Item 1. Business.
General - -------
Capital Mortgage Plus L.P. (the "Registrant") is a limited partnership formed under the laws of the State of Delaware on November 23, 1988. The sole general partner of the Registrant is CIP Associates, Inc., a Delaware corporation (the "General Partner"). The General Partner manages and controls the affairs of the Registrant. See Item 10, Directors and Executive Officers of the Registrant, below.
Investment Objectives - ---------------------
The Registrant's principal investment objectives are to: (i) preserve and protect the Registrant's capital; (ii) provide quarterly cash distributions of adjusted cash from operations; and (iii) provide additional distributions from additional interest arising from participations in the annual cash flow of the developments and/or the sale or refinancing of a development. There can be no assurance that all of the objectives can be achieved.
The Registrant originated federally insured and co-insured first mortgage construction and permanent loans ("Mortgages") to finance multi-family residential rental properties ("Developments" and each a "Development") developed by unaffiliated entities. All base interest and initially at least 90% in the aggregate of the principal of the Mortgages in which the Registrant invests are insured or coinsured by the Department of Housing and Urban Development ("HUD") and Related Mortgage Corporation ("RMC"), an affiliate of the General Partner. The remaining 10% of the Registrant's portfolio is comprised of uninsured non-interest bearing equity loans ("Equity Loans") secured by the assignment of the debtor's interests in the Development made directly to the same developers as the Mortgages for, among other purposes, defrayal of certain specific cash requirements of the Developments. The Registrant made five Mortgages in the aggregate amount of $26,158,190 and five Equity Loans in the aggregate amount of $3,062,135 in connection with five Developments. The Registrant is a closed-end Company that made its last mortgage investment in March 1993 and does not expect to make any additional investments. The Mortgage and Equity Loan relating to the Mortenson Manor Apartments ("Mortenson") was repaid in full on October 31, 2002. The Mortgage and Equity Loan relating to the Willow Trace Apartments ("Willow Trace") was repaid in full on December 16, 1998. The Registrant has no present expectation as to when it may dispose of its remaining Mortgages and Equity Loans.
The Registrant is engaged solely in the business of investing in Mortgages and Equity Loans; therefore, presentation of industry segment information is not applicable.
For detailed financial information pertaining to the Registrant, see Item 8, Financial Statements and Supplementary Data, below.
Investments - -----------
The following table lists the Mortgages and Equity Loans as of February 28, 2003; it excludes the investment in Mortenson which was repaid on October 31, 2002.
(1) The minimum interest rate shown above includes interest payable under the first mortgage note plus additional interest payable pursuant to the terms of a Limited Operating Guaranty agreement for Fieldcrest III Apartments ("Fieldcrest") and Holly Ridge II Apartments ("Holly Ridge") and the Additional Interest Guaranty agreements for Windemere Apartments ("Windemere").
(2) The Windemere Mortgage is co-insured by HUD and RMC. The Fieldcrest and Holly Ridge Mortgages are fully insured by HUD. As of February 28, 2003, all loan amounts under the Mortgages have been disbursed.
(3) Default interest payments in the aggregate amount of approximately $466,000 for the years ended December 31, 1999 through 2002 and $130,000 for the year ended December 31, 1996 have not been received and as a result, the Registrant established an allowance for uncollectability for a portion of the unpaid default interest payments which equals approximately $565,000 and $472,000 at December 31, 2002 and 2001, respectively.
(4) Default interest payments in the aggregate amount of approximately $26,000 and $40,000 for the years ended December 31, 2002 and 2001 have not been received and as a result the Registrant established an allowance for uncollectability for a portion of the unpaid default interest payments which equals approximately $53,000 and $40,000 at December 31, 2002 and 2001, respectively.
(5) All Mortgages and Equity Loans have call provisions effective ten years following final endorsement and a grace period. The Registrant, in order to enforce such provisions, would be required to terminate the mortgage insurance contract with FHA (and/or the coinsurer) with respect to each of the Mortgages not later than the accelerated payment date. Since the exercise of such option would be at the Registrant's discretion, it is intended to be exercised only where the Registrant determines that the value of the Development has increased by an amount which would justify accelerating payment in full and assuming the risks of foreclosure if the mortgagor failed to make the accelerated payment.
The following is the interest income from Mortgages as a percentage of total revenues.
* Repaid in full on October 31, 2002
Repayment of Mortgage Loan - -------------------------- On October 31, 2002, Mortenson II Associates L.P. (the "Owner"), the owner of Mortenson, prepaid the outstanding Mortgage and Equity Loan in full. The Mortgage and the Equity Loan were secured by a mortgage on the Mortenson property and partnership interests in the Owner. The outstanding debt repaid early to the Registrant totaled $5,934,739, including the $4,543,011 outstanding balance of the Mortgage Loan, the $577,885 Equity Loan and $813,843 of additional interest due pursuant to the loan documents.
Competition - ----------- The Registrant's business is affected by competition to the extent that the underlying Developments from which its borrowers derive interest and principal payments may be subject to competition from neighboring properties. In particular, the receipt of additional interest and the repayment of the Equity Loans, neither of which is insured or guaranteed by government or quasi-government agencies, are dependent upon the economic performance of the underlying Developments which could be adversely affected by competitive conditions.
Employees - --------- The Registrant does not directly employ anyone. All services are performed for the Registrant by its General Partner and that entity's affiliates. The General Partner receives compensation in connection with such activities as set forth in Items 11 and 13. In addition, the Registrant reimburses the General Partner and certain of its affiliates for expenses incurred in connection with the performance by their employees of services for the Registrant in accordance with the Partnership Agreement.
Item 2.
Item 2. Properties.
The Registrant does not own or lease any property.
Item 3.
Item 3. Legal Proceedings.
There are no material legal proceedings pending against or involving the Registrant.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fiscal year covered by this report through the solicitation of proxies or otherwise.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Security Holder Matters.
As of December 31, 2002, the Registrant had issued and outstanding 1,836,660 limited partnership interests ("Limited Partnership Interests"). All of the issued and outstanding Limited Partnership Interests are issued to Related FI BUC$ Associates, Inc. (the "Assignor Limited Partner"), which has issued Beneficial Assignment Certificates ("BACs"). Each BAC represents all of the economic and virtually all of the material ownership rights attributable to a Limited Partnership Interest held by the Assignor Limited Partner. BACs may be converted into Limited Partnership Interests at no cost to the holder, but Limited Partnership Interests are not convertible back into BACs. There is currently no established public trading market for BACs and it is not anticipated that BACs will be listed for trading on any securities exchange or included for quotation on the Nasdaq National Market.
The Registrant has 3,485 registered holders of an aggregate of $1,836,660 BACs, as of March 3, 2003.
All of the Registrant's general partnership interests, representing an aggregate capital contribution of $1,000, are held by the General Partner.
There are no material legal restrictions upon the Registrant's present or future ability to make distributions in accordance with the provisions of the Registrant's Amended and Restated Agreement of Limited Partnership.
Distribution Information - ------------------------
Accrued cash distributions per BAC made to the limited partners or BACs holders for the following quarters in 2002, 2001 and 2000, which are paid in subsequent quarters, were as follows:
Quarterly distributions are generally made 45 days following the close of the calendar quarter.
A total of $4,835,138 was distributed to the limited partners or BACs holders during the years 2002, 2001 and 2000. The Registrant utilized the original working capital reserve, in the aggregate amount of $477,532, for distributions from 1989 through 1991, which was considered to be a return of capital. An additional working capital reserve of approximately $2,800,000 was established from uninvested offering proceeds, a portion of which was applied to pay a part of the 2002, 2001 and 2000 distributions (which was considered to be a return of capital). Approximately $0, $396,000 and $274,000 paid to the limited partners or BACs holders in each of the years ended December 31, 2002, 2001 and 2000, respectively, represented a return of capital. A total of $98,676 was distributed to the General Partner during 2002, 2001 and 2000.
The 2002 fourth quarter distribution, which was paid on February 14, 2003, was funded primarily by the Mortenson repayment proceeds, $3.59 per BAC of which is considered to be a return of capital.
Item 6.
Item 6. Selected Financial Data.
The information set forth below presents selected financial data of the Registrant. Additional financial information is set forth in the audited financial statements and footnotes thereto contained in Item 8 hereof.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Capital Resources and Liquidity - -------------------------------
Sources of Registrant funds included interest earned on (1) investments in Mortgages and Equity Loans (see also Item 1, Business) and (2) the working capital reserve.
During the year ended December 31, 2002, cash and cash equivalents of the Registrant increased by approximately $5,548,000 due to cash provided by operating activities ($1,909,000), collections of principal on Mortgages and Equity Loans approximately ($5,283,000) and reduced by distributions paid to partners and BACs holders ($1,645,000). Included in the adjustments to reconcile the net income to cash flow provided by operating activities is amortization of approximately $209,000.
The regular quarterly distribution for the fourth quarter of 2002 was reduced to $.13 per BAC. Subject to the future performance of the Registrant's investments and results of operations, the General Partner anticipates that there will be sufficient cash from operations generated to cover anticipated expenses in 2003 and to fund future distributions of $.52 per BAC per annum paid quarterly.
On October 31, 2002, Mortenson II Associates L.P. (the "Owner"), the owner of Mortenson, prepaid the outstanding Mortgage Loan and Equity Loan in full. The Mortgage and the Equity Loan were secured by a mortgage on the Mortenson property and partnership interests in the Owner. The outstanding debt repaid early to the Registrant totaled $5,934,739, including the $4,543,011 outstanding balance of the Mortgage, the $577,885 Equity Loan and $813,843 of additional interest due pursuant to the loan documents. The repayment proceeds were included in a cash distribution and were considered a return of capital made during the first quarter of 2003 of $6,593,609 ($3.59 per BAC) to the BACsholders and $66,602 to the General Partner.
Regular quarterly distributions other than the distribution of repayment proceeds for the Mortenson Loans, which on an annual basis totaled approximately $1,612,000 and $1,611,000, were made to the limited partners or BACs holders during the years ended December 31, 2002 and 2001. Such distributions were made from adjusted cash flow from operations and, to a lesser extent, from working capital reserves which is considered to be a return of capital. Approximately $33,000 was distributed to the General Partner in each of the years ended December 31, 2002 and 2001, respectively.
Management is not aware of any trends or events, commitments or uncertainties that will impact liquidity in a material way. Management believes the only impact would be from laws that have not yet been adopted. All base interest and the principal of the Registrant's investments in Mortgages are insured or co-insured by HUD and additionally one Mortgage is coinsured by a private mortgage lender (which is an affiliate of the General Partner). The Registrant's investments in uninsured non-interest bearing Equity Loans (which represent approximately 10% of the Registrant's portfolio when originated) are secured by a Registrant interest in three properties. Due to the prepayment of two of the Registrant's original investments in Mortgages and Equity Loans, the portfolio is not diversified by location around the United States. Thus, the Registrant may not be protected against a general downturn in the national economy.
Critical Accounting Policies - ----------------------------
The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which requires Registrant to make certain estimates and assumptions. A summary of significant accounting policies is disclosed in Note 2 to the financial statements which are included
in Registrant's annual report on Form 10-K for the year ended December 31, 2002. The following section is a summary of certain aspects of those accounting policies that may require subjective or complex judgments and are most important to the portrayal of Registrant's financial condition and results of operations. Registrant believes that there is a low probability that the use of different estimates or assumptions in making these judgments would result in materially different amounts being reported in the financial statements.
o Interest income on the mortgage loans consist of contingent and non-contingent interest as defined in the mortgage notes and other additional interest agreements. Non-contingent interest consists of base and default interest, which is recognized as earned. Contingent interest is based on the development's cash flows and is recognized when received.
o If the interest receivable exceeds the estimated value derived by management, Registrant adjusts the allowance account to reflect its estimated fair value.
o The equity loans are considered to be premiums paid to obtain the Mortgages and are amortized over the average expected lives of the respective Mortgages.
Results of Operations - ---------------------
2002 vs. 2001 - -------------
Results of operations for the years ended December 31, 2002 and 2001 consisted primarily of interest income of $2,491,000 and $1,944,000, respectively, earned from investments in Mortgages.
Interest income from temporary investments decreased approximately $11,000 for the year ended December 31, 2002 as compared to 2001, primarily due to lower interest rates in 2002.
Other income increased approximately $448,000 for the year ended December 31, 2002 as compared to 2001, primarily due to the gain realized from the repayment of the Mortenson Mortgage Loan and Equity Loan in 2002.
General and administrative increased approximately $12,000 for the year ended December 31, 2002 as compared to 2001, primarily due to an increase in legal expenses in 2002.
General and administrative-related parties increased approximately $21,000 for the year ended December 31, 2002 as compared to 2001, primarily due to an increase in expenses reimbursements due to the General Partner for asset monitoring and overhead.
A provision for bad debts of approximately $146,000 and $262,000 was charged for the years ended December 2002 and 2001, respectively, representing the 2002 and 2001 Guaranteed Interest due from Hollyridge and the 2002 Guaranteed Interest due from Windemere and the 2001 Guaranteed Interest due from Mortenson and the 2001 and 2000 Guaranteed Interest due from Windemere.
2001 vs. 2000 - -------------
Results of operations for the years ended December 31, 2001 and 2000 consisted primarily of interest income of $1,944,000 and $1,995,000, respectively, earned from investments in Mortgages.
Interest income from temporary investments decreased approximately $8,000 for the year ended December 31, 2001 as compared to 2000 primarily due to lower interest rates in 2001.
General and administrative decreased approximately $15,000 for the year ended December 31, 2001 as compared to 2000 primarily due to a decrease in legal and printing costs in 2001.
A provision for bad debts of approximately $262,000 and $175,000 was charged for the years ended December 31, 2001 and 2000, respectively, representing the 2001 Guaranteed Interest due from Mortenson and the 2001 and 2000 Guaranteed Interest due from Windemere and the 2000 Guaranteed Interest due from Mortenson and the 1999 Guaranteed Interest due from Windemere.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not Applicable
Item 8.
Item 8. Financial Statements and Supplementary Data. Page (a) 1. Financial Statements ---- --------------------
Independent Auditors' Report 11
Statements of Financial Condition as of December 31, 2002 and 2001 12
Statements of Income for the years ended December 31, 2002, 2001 and 2000 13
Statements of Changes in Partners' Capital (Deficit) for the years ended December 31, 2002, 2001 and 2000 14
Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 15
Notes to Financial Statements 16
INDEPENDENT AUDITORS' REPORT
To the Partner of Capital Mortgage Plus L.P.
We audited the accompanying statements of financial condition of Capital Mortgage Plus, L.P. (a Delaware Limited Partnership) as of December 31, 2002 and 2001 and the related statements of income, changes in partners' capital (deficit) and cash flows for the years ended December 31, 2002, 2001 and 2000. These financial statements are the responsibility of the General Partners. 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 the General Partner, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Mortgage Plus, L.P. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the three years then ended December 31, 2002, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ REZNICK FEDDER & SILVERMAN Bethesda, Maryland March 20, 2003
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) STATEMENTS OF FINANCIAL CONDITION
ASSETS
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) STATEMENTS OF INCOME
See accompanying notes to financial statements.
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
See accompanying notes to financial statements.
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) STATEMENTS OF CASH FLOWS
See Accompanying Notes to Financial Statements.
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 and 2000
NOTE 1 - General
Capital Mortgage Plus L.P., a Delaware limited partnership (the "Partnership") commenced a public offering (the "Offering") on May 10, 1989 of 5,000,000 ($100,000,000) Beneficial Assignment Certificates ("BACs") representing assignments of limited partnership interests. The BACs represent an assignment of all of the economic and all of the material ownership rights attributable to the limited partnership interests in the Partnership. The BACs holders have virtually the same rights and, for all practical purposes, are limited partners of the Partnership.
Pursuant to the Offering, the Partnership received $36,733,200 of gross proceeds from the BACs holders representing the issuance of 1,836,660 BACs. The final closing of the Offering occurred on May 23, 1991 and no further issuance of BACs is anticipated.
The Partnership was organized on November 23, 1988 and will continue until December 31, 2041 unless terminated sooner under the provisions of its partnership agreement.
The general partner of the Partnership is CIP Associates, Inc., a Delaware corporation (the "General Partner"). Related FI BUC$ Associates, Inc. is the Assignor Limited Partner of the Partnership. CIP Associates, Inc. and Related FI BUC$ Associates, Inc. are under substantially common ownership.
The Partnership was formed to invest in insured or guaranteed mortgage investments. The Partnership has invested in first mortgage construction and permanent loans ("Mortgages") to finance multifamily residential rental properties ("Developments") developed by unaffiliated entities. A substantial portion of the Mortgages provides additional interest based on the annual cash flow from the Developments and the proceeds of prepayments, sales or other dispositions. All base interest and initially at least 90% of the principal of the Mortgages is insured or coinsured by the Department of Housing and Urban Development ("HUD") and a private mortgage lender (which is an affiliate of the General Partner). The Partnership has also invested in uninsured equity loans ("Equity Loans") made directly to developers of developments on which the Partnership holds a Mortgage.
Net income and distributions from operations of the Partnership are allocated 2% to the General Partner and 98% to the limited partners, until the limited partners have received an 11% per annum non-cumulative non-compounded return on their adjusted contributions as defined in the Amended and Restated Agreement of Limited Partnership. Thereafter, net income and distributions will be allocated 90% to the limited partners and 10% to the General Partner. Distributions of disposition proceeds are allocated 1% to the General Partner and 99% to the limited partners until each limited partner has received an amount equal to his original contribution plus an amount which, when added to all prior distributions equals a 7% per annum cumulative non-compounded return on his adjusted contribution; then 2% and 98% of disposition proceeds, until each limited partner has received an amount which, when added to all prior distributions equals an 11% per annum cumulative non-compounded return on his adjusted contribution; and thereafter 10% to the General Partner and 90% to the limited partners.
The accrued cash distributions per BAC were approximately $4.38, $.88 and $.88 for 2002, 2001 and 2000. The 2002, 2001 and 2000 distributions were made from adjusted cash flow from operations (and, in particular, of the fourth quarter 2002 distribution which was paid on February, 14, 2003 from the repayment of the Mortenson loan, $3.59 per BAC was considered to be a return of capital) and to a
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 and 2000
lesser extent were supplemented from working capital reserves, which was considered to be a return of capital.
NOTE 2 - Accounting Policies
a) Basis of Accounting
The books and records of the Partnership are maintained on the accrual basis of accounting in accordance with generally accepted accounting principles ("GAAP").
The preparation of financial statements in conformity with GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates are made when accounting for the allowance for the interest receivable. Actual results could differ from those estimates.
Acquisition expenses incurred for the investment of Mortgages have been capitalized and are included in loan origination costs, which are amortized over the average expected lives of the respective Mortgages when acquired and written off when the loan is repaid.
The Equity Loans are considered to be premiums paid to obtain the Mortgages and are amortized over the average expected lives of the respective Mortgages.
Interest rate buydowns are amortized as an adjustment to the effective interest rate over the average expected lives of the respective Mortgages.
b) Cash and Cash Equivalents
Cash and cash equivalents include temporary investments with original maturity dates of less than 3 months when acquired and are carried at cost plus accrued interest, which approximates market.
c) Income Taxes
The Partnership is not required to provide for, or pay, any federal income taxes. Income tax attributes that arise from its operation are passed directly to the individual partners. The Partnership may be subject to state and local taxes in jurisdictions in which it operates.
d) Revenue Recognition
Interest income on the Mortgages loans consists of contingent and non-contingent interest as defined in the mortgage notes and other additional interest agreements. Non-contingent interest consists of base and default interest, which is recognized as earned. Contingent interest is based on the underlying Development's cash flows and is recognized when received.
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 (Unaudited)
Note 3 - Investments in Loans
Information relating to investments in Mortgages and Equity Loans as of December 31, 2002 and 2001 is as follows, one of which was repaid on October 31, 2002:
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 and 2000
(A) Base interest on the Mortgages is that amount that is insured/co-insured by HUD and is being shown net of service fee.
(B) Default Interest is the minimum amount due over the base rate, and is not contingent upon cash flow. This interest is secured by partnership interests in the borrower.
(C) Annual Yield is the amount over the default rate and is contingent upon cash flow of the Development.
(D) Cash Flow Participation is the percent of cash flow due to the Partnership after payment of the Annual Yield and is contingent upon cash flow.
(E) The Investments in Loans amount reflects the unpaid balance of the Mortgages and the unamortized balance of the Equity Loans in the amounts of $15,945,807 and $152,391 respectively, at December 31, 2002 and $20,651,303 and $351,069, respectively, at December 31, 2001.
(F) On October 31, 2002, Mortenson II Associates L.P. (the "Owner"), the owner of Mortenson, prepaid the Mortgage and Equity Loan in full. The Mortgage and the Equity Loan were secured by a mortgage on the Mortenson property and partnership interests in the Owner. The outstanding debt repaid early to the Partnership totaled $5,934,739, including the $4,543,011 outstanding balance of the Mortgage, the $577,885 Equity Loan and $813,843 of additional interest due pursuant to the loan documents.
Total interest earned, as shown on the above schedule of investment in loans does not include the gain on the recovery of the amortized portion of the Mortenson Equity Loan of $569,859 and the writeoff of the unamortized portion of the Mortenson Loan costs of $121,561, both of which are included in other income on the Statements of Income.
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 and 2000
* This is the unamortized portion of the Equity Loan and the balance of the $577,885 repaid is included in other income on the Statements of Income.
The Windemere Mortgage is co-insured by HUD and Related Mortgage Corporation ("RMC"), an affiliate of the General Partner. The Fieldcrest III and Holly Ridge II Mortgages are insured by HUD. Mortenson was co-insured by HUD and RMC.
In addition to the interest rate payable during the post-construction periods, the Partnership will be entitled to payment of 30% of cash flow, if any, remaining after payment of the permanent loan interest and accrued interest if any, and certain amounts from sales or refinancing proceeds.
The Equity Loans are non-interest bearing and are secured by the assignment of the owner/developers' interests in the Developments. The Equity Loans are not insured by HUD or any other party and, for financial statement reporting purposes, are considered to be premiums paid to obtain the Mortgages. These premiums are amortized over the average expected lives of the respective Mortgages.
At December 31, 2002, all of the loans due to the Partnership are current with respect to their Federal Housing Authority ("FHA") mortgage obligations. Windmere has not paid its default interest of approximately $125,000, $88,000 and $126,000 for the years ended December 31, 2002, 2001 and 2000. Hollyridge II has not paid its default interest of approximately $26,000 and $40,000 for the years ended December 31, 2002 and 2001. As a result, an allowance for uncollectability relating to the default interest amounted to approximately $618,000 and $1,165,000 at December 31, 2002 and 2001, respectively.
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 and 2000
NOTE 4 - Related Parties
The costs incurred to related parties for the years ended December 31, 2002, 2001 and 2000 were as follows:
(a) A Partnership management fee for managing the affairs of the Partnership equal to .5% per annum of invested assets is payable out of cash flow to the General Partner. The fourth quarter 2002 Partnership management fee was calculated on the reduced asset base due to the repayment of the Mortenson Mortgage Loan and Equity Loan on October 31, 2002. During the years ended December 31, 2002, 2001 and 2000, payments of approximately $126,000, $126,000 and $126,000 were made, respectively. At December 31, 2002 and 2001, a balance of approximately $24,000 and $32,000 were due to the General Partner for these fees.
(b) The General Partner and its affiliates perform services for the Partnership which include, but are not limited to: accounting and financial management, registrar, transfer and assignment functions, asset management; investor communications, printing services and other administrative services. The amount of reimbursement from the Partnership is limited by the provisions of the Partnership Agreement. An affiliate of the General Partner performs asset monitoring services for the Partnership. These asset monitoring services include site visits and evaluations of the performance of the properties securing the loans. During the years ended December 31, 2002, 2001 and 2000, payments of approximately $106,000, $41,000 and $83,000 were made, respectively, relating to these costs. As of December 31, 2002 and 2001, the General Partner and its affiliates were due approximately $32,000 and $41,000, respectively.
RMC is a co-insurer on the Windemere Mortgage in which the Partnership has invested. RMC was a co-insurer in the Mortenson Mortgage. RMC is entitled to a mortgage insurance premium which is paid by the mortgagors.
NOTE 5 - Concentration of Credit Risk
The Partnership maintains its cash in several banks which are insured by the Federal Deposit Insurance Corporation (FDIC) for a balance up to $100,000. At times during 2002, 2001 and 2000, the account balance exceeded the FDIC limit.
NOTE 6 - Fair Value of Financial Instruments
Financial Accounting Standards Board SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the estimated fair value of financial instruments, as defined by SFAS No. 107, be disclosed. Financial instruments are defined as cash, evidence of an ownership interest in an entity or a contract which creates obligations and rights to exchange cash and/or other financial instruments. SFAS No. 107 also requires disclosures of the methods and
CAPITAL MORTGAGE PLUS L.P. (a limited partnership) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 and 2000
significant assumptions used to estimate the fair value of financial instruments.
Considerable judgment is required in interpreting data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Partnership could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The following methods/assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Cash Equivalents - -------------------------- Fair value is determined to be the carrying value because each class of financial instrument matures in three months or less and does not represent unanticipated credit concerns.
Investments in Loans - -------------------- At December 31, 2002, the estimated carrying value of the Mortgages and Equity Loans approximated fair value. The estimated fair values at December 31, 2002 were based on internal valuations of the three Developments collateralizing these loans. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument which sets forth the terms of a loan. This estimate is subjective in nature and involves uncertainties and matters of significant judgment. Changes in assumptions could significantly affect estimates. Due to the property-specific nature of the loans and the lack of a ready market for such investments, this fair value estimate does not necessarily represent the amount which the Partnership could realize upon a current sale of its investments.
NOTE 7 - Quarterly Financial Information (Unaudited)
NOTE 8 - Subsequent Event
On February 14, 2003, distributions of $6,832,375 and $71,475 were paid to BAC holders and the General Partner, respectively, representing the 2002 fourth quarter distributions.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The Registrant has no directors or executive officers. The Registrant's affairs are managed and controlled by the General Partner. The General Partner was organized in Delaware in November 1988. The executive officers and director of the General Partner have held their positions as indicated below. Certain information concerning the director and executive officers of the General Partner is set forth below.
The Registrant, the General Partner and its director and executive officers, and any BACs holder holding more than ten percent of the Registrant's BACs are required to report their initial ownership of such BACs and any subsequent changes in that ownership to the Securities and Exchange Commission on Forms 3, 4 and 5. Such executive officers, directors (and ten percent holders) are required by Securities and Exchange Commission regulators to furnish the Registrant with copies of all Forms 3, 4 or 5 they file. The Registrant is not aware of any BACs holders who own more than ten percent of the BACs. During the most recent fiscal year, all of these filing requirements were satisfied by the officers and director of the General Partner on a timely basis. In making these disclosures, the Registrant has relied solely on written representations of the General Partner's director and executive officers or copies of the reports they have filed with the Securities and Exchange Commission during and with respect to its most recent fiscal year.
CIP Associates Inc.
Name Position Position Held Since - ---------------- --------------------- -------------------
Stephen M. Ross Director 1988
Stuart J. Boesky Senior Vice President 1988
Alan P. Hirmes Senior Vice President 1988
Glenn F. Hopps Treasurer 1998
Teresa Wicelinski Secretary 1998
STEPHEN M. ROSS, 62, is a Director of the General Partner. Mr. Ross is President of The Related Companies, L.P. He graduated from The University of Michigan with a Bachelor of Business Administration degree and from Wayne State School of Law. Mr. Ross then received a Master of Law degree in taxation from New York University School of Law. He joined the accounting firm of Coopers & Lybrand in Detroit as a tax specialist and later moved to New York, where he worked for two large Wall Street investment banking firms in their real estate and corporate finance departments. Mr. Ross formed The Related Companies, Inc. ("Related") in 1972, to develop, manage, finance and acquire subsidized and conventional apartment developments. To date, Related has developed multi-family properties totaling in excess of 25,000 units, all of which it manages. Mr. Ross also serves on the Board of Trustees of Charter Municipal Mortgage Acceptance Company ("CharterMac") which is a public company managed by an affiliate of the General Partner.
STUART J. BOESKY, 46, is a Vice President of the General Partner. Mr. Boesky practiced real estate and tax law in New York City with the law firm of Shipley & Rothstein from 1984 until February 1986 when he joined Capital where he presently serves as Managing Director. From 1983 to 1984 Mr. Boesky practiced law with the Boston law firm of Kaye, Fialkow Richard & Rothstein (which subsequently merged with Strook & Strook & Lavan) and from 1978 to 1980 was a consultant specializing in real estate at the accounting firm of Laventhol & Horwath. Mr. Boesky graduated from Michigan State University with a Bachelor of Arts degree and from Wayne State School of Law with a Juris Doctor degree. He then received a Master of Law degree in Taxation from Boston University School of Law. Mr. Boesky also serves on the Board of Trustees of CharterMac and American Mortgage Acceptance Company and the Board of Directors of Aegis Reality, Inc. ("Aegis"), each of which public companies is managed by an affiliate of the General Partner.
ALAN P. HIRMES, 48, is a Vice President of the General Partner. Mr. Hirmes has been a Certified Public Accountant in New York since 1978. Prior to joining Capital in October 1983, Mr. Hirmes was employed by Weiner & Co., certified public accountants. Mr. Hirmes is also a Managing Director of Capital. Mr. Hirmes graduated from Hofstra University with a Bachelor of Arts degree. Mr. Hirmes also serves on the Board of Directors of Aegis and Board of Trustees of CharterMac.
GLENN F. HOPPS, 40, joined Related in December, 1990, and prior to that date was employed by Marks Shron & Company and Weissbarth, Altman and Michaelson, certified public accountants. Mr. Hopps graduated from New York State University at Albany with a Bachelor of Science Degree in Accounting.
TERESA WICELINSKI, 37, joined Related in June 1992, and prior to that date was employed by Friedman, Alprin & Green, certified public accountants. Ms. Wicelinski graduated from Pace University with a Bachelor of Arts Degree in Accounting.
There are no family relationships between the foregoing director and/or executive officers.
Item 11.
Item 11. Executive Compensation.
The Registrant has no officers or directors. The Registrant does not pay or accrue any fees, salaries or other forms of compensation to directors or officers of the General Partner for their services. The director and certain officers of the General Partner receive compensation from the General Partner and its affiliates for services performed for various affiliated entities which may include services performed for the Registrant. Such compensation may be based in part on the performance of the Registrant; however, the General Partner believes that any compensation attributable to services performed for the Registrant is immaterial. See also Note 4-Related Parties, in Notes to the Financial Statements, included in Item 8 above.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of March 3, 2003, no person was known by the Registrant to be the beneficial owner of more than five percent of the Limited Partnership Interests and/or BACs; and neither the General Partner nor any director or officer of the General Partner owns any Limited Partnership Interests or BACs.
As of March 3, 2003, the director and officers of the General Partner as a group own, in the aggregate, 95.2% of the common stock of CIP Associates Inc.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The Registrant has and will continue to have certain relationships with the General Partner and its affiliates, as discussed in Item 11, Executive Compensation. However, there have been no direct financial transactions between the Registrant and the director and/or officers of the General Partner. See Note 4-Related Parties, in Notes to the Financial Statements, included in Item 8 above.
Item 14.
Item 14. Controls and Procedures
The Principal Executive Officer and Principal Financial Officer of CIP Associates, Inc., the general partner of the Registrant has evaluated the Registrant's disclosure controls and procedures relating to the Registrant's annual report on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission and has judged such controls and procedures to be effective as of December 31, 2002 (the "Evaluation Date").
There have been no significant changes in the internal controls or in other factors that could significantly affect internal controls relating to the Registrant since the Evaluation Date.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Sequential Page ---------- (a) 1. Financial Statements --------------------
Independent Auditors' Report 11
Statements of Financial Condition as of December 31, 2002 and 2001 12
Statements of Income for the years ended December 31, 2002, 2001 and 2000 13
Statements of Changes in Partners' Capital (Deficit) for the years ended December 31, 2002, 2001 and 2000 14
Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 15
Notes to Financial Statements 16
(a) 2. Financial Statement Schedules ----------------------------- All schedules have been omitted because they are not required or because the required information is contained in the financial statements or notes hereto.
(a) 3. Exhibits -----------
(3A) The Registrant's Amended and Restated Agreement of Limited Partnership, incorporated by reference to Exhibit A to the Registrant's Prospectus, dated May 10, 1989 (the "Prospectus"), filed pursuant to Rule 424(b) under the Securities Act of 1933, File No. 33-26690.
(3B) The Registrant's Certificate of Limited Partnership, as amended, incorporated by reference to Exhibits 3B and 3C to the Registrant's Registration Statement on Form S-11, File No. 33-26690, dated January 24, 1989 and to Exhibit 3D to Amendment No. 1 to such Registration Statement dated April 28, 1989
(3C) Amendment No. 1, dated July 7, 1989, to the Registrant's Amended and Restated Agreement of Limited Partnership
(10A) Mortgage Note, dated August 31, 1990, with respect to Mortenson Manor Apartments in Ames, Iowa, in the principal amount of $4,974,900 (incorporated by reference to Exhibit 10(a) in the Registrant's Current Report on Form 8-K dated August 31, 1990)
(10B) Equity Loan Note dated August 31, 1990, with respect to Mortenson Manor Apartments in Ames, Iowa, in the principal amount of $577,885 (incorporated by reference to Exhibit 10(b) in the Registrant's Current Report on Form 8-K dated August 31, 1990)
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Sequential Page ---------- (10C) Subordinated Promissory Note, dated August 31, 1990 with respect to Mortenson Manor Partnership (incor- porated by reference to Exhibit 10(c) in the Registrant's Current Report on Form 8-K dated August 31, 1990)
(10D) Mortgage Note, dated September 27, 1990, with respect to Windemere Apartments in Wichita, Kansas, in the principal amount of $8,110,300 (incorporated by reference to Exhibit 10(a) in the Registrant's Form 8 Amendment dated October 30, 1990 to Current Report on Form 8-K dated September 28, 1990)
(10E) Equity Loan Note, dated September 27, 1990, with respect to Windemere Apartments in Wichita, Kansas, in the principal amount of $736,500 (incorporated by reference in Exhibit 10(b) in the Registrant's Form 8 Amendment dated October 30, 1990 to Current Report on Form 8-K dated September 28, 1990)
(10F) Subordinated Promissory Note, dated September 27, 1990 with respect to Windemere Development, Inc. (incorporated by reference to Exhibit 10(c) in the Registrant's Form 8 Amendment dated October 30, 1990 to Current Report on Form 8-K dated September 28, 1990)
(10G) Mortgage Note, dated August 23, 1991, with respect to Fieldcrest III Apartments in Dothan, Alabama, in the principal amount of $3,450,200 (incorporated by reference to Exhibit 10(a) in the Registrant's Current Report on Form 8-K dated August 27, 1991)
(10H) Equity Loan Note, dated August 27, 1991, with respect to Fieldcrest III Apartments in Dothan, Alabama, in the principal amount of $383,300 (incorporated by reference to Exhibit 10(b) in the Registrant's Current Report on Form 8-K dated August 27, 1991)
(10I) Subordinated Promissory Note, dated August 27, 1991 with respect to Fieldcrest III Apartments (incor- porated by reference to Exhibit 10(c) in the Registrant's Current Report on Form 8-K dated August 27, 1991)
(10J) Mortgage Note, dated March 1, 1993, with respect to Holly Ridge Apartments in Gresham, Oregon, in the principal amount of $5,310,000 (incorporated by reference to Exhibit 10(a) in the Registrant's Current Report on Form 8-K dated March 16, 1993)
(10K) Equity Loan dated March 16, 1993, with respect to Holly Ridge Apartments in Gresham, Oregon, in the principal amount of $684,000 (incorporated by reference to Exhibit 10(b) in the Registrant's Current Report on Form 8-K dated March 16, 1993)
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Sequential Page ---------- (10L) Subordinated Promissory Note, dated March 16, 1993, with respect to Holly Ridge Apartments in Gresham, Oregon (incorporated by reference to Exhibit 10(c) in the Registrant's Current Report on Form 8-K dated March 16, 1993)
(10M) Modification Agreement, dated January 1, 1995, with respect to Mortenson Manor Apartments in Ames, Iowa (incorporated by reference to Exhibit (10P) in the Registrant's Form 10-K for the fiscal year ended December 31, 1995)
(10N) Guaranty made for the benefit of the Registrant, dated January 1, 1995, with respect to the Modification Agreement regarding Mortenson Manor Apartments (incorporated by reference to Exhibit (10Q) in the Registrant's Form 10-K for the fiscal year ended December 31, 1995)
99. Additional Exhibits
(99A) The Financial Statements of Windemere Development, Inc., which owns and operates an apartment complex known as Windemere at Tallgrass located in Wichita, Kansas, as required by Staff Accounting Bulletin No. 71 34
(99B) The Financial statements of HR II Associates, which owns and operates an apartment complex known as Holly Ridge II located in Gresham, Oregon, as required by Staff Accounting Bulletin No 71. 46
(99C) The Financial Statements of Field- crest Apartments III, Ltd., which owns and operates an apartment complex known as Fieldcrest located in Dothan, Alabama, as required by Staff Accounting Bulletin No 71. 57
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
(c) Exhibits:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
CAPITAL MORTGAGE PLUS L.P. (Registrant)
By: CIP ASSOCIATES, INC. General Partner
Date: March 31, 2003 By: /s/ Alan P. Hirmes ---------------------- Alan P. Hirmes Senior Vice President (Principal Executive and Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date - ------------------ ----------------------------------------- --------------
Senior Vice President (principal executive and financial officer) /s/ Alan P. Hirmes of CIP Associates, Inc. - ------------------ (the General Partner of the Registrant) March 31, 2003 Alan P. Hirmes
Treasurer(principal accounting /s/ Glenn F. Hopps officer) of CIP Associates, Inc. - ------------------ (the General Partner of the Registrant) March 31, 2003 Glenn F. Hopps
/s/ Stephen M. Ross Director of CIP Associates, Inc. - ------------------- (the General Partner of the Registrant) March 31, 2003 Stephen M. Ross
Exhibit 99.1
CERTIFICATION PURSUANT TO 18.U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Yearly Report of Capital Mortgage Plus L.P. (the "Partnership") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alan P. Hirmes, Principal Executive Officer and Principal Financial Officer of CIP Associates, Inc., the general partner of the Partnership, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Partnership.
/s/ Alan P. Hirmes - ----------------- Alan P. Hirmes Principal Executive Officer and Principal Financial Officer March 31, 2003
CERTIFICATION
I, Alan P. Hirmes, Principal Executive Officer and Principal Financial Officer of CIP Associates, Inc., (the "General Partner"), the general partner of Capital Mortgage Plus L.P. (the "Partnership"), hereby certify that:
1. I have reviewed this annual report on Form 10K for the period ending December 31, 2002 of the Partnership;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such annual statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15-d-14) for the Partnership and I have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Partnership is made known to me by others within the Partnership, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Partnership's disclosure controls and procedures as of December 31, 2002 (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the Partnership's auditors and to the board of directors of the General Partner:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnership's ability to record, process, summarize and report financial data and have identified for the Partnership's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnership's internal controls; and
6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
By: /s/ Alan P. Hirmes -------------------------- Alan P. Hirmes Principal Executive Officer and Principal Financial Officer March 31, 2003
WINDEMERE DEVELOPMENT, INC
Financial Statements December 31, 2002 and 2001
Contents --------
Independent Auditors' Report
Financial Statements
Balance Sheets
Statements of Income
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT
Board of Directors Windemere Development, Inc. Wichita, Kansas
We have audited the accompanying balance sheets of Windemere Development, Inc. (a subchapter S corporation), as of December 31, 2002 and 2001, and the related statements of income, changes in stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Windemere Development, Inc., as of December 31, 2002 and 2001, and the results of its operations, changes in stockholders' deficit and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Peterson, Peterson & Goss L.C.
March 26, 2003
WINDEMERE DEVELOPMENT, INC. Balance Sheets December 31, 2002 and 2001
Assets ------
See notes to financial statements
WINDEMERE DEVELOPMENT, INC. Balance Sheets December 31, 2002 and 2001
Liabilities and Stockholders' Equity ------------------------------------
See notes to financial statements
WINDEMERE DEVELOPMENT, INC. Statements of Income Years Ended December 31, 2002 and 2001
See notes to financial statements
WINDEMERE DEVELOPMENT, INC. Statements of Changes in Stockholders' Equity (Deficit) Years Ended December 31, 2002 and 2001
See notes to financial statements
WINDEMERE DEVELOPMENT, INC. Statements of Cash Flows Years Ended December 31, 2002 and 2001
See notes to financial statements
WINDEMERE DEVELOPMENT, INC. Statements of Cash Flows Years Ended December 31, 2002 and 2001
See notes to financial statements
WINDEMERE DEVELOPMENT, INC. Notes to Financial Statements December 31, 2002 and 2001
1. Summary of Significant Accounting Policies
Method of Accounting --------------------
The Company presents it's financial statements in accordance with accounting principles generally accepted in the United States of America.
History and Business Activity -----------------------------
Windemere Development, Inc. was founded in 1991 to develop and operate a 206-unit apartment complex in Wichita, Kansas, known as Windemere at Tallgrass.
The apartments are located at 8220 East Oxford Circle, Wichita, Kansas 67226 and consist of one and two bedroom units.
Property and Equipment ----------------------
Depreciation is computed by using the straight-line method over the following estimated useful lives:
Buildings - 40 years Landscape improvements - 20 years Furniture and equipment - 10 years
Expenditures for maintenance and repairs are charged to income as incurred. Expenditures materially extending the useful lives of assets or increasing their productivity are capitalized.
Income Taxes ------------
An income tax provision has not been included in the financial statements since the shareholder reports the income or loss of the Company on his respective income tax return.
Cash and Cash Equivalents -------------------------
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
WINDEMERE DEVELOPMENT, INC. Notes to Financial Statements December 31, 2002 and 2001
1. Summary of Significant Accounting Policies (continued)
Use of Estimates ----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Advertising -----------
The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising expense was $13,661 and $11,610 for the years ended December 31, 2002 and 2001, respectively.
2. Restricted Deposits and Funded Reserves
The Company has deposited with the lender the following amounts:
An evaluation of the adequacy of certain escrows is as follows:
Estimated amount required as of December 31, 2002 and 2001 for future payment of:
3. Tenant Security Deposits and Funded Reserves
Tenant security deposits are held in a separate account in the name of the project. The total held in the account is $2,096 more than the deposits held for tenants. The account consists of interest bearing deposits and a mutual fund that has been adjusted to market value at December 31, 2002.
WINDEMERE DEVELOPMENT, INC. Notes to Financial Statements December 31, 2002 and 2001
4. Reserve for Replacements
In accordance with the provisions of the Regulatory Agreement restricted cash is held by the mortgagee to be used for replacement of property with the approval of HUD as follows:
5. Long-Term Liabilities
Long-term debt at December 31, 2002 and 2001 consisted of the following obligations:
WINDEMERE DEVELOPMENT, INC. Notes to Financial Statements December 31, 2002 and 2001
5. Long-Term Liabilities (continued)
Maturities of debt are as follows:
6. Accrued Real Estate Taxes
Accrued real estate taxes at December 31, 2002 consist of the following:
Description Basis for Period Amount of Tax Accrual Covered Due Date Accrued ----------- ------------ ------------ ------------- -------- Real estate Second-half January 1 to June 20, 2003 $55,122 taxes and due for 2002 December 31 special assessments
7. Related Party Transactions
Gaddis Properties, Inc., a related entity controlled by Jerry A. Gaddis, manages the Apartments. Under the terms of the management agreement with Gaddis Properties, Inc., a management fee not in excess of 6% of cash basis rental revenue, is payable monthly for management services. The total management fees earned in 2002 were $76,679.
The following summarizes other related party transactions for 2002:
8. Operations
The project has incurred increasing accrual basis operating losses over the last two years. Management has maintained positive cash flow by deferring payment of management fees and reducing salaries. Occupancy rates have increased slightly during the year. Management has also been researching lower rate financing for the project. The accrued management fees in the amount of $283,614 are not expected to require payment during the next year. Based on terms in the loan agreement, $659,529 of the accrued interest payable will not require payment until the project generates excess cash flow.
HRII ASSOCIATES
Financial Statements and Supplemental Data
December 31, 2002 and 2001
[Hansen, Bradshaw, Malmrose & Erickson Letterhead]
To the Owners of HRII Associates
We have audited the accompanying balance sheets of HRII Associates (the Partnership) as of December 31, 2002 and 2001, and the related statements of operations, changes in partners' deficit, and cash flows for the years then ended. 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 and the standards applicable to financial audit contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HRII Associates as of December 31, 2002 and 2001, and the results of its operations, changes in partners' deficit, and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
In accordance with Government Auditing Standards and the Consolidated Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing and Urban Development we have also issued a report dated February 17, 2003, on our consideration of the Project's internal controls, and reports dated February 17, 2003, on its compliance with specific requirements applicable to major HUD programs and specific requirements applicable to Fair Housing and Non-Discrimination.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information on pages 18 to 31 is presented for purposes of additional analysis and is not a required part of the basic financial statements of the Partnership. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.
/s/ Hansen, Bradshaw, Malmrose & Erickson
February 17, 2003
HRII ASSOCIATES
Balance Sheets
December 31, 2002 and 2001
The accompanying notes are an integral part of these financial statements.
HRII ASSOCIATES
Statements of Operations and Partners' Deficit
For the Years Ended December 31, 2002 and 2001
The accompanying notes are an integral part of these financial statements.
HRII ASSOCIATES
Statements of Cash Flows
For the Years Ended December 31, 2002 and 2001
HRII ASSOCIATES
Statements of Cash Flows (Continued)
For the Years Ended December 31, 2002 and 2001
The accompanying notes are an integral part of these financial statements.
HRII ASSOCIATES
Notes to the Financial Statements
December 31, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------
Business Organization --------------------- HRII Associates (HUD Project No. 126-35216) (the Partnership) is a Utah Limited Partnership, which was organized in 1989. The Project consists of 144 units in apartment buildings in Gresham, Oregon. The apartment complex is financed with a loan which is insured by the U.S. Department of Housing and Urban Development (HUD), under Section 221(d)(4) of the National Housing Act (HUD Project No. 126-35216). The Partnership's operating methods are regulated by HUD under the terms of a regulatory agreement.
Use of Estimates in the Preparation of Financial Statements -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk ----------------------------
Financial instruments which potentially subject the Partnership to concentration of credit risk consist primarily of tenant rents receivable. The Partnership maintains allowances for possible losses which, when realized, have been within range of management's expectations.
The Partnership maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Partnership has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Cash and Cash Equivalents -------------------------
For purposes of the statements of cash flows, the Partnership considers all highly liquid debt instruments with an original maturity of three month\ or less to be cash equivalents.
HRII ASSOCIATES
Notes to the Financial Statements
December 31, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) -----------------------------------------------------
Land, Buildings and Equipment -----------------------------
Land, buildings and equipment are recorded at cost and are depreciated using the straight-line method over estimated useful lives ranging from 5 to 40 years. Major additions and improvements are capitalized while minor replacements, maintenance and repairs which do not increase the useful lives of the property are expensed as incurred.
Loan Costs ----------
Costs incurred by the Partnership in connection with obtaining the construction loan and long-term financing have been capitalized and are amortized using the straight-line method over the term of the HUD insured mortgage.
Revenue Recognition -------------------
Prepaid rents are accrued as a liability by the Partnership and the associated revenue is recognized as it is earned. Tenant security deposits are recognized as income when forfeited.
Cost Allocation ---------------
On March 1, 1993, the Partnership entered into a cross easement agreement with Holly Ridge Associates, an entity that owns Phase I of Holly Ridge. Holly Ridge Phase I is located on property adjacent to the Phase II property. The two phases share common amenities such as the exercise facilities, sauna, tanning beds, swimming pools, tennis courts, maintenance building, etc. In addition, the same management company (The Stoddard Group, L.L.C.) manages both projects. Under the terms of the agreement, joint costs of the two phases are allocated based on the number of units in each phase.
Management Fee --------------
The Partnership paid a management fee equal to 4% of defined gross revenues.
HRII ASSOCIATES
Notes to the Financial Statements
December 31, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------
Income Taxes ------------ Under tax law provisions, the Partnership does not pay income taxes on its income. Instead, the income or loss of the Partnership is allocated to the partners, and the partners are responsible for any income taxes related to their share of allocated income.
Financial Instruments ---------------------
None of the Partnership's financial instruments are held for trading purposes. The Partnership estimates that the fair value of all financial instruments at December 31, 2002 and 2001, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Partnership using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Partnership could realize in a current market exchange.
2. RELATED PARTY TRANSACTIONS --------------------------
A general partner of HRII Associates also owns The Stoddard Group, L.L.C. (Stoddard). Stoddard provides services for the Partnership, which include accounting services and management functions. The management fee expensed to Stoddard for the year ended December 31, 2002 was $44,443 ($46,682 in 2001). In addition, $121,153 was paid to Stoddard in 2002 to reimburse costs of payroll, payroll taxes and workman's compensation insurance for their employees who provide on-site labor to the Project ($120,273 in 2001).
Accrued workman's compensation and payroll taxes of $5,514 at December 31, 2002 represents a payable to Stoddard ($4,970 in 2001).
3. RESTRICTED DEPOSITS -------------------
Restricted deposits consist of the following at December 31, 2002:
HRII ASSOCIATES
Notes to the Financial Statements
December 31, 2002 and 2001
4. LAND, BUILDING AND EQUIPMENT ---------------------------- Land, buildings and equipment consist of the following:
5. MORTGAGE PAYABLE AND NOTE PAYABLE ---------------------------------
The HUD insured mortgage note is payable to a financial institution in monthly installments of $37,921 including interest at 8.25%. The loan is secured by the apartment complex and matures on August 1, 2034.
The Partnership has a note payable to a corporation due in semi-annual installments of $7,130, including interest at 6%. The loan matures on September 1, 2005. The loan balance at December 31, 2002 includes accrued interest of $1,385 ($1,576 in 2001).
Future maturities over the next five years are as follows:
HRII ASSOCIATES
Notes to the Financial Statements
December 31, 2002 and 2001
6. EQUITY LOAN -----------
The Partnership also has an equity loan payable to a financial institution payable upon maturity of the HUD insured mortgage in the amount of $684,400. This is a non-interest equity loan. The Partnership also has a Subordinated Promissory Note payable to a financial institution related to both the mortgage loan and the equity loan. This note requires additional interest payments based on the outstanding balance of the mortgage note to assure an annual yield of 9.89%. The total amount of interest payable related to this loan at December 31, 2002 was $61,015 ($91,380 in 2001).
7. COMMITMENT AND CONTINGENCY --------------------------
The Partnership entered into an agreement in March 1993 with an entity which provided funds for certain costs in connection with the construction of the Project. Under the terms of the agreement, HRII Associates is obligated to pay additional interest amounts to this entity from the proceeds of events such as sale or refinancing of the Project.
8. ALLOWABLE DISTRIBUTIONS TO PARTNERS -----------------------------------
Under the HUD regulatory agreement for Section 221(d)(4) projects, distributions to partners from funds provided by rental operations are allowed, provided: 1) surplus cash, as defined by HUD, is available for such purposes, 2) the project is in compliance with all outstanding notices of requirements for proper maintenance and 3) there is no default under the regulatory agreement or under the mortgage note. For the year ended December 31, 2002, surplus cash was $54,066 ($88,811 in 2001).
FIELDCREST APARTMENTS III, LTD. HUD PROJECT NUMBER 062-35425
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
DECEMBER 31, 2002
KENMORE AND COMPANY, P.C. Certified Public Accountants Montgomery, Alabama
FIELDCREST APARTMENTS III, LTD.
INDEPENDENT AUDITOR'S REPORT
To The Partners of Fieldcrest Apartments III, LTD.
We have audited the accompanying balance sheet of Fieldcrest Apartments III, LTD., HUD Project No. 062-35425, as of December 31, 2002, and the related statements of income, changes in partners' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Project'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 and Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fieldcrest Apartments III, LTD. as of December 31, 2002, and the results of its operations, changes in partners' deficit, and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
In accordance with Government Auditing Standards and the Consolidated Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing and Urban Development, we have also issued a report dated March 8, 2003, on our consideration of Fieldcrest Apartments III, LTD.'s internal control, and reports dated March 8, 2003, on its compliance with specific requirements applicable to major HUD programs and specific requirements applicable to Fair Housing and Non-Discrimination. Those reports are an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information on pages 15 to 25 is presented for purposes of additional analysis and is not a required part of the basic financial statements of Fieldcrest Apartments III, LTD.. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ Kenmore & Company, P.C.
KENMORE & COMPANY, P.C. Montgomery, Alabama March 8, 2003
FIELDCREST APARTMENTS III, LTD.
HUD Project Number 062-35425 BALANCE SHEET December 31, 2002
ASSETS
FIELDCREST APARTMENTS III, LTD.
HUD Project Number 062-35425 BALANCE SHEET - CONTINUED December 31, 2002
LIABILITIES AND PARTNERS' DEFICIT
See notes to financial statements
See notes to financial statements.
FIELDCREST APARTMENTS III, LTD.
HUD Project Number 062-35425 STATEMENT OF CHANGES IN PARTNERS' DEFICIT For the year ended December 31, 2002
See notes to financial statements
FIELDCREST APARTMENTS III, LTD.
HUD Project Number 062-35425 STATEMENT OF CASH FLOWS For the year ended December 31, 2002
FIELDCREST APARTMENTS III, LTD.
HUD Project Number 062-35425 STATEMENT OF CASH FLOWS - CONTINUED For the year ended December 31, 2002
See notes to financial statements
FIELDCREST APARTMENTS III, LTD.
HUD PROJECT NUMBER 062-35425 NOTES TO FINANCIAL STATEMENTS December 31, 2002 - --------------------------------------------------------------------------------
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: The partnership is organized as a limited partnership formed August 23, 1991, to acquire an interest in real property located in Dothan, Alabama and to construct and operate thereon an apartment complex of 112 units, under Section 221(d)(4) of the National Housing Act. Such projects are regulated by HUD as to rent charges and operating methods. Cash distributions to partners are limited to the extent of "surplus cash" as defined by the HUD regulatory agreement. The Section 221(d)(4) loan is a major HUD program.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Major renewals and betterments are charged to the property accounts while replacement, maintenance and repairs which do not improve or extend the life of the respective assets are expensed. Depreciation is provided primarily using the straight-line method over the estimated useful lives of the assets.
AMORTIZATION: Amortization of deferred loan costs is computed on a straight line basis over 40 years.
INCOME TAXES: Fieldcrest Apartments III, Ltd. is a partnership with earnings taxed directly to the partners in their personal tax returns.
CASH FLOWS: For the purpose of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. However, mortgage escrows, replacement reserve funds, and security deposits are excluded from cash due to restrictions on expenditures from these accounts.
ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
The HUD regulatory agreement requires that monthly deposits of $1,279 be made to a replacement reserve account. The reserve's purpose is for use in funding extraordinary maintenance, repair, and replacement of capital items. Withdrawals from this account must be approved by HUD.
Monthly deposits to escrow for property insurance, mortgage insurance, and property taxes are made as required by the mortgage agreement.
FIELDCREST APARTMENTS III, LTD.
HUD PROJECT NUMBER 062-35425 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002
NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES - CONTINUED
Tenant security deposits are required by HUD to be fully funded and segregated in separate bank accounts in the name of the project.
NOTE C - LONG-TERM LIABILITIES
Mortgage Payable - ----------------
The mortgage note is held by Related Mortgage Company and is secured by the rental property. The note bears interest at a default rate of 8.75%. Principal and interest are payable in monthly installments of $25,150 through October 2032.
The mortgage loan has a participation feature which increases the rate of interest on the mortgage. This additional interest is only payable from "surplus cash" or additional capital contributions by the partners. Under this agreement, the stated interest rate increases to 10.11% plus 30% of any remaining "surplus cash" available after payment of the additional interest. The obligation is evidenced by a subordinated promissory note secured by (i) a second mortgage, (ii) collateral assignments of excess cash and capital proceeds, and (iii) operating guaranties of the partners. During 2002, additional interest of $46,363 was charged to expense and $46,363 was included in year end accruals.
Current maturities of the mortgage payable for the next five years are as follows:
Note Payable - Equity Loan - --------------------------
In connection with obtaining the mortgage loan, the partners also entered into an "equity loan" agreement with Related Mortgage Company. The non-interest bearing equity loan is due October 2032, or upon payoff or refinancing of the mortgage and is callable after October 1, 2002. This loan is secured by collateral assignments of partnership interest and a third mortgage to be held in escrow for so long as a mortgage insurance contract is in effect.
FIELDCREST APARTMENTS III, LTD.
HUD PROJECT NUMBER 062-35425 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 - --------------------------------------------------------------------------------
NOTE D - RELATED PARTY TRANSACTIONS
The managing agent, Aronov Realty Management, Inc., and one of the project's insurance providers, Aronov Insurance, are related to the partnership through common ownership. The following amounts payable to Aronov were charged to expense in 2002:
Included in accounts payable at December 31, 2002 were salaries and group insurance due to Aronov Realty Management in the amount of $15,790. Aronov Realty, a company related by common ownership, advanced $28,000 in 2002 for operating expenses. This advance is to be paid from surplus cash.
NOTE E - OTHER EXPENSES (ENTITY) (HUD FORM 92410)
The components of Line 7190 Other Expenses (Entity) on HUD Form 92410 are as follows:
FIELDCREST APARTMENTS III, LTD.
HUD PROJECT NUMBER 062-35425 NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 2002 - --------------------------------------------------------------------------------
NOTE G - ALLOWABLE DISTRIBUTIONS TO PARTNERS
Under the regulatory agreement for Section 221 (d)(4) projects, distributions to partners from funds provided by rental operations are allowed, provided: 1) surplus cash, as defined by HUD, is available for such purposes, 2) the project is in compliance with all outstanding notices of requirements for proper maintenance, and 3) there is no default under the regulatory agreement or under the mortgage note. Surplus cash as of December 31, 2002, amounted to $0. For the year ended December 31, 2002, allowable distributions of surplus cash to the partners is as
Partner capital contributions of $46,407 were made in 2002 to pay the additional 2000 interest expense.
NOTE H - CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Partnership's sole asset is Fieldcrest Apartments III, Ltd.. The Partnership's operations are concentrated in the multifamily real estate market. In addition, the Partnership operates in a heavily regulated environment. The operations of the Partnership are subject to the administrative directives, rules and regulations of federal, state and local regulatory agencies, including, but not limited to, HUD. Such administrative directives, rules and regulations are subject to change by an act of congress or an administrative change mandated by HUD. Such changes may occur with little notice or inadequate funding to pay for the related cost, including the additional administrative burden, to comply with a change.