10-K 1 area4q10k01.txt ANNUAL REPORT FOR 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 ------------------------------------------------------ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ---------------- Commission file number 0-14986 AETNA REAL ESTATE ASSOCIATES, L.P. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 11-2827907 -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 242 Trumbull Street, Hartford, Connecticut 06103 -------------------------------------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (860) 616-9000 ----------------------------- Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Depositary Units ---------------------------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the Registrant: $136,266,673 (1) ---------------- (1) This statement relates to Units which represent limited partnership interests in the Registrant. The amount above is calculated based on the Net Asset Value of Units of $10.71 at December 31, 2001. -1- PART 1 Item 1. Business. -------- Aetna Real Estate Associates, L.P. (the "Registrant") is a limited partnership organized under the laws of the State of Delaware on September 11, 1986. The general partners of the Registrant (the "General Partners") are Aetna/AREA Corporation ("Aetna/AREA"), a Connecticut corporation that is an affiliate of Aetna Life Insurance Company ("Aetna"), and AREA GP Corporation ("AREA GP"), a Delaware corporation that is an affiliate of Lehman Brothers Inc. ("Lehman"). From March 1986 through December 31, 1990, the Registrant offered up to $300,000,000 of units which represent the economic rights attributable to limited partnership interests in the Registrant ("Units") through an ongoing public offering (the "Primary Offering") and an additional $30,000,000 of Units pursuant to the Registrant's Distribution Reinvestment Plan (the "DRIP"). In addition, in conjunction with the Primary Offering, certain holders of Units (the "Selling Unitholders") offered up to $30,000,000 of Units (the "Remarketing Opportunity"). Since January 1, 1991, the Registrant has not offered Units for sale in the Primary Offering, the Remarketing Opportunity, or the DRIP. The Registrant received an aggregate of $265,521,423 of capital contributions from the sale of 12,724,547 Units. The Registrant does not anticipate raising additional capital through the sale of Units. The Registrant is engaged in the business of investing in income-producing apartment complexes, office buildings, shopping centers and other commercial real estate offered by non-affiliated sellers ("Properties"). All investments in Properties that the Registrant has made are referred to herein collectively as "Investments in Properties". The Registrant acquired its interests in Investments in Properties either directly or through joint ventures or other partnerships that own Properties, and has acquired all of its interests in Properties entirely with cash. The Registrant conducts its operations in one segment, rental real estate. As of December 31, 2001, the Registrant held two Investments in Properties at a total cost of approximately $86.4 million. (See Item 2 in this report for a further description of the Investments in Properties.) Such Investments in Properties have been funded from the proceeds of the sale of Units and from cash retained by the Registrant from operations and from sales of Investments in Properties. The General Partners have commenced a plan to market and sell the remaining properties owned by the Registrant. The Registrant sold the following properties during 2001: (1) Marina Bay Industrial Park; (2) Westgate Distribution Center; and (3) Powell Street Plaza for an aggregate gain on depreciated cost of approximately $19,743,000. In 2002, the Registrant has sold Town Center Business Park (See Note 14 to the Consolidated Financial Statements). In addition, the General Partners have begun the process of selecting brokers and marketing Summit Village during the first quarter of 2002. There can be no assurances that this property will be sold in the near future, or that if sold, the sales price will approximate the estimated net asset value of the property. Upon completion of the sales process for Summit Village and resolution of Partnership affairs, the General Partners intend to liquidate the Partnership as rapidly as is possible. Any change in the length of a property's ownership period from that currently anticipated could affect the real estate and leasing strategy to be followed at such property, which could alter the level of -2- capital expenditures to be invested in the properties. These changes could affect the level of cash flow received by the Registrant, which might affect the level of quarterly cash distributions to limited partners. During 2001, the Registrant made distributions aggregating $2.79 per unit of which $.72 per unit was generated from cash from operations. (See Item 5 below for additional information regarding recent quarterly distributions.) The level and timing of future distributions will be reviewed on a quarterly basis by the General Partners. Net Asset Value per Unit decreased to $10.71 at December 31, 2001 from $12.65 at December 31, 2000. The decrease in Net Asset Value per Unit is primarily attributable to the distribution of sales proceeds and a reduction of working capital reserves, partially offset by an increase in the appraised value of Summit Village. The increase in appraised value of Summit Village is primarily a result of an increase in market rents. Competition ----------- The Registrant competes with other real estate owners and developers for tenants and potential buyers in the rental and sale of its Investments in Properties. Each of the Investments in Properties faces competition from similar properties within the same vicinity. Increases in the availability of properties competitive with the Registrant's Investments in Properties may have an adverse effect on the occupancy levels, revenues and marketability of the Registrant's Investments in Properties. When the Registrant is in the market to sell existing Investments in Properties, it faces competition in connection with such sales from businesses, individuals, fiduciary accounts and plans and other entities engaged in real estate investment, which may include certain affiliates of the General Partners. The number of entities interested in properties held by the Registrant may change. Employees --------- The Registrant has no employees. The officers, directors and employees of the General Partners and their affiliates and agents perform services for the benefit of the Registrant. These services are provided in consideration of the fees paid to the General Partners as described under Item 13 below, and the expense of providing these services is not separately charged to the Registrant. Aetna/AREA has retained UBS Realty Investors LLC to provide investment management services to Aetna/AREA. -3- Item 2. Properties. ---------- As of December 31, 2001, the Registrant held two Investments in Properties.
(in thousands) Historical Property Cost (1) -------- -------- Summit Village $ 39,736 Town Center Business Park 46,660 -------- Total $ 86,396 ======== (1) Historical cost is before accumulated depreciation and may not equal cash invested because of certain adjustments based on the application of generally accepted accounting principles. For historical cost purposes, properties are recorded at the lower of cost, net of impairment write- downs, or estimated fair value. (See Note 3 to the Consolidated Financial Statements.)
The Registrant determines the current value of each of its Investments in Properties quarterly based on independent appraisals of the underlying real estate using generally accepted valuation techniques. These appraisals are used to determine Net Asset Value per Unit on a quarterly basis and to prepare the Registrant's current value financial statements. Each appraisal is based on numerous assumptions, limiting conditions and valuation techniques utilized by the independent appraisers retained by the Registrant. Two of the many assumptions utilized by the appraisers are the terminal capitalization rate and the discount rate. The terminal capitalization rate is used to estimate the reversionary proceeds to be received from the assumed sale of an investment at the end of a typical holding period. The discount rate is used to determine the net present value of the estimated annual cash flows of an investment, including the reversionary proceeds, over the holding period. Terminal capitalization rates utilized in the appraisals of the Investments in Properties at December 31, 2001 were 8.5% and 9.75%. Discount rates utilized in the appraisals of the Investments in Properties at December 31, 2001 were 10.5% and 11.25%. -4- CURRENT PROPERTIES A brief description of the two Investments in Properties is set forth below. Neither the Registrant, if it owns a Property directly, nor the joint venture or partnership in which the Registrant has invested, has incurred any debt to acquire or maintain any of the Properties. Summit Village -------------- The Registrant owns Summit Village, a 366-unit apartment complex built in two phases on a 6.2-acre site in the Rosslyn area of Arlington County, Virginia. Historical leasing and occupancy information with respect to Summit Village for the five most recent years is as follows: Leased Occupied ------ -------- 12/31/1997 99% 99% 12/31/1998 99% 99% 12/31/1999 100% 99% 12/31/2000 99% 99% 12/31/2001 97% 97% The current leases generally have terms of seven or twelve months at monthly rental rates ranging from $1,360 to $1,950 per unit. Summit Village's competitive submarket consists of seven luxury apartment communities totaling 3,120 apartments. These properties are all high-rise style buildings, thus allowing them to offer additional amenities that Summit Village does not offer. However, the Registrant believes that Summit Village's mid-rise style combines the attributes of both high-rise and garden style living, giving the property a competitive advantage. Summit Village's high-rise competitors range in age from two years old to fourteen years old. The newest addition, Ballston Place Apartments (383 units), was delivered in late 2000/early 2001 and has completed its lease up, with minimal impact on Summit Village's occupancy and rents. Two new competitive high-rise apartment buildings are currently under construction: Market Common at Clarendon has started construction with delivery scheduled for May 2002. It is situated at Clarendon Boulevard and Fillmore Street and will consist of 300 Class A loft-style apartment units, in addition to office and retail space. Phase III of Meridian at Courthouse Commons consisting of 275 units is being developed by Paradigm, with lease-up expected to begin in the second quarter 2002. Another smaller community, Quincy Crossing Apartments, now named The Atherton, located at Wilson Boulevard and N. Quincy Street has completed construction on its 123 units, as well as office space. Although apartment occupancies and rents softened in this market and throughout the country in the fourth quarter 2001, we expect the Northern Virginia market to recover in the near-term. -5- Town Center Business Park ------------------------- As of December 31, 2001, the Registrant owned a controlling interest in a general partnership which owned and operated Town Center Business Park, totaling approximately 457,500 square feet of net rentable area on approximately 28 acres in Santa Fe Springs, California. On March 21, 2002 Town Center Business Park was sold to an unaffiliated party (See Note 14 to the Consolidated Financial Statements). During 2002, thirteen leases covering 15% of the space in Town Center Business Park are scheduled to expire. Six tenants occupying 41,685 square feet are vacating at the end of their lease term, and lease negotiations are underway with potential tenants. Renewal negotiations began with four tenants totaling 19,953 square feet. The remaining three leases, comprising 2.5% of the space, are expiring in the latter part of 2002. Town Center Business Park has no single tenant which occupies 10% or more of the rentable square footage. During 2003 and 2004, ten and nineteen leases, respectively, are scheduled to expire, each covering 19% and 30% of the space in Town Center Business Park. Historical leasing and occupancy information with respect to Town Center Business Park for the five most recent years is as follows: Leased Occupied ------ -------- 12/31/1997 93% 92% 12/31/1998 93% 89% 12/31/1999 97% 93% 12/31/2000 85% 85% 12/31/2001 87% 86% Average annualized rental rates for December 2001 were $12.84 per square foot as compared to $12.94 and $11.55 per square foot for December 2000 and 1999, respectively. -6- PROPERTIES SOLD DURING 2001 Marina Bay Industrial Park -------------------------- On March 5, 2001, the Registrant sold Marina Bay Industrial Park, a 165,780 square foot industrial park located in Richmond, California to an unaffiliated party for a gross sales price of $14,025,000. Gain included in the December 31, 2001 consolidated financial statements was approximately $5,855,000. Westgate Distribution Center ---------------------------- On August 30, 2001, the Registrant sold Westgate Distribution Center, which consisted of two warehouse/distribution buildings located in Corona, California to an unaffiliated party for a gross sales price of $11,100,000. Gain included in the December 31, 2001 consolidated financial statements was approximately $1,914,000. Powell Street Plaza ------------------- On November 19, 2001, the Registrant sold Powell Street Plaza, a shopping center located in Emeryville, California to an unaffiliated party for a gross sales price of $37,490,000. Gain included in the December 31, 2001 consolidated financial statements was approximately $11,974,000. For additional information regarding the sold properties, see Note 4 to the Consolidated Financial Statements. -7- Item 3. Legal Proceedings. ----------------- The Registrant has not been notified that it or any of the Registrant's Investments in Properties are subject to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- During the fourth quarter of the year ended December 31, 2001, no matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise. -8- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. --------------------------------------------------------------------- The Units represent the economic rights attributable to limited partnership interests in the Registrant. There is no established public trading market for the Units. The Registrant's Units are listed on certain matching services (the "Matching Programs") currently maintained by various broker-dealers. These Matching Programs are computerized listing systems that put individuals who wish to sell listed securities in contact with persons who wish to buy such securities. Neither the broker-dealers nor the General Partners are required to list the Registrant's Units on the Matching Program. There can be no assurance that any Units listed on the Matching Program will be sold. As of March 1, 2002, the number of Unitholders was approximately 17,000. The Revised Limited Partnership Agreement dated December 1, 1988 by and among Aetna/AREA Corporation, AREA GP Corporation and AREA Depositary Corporation (the "Partnership Agreement") provides for distributions of net cash from operations, if any, to be paid quarterly to Unitholders. Net cash from operations, as defined in the Partnership Agreement, is equal to net income, before depreciation, less any amounts set aside to increase or create reserves. Quarterly cash distributions per Unit for the three years ended December 31 have been paid to Unitholders as follows:
Quarter Ended: 2001 2000 1999 ---- ---- ---- March 31 $ .18 $ .18 $ .18 June 30 1.42 (6) 2.28 (3) .88 (1) September 30 .18 .56 (4) .18 December 31 1.01 (7) 1.96 (5) 2.93 (2) ----- ----- ----- Totals $2.79 $4.98 $4.17 (1) Per Unit amount includes a distribution from operations of $.18 per Unit, a special distribution from cash reserves paid April 14, 1999 of $.20 per Unit, and a distribution of $.50 per Unit paid May 17, 1999 representing proceeds from the sale of Gateway Square. (2) In October 1999 a distribution from operations of $.18 per Unit was paid, and on November 24, 1999 a distribution of $2.75 per Unit was paid representing proceeds from the sales of 115 and 117 Flanders Road, Three Riverside Drive, and Cross Pointe Centre, and a reduction of cash reserves. (3) In May 2000 a distribution from operations of $.18 per Unit was paid, and on April 10, 2000 a distribution of $2.10 per Unit was paid representing proceeds from the sales of Windmont Apartments and Lincoln Square Apartments. -9- (4) On August 24, 2000 a distribution from operations of $.18 per Unit was paid, and on August 14, 2000 a distribution of $.38 per Unit was paid representing proceeds from the sale of one of three buildings and a parcel of land at Westgate Distribution Center. (5) In November 2000 a distribution from operations of $.18 per Unit was paid. On November 8, 2000 a distribution of $.92 per Unit was paid representing proceeds from the sale of Oakland Pointe Shopping Centre, and on December 29, 2000 a distribution of $.86 per Unit was paid representing proceeds from Village Square. (6) On March 9, 2001, cash distributions paid by the Partnership aggregated $2,313,554 which related to operations for the three months ended December 31, 2000. (7) In June 2001 a distribution from operations of $.18 per Unit was paid. On April 30, 2001 a distribution of $1.04 was paid representing proceeds from the sale of Marina Bay Industrial Park, and on June 8, 2001 a special distribution from cash reserves of $.20 per Unit was paid. (8) On August 29, 2001, cash distributions paid by the Partnership to Unitholders aggregated $2,290,418 which related to operations for the three months ended June 30, 2001. The General Partners' distributions aggregating $23,135 were withheld by the Partnership as required by the Partnership Agreement. (9) In December 2001 a distribution from operations of $.18 per Unit was paid and on November 27, 2001 a distribution of $.83 was paid representing proceeds from the sale of Westgate Distribution Center.
Item 6. Selected Financial Data. ----------------------- The following selected financial data of the Registrant have been selected by the General Partners and derived from the consolidated financial statements for the indicated periods, which have been audited by PricewaterhouseCoopers LLP, independent certified public accountants, whose report for the years ended December 31, 2001, 2000 and 1999 is included elsewhere herein. The information set forth below should be read in conjunction with the Registrant's consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" also included elsewhere herein. -10- (Dollars in thousands, except per Unit data) -------------------------------------------
Years Ended or as of December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Revenue .................. $ 17,374 $ 23,555 $ 31,437 $ 30,689 $ 29,597 Operating Income before Impairment of Investment in Real Estate ........ 7,275 8,464 7,764 7,894 6,793 Impairment of Investment in Real Estate (a) .... 695 - - 9,007 - Operating Income (Loss) .. 6,580 8,464 7,764 (1,113) 6,793 Gain (Loss) on Sales of Properties ............ 19,743 20,480 4,563 - - Rental Income ............ 16,378 22,048 30,230 29,716 28,604 Interest Income .......... 665 1,206 753 538 404 Cash and Cash Equivalents ........... 44,237 11,711 10,419 12,597 10,883 Total Assets (Historical Cost Basis) ........... 105,579 114,985 151,089 193,184 203,416 Total Assets (Current Value Basis) .......... 140,640 164,964 211,530 236,917 218,719 Earnings (Loss) per Weighted Average Unit . 2.01 2.24 .96 (.09) .53 Cash Distributions per Unit .................. 2.79 4.98 4.17 .72 .72 Net Asset Value per Unit .................. 10.71 12.65 16.21 18.12 16.71 (a) See Note 3 to the Consolidated Financial Statements with respect to accounting policy for permanent impairment of properties.
Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations. ------------- Critical Accounting Policies ---------------------------- The following disclosure pertains to policies the General Partners believe are most critical to the portrayal of the Registrant's financial condition and results of operations and require difficult, subjective or complex judgements. The notes to the consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of the Registrant's consolidated financial statements. This discussion is not applicable to the current value financial statements presented by the Registrant to provide supplementary information, which is not provided by the historical cost basis financial statements, about the Registrant's financial position and changes in partners' capital. -11- Investments in Real Estate - Properties held for investment are carried at depreciated cost, net of impairment write-downs. Properties are considered held for sale at the time the General Partners accept a purchase offer or otherwise commit to the sale of a property. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of", properties to be disposed of are carried at the lower of depreciated cost or fair value less estimated selling costs. The General Partners regularly evaluate the carrying value of its properties. Permanent impairments are recorded, if appropriate, to adjust the carrying value of a property to its estimated fair value. The General Partners use independent appraisals to determine fair value. Accounts Receivable - The General Partners are required to make judgements about collectability of receivables. Collectability factors take into consideration amounts outstanding, payment history and financial strength of the tenant. Provisions for accounts receivable and bad debts are recorded, if appropriate. Historically, amounts recorded for these provisions and allowances have not been significant to the Registrant's consolidated financial position or results of operations. The preparation of financial statements includes the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. The Registrant bases its estimates on historical experience and other assumptions which it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Registrant's results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, between the Registrant's estimates and actual amounts in any year, have not had a significant impact on its consolidated financial statements. Liquidity and Capital Resources ------------------------------- At December 31, 2001, the Registrant had working capital reserves ("Reserves") of $4.4 million, after cash distributions of sale proceeds and excess cash reserves (see Notes 8 and 14 to the Consolidated Financial Statements). During the year ended December 31, 2001, the Partnership expended approximately $2.7 million for capital improvements. At December 31, 2001, the Registrant had approximately $1.1 million of outstanding commitments for capital improvements and approximately $1.0 million of projected capital improvements (collectively "Capital Costs") related to existing Investments in Properties. These Capital Costs consist primarily of estimated building improvements, which may or may not materialize. The Registrant expects to fund Capital Costs throughout 2002 from existing Reserves and the retention of a portion of cash generated from operations. The General Partners will continue to review the Reserves quarterly to determine whether cash distributions should be adjusted. If sufficient capital is not available at the time of a funding of Capital Costs, the General Partners will review such Capital Costs and take such steps as they consider appropriate, including decreasing future cash distributions from operations, negotiating a delay or other restructuring of the capital funding requirements related to an Investment in Properties or borrowing money, as provided in the Partnership Agreement, on a short-term basis to pay Capital Costs. -12- Results of Operations --------------------- 2001 versus 2000 ---------------- Net income for the year ended December 31, 2001 decreased approximately $2,881,000 from 2000, primarily as a result of the sales of properties. A decrease in rental revenue of approximately $5,670,000 from 2000, mostly from the sales of properties, was partially offset by an increase in rental revenue at Summit Village, attributed to increased rents. Interest income decreased approximately $541,000 as a result of decreases in cash balances due to the distribution of sales proceeds. Net income also decreased as a result of a decrease in gain on sales of properties of approximately $737,000. In addition, an impairment loss of approximately $695,000 is reflected in the 2001 Consolidated Statement of Income. Property operating expenses for the year ended December 31, 2001 decreased approximately $1,582,000 in comparison to 2000, due primarily to the sales of properties, partially offset by increases at the two remaining properties. The investment portfolio fee decreased approximately $812,000, the result of the distribution of sales proceeds and lower investment portfolio fee rates, as discussed in Note 15 to the Consolidated Financial Statements. Net Asset Value per Unit decreased to $10.71 at December 31, 2001 from $12.65 at December 31, 2000. The decrease in Net Asset Value per Unit is attributable to the distribution of sales proceeds, partially offset by an increase in the appraised value of Summit Village. The increase in appraised value of Summit Village is primarily a result of an increase in market rents. The Registrant made cash distributions, of $2.79 and $4.98 per Unit to Unitholders for the years ended December 31, 2001 and 2000, respectively. Distributions of $.72 per Unit were paid from cash generated from operations for each year. During 2001, special distributions of $1.87 per Unit were paid from sales proceeds, and $.20 per Unit was paid from cash reserves. During 2000, special distributions of $4.26 per Unit were paid from sales proceeds. 2000 versus 1999 ---------------- Net income for the year ended December 31, 2000 increased approximately $16,417,000 from 1999 resulting primarily from an approximately $15,917,000 increase in gains on sales of properties. Revenue decreased approximately $7,882,000 from 1999, primarily as a result of the sales of properties. A decrease in rental revenue resulting from sales of properties was partially offset by certain increases in rental revenue, primarily at Summit Village as a result of increased rents. Interest income increased approximately $453,000 as a result of temporary increases in cash balances due to the sales of properties. Property operating expenses for the year ended December 31, 2000 decreased approximately $3,031,000 in comparison to 1999, due primarily to the sales of properties, partially offset by increases at certain properties. The most significant increases in operating expenses occurred at Summit Village, relating primarily to staffing costs, and at Town Center Industrial Park primarily as a result of increased utilities costs. The investment portfolio fee decreased approximately $1,128,000, the result of the distribution of sales proceeds. -13- Net Asset Value per Unit decreased to $12.65 at December 31, 2000 from $16.21 at December 31, 1999. The decrease in Net Asset Value per Unit is attributable to the distribution of sales proceeds, partially offset by an increase in the appraised value of Summit Village. The increase in appraised value of Summit Village is primarily a result of an increase in market rents. The Registrant made cash distributions of $4.98 and $4.17 per Unit to Unitholders for the years ended December 31, 2000 and 1999, respectively. Distributions of $.72 per Unit were paid from cash generated from operations for each year. During 2000, special distributions of $4.26 per Unit were paid from sales proceeds. During 1999, special distributions of $3.14 per Unit were paid from sales proceeds, and $.31 per Unit was paid from cash reserves. New Accounting Standards ------------------------ The General Partners have reviewed recently issued accounting standards in order to determine their effects, if any, on the results of operations or financial position of the Registrant. The Registrant adopted the accounting guidance provided by Staff Accounting Bulletin No. 101, "Revenue Recognition", beginning January 1, 2000. The cumulative effect of adopting this guidance was not material as it changed the timing of when the Registrant recognizes percentage and overage rents on a quarterly basis, but did not have an impact on the Registrant's annual consolidated financial statements. The Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 establishes the accounting and reporting standards for the impairment or disposal of long-lived assets by requiring those assets to be measured at the lower of depreciated cost or fair value less selling costs, whether reported on continuing operations or in discontinued operations. This Standard does not change the fundamental provisions of SFAS No. 121; however, it resolves various implementation issues of SFAS No. 121. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. The Registrant does not expect the adoption of SFAS No. 144 on January 1, 2002 to have a material effect on its consolidated financial position or results of operations. Forward-Looking Information --------------------------- The information contained in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although the General Partners believe that their plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved or that the Registrant's actual results will be consistent with its expected results. The forward-looking information disclosed herein is based upon the assumptions and estimates that, while considered reasonable by the General Partners as of the date hereof, are inherently subject to business, economic, competitive, and regulatory uncertainties and contingencies which are beyond the control of the General Partners. -14- Item 7A. Quantitative and Qualitative Disclosures about Market Risk. ---------------------------------------------------------- Not applicable. Item 8. Financial Statements and Supplementary Data. ------------------------------------------- See List of Financial Statements and Financial Statement Schedule on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. -------------------- None. -15- PART III Item 10. Directors and Executive Officers of the Registrant. -------------------------------------------------- The Registrant has no officers or directors. Aetna/AREA Corporation and AREA GP Corporation, the General Partners of the Registrant, jointly manage and control the affairs of the Registrant and have general responsibility and authority in all matters affecting its business. Certain officers and directors of AREA GP are now serving (or in the past have served) as officers or directors of entities which act as general partners of a number of real estate limited partnerships, unrelated to the Registrant, which have sought protection under the provisions of the Federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own real estate which has been adversely affected by the economic conditions in the markets in which the real estate is located and, consequently, the partnerships sought protection of the bankruptcy laws to protect the partnerships' assets from loss through foreclosure. As compared to the Registrant, many of these partnerships had different investment objectives, including the use of leverage. Item 11. Executive Compensation. ---------------------- No compensation was paid by the Registrant to the officers or directors of either of the General Partners. See Item 13 below for a description of the compensation and fees paid to the General Partners and their affiliates by the Registrant. Item 12. Security Ownership of Certain Beneficial Owners and Management. -------------------------------------------------------------- As of December 31, 2001, there was one group known by the Registrant to be the beneficial owner of more than five percent of the Units of the Registrant.
Number Percent Number of Units of Units Of Units Beneficially Beneficially Name and Address Owned Owned Owned ---------------- ----- ----- ----- Oak Investors, LLC 835,053 842,988 6.62% 1650 Hotel Circle North, Suite 200, San Diego, CA Don & Barbara Augustine Family Trust 5,485 842,988 6.62 1650 Hotel Circle North, Suite 200, San Diego, CA Dimension Investments, Ltd. 2,450 842,988 6.62 1650 Hotel Circle North, Suite 200, San Diego, CA ------- Total 842,988 =======
-16- The Registrant has no directors or officers, and as of March 1, 2002, neither of the General Partners of the Registrant owns any Units, though together they own a 1% general partnership interest in the Registrant. As of March 1, 2002, no directors or officers of AREA GP beneficially owned any Units. As of March 1, 2002, no directors of Aetna/AREA owned any Units, and as of such date, officers of Aetna/AREA as a group beneficially owned approximately 232 Units, which constituted less than 1% of the outstanding Units. Aetna Life Insurance Company entered into an Option Purchase Agreement dated June 7, 1996, with the managing member of UBS Realty Investors LLC by which such managing member is granted the right to purchase the stock of Aetna/AREA for nominal consideration during the twelve-year period following the date of the option. During the period of the option, such managing member is also granted the right to designate the directors of Aetna/AREA regardless of whether the option is exercised. This option has not been exercised to date. Item 13. Certain Relationships and Related Transactions. ----------------------------------------------- The General Partners and their affiliates have received or will receive certain types of compensation, fees, or other distributions in connection with the operations of the Registrant. The arrangements for payment of compensation and fees were not determined in arms-length negotiations with the Registrant. The General Partners are entitled to receive an investment portfolio fee based on the net asset value of the Registrant's investments. The fee is payable quarterly from available cash flow and may not exceed 2.25% per annum of net asset value. See Note 9 to the Consolidated Financial Statements for additional information regarding the fee. For the year ended December 31, 2001, Aetna/AREA and AREA GP were each entitled to fees of $1,193,509, totaling $2,387,018. During the year ended December 31, 2001, $95,704 was paid to Aetna Life Insurance Company, an affiliate of Aetna/AREA, primarily as reimbursement for insurance expense paid on behalf of the Registrant by Aetna Life Insurance Company to persons not affiliated with the Registrant. Cash distributions paid to the General Partners during the year ended December 31, 2001 aggregated $358,601 which related to operations for the quarters ended December 31, 2000, March 31, 2001, June 30, 2001 and September 30, 2001, and the reduction of cash reserves and the distribution of sales proceeds from properties sold during 2001. -17- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. --------------------------------------------------------------- The following documents are filed as part of this report: (a) 1. Financial Statements: See List of Financial Statements and Financial Statement Schedule on page F-1. 2. Financial Statement Schedules: See List of Financial Statements and Financial Statement Schedule on page F-1. 3. Exhibits: 3.1 Form of Subscription Agreement (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 3.2 Revised Limited Partnership Agreement of the Registrant (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 3.3 Form of Certificate of Limited Partnership Interest (incorporated by reference to Post-Effective Amendment No. 14 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 3.4 Form of Distribution Reinvestment Plan Election Card (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 4.1 Revised Depositary Agreement of the Registrant (incorporated by reference to Post-Effective Amendment No. 14 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 4.2 See Exhibits 3.1, 3.2, 3.3, and 3.4. 4.3 Distribution Reinvestment Plan of the Registrant (incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 4.4 Revised Form of Depositary Receipt of the Registrant (incorporated by reference to Post-Effective Amendment No. 17 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). -18- 4.5 Form of Distribution Reinvestment Plan Administration Agreement (incorporated by reference to Post-Effective Amendment No. 8 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 10.1 Revised Escrow Agreement (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 10.2 See Exhibits 4.1 and 4.5. 10.3 Custody Agreement (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 10.4 Processing Agreement (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). 10.5 Amendment to Revised Escrow Agreement, dated March 4, 1991 (incorporated by reference to Form 10-K for the year ended December 31, 1990). 10.6 Amendment to Custody Agreement, dated March 4, 1991 (incorporated by reference to Form 10-K for the year ended December 31, 1990). 10.7 Amendment to Processing Agreement, dated March 4, 1991 (incorporated by reference to Form 10-K for the year ended December 31, 1990). 21 Subsidiaries of the Registrant (incorporated by reference to Post-Effective Amendment No. 11 to the Registrant's Registration Statement on Form S-11, File No. 33-2264). (b) There were no reports on Form 8-K filed in the fourth quarter of fiscal year 2001. (c) See Exhibit Index contained herein. (d) See List of Financial Statements and Financial Statement Schedule included on page F-1. -19- INDEX TO EXHIBITS Exhibit Page ------- ---- 3.1 Form of Subscription Agreement (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264)......................... * 3.2 Revised Limited Partnership Agreement of the Registrant (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264).......................................................... * 3.3 Form of Certificate of Limited Partnership Interest (incorporated by reference to Post-Effective Amendment No. 14 to the Registrant's Registration Statement on Form S-11, File No. 33-2264).......................................................... * 3.4 Form of Distribution Reinvestment Plan Election Card (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264).......................................................... * 4.1 Revised Depositary Agreement of the Registrant (incorporated by reference to Post-Effective Amendment No. 14 to the Registrant's Registration Statement on Form S-11, File No. 33-2264)............ * 4.2 See Exhibits 3.1, 3.2, 3.3, and 3.4............................... * 4.3 Distribution Reinvestment Plan of the Registrant (incorporated by reference to Post-Effective Amendment No. 2 to the Registrant's Registration Statement on Form S-11, File No. 33-2264)............ * 4.4 Revised Form of Depositary Receipt of the Registrant (incorporated by reference to Post-Effective Amendment No. 17 to the Registrant's Registration Statement on Form S-11, File No. 33-2264).......................................................... * 4.5 Form of Distribution Reinvestment Plan Administration Agreement (incorporated by reference to Post-Effective Amendment No. 8 to the Registrant's Registration Statement on Form S-11, File No. 33-2264).......................................................... * 10.1 Revised Escrow Agreement (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264) * 10.2 See Exhibits 4.1 and 4.5.......................................... * * Incorporated by reference -20- 10.3 Custody Agreement (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264)...................................... * 10.4 Processing Agreement (incorporated by reference to Post-Effective Amendment No. 15 to the Registrant's Registration Statement on Form S-11, File No. 33-2264)...................................... * 10.5 Amendment to Revised Escrow Agreement, dated March 4, 1991 (incorporated by reference to Form 10-K for the year ended December 31, 1990)................................................ * 10.6 Amendment to Custody Agreement, dated March 4, 1991 (incorporated by reference to Form 10-K for the year ended December 31, 1990)... * 10.7 Amendment to Processing Agreement, dated March 4, 1991 (incorporated by reference to Form 10-K for the year ended December 31, 1990)................................................ * 21 Subsidiaries of the Registrant (incorporated by reference to Post-Effective Amendment No. 11 to the Registrant's Registration Statement on Form S-11, File No. 33-2264)......................... * * Incorporated by reference -21- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 28th day of March 2002. Aetna Real Estate Associates, L.P. By: Aetna/AREA Corporation, General Partner By: /s/ Daniel R. Leary ------------------- Daniel R. Leary President By: AREA GP Corporation, General Partner By: /s/ Mark J. Marcucci -------------------- Mark J. Marcucci President -22- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 28, 2002, by the following persons on behalf of the Registrant and in the capacities indicated. Signature Title --------- ----- /s/ Daniel R. Leary President (Principal Executive Officer) -------------------- and Director of Aetna/AREA Corporation Daniel R. Leary /s/ Carol M. Kuta Treasurer (Principal Financial and Accounting ------------------ Officer) and Comptroller of Aetna/AREA Carol M. Kuta Corporation /s/ James W. O'Keefe Chairman and Vice President of --------------------- Aetna/AREA Corporation James W. O'Keefe /s/ Dean A. Lindquist Assistant Treasurer and Assistant Comptroller ---------------------- of Aetna/AREA Corporation Dean A. Lindquist /s/ Mark J. Marcucci Director and President of --------------------- AREA GP Corporation Mark J. Marcucci -23- AETNA REAL ESTATE ASSOCIATES, L.P. ---------------------------------- (a Delaware limited partnership) List of Financial Statements and Financial Statement Schedule ------------------------------------------------------------- Page ---- Report of Independent Accountants F-2 Report of Realty Services International, Inc. F-3 - F-4 Consolidated Balance Sheets (Historical Cost and Current Value) December 31, 2001 and 2000 F-5 Consolidated Statements of Income (Historical Cost) for the years ended December 31, 2001, 2000 and 1999 F-6 Consolidated Statements of Partners' Capital (Deficiency) (Historical Cost) for the years ended December 31, 2001, 2000 and 1999 F-7 Consolidated Statements of Partners' Capital (Deficiency) (Current Value) for the years ended December 31, 2001, 2000 and 1999 F-8 Consolidated Statements of Cash Flows (Historical Cost) for the years ended December 31, 2001, 2000 and 1999 F-9 Consolidated Current Value Basis Statements of Changes in Excess of Current Value over Historical Cost for the years ended December 31, 2001, 2000 and 1999 F-10 Notes to Consolidated Financial Statements F-11 - F-22 Report of Independent Accountants- Supplementary Information F-23 The following financial statement schedule of Aetna Real Estate Associates, L.P. required by Item 14 (d) is included in this Item 8: Schedule III -- Real Estate and Accumulated Depreciation F-24 - F-26 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted since: (1) the information required is disclosed in the financial statements and notes thereto; (2) the schedules are not required under the related instructions; or (3) the schedules are inapplicable. F-1 PRICEWATERHOUSECOOPERS LLP Report of Independent Accountants To the Unitholders of Aetna Real Estate Associates, L.P. We have audited the accompanying consolidated historical cost balance sheets of Aetna Real Estate Associates, L.P. (the "Partnership") as of December 31, 2001 and 2000, and the related consolidated historical cost statements of income, partners' capital (deficiency) and of cash flows for each of the three years in the period ended December 31, 2001. We have also audited the supplemental consolidated current value basis balance sheets of Aetna Real Estate Associates, L.P. as of December 31, 2001 and 2000, and the supplemental consolidated current value basis statements of partners' capital (deficiency) and changes in the excess of current value over historical cost for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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 consolidated historical cost financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aetna Real Estate Associates, L.P. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As described in Note 2, the supplemental consolidated current value financial statements have been prepared by management to present relevant financial information that is not provided by the consolidated historical cost financial statements and are not intended to be a presentation in conformity with accounting principles generally accepted in the United States of America. In addition, the supplemental consolidated current value financial statements do not purport to present the net realizable, liquidation, or market value of the Partnership as a whole. Furthermore, amounts ultimately realized by the Partnership from the disposal of properties may vary significantly from the current values presented. In our opinion, the supplemental consolidated current value financial statements referred to above present fairly, in all material respects, the information set forth in them on the basis of accounting described in Note 2. PRICEWATERHOUSECOOPERS LLP February 11, 2002 except Note 14 for which the date is March 28, 2002 F-2 rsi a subsidiary of MortgageRamp February 11, 2002 PricewaterhouseCoopers LLP And the Unitholders of Aetna Real Estate Associates, L.P. Re: Summit Village, Rosslyn, VA Town Center Business Park, Santa Fe Springs, CA Dear Sirs: REALTY SERVICES International, Inc. ("RSI") has estimated the market value of certain real property ("the Properties") owned by Aetna Real Estate Associates, L.P. ("the Partnership") as of December 31, 2001. The Properties consist of the two properties identified above. Full annual valuation reports and quarterly update reports were performed for each of the Properties during 2001. In accordance with an ongoing schedule, the dates for the full annual valuation varied from property to property during the course of the year. The quarterly valuations, which were more limited in scope, were based on, and subject to, data contained in the most recent full valuation. Each property was inspected at least once during the course of the assignment. The reports were prepared in accordance with the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. The aggregate market value estimate reported below is subject to the detailed assumptions and limiting conditions with respect to each property considered, or incorporated by reference, in the Appraisal, with respect to such Property. The aggregate market value estimate is the sum of the individual property market values and does not reflect any premium or discount for the properties as a whole. In the opinion of RSI, the aggregate market value of the Properties, as of December 31, 2001 was: NINETY-SEVEN MILLION ONE HUNDRED THOUSAND DOLLARS ($97,100,000) RSI was not employed to provide legal analysis and assumes no responsibility for any matters of a legal nature. RSI was also not employed to perform engineering inspections, and assumes no responsibility for structural and mechanical, electrical, or any other construction matters, or the ability of the underlying properties to withstand climatic or seismic disruptions. 100 South Wacker Drive, Suite 400 o Chicago, IL 60606 o Phone (312) 845-8585 o Fax (312) 845-8511 Atlanta o Boston o Charlotte o Chicago o Dallas o Houston o Los Angeles o San Francisco o Tampa F-3 PricewaterhouseCoopers LLP And the Unitholders of Aetna Real Estate Associates, L.P. February 11, 2002 Page Two Neither RSI, its officers, nor staff have any known present or contemplated future interest in the Properties. RSI has no personal interest or bias with respect to the subject matter or the parties involved. To the best of our knowledge and belief, the facts upon which the analyses and conclusions are based are true and correct. RSI's fee for the assignments was in no way contingent upon the values reported. Sincerely, REALTY SERVICES International, Inc. /s/ John I. Wrzesinski, John I. Wrzesinski, MAI, CRE Senior Director JIW:kat F-4 AETNA REAL ESTATE ASSOCIATES, L.P. Consolidated Balance Sheets (Historical Cost and Current Value) As of December 31, 2001 and 2000 (in thousands)
2001 2000 ----------------------- ----------------------- Current Current Value Historical Value Historical (Note 2) Cost (Note 2) Cost -------- -------- -------- -------- Assets ------ Investments in real estate: Properties held for investment $ 62,817 $ 39,736 $140,063 $127,640 Less accumulated depreciation and amortization - (12,354) - (33,802) -------- -------- -------- -------- 62,817 27,382 140,063 93,838 Properties held for sale (net of accumulated depreciation of $13,272 and $3,849 and net of impairment of $695 in 2001) 33,388 33,388 12,824 7,697 -------- -------- -------- -------- Total investments in real estate 96,205 60,770 152,887 101,535 Cash and cash equivalents 44,237 44,237 11,711 11,711 Rent and other receivables 185 559 353 1,726 Other 13 13 13 13 -------- -------- -------- -------- Total assets $140,640 $105,579 $164,964 $114,985 ======== ======== ======== ======== Liabilities and Partners' Capital --------------------------------- Liabilities: Investment portfolio fee payable to related parties $ 1,059 $ 1,059 $ 702 $ 702 Accounts payable and accrued expenses 567 567 541 541 Unearned income 203 203 128 128 State income tax payable - - 200 200 Security deposits 349 349 496 496 -------- -------- -------- -------- Total liabilities 2,178 2,178 2,067 2,067 -------- -------- -------- -------- Partners' capital (deficiency): General Partners (94) (445) (326) (826) Limited Partners 138,556 103,846 163,223 113,744 -------- -------- -------- -------- Total partners' capital 138,462 103,401 162,897 112,918 -------- -------- -------- -------- Total liabilities and partners' capital $140,640 $105,579 $164,964 $114,985 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 AETNA REAL ESTATE ASSOCIATES, L.P. Consolidated Statements of Income (Historical Cost) For the Years Ended December 31, 2001, 2000 and 1999 (in thousands, except units and per unit amounts)
2001 2000 1999 -------- -------- -------- Revenue: Rental $ 16,378 $ 22,048 $ 30,230 Interest 665 1,206 753 Other income 331 301 454 -------- -------- -------- 17,374 23,555 31,437 -------- -------- -------- Expenses: Property operating 5,245 6,827 9,858 Depreciation and amortization 1,823 4,138 6,092 Investment portfolio fee - related parties 2,387 3,199 4,327 General and administrative 656 792 725 Bad debt (12) 135 263 -------- -------- -------- 10,099 15,091 21,265 -------- -------- -------- Legal expenses - litigation - - (2,408) Gain on sales of properties 19,743 20,480 4,563 Venture partner's interest in income of consolidated venture (383) - - Impairment of investment in real estate (695) - - -------- -------- -------- Income before tax expense 25,940 28,944 12,327 State income tax expense 77 200 - -------- -------- -------- Net income $ 25,863 $ 28,744 $ 12,327 ======== ======== ======== Net income allocated: To the General Partners $ 259 $ 287 $ 123 To the Limited Partners 25,604 28,457 12,204 -------- -------- -------- $ 25,863 $ 28,744 $ 12,327 ======== ======== ======== Weighted average number of limited partnership units outstanding 12,724,547 12,724,547 12,724,547 ========== ========== ========== Earnings per limited partnership unit $ 2.01 $ 2.24 $ .96 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 AETNA REAL ESTATE ASSOCIATES, L.P. Consolidated Statements of Partners' Capital (Deficiency) (Historical Cost) For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
General Limited Partners Partners Total -------- -------- ----- Balance at January 1, 1999 $(171) $189,513 $189,342 Net income 123 12,204 12,327 Cash distributions (536) (53,061) (53,597) ------ -------- -------- Balance at December 31, 1999 (584) 148,656 148,072 Net income 287 28,457 28,744 Cash contributions 111 - 111 Cash distributions (640) (63,369) (64,009) ------ -------- -------- Balance at December 31, 2000 (826) 113,744 112,918 Net income 259 25,604 25,863 Cash contributions 480 - 480 Cash distributions (358) (35,502) (35,860) ------ -------- -------- Balance at December 31, 2001 $(445) $103,846 $103,401 ====== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-7 AETNA REAL ESTATE ASSOCIATES, L.P. Consolidated Statements of Partners' Capital (Deficiency) (Current Value) For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
General Limited Partners Partners Total -------- -------- ----- Balance at January 1, 1999 $ 266 $232,809 $233,075 Net income 123 12,204 12,327 Increase in excess of current value over historical cost 167 16,541 16,708 Cash distributions (536) (53,061) (53,597) ------ -------- -------- Balance at December 31, 1999 20 208,493 208,513 Net income 287 28,457 28,744 Decrease in excess of current value over historical cost (104) (10,358) (10,462) Cash contributions 111 - 111 Cash distributions (640) (63,369) (64,009) ------ -------- -------- Balance at December 31, 2000 (326) 163,223 162,897 Net income 259 25,604 25,863 Decrease in excess of current value over historical cost (149) (14,769) (14,918) Cash contributions 480 - 480 Cash distributions (358) (35,502) (35,860) ------ -------- -------- Balance at December 31, 2001 $(94) $138,556 $138,462 ====== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-8 AETNA REAL ESTATE ASSOCIATES, L.P. Consolidated Statements of Cash Flows (Historical Cost) For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
2001 2000 1999 -------- -------- -------- Cash flows from operating activities: Net income $ 25,863 $ 28,744 $ 12,327 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,823 4,138 6,092 Gain on sales of properties (19,743) (20,480) (4,563) Venture partner's interest in income of consolidated venture 383 - - Bad debt expense (12) 135 263 Impairment of investment in real estate 695 - - Accrued rental income 48 100 518 Increase (decrease) in cash arising from changes in operating assets and liabilities: Rent and other receivables 180 509 (296) Investment portfolio fee payable to related parties 357 (265) (265) Accounts payable and accrued expenses (182) (94) 110 Accrued property taxes - (537) (233) Unearned income 75 (67) (57) State income tax payable (200) 200 - Security deposits (147) (187) (380) -------- -------- -------- Net cash provided by operating activities 9,140 12,196 13,516 -------- -------- -------- Cash flows from investing activities: Proceeds from sales of properties, net of closing costs 61,600 55,880 41,191 Investments in real estate (2,659) (2,886) (3,288) Distribution to venture partner (175) - - -------- -------- -------- Net cash provided by investing activities 58,766 52,994 37,903 -------- -------- -------- Cash flows from financing activities: Cash distributions (35,860) (64,009) (53,597) Partners' capital contributions 480 111 - -------- -------- -------- Net cash used in financing activities (35,380) (63,898) (53,597) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 32,526 1,292 (2,178) Cash and cash equivalents at beginning of year 11,711 10,419 12,597 -------- -------- -------- Cash and cash equivalents at end of year $ 44,237 $ 11,711 $ 10,419 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-9 AETNA REAL ESTATE ASSOCIATES, L.P. Consolidated Current Value Basis Statements of Changes in Excess of Current Value Over Historical Cost For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
Excess of current value over historical cost at January 1, 1999 $ 43,733 -------- Current value increase in properties 16,219 Decrease in excess of current value over historical cost resulting from sales of properties (29) Decrease in accrued rent 518 -------- 16,708 -------- Excess of current value over historical cost at December 31, 1999 60,441 -------- Current value increase in properties 10,357 Decrease in excess of current value over historical cost resulting from sales of properties (21,620) Decrease in accrued rent 801 -------- (10,462) -------- Excess of current value over historical cost at December 31, 2000 49,979 -------- Current value increase in properties 137 Write-down of property for impairment 695 Decrease in excess of current value over historical cost resulting from sales of properties (16,749) Decrease in accrued rent 999 -------- (14,918) -------- Excess of current value over historical cost at December 31, 2001 $ 35,061 ========
The accompanying notes are an integral part of these consolidated financial statements. F-10 AETNA REAL ESTATE ASSOCIATES, L.P. (a Delaware limited partnership) Notes to Consolidated Financial Statements 1. ORGANIZATION Aetna Real Estate Associates, L.P. ("the Partnership") was organized on September 11, 1986 as a limited partnership under the laws of the State of Delaware pursuant to a Certificate and Agreement of Limited Partnership (the "Partnership Agreement"), as amended and restated. The Partnership was formed for the purpose of making acquisitions in and operating certain types of residential and commercial real estate, either directly or through joint venture arrangements and, subject to certain limitations, making participating investments, construction loans and conventional mortgage loans. The Partnership's primary source of revenue is from rental real estate operations. The General Partners of the Partnership are Aetna/AREA Corporation ("Aetna/AREA"), an affiliate of Aetna Life Insurance Company, and AREA GP Corporation ("AREA GP"), an affiliate of Lehman Brothers Inc. 2. CURRENT VALUE BASIS FINANCIAL STATEMENTS Current Value Reporting ----------------------- The consolidated current value basis financial statements are presented to provide supplementary information about the Partnership's financial position and changes in partners' capital which is not provided by the historical cost basis financial statements. The Partnership's investments in real estate are subject to changes in value and, therefore, their current values differ from their historical cost basis net book values determined in conformity with generally accepted accounting principles. Management believes that reporting the financial position on a current value basis is a more realistic basis for reporting the Partnership's activities because of the changing economic conditions affecting the real estate market. As more fully explained below, estimates of the current values of the Partnership's assets and liabilities are determined by management. The estimates of current values of the Partnership's investments in real estate are based upon independent appraisals of the underlying real estate using generally accepted valuation techniques. Such estimates of current value represent the value of real estate assets held as investments for purposes of obtaining the benefit of appreciation and operating cash flows. The estimates do not necessarily represent the realizable sales values of these assets at the date of valuation. Additionally, partners' capital on a current value basis is not intended to represent the liquidation value of the Partnership or the market value of its net assets taken as a whole. F-11 2. CURRENT VALUE BASIS FINANCIAL STATEMENTS (Continued) Bases of Valuation ------------------ The following describes the bases of management's estimates of current values: o The current values of the Partnership's operating properties are determined by independent appraisers. Independent appraisals of each property are performed at the date of purchase and on a quarterly basis thereafter. The value of future cash payments from joint venture partners and additional capital costs, if any, are determined by management to the extent they have not been considered in the independent appraisals. o All other assets and liabilities are carried in the current value basis balance sheets at the lower of cost or net realizable value. Accrued rent related to scheduled rent increases and tenant concessions, included in rent and other receivables on the historical cost basis balance sheets, is deemed to have a net realizable value of zero on a current value basis. o The aggregate difference between the current value basis and historical cost basis of the Partnership's assets and liabilities is reflected in the partners' capital accounts in the current value basis balance sheets. The components of this difference at December 31, 2001 and 2000 are as follows:
2001 2000 ---- ---- (in thousands) Properties $35,435 $51,352 Accrued rent (374) (1,373) ------- ------- Excess of current value over historical cost $35,061 $49,979 ======= =======
3. SIGNIFICANT ACCOUNTING POLICIES Financial Statements -------------------- The Partnership has a controlling interest in each of its joint venture investments and, therefore, has consolidated the accounts of such joint ventures in the financial statements. The consolidated financial statements for 2001, 2000 and 1999 include the accounts of the Partnership and its joint ventures Lincoln Marina Bay and Town Center Associates. As discussed in Note 4, Lincoln Marina Bay was sold in March 2001 and the related partnership is expected to liquidate in 2002. All significant intercompany accounts and transactions have been eliminated in consolidation. Properties ---------- The Partnership regularly evaluates the carrying value of its properties. During 2001, a permanent impairment totaling approximately $695,000 was recorded to write-down the carrying value of Town Center Business Park to its estimated fair value less selling costs. This amount is reflected in the 2001 Consolidated Statement of Income. The estimated fair value represents the property's current value, as discussed in Note 2. There were no such write-downs required in 2000 or 1999. F-12 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) Properties held for investment are carried at depreciated cost, which includes the initial purchase price of the property, plus closing costs, legal fees, and other miscellaneous acquisition costs, net of impairment write-downs. Properties are considered held for sale at the time management accepts a purchase offer or otherwise commits to the sale of a property. In accordance with FAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, these properties to be disposed of are carried at the lower of depreciated cost or fair value less estimated selling costs, and classified as Properties held for sale in the accompanying Consolidated Balance Sheets. Leases are accounted for under the operating method where rental income is recognized on a straight-line basis. Lease termination fees are included in income in the period in which the fee is received. Expenses including advertising, maintenance and repairs are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives. Depreciation is computed using the straight-line method based upon the estimated useful lives of the respective depreciable properties and improvements, ranging from 5 to 40 years for land improvements; 10 to 50 years for building and improvements; and 3 to 10 years for personal property, furniture, fixtures and equipment. Leasing commissions and tenant improvements are amortized over the life of the respective leases or the lives of the improvements, whichever is shorter. Properties held for sale are not depreciated. Revenue Recognition on Property Sales ------------------------------------- The Partnership recognizes gains and losses on the sales of properties in accordance with FAS 66, Accounting for Sales of Real Estate. Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. Cash Equivalents ---------------- For purposes of the Consolidated Statements of Cash Flows, the Partnership considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Included in cash and cash equivalents are restricted security deposits of $95,098 and $101,356 at December 31, 2001 and 2000, respectively. Also, included in cash and cash equivalents at December 31, 2001 and 2000 was $41,106,953 and $8,136,839, respectively, held in a mutual fund utilizing investments such as commercial paper, certificates of deposit and government obligations, which are carried at market value. The cost of cash equivalents approximates fair value at December 31, 2001 and 2000. At December 31, 2001 and 2000, approximately $402,000 and $669,000, respectively, of the bank balances of the Partnership's checking and money market accounts were insured by the Federal Deposit Insurance Corporation ("FDIC") while approximately $2,933,000 and $3,283,000, respectively, were uninsured. Included in the uninsured bank balances was F-13 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) approximately $2,543,000 and $2,345,000 held at one major financial institution at December 31, 2001 and December 31, 2000, respectively. The remainder of the uninsured balances were held in multiple banks. Income Taxes ------------ For the years ended December 31, 2001 and 2000, the Partnership recorded state income tax expense of approximately $77,000 and $200,000, respectively, for the Michigan business tax. No other provision for federal or state income taxes has been made in the consolidated financial statements since income, losses and tax credits are generally passed through to the individual partners. Earnings Per Limited Partnership Unit ------------------------------------- Earnings per unit is based upon net income allocated to the Limited Partners and their weighted average number of units outstanding during the year. 4. SALES OF INVESTMENTS IN REAL ESTATE On March 5, 2001, Marina Bay Industrial Park was sold to an unaffiliated party. The gross sales price of $14,025,000 was $825,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $279,000 and $346,000, respectively, net cash proceeds to the Partnership were approximately $13,400,000. Gain on the sale included in these consolidated financial statements is approximately $5,855,000 for the year ended December 31, 2001, including accrued rental income of $135,000. On August 30, 2001, Westgate Distribution Center was sold to an unaffiliated party. The gross sales price of $11,100,000 was $900,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $255,000 and $206,000, respectively, net cash proceeds to the Partnership were approximately $10,639,000. Gain on the sale included in these consolidated financial statements is approximately $1,914,000 for the year ended December 31, 2001, including accrued rental income of $78,000. On November 19, 2001, Powell Street Plaza was sold to an unaffiliated party. The gross sales price of $37,490,000 was $2,540,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $428,000 and $76,000, respectively, net cash proceeds to the Partnership were approximately $36,986,000. Gain on the sale included in these consolidated financial statements is approximately $11,974,000 for the year ended December 31, 2001, including accrued rental income of $737,000. On January 19, 2000, Windmont Apartments was sold to an unaffiliated party. The gross sales price of $10,310,000 was $310,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $211,000 and $97,000, respectively, net cash proceeds to the Partnership were approximately $10,002,000. Gain on the sale included in these consolidated financial statements is approximately $4,322,000 for the year ended December 31, 2000. F-14 4. SALE OF INVESTMENTS IN REAL ESTATE (Continued) On February 22, 2000, Lincoln Square Apartments was sold to an unaffiliated party. The gross sales price of $18,050,000 was $1,050,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $240,000 and $720,000, respectively, net cash proceeds to the Partnership were approximately $17,090,000. Gain on the sale included in these consolidated financial statements is approximately $9,273,000 for the year ended December 31, 2000. On May 4, 2000, 344 Bonnie Circle, one of three buildings at Westgate Distribution Center was sold to an unaffiliated party. The gross sales price of $5,050,000 was $750,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $117,000 and $30,000, respectively, net cash proceeds to the Partnership were approximately $4,903,000. Gain on the sale included in these consolidated financial statements is approximately $1,990,000 for the year ended December 31, 2000. The gain was reduced approximately $332,000 for the accrued rent receivable that had been recorded to recognize the building's rental income on a straight-line basis. On August 18, 2000, Oakland Pointe Shopping Center was sold to an unaffiliated party. The gross sales price of $12,000,000 was $100,000 greater than the property's appraised value. Net cash proceeds to the Partnership were approximately $11,833,000 including adjustments of approximately $104,000 and after closing costs of approximately $271,000. Gain on the sale included in these consolidated financial statements is approximately $1,399,000 for the year ended December 31, 2000. The gain was reduced approximately $318,000 for the accrued rent receivable that had been recorded to recognize the building's rental income on a straight-line basis. On November 1, 2000 Village Square was sold to an unaffiliated party. The gross sales price of $11,500,000 was equal to the property's appraised value. After closing costs and adjustments aggregating approximately $191,000 and $276,000, respectively, net cash proceeds to the Partnership were approximately $11,033,000. Gain on sale included in the consolidated financial statements for the year ended December 31, 2000 is approximately $3,496,000. The gain was reduced approximately $52,000 for the accrued rent receivable that had been recorded to recognize the building's rental income on a straight-line basis. On March 17, 1999, Gateway Square was sold to an unaffiliated party. The gross sales price of $6,940,000 was approximately $640,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $211,000 and $235,000, respectively, net cash proceeds to the Partnership were approximately $6,494,000. Gain on the sale included in these consolidated financial statements for the year ended December 31, 1999 is approximately $1,211,000. On October 18, 1999, Three Riverside Drive was sold to an unaffiliated party. The gross sales price of $8,025,000 was approximately $825,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $206,000 and $177,000, respectively, net cash proceeds to the Partnership were approximately $7,642,000. Gain on the sale included in these consolidated financial statements for the year ended December 31, 1999 is approximately $320,000. F-15 4. SALE OF INVESTMENTS IN REAL ESTATE (Continued) On October 18, 1999, 115 and 117 Flanders Road was sold to an unaffiliated party. The gross sales price of $9,975,000 was approximately $275,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $254,000 and $178,000, respectively, net cash proceeds to the Partnership were approximately $9,543,000. Gain on the sale included in these consolidated financial statements for the year ended December 31, 1999 is approximately $635,000. On October 26, 1999, Cross Pointe Centre was sold to an unaffiliated party. The gross sales price of $17,254,444 was approximately $1,354,000 greater than the property's appraised value. After closing costs and adjustments aggregating approximately $315,000 and $168,000, respectively, net cash proceeds to the Partnership were approximately $16,772,000. Gain on the sale included in these consolidated financial statements for the year ended December 31, 1999 is approximately $2,397,000. 5. RENT AND OTHER RECEIVABLES Rent and other receivables at December 31, 2001 and 2000 are summarized as follows:
2001 2000 --------------------- ---------------------- Current Historical Current Historical Value Cost Value Cost --------- --------- --------- ---------- Rent and reimbursements receivable $ 346,288 $ 346,288 $ 648,609 $ 648,609 Prepaids and other receivables 26,025 26,025 46,782 46,782 Accrued rent - 373,707 - 1,372,124 --------- --------- --------- ---------- 372,313 746,020 695,391 2,067,515 Less: allowance for doubtful accounts (187,094) (187,094) (342,160) (342,160) --------- --------- --------- ---------- Total rent and other receivables $ 185,219 $ 558,926 $ 353,231 $1,725,355 ========= ========= ========= ==========
6. PARTNERSHIP ALLOCATIONS Generally, net income and losses for any fiscal year and gains and losses from sales are allocated 99% to the Limited Partners and 1% to the General Partners. The Partnership Agreement provides that net cash from operations, as defined therein, and distributable proceeds from sale of investments (other than from the sale of investments pursuant to the liquidation of the Partnership) generally will be distributed, on a quarterly basis, 99% to the Limited Partners and 1% to the General Partners. Distributable proceeds from the sale of investments in liquidation of the Partnership will be distributed in accordance with the partners' capital accounts after all allocations of income and loss. The Partnership Agreement also provides for potentially substantial compensation to be paid to the General Partners in the event the Limited Partners elect to remove the General Partners. F-16 7. JOINT VENTURES The Partnership was a general partner in one consolidated joint venture as of December 31, 2001, and two consolidated joint ventures as of December 31, 2000 and 1999. The joint venture agreement in existence as of December 31, 2001 provides the Partnership with priority cash payments from operations of the joint venture of 9% and 13% (as defined in the joint venture agreement) per annum on all funds contributed by the Partnership to the extent sufficient cash flows are generated by the underlying property. Any cash flow in excess of these payments to the Partnership will be distributed to the Partnership and its joint venture partner in accordance with their joint venture interest. The Partnership's interest in its joint venture is 80%. 8. CAPITAL CONTRIBUTIONS/DISTRIBUTIONS The Partnership initially offered up to $300,000,000 of depositary partnership units representing units of limited partnership interests and an additional $30,000,000 of units pursuant to the Partnership's Distribution Reinvestment Plan ("DRIP"). Pursuant to such Plan, Unitholders were entitled to elect to have their Partnership distributions reinvested in new units. Effective January 1, 1991, the Partnership suspended its initial offering of $300,000,000 of units. In March 1992, the Partnership terminated the offering and suspended sales of units pursuant to the DRIP. During 1993, the Partnership received a favorable response to a no-action request submitted to the Securities and Exchange Commission regarding its ability to continue to sell units pursuant to the DRIP without registration of such units under the Securities Act of 1933, as amended. As of December 31, 2001, the Partnership had not reopened sales of units pursuant to the DRIP. No additional units were issued since 1991. Information related to Unitholders' distributions for the years ended December 31, 2001, 2000 and 1999 is as follows:
Cash Distributions -------------------- Paid Per Unit ---- -------- 2001 $35,501,486 $2.79 2000 63,368,302 4.98 1999 53,061,424 4.17
The General Partners' distributions for the year ended December 31, 2001 aggregated $358,601, of which $92,542 related to operations for the quarters ended December 31, 2000, March 31, 2001, June 30, 2001 and September 30, 2001, and $266,059 related to a reduction of cash reserves and the distribution of sales proceeds from properties sold during 2001. During the year ended December 31, 2001, $95,113 of the General Partners' distributions was withheld by the Partnership since these funds would have to be contributed to the Partnership as required by the Partnership Agreement. The General Partners also contributed $385,365 during 2001 pursuant to the Partnership Agreement. Cash distributions paid to the General Partners during the year ended December 31, 2000 aggregated $640,083, of which $92,542 related to operations for the quarters ended December 31, 1999, March 31, 2000, June 30, 2000 and September 30, 2000, and $547,541 related to a reduction of cash reserves and the distribution of sales proceeds from properties sold during 2000. During the year ended December 31, 2000, $110,536 of the General Partners' distributions were withheld F-17 8. CAPITAL CONTRIBUTIONS/DISTRIBUTIONS (Continued) by the Partnership since these funds would have to be contributed to the Partnership as required by the Partnership Agreement. 9. TRANSACTIONS WITH AFFILIATES Investment Portfolio Fee ------------------------ The General Partners are entitled to receive an investment portfolio fee based on the net asset value of the Partnership's investments. The fee is payable quarterly, in arrears, from available cash flow and may not exceed 2.25% per annum of net asset value. The applicable percentage, for the purpose of calculating this fee, declines to 1.75% per annum for Investments in Properties held by the Partnership more than 10 years but less than 15 years, and to 1.5% per annum for Investments in Properties held more than 15 years. These rates became effective on March 15, 1999 in accordance with the Settlement Agreement discussed in Note 15. Prior to March 15, 1999, each of the rates were .25% higher. The current rates decreased another .25% per annum as of June 19, 2001 pursuant to the Settlement Agreement. For the years ended December 31, 2001, 2000 and 1999, Aetna/AREA and AREA GP were entitled to fees as follows:
Aetna/AREA AREA GP ----------- ----------- 2001 $ 1,193,509 $ 1,193,509 2000 1,599,410 1,599,410 1999 2,029,436 2,297,914
Other ----- The General Partners are entitled to reimbursement of expenses paid on behalf of the Partnership incurred in connection with the investments and operation of the Partnership. Reimbursable expenses of $95,704, $184,757, and $284,868, which consist primarily of insurance expense paid to a third party, were reimbursed during 2001, 2000 and 1999 respectively, to an affiliate of Aetna/AREA. 10. LEASE AGREEMENTS At December 31, 2001, the Partnership's principal assets subject to lease agreements consisted of an apartment complex and an industrial park. Apartment leases generally have terms of 6 to 12 months and provide for a fixed minimum rent. Leases with industrial park tenants generally range in term from 1 to 10 years and provide for fixed minimum rent and reimbursement of their proportionate share of operating expenses. Included in rental revenue are $1,431,790, $2,475,611 and $3,519,975 primarily consisting of expense reimbursements for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, various leases with shopping center tenants provide for additional rent based upon percentages of tenants' sales volume. Percentage rent included in rental revenue is $397,621, $344,088 and $619,872 for the years ended December 31, 2001, 2000 and 1999, respectively. F-18 10. LEASE AGREEMENTS (Continued) The following table is a schedule of minimum future rents to be received as of December 31, 2001 under non-cancelable operating leases:
Year ending December 31, ------------------------ 2002 $ 7,555,906 2003 3,539,150 2004 2,414,111 2005 1,377,591 2006 181,014 Thereafter - ----------- Total $15,067,772 ===========
11. NET ASSET VALUE PER UNIT Prior to the termination of the Offering and the Remarketing Opportunity and the suspension of the DRIP in 1992, units offered to new Unitholders or issued pursuant to the DRIP were purchased at Net Asset Value per unit as defined in the Partnership Agreement. As discussed in Note 8, the Partnership had not reopened sales of units pursuant to the DRIP as of December 31, 2001. The Net Asset Value per unit calculated in accordance with the Partnership Agreement, is summarized as of December 31, 2001 and 2000 as follows:
2001 2000 ---- ---- Limited Partners' capital - current value basis $138,557,091 $163,222,676 Cash to be distributed to Limited Partners (2,290,418) (2,290,418) ------------ ------------ $136,266,673 $160,932,258 ============ ============ Units outstanding 12,724,547 12,724,547 ============ ============ Net Asset Value per unit $ 10.71 $ 12.65 ============ ============
12. SUPPLEMENTARY INFORMATION Maintenance and repairs, real estate taxes and advertising costs included in property operating expenses for the years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 ---- ---- ---- Maintenance and repairs $ 768,004 $ 917,524 $ 1,261,180 Real estate taxes 1,394,122 2,113,633 2,908,669 Advertising costs 47,591 139,095 307,628
F-19 13. RECONCILIATION OF FINANCIAL STATEMENT AND TAX INFORMATION The following is a reconciliation of net income for financial statement purposes to net income for federal income tax purposes for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ---- ---- ---- Net income per financial statements $ 25,863,217 $ 28,743,547 $ 12,327,452 Gain on sale of properties for tax purposes less than gain on sale of properties per financial statements (49,936) (13,386,191) (4,826,918) Joint venture net income for tax purposes in excess of (less than) joint venture net income per financial statements (238,417) 528,440 (134,804) Depreciation deducted for tax purposes greater (less) than depreciation expense per financial statements (409,807) (326,416) (169,993) Permanent impairment not deductible for tax purposes 694,871 - - Rental income related to accrued rent on wholly owned properties 873,250 723,630 574,457 Bad debt expense deducted per financial statements in excess of (less than) bad debt expense deducted for tax purposes (65,528) 20,872 (251,640) Other 274,742 (286,488) 5,221 ------------ ------------ ------------ Taxable net income $ 26,942,392 $ 16,017,394 $ 7,523,775 ============ ============ ============
The following is a reconciliation of partners' capital (historical cost) for financial statement purposes to partners' capital for federal income tax purposes as of December 31, 2001, 2000 and 1999:
2001 2000 1999 ---- ---- ---- Partners' capital per financial statements $103,401,450 $112,917,842 $148,072,144 Adjustment for cumulative difference between tax basis net income and net income per financial statements 5,586,005 4,506,830 17,232,983 ------------ ------------ ------------ Partners' capital per tax return $108,987,455 $117,424,672 $165,305,127 ============ ============ ============
14. SUBSEQUENT EVENTS Town Center Business Park ------------------------- On March 21, 2002, Town Center Business Park was sold to an unaffiliated party for a gross sales price of $33,500,000. After closing costs and adjustments, net cash proceeds to the Partnership were approximately $32,800,000. Loss on sale of approximately $930,000 will be recognized in the consolidated financial statements for the quarter ended March 31, 2002. The loss includes approximately $370,000 for the accrued rent receivable that had been recorded to recognized the building's rental income on a straight-line basis. F-20 14. SUBSEQUENT EVENTS (Continued) Capital Contributions/Distributions ----------------------------------- In February 2002, the Partnership declared cash distributions aggregating $2,313,554 ($.18 per Unit) pertaining to the period from October 1, 2001 to December 31, 2001, which was paid on March 15, 2002. The General Partners also distributed a portion of the net proceeds from the sale of Powell Street Plaza in the form of a special distribution aggregating $35,901,186 ($2.79 per Unit), which was paid on February 11, 2002. For the reason discussed in Note 8, the General Partners' distributions aggregating $382,147 were withheld by the Partnership. 15. LITIGATION In November 1996, the Partnership and its general partners, Aetna/AREA Corporation and AREA GP Corporation (the "General Partners"), were named as defendants in two purported class action lawsuits filed in the Chancery Court of Delaware in New Castle County, entitled Bobbitt v. Aetna Real Estate Associates, L.P., et al and Estes v. Aetna Real Estate Associates, L.P., et al (collectively, the "Complaints"). The Complaints alleged, among other things, that management fees that had been paid to the General Partners were excessive and that a standstill agreement with a then tender offeror which had the effect of limiting the number of Partnership Units that would be the subject of any tender offer was unlawful. On March 15, 1999, the parties entered into a Stipulation and Agreement of Compromise, Settlement and Release (the "Settlement Agreement"), which was filed with and subject to approval by the Delaware Chancery Court. The Court approved the Settlement Agreement on May 19, 1999, and no appeal was filed within the applicable period. Upon the approval by the court of the Settlement Agreement, the Applicable Percentage, as defined in Section 6.6 of the Partnership Agreement, used to calculate the Investment Portfolio Fee per quarter which is paid to the General Partners, was reduced by 0.0625% (the "First Reduction"). The First Reduction was effective on June 19, 1999 (the "Final Date") and was applied retroactively to March 15, 1999, the date of the execution of the Settlement Agreement. The First Reduction resulted in a 0.25% reduction of the annual Investment Portfolio Fee otherwise provided in the Partnership Agreement. Effective on the second anniversary of the Final Date, the Applicable Percentage will be reduced by an additional 0.0625% per quarter (the "Second Reduction"). The First and Second Reductions will apply cumulatively so that the annual Investment Portfolio Fee from the second anniversary of the Final Date through the termination of the Partnership will be a total of 0.50% below the annual Investment Portfolio Fee otherwise provided in the Partnership Agreement. Pursuant to the terms of the Settlement Agreement, the Partnership made a special cash distribution out of Partnership cash reserves on April 14, 1999 of $2,544,909 ($0.20 per Unit) to Limited Partners and $25,706 to the General Partners. As part of the Settlement Agreement the plaintiff's attorneys were paid fees and out-of-pocket expenses totaling $2,195,757 during the year ended December 31, 1999. In addition, legal expenses on behalf of the Partnership and the General Partners amounting to $212,346 were F-21 paid or accrued as of December 31, 1999. The total legal expense of the litigation for the year ended December 31, 1999 aggregated $2,408,103. F-22 PRICEWATERHOUSECOOPERS LLP REPORT OF INDEPENDENT ACCOUNTANTS - SUPPLEMENTARY INFORMATION To the Unitholders of Aetna Real Estate Associates, L.P. In connection with our audits of the consolidated financial statements of Aetna Real Estate Associates, L.P. as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, which financial statements are included herein, we have also audited the related financial statement schedule listed in the index on page F-1 herein. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PRICEWATERHOUSECOOPERS LLP January 31, 2002 except Note 14 for which the date is March 28, 2002 F-23 AETNA REAL ESTATE ASSOCIATES, L.P. Schedule III - Real Estate and Accumulated Depreciation As of December 31, 2001
Costs Capitalized Gross Amount at Which Initial Cost Subsequent to Acquisition Carried at End of Year -------------------------- -------------------------- ---------------------------------------- Encum- Building & Building & Building & Description brances Land Improvements Land Improvements Land Improvements Total (a) ---------------------- ------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Partnership Owned: Summit Village $ - $ 5,395,408 $30,154,302 $116,350 $ 4,069,688 $ 5,511,758 $34,223,990 $39,735,748 Apartment Complex Rosslyn, VA Consolidated Ventures: Town Center - 10,880,641 19,198,867 94,939 16,486,165 10,975,580 35,685,032 46,660,612 Business Park Santa Fe Springs, CA ------- ----------- ----------- -------- ----------- ----------- ----------- ----------- $ - $16,276,049 $49,353,169 $211,289 $20,555,853 $16,487,338 $69,909,022 $86,396,360 ======= =========== =========== ======== =========== =========== =========== ===========
See Notes to Schedule III F-24 AETNA REAL ESTATE ASSOCIATES, L.P. Schedule III - Real Estate and Accumulated Depreciation (Continued) As of December 31, 2001
Life on which Depreciation in Latest Income Accumulated Date of Date Statement Description Depreciation (a) Construction Acquired is Computed ----------- ---------------- ------------ -------- --------------- Summit Village Apartment Complex $12,353,823 1987/1989 6/9/87 and 40 years Rosslyn, VA 8/31/89 Consolidated Ventures: Town Center Business Park (d) Santa Fe Springs, CA 13,272,100 1982 12/18/87 33 years ----------- $25,625,923 (c) ===========
See Notes to Schedule III F-25 AETNA REAL ESTATE ASSOCIATES, L.P. Notes to Schedule III (a) Reconciliation of the carrying amount of real estate investments and accumulated depreciation for the years ended December 31, 2001, 2000, and 1999 is as follows:
2001 2000 1999 ------------ ------------ ------------ Balance of real estate investments at beginning of year $139,185,811 $182,137,425 $225,833,129 Additions during year: Improvements and additions 2,659,002 2,885,247 3,288,219 Deductions during year: Cost of real estate sold (54,753,582) (45,747,685) (46,542,985) Impairment (b) (694,871) - - Other (1) - (89,176) (440,938) ------------ ------------ ------------ Balance of real estate investments at close of year $ 86,396,360 $139,185,811 $182,137,425 ============ ============ ============ Balance of accumulated depreciation at beginning of year $ 37,650,156 $ 44,651,002 $ 48,914,701 Depreciation expense 1,822,563 4,137,611 6,092,490 Accumulated depreciation of real estate sold (13,846,796) (11,049,281) (9,915,251) Other (1) - (89,176) (440,938) ------------ ------------ ------------ Balance of accumulated depreciation at close of year $ 25,625,923 $ 37,650,156 $ 44,651,002 ============ ============ ============ (1) Write-off of tenant improvements and leasing commissions for vacated tenants.
(b) In 2001, one property was written-down for an impairment aggregating $694,871. Accumulated depreciation and amortization of $13,272,100 at the time of the impairment has been included in the cost of real estate sold. (c) For Federal income tax purposes, the aggregate cost of land, buildings and improvements is $82,730,234. The amount of accumulated depreciation on real property for Federal income tax purposes is $28,006,052. (d) Town Center Business Park was considered held for sale on June 30, 2001. The Registrant stopped depreciating this property at that time, see Note 3 to the Consolidated Financial Statements for additional detail on accounting policies. F-26