors or other entities affecting the Partnership's operations will be 2000 compliant, the Partnership remains susceptible to consequences of the Year 2000 Issue. NOTE J - CONTINUATION OF THE PARTNERSHIP - ---------------------------------------- The Partnership agreement allows the limited partner to cause the sale of the assets of the Partnership subsequent to June 30, 1995, but not earlier than one year after it has given written notice of its desire to cause such sale to the general partner, and only if, during such one-year period, the general partner does not cause the sale of the Partnership's assets. If the general partner has not caused the assets of the Partnership to be sold within such one-year period, the limited partner may cause such sale, but only after it has offered to sell the assets to the general partner, and either the general partner does not accept such offer within 90 days of receiving it, or the general partner does not complete the sale in accordance with such offer after accepting the terms. During October 1998, the limited partner gave the written notice described above to the general partner of the Partnership. In light of the decision by the limited partner to initiate this action under the terms of the Partnership agreement, it is currently contemplated that the disposition of the Partnership's assets and liquidation of the Partnership could be completed by the end of calendar year 1999. There are no assurances, however, that the disposition of the Partnership's assets and liquidation of the Partnership will be completed within this time frame. [REZNICK FEDDER & SILVERMAN] [letterhead] INDEPENDENT AUDITORS' REPORT To the Partners Marvin Gardens Associates We have audited the accompanying balance sheets of Marvin Gardens Associates as of December 31, 1998 and 1997, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Marvin Gardens Associates as of December 31, 1998 and 1997, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ REZNICK FEDDER & SILVERMAN ------------------------------ REZNICK FEDDER & SILVERMAN Baltimore, Maryland February 4, 1999 MARVIN GARDENS ASSOCIATES BALANCE SHEETS December 31, 1998 and 1997 ASSETS 1998 1997 ---- ---- CURRENT ASSETS Cash $ 37,207 $ 30,259 Accounts receivable 1,694 3,024 Accounts receivable - tenant subsidy 2,723 1,441 Prepaid expenses 3,741 4,022 ---------- ---------- Total current assets 45,365 38,746 ---------- ---------- RESTRICTED DEPOSITS AND FUNDED RESERVES Tenant security deposits 10,677 9,989 Real estate tax impound fund 5,822 7,190 Replacement reserve fund 121,104 118,306 Insurance impound fund 4,146 10,794 Interest income receivable - impounds 1,480 1,665 ---------- ---------- 143,229 147,944 ---------- ---------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,187,715 and $1,112,978 1,233,596 1,308,333 DEFERRED FINANCING COSTS, net of accumulated amortization of $22,318 and $20,945 24,051 25,424 ---------- ---------- Total assets $1,446,241 $1,520,447 ========== ========== LIABILITIES AND PARTNERS' DEFICIT LIABILITIES Current maturities of mortgage payable $ 59,171 $ 54,555 Accounts payable and accrued expenses 20,236 20,136 Deferred rental income 156 366 ----------- ---------- Total current liabilities 79,563 75,057 ----------- ---------- Mortgage payable, less current maturities 1,500,449 1,556,072 Due to general partner 194,019 194,019 Tenants' security deposits 7,869 7,217 ----------- ---------- Total liabilities 1,781,900 1,832,365 PARTNERS' DEFICIT (335,659) (311,918) ----------- ---------- Total liabilities and partners' deficit $ 1,446,241 $1,520,447 =========== ========== See notes to financial statements MARVIN GARDENS ASSOCIATES STATEMENT OF OPERATIONS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Revenue Rental income $406,235 $ 410,401 $410,364 Vacancies (3,603) (1,496) (1,639) Financial revenue 6,798 7,742 6,815 Other income 4,887 8,405 4,321 -------- --------- -------- Total revenue 414,317 425,052 419,861 -------- --------- -------- Expenses Operating expenses Administration 18,488 25,512 17,356 Utilities 27,546 29,201 23,833 Management fee 17,782 17,738 17,533 Maintenance and repairs 66,813 75,504 51,999 Salaries 58,611 56,766 59,441 Insurance 7,906 8,102 8,378 Real estate taxes 23,015 22,556 22,271 -------- --------- -------- Total operating expenses 220,161 235,379 200,811 -------- --------- -------- Nonoperating expenses Interest 129,258 133,514 137,438 Depreciation and amortization 76,110 76,109 75,338 Incentive management fee 918 - - -------- --------- -------- Total nonoperating expenses 206,349 209,623 212,776 -------- --------- -------- Total expenses 426,510 445,002 413,587 -------- --------- -------- EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSES $(12,193) $ (19,950) $ 6,274 ======== ========= ======== See notes to financial statements MARVIN GARDENS ASSOCIATES STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1998, 1997 and 1996
Special General Limited Limited Partners Partners Partner Total -------- -------- ------- ----- Balance, December 31, 1995 $ (8,867) $(69,591) $(215,751) $(294,209) Excess of revenue over expenses 63 251 5,960 6,274 --------- -------- --------- --------- Balance, December 31, 1996 (8,804) (69,340) (209,791) (287,935) Distributions (40) (161) (3,832) (4,033) Excess of expenses over revenue (199) (798) (18,953) (19,950) --------- -------- --------- --------- Balance, December 31, 1997 (9,043) (70,299) (232,576) (311,918) Distributions (116) (462) (10,970) (11,548) Excess of expenses over revenue (122) (488) (11,583) (12,193) --------- -------- --------- --------- Balance, December 31, 1998 $ (9,281) $(71,249) $(255,129) $(335,659) ========= ======== ========= ========= Profit and loss sharing percentage 1% 4% 95% 100% = = == ===
See notes to financial statements MARVIN GARDENS ASSOCIATES STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Cash flows from operating activities Rental income received $402,470 $405,562 $409,972 Interest received 203 1,256 1,011 Other income received 4,887 8,405 4,321 Administrative expenses paid (26,330) (25,512) (17,356) Management fees paid (17,782) (17,738) (17,533) Utilities paid (27,546) (28,085) (23,833) Salaries and wages paid (45,857) (52,567) (46,384) Maintenance and repairs expenses paid (66,713) (75,937) (51,326) Real estate taxes paid (23,015) (22,556) (22,271) Payroll taxes paid (4,912) (4,199) (13,057) Property and other insurance paid (7,625) (5,592) (8,267) Interest paid on mortgage (129,258) (133,514) (137,438) Incentive management fee paid (981) - - Decrease (increase) in insurance impound fund 6,648 (5,023) (1,581) Decrease (increase) in real estate tax impound fund 1,368 (900) (162) Net security deposits paid (36) (195) (296) -------- -------- -------- Net cash provided by operating activities 65,521 43,405 75,800 -------- -------- -------- Cash flows from investing activities Additions to property and equipment - (6,170) (7,425) Deposits to reserve for replacements (13,440) (16,128) (16,128) Withdrawals from reserve for replacements 17,422 42,312 - -------- -------- -------- Net cash provided by (used in) investing activities 3,982 20,014 (23,553) -------- -------- -------- Cash flows from financing activities Repayment of mortgage payable (51,007) (50,300) (46,375) Distributions (11,548) (4,033) - -------- -------- -------- Net cash used in financing activities (62,555) (54,333) (46,375) -------- -------- -------- NET INCREASE (DECREASE) IN CASH 6,948 9,086 5,872 Cash and cash equivalents, beginning 30,259 21,173 15,301 -------- -------- -------- Cash and cash equivalents, ending $ 37,207 $ 30,259 $ 21,173 ======== ======== ======== See notes to financial statements MARVIN GARDENS ASSOCIATES STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Reconciliation of excess (deficiency) of revenue over expenses to net cash provided by operating activities Excess (deficiency) of revenue over expenses $ (12,193) $ (19,950) $ 6,274 Adjustments to reconcile excess (deficiency) of revenue over expenses to net cash provided by operating activities Depreciation 74,737 74,736 73,965 Amortization of deferred financing costs 1,373 1,373 1,373 Interest earned on reserve for replacements (6,780) (6,027) (5,796) Changes in assets and liabilities: (Increase) decrease in accounts receivable - tenant subsidy (1,282) (1,441) 3,221 Decrease (increase) in accounts receivable 1,515 (2,004) (183) Increase in interest income receivable - impounds - (459) (8) Decrease in prepaid expenses 281 2,510 111 Decrease (increase) in real estate tax impound fund 1,368 (900) (162) Decrease (increase) in insurance impound fund 6,648 (5,023) (1,581) Increase in accounts payable and accrued expenses 100 683 673 (Increase) decrease in deferred rent credits (210) 102 (1,791) Net security deposits paid (36) (195) (296) ---------- --------- -------- Net cash provided by operating activities $ 65,521 $ 43,405 $ 75,800 ========== ========= ======== See notes to financial statements MARVIN GARDENS ASSOCIATES NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Marvin Gardens Associates (the Partnership) is a California limited partnership which commenced operations in February 1983. The Partnership owns and operates a 37-unit rental housing project (the Project) located in Modesto, California. The Project operates under Section 8 of the National Housing Act and, therefore, receives monthly rental subsidies from the U.S. Department of Housing and Urban Development (HUD). The agreement expires in July 2003, and has two five-year renewal options. For the years ended December 31, 1998, 1997 and 1996, rental subsidies for the Project totaled $308,541, $328,830 and $324,129, respectively. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions are limited by agreements between the Partnership and the California Housing Finance Agency (CHFA) to $20,151 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. As of December 31, 1998, management does not believe that there are any current facts or circumstances that would indicate impairment of rental property in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method which approximates the effective interest method. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Reclassifications - ----------------- Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1998 and 1997, the Partnership maintained tenant security deposits of $10,677 and $9,989, respectively, in an interest bearing escrow bank account and a certificate of deposit which are carried at cost and approximate fair value. The Partnership also has a reserve for replacements and escrow funds totalling $132,552 and $137,955 at December 31, 1998 and 1997, respectively, on deposit with CHFA. These funds are held in interest bearing bank accounts, which are carried at cost and approximate fair value. NOTE C - PROPERTY AND EQUIPMENT - ------------------------------- Investment in property and equipment consisted of the following at December 31, 1998 and 1997: 1998 1997 ---- ---- Land $ 294,320 $ 294,320 Buildings and improvements 2,126,991 2,126,991 ----------- ----------- 2,421,311 2,421,311 Less accumulated depreciation 1,187,715 1,112,978 ----------- ----------- $ 1,233,596 $ 1,308,333 =========== =========== NOTE D - MORTGAGE PAYABLE - ------------------------- The mortgage payable represents a mortgage from the CHFA which is due on June 1, 2013, and is collateralized by a deed of trust on the rental property and the CHFA has been granted a security interest in rental subsidies. The mortgage is payable in monthly installments of principal and interest at the rate of 8.15%, totalling $15,310. Terms of the mortgage agreement also require monthly escrow deposits to be made to fund real estate tax, insurance, and a replacement reserve account. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1998, are as follows: December 31, ------------ 1999 $ 59,171 2000 $ 64,178 2001 $ 69,908 2002 $ 75,498 2003 $ 81,887 Management believes that the carrying amount of the mortgage payable approximates fair value at December 31, 1998, as there is no significant difference in the market rate of interest for similar debt between that rate and the rate of the mortgage. NOTE E - RELATED PARTY TRANSACTIONS - ----------------------------------- At December 31, 1998 and 1997, due to developer/general partner consisted of development advances of $194,019. These advances are non-interest bearing and payable from proceeds upon sale or refinancing of the Project after certain priority payments as defined in the Partnership agreement. The Partnership has a contractual management agreement with CMJ Management Company, Inc., an affiliate of the general partner, to provide property management services for the Project. CMJ Management Company, Inc. has hired an unaffiliated management agent to provide those services on its behalf. Total management fees paid for each of the years ended December 31, 1998, 1997 and 1996 were $17,782, $17,738 and $17,533, respectively. Effective September 1994, CMJ Management Company, Inc. receives 30% of the monthly fee which totaled $5,335, $5,321 and $5,112 for the years ended December 31, 1998, 1997 and 1996, respectively. For the year ended December 31, 1998, incentive management fee charged for the project totalled $981. NOTE F - TAX BASIS LOSS - ----------------------- The reconciliation of the excess (deficiency) of revenue over expenses reported in the accompanying statements of operations with the loss reportable on a Federal income tax basis for the years ended December 31, 1998, 1997 and 1996, are as follows: 1998 1997 1996 ---- ---- ---- Excess (deficiency) of revenue over expenses per statements of operations $ (12,193) $ (19,950) $ 6,274 GAAP to tax depreciation adjustment (30,842) (11,448) (13,924) Deferred rental income adjustments (202) 102 (1,790) ---------- --------- --------- Loss for Federal income tax purposes $ (43,237) $ (31,296) $ (9,440) ========== ========== ========= NOTE G - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risk exists with respect to these cash balances as of December 31, 1998. NOTE H - YEAR 2000 ISSUE - ------------------------ The general partner has assessed the Partnership's exposure to date sensitive computer software programs that may not be operative subsequent to 1999 and has implemented a requisite course of action to minimize year 2000 risk and ensure that neither significant costs nor disruption of normal business operations are encountered. However, because there is no guarantee that all systems of outside vendors or other entities affecting the Partnership's operations will be year 2000 compliant, the Partnership remains susceptible to consequences of the Year 2000 Issue. NOTE I - CONTINUATION OF THE PARTNERSHIP - ---------------------------------------- The Partnership agreement allows the limited partner to cause the sale of the assets of the Partnership subsequent to June 30, 1995, but not earlier than one year after it has given written notice of its desire to cause such sale to the general partner, and only if, during such one-year period, the general partner does not cause the sale of the Partnership's assets. If the general partner has not caused the assets of the Partnership to be sold within such one-year period, the limited partner may cause such sale, but only after it has offered to sell the assets to the general partner, and either the general partner does not accept such offer within 90 days of receiving it, or the general partner does not complete the sale in accordance with such offer after accepting the terms. During October 1998, the limited partner gave the written notice described above to the general partner of the Partnership. In light of the decision by the limited partner to initiate this action under the terms of the Partnership agreement, it is currently contemplated that the disposition of the Partnership's assets and liquidation of the Partnership could be completed by the end of calendar year 1999. There are no assurances, however, that the disposition of the Partnership's assets and liquidation of the Partnership will be completed within this time frame. [REZNICK FEDDER & SILVERMAN] [letterhead] INDEPENDENT AUDITORS' REPORT To the Partners Colonial Farms, Ltd. We have audited the accompanying balance sheets of Colonial Farms, Ltd. as of December 31, 1998 and 1997, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Colonial Farms, Ltd. as of December 31, 1998 and 1997, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ REZNICK FEDDER & SILVERMAN ------------------------------ REZNICK FEDDER & SILVERMAN Baltimore, Maryland February 4, 1999 COLONIAL FARMS LTD. BALANCE SHEETS December 31, 1998 and 1997 ASSETS 1998 1997 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 69,430 $ 72,579 Rents receivable 1,100 12,634 Deposits 675 - Prepaid expenses 4,808 3,021 ---------- ---------- Total current assets 76,013 88,234 ---------- ---------- RESTRICTED DEPOSITS AND FUNDED RESERVES Real estate tax impound fund 14,141 13,228 Replacement reserve fund 236,465 235,940 Insurance impound fund 8,961 16,164 Reserve fund for operations 43,101 41,172 Tenants' security deposits 25,281 23,520 Interest income receivable - impounds 3,370 3,631 ---------- ---------- 331,319 333,655 ---------- ---------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,064,714 and $1,938,862 2,038,935 2,164,787 DEFERRED FINANCING COSTS, net of accumulated amortization of $38,140 and $35,863 37,627 39,904 ---------- ---------- Total assets $2,483,894 $2,626,580 ========== ========== LIABILITIES AND PARTNERS' DEFICITS LIABILITIES Current maturities of mortgage payable $ 92,191 $ 84,159 Accounts payable 22,286 21,127 Accrued expenses 20,046 27,789 Deferred rental income 2,868 464 ---------- ---------- Total current liabilities 137,391 133,539 ---------- ---------- Mortgage payable, less current maturities 2,536,750 2,628,942 Due to general partner 318,115 318,115 Tenants' security deposits 19,455 18,166 ---------- ---------- Total liabilities 3,011,711 3,098,762 PARTNERS' DEFICIT (527,817) (472,182) ---------- ---------- Total liabilities and partners' deficit $2,483,894 $2,626,580 ========== ========== See notes to financial statements COLONIAL FARMS LTD. STATEMENTS OF OPERATIONS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Revenue Rental income $ 786,081 $ 785,784 $ 786,180 Vacancies (23,294) (7,410) (9,462) Financial revenue 16,527 17,490 15,910 Other income 32,685 23,694 19,315 --------- --------- --------- Total revenue 811,999 819,558 811,943 --------- --------- --------- Operating expenses Administrative 68,108 34,428 29,578 Management fee 43,440 42,640 38,060 Utilities 31,434 34,619 32,942 Maintenance and repairs 167,816 155,984 129,475 Salaries 81,180 79,871 73,791 Insurance 13,372 12,135 12,794 Property taxes 42,663 41,368 40,322 --------- --------- --------- Total operating expenses 448,013 401,045 356,962 --------- --------- --------- Nonoperating expenses Interest 244,135 244,011 258,803 Depreciation and amortization 128,129 128,173 124,258 Incentive management fee 7,060 7,060 7,060 Earned surplus reimbursement 12,058 69,666 2,610 --------- --------- --------- Total nonoperating expenses 391,382 448,910 392,731 --------- --------- --------- Total expenses 839,395 849,955 749,693 --------- --------- --------- EXCESS (DEFICIENCY) OF REVENUE OVER EXPENSES $ (27,396) $ (30,397) $ 62,250 ========= ========= ========= See notes to financial statements COLONIAL FARMS LTD. STATEMENTS OF PARTNERS' DEFICIT
Special General Limited Limited Partners Partners Partner Total -------- -------- ------- ----- Balance, December 31, 1995 $(23,713) $(95,195) $(328,651) $(447,559) Distributions (565) (846) (26,827) (28,238) Excess of revenue over expenses 1,245 1,868 59,137 62,250 --------- -------- --------- --------- Balance, December 31, 1996 (23,033) (94,173) (296,341) (413,547) Distributions (565) (847) (26,826) (28,238) Excess of expenses over revenue (608) (912) (28,877) (30,397) --------- -------- --------- --------- Balance, December 31, 1997 (24,206) (95,932) (352,044) (472,182) Distributions (565) (847) (26,827) (28,238) Excess of expenses over revenue (548) (822) (26,026) (27,396) --------- -------- --------- --------- Balance, December 31, 1998 $(25,319) $(97,601) $(404,897) $(527,817) ======== ======== ========= ========= Profit and loss sharing percentage 2% 3% 95% 100% = = == ===
See notes to financial statements COLONIAL FARMS, LTD. STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Cash flows from operating activities Rental income received $776,725 $770,456 $778,056 Interest received 6,303 5,597 5,311 Other income received 32,685 23,694 19,315 Administrative expenses paid (68,108) (34,427) (29,578) Management fees paid (43,440) (42,640) (38,060) Utilities paid (31,434) (40,324) (32,942) Salaries and wages paid (67,973) (67,643) (64,278) Maintenance and repairs expenses paid (173,759) (166,198) (119,663) Real estate taxes paid (42,663) (41,368) (40,322) Payroll taxes paid (13,207) (12,228) (9,513) Property and other insurance paid (15,834) (5,710) (13,451) Interest paid on mortgage (244,776) (244,305) (259,330) Incentive management fee paid (7,060) (7,060) (7,060) Earned surplus reimbursement (12,058) (69,666) (2,610) Increase in reserve fund for operations (1,929) (33) (358) (Increase) decrease in real estate tax impound fund (913) (793) 2,083 (Decrease) increase in insurance impound fund 7,203 (6,654) (2,487) Net security deposits (paid) received (472) (399) 241 -------- -------- -------- Net cash provided by operating activities 99,290 60,299 185,354 -------- -------- -------- Cash flows from investing activities Purchases of equipment - (21,366) (25,928) Deposits to reserve for replacements (22,404) (22,404) (22,404) Withdrawals from reserve for replacements 32,364 24,391 37,933 -------- -------- -------- Net cash provided by (used in) investing activities 9,960 (19,379) (10,399) -------- -------- -------- Cash flows from financing activities Repayment of mortgage payable (84,160) (76,827) (70,134) Distributions (28,239) (28,238) (28,238) -------- -------- -------- Net cash used in financing activities (112,399) (105,065) (98,372) -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,149) (64,145) 76,583 Cash and cash equivalents, beginning 72,579 136,724 60,141 -------- -------- -------- Cash and cash equivalents, ending $ 69,430 $ 72,579 $136,724 ======== ======== ======== See notes to financial statements COLONIAL FARMS LTD. STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Reconciliation of excess (deficiency) of revenue over expenses to net cash provided by operating activities Excess (deficiency) of revenue over expenses $ (27,396) $(30,397) $ 62,250 Adjustments to reconcile excess (deficiency) of revenue over expenses to net cash provided by operating activities Depreciation 125,852 125,896 121,981 Amortization of deferred financial costs 2,277 2,277 2,277 Interest earned on reserve for replacements (10,485) (10,611) (10,681) Changes in assets and liabilities Decrease (increase) in tenant accounts receivable 11,534 (8,010) 1,337 (Increase) decrease in prepaid expenses (2,462) 6,425 (657) Decrease (increase) in interest income receivable - impounds 261 (1,282) 82 Net tenants' security deposits (paid) received (472) (399) 241 (Increase) decrease in real estate tax impound fund (913) (793) 2,083 Decrease (increase) in insurance impound fund 7,203 (6,654) (2,487) Increase in reserve fund for operations (1,929) (33) (358) (Decrease) increase in accounts payable and accrued expenses (5,943) (10,507) 9,525 Decrease in accrued interest payable (641) (5,705) (242) Increase in rent deferred credits 2,404 92 3 --------- -------- -------- Net cash provided by operating activities $ 99,290 $ 60,299 $185,354 ========= ======== ======== See notes to financial statements COLONIAL FARMS, LTD. NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Colonial Farms, Ltd. (the Partnership) is a California limited partnership which commenced operations in February 1983. The Partnership owns and operates a 100-unit residential project (the Project) located in Modesto, California. The Project operates under Section 8 of the National Housing Act and therefore, receives monthly rental subsidies from the U.S. Department of Housing and Urban Development (HUD). The agreement expires June 2002, and has two five-year renewal options. For the years ended December 31, 1998, 1997 and 1996, rental subsidies for the Project totaled $531,063, $579,485, and $613,093, respectively. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions are limited by agreements between the Partnership and the California Housing Finance Agency (CHFA) to $35,299 per year to the extent of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are cumulative and may be distributed in subsequent years if future operations provide surplus cash in excess of current requirements. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash, money market accounts and U.S. Treasury bills, with a maturity of three months or less when acquired, stated at cost which approximate fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. As of December 31, 1998, management does not believe that there are any current facts or circumstanced that would indicate impairment of rental property in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized by the straight-line method over the life of the related debt, which approximates the effective interest method. Rental Income - ------------- Rental income is recognized as rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Reclassifications - ----------------- Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ At December 31, 1998 and 1997, the Partnership maintained tenant security deposits of $25,281 and $23,520 in an interest bearing escrow bank account and a certificate of deposit which are carried at cost and approximate fair value. The Partnership also has a reserve for replacements and escrow funds totalling $306,281 and $23,520 at December 31, 1998 and 1997, respectively, on deposit with CHFA. These funds are held in interest bearing bank accounts which are carried at cost and approximate fair value. NOTE C - PROPERTY AND EQUIPMENT - ------------------------------- Investment in property and equipment consisted of the following at December 31, 1998 and 1997: 1998 1997 ---- ---- Land $ 450,000 $ 450,000 Buildings and improvements 3,238,575 3,238,575 Furniture and equipment 415,074 415,074 ----------- ----------- 4,103,649 4,103,649 Less accumulated depreciation 2,064,714 1,938,862 ----------- ----------- $ 2,038,935 $ 2,164,787 =========== =========== NOTE D - MORTGAGE PAYABLE - ------------------------- The mortgage payable represents a permanent mortgage from the CHFA which is due on June 1, 2013, and is collateralized by a deed of trust on the rental property and the CHFA has been granted a security interest in rental subsidies. The terms of the mortgage require annual interest at the note of 9.15% and monthly principal and interest payments of $27,411. Terms of the loan agreement require that monthly escrow deposits be made to fund real estate tax, insurance and replacement reserve escrow accounts. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate maturities of the mortgage payable for the five years following December 31, 1998, are as follows: December 31, ----------- 1999 $ 92,191 2000 $ 110,990 2001 $ 110,637 2002 $ 121,186 2003 $ 132,751 Management believes that the carrying amount of the mortgage payable approximates fair value at December 31, 1998, as there is no significant difference in the market rate of interest for similar debt between that date and the date of the mortgage. NOTE E - RELATED PARTY TRANSACTIONS - ----------------------------------- At December 31, 1998 and 1997, due to developer/general partner consisted of development advances of $318,115. These advances are non-interest bearing and payable from proceeds upon sale or refinancing of the Project after certain priority payments as defined in the Partnership agreement. The Partnership has a contractual management agreement with CMJ Management Company, Inc., an affiliate of the general partner, to provide property management services for the Project. CMJ Management Company, Inc. has hired an unaffiliated management agent to provide these services on its behalf. Total management fees for the years ended December 31, 1998, 1997, and 1996 were $43,440, $42,640, and $38,060, respectively. CMJ Management Company, Inc. also is entitled to receive an incentive management fee. For each of the years ended December 31, 1998, 1997 and 1996, incentive fees charged for the project totaled $7,060, in accordance with the terms of the supplemental management agreement. NOTE F - TAX BASIS (LOSS) INCOME - -------------------------------- The reconciliation of the excess (deficiency) of revenue over expenses reported in the statements of operations with the (loss) income reported on the Federal income tax return for the years ended December 31, 1998, 1997, and 1996 follows: 1998 1997 1996 ---- ---- ---- Excess (deficiency) of revenue over expenses $ (27,396) $ (30,397) $ 62,250 GAAP to tax depreciation adjustment (53,713) (19,460) (20,336) Deferred rental income adjustments 731 90 3 --------- --------- -------- (Loss) income for Federal income tax purposes $ (80,378) $ (49,767) $ 41,917 ========= ========= ======== NOTE G - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances and security deposits held in trust with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration of credit risk exists with respect to these cash balances as of December 31, 1998. NOTE H - YEAR 2000 ISSUE - ------------------------ The general partner has assessed the Partnership's exposure to date sensitive computer software programs that may not be operative subsequent to 1999 and has implemented a requisite course of action to minimize year 2000 risk and ensure that neither significant costs nor disruption of normal business operations are encountered. However, because there is no guarantee that all systems of outside vendors or other entities affecting the Partnership's operations will be year 2000 compliant, the Partnership remains susceptible to consequences of the Year 2000 Issue. NOTE I - CONTINUATION OF THE PARTNERSHIP - ---------------------------------------- The Partnership agreement allows the limited partner to cause the sale of the assets of the Partnership subsequent to June 30, 1995, but not earlier than one year after it has given written notice of its desire to cause such sale to the general partner, and only if, during such one-year period, the general partner does not cause the sale of the Partnership's assets. If the general partner has not caused the assets of the Partnership to be sold within such one-year period, the limited partner may cause such sale, but only after it has offered to sell the assets to the general partner, and either the general partner does not accept such offer within 90 days of receiving it, or the general partner does not complete the sale in accordance with such offer after accepting the terms. During October 1998, the limited partner gave the written notice described above to the general partner of the Partnership. In light of the decision by the limited partner to initiate this action under the terms of the Partnership agreement, it is currently contemplated that the disposition of the Partnership's assets and liquidation of the Partnership could be completed by the end of calendar year 1999. There are no assurances, however, that the disposition of the Partnership's assets and liquidation of the Partnership will be completed within this time frame. [REZNICK FEDDER & SILVERMAN] [letterhead] INDEPENDENT AUDITORS' REPORT To the Partners Holbrook Apartments Company We have audited the accompanying balance sheets of Holbrook Apartments Company as of December 31, 1998 and 1997, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Holbrook Apartments Company as of December 31, 1998 and 1997, and the results of its operations, the changes in partners' deficit and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ REZNICK FEDDER & SILVERMAN ------------------------------ REZNICK FEDDER & SILVERMAN Baltimore, Maryland February 6, 1999 HOLBROOK APARTMENTS COMPANY BALANCE SHEETS December 31, 1998 and 1997 ASSETS 1998 1997 ---- ---- CURRENT ASSETS Cash and cash equivalents $ 514,632 $ 507,878 Accounts receivable 1,998 3,296 Other receivables 14,182 9,640 Prepaid expenses 15,871 16,022 ---------- ---------- Total current assets 546,683 536,836 ---------- ---------- RESTRICTED DEPOSITS AND FUNDED RESERVES Mortgage escrow deposits 77,606 76,359 Reserve for replacements 496,439 458,768 ---------- ---------- 574,045 535,127 ---------- ---------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $4,412,465 and $4,160,211 5,219,391 5,462,169 DEFERRED FINANCING COSTS, net of accumulated amortization of $235,877 and $222,158 318,074 331,793 ---------- ---------- Total assets $6,658,193 $6,865,925 ========== ========== LIABILITIES AND PARTNERS' DEFICIT CURRENT LIABILITIES Current maturities of mortgage payable $ 110,538 $ 102,574 Accounts payable and accrued expenses 38,017 33,168 Accrued interest payable 45,308 45,949 Rent deferred credits 1,054 11,559 Due to affiliates 1,067 - ---------- ---------- Total current liabilities 195,984 193,250 LONG-TERM LIABILITIES Mortgage payable, less current maturities 7,138,669 7,249,207 ---------- ---------- Total liabilities 7,334,653 7,442,457 PARTNERS' DEFICIT (676,460) (576,532) ---------- ---------- Total liabilities and partners' deficit $6,658,193 $6,865,925 ========== ========== See notes to financial statements HOLBROOK APARTMENTS COMPANY STATEMENTS OF OPERATIONS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Revenue Rental income $2,074,864 $2,079,319 $2,068,855 Vacancies (7,275) (4,727) (1,985) Financial revenue 31,766 35,842 27,267 Other income 8,345 8,608 7,176 ---------- ---------- ---------- Total revenue 2,107,700 2,119,042 2,101,313 ---------- ---------- ---------- Expenses Operating expenses Administration 123,690 134,493 126,635 Utilities 81,913 112,614 85,403 Management fee 98,128 98,776 99,025 Maintenance and repairs 201,428 173,586 200,197 Salaries 195,890 214,500 219,486 Insurance 14,776 16,350 27,698 Real estate taxes 213,250 181,311 182,616 ---------- ---------- ---------- Total operating expenses 929,075 931,630 941,060 ---------- ---------- ---------- Nonoperating expenses Interest 547,260 554,700 561,600 Mortgage insurance premium 36,480 36,979 37,438 Depreciation and amortization 265,973 268,185 261,682 Incentive management fee 153,231 146,297 133,795 ---------- ---------- ---------- Total nonoperating expenses 1,002,944 1,006,161 994,515 ---------- ---------- ---------- Total expenses 1,932,019 1,937,791 1,935,575 ---------- ---------- ---------- EXCESS OF REVENUE OVER EXPENSES $ 175,681 $ 181,251 $ 165,738 ========== ========== ========== See notes to financial statements HOLBROOK APARTMENTS COMPANY STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1998, 1997 and 1996 General Limited Partner Partner Total ------- ------- ----- Partners' deficit, December 31, 1995 $(573,077) $ 161,219 $ (411,858) Distributions (36,968) (209,487) (246,455) Excess of revenue over expenses 24,861 140,877 165,738 --------- --------- ---------- Partners' deficit, December 31, 1996 (585,184) 92,609 (492,575) Distributions (39,781) (225,427) (265,208) Excess of revenue over expenses 27,188 154,063 181,251 --------- --------- ---------- Partners' deficit, December 31, 1997 (597,777) 21,245 (576,532) Distributions (41,341) (234,268) (275,609) Excess of revenue over expenses 26,352 149,329 175,681 --------- --------- ---------- Partners' deficit, December 31, 1998 $(612,766) $ (63,694) $ (676,460) ========= ========= ========== Profit and loss sharing percentage 15% 85% 100% == == === See notes to financial statements HOLBROOK APARTMENTS COMPANY STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Cash flows from operating activities Rental income received $2,061,424 $2,069,734 $2,083,642 Interest received 19,587 15,185 13,786 Other income received 3,803 28,030 - Administrative expenses paid (123,690) (135,301) (125,604) Management fees paid (98,128) (98,776) (99,025) Utilities paid (81,913) (119,299) (88,920) Maintenance and repairs expenses paid (199,621) (312,749) (63,637) Real estate taxes paid (213,250) (181,311) (182,616) Salaries paid (160,249) (181,164) (182,293) Payroll taxes paid (15,194) (14,705) (15,854) Property insurance paid (14,625) (14,811) (26,982) Other taxes and insurance paid (20,447) (18,631) (21,339) Interest paid on mortgage (547,901) (555,294) (562,152) Mortgage insurance paid (36,480) (36,899) (37,367) Increase in mortgage escrow deposits (1,247) (15,290) (18,174) Mortgagor entity expenses paid (153,231) (146,297) (133,795) Due to affiliates - net 1,067 - - ---------- ---------- ---------- Net cash provided by operating activities 419,905 282,422 539,670 ---------- ---------- ---------- Cash flows from investing activities Additions to property and equipment (9,476) (52,029) (111,023) Deposits to reserve for replacements (40,920) (40,920) (40,720) Withdrawals from reserve for replacements 15,428 47,190 91,862 ---------- ---------- ---------- Net cash used in investing activities (34,968) (45,759) (59,881) ---------- ---------- ---------- Cash flows from financing activities Repayment of mortgage payable (102,574) (95,185) (88,328) Distributions paid to partners (275,609) (265,208) (246,455) ---------- ---------- ---------- Net cash used in financing activities (378,183) (360,393) (334,783) ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,754 (123,730) 145,006 Cash and cash equivalents, beginning 507,878 631,608 486,602 ---------- ---------- ---------- Cash and cash equivalents, ending $ 514,632 $ 507,878 $ 631,608 ========== ========== ========== See notes to financial statements HOLBROOK APARTMENTS COMPANY STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 ---- ---- ---- Reconciliation of excess of revenue over expenses to net cash provided by operating activities Excess of revenue over expenses $ 175,681 $ 181,251 $ 165,738 Adjustments to reconcile excess of revenue over expenses to net cash provided by operating activities Depreciation 252,254 254,644 248,141 Amortization of deferred financing costs 13,719 13,541 13,541 Interest earned on replacement reserves (12,179) (20,618) (8,912) Changes in assets and liabilities Decrease (increase) in accounts receivable - tenants 1,298 (1,143) 6,087 Decrease (increase) in accounts receivable - other (4,542) 18,908 (11,745) Decrease in prepaid expenses 151 1,619 786 Increase in mortgage escrow deposits (1,247) (15,290) (18,174) Decrease in other assets - 475 - Increase (decrease) in accounts payable and accrued expenses 4,849 (146,656) 134,075 Decrease in accrued interest payable (641) (594) (552) (Decrease) increase in rent - deferred credits (10,505) (3,715) 10,685 Increase in due to affiliates - net 1,067 - - --------- --------- --------- Net cash provided by operating activities $ 419,905 $ 282,422 $ 539,670 ========= ========== ========= See notes to financial statements HOLBROOK APARTMENTS COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- Holbrook Apartments Company (the Partnership) was formed as a limited partnership under the laws of the State of Massachusetts in July 1981, for the purpose of constructing and operating a rental housing project under Section 221 (d)(4) of the National Housing Act. The project consists of 170 units located in Holbrook, Massachusetts, and is currently operating under the name of Holbrook Apartments. All leases between the Partnership and the tenants of the property are operating leases. Cash distributions are limited by agreements between the Partnership and HUD to the extent of surplus cash as defined by HUD. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of cash and repurchase agreements with maturities of three months or less when acquired, stated at cost, which approximates fair value. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. As of December 31, 1998, management does not believe that there are any current facts or circumstances that would indicate impairment of the rental property in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121. Deferred Financing Costs - ------------------------ Deferred financing costs are amortized over the term of the mortgage using the straight-line method which approximates the effective interest method. Rental Income - ------------- Rental income is recognized as a rentals become due. Rental payments received in advance are deferred until earned. Income Taxes - ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Reclassifications - ----------------- Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - ------------------------------------------------ The Partnership has a reserve for replacements and mortgage escrow deposits totaling $574,045 and $535,127 at December 31, 1998 and 1997, respectively, on deposit with WMF/Huntoon, Paige Associates Limited. These funds are held in interest-bearing money market accounts and are carried at cost, which approximates fair value. NOTE C - PROPERTY AND EQUIPMENT - ------------------------------- Investment in property and equipment consisted of the following at December 31, 1998 and 1997: 1998 1997 ---- ---- Land $ 390,000 $ 390,000 Buildings and improvements 9,006,073 8,998,646 Furniture and equipment 235,783 233,734 ----------- ----------- 9,631,856 9,622,380 Less accumulated depreciation 4,412,465 4,160,211 ----------- ----------- $ 5,219,391 $ 5,462,169 =========== =========== NOTE D - MORTGAGE PAYABLE - ------------------------- The mortgage is insured by the Federal Housing Administration (FHA) and collateralized by a deed of trust on the rental property. The mortgage, which is due February 1, 2023, is payable in equal monthly installments of principal and interest totaling $54,207 and bears interest at a rate of 7.5%. Under agreements with the mortgage lender and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage is limited to the underlying value of the real estate, plus other amounts deposited with the lender. Aggregate annual maturities of the mortgage payable for the five years following December 31, 1998, are as follows: December 31, ----------- 1999 $ 110,538 2000 $ 119,119 2001 $ 128,366 2002 $ 138,331 2003 $ 149,070 Management believes that the carrying amount of the mortgage payable approximates fair value at December 31, 1998, as there is no significant difference in the market rate of interest for similar debt between that date and the date of the mortgage. NOTE E - HOUSING ASSISTANCE PAYMENT AGREEMENT - --------------------------------------------- FHA contracted with the Partnership under Section 8 of Title II of the Housing and Community Development Act of 1974, to make housing assistance payments to the Partnership on behalf of qualified tenants. The agreement expires July 1, 2001. Total housing assistance payments received during 1998, 1997 and 1996 were $1,573,691, $1,565,374 and $1,577,392, respectively. NOTE F - RELATED PARTY TRANSACTIONS - ----------------------------------- Management fees of 4.75% of gross receipts are paid to CMJ Management Company, Inc., an affiliate of the general partner, for its services as management agent to the Project pursuant to a management agreement approved by HUD. Such fees amounted to $98,128, $98,776 and $99,025 for the years 1998, 1997 and 1996, respectively. In addition, CMJ Management Company, Inc., received incentive management fees of $153,231, $146,297 and $133,795 for the years ended December 31, 1998, 1997 and 1996, respectively. CMJ Management Company, Inc., an affiliate of the general partner, makes monthly expenditures (primarily payroll, central office accounting, direct marketing and insurance costs) on behalf of the Partnership which are reimbursed the following month. NOTE G - TAX BASIS INCOME - ------------------------- The reconciliation of the excess of revenue over expenses in the accompanying statements of operations with the income reported on a Federal income tax basis as follows: 1998 1997 1996 ---- ---- ---- Excess of revenue over expenses per statement of operations $ 175,681 $ 181,251 $ 165,738 Additional amortization of deferred costs 8,571 8,393 8,393 GAAP to tax depreciation adjustment (52,693) 140,373 (32,751) Deferred rental income adjustment (10,504) (3,715) 10,688 --------- --------- --------- Income for Federal income tax purposes $ 121,055 $ 326,302 $ 152,068 ========= ========= ========= NOTE H - CONCENTRATION OF CREDIT RISK - ------------------------------------- The Partnership maintains operating cash balances, including repurchase agreements, with major financial institutions and its funded reserves with the mortgage lender. The Partnership has not experienced any losses with respect to bank balances in excess of government provided insurance. Management believes that no significant concentration to credit risk exists with respect to these cash balances as of December 31, 1998. NOTE I - YEAR 2000 ISSUE - ------------------------ The general partner has assessed the Partnership's exposure to date sensitive computer software programs that may not be operative subsequent to 1999 and has implemented a requisite course of action to minimize year 2000 risk and ensure that neither significant costs nor disruption of normal business operations are encountered. However, because there is no guarantee that all systems of outside vendors or other entities affecting the Partnership's operations will be year 2000 compliant, the Partnership remains susceptible to consequences of the Year 2000 Issue. NOTE J - CONTINUATION OF THE PARTNERSHIP - ---------------------------------------- The Partnership agreement allows the limited partner to cause the sale of the assets of the Partnership subsequent to June 30, 1995, but not earlier than one year after it has given written notice of its desire to cause such sale to the general partner, and only if, during such one-year period, the general partner does not cause the sale of the Partnership's assets. If the general partner has not caused the assets of the Partnership to be sold within such one-year period, the limited partner may cause such sale, but only after it has offered to sell the assets to the general partner, and either the general partner does not accept such offer within 90 days of receiving it, or the general partner does not complete the sale in accordance with such offer after accepting the terms. During October 1998, the limited partner gave the written notice described above to the general partner of the Partnership. In light of the decision by the limited partner to initiate this action under the terms of the Partnership agreement, it is currently contemplated that the disposition of the Partnership's assets and liquidation of the Partnership could be completed by the end of calendar year 1999. There are no assurances, however, that the disposition of the Partnership's assets and liquidation of the Partnership will be completed within this time frame. EX-27 2 ARTICLE 5 FDS FOR THE TWELVE MONTHS ENDED 12/31/98
5 This schedule contains summary financial information extracted from the Partnership's audited financial statements for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS Dec-31-1998 Dec-31-1998 341 0 0 0 0 341 0 0 383 117 0 0 0 0 266 383 0 503 0 365 0 0 0 138 0 138 0 0 0 138 15.58 15.58
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