June 29, 1999 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Boston Financial Qualified Housing Tax Credits L.P. IV Form 10-K Annual Report for Year Ended March 31, 1999 File Number 0-19765 Dear Sir/Madam: Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, there is filed herewith one copy of the subject report. Very truly yours, /s/Stephen Guilmette Stephen Guilmette Assistant Controller QH410K-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended Commission file number March 31, 1999 0-19765 BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (Exact name of registrant as specified in its charter) Massachusetts 04-3044617 (State of organization) (I.R.S. Employer Identification No.) 101 Arch Street, 16th Floor Boston, Massachusetts 02110-1106 (Address of Principal executive office) (Zip Code) Registrant's telephone number, including area code 617/439-3911 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered None None Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST (Title of Class) 100,000 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 (Subsection 229.405 of this chapter) 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 sales price of partnership units held by nonaffiliates of the registrant. $67,653,000 as of March 31, 1999 DOCUMENTS INCORPORATED BY REFERENCE: LIST THE FOLLOWING DOCUMENTS IF INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K INTO WHICH THE DOCUMENT IS INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS: (2) ANY PROXY OR INFORMATION STATEMENT: AND (3) ANY PROSPECTUS FILED PURSUANT TO RULE 424(b)OR (c) UNDER THE SECURITIES ACT OF 1933. Part of Report on Form 10-K into Which the Document Documents incorporated by reference is Incorporated Post-effective Amendments No. 1 through 3 to the Registration Statement, File # 33-26394 Part I, Item 1 Acquisition Reports Part I, Item 1 Prospectus - Sections Entitled: "Estimated Use of Proceeds" Part III, Item 13 "Management Compensation and Fees" Part III, Item 13 "Profits and Losses for Tax Purposes, Tax Credits and Cash Distributions" Part III, Item 13 BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 1999 TABLE OF CONTENTS PART I Page No. Item 1 Business K-3 Item 2 Properties K-6 Item 3 Legal Proceedings K-13 Item 4 Submission of Matters to a Vote of Security Holders K-13 PART II Item 5 Market for the Registrant's Units and Related Security Holder Matters K-13 Item 6 Selected Financial Data K-14 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations K-15 Item 7A. Quantitative and Qualitative Disclosures about Market Risk K-19 Item 8 Financial Statements and Supplementary Data K-19 Item 9 Changes in and Disagreements on Accounting and Financial Disclosure K-19 PART III Item 10 Directors and Executive Officers of the Registrant K-20 Item 11 Management Remuneration K-21 Item 12 Security Ownership of Certain Beneficial Owners and Management K-21 Item 13 Certain Relationships and Related Transactions K-22 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K K-25 SIGNATURES K-26 PART I Item 1. Business Boston Financial Qualified Housing Tax Credits L.P. IV (the "Partnership") is a limited partnership formed on March 30, 1989 under the Revised Uniform Limited Partnership Act of the Commonwealth of Massachusetts. The Partnership's partnership agreement ("Partnership Agreement") authorized the sale of up to 100,000 units of Limited Partnership Interest ("Units") at $1,000 per Unit, adjusted for certain discounts. The Partnership raised $67,653,000 ("Gross Proceeds"), net of discounts of $390,000, through the sale of 68,043 Units. Such amounts exclude five unregistered Units previously acquired for $5,000 by the Initial Limited Partner, which is also one of the General Partners. The offering of Units terminated on January 31, 1990. The Partnership is engaged solely in the business of real estate investment. Affiliates of the Managing General Partners, BF Leawood, Inc. and BF Texas Limited Partnership, assumed the Local General Partner interests in Leawood Manor Associates, L.P. ("Leawood") and twelve other Local Limited Partnerships in which the Partnership invests (the "Texas Partnerships"), respectively. As a result, the Partnership is deemed to have control over Leawood and the Texas Partnerships, and the accompanying financial statements are presented in combined form to conform with the required accounting treatment under generally accepted accounting principles. However, this change only affects the presentation of the Partnership's operating results, not the business of the Partnership. Accordingly, a presentation of information about industry segments is not applicable and would not be material to an understanding of the Partnership's business taken as a whole. As described more fully under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, the Managing General Partner has transferred all of the assets of eleven Texas Partnerships subject to their liabilities to unaffiliated entities. Therefore, as of March 31, 1999, one Texas Partnership is presented in combined form. The Partnership has invested as a limited partner in other limited partnerships ("Local Limited Partnerships") which own and operate residential apartment complexes ("Properties"), most of which benefit from some form of federal, state or local assistance programs and all of which qualify for the low-income housing tax credits ("Tax Credits") added to the Internal Revenue Code (the "Code") by the Tax Reform Act of 1986. The investment objectives of the Partnership include the following: (i) to provide current tax benefits in the form of Tax Credits which qualified limited partners may use to offset their federal income tax liability; (ii) to preserve and protect the Partnership's capital; (iii) to provide limited cash distributions from property operations which are not expected to constitute taxable income during the expected duration of the Partnership's operations; and (iv) to provide cash distributions from sale or refinancing transactions. There cannot be any assurance that the Partnership will attain any or all of these investment objectives. Table A on the following page lists the properties owned by the Local Limited Partnerships in which the Partnership has invested. Item 7 of this Report contains other significant information with respect to such Local Limited Partnerships. As required by applicable rules, the terms of the acquisition of Local Limited Partnership interests have been described in supplements to the Prospectus (and collected in three post-effective amendments to the Registration Statement) listed in Part IV of this Report (collectively, the "Acquisition Reports"); such descriptions are incorporated herein by this reference. TABLE A SELECTED LOCAL LIMITED PARTNERSHIP DATA (Unaudited) Properties Owned by Local Limited Partnerships* Date Interest Location Acquired --------------------------- --------------------- --------------- Brookscrossing Atlanta, GA 06/30/89 Dorsett Philadelphia, PA 10/20/89 Willow Ridge Prescott, AZ 08/28/89 Town House Allentown, PA 12/26/89 Lancaster House North Lancaster, PA 03/13/89 Sencit Towne House Shillington, PA 12/26/89 Pinewood Terrace** Rusk, TX 12/27/89 Justin Place** Justin, TX 12/27/89 Grandview** Grandview, TX 12/27/89 Hampton Lane Buena Vista, GA 12/20/89 Audobon Boston, MA 12/22/89 Bent Tree** Jackson, TX 12/27/89 Royal Crest** Bowie, TX 12/27/89 Nocona Terrace** Nocona, TX 12/27/89 Pine Manor** Jacksboro, TX 12/27/89 Hilltop** Rhome, TX 12/27/89 Valley View** Valley View, TX 12/27/89 Bentley Court Columbia, SC 12/26/89 Orocovix IV Orocovix, PR 12/30/89 Leawood Manor Leawood, KS 12/29/89 Pecan Hill** Bryson, TX 12/28/89 Carolina Woods Greensboro, NC 01/31/90 Mayfair Mansions Washington, DC 03/21/90 Oakview Square Chesterfield, MI 03/22/89 Whitehills II Howell, MI 04/21/90 Orchard View Gobles, MI 04/29/90 Lakeside Square Chicago, IL 05/17/90 Lincoln Green Old Town, ME 03/21/90 Brown Kaplan Boston, MA 07/01/90 Green Tree Village Greenville, GA 07/06/90 Canfield Crossing Milan, MI 08/20/90 Findlay Market*** Cincinnati, OH 08/15/90 Seagraves** Seagraves, TX 11/28/90 West Pine Findlay, PA 12/31/90 BK Apartments Jamestown, ND 12/01/90 46th & Vincennes Chicago, IL 03/29/91 Gateway Village Garden** Azle, TX 06/24/91 * The Partnership's interest in profits and losses of each Local Limited Partnership arising from normal operations is 99%, with the exception of Leawood Manor which is 89%. Profits and losses arising from sale or refinancing transactions are allocated in accordance with the respective Local Limited Partnership Agreements. ** As of March 31, 1999, the Managing General Partner has transferred all of the assets of eleven of the Texas Partnerships, subject to their liabilities, to unaffiliated entities. Seagraves Housing, Grandview Housing, Bryson Housing, Rhome Housing, Bent Tree Housing, Justin Housing, Valley View Housing, Nocona Terrace Housing, Bowie Housing, Pine Manor Housing and Pinewood Terrace were transferred prior to March 31, 1999. Negotiations between the Managing General Partner, the Lender and prospective buyers have continued through the past quarter to transfer title to the remaining Texas Partnership to unaffiliated buyers. If negotiations continue as expected, Gateway Village will be transferred in the second quarter of 1999. In the meantime, operating deficits continue to be funded from Partnership Reserves. *** Findlay Market was transferred to an unaffiliated entity during the year ended March 31, 1999. Although the Partnership's investments in Local Limited Partnerships are not subject to seasonal fluctuations, the Partnership's equity in losses of Local Limited Partnerships and rental operations revenues and expenses, to the extent they reflect the operations of individual Properties, may vary from quarter to quarter based upon changes in occupancy and operating expenses as a result of seasonal factors. With the exception of Leawood Manor and the Texas Partnerships, each Local Limited Partnership has, as its general partners ("Local General Partners"), one or more individuals or entities not affiliated with the Partnership or its General Partners. In accordance with the partnership agreements under which such entities are organized ("Local Limited Partnership Agreements"), the Partnership depends on the Local General Partners for the management of each Local Limited Partnership. As of March 31, 1999, the following Local Limited Partnerships have a common Local General Partner or affiliated group of Local General Partners accounting for the specified percentage of the capital contributions to Local Limited Partnerships: Sencit Townhouse L.P., Allentown Townhouse L.P. and Prince Street Ltd., representing 11.30%, have AIMCO Properties as Local General Partner; Greentree Village L.P. and Buena Vista Properties L.P., representing 0.60%, have Norsouth Corporation as Local General Partner; and Whitehills Apartments Co., L.P., Milan Apartments Co., L.P. and Gobles LDHA, L.P., representing 1.14%, have First Centrum as Local General Partner. The Local General Partners of the remaining Local Limited Partnerships are identified in the Acquisition Reports, which are incorporated herein by reference. The Properties owned by Local Limited Partnerships in which the Partnership has invested are and will continue to be subject to competition from existing and future apartment complexes in the same areas. The continued success of the Partnership will depend on many outside factors, most of which are beyond the control of the Partnership and which cannot be predicted at this time. Such factors include general economic and real estate market conditions, both on a national basis and in those areas where the Properties are located, the availability and cost of borrowed funds, real estate tax rates, operating expenses, energy costs and government regulations. In addition, other risks inherent in real estate investment may influence the ultimate success of the Partnership, including: (i) possible reduction in rental income due to an inability to maintain high occupancy levels or adequate rental levels; (ii) possible adverse changes in general economic conditions and adverse local conditions, such as competitive overbuilding, a decrease in employment or adverse changes in real estate laws, including building codes; and (iii) the possible future adoption of rent control legislation which would not permit increased costs to be passed on to the tenants in the form of rent increases or which would suppress the ability of the Local Limited Partnerships to generate operating cash flow. Since most of the Properties benefit from some form of government assistance, the Partnership is subject to the risks inherent in that area including decreased subsidies, difficulties in finding suitable tenants and obtaining permission for rent increases. In addition, any Tax Credits allocated to investors with respect to a Property are subject to recapture to the extent that the Property or any portion thereof ceases to qualify for the Tax Credits. Other future changes in federal and state income tax laws affecting real estate ownership or limited partnerships could have a material and adverse affect on the business of the Partnership. The Partnership is managed by Arch Street IV, Inc., the Managing General Partner of the Partnership. The other General Partner of the Partnership is Arch Street IV Limited Partnership. The Partnership, which does not have any employees, reimburses The Boston Financial Group Limited Partnership ("Boston Financial"), an affiliate of the General Partner, for certain expenses and overhead costs. A complete discussion of the management of the Partnership is set forth in Item 10 of this Report. Item 2. Properties The Partnership owns limited partnership interests in twenty-five Local Limited Partnerships which own and operate Properties, some of which benefit from some form of federal, state or local assistance programs and all of which qualify for the Tax Credits added to the Code by the Tax Reform Act of 1986. The Partnership's ownership interest in each Local Limited Partnership is 99% with the exception of Leawood Manor and BK Associates, which are 89% and 49.5%, respectively. Each of the Local Limited Partnerships has received an allocation of Tax Credits by its relevant state tax credit agency. In general, the Tax Credit runs for ten years from the date the Property is placed in service. The required holding period (the "Compliance Period") of the Properties is fifteen years. During these fifteen years, the Properties must satisfy rent restrictions, tenant income limitations and other requirements, as promulgated by the Internal Revenue Service, in order to maintain eligibility for the Tax Credit at all times during the Compliance Period. Once a Local Limited Partnership has become eligible for the Tax Credits, it may lose such eligibility and suffer an event of recapture if its Property fails to remain in compliance with the requirements. In addition, some of the Local Limited Partnerships have obtained one or a combination of different types of loans such as: i) below market rate interest loans; ii) loans provided by a redevelopment agency of the town or city in which the property is located at favorable terms; and iii) repayment terms that are based on a percentage of cash flow. The schedules on the following pages provide certain key information on the Local Limited Partnership interests acquired by the Partnership. Capital Contributions Total Total Paid Mtge. Loans Local Limited Partnership Number of committed at through March payable at Occupancy at Property Name Apt. Units March 31, 1999 31, 1999 December 31, Type of March 31, Property Location 1998 Subsidy* 1999 - -------------------------------- ----------- ---------------- --------------- --------------- ----------- -------------- Brookscrossing Apartments, L.P. A Limited Partnership Brookscrossing Atlanta, GA 224 $3,363,776 $3,363,776 $5,466,174 None 96% Willow Ridge Development Co. Limited Partnership Willow Ridge Prescott, AZ 134 2,125,000 2,125,000 3,055,082 None 96% Leawood Associates, L.P.** A Limited Partnership Leawood Manor Leawood, KS 254 7,497,810 7,497,810 7,415,444 None 98% Dorsett Limited Partnership Dorsett Apartments Philadelphia, PA 58 2,482,107 2,482,107 2,141,401 Section 8 97% Allentown Towne House, L.P. Towne House Apartments Allentown, PA 160 1,589,403 1,589,403 6,499,758 Section 8 100% Prince Street Towers L.P. A Limited Partnership Lancaster House North Lancaster, PA 201 1,996,687 1,996,687 7,846,424 Section 8 100% Sencit Towne House L.P. Sencit Towne House Shillington, PA 201 1,996,687 1,996,687 6,588,586 Section 8 100% Capital Contributions Total Total Paid Mtge. Loans Local Limited Partnership Number of committed at through March payable at Occupancy at Property Name Apt. Units March 31, 1999 31, 1999 December 31, Type of March 31, Property Location 1998 Subsidy* - -------------------------------------- ------------ --------------- ------------- ----------------- ----------- ------------- East Rusk Housing Associates, LTD (A)** Pinewood Terrace Apartments Rusk, TX Gateway Housing Associates, LTD (A)** Gateway Village Garden Apts. Azle, TX 50 251,326 251,326 1,131,757 FmHA 98% Justin Housing Associates, LTD(A) Justin Place Justin, TX Grandview Housing Associates, LTD (A) Grandview Grandview, TX Buena Vista Limited Partnership Hampton Lane (Buena Vista) Buena Vista, GA 24 153,474 153,474 715,816 None 100% Audobon Group, L.P. A Massachusetts Limited Partnership Audobon Boston, MA 37 2,640,419 2,640,419 3,088,524 Section 8 97% Bent Tree Housing Associates (A) Bent Tree Jacksboro, TX Bowie Housing Associates, LTD (A) Royal Crest (Bowie) Bowie, TX Capital Contributions Total Total Paid Mtge. Loans Local Limited Partnership Number of committed at through March payable at Occupancy at Property Name Apt. Units March 31, 1999 31, 1999 December 31, Type of March 31, Property Location 1998 Subsidy* 1999 - -------------------------------------- ------------ ----------------------------- ----------------- ----------- -------------- Nocona Terrace Housing Associates, LTD (A) Nocona Terrace Nocona, TX Pine Manor Housing Associates (A) Pine Manor Jacksboro, TX Rhome Housing Associates, LTD (A) Hilltop Apartments Rhome, TX Valley View Housing Associates, LTD (A) Valley View Valley View, TX Bentley Court II Limited Partnership Bentley Court Columbia, SC 273 5,000,000 5,000,000 6,868,868 None 90% Bryson Housing Associates, LTD (A) Pecan Hill Apartments Bryson, TX Orocovix Limited Dividend Partnership, S.E. Orocovix IV Orocovix, PR 40 361,444 361,444 1,642,158 FmHA 100% Carolina Woods Associates, L.P. Carolina Woods Greensboro, NC 48 1,000,000 1,000,000 1,098,156 None 96% Capital Contributions Total Total Paid Mtge. Loans Local Limited Partnership Number of committed at through March payable at Occupancy at Property Name Apt. Units March 31, 1999 31, 1999 December 31, Type of March 31, Property Location 1998 Subsidy* 1999 - ------------------------------------ ------------ -------------- ------------- -------------- ----------- -------------- Kenilworth Associates LTD A Limited Partnership Mayfair Mansions Washington, DC 569 4,250,000 4,250,000 20,953,081 Section 8 96% Oakview Square Limited Partnership A Michigan Limited Partnership Oakview Square Chesterfield, MI 192 5,299,652 5,299,652 6,002,893 None 95% Whitehills II Apartments Company Limited Partnership Whitehills II Howell, MI 24 169,276 169,276 752,994 FmHA 100% Gobles Limited Dividend Housing Associates Orchard View Gobles, MI 24 162,022 162,022 737,105 FmHA 100% Lakeside Square Limited Partnership An Illinois Limited Partnership Lakeside Square Chicago, IL 308 3,978,813 3,978,813 6,005,125 Section 8 100% Lincoln Green Associates, A Limited Partnership Lincoln Green Old Towne, ME 30 352,575 352,575 1,638,514 Section 8 97% Brown Kaplan Limited Partnership Brown Kaplan Boston, MA 60 3,024,663 3,024,663 7,998,554 Loans 100% Capital Contributions Total Total Paid Mtge. Loans Local Limited Partnership Number of committed at through March payable at Occupancy at Property Name Apt. Units March 31, 1999 31, 1999 December 31, Type of March 31, Property Location 1998 Subsidy* 1999 - -------------------------------------- ----------- --------------- ------------- ----------------- ----------- ------------ Green Tree Village Limited Partnership A Limited Partnership Green Tree Village Greenville, GA 24 145,437 145,437 657,073 FmHA 100% Milan Apartments Company Limited Partnership Canfield Crossing Milan, MI 32 230,500 230,500 1,015,158 FmHA 97% Findlay Market Limited Partnership (A) Findlay Market Cincinnati, OH Seagraves Housing Associates, LTD. (A) Seagraves Seagraves, TX West Pine Associates West Pine Findlay, PA 38 313,445 313,445 1,673,827 FmHA 97% B-K Apartments Limited Partnership BK Apartments Jamestowne, ND 48 290,000 290,000 856,667 Section 8 75% 46th and Vincennes Limited Partnership 46th and Vincennes Chicago, IL 28 751,120 751,120 1,308,408 Section 8 89% ------ ------------ ------------ ------------ 3,081 49,425,636 49,425,636 103,157,547 ====== Less: **Combined Entities 7,749,136 7,749,136 8,547,201 ------------ ------------ ------------ $41,676,50 $ 41,676,500 $ 94,610,346 ============ ============ ============ * FmHA This subsidy, which is authorized under Section 515 of the Housing Act of 1949, can be one or a combination of many different types. For instance, FmHA may provide: 1) direct below-market-rate mortgage loans for rural rental housing; 2) mortgage interest subsidies which effectively lower the interest rate of the loan to 1%; 3) rental assistance subsidies to tenants which allow them to pay no more than 30% of their monthly income as rent with the balance paid by the federal government; or 4) a combination of any of the above. Section 8 This subsidy, which is authorized under Section 8 of Title II of the Housing and Community Development Act of 1974, allows qualified low-income tenants to pay 30% of their monthly income as rent with the balance paid by the federal government. (A) As of March 31, 1999, the Managing General Partner has transferred all of the assets of eleven of the Texas Partnerships and Findlay Market subject to their liabilities. The one remaining Texas Partnership will be transferred after March 31, 1999. The eleven transferred Texas Partnerships had total capital contributions and mortgage payable amounts of $2,632,392 and $6,918,840, respectivley, as of the transfer dates. Three Local Limited Partnerships invested in by the Partnership each represent more than 10% of the total capital contributions made to Local Limited Partnerships by the Partnership. The first is Leawood Associates, L.P. ("Leawood Manor"). Leawood Manor, representing 15.17% of the total capital contributions to Local Limited Partnerships, is a 254-unit apartment complex located in Leawood, Kansas. Leawood Manor is financed by a first mortgage at 8%, with an accrual rate of 11.75% and monthly payments of $77,850 plus 95% of the net cash flows as defined by the mortgage agreement. Subsequent to December 31, 1998, Leawood Manor refinanced with Northern Financial Company. The new mortgage has monthly installments of $53,659 of principal and interest, with interest accrued at an annual rate of 6.66%. The mortgage matures on February 1, 2009. The second Local Limited Partnership which represents more than 10% of the total capital contributions to Local Limited Partnerships is Oakview Square Limited Partnership ("Oakview Square"). Oakview Square, representing 10.72% of the total capital contributions to Local Limited Partnerships, is a 192-unit apartment complex located in Chesterfield, Michigan. Oakview Square is financed by a first mortgage loan at 9.75% interest and a 35 year term with monthly installments of approximately $52,100. The loan matures in April 2010. The third Local Limited Partnership which represents more than 10% of the total capital contributions to Local Limited Partnership is Bentley Court II Limited Partnership ("Bentley Court"). Bentley Court, representing 10.12% of the total capital contribution to Local Limited Partnerships, is a 273 unit apartment complex located in Columbia, South Carolina. The duration of the leases for occupancy in the Properties described above is six to twelve months. The Managing General Partner believes the Properties described herein are adequately covered by insurance. Item 3. Legal Proceedings The IRS finalized its report from an audit of the 1993 tax return for the project. The IRS report includes the questioning of the treatment of certain items and findings for non-compliance in 1993. Management understands that the audit now also focuses on 1994 and 1995 tax credits. On behalf of the Partnership, the Managing General Partner hired attorneys to appeal the findings in the IRS report in order to minimize the loss of credits. In June 1998, the Managing General Partner was informed that the Local General Partner for this property was indicted on various criminal charges. The Local General Partner pleaded guilty to two of these counts and is now awaiting sentencing. In the opinion of management, there is a risk that Bentley Court and, consequently, the Partnership will suffer some tax credit recapture or credit disallowance. However, management cannot quantify the risk at this time. The Partnership is not a party to any other pending legal or administrative proceeding, and to the best of its knowledge, no legal or administrative proceeding is threatened or contemplated against it. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Registrant's Units and Related Security Holder Matters There is no public market for the Units, and it is not expected that a public market will develop. If a Limited Partner desires to sell Units, the buyer of those Units will be required to comply with the minimum purchase and retention requirements and investor suitability standards imposed by applicable federal or state securities laws and the minimum purchase and retention requirements imposed by the Partnership. The price to be paid for the Units, as well as the commissions to be received by any participating broker-dealers, will be subject to negotiation by the Limited Partner seeking to sell his Units. Units will not be redeemed or repurchased by the Partnership. The Partnership Agreement does not impose on the Partnership or its General Partners any obligation to obtain periodic appraisals of assets or to provide Limited Partners with any estimates of the current value of Units. As of June 15, 1999, there were 3,808 record holders of Units of the Partnership. Cash distributions, when made, are paid annually. No cash distributions were paid for the years ended March 31, 1999, 1998 and 1997. Item 6. Selected Financial Data The following table sets forth selected financial information regarding the Partnership's financial position and operating results. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Combined Financial Statements and Notes thereto, which are included in Items 7 and 8 of this Report. March 31, March 31, March 31, March 31, March 31, 1999 1998 1997 1996 1995 Revenue (C) $ 2,234,267 $ 2,061,588 $ 2,099,229 $ 2,633,694 $ 2,506,970 Equity in income (losses) of Local Limited Partnerships (C) 33,851 (1,405,591) (2,747,270) (2,957,339) (3,688,171) Net loss (166,712) (3,950,858) (5,503,780) (5,046,594) (6,661,959) Per Limited Partnership Unit (2.43) (57.48) (80.08) (73.43) (96.93) Cash and cash equivalents (C) 361,069 386,059 288,153 414,451 532,287 Marketable securities 703,642 985,849 1,056,590 1,428,765 1,962,559 Investments in Local Limited Partnerships 15,022,986 15,286,237 18,891,361 22,021,757 25,343,137 Total assets (A) 29,698,965 31,608,124 36,632,053 41,744,078 50,243,398 Long-term debt (C) 8,547,201 9,720,859 11,111,888 11,228,864 14,636,443 Total liabilities (C) 12,118,935 13,857,576 14,948,056 14,550,850 17,903,195 Cash Distribution - - - - - Per Limited Partnership Unit - - - - - Other Data: Passive loss (B) (6,298,010) (5,850,622) (6,118,380) (6,562,619) (6,695,703) Per Limited Partnership Unit (B) (91.63) (85.12) (89.02) (95.48) (97.42) Portfolio income (B) 531,853 399,057 511,058 627,741 401,044 Per Limited Partnership Unit (B) 7.74 5.81 7.44 9.13 5.84 Low-Income Housing Tax Credit (B) 9,066,656 9,278,685 9,364,677 9,536,996 9,432,363 Per Limited Partnership Unit (B) 131.49 134.57 135.81 138.31 136.78 Recapture of Low-Income Housing Tax Credits (B) 725,142 338,222 179,372 - - Per Limited Partnership Unit (B) 10.55 4.92 2.61 - - Local Limited Partnership interests owned at end of period (D) 25 27 32 34 37 (A) Total assets include the net investment in Local Limited Partnerships. (B) Income tax information is as of December 31, the year end of the Partnership for income tax purposes. The Low-Income Housing Tax Credits per Limited Partnership Unit for 1999, 1998, 1997, 1996 and 1995 represents the amount allocated to individual investors. Corporate investors were allocated $134.17, $137.27, $138.59, $141.11 and $139.60 per Unit in 1999, 1998, 1997, 1996 and 1995, respectively. (C) Revenue for the years ended March 31, 1999, 1998, 1997, 1996 and 1995 includes $1,875,069, $1,911,961, $1,941,455, $2,522,643 and $2,354,347, respectively, of total revenue from Leawood Manor and the Texas Partnerships. Equity in losses of Local Limited Partnerships for the years ended March 31, 1999, 1998, 1997, 1996 and 1995 does not include $8,850, ($26,848), $1,808,207, $1,165,223 and $1,199,409, respectively, of losses from Leawood Manor and the Texas Partnerships that have been combined with the Partnership's loss. Cash and cash equivalents at March 31, 1999, 1998, 1997, 1996 and 1995 includes $117,997, $113,251, $71,426, $107,545 and $250,751, respectively, of cash and cash equivalents from Leawood Manor and the Texas Partnerships. The total amount of long-term debt is related to Leawood Manor and the Texas Partnerships. Total liabilities for the years ended March 31, 1999, 1998, 1997, 1996 and 1995 includes $11,662,371, $13,200,479, $14,529,452, $14,368,374 and $17,756,853, respectively, of liabilities from Leawood Manor and the Texas Partnership (other than the Texas Partnerships described in (D) below). (D) As of March 31, 1999, the Managing General Partner has transferred all of the assets of eleven of the Texas Partnerships, subject to their liabilities, to unaffiliated entities. The remaining Texas Partnership was transferred subsequent to March 31, 1999. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain matters discussed herein constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Partnership intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements and are including this statement for purposes of complying with these safe harbor provisions. Although the Partnership believes the forward-looking statements are based on reasonable assumptions, the Partnership can give no assurance that their expectations will be attained. Actual results and timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, without limitation, general economic and real estate conditions, interest rates and unanticipated delays or expenses on the part of the Partnership and their suppliers in achieving year 2000 compliance. Liquidity and Capital Resources The Partnership (including the Combined Entities) had a decrease in cash and cash equivalents of $24,990 from $386,059 at March 31, 1998 to $361,069 at March 31, 1999. The decrease is mainly attributable to cash used for operating activities and cash used for purchases of marketable securities. These decreases are offset by cash provided by proceeds from sales and maturities of marketable securities and cash distributions received from Local Limited Partnerships. The Managing General Partner initially designated 4% of the Gross Proceeds as Reserves. The Reserves were established to be used for working capital of the Partnership and contingencies related to the ownership of Local Limited Partnership interests. Funds totaling approximately $1,212,000 have been withdrawn from the Reserve account to pay legal fees relating to various property issues. This amount includes approximately $1,101,000 for the Texas Partnerships. To date, Reserve funds in the amount of $304,000 have been used to make additional capital contributions to a Local Limited Partnership. To date, the Partnership has used approximately $640,000 of operating funds to replenish Reserves. At March 31, 1999, approximately $809,000 of cash, cash equivalents and marketable securities has been designated as Reserves. Management believes that the investment income earned on the Reserves, along with cash distributions received from Local Limited Partnerships, to the extent available, will be sufficient to fund the Partnership's ongoing operations. Reserves may be used to fund Partnership operating deficits, if the Managing General Partner deems funding appropriate. If Reserves are not adequate to cover the Partnership's operations, the Partnership will seek other financing sources including, but not limited to, the deferral of Asset Management Fees to an affiliate of the Managing General Partner or working with Local Limited Partnerships to increase cash distributions. In the event a Local Limited Partnership encounters operating difficulties requiring additional funds, the Partnership's management might deem it in its best interests to voluntarily provide such funds in order to protect its investment. To date, in addition to the $1,212,000 noted above, the Partnership has also advanced approximately $712,000 to the Texas Partnerships to fund operating deficits. Approximately $325,000 has also been advanced to four other Local Limited Partnerships. Since the Partnership invests as a limited partner, the Partnership has no contractual obligation to provide additional funds to Local Limited Partnerships beyond its specified investment. Thus, at March 31, 1999, the Partnership had no contractual or other obligation to any Local Limited Partnership which had not been paid or provided for. Cash Distributions No cash distributions were made during the year ended March 31, 1999. Results of Operations 1999 versus 1998 The Partnership's results of operations for the fiscal year ended March 31, 1999 resulted in a net loss of $166,712 as compared to a net loss of $3,950,858 for the same period in 1998. The decrease in net loss is primarily attributable to the gain on the transfer of assets of one of the Texas Partnerships, a decrease in equity in losses of Local Limited Partnerships, a decrease in the provision for valuation of rental property and a decrease in the provision for valuation of investments in Local Limited Partnerships. The decrease in equity in losses of Local Limited Partnerships is due to an increase in losses not recognized by the Partnership for Local Limited Partnerships whose cumulative equity in losses and cumulative distributions exceeded its total investment in those partnerships. The decrease in equity in losses of Local Limited Partnerships is expected to continue. 1998 versus 1997 The Partnership's results of operations for the fiscal year ended March 31, 1998 resulted in a net loss of $3,950,858 as compared to a net loss of $5,503,780 for the same period in 1997. The decrease in net loss is primarily attributable to the recognition of gains on asset transfers for three of the Texas Partnerships, a decrease in equity in losses of Local Limited Partnerships and a decrease in the provision for valuation of rental property. The decrease in equity in losses of Local Limited Partnerships is due to an increase in losses not recognized by the Partnerships for Local Limited Partnerships whose cumulative equity in losses and cumulative distributions exceeded its total investment in those partnerships. The decrease in equity in losses of Local Limited Partnerships is expected to continue. The expected transfers of Pinewood Terrace Apartments and Gateway Village Apartments in July 1998 and January 1999, respectively, will result in additional gains on transfers of assets. The gain on assets transfers and decrease in equity in losses of Local Limited Partnerships were partially offset by a provision for valuation of two investments in Local Limited Partnerships recorded in 1998. Low-Income Housing Tax Credits The 1999, 1998 and 1997 Tax Credits per Unit were $131.49, $134.57 and $135.81, respectively, for individual investors. The 1999, 1998 and 1997 Tax Credits per Unit were $134.17, $137.27 and $138.59, respectively, for corporate investors. Tax Credits are not available for a Property until the Property is placed in service and its apartment units are occupied by qualified tenants. In the first year the Tax Credits are claimed, the allowable credit amount is determined using an averaging convention to reflect the number of months that apartment units comprising the qualified basis were occupied by qualified tenants during the year. To the extent that the full amount of the annual credit is not allocated in the first year, an additional credit equal to the difference is available in the 11th taxable year. As of March 31, 1999, each of the twenty-five properties has been placed in service and their apartment units are qualified. The credits, which have stabilized, are expected to remain the same for the next two years, and then they are expected to decrease as properties reach the end of the ten year credit period. However, because the compliance periods extend significantly beyond the tax credit periods, the Partnership is expected to retain most of its interest in the Local Limited Partnership for the foreseeable future. The Partnership has transferred eleven of the Texas Partnerships and is in the process of transferring the remaining Texas Partnership. There will be a nominal recapture of tax credits since the Texas Partnerships represent only 3% of the Partnerships' tax credits. The Tax Credits per Unit for corporate investors will be slightly higher for the remaining years of the credit period than that for individual investors because certain of the properties took advantage of 1990 federal legislation that allowed the acceleration of future tax credits to individuals in the tax year ended December 31, 1990. For those properties that elected to accelerate the individual credit, the accelerated portion is being amortized over the remainder of the credit period, thereby causing a reduction of this and future year's tax credits passed through by those properties. In total, both individual and corporate investors will be allocated equal amounts of Tax Credits. On November 10, 1997, the Partnership transferred 50% of its interest in capital and profits of BK Apartments to the local general partner in order to protect the Partnership in the event of recapture of these tax credits. The first stage of this transfer caused approximately one-half of the recapture liability to flow to the local general partner. Property Discussions Prior to the transfer of eleven of the Texas Partnerships and Findlay Market, Limited Partnership interests had been acquired in thirty-seven Local Limited Partnerships which are located in thirteen states, Washington, D.C. and Puerto Rico. Fifteen of the properties with 1,440 apartments were newly constructed, and twenty-two of the properties with 2,061 apartments were rehabilitated. Most of the Local Limited Partnerships have stable operations, operating at break-even or generating operating cash flow. A few properties are experiencing operating difficulties and cash flow deficits due to a variety of reasons. The Local General Partners of those properties have funded operating deficits through project expense loans, subordinated loans or payments from operating escrows. In instances where the Local General Partners have stopped funding deficits because their obligation to do so has expired or otherwise, the Managing General Partner is working with the Local General Partners to increase operating income, reduce expenses or refinance the debt at lower interest rates in order to improve cash flow. As previously reported, Audobon Apartments and Brown Kaplan, both of which are located in Massachusetts, are operating below break-even. Both properties receive subsidies through the State Housing Assistance Rental Program (SHARP), which are an important part of their annual income. As originally conceived, the SHARP subsidy was scheduled to decline over time to match increases in net operating income. However, increases in net operating income failed to keep pace with the decline in the SHARP subsidy. Many of the SHARP properties (including Audobon Apartments and Brown Kaplan) sought restructuring workouts with the lender, Massachusetts Housing Finance Agency (MHFA), that included additional subsidies in the form of Operating Deficit Loans (ODL's). In July 1997, MHFA refused to close the restructuring for Brown Kaplan. Effective October 1, 1997, MHFA, which provided the SHARP subsidies, withdrew funding of the ODL's from its portfolio of 77 subsidized properties. Properties unable to make full debt service payments were declared in default by MHFA. The Managing General Partner has joined a group of SHARP property owners called the responsible SHARP Owners, Inc. (RSO) and is negotiating with MHFA and the Local General Partners of Audobon and Brown Kaplan to find a solution to the problems that will result from the withdrawn subsidies. Given the existing operating deficits and the dependence on these subsidies, Audobon Apartments and Brown Kaplan may default on their mortgage obligation in the near future. In particular, Audobon Apartments is experiencing significant operating deficits, which may affect the ability of the Fund to retain its interest in Audobon through 1999. A foreclosure would result in recapture of credits, the allocation of taxable income to the Fund and loss of future benefits associated with this property. As previously reported, on September 16, 1998, the Partnership joined with the RSO and about 20 other SHARP property owners and filed suit against the MHFA (Mass. Sup. Court Civil Action #98-4720). Among other things, the suit seeks to enforce the MHFA's previous financial commitments to the SHARP properties. The lawsuit is complex and in its early stages, so no predications can be made at this time as to the ultimate outcome. In the meantime, the Managing General Partner intends to continue to participate in the RSO's efforts to negotiate a resolution of this matter with MHFA. As previously reported on Bentley Court, located in Columbia, South Carolina, an agreement was reached with the lender which enabled an affiliate of the Managing General Partner to become an additional general partner and substitute management agent, subject to lender approval, with the right to take control of the property if it becomes necessary. In addition, the agreement stipulates that if the Local Limited Partnership defaults on the agreement, the lender has the right to remove the Management Company. The Managing General Partner is now in the process of having an affiliate admitted as the Managing General Partner of Bentley Court. The Managing General Partner will continue to monitor property operations and the Local General Partner closely. Operating deficits are currently being funded by the Local General Partner. As a result of the continuing tax issues at this property, management has decided to fully reserve the Partnership's investment in Bentley Court. As previously reported, BK Apartments, located in Jamestown, North Dakota, is generating operating deficits despite improved occupancy. The lender issued a default notice and threatened to foreclose. A workout agreement was negotiated and completed on November 10, 1997. The Managing General Partner is closely monitoring the workout plan with the Local General Partner. Furthermore, in November 1997, the Managing General Partner consummated a transfer of 50% of its interest in capital and profits of BK Apartments Limited Partnership to the Local General Partner. The Managing General Partner has the right to put the Partnership's remaining interest to the Local General Partner any time after one year has elapsed. The Partnership will retain its full share of tax credits until such time as the remaining interest is put to the Local General Partner. In addition, the Local General Partner has the right to call the remaining interest after the tax credit period has expired. As previously reported, negotiations among the Managing General Partner, Lender and prospective buyer for the remaining two Texas Partnerships, Pinewood Terrace and Gateway Village, continued and resulted in the transfer of Pinewood Terrace Apartments on July 9, 1998. The transfer of Gateway Village Apartments took place in 1999, subsequent to year end. The transfer event of Pinewood Terrace resulted in both Section 1231 Gain and cancellation of indebtedness income, in addition to credit recapture of approximately $2.80 per Unit for the 1998 tax year. For 1999 tax purposes, the transfer event of Gateway Village will result in both Section 1231 Gain and cancellation of indebtedness income and an estimated tax credit recapture of $2.40 per Unit. As previously reported, 46 & Vincennes, located in Chicago, Illinois, has been operating below break-even due to occupancy problems. On April 1, 1998, the management agent was replaced with a new management agent. For the last two quarters, occupancy has increased slightly and as of December 31, 1998 was 86%. The Managing General Partner is working closely with the Local General Partner and will continue to monitor the new management agent, property operations and marketing efforts. As previously reported, Findlay Market (located in Cincinnati, Ohio) and its Managing and Local General Partners were not successful in their negotiations with the lender. The lender was not amenable to a cure of the mortgage and exercised its right to foreclose on the mortgage effective in August 1998. The foreclosure of this property resulted in recapture of tax credits of approximately $8.00 per unit, plus interest, and the allocation of taxable income to the Partnership in the 1998 tax year. In accordance with Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Partnership has implemented policies and practices for assessing impairment of its real estate assets and investments in Local Limited Partnerships. Each asset is analyzed by real estate experts to determine if an impairment indicator exists. If so, the carrying value is compared to the undiscounted future cash flows expected to be derived from the asset and, if there is a significant impairment in value, a provision to write down the asset to fair value will be charged against income. Inflation and Other Economic Factors Inflation had no material impact on the operations or financial condition of the Partnership for the years ended March 31, 1999, 1998 and 1997. Since some of the Properties benefit from some sort of government assistance, the Partnership is subject to the risks inherent in that area including decreased subsidies, difficulties in finding suitable tenants and obtaining permission for rent increases. In addition, any Tax Credits allocated to investors with respect to a Property are subject to recapture to the extent that the Property or any portion thereof ceases to qualify for the Tax Credits. Certain of the Properties listed in this Report are located in areas suffering from poor economic conditions. Such conditions could have an adverse effect on the rent or occupancy levels at such Properties. Nevertheless, management believes that the generally high demand for below-market rate housing will tend to negate such factors. However, no assurance can be given in this regard. Impact of Year 2000 The Managing General Partner's plan to resolve year 2000 issues involves the following four phases: assessment, remediation, testing and implementation. To date, the Managing General Partner has fully completed an assessment of all information systems that may not be operative subsequent to 1999 and has begun the remediation, testing and implementation phase on both hardware and software systems. Because the hardware and software systems of both the Partnership and Local Limited Partnerships are generally the responsibility of obligated third parties, the plan primarily involves ongoing discussions with and obtaining written assurances from these third parties that pertinent systems will be 2000 compliant. In addition, neither the Partnership nor the Local Limited Partnerships are incurring significant additional costs since such expenses are principally covered under the service contracts with vendors. As of June 1999, the General Partner is in the final stages of its Year 2000 remediation plan and believes all major systems are compliant; any systems still being updated are not considered significant to the Partnership's operations. However, despite the likelihood that all significant year 2000 issues are expected to be resolved in a timely manner, the Managing General Partner has no means of ensuring that all systems of outside vendors or other entities that impact operations will be 2000 compliant. The Managing General Partner does not believe that the inability of third parties to address their year 2000 issues in a timely manner will have a material impact on the Partnership. However, the effect of non-compliance by third parties is not readily determinable. Management has also evaluated a worst case scenario projection with respect to the year 2000 and expects any resulting disruption of either the Managing General Partner's activities or any Local Limited Partnership's operations to be short-term inconveniences. Such problems, however, are not likely to fully impede the ability to carry out necessary duties of the Partnership. Moreover, because expected problems under a worst case scenario are not extensively detrimental, and because the likelihood that all systems affecting the Partnership will be compliant before 2000, the Managing General Partner has determined that a formal contingency plan that responds to material system failures is not necessary. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The table below provides information about the Partnership's market risk sensitive instruments. - ---------------------------------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Face Value - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Debt Obligations - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Long Term Debt: - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Fixed Rate 62,963 70,813 79,552 89,420 100,511 7,012,185 7,415,444 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Average interest rate 6.66% 6.66% 6.66% 6.66% 6.66% 6.66% - ---------------------------------------------------------------------------------------------------------------------- Debt extinguished subsequent to year end, not vulnerable to market risk, has been excluded from this table. The fair value of this debt obligation in this table approximates its face value at March 31, 1999. In addition to the debt obligation included in this table, the Partnership has invested in marketable securities with aggregate fair values of $703,642 at March 31, 1999; these securities, with rates ranging from 4.87% to 6.42%, do not subject the Partnership to significant market risk because of their short term maturities and high liquidity. The Partnership has no other exposure to market risk associated with activities in derivative financial instruments, derivative commodity instruments, or other financial instruments. Item 8. Financial Statements and Supplementary Data Information required under this Item is submitted as a separate section of this Report. See Index on page F-1 hereof. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The Managing General Partner of the Partnership is Arch Street IV, Inc., a Massachusetts corporation (the "Managing General Partner"), an affiliate of The Boston Financial Group Limited Partnership ("Boston Financial"), a Massachusetts limited partnership. George Fantini, Jr. and Donna C. Gibson, Vice Presidents of the Managing General Partner, resigned their positions effective June 30, 1995 and September 13, 1996, respectively. Georgia Murray resigned as Managing Director, Treasurer and Chief Financial Officer of the General Partner on May 25, 1997. Fred N. Pratt, Jr. resigned as Managing Director of the General Partner on May 28, 1997. William E. Haynsworth resigned as Managing Director and Chief Operating Officer of the General Partner on March 23, 1998. Peter G. Fallon resigned as a Vice President of the General Partner on June 1, 1999. The Managing General Partner was incorporated in December 1988. Randolph G. Hawthorne is the Chief Operating Officer of the Managing General Partner and had the primary responsibility for evaluating, selecting and negotiating investments for the Partnership. The Investment Committee of the Managing General Partner approved all investments. The names and positions of the principal officers and the directors of the Managing General Partner are set forth below. Name Position Jenny Netzer Managing Director and President Michael H. Gladstone Managing Director, Vice President and Clerk Randolph G. Hawthorne Managing Director, Vice President and Chief Operating Officer James D. Hart Chief Financial Officer and Treasurer Paul F. Coughlan Vice President William E. Haynsworth Vice President The other General Partner of the Partnership is Arch Street IV Limited Partnership, a Massachusetts Limited Partnership ("Arch Street IV L.P.") that was organized in December 1988. Arch Street IV, Inc. is the managing general partner of Arch Street IV L.P. The Managing General Partner provides day-to-day management of the Partnership. Compensation is discussed in Item 11 of this Report. Such day-to-day management does not include the management of the Properties. The business experience of each of the persons listed above is described below. There is no family relationship between any of the persons listed in this section. Jenny Netzer, age 43, graduated from Harvard University (B.A., 1976) and received a Master's in Public Policy from Harvard's Kennedy School of Government in 1982. Ms. Netzer joined Boston Financial in 1987 and is a Senior Vice President leading the Institutional Tax Credit Team. She is also a member of the Senior Leadership Team, the firm's Executive Committee. Previously, Ms. Netzer led Boston Financial's new business initiatives and managed the firm's Asset Management division, which is responsible for the performance of 750 properties and providing service to 35,000 investors. Before joining Boston Financial, she was Deputy Budget Director for the Commonwealth of Massachusetts, where she was responsible for the Commonwealth's health care and public pension programs' budgets. Ms. Netzer was also Assistant Controller at Yale University and has been a member of the Watertown Zoning Board of Appeals. Michael H. Gladstone, age 42, graduated from Emory University (B.A., 1978) and Cornell University (J.D., M.B.A., 1982). Mr. Gladstone joined Boston Financial in 1985 and serves as Vice President and General Counsel. He is also a member of the Senior Leadership Team. Prior to joining Boston Financial, Mr. Gladstone was associated with the Boston law firm of Herrick & Smith. Mr. Gladstone is on the Advisory Board of the Housing and Development Reporter. He is also a member of the Investment Program Association, The National Realty Committee, Cornell Real Estate Council, National Housing Conference and the Massachusetts Bar. Randolph G. Hawthorne, age 49, is a graduate of Massachusetts Institute of Technology (S.B., 1971) and Harvard Graduate School of Business (M.B.A., 1973). Mr. Hawthorne joined Boston Financial in 1973 and is currently a Vice President responsible for structuring and acquiring real estate investments. Previously, Mr. Hawthorne served as Treasurer of Boston Financial. Mr. Hawthorne is Past Chairman of the Board of the National Multi Housing Council, having served on the board since 1989. He is a past president of the National Housing and Rehabilitation Association, a member of the Residential Development Council of the Urban Land Institute, as well as a member of the Advisory Board of the Berkeley Real Estate Center at the University of California. In addition to speaking at industry conferences, he is on the Editorial Advisory Boards of the Tax Credit Advisor and Multi-Housing News. James D. Hart, age 41, graduated from Trinity College (B.A.) and Amos Tuck School at Dartmouth College (M.B.A.). Mr. Hart joined Boston Financial in 1997 and serves as Chief Financial Officer and is a member of the Senior Leadership Team. Prior to joining Boston Financial, Mr. Hart was engaged in venture capital management on behalf of institutional investors, including the negotiation and structuring of private equity and mezzanine transactions as a Vice President of Interfid Ltd., and later in the operational management of a venture-backed software company, as Managing Director and Chief Financial Officer of Bitstream Inc. Mr. Hart has also served on the Board of Directors of several companies, including those that went on to complete initial public offerings. Paul F. Coughlan, age 55, is a graduate of Brown University (A.B., 1965). Mr. Coughlan joined Boston Financial in 1975 and is currently a Senior Vice President and a member of the Investment Management Division with responsibility for marketing institutional investments. Previously, he was national sales manager for Boston Financial's retail tax credit funds. Prior to joining Boston Financial, Mr. Coughlan was an investment broker with Bache & Company and Reynolds Securities, Inc. William E. Haynsworth, age 59, is a graduate of Dartmouth College (A.B., 1961) and Harvard Law School (L.L.B., 1964; L.L.M., 1969). Mr. Haynsworth joined Boston Financial in 1977 and is a Senior Vice President responsible for the structuring of real estate investments and the acquisition of property interests. Prior to joining Boston Financial, Mr. Haynsworth was Acting Executive Director and General Counsel of the Massachusetts Housing Finance Agency. He was also the Director of Non-Residential Development of the Boston Redevelopment Authority and an associate of the law firm of Goodwin, Procter & Hoar. Mr. Haynsworth is a member of the Executive Committee and the Board of Directors of the Affordable Housing Tax Credit Coalition. He is a member of the Senior Leadership Team and the Board of Directors of Boston Financial. Mr. Haynsworth has over 25 years of real estate experience. Item 11. Management Remuneration Neither the directors or officers of Arch Street IV, Inc., nor the partners of Arch Street IV L.P. nor any other individual with significant involvement in the business of the Partnership receives any current or proposed remuneration from the Partnership. Item 12. Security Ownership of Certain Beneficial Owners and Management As of March 31, 1999, the following is the only entity known to the Partnership to be the beneficial owner of more than 5% of the Units outstanding: Amount Title of Name and Address of Beneficially Class Beneficial Owner Owned Percent of Class Limited AMP, Incorporated 10,000 Units 14.70% Partner P.O. Box 3608 Harrisburg, PA The equity securities registered by the Partnership under Section 12(g) of the Act consist of 100,000 Units, of which 68,043 were sold to the public. The remaining Units were deregistered in Post-Effective Amendment No. 3, dated February 21, 1990. Holders of Units are permitted to vote on matters affecting the Partnership only in certain unusual circumstances and do not generally have the right to vote on the operation or management of the Partnership. Arch Street IV L.P. owns five (unregistered) Units not included in the 68,043 Units sold to the public. Except as described in the preceding paragraph, neither Arch Street IV, Inc., Arch Street IV L.P., Boston Financial nor any of their executive officers, directors, partners or affiliates is the beneficial owner of any Units. None of the foregoing persons possess a right to acquire beneficial ownership of Units. There is no arrangement in existence, to the Partnership's knowledge, that would result in a change in control of the Partnership. Item 13. Certain Relationships and Related Transactions The Partnership paid certain fees to and reimbursed certain expenses of the Managing General Partner or its affiliates (including Boston Financial) in connection with the organization of the Partnership and the offering of Units. The Partnership was also required to pay certain fees to and reimburse certain expenses of the Managing General Partner or its affiliates (including Boston Financial) in connection with the administration of the Partnership and its acquisition and disposition of investments in Local Limited Partnerships. In addition, the General Partners are entitled to certain Partnership distributions under the terms of the Partnership Agreement. Also, an affiliate of the General Partners will receive up to $10,000 from the sale or refinancing proceeds of each Local Limited Partnership, if it is still a limited partner at the time of such transaction. All such fees and distributions are more fully described in the sections entitled "Estimated Use of Proceeds", "Management Compensation and Fees" and "Profits and Losses for Tax Purposes, Tax Credits and Cash Distributions" of the Prospectus. Such sections are incorporated herein by reference. In addition, Boston Financial Property Management ("BFPM"), an affiliate of the Managing General Partner, serves as property management agent for the properties owned by Leawood Associates, L.P., Oakview Square, L.P., Whitehills II Apartments Company, L.P., Gobles Limited Dividend Housing Association and Milan Apartments Company, L.P. BFPM is also the Management agent for the Texas Partnerships. The Partnership is permitted to enter into transactions involving affiliates of the Managing General Partner, subject to certain limitations established in the Partnership Agreement. Information regarding the fees paid and expense reimbursements made in the three years ending March 31, 1999 is presented as follows: Organizational fees and expenses In accordance with the Partnership Agreement, Boston Financial is to be reimbursed by the Partnership for organizational, offering and selling expenses advanced on behalf of the Partnership by Boston Financial or its affiliates and for salaries and direct expenses of certain employees of the Managing General Partner and its affiliates in connection with the registration and organization of the Partnership. Such expenses include printing expenses and legal, accounting, escrow agent and depository fees and expenses. Such expenses also include a non-accountable expense allowance for marketing expenses equal to 1% of gross offering proceeds. From inception through March 31, 1999, $8,351,601 of organization fees and expenses incurred on behalf of the Partnership were paid and reimbursed to an affiliate of the Managing General Partner. Total organization and offering expenses did not exceed 5.5% of the gross offering proceeds. Acquisition fees and expenses In accordance with the Partnership Agreement, the Partnership is required to pay acquisition fees to and reimburse acquisition expenses of the Managing General Partner or its affiliates for selecting, evaluating, structuring, negotiating and closing the Partnership's investments in Local Limited Partnerships. Acquisition fees totaled 7.5% of the gross offering proceeds. Acquisition expenses, which include such expenses as legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, did not exceed 1.75% of the gross offering proceeds. Acquisition fees totaling $5,080,756 for the closing of the Partnership's Local Limited Partnership Investments have been paid to an affiliate of the Managing General Partner. Acquisition expenses totaling $974,240 were incurred and have been reimbursed to an affiliate of the Managing General Partner. No payments were made or expenses reimbursed in each of the three years ended March 31, 1999. Asset Management Fees In accordance with the Partnership Agreement, an affiliate of the Managing General Partner is paid an annual fee for services in connection with the administration of the affairs of the Partnership. The affiliate currently receives $7,467 (as adjusted by the CPI factor) per Local Limited Partnership annually as the Asset Management Fee. Fees earned in each of the three years ended March 31, 1999 are as follows: 1999 1998 1997 ------------- ------------- ---------- Asset management fees $ 199,280 $ 222,066 $ 250,509 Salaries and benefits expense reimbursements An affiliate of the Managing General Partner is reimbursed for the cost of the Partnership's salaries and benefits expenses. The reimbursements are based upon the size and complexity of the Partnership's operations. Reimbursements paid or payable in each of the three years ended March 31, 1999 are as follows: 1999 1998 1997 ------------- ------------- ----------- Salaries and benefits expense reimbursements $ 108,586 $ 147,039 $ 136,075 Property Management Fees BFPM is the management agent of the Texas Partnerships and Leawood Manor, properties in which the Partnership has invested. The property management fee earned is 5% of the properties' gross revenues. Fees earned by BFPM, which have been included in the Combined Statements of Operations for each of the three years ended December 31, 1998, are as follows: 1998 1997 1996 ------------- ------------- ---------- Property management fees $ 103,724 $ 122,823 $ 129,241 BFPM is the management agent for Oakview Square, Whitehills II Apartments, Orchard View and Canfield Crossing, properties in which the Partnership invested. The property management fee charged is 5% of the properties' gross revenues. Fees earned by BFPM, which have been included in operating expenses in the summarized income statements in Note 4 to the Combined Financial Statements in Part II, Item 8 for each of the three years ended December 31, 1998, are as follows: 1998 1997 1996 ------------- ------------- ------------ Property management fees $ 73,989 $ 77,411 $ 65,926 Cash distributions paid to the General Partners In accordance with the Partnership Agreement, the General Partners of the Partnership, Arch Street IV, Inc. and Arch Street IV Limited Partnership, receive 1% of cash distributions made to partners. No cash distributions were made to the General Partners in any of the three years ended March 31, 1999. Additional information concerning cash distributions and other fees paid or payable to the Managing General Partner and its affiliates and the reimbursement of expenses paid or payable to Boston Financial and its affiliates during each of the three years ended March 31, 1999 is presented in Note 5 to the Financial Statements. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) and (a)(2) Documents filed as a part of this Report. In response to this portion of Item 14, the financial statements, financial statement schedules and the auditors' report relating thereto are submitted as a separate section of this Report. See Index on page F-1 hereof. The reports of auditors of the Local Limited Partnership relating to the audits of the financial statements of such Local Limited Partnerships appear in Exhibit (28)(1) of this Report. Other schedules have been omitted as they are either not required or the information required to be presented therein is available elsewhere in the financial statements and the accompanying notes and schedules. (a)(3)(b) Reports on Form 8-K: No reports on Form 8-K were filed during the year ended March 31, 1999. (a)(3)(c) Exhibits Number and Description in Accordance with Item 601 of Regulation S-K 4. Instruments defining the rights of security holders, including indentures 4.1 Amended and Restated Agreement Exhibit A to Prospectus contained in and Certificate of Limited Form S-11 Registration Statement, Partnership dated as of File # 33-26394 April 20, 1989 27. Financial Data Schedule 28. Additional Exhibits 28.1 (a) Reports of Other Independent Auditors (b) Audited financial statements of Local Limited Partnerships Lakeside Audobon Mayfair Mansions (a)(3)(d) None. 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. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV By: Arch Street IV, Inc. its Managing General Partner By: /s/Randolph G. Hawthorne Date: June 29, 1999 ------------------------------- ------------ Randolph G. Hawthorne Managing Director, Vice President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Managing General Partner of the Partnership and in the capacities and on the dates indicated: By: /s/Randolph G. Hawthorne Date: June 29, 1999 ------------------------------- ------------- Randolph G. Hawthorne Managing Director, Vice President and Chief Operating Officer By: /s/Michael H. Gladstone Date: June 29, 1999 ------------------------------ ------------- Michael H. Gladstone A Managing Director BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) Annual Report on Form 10-K For the Year Ended March 31, 1999 Index Page No. Report of Independent Accountants F-2 Combined Financial Statements Combined Balance Sheets - March 31, 1999 and 1998 F-3 Combined Statements of Operations - Years Ended March 31, 1999, 1998 and 1997 F-4 Statements of Changes in Partners' Equity - Years Ended March 31, 1999, 1998 and 1997 F-6 Combined Statements of Cash Flows - Years Ended March 31, 1999, 1998 and 1997 F-7 Notes to the Combined Financial Statements F-9 Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation F-27 See also Index to Exhibits on Page K-25 for the financial statements of the Investor Local Limited Partnerships included as a separate exhibit in this Annual Report of Form 10-K. Other schedules have been omitted as they are either not required or the information required to be presented therein is available elsewhere in the financial statements and the accompanying notes and schedules. REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Boston Financial Qualified Housing Tax Credits L.P. IV (A Limited Partnership) In our opinion, based on our audits and the reports of other auditors, the combined financial statements listed in the accompanying index present fairly, in all material respects, the financial position Boston Financial Qualified Housing Tax Credits L.P. IV (the "Partnership") at March 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related combined financial statements. These financial statements and financial statement schedule are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of certain local limited partnerships for which total assets of $27,203,724 and $29,317,845, are included in these financial statements as of March 31, 1999 and 1998, respectively, and for which net losses of $114,072, $1,459,984, and $4,647,629 are included in the accompanying financial statements as of March 31, 1999, 1998, 1997, respectively. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for the Local Limited Partnerships, is based solely on the reports of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standard, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for the opinions expressed above. /s/PricewaterhouseCoopers LLP June 18, 1999 Boston, Massachusetts BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) COMBINED BALANCE SHEETS - MARCH 31, 1999 AND 1998 1999 1998 ------------- ------------- Assets Cash and cash equivalents $ 361,069 $ 386,059 Marketable securities, at fair value (Note 3) 703,642 985,849 Accounts receivable, net of allowance for bad debt of $(312,788) and $314,316 in 1999 and 1998, respectively 31,351 12,759 Tenant security deposits 92,851 85,340 Investments in Local Limited Partnerships, net of reserve for valuation of $2,094,646 and $2,724,482 in 1999 and 1998, respectively (Note 4) 15,022,986 15,286,237 Rental property at cost, net of accumulated depreciation (Note 6) 12,916,254 14,519,371 Mortgagee escrow deposits 117,008 114,300 Deferred charges, net of $196,874 and $176,768 of accumulated amortization in 1999 and 1998, respectively 168,970 189,076 Other assets 284,834 29,133 ------------- ------------- Total Assets $ 29,698,965 $ 31,608,124 ============= ============= Liabilities and Partners' Equity Mortgage notes payable (Note 7) $ 8,547,201 $ 9,720,859 Accounts payable to affiliates (Note 5) 104,275 602,600 Accounts payable and accrued expenses 251,458 340,574 Interest payable (Note 7) 655,016 627,412 Tenant security deposits payable 78,985 84,131 Payable to affiliated Developer (Note 8) 2,482,000 2,482,000 ------------- ------------- Total Liabilities 12,118,935 13,857,576 ------------- ------------- Minority interest in Local Limited Partnerships 426,367 432,469 ------------- ------------- General, Initial and Investor Limited Partners' Equity 17,150,190 17,316,902 Net unrealized gains on marketable securities 3,473 1,177 ------------- ------------- Total Partners' Equity 17,153,663 17,318,079 ------------- ------------- Total Liabilities and Partners' Equity $ 29,698,965 $ 31,608,124 ============= ============= The accompanying notes are an integral part of the combined financial statements. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997 1999 1998 1997 ------------- ------------- ------------ Revenue: Rental $ 1,802,684 $ 1,831,495 $ 1,846,570 Investment 93,535 108,299 130,027 Bad debt recoveries 119,331 - - Other 218,717 121,794 122,632 ------------- ------------- ------------- Total Revenue 2,234,267 2,061,588 2,099,229 ------------- ------------- ------------- Expenses: Asset management fees, related party (Note 5) 199,280 222,066 250,509 General and administrative (includes reimbursements to affiliate in the amounts of $108,586, $147,039 and $136,075 in 1999, 1998 and 1997, respectively) (Note 5) 268,965 348,400 462,680 Bad debt expense 12,792 176,648 300,835 Rental operations, exclusive of depreciation 871,715 1,025,546 1,170,804 Property management fees, related party (Note 5) 103,724 122,823 129,241 Interest (Note 7) 1,029,682 1,012,385 987,379 Provision for valuation of rental property - 181,098 791,830 Provision for valuation of investments in Local Limited Partnerships (Note 4) - 1,880,482 - Depreciation (Note 6) 587,103 658,377 746,829 Amortization 86,230 110,330 107,784 ------------- ------------- ------------- Total Expenses 3,159,491 5,738,155 4,947,891 ------------- ------------- ------------- Loss before equity in income (losses) of Local Limited Partnerships, minority interest, loss on liquidation of interests in Local Limited Partnerships and gain on transfer of assets (925,224) (3,676,567) (2,848,662) Equity in income (losses) of Local Limited Partnerships (Note 4) 33,851 (1,405,591) (2,747,270) Minority interest in losses of Local Limited Partnerships 139,073 81,241 92,152 Loss on liquidation of interests in Local Limited Partnerships (Note 10) (3,750) (3,922) - ------------- ------------- ------------- Net loss before gain on transfer of assets (756,050) (5,004,839) (5,503,780) Gain on transfer of assets 589,338 1,053,981 - ------------- ------------- ------------- Net Loss $ (166,712) $ (3,950,858) $ (5,503,780) ============= ============= ============= Net Loss allocated: General Partners $ (1,667) $ (39,509) $ (55,038) Limited Partners (165,045) (3,911,349) (5,448,742) ------------- ------------- ------------- $ (166,712) $ (3,950,858) $ (5,503,780) ============= ============= ============= BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) COMBINED STATEMENTS OF OPERATIONS (continued) FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997 1999 1998 1997 ------------- ------------- -------------- Net loss before gain on transfer of assets per Limited Partnership Unit (68,043 Units) $ (11.00) $ (72.82) $ (80.08) ============= ============= ============= Gain on transfer of assets per Limited Partnership Unit (68,043 Units) $ 8.57 $ 15.34 $ - ============= ============= ============= Net Loss per Limited Partnership Unit (68,043 Units) $ (2.43) $ (57.48) $ (80.08) ============= ============= ============= The accompanying notes are an integral part of the combined financial statements. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIENCY) FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997 Net Initial Investor Unrealized General Limited Limited Gains Partners Partners Partners (Losses) Total Balance at March 31, 1996 $ (323,370) $ 5,000 $ 27,089,910 $ 268 $ 26,771,808 ------------ --------- ------------- ---------- ------------ Comprehensive Loss: Net change in net unrealized gains on marketable securities available for sale - - - (5,520) (5,520) Net Loss (55,038) - (5,448,742) - (5,503,780) ------------ --------- ------------- ---------- ------------- Comprehensive Loss (55,038) - (5,448,742) (5,520) (5,509,300) ------------ --------- ------------- ---------- ------------- Balance at March 31, 1997 (378,408) 5,000 21,641,168 (5,252) 21,262,508 ------------ --------- ------------- ---------- ------------- Comprehensive Income (Loss): Net change in net unrealized losses on marketable securities available for sale - - - 6,429 6,429 Net Loss (39,509) - (3,911,349) - (3,950,858) ------------ --------- ------------- ---------- ------------- Comprehensive Income (Loss): (39,509) - (3,911,349) 6,429 (3,944,429) ------------ --------- ------------- ---------- ------------- Balance at March 31, 1998 (417,917) 5,000 17,729,819 1,177 17,318,079 ------------ --------- ------------- ---------- ------------- Comprehensive Income (Loss): Net change in net unrealized gains on marketable securities available for sale - - - 2,296 2,296 Net Loss (1,667) - (165,045) - (166,712) ------------ --------- ------------- ---------- ------------- Comprehensive Income (Loss) (1,667) - (165,045) 2,296 (164,416) ------------ --------- ------------- ---------- ------------- Balance at March 31, 1999 $ (419,584) $ 5,000 $ 17,564,774 $ 3,473 $ 17,153,663 ============ ========= ============= ========== ============= The accompanying notes are an integral part of the combined financial statements. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997 1999 1998 1997 ------------ ------------ ------------- Cash flows from operating activities Net Loss $ (166,712) $ (3,950,858) $ (5,503,780) Adjustments to reconcile net loss to net cash used for operating activities: Equity in income (losses) of Local Limited Partnerships (33,851) 1,405,591 2,747,270 Gain on transfer of assets (589,338) (1,053,981) - Loss on liquidation of interests in Local Limited Partnerships 3,750 3,922 - Cash distribution income included in cash distributions from Local Limited Partnerships (63,929) (64,034) (19,584) Provision for valuation of investments in Local Limited Partnerships - 1,880,482 - Other (1,026) (5,456) - Bad debt expense (recoveries) (106,539) 176,648 300,835 Provision for valuation of rental property - 181,098 791,830 Depreciation and amortization 673,333 768,707 854,613 (Gain) loss on sales and maturities of marketable securities (3,651) 1,902 1,310 Minority interest in losses of Local Limited Partnerships (139,073) (81,241) (92,152) Increase (decrease) in cash arising from changes in operating assets and liabilities: Accounts receivable, net 516 10,918 15,868 Tenant security deposits (8,255) 11,385 11,006 Mortgagee escrow deposits (2,854) (7,945) 6,867 Other assets (255,784) 3,983 (2,805) Accounts payable to affiliates (491,485) 205,805 250,503 Accounts payable and accrued expenses 38,235 81,313 (43,617) Interest payable 193,961 180,471 289,020 Tenant security deposits payable (4,402) (3,340) 4,004 ------------ ------------ ------------ Net cash used for operating activities (957,104) (254,630) (388,812) ------------ ------------ ------------ Cash flows from investing activities: Return of investment in Local Limited Partnership - - 3,331 Purchases of marketable securities (922,221) (623,364) (487,098) Proceeds from sales and maturities of marketable securities 1,210,375 698,632 852,443 Cash distributions received from Local Limited Partnerships 360,545 318,180 332,439 (Advances to) reimbursements from Local Limited Partnerships 351,625 42,133 (336,775) Purchase of rental property and equipment (89,348) (81,449) (127,283) ----------- ------------ ------------ Net cash provided by investing activities 910,976 354,132 237,057 ----------- ------------ ------------ BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) COMBINED STATEMENTS OF CASH FLOWS (Continued) FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997 1999 1998 1997 ------------ ------------ ------------- Cash flows from financing activities: Capital contributions received 92,221 92,221 92,221 Advances from affiliate 17,701 20,851 50,212 Payment of mortgage principal (88,784) (114,668) (116,976) ----------- ------------ ------------ Net cash provided by (used for) financing activities 21,138 (1,596) 25,457 ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents (24,990) 97,906 (126,298) Cash and cash equivalents, beginning 386,059 288,153 414,451 ------------ ------------ ------------ Cash and cash equivalents, ending $ 361,069 $ 386,059 $ 288,153 ============ ============ ============ Supplemental disclosure: Cash paid for interest $ 835,730 $ 831,914 $ 698,359 ============ ============ ============ Non-cash disclosure: See Note 10 for discussion on the transfers of certain Texas Partnerships. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS 1. Organization Boston Financial Qualified Housing Tax Credits L.P. IV (the "Partnership") was formed on March 30, 1989 under the laws of the Commonwealth of Massachusetts for the primary purpose of investing, as a limited partner, in other limited partnerships ("Local Limited Partnerships"), each of which own and operate apartment complexes, most of which benefit from some form of federal, state or local assistance program and each of which qualify for low-income housing tax credits. The Partnership's objectives are to: (i) provide current tax benefits in the form of tax credits which qualified investors may use to offset their federal income tax liability; (ii) preserve and protect the Partnership's capital; (iii) provide limited cash distributions which are not expected to constitute taxable income during Partnership operations; and iv) provide cash distributions from sale or refinancing transactions. The General Partners of the Partnership are Arch Street IV, Inc., which serves as the Managing General Partner, and Arch Street IV L.P., which also serves as the Initial Limited Partner. Both of the General Partners are affiliates of The Boston Financial Group Limited Partnership ("Boston Financial"). The fiscal year of the Partnership ends on March 31. The Partnership's partnership agreement ("Partnership Agreement") authorized the sale of up to 100,000 units of Limited Partnership Interest ("Units") at $1,000 per Unit, adjusted for certain discounts. The Partnership raised $67,653,000 ("Gross Proceeds"), net of discounts of $390,000, through the sale of 68,043 Units. Such amounts exclude five unregistered Units previously acquired for $5,000 by the Initial Limited Partner, which is also one of the General Partners. The offering of Units terminated on January 31, 1990. Generally, profits, losses, tax credits and cash flows from operations are allocated 99% to the Limited Partners and 1% to the General Partners. Net proceeds from a sale or refinancing will be allocated 95% to the Limited Partners and 5% to the General Partners, after certain priority payments. Under the terms of the Partnership Agreement, the Partnership initially designated 4% of the gross proceeds from the sale of Units as a Reserve for working capital of the Partnership and contingencies related to ownership of Local Limited Partnership interests. The Managing General Partner may increase or decrease such amounts from time to time, as it deems appropriate. At March 31, 1999, the Managing General Partner has designated approximately $809,000 of cash, cash equivalents and marketable securities as such Reserve. 2. Significant Accounting Policies Basis of Presentation and Combination The Partnership accounts for its investments in Local Limited Partnerships, with the exception of the Combined Entities (defined below), using the equity method of accounting, because the Partnership does not have a majority control over the major operating and financial policies of the Local Limited Partnerships in which it invests. Under the equity method, the investment is carried at cost, adjusted for the Partnership's share of net income or loss of the Local Limited Partnership, additional investments and cash distributions from the Local Limited Partnership. Equity in income or loss of the Local Limited Partnerships is included currently in the Partnership's operations. The Partnership has no obligation to fund liabilities of the Local Limited Partnerships beyond its investment; therefore, the Local Limited Partnership's investment will not be carried below zero. To the extent that equity losses are incurred or distributions received when the Partnership's respective carrying value of the Local Limited Partnership has been reduced to a zero balance, the losses will be suspended and offset against future income, and distributions received will be recorded as income. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 2. Significant Accounting Policies (continued) Basis of Presentation and Combination (continued) Excess investment costs over the underlying net assets acquired have arisen from acquisition fees paid and expenses reimbursed to an affiliate of the Partnership. These fees and expenses are included in the Partnership's Investments in Local Limited Partnerships and are being amortized on a straight-line basis over 35 years. The Managing General Partner has elected to report results of the Local Limited Partnerships on a 90 day lag basis, because the Local Limited Partnerships report their results on a calendar year basis. Accordingly, the financial information about the Local Limited Partnerships that is included in the accompanying combined financial statements is as of December 31, 1998, 1997 and 1996. On September 13, 1991, an affiliate of the Partnership's Managing General Partner, BF Leawood, Inc., became the General Partner of Leawood Associates, L.P. ("Leawood Manor"), a Local Limited Partnership in which the Partnership has invested. BF Leawood, Inc. replaced the previous management agent with Boston Financial Property Management, an affiliate of the Managing General Partner. Since the Local General Partner of Leawood Manor is now an affiliate of the Partnership and has a controlling financial interest, these combined financial statements include all financial activity of Leawood Manor for the years ended December 31, 1998, 1997 and 1996. All significant intercompany balances and transactions have been eliminated. On October 6, 1993, an affiliate of the Partnership's Managing General Partners, BF Texas Limited Partnership, became an additional Local General Partner with responsibility for all management decisions in twelve Local Limited Partnerships (the "Texas Partnerships") in which the Partnership has invested. Since the Local General Partner of the Texas Partnerships was an affiliate of the Partnership, and had a controlling financial interest in these Local Limited Partnerships, these combined financial statements included the financial activity of the twelve Texas Partnerships beginning in the year ended December 31, 1994. Prior to March 31, 1996, control of seven of these Texas Partnerships was transferred to unrelated parties, and as such, as of that date, these partnerships were accounted for on the equity method (see Note 10). During the years ended March 31, 1998 and 1997, the Partnership relinquished its interest in these seven Texas Partnerships. During the year ended March 31, 1998, the Partnership also relinquished its interest in three of the five remaining Texas Partnerships. During the year ended March 31, 1999, the Partnership relinquished its interest in one of the two remaining Texas Partnerships. As of March 31, 1999, the financial statements of the remaining Texas Partnership are combined with the Partnership's financial statements. All significant intercompany balances and transactions have been eliminated. The Partnership has elected to report the results of Leawood Manor and the Texas Partnerships on a 90 day lag basis, consistent with the presentation of the financial information of all Local Limited Partnerships. As used herein the "Combined Entities" refers to Leawood Manor and the Texas Partnerships, prior to the transfer of control referenced above. Loans and operating advances to Local Limited Partnerships ($36,233 and $19,947 during the years ended March 31, 1999 and 1998, respectively) are reflected as receivables. A bad debt allowance is provided for such loans and advances deemed uncollectible. The Partnership recognizes a decline in the carrying value of its investments in Local Limited Partnerships when there is evidence of a non-temporary decline in the recoverable amount of the investment. There is a possibility that the estimates relating to reserves for non-temporary declines in carrying value of investments in Local Limited Partnerships may be subject to material near term adjustments. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 2. Significant Accounting Policies (continued) Basis of Presentation and Combination (continued) The Partnership, as a limited partner in the Local Limited Partnerships, is subject to risks inherent in the ownership of property which are beyond its control, such as fluctuations in occupancy rates and operating expenses, variations in rental schedules, proper maintenance and continued eligibility for tax credits. If the cost of operating a property exceeds the rental income earned thereon, the Partnership may deem it in its best interest to voluntarily provide funds in order to protect its investment. Cash Equivalents Cash equivalents consist of short-term money market instruments with maturities of ninety days or less at acquisition and approximate fair value. Marketable Securities Marketable securities consist primarily of U.S. Treasury instruments and various asset-backed investment vehicles. The Partnership's marketable securities are classified as "Available for Sale" securities and reported at fair value as reported by the brokerage firm at which the securities are held. All marketable securities have fixed maturities. Realized gains and losses from the sales of securities are based on the specific identification method. Unrealized gains and losses are excluded from earnings and reported as a separate component of partners' equity. Effect of Recently Issued Accounting Standard The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. The standard requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The standard is effective for fiscal years beginning after December 15, 1997. The Partnership adopted the new standard effective April 1, 1998 and its adoption did not have a significant effect on the Partnership's financial position or results of operations. The only component of the Partnership's other accumulated comprehensive income is net unrealized gains and losses on marketable securities. Deferred Fees Costs incurred in connection with the organization of the Partnership amounting to $50,000 were deferred and amortized on a straight-line basis over 60 months. Leawood Manor's deferred charges consist of financing fees, which are being amortized using the straight-line method over the term of the related debt. Rental Property Real estate and personal property of the Combined Entities are recorded at cost. The Combined Entities provide for depreciation using various methods over their estimated useful lives. In accordance with Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Partnership has implemented policies and practices for assessing impairment of its real estate assets and investments in Local Limited Partnerships. Each asset is analyzed by real estate experts to determine if an impairment indicator exists. If so, the carrying value is compared to the undiscounted future cash flows expected to be derived from the asset and, if there is a significant impairment in value, a provision to write down the asset to fair value will be charged against income. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 2. Significant Accounting Policies (continued) Rental Income Rental income, principally from short-term leases on the Combined Entities' apartment units, is recognized as income under the accrual method as the rentals become due. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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. Fair Value of Financial Instruments Statements of Financial Accounting Standards No. 107 ("SFAS No. 107"), Disclosures About Fair Value of Financial Instruments, requires disclosure for the fair value of most on- and off-balance sheet financial instruments for which it is practicable to estimate that value. The scope of SFAS No. 107 excludes certain financial instruments, such as trade receivables and payables when the carrying value approximates the fair value and investments accounted for under the equity method, and all nonfinancial assets, such as real property. Except as discussed in Note 7, the fair values of the Partnership's assets and liabilities, which qualify as financial instruments under SFAS No. 107, approximate their carrying amounts in the accompanying balance sheets. Income Taxes No provision for income taxes has been made, as the liability for such taxes is the obligation of the partners of the Partnership. Reclassifications Certain amounts in prior years' financial statements have been reclassified herein to conform to the current year presentation. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 3. Marketable Securities A summary of marketable securities is as follows: Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value Debt securities issued by the US Treasury and other US government corporations and agencies $ 596,872 $ 1,526 $ (352) $ 598,046 Mortgage backed securities 103,297 2,299 - 105,596 ----------- ---------- -------- ----------- Marketable securities at March 31, 1999 $ 700,169 $ 3,825 $ (352) $ 703,642 =========== ========== ======== =========== Debt securities issued by the US Treasury and other US government corporations and agencies $ 836,320 $ 1,298 $ (2,249) $ 835,369 Mortgage backed securities 148,352 2,128 - 150,480 ----------- ---------- -------- ----------- Marketable securities at March 31, 1998 $ 984,672 $ 3,426 $ (2,249) $ 985,849 =========== ========== ======== =========== The contractual maturities at March 31, 1999 are as follows: Fair Cost Value Due in less than one year $ 347,165 $ 347,202 Due in one to five years 249,707 250,844 Mortgage backed securities 103,297 105,596 ----------- ----------- $ 700,169 $ 703,642 =========== =========== Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations. Proceeds from sales of marketable securities were approximately $679,000, $382,000 and $560,000 during the fiscal years ended March 31, 1999, 1998 and 1997, respectively. Proceeds from the maturities of marketable securities were approximately $531,000, $317,000 and $292,000 during the fiscal years ended March 31, 1999, 1998 and 1997, respectively. Included in investment income are gross gains of $4,891, $1,041 and $4,471 and gross losses of $1,239, $2,943 and $5,781 that were realized on the sales during the fiscal years ended March 31, 1999, 1998 and 1997, respectively. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 4. Investments in Local Limited Partnerships The Partnership uses the equity method to account for its limited partnership interests in twenty-five Local Limited Partnerships (excluding the Combined Entities) which own and operate multi-family housing complexes, most of which are government-assisted. The Partnership, as Investor Limited Partner pursuant to the various Local Limited Partnership Agreements which contain certain operating and distribution restrictions, has acquired a 99% interest in the profits, losses, tax credits and cash flows from operations of each of the Local Limited Partnerships. Upon dissolution, proceeds will be distributed according to each respective partnership agreement. The following is a summary of investments in Local Limited Partnerships, excluding the Combined Entities, at March 31: 1999 1998 1997 ------------- ------------- ------------- Capital contributions paid to Local Limited Partnerships and purchase price paid to withdrawing partners of Local Limited Partnerships $ 41,688,356 $ 43,001,951 $ 43,318,237 Cumulative equity in losses of Local Limited Partnerships (excluding cumulative unrecognized losses of $8,811,999, $2,445,394 and $895,873 for the years ended 1999, 1998 and 1997, respectively) (24,770,928) (25,573,556) (24,452,001) Cash distributions received from Local Limited Partnerships (2,128,254) (1,808,459) (1,490,279) ------------- ------------- ------------- Investments in Local Limited Partnerships before adjustment 14,789,174 15,619,936 17,375,957 Excess of investment cost over the underlying net assets acquired: Acquisition fees and expenses 2,999,362 3,025,727 3,031,645 Accumulated amortization of acquisition fees and expenses (670,904) (634,944) (570,964) ------------- ------------- ------------- Investments in Local Limited Partnerships 17,117,632 18,010,719 19,836,638 Reserve for valuation of investments in Local Limited Partnerships (2,094,646) (2,724,482) (945,277) ------------- ------------- ------------- $ 15,022,986 $ 15,286,237 $ 18,891,361 ============= ============= ============= At March 31, 1999, the Partnership has provided for a reserve for valuation for its investment in two Local Limited Partnerships, Bentley Court and Sencit Townhouse, because there is evidence of non-temporary declines in the recoverable amount of these investments. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 4. Investments in Local Limited Partnerships (continued) Summarized financial information as of December 31, 1998, 1997 and 1996 (due to the Partnership's policy of reporting the financial information of its Local Limited Partnership interests on a 90 day lag basis) of all the Local Limited Partnerships in which the Partnership has invested as of that date (excluding the Combined Entities) is as follows: Summarized Balance Sheets - as of December 31, 1998 1997 1996 ---------------- --------------- --------------- Assets: Rental property, net $ 103,820,897 $ 114,216,561 $ 119,968,771 Current assets 4,473,619 4,386,715 4,512,930 Other assets, net 10,293,049 11,196,370 11,160,325 Total Assets ---------------- --------------- --------------- $ 129,799,646 $ 135,642,026 $ 118,587,565 ================ =============== =============== Liabilities and Partners' Equity: Mortgages payable, net of current portion $ 92,036,400 $ 95,338,576 $ 98,043,569 Other liabilities 9,448,555 8,068,167 9,238,211 Current liabilities (includes current portion of mortgage payable) 7,118,446 8,647,970 7,371,825 ---------------- --------------- --------------- Total Liabilities 108,603,401 112,054,713 114,653,605 ---------------- --------------- --------------- Partners' Equity: Partnership's equity 5,812,380 13,407,318 16,613,767 Other partners' equity 4,171,784 4,337,615 4,374,654 ---------------- --------------- --------------- Total Partners' Equity 9,984,164 17,744,933 20,988,421 ---------------- --------------- --------------- Total Liabilities and Partners' Equity $ 118,587,565 $ 129,799,646 $ 135,642,026 ================ =============== =============== Summarized Income Statements - for the years ended December 31, Rental and other revenue $ 19,849,782 $ 20,094,050 $ 19,632,293 ---------------- --------------- --------------- Expenses: Operating expenses 11,511,920 10,525,127 10,458,548 Interest expense 6,969,702 7,356,242 7,621,226 Depreciation and amortization 4,675,417 4,807,406 4,847,371 Provisions for valuation of real estate 3,078,687 - - ---------------- --------------- --------------- Total Expenses 26,235,726 22,688,775 22,927,145 ---------------- --------------- --------------- Net Loss $ (6,385,944) $ (2,594,725) $ (3,294,852) ================ =============== =============== Partnership's share of Net Loss $ (6,322,085) $ (2,891,078) $ (3,606,691) ================ =============== =============== Other partners' share of Net Loss $ (63,859) $ 296,353 $ 311,839 ================ =============== =============== The summarized financial information of the Local Limited Partnerships above does not include Leawood Manor and the Texas Partnerships for the years ended December 31, 1998, 1997 and 1996. The balance sheets and statements of operations of these Local Limited Partnerships are combined with the Partnership's financial statements through the date that these partnerships were transferred (see Note 10). BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 4. Investments in Local Limited Partnerships (continued) For the fiscal years ended March 31, 1999, 1998 and 1997, the Partnership has not recognized $6,375,605, $1,549,521 and $879,005, respectively, of equity in losses relating to twelve Local Limited Partnerships where cumulative equity in losses and cumulative distributions exceeded its total investments in these Local Limited Partnerships. The Partnership's equity as reflected by the Local Limited Partnerships of $5,812,380 differs from the Partnerships Investment in Local Limited Partnerships before adjustment of $14,789,174 primarily because of unrecognized losses as described above. 5. Transactions with Affiliates In accordance with the Partnership Agreement, the Partnership was required to pay certain fees to and reimburse expenses of the Managing General Partner and others in connection with the organization of the Partnership and the offering of Limited Partnership Units. Selling commissions and other issuance expenses aggregating $8,351,601 have been charged directly to Limited Partners' Equity. Total organizational and offering expenses exclusive of selling commissions did not exceed 5.5% of the gross offering proceeds, and organizational and offering expenses inclusive of selling commissions did not exceed 15% of the gross offering proceeds. In accordance with the Partnership Agreement, the Partnership was required to pay acquisition fees to and reimburse acquisition expenses of the Managing General Partner or its affiliates for selecting, evaluating, structuring, negotiating and closing the Partnership's investments in Local Limited Partnerships. Acquisition fees totaled 7.5% of the gross offering proceeds, and acquisition expenses did not exceed 1.75% of the gross offering proceeds. Acquisition fees totaling $5,080,756 have been paid to an affiliate of the Managing General Partner for the closing of the Partnership's Local Limited Partnership Investments. Approximately $2,125,000 of these fees are classified as capital contributions to Local Limited Partnerships in the summary of Investments in Local Limited Partnerships in Note 4 to the Combined Financial Statements. Acquisition expenses totaling $974,240 were incurred and have been reimbursed to an affiliate of the Managing General Partner. An affiliate of the Managing General Partner currently receives $7,467 (as adjusted by the CPI factor) per Local Limited Partnership annually as the Asset Management Fee for administering the affairs of the Partnership. Included in the Combined Statements of Operations are Asset Management Fees of $199,280, $222,066 and $250,509 for the years ended March 31, 1999, 1998 and 1997, respectively. Payables to an affiliate of the Managing General Partner relating to the aforementioned fees and expenses aggregate $50,402 and $536,918 at March 31, 1999 and 1998, respectively. An affiliate of the Managing General Partner is reimbursed for the actual cost of the Partnership's operating expenses. Included in general and administrative expenses for the years ended March 31, 1999, 1998 and 1997 is $108,586, $147,039 and $136,075, respectively, that has been paid or is payable by the Partnership as reimbursement for salaries and benefits. At March 31, 1999 and 1998, $21,138 and $18,442, respectively, is payable to an affiliate of the Managing General Partner. Boston Financial Property Management ("BFPM"), an affiliate of the Managing General Partner, is the management agent for Oakview Square, Whitehills II Apartments, Orchard View and Canfield Crossing, properties in which the Partnership invested. The property management fee charged is 5% of properties' gross revenues. Included in operating expenses in the summarized income statements in Note 4 to the Combined Financial Statements is $73,989, $77,411 and $65,926 of fees earned by BFPM for the years ended December 31, 1998, 1997 and 1996. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 5. Transactions with Affiliates (continued) Additionally, BFPM is the management agent of the Texas Partnerships and Leawood Manor, properties in which the Partnership has invested. The property management fee charged is 5% of the properties' gross revenues. Included in the Combined Statements of Operations for the years ended March 31, 1999, 1998 and 1997 is $103,724, $122,823 and $129,241, respectively, of fees earned by BFPM during the years ended December 31, 1998, 1997 and 1996, respectively. Included in accounts payable to affiliates at March 31, 1999 and 1998 is $7,061 and $16,014, respectively, of property management fees due to an affiliate of the Managing General Partner. 6. Rental Property Real estate and personal property belonging to the Combined Entity are recorded at cost, the components of which, excluding certain acquisition costs of $644,180 and $672,818 as of December 31, 1998 and 1997, respectively, paid by the Partnership and included in basis, are as follows at December 31: 1998 1997 ------------ ------------ Land $ 1,268,099 $ 1,097,749 Building and improvements, net of impairment write-down 15,731,509 17,041,167 Equipment 774,723 925,330 ------------ ------------ 17,774,331 19,064,246 Less: accumulated depreciation 5,502,257 5,217,693 ------------ ------------ Total $ 12,272,074 $ 13,846,553 ============ ============ During the year ended December 31, 1997, an impairment loss of $181,098 was recognized on the real estate in the Texas Partnerships, which reduced the carrying values of the Texas Partnerships to approximately $2,249,000. For the year ended December 31, 1997, the net operating results of the Texas Partnerships increased the loss of the Partnership (prior to impairment losses) by $253,291. See Note 10 for further details on the liquidation of the interests in the Texas Partnerships. 7. Mortgage Notes Payable Leawood Manor The amended and restated mortgage note as of December 31, 1998 and 1997 is payable in the outstanding amount of $7,415,445 and $7,471,460, respectively, by Leawood Manor in monthly installments of $77,850 for principal and interest in arrears, with interest accrued at an annual rate of 11.75%. Interest is payable monthly at the rate of 8% per annum plus 95% of the net cash flows as defined by the mortgage agreement. Under the terms of the agreement, the difference in the interest payments at the contract rate of 11.75% and the reduced payment rates will accrue interest at the rate of 8%, which will be payable from 95% of net cash flows, if available, or upon maturity of the note. On July 10, 1999 the reduced payment rate is scheduled to increase to 10%. The note matures in July 2006 and is collateralized by the property. The terms of the mortgage note and other contract documents require the establishment of restricted deposits and funded reserves to be held and invested by the mortgagee. These financial instruments potentially subject Leawood Manor to a concentration of credit risk. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 7. Mortgage Notes Payable (continued) Subequent to December 31, 1998, Leawood Manor entered into a mortgage agreement with Northern Financial Company to pay off the first mortgage. The new mortgage, having a principal sum of $8,350,000, will be payable in monthly installments of $53,659 of principal and interest in arrears, with interest accrued at an annual rate of 6.66%. The first mortgage payment is due March 1, 1999 and the mortgage matures on February 1, 2009 with any remaining principal and interest due at the time. A prepayment premium shall be payable in connection with any prepayment made under the mortgage as described in the agreement. The liability of Leawood Manor under the mortgage will be limited to the underlying value of the real estate collateral plus other amounts deposited with the lender. Aggregate annual maturities of the new mortgage payable over each of the next five years are as follows: December 31, 1999 $ 62,963 2000 70,813 2001 79,552 2002 89,420 2003 100,511 As the terms of the mortgage were modified under current market conditions, management believes carrying value of the note approximates fair value as of March 31, 1999. Texas Partnerships The Texas Partnerships and RECD have entered into Interest Credit and Rental Assistance Agreements that have stated interest rates ranging from 9.5% to 7.25% and provide for an effective interest rate on the notes payable to FmHA of 1 percent, plus all rental income over basic rents as determined by the government (overages) with maturities ranging from 2016 to 2030. All notes are collateralized by the respective properties. The principal balances of the Texas Partnerships' mortgage notes at December 31, 1998 and 1997 are $1,131,757 and $2,249,399, respectively. The remaining mortgage is currently in default and, as a result, the entire balance is classified as current. During May 1999, this mortgage was transferred to an unaffiliated entity (see Note 11). The Partnership believes it is not practical to estimate the fair value of these mortgage notes payable because loans with similar characteristics are not currently available to the Partnership. 8. Payable to Developer Under the terms of Leawood Manor's development agreement, the Developer had agreed to advance to the property such funds as may be required to pay certain operating expenses. Any funds so advanced were to be repaid by Leawood Manor only in certain circumstances. The amount payable to the Developer at December 31, 1997 represented the net amount advanced to Leawood Manor under this agreement, the rights to which had been assigned to the general partner of Leawood Manor. During 1998, this debt was forgiven by the general partner. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 9. Litigation The IRS finalized its report from an audit of the 1993 tax return for the project. The IRS report includes the questioning of the treatment of certain items and findings for non-compliance in 1993. Management understands that the audit now also focuses on 1994 and 1995 tax credits. On behalf of the Partnership, the Managing General Partner hired attorneys to appeal the findings in the IRS report in order to minimize the loss of credits. In June 1999, the Managing General Partner was informed that the Local General Partner for this property was indicted on various criminal charges. The Local General Partner pleaded guilty to two of these counts and is now awaiting sentencing. In the opinion of management, there is a risk that Bentley Court and, consequently, the Partnership will suffer some tax credit recapture or credit disallowance. However, management cannot quantify the risk at this time. The Partnership is not a party to any other pending legal or administrative proceeding, and to the best of its knowledge, no legal or administrative proceeding is threatened or contemplated against it. 10. Transfer and Liquidation of Interests in Local Limited Partnerships The Managing General Partner has transferred all of the assets of eleven of the Texas Partnerships, subject to their liabilities, to unaffiliated entities. The transfers of Grandview Terrace Apartments, Pecan Hills Apartment, Seagraves Garden Apartments, Hilltop Apartments and Bent Tree Housing were effective February 21, 1996, February 29, 1996, March 8, 1996, June 6, 1996 and November 20, 1996, respectively. Justin Place Apartments and Valley View Apartments were transferred July 9, 1997, Nacona Terrace Apartments and Royal Creste Apartments were transferred August 6, 1997 and Pine Manor Apartments was transferred on October 28, 1997. Pinewood Terrace Apartments was transferred on July 7, 1998. For financial reporting purposes, a loss on liquidation of interests in Local Limited Partnerships of $3,750 and a gain on transfer of assets of $589,338 were recognized in the year ended March 31, 1999 as a result of the transfer of Pinewood Terrace Apartments. For financial reporting purposes, a loss on liquidation of interests in Local Limited Partnerships of $3,922 and a gain on transfers of assets of $1,053,981 were recognized in the year ended March 31, 1998 as a result of the transfer of Justin Place Apartments, Valley View Apartments and Pine Manor Apartments. The loss on the transfers of Nacona Terrace Apartments and Royal Creste Apartments were previously reserved for in the provision for valuation of investments in Local Limited Partnerships. On November 10, 1997, the Managing General Partner transferred 50% of its interest in capital and profits of BK Apartments to an affiliate of the local general partner. Included in this transfer is a put option. The put option grants the Managing General Partner the right to put the Partnership's remaining interest to the local general partner anytime after one year has elapsed. For financial reporting purposes, the Partnership has written-down the carrying value of this investment in Local Limited Partnership to zero because it is unknown as to whether the Partnership will be able to recover its remaining invested balance. The Partnership will retain its full share of tax credits until such time as the remaining interest is put to the local general partner. For tax purposes, these events will result in both Section 1231 Gain and cancellation of indebtedness income. In addition, the transfer of ownership will result in a nominal amount of recapture of tax credits, since the Texas Partnerships represent only 3% of the Partnership's tax credits. 11. Subsequent Event In May 1999, the Partnership transferred all of the assets of the remaining Texas Partnership, Gateway Village, to an unaffiliated entity. The assets were transferred subject to the related liabilities and the Partnership no longer retains any ownership in the property. This event will result in both section 1231 Gain and cancellation of indebtedness income. In addition, the transfer of ownership will result in a nominal amount of tax credit recapture. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 12. Federal Income Taxes A reconciliation of the net loss reported in the Combined Statements of Operations for the fiscal years ended March 31, 1999, 1998 and 1997 to the net loss reported for federal income tax purposes for the years ended December 31, 1998, 1997 and 1996 is as follows: 1999 1998 1997 ------------- ------------ ------------ Net Loss per Statement of Operations $ (166,712) $ (3,950,858) $ (5,503,780) Amortization of acquisition fees and expenses not deductible for tax purposes 66,124 90,224 92,053 Adjustment for equity in losses of Local Limited Partnerships for financial reporting purposes over (under) equity in losses for tax purposes 1,924,525 (784,701) 499,384 Equity in losses of Local Limited Partnerships not recognized for financial reporting purposes (6,056,827) (1,549,521) (879,005) Provision (recovery) for valuation of investment in Local Limited Partnership not deductible/taxable for tax purposes (309,778) 1,880,482 - Operating expenses not deductible in current year for tax purposes 157,966 253,468 507,615 Operating expenses paid in current year but expensed for financial reporting purposes in prior year (685,796) - (62,752) Adjustment to reflect March 31 fiscal year end to December 31 tax year end (635,480) (236,277) 40,206 Other (60,179) (79,696) (145,350) ------------- ------------ ------------ Net Loss for federal income tax purposes $ (5,766,157) $ (4,376,879) $(5,451,629) ============= ============ =========== The differences in the assets and liabilities of the Partnership for financial reporting purposes and tax reporting purposes for the year ended March 31, 1999 are as follows: Financial Tax Reporting Reporting Purposes Purposes Differences Investments in Local Limited Partnerships $ 15,022,986 $ 12,770,183 $ 2,252,803 ============== ============= ============= Other assets $ 14,675,979 $ 9,149,622 $ 5,526,357 ============== ============= ============= Liabilities $ 12,118,935 $ 115,520 $ 12,003,415 ============== ============= ============= The differences in the assets and liabilities of the Partnership for financial reporting purposes are primarily attributable to: (i) for financial reporting purposes, the Partnership combines the financial statements of two Local Limited Partnerships with its financial statements; for tax reporting purposes, these entities are carried on the equity method; (ii) the Partnership has not recognized approximately $8,502,000 of equity in losses relating to twelve Local Limited Partnerships whose cumulative equity in losses exceeded their total investments; (iii) the Partnership has provided a reserve for valuation of approximately $1,785,000 against two of its investments in Local Limited Partnerships for financial reporting purposes; (iv) approximately $895,000 of amortization has been deducted for financial reporting purposes only; (v) $110,000 of cash distributions received from Local Limited Partnerships during the quarter ended March 31, 1999 are not included in the Partnership's Investments in Local Limited Partnerships for tax reporting purposes at December 31, 1998; and (vi) organizational and offering costs of approximately $8,352,000 have been capitalized for tax reporting purposes but are charged to Limited Partners' equity for financial reporting purposes. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 12. Federal Income Taxes (continued) The differences in the assets and liabilities of the Partnership for financial reporting purposes and tax reporting purposes for the year ended March 31, 1998 are as follows: Financial Tax Reporting Reporting Purposes Purposes Differences Investments in Local Limited Partnerships $ 15,286,237 $ 17,507,057 $ (2,220,820) ============== ============ ============= Other assets $ 16,321,887 $ 10,150,731 $ 6,171,156 ============== ============ ============= Liabilities $ 13,857,576 $ 87,346 $ 13,770,230 ============== ============ ============= The differences in the assets and liabilities of the Partnership for financial reporting purposes are primarily attributable to: (i) for financial reporting purposes, the Partnership combines the financial statements of three Local Limited Partnerships with its financial statements; for tax reporting purposes, these entities are carried on the equity method; (ii) the Partnership has not recognized approximately $2,445,000 of equity in losses relating to ten Local Limited Partnerships whose cumulative equity in losses exceeded their total investments; (iii) the Partnership has provided a reserve for valuation of approximately $2,724,000 against two of its investments in Local Limited Partnerships for financial reporting purposes; (iv) approximately $836,000 of amortization has been deducted for financial reporting purposes only; (v) $110,000 of cash distributions received from Local Limited Partnerships during the quarter ended March 31, 1998 are not included in the Partnership's Investments in Local Limited Partnerships for tax reporting purposes at December 31, 1997; and (vi) organizational and offering costs of approximately $8,352,000 have been capitalized for tax reporting purposes but are charged to Limited Partners' equity for financial reporting purposes. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 13. Supplemental Combining Schedules Balance Sheets Boston Financial Qualified Housing Tax Credits Combined Combined L.P. IV (A) Entities (B) Eliminations (A) Assets Cash and cash equivalents $ 243,072 $ 117,997 $ - $ 361,069 Marketable securities, at fair value 703,642 - - 703,642 Accounts receivable, net 392,056 11,284 (371,989) 31,351 Tenant security deposits - 92,851 - 92,851 Investments in Local Limited Partnerships, net 15,996,670 - (973,684) 15,022,986 Rental property at cost, net of accumulated depreciation - 12,272,074 644,180 12,916,254 Mortgagee escrow deposits - 117,008 - 117,008 Deferred charges, net - 168,970 - 168,970 Other assets 6,287 278,547 - 284,834 --------------- --------------- ------------- -------------- Total Assets $ 17,341,727 $ 13,058,731 $ (701,493) $ 29,698,965 =============== =============== ============= ============== Liabilities and Partners' Equity Mortgage notes payable $ - $ 8,547,201 $ - $ 8,547,201 Accounts payable to affiliates 71,540 404,724 (371,989) 104,275 Accounts payable and accrued expenses 116,524 134,934 - 251,458 Interest payable - 655,016 - 655,016 Tenant security deposits payable - 78,985 - 78,985 Payable to affiliated developer - 2,482,000 - 2,482,000 --------------- --------------- ------------- -------------- Total Liabilities 188,064 12,302,860 (371,989) 12,118,935 --------------- --------------- ------------- -------------- Minority interest in Local Limited Partnerships - - 426,367 426,367 --------------- --------------- ------------- -------------- General, Initial, and Investor Limited Partners' Equity 17,150,190 755,871 (755,871) 17,150,190 Net unrealized gains on marketable securities 3,473 - - 3,473 --------------- --------------- ------------- -------------- Total Partners' Equity 17,153,663 755,871 (755,871) 17,153,663 --------------- --------------- ------------- -------------- Total Liabilities and Partners' Equity $ 17,341,727 $ 13,058,731 $ (701,493) $ 29,698,965 =============== =============== ============= ============== (A) As of March 31, 1999. ( B) As of December 31, 1998 - See Note 2. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 13. Supplemental Combining Schedules (continued) Statements of Operations Boston Financial Qualified Housing Tax Credits Combined Combined L.P. IV (A) Entities (B) Eliminations (A) Revenue: Rental $ - $ 1,802,684 $ - $ 1,802,684 Investment 65,213 28,322 - 93,535 Bad debt recoveries 119,331 - - 119,331 Other 174,654 44,063 - 218,717 --------------- --------------- ------------- ------------ Total Revenue 359,198 1,875,069 - 2,234,267 --------------- --------------- ------------- ------------ Expenses: Asset management fees, related party 199,280 - - 199,280 General and administrative 268,965 - - 268,965 Bad debt expense 12,792 - - 12,792 Rental operations, exclusive of depreciation - 871,715 - 871,715 Property management fees, related party - 103,724 - 103,724 Interest - 1,029,682 - 1,029,682 Depreciation - 587,103 - 587,103 Amortization 66,124 20,106 - 86,230 --------------- --------------- ------------- ------------ Total Expenses 547,161 2,612,330 - 3,159,491 --------------- --------------- ------------- ------------ Loss before equity in income of Local Limited Partnerships, minority interest, loss on liquidation of interests in Local Limited Partnerships and extraordinary item (187,963) (737,261) - (925,224) Equity in income of Local Limited Partnerships 25,001 - 8,850 33,851 Minority interest in losses of Local Limited Partnerships - - 139,073 139,073 Loss on liquidation of interests in Local Limited Partnerships (3,750) - - (3,750) --------------- --------------- ------------- ------------ Net Loss before gain on transfer (166,712) (737,261) 147,923 (756,050) Gain on transfer of assets - 589,338 - 589,338 --------------- --------------- ------------- ------------ Net Loss $ (166,712) $ (147,923) $ 147,923 $ (166,712) =============== =============== ============= ============ (A) For the year ended March 31, 1999. (B) For the year ended December 31, 1998- See Note 2. BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 13. Supplemental Combining Schedules (continued) Statements of Cash Flows Boston Financial Qualified Housing Tax Credits Combined Combined L.P. IV (A) Entities (B) Eliminations (A) Cash flows from operating activities: Net Loss $ (166,712) $ (147,923) $ 147,923 $ (166,712) Adjustments to reconcile net loss to net cash used for operating activities: Equity in losses of Local Limited Partnerships (25,001) - (8,850) (33,851) Gain on transfer of assets - (589,338) - (589,338) Loss on liquidation of interests in Local Limited Partnerships 3,750 - - 3,750 Cash distribution income included in cash distributions from Local Limited Partnerships (63,929) - - (63,929) Other - (1,026) - (1,026) Bad debt expense (recoveries) (106,539) - - (106,539) Depreciation and amortization 66,124 607,209 - 673,333 Gain on sale of marketable securities (3,651) - - (3,651) Minority interest in losses of Local Limited Partnerships - - (139,073) (139,073) Increase (decrease) in cash arising from changes in operating assets and liabilities Accounts receivable, net - 516 - 516 Tenant security deposits - (8,255) - (8,255) Mortgagee escrow deposits - (2,854) - (2,854) Other assets 13,398 (269,182) - (255,784) Accounts payable to affiliates (483,820) (7,665) - (491,485) Accounts payable and accrued expenses 14,787 23,448 - 38,235 Interest payable - 193,961 - 193,961 Tenant security deposits payable - (4,402) - (4,402) --------------- --------------- ------------- ------------ Net cash used for operating activities (751,593) (205,511) - (957,104) --------------- --------------- ------------- ------------ Cash flows from investing activities: Purchases of marketable securities (922,221) - - (922,221) Proceeds from sales and maturities of marketable securities 1,210,375 - - 1,210,375 Cash distributions received from Local Limited Partnerships 360,545 - - 360,545 BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS L.P. IV (A Limited Partnership) NOTES TO THE COMBINED FINANCIAL STATEMENTS (continued) 13. Supplemental Combining Schedules (continued) Statements of Cash Flows (continued) Boston Financial Qualified Housing Tax Credits Combined Combined L.P. IV (A) Entities (B) Eliminations (A) Reimbursements from Local Limited Partnerships 73,158 - 278,467 351,625 Purchase of rental property and equipment - (89,348) - (89,348) --------------- --------------- ------------- ------------ Net cash provided by (used for) investing activities 721,857 (89,348) 278,467 910,976 --------------- --------------- ------------- ------------ Cash flows from financing activities: Capital contributions received - 92,221 - 92,221 Advances from affiliate - 296,168 (278,467) 17,701 Payment of mortgage principal - (88,784) - (88,784) --------------- --------------- ------------- ------------ Net cash provided by financing activities - 299,605 (278,467) 21,138 --------------- --------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents (29,736) 4,746 - (24,990) Cash and cash equivalents, beginning 272,808 113,251 - 386,059 --------------- --------------- ------------- ------------ Cash and cash equivalents, ending $ 243,072 $ 117,997 $ - $ 361,069 =============== =============== ============= ============ (A) For the year ended March 31, 1999. (B) For the year ended December 31, 1998- See Note 2. Boston Financial Qualified Housing Tax Credits L. P. IV Schedule III - Real Estate and Accumulated Depreciation of Property owned by Local Limited Partnerships in which Registrant has invested at March 31, 1999 GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, COST OF INTEREST AT 1998 ACQUISITION DATE ------------------------------- -------------- NET IMPROVEMENTS NUMBER TOTAL CAPITALIZED OF ENCUM- BUILDING AND SUBSEQUENT TO DESCRIPTION UNITS BRANCES * LAND IMPROVEMENTS ACQUISITION LAND - ----------- ----- --------- ---- ------------ ----------- ---- Low and Moderate Income Apartment Complexes Brooks Crossing Apartments 224 $5,466,174 $878,034 $4,468,624 $3,978,671 $878,034 Atlanta, GA Willow Ridge 134 3,055,082 345,600 4,722,160 (444,082) 345,600 Prescott, AZ Dorsett Apartments 58 2,141,401 38,599 2,617,152 3,569,965 42,112 Philadelphia, PA Hampton Lane Apartments 24 715,816 15,120 25,930 849,554 33,397 Buena Vista, GA Audubon Apartments 37 3,088,524 0 1,714,176 907,636 0 Boston, MA Sencit Towne House 201 6,588,586 371,854 9,716,234 825,664 371,854 Shillington, PA Allentown Towne House 160 6,499,758 236,460 7,917,331 380,740 238,945 Allentown, PA Prince Street Housing 201 7,846,424 371,734 9,788,527 657,162 371,734 Lancaster, PA Hilltop Apartments (A) 0 0 8,683 389,661 (398,344) 0 Rhome, TX Royal Crest Apartments (B) 0 0 13,985 906,750 (920,735) 0 Bowie, TX Pine Manor Apart. (B) 0 0 19,991 0 (19,991) 0 Jacksonboro, TX Bryson Place (A) 0 0 1,200 0 (1,200) 0 Bryson, TX Leawood Manor** 254 7,415,444 971,742 12,044,206 3,383,696 1,127,463 Kansas City, KS Pinewood Terrace I (C) 0 0 6,897 1,400,102 (1,406,999) 0 Rusk, TX Valley View Apts (B) 0 0 4,835 466,237 (471,072) 0 Valley View, TX Grandview Apartments (A) 0 0 8,660 0 (8,660) 0 Grandview, TX Bent Tree Apts (A) 0 0 14,533 0 (14,533) 0 Jacksonboro, TX Bentley Court 273 6,868,868 0 0 13,362,725 1,679,225 Columbia, SC Nocona Terrace (B) 0 0 7,050 741,550 (748,600) 0 Nocona, TX Boston Financial Qualified Housing Tax Credits L. P. IV Schedule III - Real Estate and Accumulated Depreciation of Property owned by Local Limited Partnerships in which Registrant has invested at March 31, 1999 GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1998 --------------------------------------------------- LIFE ON WHICH DEPRECIATION BUILDING AND ACCUMULATED DATE IS COMPUTED DATE DESCRIPTION IMPROVEMENTS TOTAL DEPRECIATION BUILT (YEARS) ACQUIRED - ----------- ------------ ----- ------------ ----- ------- -------- Low and Moderate Income Apartment Complexes Brooks Crossing Apartments $8,447,295 $9,325,329 $2,783,624 1990 various 06/30/89 Atlanta, GA Willow Ridge 4,278,078 4,623,678 1,052,243 1989 various 8/28/89 Prescott, AZ Dorsett Apartments 6,183,604 6,225,716 1,217,758 1990 various 10/20/89 Philadelphia, PA Hampton Lane Apartments 857,207 890,604 293,174 1990 various 12/20/89 Buena Vista, GA Audubon Apartments 2,621,812 2,621,812 1,300,807 1990 various 12/22/89 Boston, MA Sencit Towne House 10,541,898 10,913,752 2,916,228 1989 various 12/26/89 Shillington, PA Allentown Towne House 8,295,586 8,534,531 2,072,547 1989 various 12/26/89 Allentown, PA Prince Street Housing 10,445,689 10,817,423 2,710,781 1989 various 12/26/89 Lancaster, PA Hilltop Apartments (A) 0 0 0 1989 N/A 12/27/89 Rhome, TX Royal Crest Apartments (B) 0 0 0 1989 various 12/27/89 Bowie, TX Pine Manor Apart. (B) 0 0 0 1989 various 12/27/89 Jacksonboro, TX Bryson Place (A) 0 0 0 1990 N/A 12/28/89 Bryson, TX Leawood Manor** 15,272,181 16,399,644 5,253,564 1989 various 12/29/89 Kansas City, KS Pinewood Terrace I (C) 0 0 0 1989 various 12/27/89 Rusk, TX Valley View Apts (B) 0 0 0 1989 various 12/27/89 Valley View, TX Grandview Apartments (A) 0 0 0 1990 N/A 12/27/89 Grandview, TX Bent Tree Apts (A) 0 0 0 1989 N/A 12/27/89 Jacksonboro, TX Bentley Court 11,683,500 13,362,725 4,212,297 1990 various 12/26/89 Columbia, SC Nocona Terrace (B) 0 0 0 1989 various 12/27/89 Nocona, TX Boston Financial Qualified Housing Tax Credits L. P. IV Schedule III - Real Estate and Accumulated Depreciation of Property owned by Local Limited Partnerships in which Registrant has invested at March 31, 1999 GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, COST OF INTEREST AT 1998 ACQUISITION DATE ------------------------------- -------------- NET IMPROVEMENTS NUMBER TOTAL CAPITALIZED OF ENCUM- BUILDING AND SUBSEQUENT TO DESCRIPTION UNITS BRANCES * LAND IMPROVEMENTS ACQUISITION LAND - ----------- ----- --------- ---- ------------ ----------- ---- Low and Moderate Income Apartment Complexes Justin Place (B) 0 0 5,485 0 (5,485) 0 Justin, TX Orocovix IV 40 1,642,158 60,000 1,175,705 886,147 61,800 Orocovix, PR Carolina Woods 48 1,098,156 121,710 2,160,614 6,903 121,710 Greensboro, NC Mayfair Mansions 569 20,953,081 2,080,022 27,784,358 394,521 2,080,022 Washington, DC Oakview Square 192 6,002,893 530,411 7,353,548 3,857,255 530,411 Chesterfield, MI Whitehills 24 752,994 40,200 934,444 8,439 122,878 Howell, MI Gobles Apts. 24 737,105 12,500 939,518 11,372 56,088 Gobles, MI Brown Kaplan 60 7,998,554 0 7,096,932 2,018,359 0 Boston, MA Green Tree 24 657,073 21,120 788,935 3,015 21,120 Greenville, GA Milan Apartments 32 1,015,158 50,500 1,254,727 50,378 164,803 Milan, MI Findlay (C) 0 0 19,533 3,165,904 (3,185,437) 0 Cincinnati, OH Seagraves (A) 0 0 20,000 634,518 (654,518) 0 Seagraves, TX Lakeside 308 6,005,125 400,000 9,416,579 1,113,039 400,000 Chicago, IL Lincoln Green 30 1,638,514 156,725 1,924,700 89,571 160,874 Old Town, ME West Pine 38 1,673,827 74,800 944,818 1,086,747 74,800 Allegheny County, PA BK Apartments 48 856,667 30,000 983,020 298,978 57,223 Jamestown, ND 46th & Vincennes 28 1,308,408 16,200 1,901,527 75,871 16,200 Chicago, IL Gateway** 50 1,131,757 119,110 1,355,075 (99,498) 140,636 Azle, TX -------------------------------------------------------------------------------------------- SUBTOTAL 3,081 103,157,547 7,073,293 126,733,562 29,437,254 9,096,929 LESS: Combined Entities ** 304 8,547,201 1,128,060 15,265,620 1,380,651 1,268,099 -------------------------------------------------------------------------------------------- TOTAL 2,777 $94,610,346 $5,945,233 $111,467,942 $28,056,603 $7,828,830 ============================================================================================ Boston Financial Qualified Housing Tax Credits L. P. IV Schedule III - Real Estate and Accumulated Depreciation of Property owned by Local Limited Partnerships in which Registrant has invested at March 31, 1999 GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1998 -------------------------------------------------- LIFE ON WHICH DEPRECIATION BUILDING AND ACCUMULATED DATE IS COMPUTED DATE DESCRIPTION IMPROVEMENTS TOTAL DEPRECIATION BUILT (YEARS) ACQUIRED - ----------- ------------ ----- ------------ ----- ------- -------- Low and Moderate Income Apartment Complexes Justin Place (B) 0 0 0 1990 various 12/27/89 Justin, TX Orocovix IV 2,060,052 2,121,852 496,748 1990 various 12/30/89 Orocovix, PR Carolina Woods 2,167,517 2,289,227 532,341 1990 various 01/31/90 Greensboro, NC Mayfair Mansions 28,178,879 30,258,901 10,819,279 1990 various 3/21/90 Washington, DC Oakview Square 11,210,803 11,741,214 2,185,647 1991 various 3/22/89 Chesterfield, MI Whitehills 860,205 983,083 355,626 1990 various 4/21/90 Howell, MI Gobles Apts. 907,302 963,390 337,088 1990 various 4/29/90 Gobles, MI Brown Kaplan 9,115,291 9,115,291 2,275,472 1991 various 7/1/90 Boston, MA Green Tree 791,950 813,070 261,685 1990 various 7/6/90 Greenville, GA Milan Apartments 1,190,802 1,355,605 469,290 1990 various 8/20/90 Milan, MI Findlay (C) 0 0 0 1990 various 8/15/90 Cincinnati, OH Seagraves (A) 0 0 0 1990 N/A 11/28/90 Seagraves, TX Lakeside 10,529,618 10,929,618 3,418,612 1991 various 5/17/90 Chicago, IL Lincoln Green 2,010,122 2,170,996 554,121 1989 various 3/21/90 Old Town, ME West Pine 2,031,565 2,106,365 485,625 1991 various 12/31/90 Allegheny County, PA BK Apartments 1,254,775 1,311,998 284,626 1991 various 12/1/90 Jamestown, ND 46th & Vincennes 1,977,398 1,993,598 613,267 1990 various 3/29/91 Chicago, IL Gateway** 1,234,051 1,374,687 248,693 1991 various 6/24/91 Azle, TX -------------------------------------------------- SUBTOTAL 154,147,180 163,244,109 47,151,143 LESS: Combined Entities ** 16,506,232 17,774,331 5,502,257 -------------------------------------------------- TOTAL $137,640,948 $145,469,778 $41,648,886 ================================================== (1) The aggregate cost for Federal Income Tax purposes is approximately $ 167,158,000. (A) During the year ended March 31, 1997, the Partnership transferred all of the assets of five of the Texas Partnerships subject to their liabilities to unaffiliated entities. (B) During the year ended March 31, 1998, the Partnership transferred all of the assets of five of the Texas Partnerships subject to their liabilities to unaffiliated entities. (C) During the year ended March 31, 1999, the Partnership has transferred all of the assets of Findlay Market and one of the Texas Partnerships subject to their liabilities to unaffiliated entities. * Mortgage notes payable generally represent non-recourse financing of low-income housing projects payable with terms of up to 40 years with interest payable at rates ranging from 7.20% to 9.75%. The Partnership has not guaranteed any of these mortgage notes payable. Summary of property owned and accumulated depreciation: Property Owned December 31, 1998 Accumulated Depreciation December 31, 1998 - ------------------------------------------------------------------- -------------------------------------------------- Balance at beginning of period $151,824,387 Balance at beginning of period Additions during period: before Combined Entities $37,607,826 Other acquisitions 286,686 Additions during period: Improvements etc. 280,068 Eliminations - 1997 Combined Entities 5,217,693 -------------- 566,754 Eliminations - Combined Entities** (5,502,257) Deductions during period: Properties disposed of (C) (792,962) Cost of real estate sold (1,922) Depreciation 5,118,586 ============== Write down of building Balance at close of period $41,648,886 resulting from a non temporary decline in value (3,078,687) ============== Eliminations -1997 Combined Entities 19,064,246 Eliminations - Combined Entities** (17,774,331) Disposals from transferred Properties (C) (5,130,669) -------------- (6,921,363) --------------- Balance at close of period $145,469,778 =============== Property Owned December 31, 1997 Accumulated Depreciation December 31, 1997 - ------------------------------------------------------------------- -------------------------------------------------- Balance at beginning of period $153,104,249 Balance at beginning of period Additions during period: before Combined Entities $33,135,477 Other acquisitions 92,036 Additions during period: Improvements etc. 390,536 Eliminations - 1996 Combined Entities 4,878,763 -------------- Eliminations - Combined 482,572 Entities** (5,217,693) Deductions during period: Properties disposed of (B) (553,079) Write down of building Depreciation 5,364,358 resulting from a non- ============== temporary decline in value (181,098) Balance at close of period $37,607,826 ============== Eliminations -1996 Combined Entities 20,095,959 Eliminations - Combined Entities** (19,064,246) Disposals from transferred Properties (B) (2,613,049) -------------- (1,762,434) --------------- Balance at close of period $151,824,387 =============== Property Owned December 31, 1996 Accumulated Depreciation December 31, 1996 - ------------------------------------------------------------------- -------------------------------------------------- Balance at beginning of period $153,974,533 Balance at beginning of period Additions during period: before Combined Entities $28,735,999 Acquisitions through foreclosure $0 Additions during period: Other acquisitions 62,414 Eliminations - 1995 Combined Entities 4,131,931 Improvements etc. 1,770,452 Eliminations - Combined Entities** (4,878,763) -------------- 1,832,866 Properties disposed of (A) (386,880) Deductions during period: Depreciation 5,533,190 Cost of real estate ============ sold (4,622) Balance at close of period $33,135,477 ============ Write down of building resulting from a non- temporary decline in value (791,830) Eliminations -1995 Combined Entities 20,760,503 Eliminations - Combined Entities** (20,095,959) Disposals from transferred Properties (A) (2,571,242) -------------- (2,703,150) --------------- Balance at close of period $153,104,249 =============== BOSTON FINANCIAL QUALIFIED HOUSING TAX CREDITS IV (A Limited Partnership) Annual Report on form 10-K For The Year Ended March 31, 1999 Reports of Independent Auditors 46th & VINCENNES [Letterhead] [LOGO] Haran & Associates INDEPENDENT AUDITORS REPORT To the Partners HUD Field Office Director 46th & VINCENNES LIMITED PARTNERSHIP Chicago, Illinois Chicago, Illinois We have audited the accompanying balance sheet of 46th & VINCENNES LIMITED PARTNERSHIP, Project No. 071-35594, as of December 31, 1998, and the related statements of profit and loss, changes in partners' equity and statement of cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 46th & VINCENNES LIMITED PARTNERSHIP, as of December 31, 1998, and its profit or loss, changes in partners' equity, and its cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report dated February 18, 1999 on our consideration of 46th & VINCENNES LIMITED PARTNERSHIP's internal control structure and reports dated February 18, 1999 on its compliance with specific requirements applicable to Major HUD Programs, specific requirements applicable to Affirmative Fair Housing, and specific requirements applicable to Nonmajor HUD Programs. The accompanying supplementary information (shown on pages 14 to 18) is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statement and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. /s/Haran & Associates Ltd. Haran & Associates LTD Certified Public Accountants Wilmette, Illinois Illinois Certificate No. 060-002892 Federal Certification No. 36-3097692 Audit Partner: W. Garrett Heinl (847)853-2576 February 18, 1999 [Letterhead] [LOGO] Haran & Associates INDEPENDENT AUDITORS REPORT To the Partners HUD Field Office Director 46th & VINCENNES LIMITED PARTNERSHIP Chicago, Illinois Chicago, Illinois We have audited the accompanying balance sheet of 46th & VINCENNES LIMITED PARTNERSHIP, Project No. 071-35594, as of December 31, 1997, and the related statements of profit and loss, changes in partners' equity and statement of cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 46th & VINCENNES LIMITED PARTNERSHIP, as of December 31, 1997, and its profit or loss, changes in partners' equity, and its cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report dated January 21, 1998 on our consideration of 46th & VINCENNES LIMITED PARTNERSHIP's internal control structure and reports dated January 21, 1998 on its compliance with specific requirements applicable to Major HUD Programs, specific requirements applicable to Affirmative Fair Housing, and specific requirements applicable to Nonmajor HUD Programs. The accompanying supplementary information (shown on pages 15 to 19) is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statement and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. /s/Haran & Associates Ltd. Haran & Associates LTD Certified Public Accountants Wilmette, Illinois Illinois Certificate No. 060-002892 Federal Certification No. 36-3097692 Audit Partner: James E. Haran January 21, 1998 [Letterhead] [LOGO] Haran & Associates INDEPENDENT AUDITORS REPORT To the Partners HUD Field Office Director 46th & VINCENNES LIMITED PARTNERSHIP Chicago, Illinois Chicago, Illinois We have audited the accompanying balance sheet of 46th & VINCENNES LIMITED PARTNERSHIP, Project No. 071-35594, as of December 31, 1996, and the related statements of profit and loss, changes in partners' equity and statement of cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 46th & VINCENNES LIMITED PARTNERSHIP, as of December 31, 1996, and its profit or loss, changes in partners' equity, and its cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report dated January 21, 1997 on our consideration of 46th & VINCENNES LIMITED PARTNERSHIP's internal control structure and reports dated January 21, 1997 on its compliance with specific requirements applicable to Major HUD Programs, specific requirements applicable to Affirmative Fair Housing, and specific requirements applicable to Nonmajor HUD Programs. The accompanying supplementary information (shown on pages 15 to 19) is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statement and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. /s/Haran & Associates Ltd. Haran & Associates LTD Certified Public Accountants Wilmette, Illinois Illinois Certificate No. 060-002892 Federal Certification No. 36-3097692 Audit Partner: James E. Haran January 21, 1997 Audobon [Letterhead] [LOGO] Ziner, Kennedy & Lehan LLP INDEPENDENT AUDITORS REPORT To the Partners of Audobon Group Limited Partnership We have audited the accompanying balance sheet (MHFA Forms F.C.-3A & -3B) of Audobon Group Limited Partnership (a Massachusetts limited partnership) (Project No. 89-008-R) as of December 31, 1998, and the related statements changes in partners' equity (deficiency) (MHFA Forms F.C.-3C), operations (MHFA Forms F.C.-2A), cash flows (MHFA Forms F.C.-4A , -4B & -4C) for the year then ended. These financial statements are the responsibility of the general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 Audobon Group Limited Partnership, as of December 31, 1998, and the results of its operations, its changes in partners' equity and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note E to the financial statements, the Partnership has suffered significant operating losses and has a net working capital deficiency, which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/Ziner, Kennedy & Lehan LLP Boston, MA February 12, 1999 [Letterhead] [LOGO] Ziner & Company, P.C. INDEPENDENT AUDITORS REPORT To the Partners of Audobon Group Limited Partnership We have audited the accompanying balance sheet (MHFA Forms F.C.-3A & -3B) of Audobon Group Limited Partnership (a Massachusetts limited partnership) (Project No. 89-008-R) as of December 31, 1997, and the related statements changes in partners' equity (deficiency) (MHFA Forms F.C.-3C), operations (MHFA Forms F.C.-2A), cash flows (MHFA Forms F.C.-4A & -4C) for the year then ended. These financial statements are the responsibility of the general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 Audobon Group Limited Partnership, as of December 31, 1997, and the results of its operations, its changes in partners' equity and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note F to the financial statements, the Partnership's significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/Ziner & Company, P.C. Boston, MA February 10, 1998 [Letterhead] [LOGO] Ziner & Company, P.C. INDEPENDENT AUDITORS REPORT To the Partners of Audobon Group Limited Partnership We have audited the accompanying balance sheet (MHFA Forms F.C.-3A & -3B) of Audobon Group Limited Partnership (a Massachusetts limited partnership)(Project No. 89-008-R) as of December 31, 1996, and the related statements changes in partners' equity (deficiency) (MHFA Forms F.C.-3C), operations (MHFA Forms F.C.-2A), cash flows (MHFA Forms F.C.-4A & -4C) for the year then ended. These financial statements are the responsibility of the general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 Audobon Group Limited Partnership, as of December 31, 1996, and the results of its operations, its changes in partners' equity and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note F to the financial statements, the Partnership's significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/Ziner & Company, P.C. Boston, MA February 22, 1997 B-K Apartments [Letterhead] [LOGO] EideBailly LLP INDEPENDENT AUDITORS REPORT The Partners B-K Apartments Limited Partnership Wahpeton, North Dakota We have audited the accompanying balance sheets of B-K Apartments Limited Partnership as of December 31, 1998 and 1997, and the related statements of operations, partners' equity 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of B-K Apartments Limited Partnership as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 9 to the financial statements, the Partnership has entered into a forebearance agreement with its bond holder as a result of recurring vacancies and cash flow deficiencies which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ EideBailly LLP Fargo, North Dakota January 19, 1999, except for Note 10 As to which the date is January 25, 1999 [Letterhead] [LOGO] Charles Bailly & Company P.L.L.P. INDEPENDENT AUDITORS REPORT The Partners B-K Apartments Limited Partnership Wahpeton, North Dakota We have audited the accompanying balance sheets of B-K Apartments Limited Partnership as of December 31, 1997 and 1996, and the related statements of operations, partners' equity 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of B-K Apartments Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 9 to the financial statements, the Partnership has suffered recurring vacancies and cash deficiencies that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Charles Bailly & Company P.L.L.P. Fargo, North Dakota February 18, 1998 Brookscrossing [Letterhead] [LOGO] Mueller, Walla & Albertson, P.C. INDEPENDENT AUDITORS REPORT The Partners, Brookscrossing Apartments, L.P. St. Louis, Missouri We have audited the accompanying balance sheet of Brookscrossing Apartments, L.P. (a limited partnership) as of December 31, 1998, and the related statements of operations, partners' capital and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Brookscrossing Apartments, L.P. as of December 31, 1998, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Mueller, Walla & Albertson, P.C. Certified Public Accountants Kirkwood, MS February 2, 1999 [Letterhead] [LOGO] Mueller, Walla & Albertson, P.C. INDEPENDENT AUDITORS REPORT The Partners, Brookscrossing Apartments, L.P. St. Louis, Missouri We have audited the accompanying balance sheets of Brookscrossing Apartments, L.P. (a limited partnership) as of December 31, 1997, and the related statements of operations, partners' capital and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Brookscrossing Apartments, L.P. as of December 31, 1997, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Mueller, Walla & Albertson, P.C. Certified Public Accountants Kirkwood, MS February 19, 1998 [Letterhead] [LOGO] Mueller, Walla & Albertson, P.C. INDEPENDENT AUDITORS REPORT The Partners, Brookscrossing Apartments, L.P. St. Louis, Missouri We have audited the accompanying balance sheets of Brookscrossing Apartments, L.P. (a limited partnership) as of December 31, 1996, and the related statements of operations, partners' capital and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Brookscrossing Apartments, L.P. as of December 31, 1996, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Mueller, Walla & Albertson, P.C. Certified Public Accountants Kirkwood, MS February 11, 1997 Brown-Kaplan [Letterhead] [LOGO] Reznick Fedder & Silverman INDEPENDENT AUDITORS REPORT To the Partners Brown-Kaplan Limited Partnership We have audited the accompanying balance sheet of Brown-Kaplan Limited Partnership as of December 31, 1998, and the related statements of operations, partners' deficit and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by he 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 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 Brown-Kaplan Limited Partnership as of December 31, 1998, the results of its operations, changes in partners' deficit and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information on pages 20 through 34 is presented for purposed of additional analysis and is not a required part of the basic financial statements. 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 basic financial statements taken as a whole. In accordance with Government Auditing Standards, and the Consolidated Audit Guide for Audits of HUD Programs, we have also issued reports dated January 20, 1999 on or consideration of Brown-Kaplan Limited Partnership's internal control and on its compliance with specific requirements applicable to major HUD programs, fair housing and non-discrimination, and laws and regulations applicable to the financial statements. /s/Reznick Fedder & Silverman Boston, Massachusetts Federal Employer January 20, 1999 Identification Number 52-1088612 Audit Principal: Philip A. Weitzel [Letterhead] [LOGO] Reznick Fedder & Silverman INDEPENDENT AUDITORS REPORT To the Partners of Brown-Kaplan Limited Partnership We have audited the accompanying balance sheet (MHFA Forms F.C.-3a and 3b) of Brown-Kaplan Limited Partnership as of December 31, 1997, and the related statements of operations (MHFA Form F.C.-2A), partners' equity (deficiency) (MHFA Form F.C.-3C) and cash flows (MHFA Form F.C.-4A,4B, and 4C) for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by he 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 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 Brown-Kaplan Limited Partnership as of December 31, 1997, the results of its operations, changes in partners' equity (deficiency) and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information on pages 22 through 29 is presented for purposed of additional analysis and is not a required part of the basic financial statements. 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 basic financial statements taken as a whole. In accordance with Government Auditing Standards, and the Consolidated Audit Guide for Audits of HUD Programs, we have also issued reports dated January 23, 1998 on or consideration of Brown-Kaplan Limited Partnership's internal control and on its compliance with specific requirements applicable to major HUD programs, fair housing and non-discrimination, and laws and regulations applicable to the financial statements. /s/Reznick Fedder & Silverman Boston, Massachusetts Federal Employer January 23, 1998 Identification Number 52-1088612 Audit Principal: Philip A. Weitzel [Letterhead] [LOGO] Ziner & Company, P.C. INDEPENDENT AUDITORS REPORT To the Partners of Brown-Kaplan Limited Partnership We have audited the accompanying balance sheet of Brown-Kaplan Limited Partnership (a Massachusetts limited partnership) (MHFA Project No. 88-002) as of December 31, 1996, and the related statements changes in partners' equity, operations and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. These 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 partnership's 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 Brown-Kaplan Limited Partnership as of December 31, 1996, and the changes in partners' equity, the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/Ziner & Company, P.C. Boston, MA February 7, 1997 Buena Vista [Letterhead] [LOGO] David G. Pelliccione, C.P.A., P.C. INDEPENDENT AUDITORS REPORT To the Partners Buena Vista Limited Partnership We have audited the accompanying balance sheets of BUENA VISTA LIMITED, as of December 31, 1998 and 1997, and the related statement of operations, changes in partners' equity 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 audit. We conducted our audit in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 BUENA VISTA LIMITED PARTNERSHIP as of December 31, 1998 and 1997, and the results in its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements of BUENA VISTA LIMITED PARTNERSHIP taken as a whole. The supplemental information on pages 9 and 10 is presented for the purposes of additional analysis and is not a required part of the basic financial statements. 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/ David G. Pelliccione Savannah, Georgia February 11, 1999 [Letterhead] [LOGO] David G. Pelliccione, C.P.A., P.C. INDEPENDENT AUDITORS REPORT To the Partners Buena Vista Limited Partnership We have audited the accompanying balance sheet of BUENA VISTA LIMITED PARTNERSHIP (A Limited Partnership), as of December 31, 1997 and 1996, and the related statement of operations, changes in partners' equity 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 audit. We conducted our audit in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 BUENA VISTA LIMITED PARTNERSHIP as of December 31, 1997 and 1996, and the results in its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ David G. Pelliccione Savannah, Georgia February 23, 1998 Carolina Woods [Letterhead] [LOGO] Halbert, Katz & Co., P.C. INDEPENDENT AUDITORS REPORT To the Partners Carolina Woods Associates, Limited Partnership Wilmington, Delaware We have audited the accompanying balance sheets of Carolina Woods Associates, Limited Partnership, as of December 31, 1998 and December 31, 1997, and the related statements of loss, partners' capital (capital deficiency) and cash flows for the years 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 audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Carolina Woods Associates, Limited Partnership, as of December 31, 1998 and December 31, 1997, and the results of its operations, changes in partners' capital (capital deficiency) and cash flows for the years then ended, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supporting information included in the report (shown on page 11) is presented for the purpose of additional analysis and is not a required part of the basic financial statements of Carolina Woods Associates, Limited Partnership. 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 financial statements taken as a whole. /s/Halbert, Katz & Co., P.C. Philadelphia, PA January 29, 1999 [Letterhead] [LOGO] Halbert, Katz & Co., P.C. INDEPENDENT AUDITORS REPORT To the Partners Carolina Woods Associates, Limited Partnership Wilmington, Delaware We have audited the accompanying balance sheet of Carolina Woods Associates, Limited Partnership, as of December 31, 1997 and December 31, 1996, and the related statements of loss, partners' capital (capital deficiency) and cash flows for the years 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 audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Carolina Woods Associates, Limited Partnership, as of December 31, 1997 and December 31, 1996, and the results of its operations, changes in partners' capital and cash flows for the years then ended, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supporting information included in the report (shown on page 11) is presented for the purpose of additional analysis and is not a required part of the basic financial statements of Carolina Woods Associates, Limited Partnership. 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 financial statements taken as a whole. /s/Halbert, Katz & Co., P.C. Philadelphia, PA January 30, 1998 Dorsett [Letterhead] [LOGO] Fishbein & Company, P.C. INDEPENDENT AUDITORS REPORT February 2, 1999 Partners Dorsett Limited Partnership We have audited the accompanying balance sheets of DORSETT LIMITED PARTNERSHIP as of December 31, 1998 and 1997, and the related statements of operations, partners' equity 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dorsett Limited Partnership as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information included in this report (shown on pages 10 and 11) 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/Fishbein & Company P.C. Elkins Park, PA [Letterhead] [LOGO] Fishbein & Company, P.C. INDEPENDENT AUDITORS REPORT February 5, 1998 Partners Dorsett Limited Partnership We have audited the accompanying balance sheets of DORSETT LIMITED PARTNERSHIP as of December 31, 1997 and 1996, and the related statements of operations, partners' equity and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit 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 Dorsett Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information included in this report (shown on pages 10 and 11) 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/Fishbein & Company P.C. Elkins Park, PA Gobles [Letterhead] [LOGO] Kirschner Hutton Perlin, P.C. INDEPENDENT AUDITORS REPORT January 18, 1999 Partners Gobles Limited Dividend Housing Association Limited Partnership We have audited the accompanying balance sheet of Gobles Limited Dividend Housing Association Limited Partnership as of December 31, 1998 and 1997, and the related statements of operations, 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 audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gobles Limited Dividend Housing Association Limited Partnership as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Kirschner Hutton Perlin, P.C. Southfield, MI [Letterhead] [LOGO] Kirschner Hutton Perlin, P.C. INDEPENDENT AUDITORS REPORT January 27, 1998 Gobles Limited Dividend Housing Association Limited Partnership We have audited the accompanying balance sheet of Gobles Limited Dividend Housing Association Limited Partnership as of December 31, 1997 and 1996, and the related statements of operations, partners' equity (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 audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gobles Limited Dividend Housing Association Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Kirschner Hutton Perlin, P.C. Southfield, MI Greentree Village [Letterhead] [LOGO] FLOYD & COMPANY, CPA INDEPENDENT AUDITORS REPORT To the General Partners of Greentree Village Limited Partnership We have audited the accompanying balance sheets of Greentree Village Limited Partnership (a Georgia Limited Partnership), as of December 31, 1998 and the related statements of operations, partners' equity (deficit) and cash flows for the year 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 audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit 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 Greentree Village Limited Partnership (a Georgia Limited Partnership), as of December 31, 1998 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Floyd & Company, C.P.A. /s/R. Doug Floyd Savannah, Georgia February 28, 1999 [Letterhead] FLOYD & COMPANY 306 Commercial Drive, Suite 202 Post Office Box 14251 Savannah, Georgia 31406 Savannah, Georgia Phone: (912) 355-9969 INDEPENDENT AUDITORS REPORT To the General Partners of Greentree Village Limited Partnership We have audited the accompanying balance sheets of Greentree Village Limited Partnership (a Georgia Limited Partnership), as of December 31, 1997 and the related statements of operations, partners' equity (deficit) and cash flows for the year 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 audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 Greentree Village Limited Partnership (a Georgia Limited Partnership), as of December 31, 1997 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Floyd & Company, C.P.A. /s/R. Doug Floyd February 28, 1998 [Letterhead] FLOYD & COMPANY 306 Commercial Drive, Suite 202 Post Office Box 14251 Savannah, Georgia 31406 Savannah, Georgia Phone: (912) 355-9969 INDEPENDENT AUDITORS REPORT To the General Partners of Greentree Village Limited Partnership We have audited the accompanying balance sheets of Greentree Village Limited Partnership (a Georgia Limited Partnership), as of December 31, 1996 and the related statements of operations, partners' equity (deficit) and cash flows for the year 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. The financial statement information for the year ending December 31, 1995 was audited by another independent certified public accountant who expressed an opinion dated March 16, 1996. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 Greentree Village Limited Partnership (a Georgia Limited Partnership), as of December 31, 1996 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information, except for the portion market "unaudited", on which we express no opinion, has been subjected to the 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. Floyd & Company, C.P.A. /s/R. Doug Floyd February 28, 1997 Lakeside Square [Letterhead] [LOGO] VACEK, LANGE, & WESTERFIELD, P.C. INDEPENDENT AUDITORS REPORT To the Partners of Lakeside Square Limited Partnership We have audited the accompanying balance sheet of Lakeside Square Limited Partnership, a limited partnership, (HUD Project No. IL06-E000-093), as of December 31, 1998, and the related statements of profit and loss, changes in partners' capital, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's managing general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards 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 the managing general partner, 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 Lakeside Square Limited Partnership as of December 31, 1998, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole.The supplementary data included in the report (shown on pages 13 to 19) are presented for the purposes of additional analysis and are not a required part of the basic financial statements of Lakeside Square Limited 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 presented in all material respects, in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued reports dated January 27, 1999 on our consideration of Lakeside Square Limited Partnership's (the "Partnership") internal controls and the Partnership's compliance with specific requirements applicable to major HUD programs and Fair Housing and Discrimination. /s/ VACEK, LANGE, & WESTERFIELD, P.C. Houston, Texas January 27, 1999 [Letterhead] [LOGO] VACEK, LANGE, & WESTERFIELD, P.C. INDEPENDENT AUDITORS REPORT To the Partners of Lakeside Square Limited Partnership We have audited the accompanying balance sheets of Lakeside Square Limited Partnership, a limited partnership, (HUD Project No. IL06-E000-093), as of December 31, 1997, and the related statements of profit and loss, changes in partners' capital, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's Managing general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards 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 the managing general partner, 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 Lakeside Square Limited Partnership as of December 31, 1997, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with generally accepted accounting principles. The supplementary data included in the report (shown on pages 13 to 20) are presented for the purposes of additional analysis and are not a required part of the basic financial statements of Lakeside Square Limited 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 presented in all material respects, in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued reports dated January 23, 1998 on our consideration of Lakeside Square Limited Partnership's (the "Partnership") internal control structure and the Partnership's compliance with laws and regulations. /s/ VACEK, LANGE, & WESTERFIELD, P.C. Houston, Texas January 23, 1998 [Letterhead] [LOGO] VACEK, LANGE, & WESTERFIELD, P.C. INDEPENDENT AUDITORS REPORT To the Partners of Lakeside Square Limited Partnership We have audited the accompanying balance sheets of Lakeside Square Limited Partnership, a limited partnership, (HUD Project No. IL06-E000-093), as of December 31, 1996, and the related statements of profit and loss, changes in partners' capital, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's Managing general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards 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 the managing general partner, 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 Lakeside Square Limited Partnership as of December 31, 1996, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued reports dated January 22 and January 24, 1997 on our consideration of Lakeside Square Limited Partnership's (the "Partnership") internal control structure and the Partnership's compliance with laws and regulations, respectively. The supplementary data included in the report (shown on pages 13 to 20) are presented for the purposes of additional analysis and are not a required part of the basic financial statements of Lakeside Square Limited 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 presented in all material respects, in relation to the financial statements taken as a whole. /s/ VACEK, LANGE, & WESTERFIELD, P.C. Houston, Texas January 22, 1997 Leawood [Letterhead] [LOGO] Reznick Fedder & Silverman INDEPENDENT AUDITORS REPORT To the Partners Leawood Associates, L.P. We have audited the accompanying balance sheets of Leawood Associates, L.P., as of December 31, 1998 and 1997, and the related statements of operations, partners' equity, 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Leawood Associates, L.P., as of December 31, 1998 and 1997, and the results of its operations, changes in partners' capital and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman Boston, Massachusetts January 28, 1999 [Letterhead] [LOGO] Reznick Fedder & Silverman INDEPENDENT AUDITORS REPORT To the Partners Leawood Associates, L.P. We have audited the accompanying balance sheets of Leawood Associates, L.P., as of December 31, 1997 and 1996, and the related statements of operations, partners' equity, 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Leawood Associates, L.P., as of December 31, 1997 and 1996, and the results of its operations, changes in partners' capital and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Reznick Fedder & Silverman Boston, Massachusetts February 2, 1998 Lincoln Green Associates [Letterhead] [LOGO] OUELLETTE, LABONTE, ROBERGE & ALLEN, P.A. INDEPENDENT AUDITORS REPORT The Partners Lincoln Green Associates Limited Partnership We have audited the accompanying balance sheets of Lincoln Green Associates Limited Partnership, as of December 31, 1998 and 1997, and the related statements of income (loss), partners' equity (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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 Lincoln Green Associates Limited Partnership, as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The additional information included in the Schedules 1 through 2 is presented for the purposes of additional analysis and is not a required part of the basic financial statements. 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 basic financial statements taken as a whole. /s/ OUELLETTE, LABONTE, ROBERGE & ALLEN Certified Public Accountants January 25, 1999 Lewiston, Maine [Letterhead] [LOGO] OUELLETTE, LABONTE, ROBERGE & ALLEN, P.A. INDEPENDENT AUDITORS REPORT The Partners Lincoln Green Associates Limited Partnership We have audited the accompanying balance sheets of Lincoln Green Associates Limited Partnership, as of December 31, 1997 and 1996, and the related statements of income (loss), partners' equity, 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 Lincoln Green Associates Limited Partnership, as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The additional information included in the Schedules 1 through 2 is presented for the purposes of additional analysis and are not a required part of the basic financial statements. 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 basic financial statements taken as a whole. /s/ OUELLETTE, LABONTE, ROBERGE & ALLEN February 3, 1998 Lewiston, Maine Kenilworth Associates Ltd. [Letterhead] [LOGO] Ernst & Young LLP INDEPENDENT AUDITORS REPORT To the Partners Kenilworth Associates Ltd. We have audited the accompanying balance sheet of Kenilworth Associates Ltd., a Limited Partnership, FHA Project No. 000-44160/000-35349 (the "Partnership"), as of December 31, 1998, and the related statements of profit and, partners' equity (deficit), and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards 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 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 Kenilworth Associates Ltd., a Limited Partnership, FHA Project No. 000-44160/000-35349, as of December 31, 1998, and the results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in the report, as referred to in the Table of Contents, is presented for the purposed of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, unless otherwise noted, and in our opinion is fairly stated in all material respect in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued our report dated February 12, 1999, on our consideration of Keilworth Associates LTD's, a Limited Partnership, FHA Project No. 000-44160/000-35349, internal control and a report dated February 12, 1999, on its compliance with applicable laws and regulations. /s/ Ernst & Young LLP February 12, 1999 Washington, DC [Letterhead] [LOGO] Ernst & Young LLP Suite 500 Phone 202-775-1880 1150 18th Street, N.W. Fax 202-833-2019 Washington D. C. 20036 INDEPENDENT AUDITORS REPORT To the Partners Kenilworth Associates Ltd. We have audited the accompanying balance sheet of Kenilworth Associates Ltd., a Limited Partnership, FHA Project No. 000-44160/000-35349 (the "Partnership"), as of December 31, 1997, and the related statements of profit and loss (on HUD Form No. 92410), partners' equity, and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards 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 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 Kenilworth Associates Ltd., a Limited Partnership, as of December 31, 1997, and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in the report, referred to as "Supplementary Information" in the accompanying Table of Contents, is presented for the purposed of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, unless otherwise noted, and in our opinion is fairly stated in all material respect in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued our report dated January 30, 1998, on our consideration of Keilworth Associates LTD's, a Limited Partnerships, internal control over financial reporting and our report dated January 30, 1998, on its compliance with certain provisions of laws, regulations and contracts. /s/ Ernst & Young LLP January 30, 1998 Washington, DC [Letterhead] [LOGO] Ernst & Young LLP Suite 500 Phone 202-775-1880 1150 18th Street, N.W. Fax 202-833-2019 Washington D. C. 20036 INDEPENDENT AUDITORS REPORT To the Partners Kenilworth Associates Ltd. We have audited the accompanying balance sheet of Kenilworth Associates Ltd., a Limited Partnership, (the "Partnership"), as of December 31, 1996, and the related statements of profit and loss, partners' equity, and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Kenilworth Associates Ltd., a Limited Partnership, as of December 31, 1996, and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP January 31, 1997 Washington, DC Orocovix Limited Dividend Partnership, S.E. [Letterhead] [LOGO] Horwath Valez Semprit & Co. PSC INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS Partners Orocovix Limited Dividend Partnership, S.E. San Juan, Puerto Rico We have audited the accompanying balance sheets of Orocovix Limited Dividend Partnership, S.E. as of December 31, 1998 and 1997, and the related statements of operations, partners' equity (deficiency) 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 audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 Orocovix Limited Dividend Partnership, S.E. as of December 31, 1998 and 1997, and the results of its operations, its changes in partners' equity (deficiency) and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/HORWATH VELEZ SEMPRIT NIEVES & CO. PSC San Juan, PR January 21, 1999 Stamp number 1553568 was affixed to the original of this report Orocovix Limited Dividend Partnership, S.E. San Juan, Puerto Rico We have audited the accompanying balance sheets of Orocovix Limited Dividend Partnership, S.E. as of December 31, 1997 and 1996, and the related statements of operations, partners' equity (deficiency) 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 audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 Orocovix Limited Dividend Partnership, S.E. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/HORWATH VELEZ SEMPRIT NIEVES & CO. San Juan, PR February 2, 1998 Prince Street [Letterhead] [LOGO] Armacost & Osborne, LLP INDEPENDENT AUDITOR'S REPORT February 3, 1999 Partners Prince Street Towers Limited Partnership Indianapolis, IN We have audited the accompanying statements of financial position of Prince Street Towers Limited Partnership, PHFA Project No. R-414-8E, A Limited Partnership, as of December 31, 1998 and 1997, and the related statements of profit and loss, partners' equity (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 audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 Prince Street Towers Limited Partnership at December 31, 1998 and 1997, and the results of its operations, changes in partners' equity and cash flows for the years then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information, as referred to in the Table of Contents, 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 basic financial statements taken as a whole. /s/ Armacost & Osborne, LLP Certified Public Accountants Bethesda, Maryland [Letterhead] [LOGO] J.A. PLUMER & CO., P.A. INDEPENDENT AUDITOR'S REPORT February 6, 1998 Partners Prince Street Towers Limited Partnership Washington, D.C. We have audited the accompanying statements of financial position of Prince Street Towers Limited Partnership, PHFA Project No. R-414-8E, A Limited Partnership, as of December 31, 1997 and 1996, and the related statements of profit and loss (on HUD Form No. 92410), partners' equity (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 audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 Prince Street Towers Limited Partnership at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ J.A. PLUMER & CO., P.A. Certified Public Accountants Bethesda, Maryland Milan Apartments [Letterhead] [LOGO] KIRSCHNER HUTTON PERLIN, P.C. INDEPENDENT AUDITORS REPORT January 15, 1999 Partners Milan Apartments Company Limited Partnership We have audited the accompanying balance sheet of Milan Apartments Company Limited Partnership, RD Project No. 26-58-382867000, as of December 31, 1998 and 1997, and the related statements of operations, 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 generally accepted auditing standards 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 Milan Apartments Company Limited Partnership as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report dated January 15, 1999, on our consideration of Milan Apartments Company Limited Dividend Housing Association Limited Partnership's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations and contracts. /s/ Kirschner Hutton Perlin, P.C. Southfield, MI [Letterhead] [LOGO] KIRSCHNER HUTTON PERLIN, P.C. INDEPENDENT AUDITORS REPORT January 16, 1998 Partners Milan Apartments Company Limited Partnership We have audited the accompanying balance sheet of Milan Apartments Company Limited Partnership, RECD Project No. 26-58-382867000, as of December 31, 1997 and 1996, and the related statements of operations, partners' equity, 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 generally accepted auditing standards 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 Milan Apartments Company Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report dated January 16, 1998, on our consideration of Milan Apartments Company Limited Dividend Housing Association Limited Partnership's internal control structure and a report dated January 16, 1998, on its compliance with laws and regulations. /s/ Kirschner Hutton Perlin, P.C. Southfield, MI Oakview Square [Letterhead] [LOGO] JOHN J. LEHOTAN C.P.A. To The Partners of Oakview Square Limited Partnership Detroit, Michigan 48124 INDEPENDENT AUDITORS REPORT I have audited the accompanying balance sheet of Oakview Square Limited Partnership, a Michigan limited partnership, as of December 31, 1998, and the related statements of profit and loss, partners' equity and cash flow for the year then ended. These financial statements are the responsibility of the Partnership's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I 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. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial positions of Oakview Square Limited Partnership as of December 31, 1998 and the results of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. /s/John J. Lehotan Certified Public Accountants Brown City, MI February 10, 1999 [Letterhead] [LOGO] JOHN J. LEHOTAN C.P.A. To The Partners of Oakview Square Limited Partnership Detroit, Michigan INDEPENDENT AUDITORS REPORT I have audited the accompanying balance sheet of Oakview Square Limited Partnership, a Michigan limited partnership, as of December 31, 1997, and the related statements of profit and loss, partners' equity and cash flow for the year then ended. These financial statements are the responsibility of the Partnership's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I 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. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial positions of Oakview Square Limited Partnership as of December 31, 1997 and the results of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. /s/John J. Lehotan Certified Public Accountants Brown City, MI February 7, 1998 [Letterhead] [LOGO] JOHN J. LEHOTAN C.P.A. To The Partners of Oakview Square Limited Partnership Detroit, Michigan INDEPENDENT AUDITORS REPORT I have audited the accompanying balance sheet of Oakview Square Limited Partnership, a Michigan limited partnership, as of December 31, 1996, and the related statements of profit and loss, partners' equity and cash flow for the year then ended. These financial statements are the responsibility of the Partnership's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I 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. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial positions of Oakview Square Limited Partnership as of December 31, 1996 and the results of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. /s/John J. Lehotan Certified Public Accountants Brown City, MI February 6, 1997 Sencit Towne House [Letterhead] [LOGO] Ernst & Young LLP REPORT OF INDEPENDENT AUDITORS To the Partners of Sencit Towne House Limited Partnership We have audited the accompanying balance sheet of Sencit Towne House Limited Partnership, a Limited Partnership - Project No. R389-8E, as of December 31, 1998, and the related statements of profit and loss, partners' equity deficit and cash flows for the year 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 audit. The financial statements of Sencit Towne House Limited Partnership for the year ended December 31, 1997, were audited by other auditors whose report dated February 8, 1998, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards 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 audit provides a reasonable basis for our opinion. In our opinion, the 1998 financial statements referred to above present fairly, in all material respects, the financial position of Sencit Towne House Limited Partnership at December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report entitled "Independent Auditors' Report on Compliance and on Internal Control Over Financial Reporting Based on an Audit of the Financial Statements in Accordance with Government Auditing Standards" dated February 22, 1999, on our consideration of the Partnership's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations and contracts. /s/Ernst & Young LLP Indianapolis, Indiana February 22, 1999 [Letterhead] [LOGO] Deloitte & Touche LLP INDEPENDENT AUDITORS' REPORT To the Partners of Sencit Towne House Limited Partnership Washington, D.C. Pennsylvania Housing Finance Agency 2101 North Front Street PO Box 8029 Harrisburg, PA We have audited the accompanying statements of financial position of Sencit Towne House Limited Partnership A Limited Partnership, PHFA Project No. R389-8E, as of December 31, 1997 and 1996, and the related statements of profit and loss (on HUD Form No. 92410), partners' equity (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 generally accepted auditing standards 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 misstatements. 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, such financial statements present fairly, in all material respects, the financial statements of Sencit Towne House Limited Partnership at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Our audit were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information referred to in the Table of Contents, is presented for the purposed of additional analysis and is not a required part of the basic financial statements. This additional information is the responsibility of the Partnership's management. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion , the additional information is fairly stated, in all material respect, in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued our report dated February 4, 1998, on our consideration of the Partnership's internal control over financial reporting and our report dated February 4, 1998, on its compliance with laws and regulations. /s/Deloitte & Touche LLP Washington, DC February 4, 1998 Allentown Towne [Letterhead] [LOGO] Ernst & Young LLP REPORT OF INDEPENDENT AUDITORS To the Partners Allentown Towne House Limited Partnership We have audited the accompanying balance sheet of Allentown Towne House Limited Partnership, a Limited Partnership - Project No. R187-8E, as of December 31, 1998, and the related statements of profit and loss, partners' equity (deficit) and cash flows for the year 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 audit. The financial statements of Allentown Towne House Limited Partnership for the year ended December 31, 1997, were audited by other auditors whose report dated January 26, 1998, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards 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 audit provides a reasonable basis for our opinion. In our opinion, the 1998 financial statements referred to above present fairly, in all material respects, the financial position of Sencit Towne House Limited Partnership at December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report entitled "Independent Auditors' Report on Compliance and on Internal Control Over Financial Reporting Based on an Audit of the Financial Statements in Accordance with Government Auditing Standards" dated February 22, 1999, on our consideration of the Partnership's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations and contracts. /s/Ernst & Young LLP Indianapolis, Indiana February 22, 1999 [Letterhead] [LOGO] Deloitte & Touche LLP INDEPENDENT AUDITORS' REPORT To the Partners of Allentown Towne House Limited Partnership Washington, D.C. Pennsylvania Housing Finance Agency 2101 North Front Street PO Box 8029 Harrisburg, PA We have audited the accompanying statements of financial position of Allentown Towne House Limited Partnership, A Limited Partnership, PHFA Project No. R187-8E, as of December 31, 1997 and 1996, and the related statements of profit and loss (on HUD Form No. 92410), partners' equity (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 generally accepted auditing standards 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 misstatements. 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, such financial statements present fairly, in all material respects, the financial statements of Allentown Towne House Limited Partnership at December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Our audit were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information referred to in the Table of Contents, is presented for the purposed of additional analysis and is not a required part of the basic financial statements. This additional information is the responsibility of the Partnership's management. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion , the additional information is fairly stated, in all material respect, in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued our report dated January 26, 1998, on our consideration of the Partnership's internal control over financial reporting and our report dated January 26, 1998, on its compliance with laws and regulations. /s/Deloitte & Touche LLP Washington, DC January 26, 1998 West Pine Associates [Letterhead] [LOGO] Paul E. Campbell INDEPENDENT AUDITORS' REPORT West Pine Associates Imperial, PA 15126 I have audited the accompanying balance sheet of West Pine Associates (a limited partnership), as of December 31, 1998 and 1997, and the related income statement, changes in partners' equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the project's management. My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audits in accordance with generally accepted auditing standards. Government Auditing Standards, issued by the Comptroller General of the United States, and the U.S. Department of Agriculture, Farmers Home Administration "Audit Program" issued in December, 1989. Those standards require that I 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. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of West Pine Associates at December 31, 1998, and the results of its operations and changes in partners' equity (deficit) and cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, I have also issued a report dated January 19, 1999 on my consideration of West Pine Associates internal control structure and a report dated January 19, 1999, on its compliance with specific requirements applicable to Rural Development Services Programs /s/Paul E. Campbell Certified Public Accountant Huntington, WV January 19, 1999 [Letterhead] [LOGO] Paul E. Campbell INDEPENDENT AUDITORS' REPORT To the Partners of West Pine Associates Huntington, West Virginia 25704 I have audited the accompanying balance sheets of West Pine Associates, as of December 31, 1997 and 1996, and the related statements of income, partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audits in accordance with generally accepted auditing standards and Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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. I believe that my audits provide a reasonable basis for my opinion. In my opinion, such financial statements present fairly, in all material respects, the financial statements of West Pine Associates as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. My audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. /s/Paul E. Campbell Huntington, West VA January 8, 1998 Whitehills II [Letterhead] [LOGO] Kirschner Hutton Perlin, P.C. INDEPENDENT AUDITORS' REPORT January 21, 1999 Partners Whitehills II Apartments Company Limited Partnership We have audited the accompanying balance sheet of Whitehills II Apartments Company Limited Partnership as of December 31, 1998 and 1997, and the related statements of operations, 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Whitehills II Apartments Company Limited Partnership as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Kirschner Hutton Perlin, P.C. Southfield, MI [Letterhead] [LOGO] Kirschner Hutton Perlin, P.C. INDEPENDENT AUDITORS' REPORT January 21, 1998 Partners Whitehills II Apartments Company Limited Partnership We have audited the accompanying balance sheet of Whitehills II Apartments Company Limited Partnership as of December 31, 1997 and 1996, and the related statements of operations, partners' equity (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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements referred to above present fairly, in all material respects, the financial position of Whitehills II Apartments Company Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Kirschner Hutton Perlin, P.C. Southfield, MI Willow Ridge [Letterhead] [LOGO] Cleveland & Company, P.C. INDEPENDENT AUDITORS' REPORT To the Partners of Willow Ridge Development Company Limited Partnership Prescott, Arizona We have audited the accompanying balance sheet of Willow Ridge Development Company Limited Partnership (FHA Project No. 123-94010, formerly Project No. 123-36610) as of December 31, 1998, and the related statements of operations, changes in partners' equity, and cash flows for the year 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 audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 Willow Ridge Development Company Limited Partnership (FHA Project No. 123-94010, formerly Project No. 123-36610), as of December 31, 1998, and the results of its operations, and the changes in partner's equity and cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information (shown on pages 13-17) are presented for purposes of additional analysis and is not a required part of the basic financial statements. 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 basic financial statements taken as a whole. /s/Cleveland & Company, P.C. Certified Public Accountants Phoenix, AZ Federal Employer I.D. No. 86-0564541 February 16, 1999 [Letterhead] [LOGO] Cleveland & Company, P.C. INDEPENDENT AUDITORS' REPORT To the Partners of Willow Ridge Development Company Limited Partnership Prescott, Arizona We have audited the accompanying balance sheet of Willow Ridge Development Company Limited Partnership (FHA Project No. 123-94010, formerly Project No. 123-36610) as of December 31, 1997, and the related statements of operations, changes in partners' equity, and cash flows for the year 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 audit. We conducted our audits in accordance with generally accepted auditing standards 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 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 Willow Ridge Development Company Limited Partnership (FHA Project No. 123-94010 formerly Project No. 123-36610), as of December 31, 1997, and the results of its operations, and the changes in partner's equity and cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying supplementary information (shown on pages 13-32) are presented for purposes of additional analysis and is not a required part of the basic financial statements. 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 basic financial statements taken as a whole. In accordance with Government Auditing Standards, and the Consolidated Audit Guide for Audits for HUD Programs issued by the U.S. Department of Housing and Urban Development, we have also issued a report dated February 21, 1998, on our consideration of Willow Ridge Development Company Limited Partnership's internal control structure, and reports dated February 21, 1997, on its compliance with specific requirements applicable to major HUD programs, and specific requirements applicable to Affirmative Fair Housing. /s/Cleveland & Company, P.C. Certified Public Accountants Phoenix, AZ Federal Employer I.D. No. 86-0564541 February 21, 1998 [Letterhead] [LOGO] Cleveland & Company, P.C. INDEPENDENT AUDITORS' REPORT To the Partners of Willow Ridge Development Company Limited Partnership Prescott, Arizona We have audited the accompanying balance sheet of Willow Ridge Development Company Limited Partnership (FHA Project No. 123-94010, formerly Project No. 123-36610) as of December 31, 1996, and the related statements of operations, changes in partners' equity, and cash flows for the year 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 audit. We conducted our audits in accordance with generally accepted auditing standards 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 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 Willow Ridge Development Company Limited Partnership (FHA Project No. 123-94010 formerly Project No. 123-36610), as of December 31, 1996, and the results of its operations, and the changes in partner's equity and cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, and the Consolidated Audit Guide for Audits for HUD Programs issued by the U.S. Department of Housing and Urban Development, we have also issued a report dated February 10, 1997, on our consideration of Willow Ridge Development Company Limited Partnership's internal control structure, and reports dated February 10, 1997, on its compliance with specific requirements applicable to major HUD programs, and specific requirements applicable to Affirmative Fair Housing. The accompanying supplementary information (shown on pages 11-24) are presented for purposes of additional analysis and is not a required part of the basic financial statements. 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 basic financial statements taken as a whole. /s/Cleveland & Company, P.C. Certified Public Accountants Phoenix, AZ Federal Employer I.D. No. 86-0564541 February 10, 1997 AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION PROJECT NO. 89-008-R For the Year Ended December 31, 1998 TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS Balance Sheet (MHFA Forms F.C. -3A & -3B) 2 Statement of Changes in Partners' Equity (Deficiency) (MHFA Form F.C.-3C) 4 Statement of Operations (MHFA Form F.C. -2A) 5 Statement of Cash Flows (MHFA Forms F.C. -4A, -4B, & -4C) 6 Notes to Financial Statements 9 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION 12 MHFA SUPPLEMENTARY INFORMATION 13 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH THE REGULATORY AND MANAGEMENT AGREEMENTS 20 MORTGAGOR'S AND GENERAL PARTNER'S CERTIFICATE 21 [Letterhead] INDEPENDENT AUDITORS' REPORT To the Partners of Audubon Group Limited Partnership We have audited the accompanying balance sheet (MHFA Forms F.C.-3A & - -3B) of Audubon Group Limited Partnership (a Massachusetts limited partnership) (Project No. 89-008-R) as of December 31, 1998, and the related statements of changes in partners' equity (deficiency) (MHFA Form F.C.-3C), operations (MHFA Form F.C.-2A), and cash flows (MHFA Forms F.C.-4A, -4B & -4C) for the year then ended. These financial statements are the responsibility of the general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the general partner, 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 Audubon Group Limited Partnership as of December 31, 1998, and the results of its operations, its changes in partners' equity and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note E to the financial statements, the Partnership has suffered significant operating losses and has a net working capital deficiency, which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Ziner, Kennedy & Lehan February 12, 1999 -1- AUDUBON GROUP LIMITED PARTNERSHIP BALANCE SHEET December 31, 1998 ASSETS Current Assets: Cash and Cash Equivalents: 201. Partnership 0 ------------- 202. Development 2,593 ------------- 203. Subtotal 2,593 --------------- Cash Reserved or Escrowed: 205. Tenant Security Deposits 10,862 -------------- 206. Insurance & R.E. Tax Escrow 9,425 -------------- 209. Special & Other Escrow * 173,144 -------------- 210. Subtotal 193,431 --------------- Accounts Receivable: 215. Tenant 14,525 -------------- 216. HUD 1,019 -------------- 218. Other 19 -------------- 220. Subtotal 15,563 --------------- 222. Residual Receipts Receivable 0 --------------- 223. Short-Term Investments 0 --------------- 225. Due from General Partners & Affiliates 0 --------------- 227. Prepaid Expenses 9,997 --------------- 228. All Other Current Assets 0 --------------- 230. Total Current Assets 221,584 --------------- Property & Equipment - -------------------- 231. Land 0 -------------- 232. Building & Equipment 2,621,817 -------------- 234. Subtotal 2,621,817 --------------- 235. Accumulated Depreciation 1,300,807 --------------- 236. Net 1,321,010 --------------- Other Assets: 240. Capital Contributions Receivable 0 --------------- 241. Reserve for Replacement Escrow * 8,865 --------------- 242. Excess Rental Income Escrow Account 0 --------------- 243. Long-Term Investments 0 --------------- 243.A Market Value 0 -------------- 244. Gross Organizational and Financing Costs 179,790 -------------- 244.A Accumulated Amortization 47,944 -------------- 245. Net 131,846 --------------- 246. Deferred Syndication Costs 0 --------------- 248. Deposits & Other 0 --------------- 250. Total Assets 1,683,305 --------------- 250.A *Unreimbursed R/R & Special Escrow Withdrawals Included in Above 0 FORM F.C. -3A The accompanying notes are an integral part of the financial statements. -2- AUDUBON GROUP LIMITED PARTNERSHIP BALANCE SHEET December 31, 1998 LIABILITIES & PARTNERS' EQUITY (DEFICIENCY) Current Liabilities: 251. Current Portion of Mortgage Payable 42,380 252. Notes & Advances - due within 1 year 0 Accounts Payable: 255. Trade - due within 30 days 105,860 257. Other 0 260. Subtotal 105,860 262. Residual Receipts Payable 0 Accrued Expenses: 265. Interest 25,665 266. R.E. Taxes & Insurance 0 267. Other 22,539 ------ 270. Subtotal 48,204 272. Tenant Security Deposits 9,502 274. Prepaid Rent 354 278. All Other Current Liabilities 0 280. Total Current Liabilities 206,300 ======= Long-Term Liabilities: - - 281. Mortgage Payable, net of current portion 3,046,144 Notes & Advances: 282. Energy Notes 0 283. Arrearage & Flexible Subsidy Notes 0 284. Other Notes & Advances 1,742,757 --------- 285. Subtotal 1,742,757 ========= 286. Accrued Interest on Long-Term Liabilities 459,494 287. Due to General Partners & Affiliates 24,800 288. Development Fees Payable 0 289. All Other Long-Term Liabilities 0 290. Total Long-Term Liabilities 5,273,195 291. Total Liabilities 5,479,495 ========= Partners' Equity (Deficiency): - - 292. Total Partners' Equity (3,796,190) (Deficiency) 294. Total Liabilities & Partners' 1,683,305 Equity (De FORM F.C.-3B The accompanying notes are an integral part of the financial statements. - -3- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIENCY) FOR THE YEAR ENDED December 31, 1998 295. Balance, Beginning of Year $ (303,282) ---------------- 295.A Add/(Substract) Prior Period Adjustments 0 ---------------- 296 Add: Capital Contributions 0 ---------------- 297. Add: Income or (Loss) (3,492,908) ---------------- 298. Deduct: Distributions - Regulatory 0 ---------------- 299. Deduct Distriubtions - Refinancing & Other 0 ---------------- 300. Balance, End of Year $ (3,796,190) ---------------- FORM F.C. - 3c The accompanying notes are an integral part of the financial statements. -4- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF OPERATIONS For the Year Ended December 31, 1998 DEVELOPMENT REVENUES: 100. Gross Potential Rental Income 374,889 103. Less Vacancies, Bad Debts & Section 236 Excess (37,881) Rental Income Remitted 105. Effective Rental Income 337,008 106. Interest Subsidy 0 107. Other Income - Total 10,143 108. Residual Receipts (Remitted) or Reimbursed 0 110. Total Income 347,151 OPERATING EXPENSES: - - 111. Administration 46,755 112. Maint., Res. Svcs. & Security 73,156 113. Utilities 58,393 114. Taxes (R.E. & Other) 23,674 115. Insurance 15,373 116. Interest (Financing & Other) 394,342 120. Subtotal 611,693 125. Operating Income (264,542) 130. Depreciation & Amortization 149,679 135. Net Income or (Loss) for the Development before Non- (414,221) Operating Items 140. Non-Operating Items [Gains or (Losses)] 0 145. Net Income or (Loss) for the Development (414,221) PARTNERSHIP ADD: REVENUES OF PARTNERSHIP NOT APPLICABLE TO THE DEVELOPMEN 146.A "Cliff" Type Investments 0 146.B Other Partnership Investments 0 146.C Other Revenues 0 146.D Subtotal 0 SUBTRACT: EXPENSES OF PARTNERSHIP NOT APPLICABLE TO THE DEVEL 147.A Paid in Lieu of Distributions 0 147.B Paid from Syndication Proceeds 0 147.C Accrued but not Paid 0 147.D Management Fees - Incentive 0 147.E Other Expenses 3,078,687 147.F Subtotal 3,078,687 148. Net Income or (Loss) for the Partnership (3,492,908) FORM F.C.-2A The accompanying notes are an integral part of the financial statements. -5- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEAR ENDED December 31, 1998 LINE CASH LINE CASH LINE NET NUMBER PROVIDED NUMBER USED NUMBER CASH OPERATING ACTIVITIES NET INCOME OR (LOSS) 301 341 $ 3,492,908 ------------- ------------- ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION & AMORTIZATION 302 149,679 ------------- NON-OPERATING ITEMS [(GAINS OR LOSSES)] 303 3,078,687 343 0 ------------- ------------- CHANGES IN OPERATING ASSETS & LIABILITIES: DECR/INCR IN ACCOUNTS RECEIVABLE 304 0 344 6,165 ------------- ------------- DECR/INCR IN RESIDUAL RECEIPTS RECEIVABLE 304A 0 344A 0 ------------- ------------- DECR/INCR IN PREPAID EXPENSES 305 1,358 345 0 ------------- ------------- DECR/INCR IN ALL OTHER CURRENT ASSETS 306 0 346 0 ------------- ------------- DECR/INCR IN DEPOSITS & OTHER 307 0 347 0 ------------- ------------- DECR/INCR IN TENANT SECURITY DEPOSIT ESCROW 308 0 348 2,328 ------------- ------------- DECR/INCR IN INSURANCE R/E/ TAX ESCROWS 309 0 349 1,501 ------------- ------------- DECR/INCR IN ACCOUNTS PAYABLE 310 0 350 8,264 ------------- ------------- DECR/INCR IN RESIDUAL RECEIPTS PAYABLE 310A 0 350A 0 ------------- ------------- DECR/INCR IN ACCRUED EXPENSES 311 588 351 0 ------------- ------------- DECR/INCR IN TENANT SECURITY DEPOSIT LIAB. 312 981 352 0 ------------- ------------- DECR/INCR IN PREPAID RENT 313 2 353 0 ------------- ------------- DECR/INCR IN ALL OTHER CURRENT LIABILITIES 314 0 354 0 ------------- ------------- DECR/INCR IN ACCRUED INTEREST ON L-T LIABS. 315 117,307 355 0 ------------- ------------- NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES 320 $ 3,348,602 360 $ 3,511,166 381 $ (162,564) ------------ ------------ ------------ FORM F.C.-4A The accompanying notes are an integral part of the financial statements. -6- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED December 31, 1998 LINE CASH LINE CASH LINE NET NUMBER PROVIDED NUMBER USED NUMBER CASH INVESTING ACTIVITIES DISPOSAL/ACQUISITION OF LAND, BUILDING & EQUIP. 321 $ 0 361 $ 16,775 ------------ ------------- DISPOSAL/ACQUISITION OF SHORT-TERM INVESTMENTS 322 0 361 0 ------------- ------------- DECR/INCR IN DUE FROM G.P.'S & AFFILIATES 323 0 363 0 ------------- ------------- DECR/INCR IN RESERVE FOR REPLACEMENT 324 23,597 364 13,325 ------------- ------------- DECR/INCR IN EXCESS RENT ACCOUNT 325 0 365 0 ------------- ------------- DECR/INCR IN SPECIAL & OTHER ESCROWS 326 85,604 366 40,860 ------------- ------------- ADDITIONAL FINANCING & ORGANIZATION COSTS 367 0 --------- DISPOSAL/ACQUISITION OF LONG-TERM INVESTMENTS 328 0 368 0 ------------- ------------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 330 109,201 370 70,960 382 38,241 ------------- ------------- ------------ FINANCING ACTIVITIES INCR/DECR IN CURRENT PORTION OF MORG PAYABLE 331 3,884 371 0 ------------- ------------- INCR/DECR IN L-T PORTION OF MORT PAYABLE 332 0 372 42,380 ------------- ------------- INCR/DECR IN NOTES & ADVANCES DUE WITHIN 1 YR 333 0 373 0 ------------- ------------- INCR/DECR IN L-T PORTION OF NOTES & AFFILIATES 334 160,718 374 0 ------------- ------------- INCR/DECR IN DUE TO G.P.'S & AFFILIATES 335 4,300 375 0 ------------- ------------- INCR/DECR IN ALL OTHER LONG-TERM LIABILITIES 336 0 376 0 ------------- ------------- CAPITAL CONTRIBUTIONS 337 0 ------------- EQUITY DISTRIBUTIONS 378 0 --------------- INCR/DECR IN DEVELOPMENT FEES PAYABLE 339 0 379 0 ------------- ------------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES 340 $ 168,902 380 $ 42,380 383 $ 126,522 ------------ ------------ --------- NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 384 2,199 ------------- CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 385 394 ------- CASH & CASH EQUIVALENTS AT END OF YEAR 386 2,593 ----------------- FORM F.C.-4B The accompanying notes are an integral part of the financial statements. -7- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) STATEMENT OF CASH FLOWS For the Year Ended December 31, 1998 LINE CASH LINE CASH LINE NET NUMBER PROVIDED NUMBER USED NUMBER CASH SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest - net of RDAL loan proceeds of $160,718 391 $ 149,303 --------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES: Increase Decrease Increase/Decrease in Capital Contribs. Receivable 394 $ 395 $ ------------------ Increase/Decrease in Deferred Syndication Costs 396 $ 397 $ ------------------ Other (Describe) The accompanying Statement of Cash Flows has been prepared in the format prescribed by the Massachusetts Housing Finance Agency (MHFA). Generally accepted accounting principles (GAAP) require that non-cash investing and financing activities be disclosed separately. The following schedule reconciles the prescribed format to a presentation in accordance with generally accepted accounting principles. Net Cash Provided Net Cash Provided (Used) in Operating (Used) in Financing Activities Activities As reported above $ (162,564) $ 126,522 Proceeds of RDAL paid directly to MHFA on behalf of Partnership 160,718 (160,718) ----------- -------------- As revised to comply with GAAP $ 1,846 $ (34,196) ============ ============== DISCLOSURE OF ACCOUNTING POLICY: For purposes of the Statement of Cash Flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash or cash equivalents. Form F.C.-4C The accompanying notes are an integral part of the financial statements. -8- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization Audubon Group Limited Partnership (Partnership) was formed on November 22, 1988 to acquire, develop and operate 37 rental units in Boston, Massachusetts. Method of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Financial statements are prepared in a format which conforms to the regulatory requirements of the Massachusetts Housing Finance Agency (MHFA). Income Taxes No provision has been made for federal or state income taxes since each partner includes his pro-rata share of net income or loss and tax credits in his tax return. Low-Income Housing Tax Credit The project is eligible for low-income housing tax credits over a 10 year period which are calculated at approximately 9% of certain costs incurred in connection with the building rehabilitation. The project has received an annual allocation of up to $504,000 from the Executive Office of Communities and Development (EOCD). Provisions of the enabling legislation regarding the credit restrict occupancy to qualified low income tenants for a 15 year period. Provisions of the legislation could result in a recapture of a portion of the credits by the partners if these provisions are not met. Depreciation and Amortization Building and related improvements are being depreciated over 40 years which approximates their useful life. Site improvements are depreciated on an accelerated basis over 15 years. Equipment is being depreciated over 7 years. Finance fees of $179,790 are being amortized over 32 years. At December 31, 1998, property and equipment (at cost less impairment adjustment) consist of the following: Buildings (net of $3,078,687 impairment adjustment) $ 2,436,871 Site improvements 106,775 Equipment 78,171 -------------- $ 2,621,817 Estimates The presentation 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. -9- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) Year 2000 The Managing Agent has assessed the Partnership's exposure to date sensitive computer software programs that may not be operative subsequent to 1999 and has implemented a requisite course of action to minimize Year 2000 risk and ensure that neither significant costs nor disruption of normal business operations are encountered. However, because there is no guarantee that all systems of outside vendors or other entities affecting the partnership's operations rely will be 2000 compliant, the Partnership remains susceptible to consequences of the Year 2000 issue. NOTE B - FINANCING Permanent financing is being provided by MHFA in the form of a 30 year mortgage which is secured by the property and bears interest at 9.65% per annum. Installments of $29,043 for principal and interest are due monthly until January 2021. Monthly remittances of $848 are due to fund the reserve for replacements and $2,923 for the property tax and insurance escrow. Annual maturities of debt for this mortgage for the ensuing five years are as follows: 1999 $42,380 2000 46,657 2001 51,362 2002 56,544 2003 62,248 As required by MHFA, an operating deficit escrow was funded at the permanent loan closing. These funds will remain in the escrow account for approximately four years. During this period, the project can use these funds for operating deficits. Additionally, withdrawals can be made with MHFA approval upon the project achieving certain financial goals as described in the development fund agreement. The balance in the escrow account at December 31, 1998 was $173,144 and is reported on the balance sheet on line 209. It is anticipated that the remaining funds will be needed by the operations of the development. The Partnership has entered into a contract with the MHFA through its Rental Housing Development Action Loan Program (RDAL) whereby MHFA will advance funds to the project. The funds (the RDAL loan) are expected to total approximately $3,550,000, subject to, and conditioned upon, annual appropriations of the Commonwealth of Massachusetts, payable in installments through 2010 and bearing interest at 5% per annum. In the event of a sale or refinancing of the project, the entire balance of the RDAL loan plus accrued interest shall become due. Otherwise, principal and accrued interest thereon will mature in 2010. During 1998, proceeds from this program totaled $ 160,718 and $32,654 of interest was accrued and added capital. At December 31, 1998, advances totaled $1,500,412 with accrued interest of $304,308. -10- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE B - FINANCING (continued) The Boston Redevelopment Authority has provided additional secondary financing totaling $275,000, secured by the property, which bears simple interest at the rate of 5% per annum. Interest is payable from cash flow as defined in the agreement. All unpaid principal and interest is due on or before 2010. Interest of $13,750 accrued during 1998. At December 31, 1998, accrued interest to date totaled $122,531. Under the terms of the regulatory agreement with MHFA, distributions are limited to $50,500 per annum subject to the availability of surplus cash at year end, as defined in the regulatory agreement. NOTE C - CAPITAL CONTRIBUTIONS The general partner has contributed $10 in exchange for a 1% interest in the profits, losses and distributions. The remaining 99% is allocated to the special limited and limited partners who contributed $2,640,439. The special limited partner is entitled to receive a one time distribution of $10,000 which will be funded by sale or refinancing proceeds. NOTE D - RENTAL REVENUES Tenant rents are being subsidized under the Massachusetts Rental Voucher program which also restricts assistance to those tenants who qualify, including maximum income limitations. NOTE E - GOING CONCERN The project has suffered significant operating losses in recent years. The general partner has begun negotiations with the limited partners for additional capital contributions. Additionally, negotiations have commenced with the MHFA for a modification to the existing financing agreement. Management continues to streamline expenses while focusing on maintaining occupancy at high levels. These financial statements do not include any adjustments that may result from the outcome of this uncertainty. NOTE F - IMPAIRMENT OF LONG-LIVED ASSETS During 1998, management became aware of certain indicators that caused management to reassess the recoverability of the cost of the real estate. Based on this assessment, the impairment loss of $3,078,687 was recognized to reduce the carrying amount of the property to its fair value. Fair value was estimated using the present value of estimated future cash flows discounted at a 9% interest rate. The impairment loss is reported in line 140 of the Statement of Operations in these financial statements. -11- [Letterhead] INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION To the Partners of Audubon Group Limited Partnership Our report on our audit of the basic financial statements of Audubon Group Limited Partnership for 1998 appears on page 1. That audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying information, which has been presented in accordance with regulations of the Massachusetts Housing Finance Agency, is presented for purposes of additional analysis and is not a required part of the basic financial statements. 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 basic financial statements taken as a whole. /s/ Ziner, Kennedy & Lehan February 12, 1999 -12- MHFA SUPPLEMENTARY INFORMATION AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS FLOW AVAILABLE FOR EQUITY For the Year Ended December 31, 1998 FUNDS RECEIVED RESIDENTIAL COMMERCIAL TOTAL 1. Base Rental - Occupancy 374,889 0 2. Gross Excess Rental Income 0 3. Parking Rentals 0 0 5. Gross Potential Rental Income 374,889 0 374,889 6. Less: Vacancies - Occupancy 21,258 0 7. Less: Vacancies - Parking 0 0 8. Less: Bad Debts 16,623 0 9. Less: Excess S13 Rental Income Escrowed 0 10. Less: Excess S236 Rental Income Remitted 0 11. Total Deductions 37,881 0 37,881 13. Effective Rental Income 337,008 0 337,008 14.A Interest Subsidy 0 0 14.B SHARP Subsidy 0 0 14.C RDAL/Other Subsidy 193,373 193,373 15.A Other Income - Interest-Ordinary 9,365 0 15.B - Interest-Annuity 0 15.C - Laundry/Vending 778 0 15.D - Commercial Lease Guarantee 0 15.E - Other (Specify) 0 0 16. Total Other Income 10,143 0 10143 17. Total Effective Income 540,524 0 540,524 18.A Replacement Reserve Reimbursements 23,597 0 23,597 18.B Special Escrow Account Reimbursements 85,604 0 85,604 19. Developer's Contributions 0 0 20. Total Funds Received 649,725 0 649,725 FUNDS DISBURSED ADMINISTRATIVE EXPENSES 21. Management Fee - Contractual 11,100 0 22.A Payroll 8,216 0 22.B Payroll Taxes & Fringe Benefits 0 0 23. Legal 16,959 0 24. Audit 8,925 0 25. Marketing 481 0 26. Telephone 300 0 27. Office Supplies & Services 774 0 28.A Accounting & Data Proc. Svs. 0 0 28.B Central Office Fee 0 0 29. Miscellaneous 0 0 30. Total Administrative Expenses 46,755 0 46,755 FORM F.C.-1 -13- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS FLOW AVAILABLE FOR EQUITY For the Year Ended December 31, 1998 MAINTENANCE EXPENSES RESIDENTIAL COMMERCIAL TOTAL 31.A Payroll 16,746 0 31.B Payroll Taxes & Fringe Benefits 0 0 32. Janitorial Material & Services 4,197 0 33. Landscaping 3,449 0 34. Decorating (Interior Only) 9,666 0 35. Repairs (Interior & Exterior) 23,636 0 36. Elevator Maintenance 0 0 37. Garbage & Trash Removal 6,949 0 38. Snow Removal 6,542 0 39. Exterminating 896 0 40. Recreation 0 0 41. Miscellaneous 1,075 0 43. Total Maintenance Expenses 73,156 0 73,156 44. Resident Services 0 0 45. Security 0 0 UTILITIES 46. Electricity 11,357 0 47. Gas 26,404 0 48. Oil 0 0 49. Water & Sewer 20,632 0 50. Total Utilities 58,393 0 58,393 53. Replacement Reserve Deposits 12,719 0 12,719 54. Special Escrow Deposits 32,654 0 32,654 TAXES, INSURANCE & INTEREST 55. Taxes - Real Estate 23,674 0 56. Taxes - Other 0 0 57. Insurance 15,373 0 58. Interest 0 0 59. Total Taxes, Insurance & Int. 39,047 0 39,047 61. Totl Disb Prior to Cap Exp & D/S 262,724 0 262,724 62. Totl Funds Flow Prior to CE & DS 387,001 0 387,001 63. Cap. Exp. (Exc. of Mortg. Increases, Flex Sub Funds, Bank Loans, and Capitalized Leases, ect.) 16,775 65. Funds Flow Prior to D/S 370,226 FORM F.C.-1 -14- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS FLOW AVAILABLE FOR EQUITY For the Year Ended December 31, 1998 GROSS DEBT SERVICE 66. Gross Debt Service - Mortgage (MHFA) $ 348,186 67. Gross Debt Service - Arrearage & Flexible Subsidy No 0 68. Gross Debt Service - Energy Loans 0 69. Gross Debt Service - Secondary Financing 84,652 70. Gross Debt Service - Other Notes Payable 0 71. Total Gross Debt Service 432,838 73. Funds Flow Prior to Non-Operating Items (62,612) 75. Non-Operating Items [Gain or (Loss)] 0 CALCULATIONS OF NET AVAILABLE FOR EQUITY 76. Net Available for Equity - Current Operating Cycle B (62,612) 77. Add: Interest Expense Recorded but not Paid on D/S (i.e. SHARP and Arrearage Notes, Flex. Sub. Notes 84,652 78. Subtract: Interest Income Earned on R/R and Special (8,812) 80. Net Available for Equity - Distribution Basis 13,228 81.A Add/Subtract: Excess (Deficient) Contributions to R/R 0 81.B Add/Subtract: Excess (Deficient) Contributions to Spec 0 82. Subtract: Tax Abatements Applicable to Prior Report 0 83. Non-Operating Intems [Loss or (Gain)] 0 84.A Management Fee - Incentive 0 84.B Other Timing Differences 0 85. Net Available Equity - Normalized Basis 13,228 FORM F.C.-1 -15- AUDUBON GROUP LIMITED PARTNERSHIP RECONCILIATION TO FORM F.C.-1 For the Year Ended December 31, 1998 150. Net Income or (Loss) for the Development (414,221) 155. Add: Depreciation & Amortization 149,679 156. : Residual Receipts Remitted 0 160. : SHARP Subsidy 0 161. : RDAL/Other Subsidy 193,373 162. : Developer's Contribution 0 164. : Replacement Reserve Reimbursements 23,597 165. : Special Escrow Account Reimbursements 85,604 166. Subtotal 452,253 168. Less: Excess Section 13A Rental Income Escrowed 0 169. : Residual Receipts Reimbursed 0 170. : Debt Service (Principal) 38,496 175. : Replacement Reserve Deposits 12,719 176. : Special Escrow Deposits 32,654 180. : Capital Expenditures (Exclusive of Flexible Subsidies and Mortgage) 16,775 186. Subtotal 100,644 190. Other Reporting Differences 0 195. Net Available for Equity - Current Operating Cycle B (See Line #76 of Form F.C.-1) (62,612) FORM F.C.-2b -16- AUDUBON GROUP LIMITED PARTNERSHIP SUPPLEMENTAL SCHEDULE OF LONG-TERM LIABILITIES For the Year Ended December 31, 1998 Number Balance Number Interest Number Balance Energy Loans 401$ 0 426 $ 0 451 $ 0 Arrearage Notes 402 0 427 0 452 0 Flexible Subsidy Notes 403 0 428 0 453 0 SHARP Notes 404 0 429 0 454 0 Secondary Financing Notes 405 275,000 430 122,531 455 397,531 Residual Proceeds Notes 406 0 431 0 456 0 Bank Loans (Notes) 407 0 432 0 457 0 Capitalized Lease Obligation Notes 408 0 433 0 458 0 HODAG 409 0 434 0 459 0 UDAG 410 0 435 0 460 0 RDAL 411 1,500,412 436 304,308 461 1,804,720 Other 412 0 437 0 462 0 Subtotal 415 1,775,412 440 426,839 465 2,202,251 Due to GP & Affiliates 420 24,800 445 0 470 24,800 Development Fees Payable 421 0 446 0 471 0 All Other Long-Term Liabilities 422 0 447 0 472 0 Total 425 1,800,212 450 426,839 475 2,227,051 FORM F.C.-3D -17- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS AVAILABLE FOR DISTRIBUTION For the Year Ended December 31, 1998 (1) Calcualtion of Funds Available for Distribution Sources of Available Funds: 500 Cash and Cash Equivalents $ 2,593 505 Short-term Investments 0 507 Accounts Receivable & Residual Receipts Receivable 15,563 508 Prepaid Expenses 9,997 509 Unreimbursed R/R and Special Escrow Withdrawals 0 510 Total Sources 28,153 Uses of Available Funds: 515 Accrued interest expenses 25,665 520 Delinquent Mortgage Payments & Interest 0 525 Delinquent Deposits to R/R 0 528 Delinquent Deposits to Insurance R/E. Tax Escrows 0 530 Delinquent Deposits Special & Other Escrows 0 535 Accounts Payable & Residual Receipts Payable 105,860 540 Accrued Expenses (not escrowed) 22,539 545 Notes & Advances - Operating Exepenses (due within 30 days) 0 550 Unfunded Security Deposits 0 555 Prepaid Rent 354 560 Due to General Partners & Affiliates (exclusive of developmemt fee) 0 565 Total Uses 154,418 570 Funds Available for Distribution (126,265) 572 Maximum Allowable Distribution if Funds Available 0 FORM F.C. -5 -18- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS AVAILABLE FOR DISTRIBUTION For the Year Ended December 31, 1998 (ii) Calcualtion of Funds Available for Distribution 575 Maximum permissible distribution for current year 13,228 580 Excess net available for distribution from current Year applied to 3 proceeding years 0 582 Excess net available for distribution from 3 proceeding years applied to current year 0 585 Distributions earned for Prior years but not paid as of beginning of the year 303,000 586 Less: Distribution paid during current year 0 587 Balance at Year's end 303,000 590 Maximum possible distriubution if Funds available 316,228 (III) Statistics: 595 Accumulated Partnership distributions 0 600 Stated Equity 2,525,023 Form F.C.-5 -19- [Letterhead] INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH THE REGULATORY AND MANAGEMENT AGREEMENTS To the Partners of Audubon Group Limited Partnership We have audited, in accordance with generally accepted auditing standards, the balance sheet of Audubon Group Limited Partnership (a Massachusetts limited partnership) as of December 31, 1998, and the related statements of operations, changes in partners' equity (deficiency) and cash flows for the year then ended, and have issued our report thereon dated February 12, 1999. In connection with the audit, nothing came to our attention that caused us to believe that the Partnership failed to comply with the terms, covenants, provisions or conditions of Section 6, 7, 8a, 8b, 8c, 9, 11a through 11j and 16 of the Regulatory Agreement, dated December 19, 1990, between the Massachusetts Housing Finance Agency and Audubon Group Limited Partnership, and Sections 5i, 6, 16, 10d, 10e, 10f, and 21 of the Management Agreement, dated November 13, 1997, between Audubon Group Limited Partnership and Peabody Properties, Inc. insofar as they relate to accounting matters. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. This report is intended solely for the information and use of the general partner and management company of Audubon Group Limited Partnership, and the Massachusetts Housing Finance Agency and is not intended to be and should not be used by anyone other than these specified parties. /s/ Ziner, Kennedy & Lehan February 12, 1999 -20- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) December 31, 1998 MORTGAGOR'S AND GENERAL PARTNER'S CERTIFICATE I hereby certify that I have examined the accompanying financial statements and supplementary information of Audubon Group Limited Partnership (Project No. 89-008-R) and, to the best of my knowledge and belief, the same is complete and accurate. I hereby certify that for fiscal year ended December 31, 1998, there has been no change in the general partner of Audubon Group Limited Partnership. General Partner Date Partnership Federal Identification Number 04-3070968 -21- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) FINANCIAL STATEMENTS For the Year Ended December 31, 1997 TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS Balance Sheet (MHFA Forms F.C. -3A & -3B) 2 Statement of Changes in Partners' Equity (Deficiency) (MHFA Form F.C.-3C) 4 Statement of Operations (MHFA Form F.C. -2A) 5 Statement of Cash Flows (MHFA Forms F.C. -4A, -4B, & -4C) 6 Notes to Financial Statements 9 [Letterhead] INDEPENDENT AUDITORS' REPORT To the Partners of Audubon Group Limited Partnership We have audited the accompanying balance sheet (MHFA Forms F.C.-3A & - -3B) of Audubon Group Limited Partnership (a Massachusetts limited partnership) (Project No. 89-008-R) as of December 31, 1997, and the related statements of changes in partners' equity (deficiency) (MHFA Form F.C.-3C), operations (MHFA Form F.C.-2A), and cash flows (MHFA Forms F.C.-4A, -4B & -4C) for the year then ended. These financial statements are the responsibility of the general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the general partner, 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 Audubon Group Limited Partnership as of December 31, 1997, and the results of its operations, its changes in partners' equity and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note E to the financial statements, the Partnership's significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Ziner & Company, P.C. February 10, 1998 -1- AUDUBON GROUP LIMITED PARTNERSHIP BALANCE SHEET December 31, 1997 ASSETS Current Assets: Cash and Cash Equivalents: 201. Partnership 0 ------------- 202. Development 394 ------------- 203. Subtotal 394 ------------- Cash Reserved or Escrowed: 205. Tenant Security Deposits 8,534 ------------- 206. Insurance & R.E. Tax Escrow 7,924 ------------- 209. Special & Other Escrow * 217,888 ------------- 210. Subtotal 234,346 ------------- Accounts Receivable: 215. Tenant 5,192 ------------- 216. HUD 4,187 ------------- 218. Other 19 ------------- 220. Subtotal 9,398 ------------- 222. Residual Receipts Receivable 0 ------------- 223. Short-Term Investments 0 ------------- 225. Due from General Partners & Affiliates 0 ------------- 227. Prepaid Expenses 11,355 ------------- 228. All Other Current Assets 0 ------------- 230. Total Current Assets 255,493 ------------- Property & Equipment - -------------------- 231. Land 0 ------------- 232. Building & Equipment 5,683,729 ------------- 234. Subtotal 5,683,729 ------------- 235. Accumulated Depreciation 1,157,121 ------------- 236. Net 4,526,608 ------------- Other Assets: 240. Capital Contributions Receivable 0 ------------- 241. Reserve for Replacement Escrow * 19,137 ------------- 242. Excess Rental Income Escrow Account 0 ------------- 243. Long-Term Investments 0 ------------- 243.A Market Value 0 ------------- 244. Gross Organizational and Financing Costs 179,790 ------------- 244.A Accumulated Amortization 41,951 ------------- 245. Net 137,839 ------------- 246. Deferred Syndication Costs 0 ------------- 248. Deposits & Other 0 ------------- 250. Total Assets 4,939,077 ------------- 250.A *Unreimbursed R/R & Special Escrow Withdrawals Included in Above 0 FORM F.C. -3A The accompanying notes are an integral part of the financial statements. -2- AUDUBON GROUP LIMITED PARTNERSHIP BALANCE SHEET December 31, 1997 LIABILITIES & PARTNERS' EQUITY (DEFICIENCY) Current Liabilities: 251. Current Portion of Mortgage Payable 38,496 252. Notes & Advances - due within 1 year 0 Accounts Payable: 255. Trade - due within 30 days 114,124 257. Other 0 260. Subtotal 114,124 262. Residual Receipts Payable 0 Accrued Expenses: 265. Interest 26,023 266. R.E. Taxes & Insurance 0 267. Other 21,593 270. Subtotal 47,616 272. Tenant Security Deposits 8,521 274. Prepaid Rent 352 278. All Other Current Liabilities 0 280. Total Current Liabilities 209,109 Long-Term Liabilities: - - 281. Mortgage Payable, net of current portion 3,088,524 Notes & Advances: 282. Energy Notes 0 283. Arrearage & Flexible Subsidy Notes 0 284. Other Notes & Advances 1,582,039 285. Subtotal 1,582,039 286. Accrued Interest on Long-Term Liabilities 342,187 287. Due to General Partners & Affiliates 20,500 288. Development Fees Payable 0 289. All Other Long-Term Liabilities 0 290. Total Long-Term Liabilities 5,033,250 291. Total Liabilities 5,242,359 Partners' Equity (Deficiency): 292. Total Partners' Equity (303,282) (Deficiency) 294. Total Liabilities & Partners' 4,939,077 Equity (Deficiency) FORM F.C.-3B The accompanying notes are an integral part of the financial statements. - -3- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIENCY) FOR THE YEAR ENDED December 31, 1997 295. Balance, Beginning of Year $ 83,723 ----------------- 295.A Add/(Substract) Prior Period Adjustments 0 ----------------- 296 Add: Capital Contributions 0 ----------------- 297. Add: Income or (Loss) (387,005) ----------------- 298. Deduct: Distributions - Regulatory 0 ----------------- 299. Deduct Distriubtions - Refinancing & Other 0 ----------------- 300. Balance, End of Year $ (303,282) ----------------- FORM F.C. - 3c The accompanying notes are an integral part of the financial statements. -4- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF OPERATIONS For the Year Ended December 31, 1997 DEVELOPMENT REVENUES: 100. Gross Potential Rental Income 366,352 103. Less Vacancies, Bad Debts & Section 236 Excess Renta (26,167) 105. Effective Rental Income 340,185 106. Interest Subsidy 0 107. Other Income - Total 20,055 108. Residual Receipts (Remitted) or Reimbursed 0 110. Total Income 360,240 OPERATING EXPENSES: - - 111. Administration 41,447 112. Maint., Res. Svcs. & Security 46,938 113. Utilities 84,232 114. Taxes (R.E. & Other) 25,877 115. Insurance 11,338 116. Interest (Financing & Other) 384,728 120. Subtotal 594,560 125. Operating Income (234,320) 130. Depreciation & Amortization 152,685 135. Net Income or (Loss) for the Development before Non- (387,005) 140. Non-Operating Items [Gains or (Losses)] 0 145. Net Income or (Loss) for the Development (387,005) PARTNERSHIP ADD: REVENUES OF PARTNERSHIP NOT APPLICABLE TO THE DEVELOPMEN 146.A "Cliff" Type Investments 0 146.B Other Partnership Investments 0 146.C Other Revenues 0 146.D Subtotal 0 SUBTRACT: EXPENSES OF PARTNERSHIP NOT APPLICABLE TO THE DEVEL 147.A Paid in Lieu of Distributions 0 147.B Paid from Syndication Proceeds 0 147.C Accrued but not Paid 0 147.D Management Fees - Incentive 0 147.E Other Expenses 147.F Subtotal 148. Net Income or (Loss) for the Partnership (387,005) FORM F.C.-2A The accompanying notes are an integral part of the financial statements. -5- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEAR ENDED December 31, 1997 LINE CASH LINE CASH LINE NET NUMBER PROVIDED NUMBER USED NUMBER CASH OPERATING ACTIVITIES NET INCOME OR (LOSS) 301 341 $ 387,005 ------------- ------------- ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION & AMORTIZATION 302 152,685 ------------- NON-OPERATING ITEMS [(GAINS OR LOSSES)] 303 0 343 0 ------------- ------------- CHANGES IN OPERATING ASSETS & LIABILITIES: DECR/INCR IN ACCOUNTS RECEIVABLE 304 9,161 344 0 ------------- ------------- DECR/INCR IN RESIDUAL RECEIPTS RECEIVABLE 304A 0 344A 0 ------------- ------------- DECR/INCR IN PREPAID EXPENSES 305 0 345 3,721 ------------- ------------- DECR/INCR IN ALL OTHER CURRENT ASSETS 306 0 346 0 ------------- ------------- DECR/INCR IN DEPOSITS & OTHER 307 0 347 0 ------------- ------------- DECR/INCR IN TENANT SECURITY DEPOSIT ESCROW 308 1,058 348 0 ------------- ------------- DECR/INCR IN INSURANCE R/E/ TAX ESCROWS 309 5,383 349 0 ------------- ------------- DECR/INCR IN ACCOUNTS PAYABLE 310 0 350 15,328 ------------- ------------- DECR/INCR IN RESIDUAL RECEIPTS PAYABLE 310A 4,829 350A 0 ------------- ------------- DECR/INCR IN ACCRUED EXPENSES 311 0 351 851 ------------- ------------- DECR/INCR IN TENANT SECURITY DEPOSIT LIAB. 312 352 352 0 ------------- ------------- DECR/INCR IN PREPAID RENT 313 0 353 0 ------------- ------------- DECR/INCR IN ALL OTHER CURRENT LIABILITIES 314 0 354 0 ------------- ------------- DECR/INCR IN ACCRUED INTEREST ON L-T LIABS. 315 74,399 355 0 ------------- ------------- NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES 320 $ 247,867 360 $ 406,905 381 $ (159,038) ------------ ------------ FORM F.C.-4A The accompanying notes are an integral part of the financial statements. -6- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED December 31, 1997 LINE CASH LINE CASH LINE NET NUMBER PROVIDED NUMBER USED NUMBER CASH INVESTING ACTIVITIES DISPOSAL/ACQUISITION OF LAND, BUILDING & EQUIP. 321 $ 0 361 $ 0 ------------ ------------- DISPOSAL/ACQUISITION OF SHORT-TERM INVESTMENTS 322 0 361 0 ------------- ------------- DECR/INCR IN DUE FROM G.P.'S & AFFILIATES 323 0 363 0 ------------- ------------- DECR/INCR IN RESERVE FOR REPLACEMENT 324 10,800 364 8,944 ------------- ------------- DECR/INCR IN EXCESS RENT ACCOUNT 325 0 365 0 ------------- ------------- DECR/INCR IN SPECIAL & OTHER ESCROWS 326 0 366 0 ------------- ------------- ADDITIONAL FINANCING & ORGANIZATION COSTS 367 0 --------- DISPOSAL/ACQUISITION OF LONG-TERM INVESTMENTS 328 0 368 0 ------------- ------------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 330 10,800 370 18,215 382 (7,415) ------------- ------------- ------------ FINANCING ACTIVITIES INCR/DECR IN CURRENT PORTION OF MORG PAYABLE 331 1,381 371 0 ------------- ------------- INCR/DECR IN L-T PORTION OF MORT PAYABLE 332 0 372 36,350 ------------- ------------- INCR/DECR IN NOTES & ADVANCES DUE WITHIN 1 YR 333 0 373 0 ------------- ------------- INCR/DECR IN L-T PORTION OF NOTES & AFFILIATES 334 200,630 374 0 ------------- ------------- INCR/DECR IN DUE TO G.P.'S & AFFILIATES 335 0 375 0 ------------- ------------- INCR/DECR IN ALL OTHER LONG-TERM LIABILITIES 336 0 376 0 ------------- ------------- CAPITAL CONTRIBUTIONS 337 0 ------------- EQUITY DISTRIBUTIONS 378 0 --------------- INCR/DECR IN DEVELOPMENT FEES PAYABLE 339 0 379 0 ------------- ------------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES 340 $ 202,011 380 $ 36,350 383 $ 165,661 ------------ ------------ NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 384 (792) ------------- CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 385 1,186 --------- CASH & CASH EQUIVALENTS AT END OF YEAR 386 394 FORM F.C.-4B The accompanying notes are an integral part of the financial statements. -7- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) STATEMENT OF CASH FLOWS For the Year Ended December 31, 1997 LINE CASH LINE CASH LINE NET NUMBER PROVIDED NUMBER USED NUMBER CASH SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest - net of RDAL loan proceeds of $200,630 391 $ 109,713 --------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES: Increase Decrease Increase/Decrease in Capital Contribs. Receivable 394 $ 395 $ ------------------ Increase/Decrease in Deferred Syndication Costs 396 $ 397 $ ------------------ Other (Describe) The accompanying Statement of Cash Flows has been prepared in the format prescribed by the Massachusetts Housing Finance Agency (MHFA). Generally accepted accounting principles (GAAP) require that non-cash investing and financing activities be disclosed separately. The following schedule reconciles the prescribed format to a presentation in accordance with generally accepted accounting principles. Net Cash Provided Net Cash Provided (Used) in Operating (Used) in Financing Activities Activities As reported above $ (159,038) $ 165,661 Proceeds of RDAL paid directly to MHFA on behalf of Partnership 200,630 (200,630) ----------- -------------- As revised to comply with GAAP $ 41,592 $ (34,969) ============ ============== DISCLOSURE OF ACCOUNTING POLICY: For purposes of the Statement of Cash Flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash or cash equivalents. Form F.C.-4C The accompanying notes are an integral part of the financial statements. -8- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1997 NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization Audubon Group Limited Partnership (Partnership) was formed on November 22, 1988 to acquire, develop and operate 37 rental units in Boston, Massachusetts. Method of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Financial statements are prepared in a format which conforms to the regulatory requirements of the Massachusetts Housing Finance Agency (MHFA). Income Taxes No provision has been made for federal or state income taxes since each partner includes his pro-rata share of net income or loss and tax credits in his tax return. Low-Income Housing Tax Credit The project is eligible for low-income housing tax credits over a 10 year period which are calculated at approximately 9% of certain costs incurred in connection with the building rehabilitation. The project has received an annual allocation of up to $504,000 from the Executive Office of Communities and Development (EOCD). Provisions of the enabling legislation regarding the credit restrict occupancy to qualified low income tenants for a 15 year period. Provisions of the legislation could result in a recapture of a portion of the credits by the partners if these provisions are not met. Depreciation and Amortization Building and related improvements are being depreciated over 40 years which approximates their useful life. Site improvements are depreciated on an accelerated basis over 15 years. Equipment is being depreciated over 7 years. Finance fees of $179,790 are being amortized over 32 years. At December 31, 1997 property and equipment (at cost) consist of the following: Buildings $ 5,515,558 Site improvements 90,000 Equipment 78,171 -------------- $ 5,683,729 Estimates The presentation 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. -9- AUDUBON GROUP LIMITED PARTNERSHIP (Massachusetts limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1997 NOTE B - FINANCING Permanent financing is being provided by MHFA in the form of a 30 year mortgage which is secured by the property and bears interest at 9.65% per annum. Installments of $29,043 for principal and interest are due monthly until January 2021. Monthly remittances of $848 are due to fund the reserve for replacements and $2,991 for the property tax and insurance escrow. Annual maturities of debt for this mortgage for the ensuing five years are as follows: 1998 $38,496 1999 42,380 2000 46,657 2001 51,362 2002 56,544 As required by MHFA, an operating deficit escrow was funded at the permanent loan closing. These funds will remain in the escrow account for approximately four years. During this period, the project can use these funds for operating deficits. Additionally, withdrawals can be made with MHFA approval upon the project achieving certain financial goals as described in the development fund agreement. The balance in the escrow account at December 31, 1997 was $217,888 and is reported on the balance sheet on line 209. It is anticipated that the remaining funds will be needed by the operations of the development. The Partnership has entered into a contract with the MHFA through its Rental Housing Development Action Loan Program (RDAL) whereby MHFA will advance funds to the project. The funds (the RDAL loan) are expected to total approximately $3,550,000, subject to, and conditioned upon, annual appropriations of the Commonwealth of Massachusetts, payable in installments through 2010 and bearing interest at 5% per annum. In the event of a sale or refinancing of the project, the entire balance of the RDAL loan plus accrued interest shall become due. Otherwise, principal and accrued interest thereon will mature in 2010. During 1997, proceeds from this program totaled $200,630 and $60,649 of interest was accrued and added capital. At December 31, 1997, advances totaled $1,307,039 with accrued interest of $233,406. The Boston Redevelopment Authority has provided additional secondary financing totaling $275,000, secured by the property, which bears simple interest at the rate of 5% per annum. Interest is payable from cash flow as defined in the agreement. All unpaid principal and interest is due on or before 2010. Interest of $13,750 accrued during 1997. At December 31, 1997, accrued interest to date totaled $108,781. Under the terms of the regulatory agreement with MHFA, distributions are limited to $50,500 per annum subject to the availability of surplus cash at year end, as defined in the regulatory agreement. NOTE C - CAPITAL CONTRIBUTIONS The general partner has contributed $10 in exchange for a 1% interest in the profits, losses and distributions. The remaining 99% is allocated to the special limited and limited partners who contributed $2,640,439. The special limited partner is entitled to receive a one time distribution of $10,000 which will be funded by sale or refinancing proceeds. - -10- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1997 NOTE D - RENTAL REVENUES Tenant rents are being subsidized under the Massachusetts Rental Voucher program which also restricts assistance to those tenants who qualify, including maximum income limitations. NOTE E - GOING CONCERN The project has suffered significant operating losses in recent years. The general partner has begun negotiations with the limited partners for additional capital contributions. Additionally, negotiations have commenced with the MHFA for a modification to the existing financing agreement. Management continues to streamline expenses while focusing on maintaining occupancy at high levels. These financial statements do not include any adjustments that may result from the outcome of this uncertainty. -11- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION PROJECT NO. 89-008-R For the Year Ended December 31, 1996 TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS Balance Sheet (MHFA Forms F.C. -3A & -3B) 2 Statement of Changes in Partners' Equity (Deficiency) (MHFA Form F.C.-3C) 4 Statement of Operations (MHFA Form F.C. -2A) 5 Statement of Cash Flows (MHFA Forms F.C. -4A, -4B, & -4C) 6 Notes to Financial Statements 9 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION 12 MHFA SUPPLEMENTARY INFORMATION 13 INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH THE REGULATORY AND MANAGEMENT AGREEMENTS 20 MORTGAGOR'S AND GENERAL PARTNER'S CERTIFICATE 21 AUDUBON GROUP LIMITED PARTNERHSIP (a Massachusetts limited partnership) FINANCIAL STATEMENTS For the Year Ended December 31, 1996 INDEPENDENT AUDITORS' REPORT To the Partners of Audubon Group Limited Partnership We have audited the accompanying balance sheet (MHFA Forms F.C.-3A & - -3B) of Audubon Group Limited Partnership (a Massachusetts limited partnership) (Project No. 89-008-R) as of December 31, 1996, and the related statements of changes in partners' equity (deficiency) (MHFA Form F.C.-3C), operations (MHFA Form F.C.-2A), and cash flows (MHFA Forms F.C.-4A, -4B & -4C) for the year then ended. These financial statements are the responsibility of the general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the general partner, 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 Audubon Group Limited Partnership as of December 31, 1996, and the results of its operations, its changes in partners' equity and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note F to the financial statements, the Partnership's significant operating raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/Ziner & Company February 22, 1997 -1- AUDUBON GROUP LIMITED PARTNERSHIP BALANCE SHEET December 31, 1996 ASSETS Current Assets: Cash and Cash Equivalents: 201. Partnership 0 -------------- 202. Development 1,186 -------------- 203. Subtotal 1,186 --------------- Cash Reserved or Escrowed: 205. Tenant Security Deposits 9,592 -------------- 206. Insurance & R.E. Tax Escrow 13,307 -------------- 209. Special & Other Escrow * 208,617 -------------- 210. Subtotal 231,516 --------------- Accounts Receivable: 215. Tenant 18,560 -------------- 216. HUD 0 -------------- 218. Other 0 -------------- 220. Subtotal 18,560 --------------- 222. Residual Receipts Receivable 0 --------------- 223. Short-Term Investments 0 --------------- 225. Due from General Partners & Affiliates 0 --------------- 227. Prepaid Expenses 7,634 --------------- 228. All Other Current Assets 0 --------------- 230. Total Current Assets 258,896 --------------- Property & Equipment - -------------------- 231. Land 0 -------------- 232. Building & Equipment 5,683,729 -------------- 234. Subtotal 5,683,729 --------------- 235. Accumulated Depreciation 1,010,429 --------------- 236. Net 4,673,300 --------------- Other Assets: 240. Capital Contributions Receivable 0 --------------- 241. Reserve for Replacement Escrow * 20,994 --------------- 242. Excess Rental Income Escrow Account 0 --------------- 243. Long-Term Investments 0 --------------- 243.A Market Value 0 -------------- 244. Net Organizational and Financing Costs 143,832 --------------- 245 Accumulated Amortization 35,958 -------------- 246. Deferred Syndication Costs 0 --------------- 248. Deposits & Other 0 --------------- 250. Total Assets 5,097,022 --------------- 250.A *Unreimbursed R/R & Special Escrow Withdrawals Included in Above 0 FORM F.C. -3A The accompanying notes are an integral part of the financial statements. -2- AUDUBON GROUP LIMITED PARTNERSHIP BALANCE SHEET December 31, 1996 LIABILITIES & PARTNERS' EQUITY (DEFICIENCY) Current Liabilities: 251. Current Portion of Mortgage Payable 37,115 252. Notes & Advances - due within 1 year 0 Accounts Payable: 255. Trade - due within 30 days 129,452 257. Other 0 260. Subtotal 129,452 262. Residual Receipts Payable 0 Accrued Expenses: 265. Interest 29,257 266. R.E. Taxes & Insurance 0 267. Other 13,532 270. Subtotal 42,789 272. Tenant Security Deposits 9,372 274. Prepaid Rent 0 278. All Other Current Liabilities 0 280. Total Current Liabilities 218,728 Long-Term Liabilities: - - 281. Mortgage Payable, net of current portion 3,124,874 Notes & Advances: 282. Energy Notes 0 283. Arrearage & Flexible Subsidy Notes 0 284. Other Notes & Advances 1,381,409 285. Subtotal 1,381,409 286. Accrued Interest on Long-Term Liabilities 267,788 287. Due to General Partners & Affiliates 20,500 288. Development Fees Payable 0 289. All Other Long-Term Liabilities 0 290. Total Long-Term Liabilities 4,794,571 291. Total Liabilities 5,013,299 Partners' Equity (Deficiency): - - 292. Total Partners' Equity 83,723 (Deficiency) 294. Total Liabilities & Partners' 5,097,022 Equity (De FORM F.C.-3B The accompanying notes are an integral part of the financial statements. - -3- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIENCY) FOR THE YEAR ENDED December 31, 1996 295. Balance, Beginning of Year $ 486,730 ---------------- 295.A Add/(Substract) Prior Period Adjustments 0 ---------------- 296 Add: Capital Contributions 0 ---------------- 297. Add: Income or (Loss) (403,007) ---------------- 298. Deduct: Distributions - Regulatory 0 ---------------- 299. Deduct Distriubtions - Refinancing & Other 0 ---------------- 300. Balance, End of Year $ 83,723 ---------------- FORM F.C. - 3c The accompanying notes are an integral part of the financial statements. -4- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF OPERATIONS For the Year Ended December 31, 1996 DEVELOPMENT REVENUES: 100. Gross Potential Rental Income 374,003 103. Less Vacancies, Bad Debts & Section 236 Excess Renta (10,747) 105. Effective Rental Income 363,256 106. Interest Subsidy 0 107. Other Income - Total 18,317 108. Residual Receipts (Remitted) or Reimbursed 0 110. Total Income 381,573 OPERATING EXPENSES: - - 111. Administration 42,793 112. Maint., Res. Svcs. & Security 81,874 113. Utilities 94,516 114. Taxes (R.E. & Other) 26,060 115. Insurance 17,889 116. Interest (Financing & Other) 365,275 120. Subtotal 628,407 125. Operating Income (264,834) 130. Depreciation & Amortization 156,173 135. Net Income or (Loss) for the Development before Non- (403,007) 140. Non-Operating Items [Gains or (Losses)] 0 145. Net Income or (Loss) for the Development (403,007) PARTNERSHIP ADD: REVENUES OF PARTNERSHIP NOT APPLICABLE TO THE DEVELOPMEN 146.A "Cliff" Type Investments 0 146.B Other Partnership Investments 0 146.C Other Revenues 0 146.D Subtotal 0 SUBTRACT: EXPENSES OF PARTNERSHIP NOT APPLICABLE TO THE DEVEL 147.A Paid in Lieu of Distributions 0 147.B Paid from Syndication Proceeds 0 147.C Accrued but not Paid 0 147.D Management Fees - Incentive 0 147.E Other Expenses 0 147.F Subtotal 0 148. Net Income or (Loss) for the Partnership (403,007) FORM F.C.-2A The accompanying notes are an integral part of the financial statements. -5- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEAR ENDED December 31, 1996 LINE CASH LINE CASH LINE NET NUMBER PROVIDED NUMBER USED NUMBER CASH OPERATING ACTIVITIES NET INCOME OR (LOSS) 301 341 $ 403,007 ------------- ------------- ADJUSTMENT TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION & AMORTIZATION 302 156,173 ------------- NON-OPERATING ITEMS [(GAINS OR LOSSES)] 303 0 343 0 ------------- ------------- CHANGES IN OPERATING ASSETS & LIABILITIES: DECR/INCR IN ACCOUNTS RECEIVABLE 304 0 344 1,339 ------------- ------------- DECR/INCR IN RESIDUAL RECEIPTS RECEIVABLE 304A 0 344A 0 ------------- ------------- DECR/INCR IN PREPAID EXPENSES 305 5,840 345 0 ------------- ------------- DECR/INCR IN ALL OTHER CURRENT ASSETS 306 0 346 0 ------------- ------------- DECR/INCR IN DEPOSITS & OTHER 307 0 347 0 ------------- ------------- DECR/INCR IN TENANT SECURITY DEPOSIT ESCROW 308 0 348 1,072 ------------- ------------- DECR/INCR IN INSURANCE R/E/ TAX ESCROWS 309 1,468 349 0 ------------- ------------- DECR/INCR IN ACCOUNTS PAYABLE 310 58,772 350 0 ------------- ------------- DECR/INCR IN RESIDUAL RECEIPTS PAYABLE 310A 0 350A 0 ------------- ------------- DECR/INCR IN ACCRUED EXPENSES 311 351 27,897 ------------- ------------- DECR/INCR IN TENANT SECURITY DEPOSIT LIAB. 312 1,006 352 0 ------------- ------------- DECR/INCR IN PREPAID RENT 313 0 353 0 ------------- ------------- DECR/INCR IN ALL OTHER CURRENT LIABILITIES 314 0 354 0 ------------- ------------- DECR/INCR IN ACCRUED INTEREST ON L-T LIABS. 315 64,752 355 0 ------------- ------------- NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES 320 $ 288,011 360 $ 433,315 381 $(145,304) ------------ ------------ FORM F.C.-4A The accompanying notes are an integral part of the financial statements. -6- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED December 31, 1998 LINE CASH LINE CASH LINE NET NUMBER PROVIDED NUMBER USED NUMBER CASH INVESTING ACTIVITIES DISPOSAL/ACQUISITION OF LAND, BUILDING & EQUIP. 321 $ 0 361 $ 0 ------------ ------------- DISPOSAL/ACQUISITION OF SHORT-TERM INVESTMENTS 322 0 361 0 ------------- ------------- DECR/INCR IN DUE FROM G.P.'S & AFFILIATES 323 0 363 0 ------------- ------------- DECR/INCR IN RESERVE FOR REPLACEMENT 324 7,000 364 9,252 ------------- ------------- DECR/INCR IN EXCESS RENT ACCOUNT 325 0 365 0 ------------- ------------- DECR/INCR IN SPECIAL & OTHER ESCROWS 326 0 366 9,540 ------------- ------------- ADDITIONAL FINANCING & ORGANIZATION COSTS 367 0 ------------ DISPOSAL/ACQUISITION OF LONG-TERM INVESTMENTS 328 0 368 0 ------------- ------------- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 330 7,000 370 18,792 382 (11,792) ------------- ------------- ------------- FINANCING ACTIVITIES INCR/DECR IN CURRENT PORTION OF MORG PAYABLE 331 3,272 371 0 ------------- ------------- INCR/DECR IN L-T PORTION OF MORT PAYABLE 332 0 372 27,665 ------------- ------------- INCR/DECR IN NOTES & ADVANCES DUE WITHIN 1 YR 333 0 373 0 ------------- ------------- INCR/DECR IN L-T PORTION OF NOTES & AFFILIATES 334 172,720 374 0 ------------- ------------- INCR/DECR IN DUE TO G.P.'S & AFFILIATES 335 9,000 375 0 ------------- ------------- INCR/DECR IN ALL OTHER LONG-TERM LIABILITIES 336 0 376 0 ------------- ------------- CAPITAL CONTRIBUTIONS 337 0 ------------- EQUITY DISTRIBUTIONS 378 0 --------------- INCR/DECR IN DEVELOPMENT FEES PAYABLE 339 0 379 0 ------------- ------------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES 340 $ 184,992 380 $ 27,665 383 $157,327 ------------ ------------ NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 384 231 ------------- CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 385 955 ------------- CASH & CASH EQUIVALENTS AT END OF YEAR 386 1,186 FORM F.C.-4B The accompanying notes are an integral part of the financial statements. -7- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) STATEMENT OF CASH FLOWS For the Year Ended December 31, 1996 LINE CASH LINE CASH LINE NET NUMBER PROVIDED NUMBER USED NUMBER CASH SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest - net of RDAL loan proceeds of $170,720 391 $ 151,608 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES: Increase Decrease Increase/Decrease in Capital Contribs. Receivable 394 $ 395 $ ------------------ Increase/Decrease in Deferred Syndication Costs 396 $ 397 $ ------------------ Other (Describe) The accompanying Statement of Cash Flows has been prepared in the format prescribed by the Massachusetts Housing Finance Agency (MHFA). Generally accepted accounting principles (GAAP) require that non-cash investing and financing activities be disclosed separately. The following schedule reconciles the prescribed format to a presentation in accordance with generally accepted accounting principles. Net Cash Provided Net Cash Provided (Used) in Operating (Used) in Financing Activities Activities As reported above $ (145,304) $ 157,327 Proceeds of RDAL paid directly to MHFA on behalf of Partnership 172,720 (172,720) ----------- -------------- As revised to comply with GAAP $ 27,416 $ (15,393) ============= ============== DISCLOSURE OF ACCOUNTING POLICY: For purposes of the Statement of Cash Flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash or cash equivalents. Form F.C.-4C The accompanying notes are an integral part of the financial statements. -8- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996 NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization Audubon Group Limited Partnership (Partnership) was formed on November 22, 1988 to acquire, develop and operate 37 rental units in Boston, Massachusetts. Method of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Financial statements are prepared in a format which conforms to the regulatory requirements of the Massachusetts Housing Finance Agency (MHFA). Income Taxes No provision has been made for federal or state income taxes since each partner includes his pro-rata share of net income or loss and tax credits in his tax return. Low-Income Housing Tax Credit The project is eligible for low-income housing tax credits over a 10 year period which are calculated at approximately 9% of certain costs incurred in connection with the building rehabilitation. The project has received an annual allocation of up to $504,000 from the Executive Office of Communities and Development (EOCD). Provisions of the enabling legislation regarding the credit restrict occupancy to qualified low income tenants for a 15 year period. Provisions of the legislation could result in a recapture of a portion of the credits by the partners if these provisions are not met. Depreciation and Amortization Building and related improvements are being depreciated over 40 years which approximates their useful life. Site improvements are depreciated on an accelerated basis over 15 years. Equipment is being depreciated over 7 years. Finance fees of $179,790 are being amortized over 32 years. At December 31, 1996 property and equipment (at cost) consist of the following: Buildings $ 5,515,558 Site improvements 90,000 Equipment 78,171 -------------- $ 5,683,729 Estimates The presentation 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 - FINANCING Permanent financing is being provided by MHFA in the form of a 30 year mortgage which is secured by the property and bears interest at 9.65% per annum. Installments of $29,043 for principal and interest are due monthly until 2020. Monthly remittances of $848 are due to fund the reserve for replacements. -9- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996 NOTE B - FINANCING (continued) Annual maturities of debt for this mortgage for the ensuing five years are as follows: 1997 $37,115 1998 40,696 1999 44,623 2000 48,929 2001 53,651 As required by MHFA, an operating deficit escrow was funded at the permanent loan closing. These funds will remain in the escrow account for approximately four years. During this period, the project can use these funds for operating deficits. Additionally, withdrawals can be made with MHFA approval upon the project achieving certain financial goals as described in the development fund agreement. The balance in the escrow account at December 31, 1996 was $208,617 and is reported on the balance sheet on line 209. It is anticipated that the remaining funds will be needed by the operations of the development. The Partnership has entered into a contract with the MHFA through its Rental Housing Development Action Loan Program (RDAL) whereby MHFA will advance funds to the project. The funds (the RDAL loan) are expected to total approximately $3,550,000, subject to, and conditioned upon, annual appropriations of the Commonwealth of Massachusetts, payable in installments through 2010 and bearing interest at 5% per annum. In the event of a sale or refinancing of the project, the entire balance of the RDAL loan plus accrued interest shall become due. Otherwise, principal and accrued interest thereon will mature in 2010. During 1996, proceeds from this program totaled $172,720 and $51,002 of interest was accrued. At December 31, 1996, advances totaled $1,106,409 with accrued interest of $172,757. The Boston Redevelopment Authority has provided additional secondary financing totaling $275,000, secured by the property, which bears simple interest at the rate of 5% per annum. Interest is payable from cash flow as defined in the agreement. All unpaid principal and interest is due on or before 2010. Interest of $13,750 accrued during 1996 At December 31, 1996, accrued interest to date totaled $95,031. Under the terms of the regulatory agreement with MHFA, distributions are limited to $50,500 per annum subject to the availability of surplus cash at year end, as defined in the regulatory agreement. NOTE C - CAPITAL CONTRIBUTIONS The general partner has contributed $10 in exchange for a 1% interest in the profits, losses and distributions. The remaining 99% is allocated to the special limited and limited partners who contributed $2,640,439. The special limited partner is entitled to receive a one time distribution of $10,000 which will be funded by sale or refinancing proceeds. NOTE D - RENTAL REVENUES Tenant rents are being subsidized under the Massachusetts Rental Voucher program which also restricts assistance to those tenants who qualify, including maximum income limitations. -10- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) NOTES TO FINANCIAL STATEMENTS December 31, 1996 NOTE E - RELATED PARTY TRANSACTIONS During 1996, the general partner advanced $9,000 to the Partnership to pay operating deficits. Aggregate advances of $20,000 are non-interest bearing. NOTE F- GOING CONCERN The project has suffered significant operating losses in recent years. The general partner has begun negotiations with the limited and special limited partners for additional capital contributions. Additionally, negotiations have commenced with the MHFA for a modification to the existing financing agreement. Management continues to streamline expenses while focusing on maintaining occupancy at high levels and has replaced the management agent in February, 1997. These financial statements do not include any adjustments that may result from the outcome of this uncertainty. -11- INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION To the Partners of Audubon Group Limited Partnership Our report on our audit of the basic financial statements of Audubon Group Limited Partnership for 1996 appears on page 1. That audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying information, which has been presented in accordance with regulations of the Massachusetts Housing Finance Agency, is presented for purposes of additional analysis and is not a required part of the basic financial statements. 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 basic financial statements taken as a whole. /s/Ziner & Company February 22, 1997 -12- MHFA SUPPLEMENTARY INFORMATION AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS FLOW AVAILABLE FOR EQUITY For the Year Ended December 31, 1996 FUNDS RECEIVED RESIDENTIAL COMMERCIAL TOTAL 1. Base Rental - Occupancy 374,003 0 2. Gross Excess Rental Income 0 3. Parking Rentals 0 0 5. Gross Potential Rental Income 374,003 0 374,003 6. Less: Vacancies - Occupancy 10,747 0 7. Less: Vacancies - Parking 0 0 8. Less: Bad Debts 0 0 9. Less: Excess S13 Rental Income Escrowed 0 10. Less: Excess S236 Rental Income Remitted 0 11. Total Deductions 10,747 0 10,747 13. Effective Rental Income 363,256 0 363,256 14.A Interest Subsidy 0 0 14.B SHARP Subsidy 0 0 14.C RDAL/Other Subsidy 172,720 172,720 15.A Other Income - Interest-Ordinary 11,778 0 15.B - Interest-Annuity 0 15.C - Laundry/Vending 5,950 0 15.D - Commercial Lease Guarantee 0 15.E - Other (Specify) 0 0 16. Total Other Income 17,728 0 17,728 17. Total Effective Income 553,704 0 553,704 18.A Replacement Reserve Reimbursements 0 0 0 18.B Special Escrow Account Reimbursements 0 0 0 19. Developer's Contributions 0 0 20. Total Funds Received 553,704 0 553,704 FUNDS DISBURSED ADMINISTRATIVE EXPENSES 21. Management Fee - Contractual 14,477 0 22.A Payroll 10,824 0 22.B Payroll Taxes & Fringe Benefits 0 0 23. Legal 2,875 0 24. Audit 8,500 0 25. Marketing 0 0 26. Telephone 0 0 27. Office Supplies & Services 205 0 28.A Accounting & Data Proc. Svs. 2,664 0 28.B Central Office Fee 0 0 29. Miscellaneous 3,248 0 30. Total Administrative Expenses 42,793 0 42,793 FORM F.C.-1 -13- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS FLOW AVAILABLE FOR EQUITY For the Year Ended December 31, 1996 MAINTENANCE EXPENSES RESIDENTIAL COMMERCIAL TOTAL 31.A Payroll 30,479 0 31.B Payroll Taxes & Fringe Benefits 1,787 0 32. Janitorial Material & Services 4,937 0 33. Landscaping 9,354 0 34. Decorating (Interior Only) 11,475 0 35. Repairs (Interior & Exterior) 12,927 0 36. Elevator Maintenance 0 0 37. Garbage & Trash Removal 6,066 0 38. Snow Removal 0 0 39. Exterminating 683 0 40. Recreation 0 0 41. Miscellaneous 1,159 0 43. Total Maintenance Expenses 78,867 0 78,867 44. Resident Services 0 0 45. Security 2,418 2,418 UTILITIES 46. Electricity 30,364 0 47. Gas 25,525 0 48. Oil 0 0 49. Water & Sewer 38,627 0 50. Total Utilities 94,516 0 94,516 53. Replacement Reserve Deposits 8,480 0 8,480 54. Special Escrow Deposits 0 0 0 TAXES, INSURANCE & INTEREST 55. Taxes - Real Estate 26,060 0 56. Taxes - Other 0 0 57. Insurance 17,889 0 58. Interest 204 0 59. Total Taxes, Insurance & Int. 44,153 0 44,153 61. Totl Disb Prior to Cap Exp & D/S 271,227 0 271,227 62. Totl Funds Flow Prior to CE & DS 282,477 0 282,477 63. Cap. Exp. (Exc. of Mortg. Increases, Flex Sub Funds, Bank Loans, and Capitalized Leases, ect.) 0 65. Funds Flow Prior to D/S 282,477 FORM F.C.-1 -14- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS FLOW AVAILABLE FOR EQUITY For the Year Ended December 31, 1996 GROSS DEBT SERVICE 66. Gross Debt Service - Mortgage (MHFA) $ 324,712 67. Gross Debt Service - Arrearage & Flexible Subsidy No 0 68. Gross Debt Service - Energy Loans 0 69. Gross Debt Service - Secondary Financing 64,752 70. Gross Debt Service - Other Notes Payable 0 71. Total Gross Debt Service 389,464 73. Funds Flow Prior to Non-Operating Items (106,987) 75. Non-Operating Items [Gain or (Loss)] 0 CALCULATIONS OF NET AVAILABLE FOR EQUITY 76. Net Available for Equity - Current Operating Cycle B (106,987) 77. Add: Interest Expense Recorded but not Paid on D/S (i.e. SHARP and Arrearage Notes, Flex. Sub. Notes 64,752 78. Subtract: Interest Income Earned on R/R and Special (10,312) 80. Net Available for Equity - Distribution Basis (52,547) 81.A Add/Subtract: Excess (Deficient) Contributions to R/R 0 81.B Add/Subtract: Excess (Deficient) Contributions to Spec 0 82. Subtract: Tax Abatements Applicable to Prior Report 0 83. Non-Operating Intems [Loss or (Gain)] 0 84.A Management Fee - Incentive 0 84.B Other Timing Differences 0 85. Net Available Equity - Normalized Basis (52,547) FORM F.C.-1 -15- AUDUBON GROUP LIMITED PARTNERSHIP RECONCILIATION TO FORM F.C.-1 For the Year Ended December 31, 1996 150. Net Income or (Loss) for the Development (403,007) 155. Add: Depreciation & Amortization 156,173 156. : Residual Receipts Remitted 0 160. : SHARP Subsidy 0 161. : RDAL/Other Subsidy 172,720 162. : Developer's Contribution 0 164. : Replacement Reserve Reimbursements 0 165. : Special Escrow Account Reimbursements 0 166. Subtotal 328,893 168. Less: Excess Section 13A Rental Income Escrowed 0 169. : Residual Receipts Reimbursed 0 170. : Debt Service (Principal) 24,393 175. : Replacement Reserve Deposits 8,480 176. : Special Escrow Deposits 0 180. : Capital Expenditures (Exclusive of Flexible Subsidies and Mo 0 186. Subtotal 32,873 190. Other Reporting Differences 0 195. Net Available for Equity - Current Operating Cycle B (See Line #76 of Form F.C.-1) (106,987) FORM F.C.-2b -16- AUDUBON GROUP LIMITED PARTNERSHIP SUPPLEMENTAL SCHEDULE OF LONG-TERM LIABILITIES For the Year Ended December 31, 1996 Number Balance Number Interest Number Balance Energy Loans 401$ 0 426 $ 0 451 $ 0 Arrearage Notes 402 0 427 0 452 0 Flexible Subsidy Notes 403 0 428 0 453 0 SHARP Notes 404 0 429 0 454 0 Secondary Financing Notes 404 275,000 430 95,031 455 370,031 Residual Proceeds Notes 406 0 431 0 456 0 Bank Loans (Notes) 407 0 432 0 457 0 Capitalized Lease Obligation Notes 408 0 433 0 458 0 HODAG 409 0 434 0 459 0 UDAG 410 0 435 0 460 0 RDAL 411 1,106,409 436 172,757 461 1,279,166 Other 412 0 437 0 462 0 Subtotal 415 1,381,409 440 267,788 465 1,649,197 Due to GP & Affiliates 420 20,500 445 0 470 20,500 Development Fees Payable 421 0 446 0 471 0 All Other Long-Term Liabilities 422 0 447 0 472 0 Total 425 1,401,909 450 267,788 47 1,669,697 FORM F.C.-3D -17- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS AVAILABLE FOR DISTRIBUTION For the Year Ended December 31, 1996 (1) Calcualtion of Funds Available for Distribution Sources of Available Funds: 500 Cash and Cash Equivalents $ 1,186 505 Short-term Investments 0 507 Accounts Receivable & Residual Receipts Receivable 18,560 508 Prepaid Expenses 7,634 509 Unreimbursed R/R and Special Escrow Withdrawals 0 510 Total Sources 27,380 Uses of Available Funds: 515 Accrued interest expenses 29,257 520 Delinquent Mortgage Payments & Interest 0 525 Delinquent Deposits to R/R 0 528 Delinquent Deposits to Insurance R/E. Tax Escrows 0 530 Delinquent Deposits Special & Other Escrows 0 535 Accounts Payable & Residual Receipts Payable 129,452 540 Accrued Expenses (not escrowed) 13,532 546 Notes & Advances - Operating Exepenses (due within 30 days) 0 550 Unfunded Security Deposits 0 555 Prepaid Rent 0 561 Due to General Partners & Affiliates (exclusive of developmemt fee) 0 565 Total Uses 172,241 570 Funds Available for Distribution (144,861) 572 Maximum Allowable Distribution if Funds Available 0 FORM F.C. -5 -18- AUDUBON GROUP LIMITED PARTNERSHIP STATEMENT OF FUNDS AVAILABLE FOR DISTRIBUTION For the Year Ended December 31, 1996 (iii) Calcualtion of Funds Available for Distribution 575 Maximum permissible distribution for current year 50,500 581 Excess net available for distribution from current Year applied to 3 proceeding years 0 583 Excess net available for distribution from 3 proceeding years applied to current year 0 586 Distributions earned for Prior years but not paid as of beginning of the year 252,500 586 Less: Distribution paid during current year 0 587 Balance at Year's end 252,500 591 Maximum possible distriubution if Funds available 303,000 (IV) Statistics: 595 Accumulated Partnership distributions 0 600 Stated Equity 2,525,023 Form F.C.-5 -19- INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH THE REGULATORY AND MANAGEMENT AGREEMENTS To the Partners of Audubon Group Limited Partnership We have audited, in accordance with generally accepted auditing standards, the balance sheet of Audubon Group Limited Partnership (a Massachusetts limited partnership) as of December 31, 1996, and the related statements of operations, changes in partners' equity (deficiency) and cash flows for the year then ended, and have issued our report thereon dated February 22, 1997. In connection with the audit, nothing came to our attention that caused us to believe that the Partnership failed to comply with the terms, covenants, provisions or conditions of Section 6, 7, 8a, 8b, 8c, 9, 11a through 11j and 16 of the Regulatory Agreement, dated December 19, 1990, between the Massachusetts Housing Finance Agency and Audubon Group Limited Partnership, and Sections 5i, 6, 16, 10d, 10e, 10f, and 21 of the Management Agreement, dated May 30, 1990, between Audubon Group Limited Partnership and Peabody Properties, Inc. insofar as they relate to accounting matters. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. This report is intended solely for the information and use of the general partner and management company of Audubon Group Limited Partnership, and the Massachusetts Housing Finance Agency and is not intended to be and should not be used by anyone other than these specified parties. /s/Ziner & Company February 22, 1997 -20- AUDUBON GROUP LIMITED PARTNERSHIP (a Massachusetts limited partnership) December 31, 1996 MORTGAGOR'S AND GENERAL PARTNER'S CERTIFICATE I hereby certify that I have examined the accompanying financial statements and supplementary information of Audubon Group Limited Partnership (Project No. 89-008-R) and, to the best of my knowledge and belief, the same is complete and accurate. I hereby certify that for fiscal year ended December 31, 1996, there has been no change in the general partner of Audubon Group Limited Partnership. General Partner Date Partnership Federal Identification Number 04-3070968 -21- LAKESIDE SQUARE LIMITED PARTNERSHIP (AN ILLINOIS LIMITED PARTNERSHIP) HUD PROJECT NO. IL06-E000-093 FINANCIAL STATEMENTS DECEMBER 31, 1996 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTSLAKESIDE SQUARE LIMITED PARTNERSHIP Index to Financial Statements Page(s) Independent Auditors' Report 1 Auditor Information 1 Balance Sheet 2 Statement of Profit and Loss 3 - 4 Statement of Changes in Partners' Capital 5 Statement of Cash Flows 6 - 7 Notes to Financial Statements 8 - 12 Supplementary Data 13 - 15 Independent Auditors' Report on Internal Control Structure 16 - 17 Independent Auditors' Report on Compliance with Specific Requirements Applicable to Major HUD Programs 18 Auditors' Schedule of Findings 19 Auditee's Corrective Action Plan 20 Auditor's Comments on Audit Resolution Matters 21 Independent Auditors' Report on Compliance with Specific Requirements Applicable to Affirmative Fair Housing 22 Certification of Partners and Managing Agent 23 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY Of CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report To the Partners of Lakeside Square Limited Partnership We have audited the accompanying balance sheet of Lakeside Square Limited Partnership, a limited partnership, (HUD Project No. IL06-E000-093) as of December 31, 1996, and the related statements of profit and loss, changes in partners' capital, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's managing general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards 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 the managing general partner, 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 Lakeside Square Limited Partnership as of December 31, 1996, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued reports dated January 22 and January 24, 1997 on our consideration of Lakeside Square Limited Partnership's (the "Partnership") internal control structure and the Partnership's compliance with laws and regulations, respectively. The supplementary data included in the report (shown on pages 13 to 20) are presented for the purposes of additional analysis and are not a required part of the basic financial statements of Lakeside Square Limited 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 presented, in all material respects, in relation to the financial statements taken as a whole. /s/Vacek, Lange & Westerfield, P.C. Houston, Texas January 22, 1997 - ------------------------------------------------------------------------------- Under the direct supervision of Randy G. Lange, C.P.A., Texas License No. 24214, the audit of Lakeside Square Limited Partnership's December 31, 1996 financial statements was performed by Vacek, Lange & Westerfield, P.C., FIN: 76-0192275, Texas License C 1882-001, 11 Greenway Plaza, Suite 1524, Houston, Texas 77046, 713-623-2929. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Balance Sheet December 31, 1996 Asset Current assets: 1120 Cash $ 687,769 1130 Tenant accounts receivable 3,157 1140 Release from reserve for replacement receivable 19,688 1190 Rent subsidy receivable from HUD 23,158 1240 Prepaid property and liability insurance 57,390 1290 Miscellaneous prepaid expenses 875 1310 Mortgage escrow deposits 157,821 Total current assets 949,858 1191 Tenants' security deposits held in trust 78,779 1320 Reserve for replacement (Note 2) 287,925 Property and equipment (Notes 1 and 3): 1410 Land $ 400,000 1420 Buildings and improvements 10,326,151 1440 Building equipment - portable 121,053 1450 Furniture 15,874 1480 Transportation equipment 15,497 10,878,575 Less: accumulated depreciation -2,630,431 Net property and equipment 8,248,144 1800 Organization costs 680 1900 Debt issue costs, net of amortization of $84,886 75,759 Total assets $9,641,145 LIABILITIES AND PARTNERS' CAPITAL Current liabilities: 2320 Current portion of mortgage payable $ 154,904 2110 Accounts payable 8,720 2120 Accrued wages and payroll taxes 7,753 2150 Accrued property taxes payable 297,738 2190 Miscellaneous accrued expenses and current liabilities 68,540 2210 Deferred rental income 3,402 Total current liabilities 541,057 2191 Tenant security deposits 53,682 2320 Long-term portion of mortgage payable 6,178,202 Total liabilities 6,772,941 3130 Partners' capital 2,868,204 Total liabilities and partners' capital $ 9,641,145 The accompanying notes are an integral part of these financial statements. Statement of U.S. Department of Housing Profit and Loss and Urban Development Office of Housing Federal Housing Commissioner OMB Approval No.2502-0052 (Exp.1/31/95) For Month/Period Project Number: Project Name: Beginning: Ending: JAN. 1, 1996 DEC 31,1996 IL06-E000-093 LAKESIDE SQUARE LIMITED PARTNERSHIP Part I Description of Account Acct. No. Amount* Apartments or Member Carrying Charges (Coops) 5120 625,921 Tenant Assistance Payments 5121 2,228,695 Rental Furniture and Equipment 5130 Income Stores and Commercial 5140 5100 Garage and Parking Spaces 5170 73,313 Flexible Subsidy Income 5180 Miscellaneous (specify) 5190 Total Rent Revenue - Potential at 100% Occupancy 2,927,929 Apartments 5220 21,018 Furniture and Equipment 5230 Vacancies Stores and Commercial 5240 5200 Garage and Parking Spaces 5270 Miscellaneous (specify) 5290 Total Vacancies 21,018 Net Rental Revenue - Rent Revenue Less Vacancies 2,906,911 Elderly and Congregate Services Income--5300 Total Service Income - (Schedule Attached) 5300 Interest Income--Project Operations 5410 22,573 Financial Income from Investments--Residual Receipts 5430 Revenue Income from Investments--Reserve for Replacement 5440 9,548 5400 Income from Investments--Miscellaneous 5490 Total Financial Revenue 32,121 Laundry and Vending 5910 22,640 NSF and Late Charges 5920 3,429 Other Damages and Cleaning Fees 5930 Revenue Forfeited Tenant Security Deposits 5940 678 5900 Other Revenue (specify) Miscellaneus 5990 Total Other Revenue 26,747 Total Revenue 2,965,779 Advertising 6210 Other Administrative Expense 6250 Office Salaries 6310 95,272 Office Supplies 6311 25,261 Office or Model Apartment Rent 6312 Administrative - Management 6320 180,609 Expenses Manager or Superintendent Salaries 6330 59,796 6200/6300 Manager or Superintendent Rent Free Unit 6331 7,932 Legal Expenses (Project) 6340 17,275 Auditing Expenses (Project) 6350 13,056 Bookkeeping Fees/Accounting Services 6351 Telephone and Answering Service 6360 9,821 Bad Debts 6370 Miscellaneous Administrative Expenses (specify) 6390 17,098 Total Administrative Expenses 426,120 Fuel Oil/Coal 6420 Utilities Electricity (Light and Misc. Power) 6450 56,007 Expense Water 6451 43,943 6400 Gas 6452 163,544 Sewer 6453 Total Utilities Expense 263,494 Page 1 of 2 form HUD-92410 (7/91) ref Handbook 4370.2 The accompanying notes are an integral part of these financial statements. Janitor and Cleaning Payroll 6510 Janitor and Cleaning Supplies 6515 20,612 Janitor and Cleaning Contract 6517 Exterminating Payroll/Contract 6519 Exterminating Supplies 6520 6,642 Garbage and Trash Removal 6525 31,261 Security Payroll/Contract 6530 157,395 Grounds Payroll 6535 Grounds Supplies 6536 2,223 Operating and Grounds Contract 6537 1,395 Maintenance Repairs Payroll 6540 158,636 Expenses Repairs Material 6541 45,156 6500 Repairs Contract 6542 40,330 Elevator Maintenance/Contract 6545 22,658 Heating/Cooling Repairs and Maintenance 6546 3,305 Swimming Pool Maintenance/Contract 6547 Snow Removal 6548 Decorating Payroll/Contract 6560 14,950 Decorating Supplies 6561 11,586 Other 6570 530 Miscellaneous Operating and Maintenance Expenses 6590 6,145 Total Operating and Maintenance Expenses 522,824 Real Estate Taxes 6710 257,506 Payroll Taxes (FICA) 6711 25,666 Miscellaneous Taxes, Licenses and Permits 6719 Taxes Property and Liability Insurance (Hazard) 6720 55,283 and Fidelity Bond Insurance 6721 318 Insurance Workmen's Compensation 6722 9,029 6700 Health Insurance and Other Employee Benefits 6723 36,276 Other Insurance (specify) Vehicle 6729 2,194 Total Taxes and Insurance 386,272 Interest on Bonds Payable 6810 Interest on Mortgage Payable 6820 496,823 Financial Interest on Notes Payable (Long-Term) 6830 Expenses Interest on Notes Payable (Short-Term) 6840 2,568 6800 Mortgage Insurance Premium/Service Charge 6850 Miscellaneous Financial Expenses 6890 450 Total Financial Expenses 499,841 Elderly & Total Service Expenses- --Schedule Attached 6900 Congregate Total Cost of Operations Before Depreciation 2,098,551 Service Profit (Loss) Before Depreciation 867,228 Expenses Depreciation (Total)--6600 (specify) 6600 395,553 6900 Operating Profit or (Loss) 471,675 Officer Salaries 7110 Corporate or Legal Expenses (Entity) 7120 Mortgagor Taxes (Federal-State-Entity) 7130-32 Entity Other Expenses (Entity) 7190 53,751 Expenses Total Corporate Expenses 53,751 7100 Net Profit or (Loss) 417,924 WARNING: HUD will prosecute false claims and statements. Conviction may result in criminal and/or civil penalties.(18 U.S.C. 1001, 1010, 1012;31U.S.C. 3729, 3802) Miscellaneous or other Income and Expense Sub-account Groups. If miscellaneous or other income and/or expense sub-accounts (5190, 5290, 5490, 5990, 6390, 6590, 6729, 6890, and 7190)exceed the Account Groupings by 10% or more, attach a separate schedule describing or explaining the miscellaneous income or expense. Part II 1. Total principal payments required under the mortgage, even if payments under a Workout $143,388 Agreement are less or more than those required under the mortgage. 2. Replacement Reserve deposits required by the Regulatory Agreement or $72,000 Amendments thereto, even if payments may be temporarily suspended or waived. 3. Replacement or Painting Reserve releases which are included as expense items on this $1,975 Profit and Loss statement. 4. Project Improvement Reserve Releases under the Flexible Subsidy Program that are included as expense items on this Profit and Loss Statement. N/A Page 2 of 2 form HUD-92410 The accompanying notes are an integral part of these financial statements. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Changes in Partners' Equity For the Year Ended December 31, 1996 Partners' Capital Owner- (Deficit) Net Cash ship % 12/31/95 Income Withdrawals General Partner: Texas Lakeside Group Limited Partnership 1% -$726,345 $348,967 -$501,000 Investor Limited Partner: Boston Financial Qualified Housing Tax Credits LP, IV 99% 3,776,643 68,957 -99,000 Special Limited Partner: SLP 89, Inc. NIL --- --- --- Class A Limited Partner: Radney Management and Investments, Inc. NIL -18 --- --- --- --- --- $3,050,280 $417,924 -$600,000 The accompanying notes are an integral part of these financial statements. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Cash Flows Increase (Decrease) in Cash and Cash Equivalents For the Year Ended December 31, 1996 Cash flows from operating activities: Rental receipts $ 2,897,874 Interest receipts 32,121 Other receipts 7,059 Total reciepts 2,937,054 Administrative expenses -93,298 Management fees -177,900 Utilities -254,499 Salaries and wages -312,015 Operating and maintenance expenses -377,778 Real estate taxes -257,506 Miscellaneous taxes and insurance -73,947 Property insurance -66,235 Interest on mortgage note -496,823 Miscellaneous financial expenses -2,963 Tenant security and other deposits -24,472 -2,137,436 Net cash provided by operating activities 799,618 (See page 7 for reconciliation to net income) Cash flows from investing activities: Building improvements and acquisition of other depreciable assets -17,713 Contributions to reserve for replacement -81,544 Releases from reserve for replacement 19,688 Net cash (used) by investing activities -79,569 Cash flows from financing activities: Mortgage principal payments -143,388 Mortgagor expenses -42,224 Cash distributions paid to partners -600,000 Net cash (used) by financing activities -785,612 Net increase in cash -65,563 Cash - beginning of period 753,332 Cash - end of period $ 687,769 The accompanying notes are an integral part of these financial statements. - - 6 - LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Notes to Financial Statements December 31, 1996 Note 1 - The Organization and Summary of Significant Account Policies Organization Lakeside Square Limited Partnership (the "Partnership") was organized on October 2, 1989 as a limited partnership under the laws of the State of Illinois to acquire an apartment building located in Chicago, Illinois, and to operate under the National Housing Act, such apartment project consisting of 308 units. The apartment project is regulated by the U.S. Department of Housing and Urban Development ("HUD") as to rent charges and certain operating methods. Additionally, the Partnership entered into a Housing Assistance Payments Contract ("HAP") which limits annual distributions to partners to an amount equivalent to surplus cash, as defined. Surplus cash is calculated on a specific date in time and is not cumulative for purposes of determining allowable distributions to partners. Surplus cash at December 31, 1996 is $664,636 and is calculated on page 18 of this report. The amended partnership agreement specifies that the term of the Partnership shall not extend beyond December 31, 2040. As specified in the HAP contract, the Partnership's rental income is subsidized under Section 8 of the National Housing Act. Accordingly, HUD subsidizes and pays to the Partnership a portion of each qualifying tenant's rent. The amount of subsidy is based on the tenant's adjusted income but is not to exceed 100% of contract rent and certain utility allowances. The provisions stated herein are defined by the HAP contract, and such contract had an original 15 year term commencing in October 1989. Under terms of the Partnership Agreement, profits and losses of the Partnership are allocated in accordance with each partner's percentage interest, which are as follows: Texas Lakeside Group Limited Partnership 1% Boston Financial Qualified Housing Tax Credits L.P. IV (the "Investor Limited Partner") 99% Other Partners NIL For years in which cash flow is distributed to partners, profits will be allocated to the partners ratably in accordance with such distributions. Generally, the partnership agreement specifies that distributions of cash flow, as defined, prior to January 1, 1992, shall be distributed to the general partner. Thereafter and through December 31, 2010, a cumulative "Priority Distribution" of $61,000 per year through 1995 and $110,000 per year, thereafter, is payable to the Investor Limited Partner and, in essence, any remaining cash flow shall be distributed to the General Partner. Distributions of cash flow subsequent to December 31, 2010, will be made in accordance with provisions of the Partnership Agreement. The Partnership Agreement and other agreements with HUD, provides for Radney Management & Investments, Inc. to be paid a management fee of 6% of gross collections (See Note 5). Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Debt Issue Costs Costs incurred to refinance the apartment project acquisition and to secure funds to rehabilitate the project are capitalized and amortized over the life of the related loans using the effective interest rate method of amortization. Amortization of debt issue costs for 1996 totalled $11,960 and is included in mortgagor entity expenses. Cash Equivalents Cash Flows For purposes of the statement of cash flows, the Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less and all certificates of deposit to be cash equivalents. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated on the straight-line method over the following estimated useful lives: Life Buildings and improvements 27.5 years Building equipment and furniture 7.0 years Vehicle 5.0 years Expenditures for major renewals and betterments which substantially increase the project's remaining estimated useful life are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recognized currently. Income Taxes The Partnership is not a tax paying entity. Income, deductions and credits of the Partnership must be shown on each individual partner's tax return. Accordingly, a provision for Federal income taxes has not been made in the financial statements. The Partnership's net income for Federal income tax purposes is approximately $420,700. The difference between financial statement and income tax reporting net income is due to differing depreciation methods and recognition of deferred rents as taxable income when collected. A substantial portion of the Partnership's assets qualify to generate low income housing tax credits. Low income housing tax credits for 1996 are estimated to be $643,000. If the Partnership meets specific requirements under existing income tax regulations, certain low income housing tax credits will be available annually through December 31, 2001. Revenue Recognition Monthly rents from occupied units are recognized as income on the first day of each month. Rents collected prior to the first day of the month are deferred. Mortgagor Entity Expenses Mortgagor entity expenses generally consist of wages, payroll benefit allowance expense, travel expenses, legal expense, amortization of debt issue costs and miscellaneous expenses. Note 2 - Reserve for Replacement Pursuant to terms of the Community Investment Corporation ("CIC") loan agreement, the Partnership is currently required to deposit $3,000 per month to a "Reserve for Replacement". For 1996, however, the Partnership elected to make a nonrecurring additional deposit of $36,000. Monthly deposits to the fund will continue until the fund accumulates $400,000. Withdrawals from the fund require approval from CIC and are generally limited to expenditures necessary to improve or replace buildings and equipment. During 1996, the Partnership had expended funds and rquested CIC to approve the release of $19,688 from the fund. Accordingly, the financial statements and surplus cash calculations reflect a receivable for this amount. Note 3 - Long-Term Debt Long-term mortgage debt as December 31, 1996 consists of: Nonrecourse note payable to Community Investment Corporation, secured by mortgage on apartment complex and assignment of rents generated thereby, interest rate is adjustable every third year beginning March 1, 1993, but such adjustment shall not exceed 2% points per adjustment or 5% points in aggregate, interest accrues at the rate of 7.75% during three year period beginning March 1, 1996, principal and interest are payable in monthly installments of $20,065, the note is amortized assuming a twenty-five year level annuity; however, any unpaid principal is due on March 20, 2005 $ 2,343,370 Nonrecourse note payable to Community Investment Corporation, secured by mortgage on apartment complex and assignment of rents generated thereby, interest rate is adjustable every third year beginning March 1, 1993, but such adjustment shall not exceed 2% points per adjustment or 5% points in aggregate. The current interest rate is 7.75%, principal and interest are payable in monthly installments of $33,292, the note is amortized assuming a twenty-five year level annuity; however, any unpaid principal is due on March 20, 2005 3,989,736 6,333,106 Less - current maturities 154,904 ------------- $ 6,178,202 Six individuals related to the Partnership's general partner have severally guaranteed $500,000 of the notes payable to CIC. For the succeeding five years, aggregate maturities applicable to long-term debt outstanding at December 31, 1996 are as follows: Year Ending December 31, 1997 $ 154,902 1998 $ 167,344 1999 $ 180,784 2000 $ 195,305 2001 $ 210,989 Note 4 - Concentration of Credit Risk The Partnership maintains cash balances and other deposits with banks which, in aggregate, are $751,639 in excess of insured limits established by the Federal Deposit Insurance Corporation. Note 5 - Related Party Transactions The apartment project is managed by Radney Management and Investments, Inc. ("Radney"), a limited partner in the Partnership. Management fees payable to Radney are based on six percent of gross collections, which the Partnership's management interprets to include $92,595 for utility allowances that are withheld by HUD from gross rents. For the period ended December 31, 1996, management fees totalled $180,609. For the year ended December 31, 1996, Radney provided the Partnership with all personnel necessary and assigned to operate the project and was reimbursed or accrued for actual costs incurred totalling $375,646. Additionally, Radney was paid $11,440 for "non front line" employee salaries and an employee benefit allowance expense equivalent to 7.7% of wages which totalled $24,411. The non front line employee salaries and employee benefit allowance expense are mortgagor entity expenses which are essentially paid from partnership funds. As of December 31, 1996, non-interest bearing advances due to the Partnership's general partner totalling $8,361 are included in the Balance Sheet item captioned "Miscellaneous accrued expenses and current liabilities". The advances were made in previous years to fund key man life insurance premiums. Note 6 - Accrued Property Taxes Payable The Partnership is assessed ad valorem taxes by the Tax Assessor for the County of Cook, Illinois. Property taxes for the year ended December 31, 1996 will be determined and assessed during the summer of 1997. The Partnership has estimated this assessment will not vary materially from the 1996 tax assessment. Accordingly, the December 31, 1996 financial statements reflect a property tax liability based upon this estimate. During 1996, the Partnership's 1992 property tax assessment was redetermined and the Partnership received a refund of amounts previously paid totalling $44,369. This refund is reflected as a reduction to the Partnership's 1996 real estate tax expense. Note 7 - Union Contracts All of the Partnership's maintenance personnel are employed under a collective bargaining agreement between the Service Employees International Union (AFL-CIO) and the Apartment Building Owners & Managers Association. This annual contract expires on November 30, 1997. The Partnership's administrative personnel do not participate in collective bargaining agreement. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Supplementary Data December 31, 1996 Accounts and notes receivable (other than tenants): Receivables other than from tenants at December 31, 1996 consists of (1) rent subsidy due from HUD of $23,158 and (2) a release due from the Reserve for Replacement of $19,688. Delinquent tenant accounts receivable: At December 31, 1996 rents receivable from tenants are as follows: Number of Amount tenants past due Delinquent 30 days...............20... .........$ 2,718 Delinquent 31-60 days.............6................. 439 Delinquent 61-90 days............ 0 0 Total........................................$ 3,157 Mortgage escrow deposits: Estimated amount required as of December 31, 1996 for future payment of: City, state, school and county taxes............$100,625 Property insurance................................12,992 Mortgage insurance........................... N/A ...............................................$ 113,617 Total deposits reconciled to mortgagee........$ 157,821 ========== Amount per financial statements in excess (deficient) of estimated requirements......$ 44,204 ========== Tenant security deposits: Tenant security deposits of $53,682 are held in the name of the project at Old Kent Bank-Chicago, money market account # 1063480. This account is insured by the Federal Deposit Insurance Corporation. Tenants receive interest on their deposits calculated at the annual rate of 5%. Reserve for replacement: In accordance with the provisions of the Partnership's note agreement, restricted cash is held by the Partnership to be used for repair or replacement of property or equipment with the approval of the mortgagee. The balance of funds in such reserve is as follows: Balance, December 31, 1995...................$ 226,069 Plus: Monthly deposits..........................36,000 Plus: Non-recurring deposit (6/18/96)...........36,000 Less: December 19 release requested Refrigerators & stoves - capital.... .(17,713) December 19 release requested Refrigerators & stoves - expense.......(1,975) Plus: Interest earned..................... 9,544 ----------- Balance, December 31, 1996, as confirmed..... $ 287,925 The reserve account is maintained with Old Kent Bank - Chicago. Changes in Property and Equipment: See page 16 for detailed analysis. Accounts payable (other than trade creditors): Accounts payable other than trade creditors represents $8,361 payable to the Partnership's general partner for previous cash advances and life insurance premiums paid. The repayment thereof, from partnership funds, is expected to occur more than sixty days after December 31, 1996. The payable of $8,361 is included in the balance sheet caption "miscellaneous accrued expenses and current liabilities." Accrued taxes: Description Basis for Period Date Amount of Tax Accrual Covered Due Accrued -------------------------------------------------------------------------- School 1995 Assessed Value 1996 * $ 154,395 City 1995 Assessed Value 1996 * 69,356 County 1995 Assessed Value 1996 * 31,913 Other 1995 Assessed Value 1996 * 42,074 ---------- $297,738 * 50% of all taxes are due March 1, 1997 and the remaining 50% is due September 1, 1997. Notes Payable (other than mortgage): None Changes in Ownership Interests: None Distributions Paid to Partners The following distributions were paid from Surplus Cash available as of December 31, 1995: Date Partner Amount - ------------------------------------------------------------------------------ January 30, 1996 Texas Lakeside Group Limited Partnership $ 401,000 January 30, 1996 BFQH Tax Credit LP, IV. $ 99,000 April 30, 1996 Texas Lakeside Group Limited Partnership $ 100,000 Unauthorized Distribution of Project Revenue: None Comments on Balance Sheet Items: None Compensation of Partners or Officers: Compensation was not paid to partners during 1996. However, see Note 5 to the financial statements regarding management fees of $180,609 paid to Radney Management & Investments, Inc., a Class A Limited Partner. Apartment unit not producing revenue: Sofia Slobodetsky, Lakeside Square Limited Partnership's office clerk, currently resides at the project site and is provided a one-bedroom unit rent free. Listing of Identity of Interest Companies and Activity: See page 17. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Supplementary Data Changes in Property and Equipment For the Year Ended December 31, 1996 Asset Accumulated Depreciation Net Book Balance Balance Balance Balance Value December 31, December 31, December 31, December 31, December 31, 1995 Additions Retirements 1996 1995 Additions Retirements 1996 1996 ---- --------- ----------- ----------- ---------- --------- ----------- ------------ ----------- Land $400,000 - - - - - - $400,000 $0 - - - - - - $0 $400,000 Buildings $10,326,151 - - - - - - $10,326,151 $2,167,023 375,496 - - - $2,542,519 $7,783,632 Building equipment: Portable $103,340 17,713 - - - $121,053 $52,039 14,866 - - - $66,905 $54,148 Furniture $15,874 --- - - - $15,874 $8,327 2,091 - - - $10,418 $5,456 ------- Transportation equipment $15,497 - - - - - - $15,497 $7,489 3,100 - - - $10,589 $4,908 ------- ----- ----- ------- ------ ----- ----- ------- ------ $10,860,862 $17,713 $0 $10,878,575 $2,234,878 $395,553 $0 $2,630,431 $8,248,144 LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Identity of Interest Companies and Activity For the Year Ended December 31, 1996 (Supplementary Information) Identity of Interest Company Services Amount Radney Management & Investments,Inc. Management of Project 180,609 Managing Agent Radney Management & Investments,Inc. Reimbursement for project salaries, Managing Agent payroll taxes, retirement benefits and health insurance 375,646 Computation of Surplus Cash, U. S. Department of Housing Distributions and Residual and Urban Development Receipts Office of Housing Federal Housing Commissioner PROJECT NAME FISCAL PERIOD ENDED PROJECT NUMBER Lakeside Square Limited Partnership 12 / 31 / 96 IL06-E000-093 Part A - Compute Surplus Cash Cash 1. Cash (Accounts 1110, 1120, 1191, 1192) $764,214 2. Tenant subsidy vouchers due for period covered by financial statement $23,158 3. Other (describe) Release from Reserve for Replacement receivable $19,688 (a) Total Cash (Add Lines 1, 2 and 3) $807,060 Current obligations 4. Accrued mortgage interest payable 5. Delinquent mortgage principal payments 6. Delinquent deposits to reserve for replacements 7. Accounts payable (due within 30 days) $8,720 8. Loans and notes (due within 30 days) $12,456 9. Deficient Tax Insurance or MIP Escrow Deposits 10. Accrued expenses (not escrowed) $64,164 11. Prepaid Rents (Account 2210) $3,402 12. Tenant security deposits liability (Account 2191) $53,682 13. Other (Describe) (b) Less Total Current Obligations (Add Lines 4 through 13) $142,424 (c) Surplus Cash (Deficiency) (Line (a) minus Line (b)) $664,636 PART B - COMPUTE DISTRIBUTIONS TO OWNERS AND REQUIRED DEPOSIT TO RESIDUAL RECEIPTS 1. Surplus Cash $664,636 Limited Dividend Projects 2a. Annual Distribution Earned During Fiscal Period Coverd by the Statement 2b. Distribution Accrued and Unpaid as of the End of the Prior Fiscal Period 2c. Distributions Paid During Fiscal Period Covered by Statement 3. Amount to be Carried on Balance Sheet as Distribution Earned but Unpaid (Line 2a plus 2b minus 2c) 4. Amount Available for Distribution During Next Fiscal Period 5. Deposit Due Residual Receipts (Must be deposited with Mortgagee within 60 days after Fiscal Period ends) PREPARED BY REVIEWED BY Loan Technician Loan Servicer Date Date (See Reverse for Instructions) HUD-93486 (8/95) LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Receipts and Disbursements For the Year Ending December 31, 1996 (Supplementary Data) SOURCE OF FUNDS Operations: Revenues Rental income $ 2,897,874 Other income 39,180 $ 2,937,054 Expenses Administrative expenses 93,298 Management fees 177,900 Operating expenses (utilities) 254,499 Payrolls 312,015 Maintenance expenses 377,778 Taxes - real estate 257,506 Taxes - other 25,666 Insurance 114,513 Interest on building loan 496,826 Miscellaneous financial expenses 2,963 2,112,964 Cash provided by operations before amortization 824,090 Amortization of mortgage 143,388 Cash provided by operations after debt service 680,702 Other Increase in mortgage escrow deposits -23,644 Release from Reserve for replacement 19,688 Total sources 676,746 APPLICATION OF FUNDS Reserve for replacement - funded 81,544 Tenant security deposits 828 Mortgagor expenses 42,224 Acquisition of fixed assets 17,713 Distributions to partners 600,000 Total application of funds 742,309 Increase in cash -65,563 Unrestricted cash at beginning of year 753,332 Unrestricted cash at end of year $ 687,769 - 19 - LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Schedule of Funds In Financial Institutions December 31, 1996 (Supplementary Data) Funds Held by Mortgagor, Regular Operating Account: Frost National Bank - money market - 4.17% $444,124 Bank of Chicago - money market - 3.15% 222,993 Old Kent Bank, Chicago - checking 17,818 Operating account, sub-total 684,935 Petty cash 500 Partnership funds 2,334 Cash per balance sheet $687,769 Funds Held by Mortgagor, In Trust, Tenant Security Deposit: Old Kent Bank - Chicago, Money Market - 3.30% $78,779 Funds Held by Mortgagor, In Trust, Reserve for Replacement: Old Kent Bank - Chicago, Money Market - 3.50% $287,925 Funds Held by Mortgagor $1,051,639 Funds Held by Mortgagee: Tax and insurance escrow held by Community Investment Corporation $157,821 All bank accounts maintained by Mortgagor were confirmed with the financial institution. Funds held by the Mortgagee were confirmed with Community Investment Corporation. VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report on Internal Control Structure To the Partners Lakeside Square Limited Partnership We have audited the financial statements of Lakeside Square Limited Partnership as of and for the year ended December 31, 1996, and have issued our report thereon dated January 22, 1997. We have also audited Lakeside Square Limited Partnership's compliance with requirements applicable to HUD-assisted programs and have issued our report thereon dated January 24, 1997. We conducted our audits in accordance with generally accepted auditing standards, Government Auditing Standards issued by the Comptroller General of the United States, and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General in July 1993. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and about whether Lakeside Square Limited Partnership complied with laws and regulations, noncompliance with which would be material to a HUD-assisted program. The management of Lakeside Square Limited Partnership is responsible for establishing and maintaining an internal control structure. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of internal control structure policies and procedures. The objectives of an internal control structure are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles and that HUD-assisted programs are managed in compliance with applicable laws and regulations. Because of inherent limitations in any internal control structure, errors, irregularities, or instances of noncompliance may nevertheless occur and not be detected. Also, projection of any evaluation of the structure to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate. In planning and performing our audits for the year ended December 31, 1996, we obtained an understanding of the design of relevant internal control structure policies and procedures and determined whether they had been placed in operation, and we assessed control risk in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements of Lakeside Square Limited Partnership and on its compliance with specific requirements applicable to its major HUD-assisted program and to report on the internal control structure in accordance with provisions of the Guide and not to provide any assurance on the internal control structure. We performed tests of controls, as required by the Guide, to evaluate the effectiveness of the design and operation of internal control structure policies and procedures that we considered relevant to preventing or detecting material noncompliance with specific requirements applicable to Lakeside Square Limited Partnership's HUD-assisted program. Our procedures were less in scope than would be necessary to render an opinion on internal control structure policy and procedures. Accordingly, we do not express such an opinion. Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. A material weakness is a reportable condition in which the design or operation of one or more of the internal control structure elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited or that noncompliance with laws and regulations that would be material to a HUD-assisted program may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control structure and its operations that we consider to be material weaknesses as defined above. This report is intended for the information of Lakeside Square Limited Partnership's partners, management, and the Department of Housing and Urban Development. However, this report is a matter of public record and its distribution is not limited. /s/ Vacek, Lange & Westerfield, P.C. January 22, 1997 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report on Compliance with Specific Requirements Applicable to Major HUD Programs To the Partners Lakeside Square Limited Partnership We have audited the financial statements of Lakeside Square Limited Partnership as of and for the year ended December 31, 1996 and have issued our report thereon dated January 22, 1997. We have also audited Lakeside Square Limited Partnership's compliance with the specific program requirements governing (1) rent subsidy requests, and (2) tenant application, eligibility and recertification that are applicable to its only major HUD-assisted program (Section 8 rent subsidy) for the year ended December 31, 1996. The management of Lakeside Square Limited Partnership is responsible for compliance with those requirements. Our responsibility is to express an opinion on compliance with those requirements based on our audit. We conducted our audit in accordance with generally accepted auditing standards, Government Auditing Standards issued by the Comptroller General of the United States, and Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U.S. Department of Housing and Urban Development, Office of Inspector General in July 1993. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether material noncompliance with the requirements referred to above occurred. An audit includes examining, on a test basis, evidence about Lakeside Square Limited Partnership's compliance with those requirements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, Lakeside Square Limited Partnership complied, in all material respects, with the requirements described above that are applicable to its major HUD-assisted program for the year ended December 31, 1996. This report is intended for the information of Lakeside Square Limited Partnership's partners, management, and the Department of Housing and Urban Development. However, this report is a matter of public record and its distribution is not limited. /s/Vacek, Lange & Westerfield, P.C. January 24, 1997 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Auditors' Schedule of Findings There are no findings to report. Auditee's Corrective Action Plan Project: Lakeside Square Limited Partnership. Audit Firm: Vacek, Lange & Westerfield, P.C. Audit Period: December 31, 1996 C. Status of Corrective Action or Prior Findings Our December 31, 1995 audit did not disclose any findings. VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Auditors' Comments on Audit Resolution Matters Our December 31, 1995 audit did not reveal any matters to report. VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report on Compliance with Specific Requirements Applicable to Affirmative Fair Housing To the Partners of Lakeside Square Limited Partnership We have audited the financial statements of Lakeside Square Limited Partnership as of and for the year ended December 31, 1996, and have issued our report thereon dated January 22, 1997. We have applied procedures to test Lakeside Square Limited Partnership's compliance with the Affirmative Fair Housing requirements applicable to its HUD-assisted program, for the year ended December 31, 1996. Our procedures were limited to the applicable compliance requirement described in the Consolidated Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing and Urban Development, Office of Inspector General in July 1993. Our procedures were substantially less in scope than an audit, the objective of which would be the expression of an opinion on Lakeside Square Limited Partnership's compliance with the Affirmative Fair Housing requirements. Accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported herein under the Guide. This report is intended for the information of Lakeside Square Limited Partnership's partners, management and the Department of Housing and Urban Development. However, this report is a matter of public record and its distribution is not limited. January 24, 1997 LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Certificate of Partners and Managing Agent I hereby certify that I have examined the accompanying financial statements and supplementary data of Lakeside Square Limited Partnership (Federal Identification No. 76-0288740) and to the best of my knowledge and belief, the same is complete and accurate. /s/ John N. Barineau, III February 24, 1997 ------------------------------------------------ John N. Barineau, III Date as President of J.B. Lakeside, Inc. Managing General Partner of Texas Lakeside Group Limited Partnership, General Partner of Lakeside Square Limited Partnership Also as, President of Radney Management & Investments, Inc. Project Managing Agent and as individual directly responsible for project managament LAKESIDE SQUARE LIMITED PARTNERSHIP (AN ILLINOIS LIMITED PARTNERSHIP) HUD PROJECT NO. IL06-E000-093 FINANCIAL STATEMENTS DECEMBER 31, 1997 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS LAKESIDE SQUARE LIMITED PARTNERSHIP Index to Financial Statements Page(s) Independent Auditors' Report 1 Auditor Information 1 Balance Sheet 2 Statement of Profit and Loss 3 - 4 Statement of Changes in Partners' Capital 5 Statement of Cash Flows 6 - 7 Notes to Financial Statements 8 - 12 Supplementary Data 13 - 15 Independent Auditors' Report on Internal Control 16 - 17 Independent Auditors' Report on Compliance with Specific Requirements Applicable to Major HUD Programs 18 Auditors' Schedule of Findings 19 Auditee's Corrective Action Plan 20 Auditor's Comments on Audit Resolution Matters 21 Independent Auditors' Report on Compliance with Specific Requirements Applicable to Fair Housing and Non-Discrimination 22 Certification of Partners and Managing Agent 23 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report To the Partners of Lakeside Square Limited Partnership We have audited the accompanying balance sheet of Lakeside Square Limited Partnership, a limited partnership, (HUD Project No. IL06-E000-093) as of December 31, 1997, and the related statements of profit and loss, changes in partners' capital, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's managing general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards 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 the managing general partner, 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 Lakeside Square Limited Partnership as of December 31, 1997, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary data included in the report (shown on pages 13 to 20) are presented for the purposes of additional analysis and are not a required part of the basic financial statements of Lakeside Square Limited 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 presented, in all material respects, in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued reports dated January 23, 1998 on our consideration of Lakeside Square Limited Partnership's (the "Partnership") internal controls and the Partnership's compliance with laws and regulations. /s/Vacek,Lange & Westerfield, P.C. Houston, Texas January 23, 1998 Under the direct supervision of Randy G. Lange, C.P.A., Texas License No. 24214, the audit of Lakeside Square Limited Partnership's December 31, 1997 financial statements was performed by Vacek, Lange & Westerfield, P.C., FIN: 76-0192275, Texas License C 1882-001, 11 Greenway Plaza, Suite 1524, Houston, Texas 77046, 713-623-2929. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Balance Sheet December 31, 1997 ASSETS Current assets: 1120 Cash $ 825,436 1130 Tenant accounts receivable 5,534 1240 Prepaid property and liability insurance 49,702 1290 Miscellaneous prepaid expenses 1,062 Total current assets 881,734 1191 Tenants' security deposits held in trust 81,419 Restricted deposits and funded reserves: 1320 Reserve for replacement (Note 2) 309,038 1310 Mortgage escrow deposits 139,842 Total deposits 448,880 Property and equipment (Notes 1 and 3): 1410 Land$ 400,000 1420 Buildings and improvements 10,326,151 1440 Building equipment - portable 135,041 1450 Furniture 19,159 1480 Transportation equipment 15,497 10,895,848 Less: accumulated depreciation -3,024,059 Net property and equipment 7,871,789 1800 Organization costs 680 1900 Debt issue costs, net of amortization of $96,846 63,799 Total assets $ 9,348,301 LIABILITIES AND PARTNERS' CAPITAL Current liabilities: 2320 Current portion of mortgage payable $ 167,344 2110 Accounts payable 18,594 2120 Accrued wages and payroll taxes 7,761 2150 Accrued property taxes payable 309,304 2190 Miscellaneous accrued expenses and current liabilities 56,717 2210 Deferred rental income 8,922 Total current liabilities 568,642 2191 Tenant security deposits 54,460 2320 Long-term portion of mortgage payable 6,010,858 Total liabilities 6,633,960 3130 Partners' capital 2,714,341 Total liabilities and partners' capital $ 9,348,301 The accompanying notes are an integral part of these financial statements. - 2 - > Statement of U.S. Department of Housing Profit and Loss and Urban Development Office of Housing Federal Housing Commissioner OMB Approval No.2502-0052 (Exp.9/30/98) For Month/Period Project Number: Project Name: Beginning: Ending: JAN. 1, 1997 DEC 31,1997 IL06-E000-093 LAKESIDE SQUARE LIMITED PARTNERSHIP Part I Description of Account Acct. No. Amount* Apartments or Member Carrying Charges (Coops) 5120 642,661 Tenant Assistance Payments 5121 2,297,975 Rental Furniture and Equipment 5130 Income Stores and Commercial 5140 5100 Garage and Parking Spaces 5170 72,696 Flexible Subsidy Income 5180 Miscellaneous (specify) 5190 Total Rent Revenue Potential at 100% Occupancy 3,013,332 Apartments 5220 6,353 Furniture and Equipment 5230 Vacancies Stores and Commercial 5240 5200 Garage and Parking Spaces 5270 Miscellaneous (specify) 5290 Total Vacancies 6,353 Net Rental Revenue Rent Revenue Less Vacancies 3,006,979 Elderly and Congregate Services Income--5300 Total Service Income (Schedule Attached) 5300 Interest Income--Project Operations 5410 23,824 Financial Income from Investments--Residual Receipts 5430 Revenue Income from Investments--Reserve for Replacement 5440 10,826 5400 Income from Investments--Miscellaneous 5490 Total Financial Revenue 34,650 Laundry and Vending 5910 22,181 NSF and Late Charges 5920 2,540 Other Damages and Cleaning Fees 5930 Revenue Forfeited Tenant Security Deposits 5940 2,363 5900 Other Revenue (specify) Miscellaneus 5990 1,703 Total Other Revenue 28,787 Total Revenue 3,070,416 Advertising 6210 Other Administrative Expense 6250 Office Salaries 6310 92,575 Office Supplies 6311 15,987 Office or Model Apartment Rent 6312 Administrative Management 6320 187,651 Expenses Manager or Superintendent Salaries 6330 57,618 6200/6300 Manager or Superintendent Rent Free Unit 6331 8,274 Legal Expenses (Project) 6340 14,830 Auditing Expenses (Project) 6350 10,996 Bookkeeping Fees/Accounting Services 6351 Telephone and Answering Service 6360 9,197 Bad Debts 6370 Miscellaneous Administrative Expenses (specify) 6390 43,109 Total Administrative Expenses 440,237 Fuel Oil/Coal 6420 Utilities Electricity (Light and Misc. Power) 6450 49,600 Expense Water 6451 45,772 6400 Gas 6452 172,857 Sewer 6453 Total Utilities Expense 268,229 Page 1 of 2 form HUD-92410 (7/91) ref Handbook 4370.2 The accompanying notes are an integral part of these financial statements. Janitor and Cleaning Payroll 6510 Janitor and Cleaning Supplies 6515 15,893 Janitor and Cleaning Contract 6517 1,478 Exterminating Payroll/Contract 6519 Exterminating Supplies 6520 4,122 Garbage and Trash Removal 6525 29,001 Security Payroll/Contract 6530 159,226 Grounds Payroll 6535 Grounds Supplies 6536 2,220 Operating and Grounds Contract 6537 3,785 Maintenance Repairs Payroll 6540 157,251 Expenses Repairs Material 6541 23,422 6500 Repairs Contract 6542 122,566 Elevator Maintenance/Contract 6545 26,345 Heating/Cooling Repairs and Maintenance 6546 2,603 Swimming Pool Maintenance/Contract 6547 Snow Removal 6548 Decorating Payroll/Contract 6560 Decorating Supplies 6561 8,938 Other 6570 442 Miscellaneous Operating and Maintenance Expenses 6590 8,862 Total Operating and Maintenance Expenses 566,154 Real Estate Taxes 6710 318,937 Payroll Taxes (FICA) 6711 23,243 Miscellaneous Taxes, Licenses and Permits 6719 Taxes Property and Liability Insurance (Hazard) 6720 64,049 and Fidelity Bond Insurance 6721 318 Insurance Workmen's Compensation 6722 10,147 6700 Health Insurance and Other Employee Benefits 6723 36,569 Other Insurance (specify) Vehicle 6729 2,103 Total Taxes and Insurance 455,366 Interest on Bonds Payable 6810 Interest on Mortgage Payable 6820 485,060 Financial Interest on Notes Payable (Long-Term) 6830 Expenses Interest on Notes Payable (Short-Term) 6840 2,600 6800 Mortgage Insurance Premium/Service Charge 6850 Miscellaneous Financial Expenses 6890 450 Total Financial Expenses 488,110 Elderly & Total Service Expenses- --Schedule Attached 6900 Congregate Total Cost of Operations Before Depreciation 2,218,096 Service Profit (Loss) Before Depreciation 852,320 Expenses Depreciation (Total)--6600 (specify) 6600 393,628 6900 Operating Profit or (Loss) 458,692 Officer Salaries 7110 Corporate or Legal Expenses (Entity) 7120 Mortgagor Taxes (Federal-State-Entity) 7130-32 Entity Other Expenses (Entity) 7190 52,555 Expenses Total Corporate Expenses 52,555 7100 Net Profit or (Loss) 406,137 WARNING: HUD will prosecute false claims and statements. Conviction may result in criminal and/or civil penalties.(18 U.S.C. 1001, 1010, 1012;31 U.S.C. 3729, 3802) Miscellaneous or other Income and Expense Sub-account Groups. If miscellaneous or other income and/or expense sub-accounts (5190, 5290, 5490, 5990, 6390, 6590, 6729, 6890, and 7190)exceed the Account Groupings by 10% or more, attach a separate schedule describing or explaining the miscellaneous income or expense. Part II 1. Total principal payments required under the mortgage, even if payments under a Workout $154,904 Agreement are less or more than those required under the mortgage. 2. Replacement Reserve deposits required by the Regulatory Agreement or $36,000 Amendments thereto, even if payments may be temporarily suspended or waived. 3. Replacement or Painting Reserve releases which are included as expense items on this $16,208 Profit and Loss statement. 4. Project Improvement Reserve Releases under the Flexible Subsidy Program that are included as expense items on this Profit and Loss Statement. N/A Page 2 of 2 form HUD-92410 (7/91) The accompanying notes are an integral part of these financial statements. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Changes in Partners' Equity For the Year Ended December 31, 1997 Partners' Partners' Capital Capital Owner- (Deficit) Net Cash (Deficit) ship % 12/31/96 Income Withdrawals 12/31/97 General Partner: Texas Lakeside Group Limited Partnership 1% -$878,378 $326,360 -$450,000 -$1,002,018 Investor Limited Partner: Boston Financial Qualified Housing Tax Credits LP, IV 99% 3,746,600 79,777 -110,000 3,716,377 Special Limited Partner: SLP 89, Inc. NIL --- --- --- --- Class A Limited Partner: Radney Management and Investments, Inc. NIL -18 --- --- -18 --- --- --- --- $3,050,280 $406,137 -$560,000 $2,714,341 The accompanying notes are an integral part of these financial statements. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Cash Flows Increase (Decrease) in Cash and Cash Equivalents For the Year Ended December 31, 1997 Cash flows from operating activities: Rental receipts $ 3,033,280 Interest receipts 34,650 Other receipts 28,787 Total reciepts 3,096,717 Administrative expenses -105,007 Management fees -179,998 Utilities -280,069 Salaries and wages -307,436 Operating and maintenance expenses -404,604 Real estate taxes -307,370 Miscellaneous taxes and insurance -72,380 Property insurance -56,548 Interest on mortgage note -485,060 Miscellaneous financial expenses -3,018 Tenant security and other deposits 16,117 -2,185,373 Net cash provided by operating activities 911,344 (See page 7 for reconciliation to net income) Cash flows from investing activities: Building improvements and acquisition of other depreciable assets -17,273 Contributions to reserve for replacement -46,826 Releases from reserve for replacement 45,401 Net cash (used) by investing activities -18,698 Cash flows from financing activities: Mortgage principal payments -154,904 Mortgagor expenses -40,075 Cash distributions paid to partners -560,000 Net cash (used) by financing activities -754,979 Net increase in cash 137,667 Cash - beginning of period 687,769 Cash - end of period $ 825,436 The accompanying notes are an integral part of these financial statements. - 6 - LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Cash Flows Increase (Decrease) in Cash and Cash Equivalents For the Year Ended December 31, 1997 Reconciliation of net income to net cash provided operating activities: Net income $ 406,137 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 393,628 Amortization 11,960 Mortgagor expenses 40,075 Decrease (increase) in: Tenant accounts receivable -2,377 Rent subsidy receivable from HUD 23,158 Tenant security deposits held in Trust -2,640 Prepaid property and liability insurance 7,501 Mortgage escrow deposits 17,979 Increase (decrease) in: Accounts payable 9,874 Deferred rental income 5,520 Miscellaneous accrued expenses -249 Tenant security deposit 778 Net cash provided by operating activities $ 911,344 The accompanying notes are an integral part of these financial statements. - -7- LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Notes to Financial Statements December 31, 1997 Note 1 - The Organization and Summary of Significant Account Policies Organization Lakeside Square Limited Partnership (the "Partnership") was organized on October 2, 1989 as a limited partnership under the laws of the State of Illinois to acquire an apartment building located in Chicago, Illinois, and to operate under the National Housing Act, such apartment project consisting of 308 units. The apartment project is regulated by the U.S. Department of Housing and Urban Development ("HUD") as to rent charges and certain operating methods. Additionally, the Partnership entered into a Housing Assistance Payments Contract ("HAP") which limits annual distributions to partners to an amount equivalent to surplus cash, as defined. Surplus cash is calculated on a specific date in time and is not cumulative for purposes of determining allowable distributions to partners. Surplus cash at December 31, 1997 is $753,534 and is calculated on page 18 of this report. The amended partnership agreement specifies that the term of the Partnership shall not extend beyond December 31, 2040. As specified in the HAP contract, the Partnership's rental income is subsidized under Section 8 of the National Housing Act. Accordingly, HUD subsidizes and pays to the Partnership a portion of each qualifying tenant's rent. The amount of subsidy is based on the tenant's adjusted income but is not to exceed 100% of contract rent and certain utility allowances. The provisions stated herein are defined by the HAP contract, and such contract had an original 15 year term commencing in October 1989. Under terms of the Partnership Agreement, profits and losses of the Partnership are allocated in accordance with each partner's percentage interest, which are as follows: Texas Lakeside Group Limited Partnership 1% Boston Financial Qualified Housing Tax Credits L.P. IV (the "Investor Limited Partner") 99% Other Partners NIL For years in which cash flow is distributed to partners, profits will be allocated to the partners ratably in accordance with such distributions. Generally, the partnership agreement specifies that distributions of cash flow, as defined, prior to January 1, 1992, shall be distributed to the general partner. Thereafter and through December 31, 2010, a cumulative "Priority Distribution" of $61,000 per year through 1995 and $110,000 per year, thereafter, is payable to the Investor Limited Partner. The next $500,000 of cash flow shall be distributed to the General Partner and any amounts in excess thereof is to be distributed in accordance with each partner's percentage interest. Distributions of cash flow subsequent to December 31, 2010, will be made in accordance with provisions of the Partnership Agreement. The Partnership Agreement and other agreements with HUD, provide for Radney Management & Investments, Inc. to be paid a management fee of 6% of gross collections (See Note 5). Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Debt Issue Costs Costs incurred to refinance the apartment project acquisition and to secure funds to rehabilitate the project are capitalized and amortized over the life of the related loans using the effective interest rate method of amortization. Amortization of debt issue costs for 1996 totalled $11,960 and is included in mortgagor entity expenses. Cash Equivalents Cash Flows For purposes of the statement of cash flows, the Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less and all certificates of deposit to be cash equivalents. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated on the straight-line method over the following estimated useful lives: Life Buildings and improvements 27.5 years Building equipment and furniture 7.0 years Vehicle 5.0 years The Partnership accounts for the carrying value of long-lived assets in accordance with the requirements of Statements of Financial Accounting Standards #121. Expenditures for major renewals and betterments which substantially increase the project's remaining estimated useful life are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recognized currently. Income Taxes The Partnership is not a tax paying entity. Income, deductions and credits of the Partnership must be shown on each individual partner's tax return. Accordingly, a provision for Federal income taxes has not been made in the financial statements. The Partnership's net income for Federal income tax purposes is approximately $417,200. The difference between financial statement and income tax reporting net income is due to differing depreciation methods and recognition of deferred rents as taxable income when collected. A substantial portion of the Partnership's assets qualify to generate low income housing tax credits. Low income housing tax credits for 1997 are estimated to be $643,000. If the Partnership meets specific requirements under existing income tax regulations, certain low income housing tax credits will be available annually through December 31, 2001. Revenue Recognition Monthly rents from occupied units are recognized as income on the first day of each month. Rents collected prior to the first day of the month are deferred. Mortgagor Entity Expenses Mortgagor entity expenses generally consist of wages, payroll benefit allowance expense, travel expenses, legal expense, amortization of debt issue costs and miscellaneous expenses. Note 2 - Reserve for Replacement Pursuant to terms of the Community Investment Corporation ("CIC") loan agreement, the Partnership is currently required to deposit $3,000 per month to a "Reserve for Replacement". Monthly deposits to the fund will continue until the fund accumulates $400,000. Withdrawals from the fund require approval from CIC and are generally limited to expenditures necessary to improve or replace buildings and equipment. Note 3 - Long-Term Debt Long-term mortgage debt as December 31, 1997 consists of: Nonrecourse note payable to Community Investment Corporation, secured by mortgage on apartment complex and assignment of rents generated thereby, interest rate is adjustable every third year beginning March 1, 1993, but such adjustment shall not exceed 2% points per adjustment or 5% points in aggregate, interest accrues at the rate of 7.75% during three year period beginning March 1, 1996, principal and interest are payable in monthly installments of $20,065, the note is amortized assuming a twenty-five year level annuity; however, any unpaid principal is due on March 20, 2005 $ 2,282,664 Nonrecourse note payable to Community Investment Corporation, secured by mortgage on apartment complex and assignment of rents generated thereby, interest rate is adjustable every third year beginning March 1, 1993, but such adjustment shall not exceed 2% points per adjustment or 5% points in aggregate. The current interest rate is 7.75%, principal and interest are payable in monthly installments of $33,292, the note is amortized assuming a twenty-five year level annuity; however, any unpaid principal is due on March 20, 2005 3,895,538 6,178,202 Less - current maturities 167,344 ------------- $ 6,010,858 Six individuals related to the Partnership's general partner have severally guaranteed $500,000 of the notes payable to CIC. For the succeeding five years, aggregate maturities applicable to long-term debt outstanding at December 31, 1997 are as follows: Year Ending December 31, 1998 $ 167,344 1999 $ 180,784 2000 $ 195,305 2001 $ 210,989 2002 $ 227,903 Note 4 - Concentration of Credit Risk The Partnership maintains cash balances and other deposits with banks which, in aggregate, are $659,624 in excess of insured limits established by the Federal Deposit Insurance Corporation. Note 5 - Related Party Transactions The apartment project is managed by Radney Management and Investments, Inc. ("Radney"), a limited partner in the Partnership. Management fees payable to Radney are based on six percent of gross collections, which the Partnership's management interprets to include $92,595 for utility allowances that are withheld by HUD from gross rents. For the period ended December 31, 1997, management fees totalled $187,651. For the year ended December 31, 1997, Radney provided the Partnership with all personnel necessary and assigned to operate the project and was reimbursed or accrued for actual costs incurred totalling $367,111. Additionally, Radney was paid $8,435 for "non front line" employee salaries and an employee benefit allowance expense equivalent to 7.7% of wages which totalled $23,672. The non front line employee salaries and employee benefit allowance expense are mortgagor entity expenses which are essentially paid from partnership funds. As of December 31, 1997, non-interest bearing advances due to the Partnership's general partner totalling $8,361 are included in the Balance Sheet item captioned "Miscellaneous accrued expenses and current liabilities". The advances were made in previous years to fund key man life insurance premiums. Note 6 - Accrued Property Taxes Payable The Partnership is assessed ad valorem taxes by the Tax Assessor for the County of Cook, Illinois. Property taxes for the year ended December 31, 1997 will be determined and assessed during the summer of 1998. The Partnership has estimated this assessment will not vary materially from the 1997 tax assessment. Accordingly, the December 31, 1997 financial statements reflect a property tax liability based upon this estimate. Note 7 - Union Contracts All of the Partnership's maintenance personnel are employed under a collective bargaining agreement between the Service Employees International Union (AFL-CIO) and the Apartment Building Owners & Managers Association. This annual contract expires on November 30, 1998. The Partnership's administrative personnel do not participate in collective bargaining agreement. Note 8 - Contingency The Partnership is a defendant in a lawsuit arising in the normal course of business. The Partnership intends to defend its position vigorously. However, the ultimate outcome of this suit cannot be determined at this time. The Managing General Partner does not, however, believe the outcome will have a material adverse effect on the Partnership. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Supplementary Data December 31, 1997 Accounts and notes receivable (other than tenants): None Delinquent tenant accounts receivable: At December 31, 1997 rents receivable from tenants are as follows: Number of Amount tenants past due Delinquent 30 days..........9.................$ 2,080 Delinquent 31-60 days.......6...................1,235 Delinquent 61-90 days.......5................. 2,219 Total.....................................$5,534 Mortgage escrow deposits: Estimated amount required as of December 31, 1997 for future payment of: City, state, school and county taxes..........$103,101 Property insurance..............................12,181 Mortgage insurance......................... N/A .............................................$ 115,282 Total deposits reconciled to mortgagee...... $ 139,842 ========== Amount per financial statements in excess (deficient) of estimated requirements......$ 24,560 ========== Tenant security deposits: Tenant security deposits of $54,460 are held in the name of the project at Old Kent Bank-Chicago, money market account # 1063480. This account is insured by the Federal Deposit Insurance Corporation. Tenants receive interest on their deposits calculated at the annual rate of 5%. Reserve for replacement: In accordance with the provisions of the Partnership's note agreement, restricted cash is held by the Partnership to be used for repair or replacement of property or equipment with the approval of the mortgagee. The balance of funds in such reserve is as follows: Balance, December 31, 1996..................$ 287,925 Plus: Monthly deposits.........................36,000 Less: November 19 release requested Hotwater Heaters - expense............(16,208) November 19 release requested Refrigerators & stoves - capital.......(9,505) Plus: Interest earned...................... 10,826 ----------- Balance, December 31, 1997, as confirmed....$ 309,038 The reserve account is maintained with Old Kent Bank - Chicago. Changes in Property and Equipment: See page 16 for detailed analysis. Accounts payable (other than trade creditors): Accounts payable other than trade creditors represents $8,361 payable to the Partnership's general partner for previous cash advances and life insurance premiums paid. The repayment thereof, from partnership funds, is expected to occur more than sixty days after December 31, 1997. The payable of $8,361 is included in the balance sheet caption "miscellaneous accrued expenses and current liabilities." Accrued taxes: Description Basis for Period Date Amount of Tax Accrual Covered Due Accrued -------------------------------------------------------------------------- School 1996 Assessed Value 1997 *.............$ 163,436 City 1996 Assessed Value 1997 *............ ..71,394 County 1996 Assessed Value 1997 *........... ...32,359 Other 1996 Assessed Value 1997 *............ 42,115 ---------- ...............$309,304 * 50% of all taxes are due March 1, 1998 and the remaining 50% is due September 1, 1998. Notes Payable (other than mortgage): None Changes in Ownership Interests: None Distributions Paid to Partners The following distributions were paid from Surplus Cash available as of December 31, 1996: Date Partner Amount - ------------------------------------------------------------------------------- February 12, 1997 Texas Lakeside Group Limited Partnership $ 450,000 February 12, 1997 BFQH Tax Credit LP, IV. $ 110,000 Unauthorized Distribution of Project Revenue: None Comments on Balance Sheet Items: None Compensation of Partners or Officers: Compensation was not paid to partners during 1997. However, see Note 5 to the financial statements regarding management fees of $187,651 paid to Radney Management & Investments, Inc., a Class A Limited Partner. Apartment unit not producing revenue: Sofia Slobodetsky, Lakeside Square Limited Partnership's office clerk, currently resides at the project site and is provided a one-bedroom unit rent free. Listing of Identity of Interest Companies and Activity: See page 17. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Supplementary Data Changes in Property and Equipment For the Year Ended December 31, 1997 Accumulated Depreciation Net Book Balance Balance Balance Balance Value December 31, December 31, December 31, December 31, December 31, 1996 Additions Retirements 1997 1996 Additions Retirements 1997 1997 ---------- --------- ----------- ----------- ----------- --------- ----------- ----------- ------------ Land $400,000 - - - - - - $400,000 $0 - - - - - - $0 $400,000 Buildings $10,326,151 - - - - - - $10,326,151 $2,542,519 375,496 - - - $2,918,015 $7,408,136 Building equipment: Portable $121,053 13,988 - - - $135,041 $66,905 13,429 - - - $80,334 $54,707 Furniture $15,874 3,285 - - - $19,159 $10,418 1,603 - - - $12,021 $7,138 Transportation $15,497 - - - - - - $15,497 $10,589 3,100 - - - $13,689 $1,808 equipment ----------- ----- ----- ---------- ------- ----- ----- ----------- ---------- $10,878,575 $17,273 $0 $10,895,848 $2,630,431 $393,628 $0 $3,024,059 $7,871,789 LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Identity of Interest Companies and Activity For the Year Ended December 31, 1997 (Supplementary Information) Identity of Interest Company Services Amount Radney Management & Investments,Inc. Management of Project 187,651 Managing Agent Radney Management & Investments,Inc. Reimbursement for project salaries, Managing Agent payroll taxes, retirement benefits and health insurance 367,111 J. M. Brown Construction Company, Inc. Reimbursement for travel expenses 20% Shareholder in general partner of acting manager 1,132 Computation of Surplus Cash, U. S. Department of Housing Distributions and Residual and Urban Development Receipts Office of Housing Federal Housing Commissioner PROJECT NAME FISCAL PERIOD ENDED PROJECTNUMBER Lakeside Square Limited Partnership 12 / 31 / 97 IL06-E000-093 Part A - Compute Surplus Cash Cash 1. Cash (Accounts 1110, 1120, 1191, 1192) $900,794 2. Tenant subsidy vouchers due for period covered by financial statement 3. Other (describe) (a) Total Cash (Add Lines 1, 2 and 3) $900,794 Current obligations 4. Accrued mortgage interest payable 5. Delinquent mortgage principal payments 6. Delinquent deposits to reserve for replacements 7. Accounts payable (due within 30 days) $18,594 8. Loans and notes (due within 30 days) $13,455 9. Deficient Tax Insurance or MIP Escrow Deposits 10. Accrued expenses (not escrowed) $51,829 11. Prepaid Rents (Account 2210) $8,922 12. Tenant security deposits liability (Account 2191) $54,460 13. Other (Describe) (b) Less Total Current Obligations (Add Lines 4 through 13) $147,260 (c) Surplus Cash (Deficiency) (Line (a) minus Line (b)) $753,534 PART B - COMPUTE DISTRIBUTIONS TO OWNERS AND REQUIRED DEPOSIT TO RESIDUAL RECEIPTS 1. Surplus Cash $753,534 Limited Dividend Projects 2a. Annual Distribution Earned During Fiscal Period Coverd by the Statement 2b. Distribution Accrued and Unpaid as of the End of the Prior Fiscal Period 2c. Distributions Paid During Fiscal Period Covered by Statement 3. Amount to be Carried on Balance Sheet as Distribution Earned but Unpaid (Line 2a plus 2b minus 2c) 4. Amount Available for Distribution During Next Fiscal Period 5. Deposit Due Residual Receipts (Must be deposited with Mortgagee within 60 days after Fiscal Period ends) PREPARED BY REVIEWED BY Loan Tech Loan Servicer Date Date (See Reverse for Instructions) HUD-93486 (8/95) - - 18 - LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Receipts and Disbursements For the Year Ending December 31, 1997 (Supplementary Data) SOURCE OF FUNDS Operations: Revenues Rental income $ 3,033,280 Other income 63,437 $ 3,096,717 Expenses Administrative expenses 105,007 Management fees 179,998 Operating expenses (utilities) 280,069 Payrolls 307,436 Maintenance expenses 404,604 Taxes - real estate 307,370 Taxes - other 23,243 Insurance 105,685 Interest on building loan 485,060 Miscellaneous financial expenses 3,018 2,201,490 Cash provided by operations before amortization 895,227 Amortization of mortgage 154,904 Cash provided by operations after debt service 740,323 Other Decrease in mortgage escrow deposits 17,979 Release from Reserve for replacement 45,401 Total sources 803,703 APPLICATION OF FUNDS Reserve for replacement - funded 46,826 Tenant security deposits 1,862 Mortgagor expenses 40,075 Acquisition of fixed assets 17,273 Distributions to partners 560,000 Total application of funds 666,036 Increase in cash 137,667 Unrestricted cash at beginning of year 687,769 Unrestricted cash at end of year $ 825,436 - 19 - LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Schedule of Funds In Financial Institutions December 31, 1997 (Supplementary Data) Funds Held by Mortgagor, Regular Operating Account: Frost National Bank - money market - 4.25% $543,352 TCF National Bank - money market - 3.10% 40,170 Old Kent Bank, Chicago - checking 234,853 Operating account, sub-total 818,375 Petty cash 1,000 Partnership funds 6,061 Cash per balance sheet $825,436 Funds Held by Mortgagor, In Trust, Tenant Security Deposit: Old Kent Bank - Chicago, Money Market - 3.30% $81,419 Funds Held by Mortgagor, In Trust, Reserve for Replacement: Old Kent Bank - Chicago, Money Market - 3.50% $309,038 Funds Held by Mortgagor $1,209,832 Funds Held by Mortgagee: Tax and insurance escrow held by Community Investment Corporation $139,842 All bank accounts maintained by Mortgagor were confirmed with the financial institution. Funds held by the Mortgagee were confirmed with Community Investment Corporation. VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report on Internal Control To the Partners Lakeside Square Limited Partnership We have audited the financial statements of Lakeside Square Limited Partnership as of and for the year ended December 31, 1997, and have issued our report thereon dated January 23, 1998. We have also audited Lakeside Square Limited Partnership's compliance with requirements applicable to HUD-assisted programs and have issued our report thereon dated January 23, 1998. We conducted our audits in accordance with generally accepted auditing standards, Government Auditing Standards issued by the Comptroller General of the United States, and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General in July 1993. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and about whether Lakeside Square Limited Partnership complied with laws and regulations, noncompliance with which would be material to a HUD-assisted program. In planning and performing our audit for the year ended December 31, 1997, we obtained an understanding of the design of relevant internal controls and determined whether they had been placed in operation, and we assessed control risk in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements of Lakeside Square Limited Partnership and on its compliance with specific requirements applicable to its major HUD-assisted program and to report on the internal controls in accordance with provisions of the Guide and not to provide any assurance on the internal controls. The management of Lakeside Square Limited Partnership is responsible for establishing and maintaining internal controls. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of internal controls. The objectives of internal controls are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles and that HUD-assisted programs are managed in compliance with applicable laws and regulations. Because of inherent limitations in internal controls, errors, irregularities, or instances of noncompliance may nevertheless occur and not be detected. Also, projection of any evaluation to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate. We performed tests of controls, as required by the Guide, to evaluate the effectiveness of the design and operation of internal controls that we considered relevant to preventing or detecting material noncompliance with specific requirements applicable to Lakeside Square Limited Partnership's HUD-assisted program. Our procedures were less in scope than would be necessary to render an opinion on internal control policy and procedures. Accordingly, we do not express such an opinion. Our consideration of internal controls would not necessarily disclose all matters in internal controls that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited or that noncompliance with laws and regulations that would be material to a HUD-assisted program may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving internal controls and its operation that we consider to be material weaknesses as defined above. This report is intended for the information of Lakeside Square Limited Partnership's partners, management, and the Department of Housing and Urban Development. However, this report is a matter of public record and its distribution is not limited. /s/Vacek, Lange & Westerfield, P.C. January 23, 1998 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report on Compliance with Specific Requirements Applicable to Major HUD Programs To the Partners Lakeside Square Limited Partnership We have audited the financial statements of Lakeside Square Limited Partnership as of and for the year ended December 31, 1997 and have issued our report thereon dated January 23, 1998. We have also audited Lakeside Square Limited Partnership's compliance with the specific program requirements governing tenant security deposits, cash receipts and disbursements, distributions to owners, tenant application, tenant eligibility, tenant recertification, management functions, maintenance and reexamination of tenants, that are applicable to its only major HUD-assisted program (Section 8 rent subsidy) for the year ended December 31, 1997. The management of Lakeside Square Limited Partnership is responsible for compliance with those requirements. Our responsibility is to express an opinion on compliance with those requirements based on our audit. We conducted our audit in accordance with generally accepted auditing standards, Government Auditing Standards issued by the Comptroller General of the United States, and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U.S. Department of Housing and Urban Development, Office of Inspector General. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether material noncompliance with the requirements referred to above occurred. An audit includes examining, on a test basis, evidence about Lakeside Square Limited Partnership's compliance with those requirements. We believe that our audit provides a reasonable basis for our opinion. The results of our audit disclosed immaterial instances of noncompliance with the requirements referred to above which are listed on page 24 herein. We considered these instances of noncompliance in forming our opinion on compliance, which is expressed in the following paragraph. In our opinion, Lakeside Square Limited Partnership complied, in all material respects, with the requirements described above that are applicable to its major HUD-assisted program for the year ended December 31, 1997. This report is intended for the information of Lakeside Square Limited Partnership's partners, management, and the Department of Housing and Urban Development. However, this report is a matter of public record and its distribution is not limited. /s/Vacek, Lange & Westerfield, P.C. January 23, 1998 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Auditors' Schedule of Findings FINDING #1: Our audit revealed instances indicative that the procedures employed by Lakeside Square Apartments may require modification to ensure compliance with guidelines set forth in HUD Handbook 4350.3 Change-24 "Occupancy Requirements of Subsidized MultiFamily Housing Programs". Those instances are as follows: Our sample of five tenant move-ins revealed that applicants' files do not document Federal Preferences. In the particular instances noted, applicants were moved-in apartment units under the Federal preference designation "paying in excess of fifty percent of income for rent". Upon examination of the file documentation, it was discovered that the file did not contain evidence to support the Federal Preference claimed. Paragraph 2-28 of HUD Handbook 4350.3 Change-24 essentially requires that applicants with Federal preferences receive priority over all other applicants. To ensure Federal Preferences are consistently considered, Lakeside Square Apartments should consider implementing the use of a checklist, or other document, whereby leasing personnel can sign-off that a given preference exists. If the application processing determines that an applicant does not qualify for a Federal Preference, the leasing personnel should select the next applicant on the waiting list who has indicated a Federal Preference. FINDING #2: During July 1997 the Partnership's waiting list was opened and applications were accepted. As the applications were processed, qualified applicants were processed for housing. Three applicants did not meet the Partnership's screening criteria and, accordingly will not be offered housing. The applicants, however, had not been given a formal denial. Denial letters should be provided immediately upon determination so that the applicant is afforded the appeals right provided by housing regulations. Findings #1 and #2 appear to relate principally to employee turnover experienced during 1997. Auditee's Corrective Action Plan Project: Lakeside Square Limited Partnership Audit Firm: Vacek, Lange & Westerfield, P.C. Audit Period: December 31, 1997 A. Comments on Findings and Recommendations Finding #1 Lakeside did opt to use the Preference Rule and it has been our practice to obtain copies of leases from the applicants to show that they, indeed, did pay over 50% of their income on rent. Due to transition of personnel some of these copies were not made to go on file. We are in process of trying to obtain the missing information to correct the deficiency. Finding #2 It has always been our practice to formally deny applicants when they do not meet our screening criteria. We follow the 4350.3 procedures. These three applicants were inadvertently overlooked to the best of my knowledge. B. Action Taken Findings #1 & #2 The actions taken on above two findings are tighter controls, periodic site file audits and closer supervision of site staff. C. Status of Corrective Action or Prior Findings Our December 31, 1996 audit did not disclose any findings. VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Auditors' Comments on Audit Resolution Matters Our December 31, 1996 audit did not reveal any matters to report. VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report on Compliance with Specific Requirements Applicable to Fair Housing and Non-Discrimination To the Partners of Lakeside Square Limited Partnership We have audited the financial statements of Lakeside Square Limited Partnership as of and for the year ended December 31, 1997, and have issued our report thereon dated January 23, 1998. We have applied procedures to test Lakeside Square Limited Partnership's compliance with the Fair Housing and Non-Discrimination requirements applicable to its HUD-assisted program for the year ended December 31, 1997. Our procedures were limited to the applicable compliance requirement described in the Consolidated Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing and Urban Development, Office of Inspector General. Our procedures were substantially less in scope than an audit, the objective of which would be the expression of an opinion on Lakeside Square Limited Partnership's compliance with the Fair Housing and Non-Discrimination requirements. Accordingly, we do not express such an opinion. The results of our tests disclosed minor instances of noncompliance that are required to be reported herein under the Guide and such instances are presented on page 24 of this report. This report is intended for the information of Lakeside Square Limited Partnership's partners, management and the Department of Housing and Urban Development. However, this report is a matter of public record and its distribution is not limited. /s/Vacek, Lange & Westerfield, P.C. January 23, 1998 LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Certification of Partners and Management Agent's Certification I hereby certify that I have examined the accompanying financial statements and supplementary data of Lakeside Square Limited Partnership HUD Project No. IL06-E000-093 (Federal Identification No. 76-0288740) and to the best of my knowledge and belief, the same are complete and accurate. /s/ John N. Barineau, III January 23, 1998 ------------------------------------------------- John N. Barineau, III Date as President of J.B. Lakeside, Inc. Managing General Partner of Texas Lakeside Group Limited Partnership, General Partner of Lakeside Square Limited Partnership Also as, President of Radney Management & Investments, Inc. Project Managing Agent and as individual directly responsible for project management LAKESIDE SQUARE LIMITED PARTNERSHIP (AN ILLINOIS LIMITED PARTNERSHIP) HUD PROJECT NO. IL06-E000-093 FINANCIAL STATEMENTS December 31, 1998 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS LAKESIDE SQUARE LIMITED PARTNERSHIP Index to Financial Statements Page(s) Independent Auditors' Report 1 Auditor Information 1 Balance Sheet 2 Statement of Profit and Loss 3 - 4 Statement of Changes in Partners' Capital 5 Statement of Cash Flows 6 - 7 Notes to Financial Statements 8 - 12 Supplementary Data 13 - 19 Independent Auditors' Report on Internal Control 20 - 21 Independent Auditors' Report on Compliance with Specific Requirements Applicable to Major HUD Programs 22 Auditors' Schedule of Findings 23 Auditee's Corrective Action Plan 24 Auditor's Comments on Audit Resolution Matters 25 Independent Auditors' Report on Compliance with Specific Requirements Applicable to Fair Housing and Non-Discrimination 26 Certification of Partners and Managing Agent 27 - 29 - VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report To the Partners of Lakeside Square Limited Partnership We have audited the accompanying balance sheet of Lakeside Square Limited Partnership, a limited partnership, (HUD Project No. IL06-E000-093) as of December 31, 1998, and the related statements of profit and loss, changes in partners' capital, and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's managing general partner. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards 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 the managing general partner, 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 Lakeside Square Limited Partnership as of December 31, 1998, and the results of its operations, changes in partners' capital and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary data included in the report (shown on pages 13 to 19) are presented for the purposes of additional analysis and are not a required part of the basic financial statements of Lakeside Square Limited 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 presented, in all material respects, in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued reports dated January 27, 1999 on our consideration of Lakeside Square Limited Partnership's (the "Partnership") internal controls, and the Partnership's compliance with specific requirements applicable to major HUD programs and Fair Housing and Discrimination. /s/ Vacek,Lange & Westerfield, P.C. Houston, Texas January 27, 1999 ----------------------------------------------------------------- Under the direct supervision of Randy G. Lange, C.P.A., Texas License No. 24214, the audit of Lakeside Square Limited Partnership's December 31, 1998 financial statements was performed by Vacek, Lange & Westerfield, P.C., FIN: 76-0192275, Texas License C 1882-001, 11 Greenway Plaza, Suite 1524, Houston, Texas 77046, 713-623-2929. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Balance Sheet December 31, 1998 ASSETS Current assets: 1120 Cash - Operations $ 812,926 1125 Cash - Entity 10,022 Total Cash 822,948 1130 Tenant Accounts Receivable 472 1200 Miscellaneous Prepaid Expenses 46,278 1100T Total current assets 869,698 1191 Tenant Deposits Held in Trust 84,147 Restricted deposits and funded reserves: 1310 Escrow Deposits 145,314 1320 Replacement Reserve 347,505 1300T Total deposits 492,819 Property and equipment (Notes 1 and 3): 1410 Land $ 400,000 1420 Buildings 10,326,151 1440 Buildings Equipment 167,044 1465 Office Furniture and Equipment 20,926 1480 Motor Vehicles 15,497 1400T Total Fixed Assets 10,929,618 1495 Accumulated Depreciation 3,418,612 1400N Net Fixed Assets 7,511,006 Intangible Assets Organization costs 680 Debt issue costs, net of amortization of $108,806 51,839 1520 Total Intangible Assets 52,519 1000T Total assets $ 9,010,189 The accompanying notes are an integral part of these financial statements. - 2 - LIABILITIES AND PARTNERS' CAPITAL Current liabilities: 2109 Accounts Payable (30 days) $ 26,581 2113 Accounts Payable Entity 15,981 2120 Accrued Wages Payable 9,496 2121 Accrued Payroll Taxes Payable 727 2123 Accrued Management Fee Payable 11,190 2150 Accrued Property Taxes 320,000 2170 Mortgage Payable (Short-Term) 180,784 2190 Miscellaneous Current Liabilities 2,832 2210 Prepaid Revenue 660 2122T Total current liabilities 568,251 2191 Tenant Deposits Held In Trust 59,796 2320 Mortgage Payable 5,824,341 2300T Total Long-Term Liabilities 5,884,137 2000T Total liabilities 6,452,388 3130 Partners' Capital 2,557,801 2033T Total Liabilities and Partners' Capital $ 9,010,189 The accompanying notes are an integral part of these financial statements. Statement of Profit and Loss For Month/Period Project Number: Project Name: Beginning: Ending: JAN. 1, 1998 DEC 31,1998 IL06-E000-093 LAKESIDE SQUARE LIMITED PARTNERSHIP Part I Description of Account Acct. No. Amount* Gross Potential 5120 755,780 Tenant Assistance Payments 5121 2,308,889 Rental Stores and Commercial 5140 Revenue Garage and Parking Spaces 5170 68,724 5100 Flexible Subsidy Income 5180 Miscellaneous (specify) 5190 Excess Rent 5191 Insurance 5192 Special Claims 5193 Retained Excess Income 5194 Total Rent Revenue 5100T 3,133,393 Apartments 5220 46,249 Stores and Commercial 5240 Vacancies Rental Concessions 5250 5200 Garage and Parking Spaces 5270 Miscellaneous 5290 Total Vacancies 5200T 46,249 Net Rental Revenue 5152N 3,087,144 Nursing Homes/Assited Living Board Care/ Other Coop (Schedule Attached) 5300 Project Operations 5410 22,957 Financial Residual Receipts 5430 Revenue Reserve for Replacement 5440 11,570 5400 Revenue from Investments--Miscellaneous 5490 Total Financial Revenue 5400T 34,527 Laundry and Vending 5910 19,556 Tenant Charges 5920 5,430 Other Interest Reduction Payments 5945 Revenue Other Revenue (specify) Miscellaneus 5990 5900 Total Other Revenue 5900T 24,986 Total Revenue 5000T 3,146,657 Conventions and Meetings 6203 Management Consultants 6204 Advertising and Marketing 6210 Other Renting Expenses 6250 Office Salaries 6310 81,346 Office Expenses 6311 77,371 Office or Model Apartment Rent 6312 Administrative Management 6320 192,256 Expenses Manager or Superintendent Salaries 6330 54,692 6200/6300 Administrative Rent Free Unit 6331 8,514 Legal Expenses Project 6340 10,893 Audit Expense 6350 12,587 Bookkeeping Fees/Accounting Services 6351 Bad Debts 6370 Miscellaneous Administrative Expense 6390 7,438 Total Administrative Expenses 6263T 445,097 Fuel Oil/Coal 6420 Utilities Electricity 6450 50,710 Expense Water 6451 47,959 6400 Gas 6452 119,691 Sewer 6453 Total Utilities Expense 6400T 218,360 Page 1 of 2 The accompanying notes are an integral part of these financial statements. -3- Payroll 6510 155,738 Supplies 6515 57,909 Contracts 6520 214,479 Operating Maintenance Rent Free Unit 6521 Garbage and Trash Removal 6525 8,568 Security Payroll/Contract 6530 162,217 Security Rent Free Unit 6531 Heating/Cooling Repairs and Maintenance 6546 20,805 Snow Removal 6548 Vehicle & Maintenance Equipment Operation & Repairs 6570 8,595 Miscellaneous Operating and Maintenance Expenses 6590 9,884 Total Operating and Maintenance Expenses 6500T 638,195 Real Estate Taxes 6710 321,307 Payroll Taxes (Project's share) 6711 25,571 Taxes Property and Liability Insurance (Hazard) 6720 53,159 and Fidelity Bond Insurance 6721 358 Insurance Workmen's Compensation 6722 7,089 6700 Health Insurance and Other Employee Benefits 6723 33,093 Miscellaneous Taxes, Licenses, Permits and Insurance 6790 2,013 Total Taxes and Insurance 6700T 442,590 Interest on Mortgage Payable 6820 472,620 Financial Interest on Notes Payable (Long-Term) 6830 Expenses Interest on Notes Payable (Short-Term) 6840 6800 Mortgage Insurance Premium/Service Charge 6850 Miscellaneous Financial Expenses 6890 3,282 Total Financial Expenses 6800T 475,902 Elderly & Congregate Nursing Home/Assited Living, etc.--Schedule Attached 6900 Service Total Cost of Operations Before Depreciation 6000T 2,220,144 Profit (Loss) Before Depreciation 5060T 926,513 Depreciation Expense 6600 394,553 Amortization Expense 6610 11,960 Operating Profit or (Loss) 5060N 520,000 Officer Salaries 7110 Corporate or Legal Expenses 7120 Mortgagor Federal, State and Other Income Taxes 7130 Entity Interest Income 7140 Expenses Interest on Mortgage Payable 7141 7100 Interest on Notes Payable 7142 Other Expenses 7190 66,540 Total Corporate Expenses 7100T 66,540 Net Profit or (Loss) 3250 453,460 Part II 1.Total mortgage principal payments required during the audit year (12 monthly payments). This applies to all direct loans and HUD-held and fully insured mortgages. Any approved second mortgages should be included in the figures. $167,344 2.Total of 12 monthly deposits in the audit year into the Replacement Reserve account, as required by the Regulatory Agreement even if payments may be temporarily suspended or reduced. $36,000 3.Replacement Reserves, or Residual Receipts and Releases which are included as expenseitems on this Profit and Loss statement. $2,200 4.Project Improvement Reserve releases under the Flexible Subsidy Program that are included as expense items on this Profit and Loss Statement. n/a Page 2 of 2 The accompanying notes are an integral part of these financial statements. -4- LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Changes in Partners' Equity For the Year Ended December 31, 1998 Partners' Partners' Capital Capital Owner- (Deficit) Net Cash (Deficit) ship % 12/31/97 Income Withdrawals 12/31/98 General Partner: Texas Lakeside Group Limited Partnership 1% -$1,002,018 $371,689 -$500,000 -$1,130,329 Investor Limited Partner: Boston Financial Qualified Housing Tax Credits LP, IV 99% 3,716,377 81,771 -110,000 3,688,148 Special Limited Partner: SLP 89, Inc. NIL 0 0 0 0 Class A Limited Partner: Radney Management and Investments, Inc. NIL -18 0 0 -18 ---------- --------- --------- ---------- $2,714,341 $453,460 -$610,000 $2,557,801 The accompanying notes are an integral part of these financial statements. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Cash Flows Increase (Decrease) in Cash and Cash Equivalents For the Year Ended December 31, 1997 Cash flows from operating activities: Rental receipts $ 3,083,944 Interest receipts 34,527 Other receipts 24,986 Total reciepts 3,143,456 Administrative expenses -117,753 Management fees -188,917 Utilities -229,671 Salaries and wages -289,505 Operating and maintenance expenses -495,826 Real estate taxes -310,611 Property insurance -48,670 Miscellaneous taxes and insurance -67,936 Tenant security and other deposits -2,608 Interest on mortgage note -472,620 Miscellaneous financial expenses -3,050 -2,221,951 Net cash provided by operating activities 921,506 (See page 7 for reconciliation to net income) Cash flows from investing activities: Building improvements and acquisition of other depreciable assets -33,770 Net deposits to mortgage escrow account -38,467 Net deposits to the reserve for replacement account -33,770 Net cash (used) by investing activities -77,709 Cash flows from financing activities: Mortgage principal payments -173,077 Cash distributions paid to partners -610,000 Other financing activties (entity expeses) -63,208 Net cash (used) by financing activities -846,285 Net increase in cash -2,488 Cash - beginning of period 825,436 Cash - end of period $ 822,948 The accompanying notes are an integral part of these financial statements. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Statement of Cash Flows Increase (Decrease) in Cash and Cash Equivalents For the Year Ended December 31, 1997 Reconcilation of net income to net cash provided operating activities: Net income $ 453,460 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation 394,553 Amortization 11,960 Entitiy expenses 66,540 Decrease (increase) in: Tenant accounts receivable 5,062 Prepaid expenses 4,486 Cash restricted for tenant security deposits -2,728 Increase (decrease) in: Accounts payable -25,630 Accrued liabilities 16,497 Tenant security deposit 5,336 Prepaid revenue (8,262) Other items 232 Net cash provided by operating activities $ 921,506 The accompanying notes are an integral part of these financial statements. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Notes to Financial Statements December 31, 1998 Note 1 - The Organization and Summary of Significant Account Policies Organization Lakeside Square Limited Partnership (the "Partnership") was organized on October 2, 1989 as a limited partnership under the laws of the State of Illinois to acquire an apartment building located in Chicago, Illinois, and to operate under the National Housing Act, such apartment project consisting of 308 units. The apartment project is regulated by the U.S. Department of Housing and Urban Development ("HUD") as to rent charges and certain operating methods. Additionally, the Partnership entered into a Housing Assistance Payments Contract ("HAP") which limits annual distributions to partners to an amount equivalent to surplus cash, as defined. Surplus cash is calculated on a specific date in time and is not cumulative for purposes of determining allowable distributions to partners. Surplus cash at December 31, 1998 is $771,256 and is calculated on page 18 of this report. The amended partnership agreement specifies that the term of the Partnership shall not extend beyond December 31, 2040. As specified in the HAP contract, the Partnership's rental income is subsidized under Section 8 of the National Housing Act. Accordingly, HUD subsidizes and pays to the Partnership a portion of each qualifying tenant's rent. The amount of subsidy is based on the tenant's adjusted income but is not to exceed 100% of contract rent and certain utility allowances. The provisions stated herein are defined by the HAP contract, and such contract had an original 15 year term commencing in October 1989. Under terms of the Partnership Agreement, profits and losses of the Partnership are allocated in accordance with each partner's percentage interest, which are as follows: Texas Lakeside Group Limited Partnership 1% Boston Financial Qualified Housing Tax Credits L.P. IV (the "Investor Limited Partner") 99% Other Partners NIL For years in which cash flow is distributed to partners, profits will be allocated to the partners ratably in accordance with such distributions. Generally, the partnership agreement specifies that distributions of cash flow, as defined, prior to January 1, 1992, shall be distributed to the general partner. Thereafter and through December 31, 2010, a cumulative "Priority Distribution" of $61,000 per year through 1995 and $110,000 per year, thereafter, is payable to the Investor Limited Partner. The next $500,000 of cash flow shall be distributed to the General Partner and any amounts in excess thereof is to be distributed in accordance with each partner's percentage interest. Distributions of cash flow subsequent to December 31, 2010, will be made in accordance with provisions of the Partnership Agreement. The Partnership Agreement and other agreements with HUD, provide for Radney Management & Investments, Inc. to be paid a management fee of 6% of gross collections (See Note 5). Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Debt Issue Costs Costs incurred to refinance the apartment project acquisition and to secure funds to rehabilitate the project are capitalized and amortized over the life of the related loans using the effective interest rate method of amortization. Amortization of debt issue costs for 1998 totalled $11,960 and is included in mortgagor entity expenses. Cash Equivalents Cash Flows For purposes of the statement of cash flows, the Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less and all certificates of deposit to be cash equivalents. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated on the straight-line method over the following estimated useful lives: Life Buildings and improvements 27.5 years Building equipment and furniture 7.0 years Vehicle 5.0 years The Partnership accounts for the carrying value of long-lived assets in accordance with the requirements of Statements of Financial Accounting Standards #121. Expenditures for major renewals and betterments which substantially increase the project's remaining estimated useful life are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recognized currently. Income Taxes The Partnership is not a tax paying entity. Income, deductions and credits of the Partnership must be shown on each individual partner's tax return. Accordingly, a provision for Federal income taxes has not been made in the financial statements. The Partnership's net income for Federal income tax purposes is approximately $456,000. The difference between financial statement and income tax reporting net income is due to differing depreciation methods, non-deductible life insurance and recognition of deferred rents as taxable income when collected. A substantial portion of the Partnership's assets qualify to generate low income housing tax credits. Low income housing tax credits for 1998 are estimated to be $643,000. If the Partnership meets specific requirements under existing income tax regulations, certain low income housing tax credits will be available annually through December 31, 2001. Revenue Recognition Monthly rents from occupied units are recognized as income on the first day of each month. Rents collected prior to the first day of the month are deferred. Mortgagor Entity Expenses Mortgagor entity expenses generally consist of wages, payroll benefit allowance expense, travel expenses, and miscellaneous office expenses. Note 2 - Reserve for Replacement Pursuant to terms of the Community Investment Corporation ("CIC") loan agreement, the Partnership is currently required to deposit $3,000 per month to a "Reserve for Replacement". Monthly deposits to the fund will continue until the fund accumulates $400,000. Withdrawals from the fund require approval from CIC and are generally limited to expenditures necessary to improve or replace buildings and equipment. Note 3 - Long-Term Debt Long-term mortgage debt as December 31, 1998 consists of: Nonrecourse note payable to Community Investment Corporation, secured by mortgage on apartment complex and assignment of rents generated thereby, interest rate is adjustable every third year beginning March 1, 1993, but such adjustment shall not exceed 2% points per adjustment or 5% points in aggregate, interest accrues at the rate of 7.75% during three year period beginning March 1, 1996, principal and interest are payable in monthly installments of $20,065, the note is amortized assuming a twenty-five year level annuity; however, any unpaid principal is due on March 20, 2005 $ 2,211,068 Nonrecourse note payable to Community Investment Corporation, secured by mortgage on apartment complex and assignment of rents generated thereby, interest rate is adjustable every third year beginning March 1, 1993, but such adjustment shall not exceed 2% points per adjustment or 5% points in aggregate. The current interest rate is 7.75%, principal and interest are payable in monthly installments of $33,292, the note is amortized assuming a twenty-five year level annuity; however, any unpaid principal is due on March 20, 2005 3,794,057 6,005,125 Less - current maturities 180,784 ------------ $ 5,824,341 Six individuals related to the Partnership's general partner have severally guaranteed $500,000 of the notes payable to CIC. For the succeeding five years, aggregate maturities applicable to long-term debt outstanding at December 31, 1998 are as follows: Year Ending December 31, 1999 $ 180,784 2000 $ 195,305 2001 $ 210,989 2002 $ 227,903 2003 $ 246,207 thereafter $ 4,943,937 Note 4 - Concentration of Credit Risk The Partnership maintains cash balances and other deposits with banks which, in aggregate, are $915,684 in excess of insured limits established by the Federal Deposit Insurance Corporation. Note 5 - Related Party Transactions The apartment project is managed by Radney Management and Investments, Inc. ("Radney"), a limited partner in the Partnership. Management fees payable to Radney are based on six percent of gross collections, which the Partnership's management interprets to include $92,127 for utility allowances that are withheld by HUD from gross rents. For the period ended December 31, 1998, management fees totalled $192,256. Accrued and unpaid management fees as of December 31, 1998 total $11,190. For the year ended December 31, 1998, Radney provided the Partnership with all personnel necessary and assigned to operate the project and was reimbursed or accrued for actual costs incurred totalling $351,219. Additionally, Radney was paid $16,311 for "non front line" employees' salaries and an employee benefit allowance expense equivalent to 7.7% of wages which totalled $23,723. Radney was also paid $12,997 for telephone and office expenses. The non front line employees' salaries, employee benefit allowance expense, telephone, and office expenses are mortgagor entity expenses which are essentially paid from "entity" funds. As of December 31, 1998, non-interest bearing advances due to the Partnership's general partner totalling $8,361 are included in the Balance Sheet item captioned "Accounts Payable Entity". The advances were made in previous years to fund key man life insurance premiums. Also, accrued employee benefit allowance expenses of $7,620, which are payable to Radney, are also included in "Accounts Payable Entity". Note 6 - Accrued Property Taxes Payable The Partnership is assessed ad valorem taxes by the Tax Assessor for the County of Cook, Illinois. Property taxes for the year ended December 31, 1998 will be determined and assessed during the summer of 1999. The Partnership has estimated this assessment will not vary materially from the 1997 tax assessment. Accordingly, the December 31, 1998 financial statements reflect a property tax liability based upon this estimate. Note 7 - Union Contracts All of the Partnership's maintenance personnel are employed under a collective bargaining agreement between the Service Employees International Union (AFL-CIO) and the Apartment Building Owners & Managers Association. This annual contract expired on November 30, 1998 and the Partnership has negotiated an extended contract through November 1999. The Partnership's administrative personnel do not participate in collective bargaining agreement. Note 8 - Contingency The Partnership has assessed its exposure to date sensitive computer software programs that may not be operative subsequent to 1999 and has implemented a requisite course of action to minimize year 2000 risk and ensure that neither significant costs nor disruption of normal business operations are encountered. However, because there is no guarantee that all systems of outside vendors or other entities affecting the Partnership's operations will be year 2000 complaint, the Partnership remains susceptible to consequences of the year 2000 issue. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Supplementary Data December 31, 1998 Accounts and notes receivable (other than tenants): None Delinquent tenant accounts receivable: At December 31, 1998 rents receivable from tenants are as follows: Number of Amount tenants past due Delinquent 30 days 2 $ 271 Delinquent 31-60 days 1 201 Delinquent 61-90 days - - - - - -------- Total $ 472 ======== Mortgage escrow deposits: Estimated amount required as of December 31, 1998 for future payment of: City, state, school and county taxes $106,666 Property insurance 11,257 Mortgage insurance N/A $ 117,923 Total deposits reconciled to mortgagee $ 145,315 ========= Amount per financial statements in excess (deficient) of estimated requirements $ 27,392 ========== Tenant security deposits: Tenant security deposits of $84,187 are held in the name of the project at Old Kent Bank-Chicago, money market account # 1063480. This account is insured by the Federal Deposit Insurance Corporation. Tenants receive interest on their deposits calculated at the annual rate of 5%. Reserve for replacement: In accordance with the provisions of the Partnership's note agreement, restricted cash is held by the Partnership to be used for repair or replacement of property or equipment with the approval of the mortgagee. The balance of funds in such reserve is as follows: Balance, December 31, 1997 $ 309,038 Plus: Monthly deposits 36,000 Less: December 8 release requested: Replace fire door- expense (2,200) Refrigerators & stoves - capital (6,903) Plus: Interest earned 11,570 Balance, December 31, 1998, as confirmed $ 347,505 ========= The reserve account is maintained with Old Kent Bank - Chicago. Changes in Property and Equipment: See page 16 for detailed analysis. Accounts payable (other than trade creditors): Accounts payable other than trade creditors represents $8,361 payable to the Partnership's general partner for previous cash advances and life insurance premiums paid. The repayment thereof, from entity funds, is expected to occur more than sixty days after December 31, 1998. The payable of $8,361 is included in the balance sheet caption "Accounts Payable Entity." Accrued taxes: Description Basis for Period Date Amount of Tax Accrual Covered Due Accrued ------------- ------------ --------- ----- --------- School 1997 Assessed Value 1998 * $ 170,440 City 1997 Assessed Value 1998 * 73,242 County 1997 Assessed Value 1998 * 33,256 Other 199 Assessed Value 1998 * 43,062 ---------- $320,000 * 50% of all taxes are due March 1, 1999 and the remaining 50% is due September 1, 1999. Notes Payable (other than mortgage): None Changes in Ownership Interests: None Distributions Paid to Partners The following distributions were paid from Surplus Cash available as of December 31, 1997: Date Partner Amount - ---- -------- -------- January 27, 1998 Texas Lakeside Group Limited Partnership $ 500,000 January 27, 1998 BFQH Tax Credit LP, IV. $ 110,000 Unauthorized Distribution of Project Revenue: None Comments on Balance Sheet Items: None Compensation of Partners or Officers: Compensation was not paid to partners during 1998. However, see Note 5 to the financial statements regarding management fees of $192,256 paid to Radney Management & Investments, Inc., a Class A Limited Partner. Apartment unit not producing revenue: Sofia Slobodetsky, Lakeside Square Limited Partnership's office clerk, currently resides at the project site and is provided a one-bedroom unit rent free. Listing of Identity of Interest Companies and Activity: See page 17. LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Supplementary Data Changes in Property and Equipment For the Year Ended December 31, 1998 ASSETS ACCUMULATED DEPRECIATION Balance Balance Balance Not Book December 31, December 31, December 31, Balance Value 1997 Additions Retirements 1998 1997 Additions Retirements December 31, December 31, 1998 1998 1410 Land $ 400,000 - - - - - - $ 400,000 $ 0 - - - - - - $ 0 $ 400,000 1420 Buildings $10,326,151 - - - - - - $10,326,151 $2,918,015 375,496 - - - $ 3,293,511 $ 7,032,640 Building equipment: 1440 Portable $ 135,041 32,003 - - - $ 167,044 $ 80,334 15,440 - - - $ 95,774 $ 71,270 1465 Furniture $ 19,159 1,767 - - - $ 20,926 $ 12,021 1,809 - - - $ 13,830 $ 7,096 1480 Transportatio equipment $ 15,497 - - - - - - $ 15,497 $ 13,689 1,808 - - - $ 15,497 $ 0 ----------- ----- --------- ----------- ---------- -------- ----- -------------- ------------ $10,895,848 $33,770 $0 $10,929,618 $3,024,059 $394,553 $ 0 $ 3,418,612 $ 7,511,006 Asset additions & retirements Additions Retirements 1440 Fire boxes $ 14,739 --- 1440 Refrigerators (10) -4,450 --- 1440 Ranges (14) -3,440 --- 1440 Computers (3) 7,314 --- 1440 Software - HUD 2000 2,060 --- $32,033 --- 1465 Desk & office furniture 1,767 --- LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Identity of Interest Companies and Activity For the Year Ended December 31, 1998 (Supplementary Information) Identity of Interest Company Services Amount Radney Management & Investments,Inc. Management of Project $192,256 Managing Agent Radney Management & Investments,Inc. Reimbursement for project salaries, Managing Agent payroll taxes, retirement benefits and health insurance 351,219 LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Detail of Miscellaneous Accounts Comprising 10% of Category For the Year Ended December 31, 1998 (Supplementary Information) Acct. 7190 - Other Expenses: Life insurance $5,618 Telephone and office expenses 15,509 Non front- line employee salaries 16,311 Tax return preparation fees 2,633 Travel and other 2,746 Employee benefit allowance paid to Radney Management & Investments, Inc. 23,723 $66,540 - 17 - Computation of Surplus Cash, U. S. Department of Housing Distributions and Residual and Urban Development Receipts Office of Housing Federal Housing Commissioner PROJECT NAME FISCAL PERIOD ENDED PROJECTNUMBER Lakeside Square Limited Partnership 12 / 31 / 98 IL06-E000-093 Part A - Compute Surplus Cash Cash 1. Cash (Accounts 1120, 1170, and 1191 less 2105) $897,073 2. Tenant subsidy vouchers due for period covered by financial statement 3. Other (describe) (a) Total Cash (Add Lines 1, 2 and 3) $897,073 Current obligations 4. Accrued mortgage interest payable 5. Delinquent mortgage principal payments 6. Delinquent deposits to reserve for replacements 7. Accounts payable (due within 30 days) $26,581 8. Loans and notes (due within 30 days) $14,535 9. Deficient Tax Insurance or MIP Escrow Deposits 10. Accrued expenses (not escrowed) $24,245 11. Prepaid Rents (Account 2210) $ 60 12. Tenant security deposits liability (Account 2191) $59,796 13. Other (Describe) (b) Less Total Current Obligations (Add Lines 4 through 13) $125,817 (c) Surplus Cash (Deficiency) (Line (a) minus Line (b)) $771,256 PART B - COMPUTE DISTRIBUTIONS TO OWNERS AND REQUIRED DEPOSIT TO RESIDUAL RECEIPTS 1. Surplus Cash Limited Dividend Projects 2a. Annual Distribution Earned During Fiscal Period Coverd by the Statement 2b. Distribution Accrued and Unpaid as of the End of the Prior Fiscal Period 2c. Distributions Paid During Fiscal Period Covered by Statement 3. Amount to be Carried on Balance Sheet as Distribution Earned but Unpaid (Line 2a plus 2b minus 2c) 4. Amount Available for Distribution During Next Fiscal Period 5. Deposit Due Residual Receipts (Must be deposited with Mortgagee within 60 days after Fiscal Period ends) PREPARED BY REVIEWED BY Loan Technician Loan Servicer Date Date (See Reverse for Instructions) HUD-93486 (8/95) LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Schedule of Funds In Financial Institutions December 31, 1998 (Supplementary Data) Funds Held by Mortgagor, Regular Operating Account: Frost National Bank - money market - 4.22% $684,032 TCF National Bank - money market 95,492 Old Kent Bank, Chicago - checking 32,502 Operating account, sub-total 812,026 Petty cash 900 Cash - operations $812,926 Funds Held by Mortgagor, In Trust, Tenant Security Deposit: Old Kent Bank - Chicago, Money Market $84,147 Funds Held by Mortgagor, In Trust, Reserve for Replacement: Old Kent Bank - Chicago, Money Market $347,505 Funds Held by Mortgagor $1,244,578 Funds Held by Mortgagee: Tax and insurance escrow held by Community Investment Corporation $145,314 All bank accounts maintained by Mortgagor were confirmed with the financial institution. Funds held by the Mortgagee were confirmed with Community Investment Corporation. VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report on Internal Control To the Partners Lakeside Square Limited Partnership We have audited the financial statements of Lakeside Square Limited Partnership as of and for the year ended December 31, 1998, and have issued our report thereon dated January 27, 1999. We have also audited Lakeside Square Limited Partnership's compliance with requirements applicable to HUD-assisted programs and have issued our report thereon dated January 27, 1999. We conducted our audits in accordance with generally accepted auditing standards, Government Auditing Standards issued by the Comptroller General of the United States, and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and about whether Lakeside Square Limited Partnership complied with laws and regulations, noncompliance with which would be material to a HUD-assisted program. In planning and performing our audit for the year ended December 31, 1998, we obtained an understanding of the design of relevant internal controls and determined whether they had been placed in operation, and we assessed control risk in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements of Lakeside Square Limited Partnership and on its compliance with specific requirements applicable to its major HUD-assisted program and to report on the internal controls in accordance with provisions of the Guide and not to provide any assurance on the internal controls. The management of Lakeside Square Limited Partnership is responsible for establishing and maintaining internal controls. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of internal controls. The objectives of internal controls are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles and that HUD-assisted programs are managed in compliance with applicable laws and regulations. Because of inherent limitations in internal controls, errors, irregularities, or instances of noncompliance may nevertheless occur and not be detected. Also, projection of any evaluation to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate. We performed tests of controls, as required by the Guide, to evaluate the effectiveness of the design and operation of internal controls that we considered relevant to preventing or detecting material noncompliance with specific requirements applicable to Lakeside Square Limited Partnership's HUD-assisted program. Our procedures were less in scope than would be necessary to render an opinion on internal control policy and procedures. Accordingly, we do not express such an opinion. Our consideration of internal controls would not necessarily disclose all matters in internal controls that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited or that noncompliance with laws and regulations that would be material to a HUD-assisted program may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving internal controls and its operation that we consider to be material weaknesses as defined above. This report is intended solely for the information of Lakeside Square Limited Partnership's partners, management and personnel, and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. /s/Vacek, Lange & Westerfield P.C. January 27, 1999 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report on Compliance with Specific Requirements Applicable to Major HUD Programs To the Partners Lakeside Square Limited Partnership We have audited the financial statements of Lakeside Square Limited Partnership as of and for the year ended December 31, 1998 and have issued our report thereon dated January 27, 1999. We have also audited Lakeside Square Limited Partnership's compliance with the specific program requirements governing tenant security deposits, cash receipts and disbursements, distributions to owners, tenant application, tenant eligibility, tenant recertification, management functions, maintenance and reexamination of tenants, that are applicable to its only major HUD-assisted program (Section 8 rent subsidy) for the year ended December 31, 1998. The management of Lakeside Square Limited Partnership is responsible for compliance with those requirements. Our responsibility is to express an opinion on compliance with those requirements based on our audit. We conducted our audit in accordance with generally accepted auditing standards, Government Auditing Standards issued by the Comptroller General of the United States, and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U.S. Department of Housing and Urban Development, Office of Inspector General. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether material noncompliance with the requirements referred to above occurred. An audit includes examining, on a test basis, evidence about Lakeside Square Limited Partnership's compliance with those requirements. We believe that our audit provides a reasonable basis for our opinion. The results of our tests disclosed immaterial instances of noncompliance with the above requirements, which have been communicated to management of Lakeside Square Limited Partnership in a separate letter dated February 10, 1999. We considered those instances of non-compliance in forming our opinion on compliance, which is expressed in the following paragraph. In our opinion, Lakeside Square Limited Partnership complied, in all material respects, with the requirements described above that are applicable to its major HUD-assisted program for the year ended December 31, 1998. This report is intended solely for the information of Lakeside Square Limited Partnership's partners, management and personnel, and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. /s/Vacek, Lange & Westerfield P.C. January 27, 1999 VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Auditors' Schedule of Findings There are no findings to report. Auditee's Corrective Action Plan Project: Lakeside Square Limited Partnership Audit Firm: Vacek, Lange & Westerfield, P.C. Audit Period: December 31, 1998 A. Comments on Findings and Recommendations The audit did not disclose any reportable findings. B. Action Taken None required. C. Status of Corrective Action or Prior Findings ------------------------------------------------------------------------- During 1998 the Partnership discontinued the use of Federal Preferences for selecting housing applicants. Also, property management was instructed to issue applicant denial letters expeditiously. --------------------------------------------------------------------------- VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Auditors' Comments on Audit Resolution Matters The Partnership has taken action to resolve both findings reported in our December 31, 1997 report. Specifically, Federal Preference are no longer used to select housing applicants and formal applicant denial letters are issued on a timely basis. VACEK, LANGE & WESTERFIELD, P.C. CERTIFIED PUBLIC ACCOUNTANTS ELEVEN GREENWAY PLAZA SUITE 1524 HOUSTON, TEXAS 77046 (713) 623-2929 Fax: (713) 623-4436 MEMBERS, AMERICAN INSTITUTE OF MEMBERS, TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Independent Auditors' Report on Compliance with Specific Requirements Applicable to Fair Housing and Non-Discrimination To the Partners of Lakeside Square Limited Partnership We have audited the financial statements of Lakeside Square Limited Partnership as of and for the year ended December 31, 1998, and have issued our report thereon dated January 27, 1999. We have applied procedures to test Lakeside Square Limited Partnership's compliance with the Fair Housing and Non-Discrimination requirements applicable to its HUD-assisted program for the year ended December 31, 1998. Our procedures were limited to the applicable compliance requirement described in the Consolidated Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing and Urban Development, Office of Inspector General. Our procedures were substantially less in scope than an audit, the objective of which would be the expression of an opinion on Lakeside Square Limited Partnership's compliance with the Fair Housing and Non-Discrimination requirements. Accordingly, we do not express such an opinion. The results of our tests disclosed immaterial instances of noncompliance with the above requirements, which have been communicated to management of Lakeside Square Limited Partnership in a separate letter dated February 10, 1999. This report is intended solely for the information of Lakeside Square Limited Partnership's partners, management and personnel, and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. /s/Vacek, Lange & Westerfield P.C. January 27, 1999 LAKESIDE SQUARE LIMITED PARTNERSHIP HUD Project No. IL06-E000-093 Certification of Partners and Management Agent's Certification I hereby certify that I have examined the accompanying financial statements and supplementary data of Lakeside Square Limited Partnership HUD Project No. IL06-E000-093 (Federal Identification No. 76-0288740) and to the best of my knowledge and belief, the same are complete and accurate. --------------------------------------------- John N. Barineau, III Date as President of J.B. Lakeside, Inc. Managing General Partner of Texas Lakeside Group Limited Partnership, General Partner of Lakeside Square Limited Partnership Also as, President of Radney Management & Investments, Inc. Project Managing Agent and as individual directly responsible for project management Financial Statements, Additional Information and Additional Reports Kenilworth Associates Ltd. A Limited Partnership (a.k.a. Mayfair Mansions) FHA Project No. 000-44160/000-35349 Year ended December 31, 1998 Kenilworth Associates Ltd. A Limited Partnership (a.k.a. Mayfair Mansions) FHA Project No. 000-44160/000-35349 Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Financial Statements, Additional Information and Additional Reports Year ended December 31, 1998 Contents Report of Independent Auditors.................................................3 Financial Statements: Balance Sheet...............................................................4 Statement of Profit and Loss................................................6 Statement of Partners' Equity (Deficit).....................................8 Statement of Cash Flows.....................................................9 Notes to Financial Statements..............................................12 19 Report of Independent Auditors To the Partners Kenilworth Associates Ltd. We have audited the accompanying balance sheet of Kenilworth Associates Ltd., a Limited Partnership, FHA Project No.000-44160/000-35349 (the "Partnership"), as of December 31, 1998, and the related statements of profit and loss, partners' equity (deficit), and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards 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 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 Kenilworth Associates Ltd., a Limited Partnership, FHA Project No.000-44160/000-35349, as of December 31, 1998, and the results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in the report, as referred to in the Table of Contents, is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, unless otherwise noted, and in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have issued a report dated February 12, 1999, on our consideration of Kenilworth Associates Ltd.'s, a Limited Partnership, FHA Project No. 000-44160/000-35349 internal control and a report dated February 12, 1999, on its compliance with applicable laws and regulations. [GRAPHIC OMITTED] February 12, 1999 Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Balance Sheet December 31, 1998 Assets Current assets: 1120 Cash - operations $ 311,695 1130 Accounts receivable - tenant 48,603 1160 Accounts receivable - interest 2,542 1191 Tenant security deposits held in trust fund 190,000 1200 Miscellaneous prepaid expense 156,920 --------------------- 709,760 Funded Reserves: 1310 Escrow deposits 150,880 1320 Replacement reserve 986,224 1330 Other reserves 1,221,204 1340 Residual receipts reserve 5,985 --------------------- 2,364,293 Fixed Assets: 1410 Land 2,080,022 1420 Buildings 28,010,005 1465 Office furniture and equipment 13,921 1470 Maintenance equipment 133,560 1480 Motor vehicles 16,124 1490 Miscellaneous fixed assets 5,269 --------------------- 30,258,901 Less: 1495 Accumulated depreciation (10,819,279) --------------------- 19,439,622 Other assets: 1520 Intangible assets, less accumulated amortization of $163,618 133,953 --------------------- Total assets $ 22,647,628 ===================== See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Balance Sheet (continued) December 31, 1998 Liabilities Current liabilities: 2110 Accounts payable - operations $ 92,568 2120 Accrued wages payable 8,255 2121 Accrued payroll taxes payable 7,057 2123 Accrued management fee payable 18,624 2130 Accrued interest payable - section 236 1,182 2131 Accrued interest payable - first mortgage 69,923 2133 Accrued interest payable - other loans 419,100 2170 Mortgage payable - first mortgage (short-term) 149,575 2172 Mortgage payable - second mortgage (short-term) 217,111 2191 Tenant deposits held in trust 187,796 2210 Prepaid revenue 24,255 ----------------- 1,195,446 Long-term liabilities: 2310 Notes payable (long-term) 1,905,000 2320 Mortgage payable - first mortgage, less current portion 13,673,766 2322 Mortgage payable - second mortgage, less current portion 5,691,425 2390 Miscellaneous long-term liabilities 1,221,204 ----------------- 22,491,395 Owners' equity 3130 Partners' deficit (1,039,213) ----------------- Total liabilities and equity $22,647,628 ================= See accompanying notes. Statement of U.S. Department of Housing Profit and Loss and Urban Development Office of Housing Federal Housing Commissioner OMB Approval No. 2502-0052 (Exp. 8/31/92) - -------------------------------------------------------------------------------- Public Reporting Burden for this collection of information is estimated to average 1.0 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to the Reports Management Officer, Office of Information Policies and Systems, U.S. Department of Housing and Urban Development, Washington D.C.20410-3600 and to the Office of Management and Budget, Paperwork Reduction Project (2502-0052), Washington D.C. 20503. Do not send this completed form to either of these addresses. - -------------------------------------------------------------------------------- - ------------------------------- ---------------------- ------------------------- For Month/Period Project Number: Project Name: Beginning: 01/1/98 000-44160/000-35349 Kenilworth Associates Ltd Ending: 12/31/98 - ------------------------------- ---------------------- ------------------------------------------------------------------- PartI Description of Account Acct. No. Amount* - ----- ------------------------------------------------ ----------- ------------------------------------------------------- ------------------------------------------------ ----------- Rent Revenue Gross Potential 5120 $ 2,347,565 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Tenant Assistance Payments 5121 $ 1,521,523 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- RentalStores and Commercial 5140 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- RevenuGarage and Parking Spaces 5170 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 5100 Flexible Subsidy Income 5180 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Excess Rental 5191 $ 31,383 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Rent Revenue Potential at 100% Occupancy $ 3,900,471 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Apartments 5220 ( 170,159) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Rental Concessions 5250 ( ) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- VacancStores and Commercial 5240 ( ) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 5200 Garage and Parking Spaces 5270 ( ) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Miscellaneous (specify) 5290 ( ) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Vacancies ( 170,159) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Net Rental Revenue Rent Revenue Less Vacancies $ 3,730,312 ------------------------------------------------ ----------- -------------------------- - ----- ------------------------------------------------ ----------- -------------------------- ---------------------------- Elderly and Congregate Services Income - 5300 Total Service Income (Schedule Attached) 5300 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Financial - Project Operations 5410 $ 18,622 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- FinancRevenue from Investments - Residual Receipts 5430 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- RevenuRevenue from Investments - Reserve for 5440 $ 24,530 Replacement ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 5400 Revenue from Investments - Miscellaneous 5490 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Revenue Income - Other $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Financial Reserve 43,152 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Laundry and Vending Revenue 5910 $ 11,313 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Tenant Changes 5920 $ 19,037 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Other Interest Reduction 5945 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- RevenuExpiration of Gift/Owner Reductions 5960 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 5900 Miscellaneous Revenue 5990 $ 7,140 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Other Revenue 37,490 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Revenue 3,810,954 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Advertising and Marketing 6210 $ 5,319 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Other Renting Expense 6250 $ 4,898 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Office Salaries 6310 $ 68,738 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Office Expenses 6311 $ 28,591 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Office or Model Apartment Rent 6312 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- AdminiManagement Fee 6320 $ 202,044 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ExpensManager or Superintendent Salaries 6330 $ 42,038 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 6200/6Administrative Rent Free Unit 6331 $ 7,056 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Legal Expense Project 6340 $ 24,825 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Auditing Expenses (Project) 6350 $ 28,900 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Bad Debts 6370 $ 37,482 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Miscellaneous Administrative Expenses 6390 $ 4,322 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Administrative Expenses 454,213 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Fuel Oil/Coal 6420 $ - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Electricity 6450 $ 54,495 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- UtilitWater 6451 $ 258,650 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ExpensGas 6452 $ 130,822 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 6400 Sewer 6453 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Utilities Expense 443,967 ------------------------------------------------ ----------- -------------------------- ---------------------------- ------------------------------------------------ ----------- -------------------------- --------------------------- - ----- ------------------------------------------------ ----------- -------------------------- ---------------------------- * All amounts must be rounded to the nearest dollar; $.50 and Page 1 of 2 form HUD-92410 (7/91) over, round up- $.49 and below, round down. ref Handbook 4370.2 - -------------------------------------------------------------------------------------------------------------------------- - ------------------------------- ---------------------- ------------------------------------------------------------------- For Month/Period Project Number: Project Name: Beginning: 01/1/98 000-44160/000-35349 Kenilworth Associates Ltd Ending: 12/31/98 - ------------------------------- ---------------------- ------------------------------------------------------------------- Part Description of Account Acct. No. Amount* I - ----- ------------------------------------------------ ---------- -------------------------------------------------------- ------------------------------------------------ ---------- -------------------------- Payroll 6510 $ 194,873 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- Supplies 6515 $ 77,366 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- Contract 6520 $ 257,217 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- Garbage and Trash Removal 6525 $ 57,775 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- OperatSecurity Payroll/Contract 6530 $ 142,853 and ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- MainteHeating/Cooling Repairs 6546 $ 49,297 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- ExpensVehicle Maintenance Equipment Operations and 6570 $ 1,001 Repairs ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- 6500 Miscellaneous Operating and Maintenance 6590 $ 35,001 Expenses ------------------------------------------------ ---------- -------------------------- ----------------------------- ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- ----------------------------- Total Operating and Maintenance Expenses $ 815,383 - ----- ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- Real Estate Taxes 6710 $ 189,480 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- Taxes Payroll Taxes (Project's share) 6711 $ 31,584 and ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- InsuraProperty and Liability Insurance (Hazard) 6720 $ 115,491 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- 6700 Workmen's Compensation 6722 $ 9,211 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- Miscellaneous Taxes, License, Permits, 6790 $ 23,847 Insurance ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- Total Taxes and Insurance $ 369,613 ------------------------------------------------ ---------- -------------------------- - ----- ------------------------------------------------ ---------- -------------------------- ----------------------------- Interest on Bonds Payable 6810 $ ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- Interest on Mortgage Payable 6820 $ 1,008,356 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- FinancInterest on Notes Payable (Long-Term) 6830 $ 57,150 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- ExpensInterest on Notes Payable (Short-Term) 6840 $ ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- 6800 Mortgage Insurance Premium/Service Charge 6850 $ 99,903 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- Miscellaneous Financial Expenses 6890 $ 20,672 ------------------------------------------------ ---------- -------------------------- ----------------------------- ------------------------------------------------ ---------- -------------------------- Total Financial Expenses $ 1,186,081 - ----- ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- ----------------------------- Total Service Expenses - Schedule Attached 6900 $ ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- ----------------------------- ElderlTotal Cost of Operations Before Depreciation $ 3,269,257 & ------------------------------------------------ ---------- -------------------------- ----------------------------- ------------------------------------------------ ---------- -------------------------- CongreProfit (Loss) Before Depreciation and $ 541,697 Amortization ------------------------------------------------ ---------- -------------------------- ----------------------------- ------------------------------------------------ ---------- -------------------------- ServicDepreciation (Total) - 6600 (specify) 6600 $ 1,105,067 Expenses ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- ----------------------------- 6900 Amortization Expense 6610 $ 2,127 ------------------------------------------------ ---------- -------------------------- -------------------------------------------------------------------------------------- ----------------------------- Operating Profit or (Loss) $ (565,497) -------------------------------------------------------------------------------------- ----------------------------- - ----- ------------------------------------------------ ---------- -------------------------- ----------------------------- Officer Salaries 7110 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- CorporLegal Expenses (Entity) 7120 $ or ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- MortgaTaxes (Federal-State-Entity) 7130-32 $ ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- EntityOther Expenses (Entity) 7190 $ 1,074,625 ------------------------------------------------ ---------- -------------------------- ------------------------------------------------ ---------- -------------------------- ----------------------------- ExpensTotal Corporate Expense $ 1,074,625 ------------------------------------------------ ---------- -------------------------- ----------------------------- ------------------------------------------------ ---------- -------------------------- ----------------------------- 7100 Net Profit or (Loss) $ (1,640,122) - ----- ------------------------------------------------ ---------- -------------------------- ----------------------------- Warning: HUD will prosecute false claims and statements. Conviction may result in criminal and/or civil penalties. (18 U.S.C. 1001, 1010, 1012; 31 U.S.C. 3729, 3802) Miscellaneous or other Income and Expense Sub-account Groups. If miscellaneous or other income and/or expense sub-accounts (5190, 5290, 5940, 5990, 6390, 6590, 6729, 6890, and 7190) exceed the Account Groupings by 10% or more, attach a separate schedule describing or explaining the miscellaneous income or expense. - -------------------------------------------------------------------------------------------------------------------------- Part II - -------------------------------------------------------------------------------------------- ----------------------------- 1. Total principal payments required under the mortgage, even if payments under a Workout Agreement are less or more $ 311,169 than those required under the mortgage. - -------------------------------------------------------------------------------------------- ----------------------------- 2. Replacement Reserve deposits required by the Regulatory Agreement of Amendments thereto, even if payments may $ 80,856 be temporarily suspended or waived. - -------------------------------------------------------------------------------------------- ----------------------------- 3. Replacement or Painting Reserve releases which are included as expense items on this Profit and Loss statement $ - ----------------------------- - -------------------------------------------------------------------------------------------- ----------------------------- 4. Project Improvement Reserve Releases under the Flexible Subsidy Program that are included as expense items on this Profit and Loss Statement. - -------------------------------------------------------------------------------------------- ----------------------------- *U.S. Government Printing Office: 1992 - 312-128/60160 Page 2 of 2 form HUD-92410 Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Partners' Equity (Deficit) Year ended December 31, 1998 Partners' equity, beginning of year $ 663,447 Distributions (62,538) Net loss (1,640,122) ----------------- Partners' deficit, end of year $ (1,039,213) ================= Percentage of partnership interests: General 1% Limited 99% See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Cash Flows Year ended December 31, 1998 Cash flows from operating activities Rental receipts $3,702,827 Interest receipts 43,153 Other receipts 37,489 Administrative expenses (141,392) Administrative salaries (110,776) Management fees (203,023) Utilities (427,795) Operating and maintenance expenses (495,646) Operating and maintenance payroll (319,739) Real estate taxes (186,708) Payroll taxes (26,876) Miscellaneous taxes (13,954) Property insurance (118,802) Miscellaneous insurance (19,104) Interest on mortgage notes (1,037,783) Mortgage insurance premium (96,840) Miscellaneous financial expense (20,672) ----------------- Net cash provided by rental operating activities 564,359 Tenant security deposits 2,485 Mortgagor entity expenses (387,316) ----------------- (384,831) ----------------- Net cash provided by operating activities $ 179,528 ----------------- See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Cash Flows (continued) Year ended December 31, 1998 Cash flows from investing activities Acquisitions of building improvements $ (49,085) Acquisitions of equipment (45,646) Deposits to reserve for replacements (105,357) ----------------- Net cash used in investing activities (200,088) ----------------- Cash flows from financing activities Proceeds from debt refinancing 457,351 Payment for deferred financing costs (136,100) Mortgage principal payments (311,169) Distribution to partners (62,538) ----------------- Net cash used in financing activities (52,456) ----------------- Net decrease in cash (73,016) Cash, beginning of year 384,711 ----------------- Cash, end of year $ 311,695 ================= See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Cash Flows (continued) Year ended December 31, 1998 Reconciliation of net loss to net cash provided by operating activities: Net loss $ (1,640,122) Adjustments to reconcile net loss to net cash provided by operating activities: Extraordinary item 755,230 Depreciation 1,105,067 Amortization expense 2,127 Accrued interest payable - other loans 57,150 Decrease (increase) in: Accounts receivable-tenants (7,717) Tenant security deposits held in trust fund 2,251 Miscellaneous prepaid expense (6,084) Escrow deposits 10,065 Increase (decrease) in: Accounts payable-operations 16,172 Accrued management fee payable (979) Accrued wages payable 3,251 Accrued interest payable (29,427) Prepaid revenue (19,768) Payable to HUD (67,922) Tenant deposits held in trust 234 ----------------- Total adjustments 1,819,650 ----------------- Net cash provided by operating activities $ 179,528 ================= See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements Year ended December 31, 1998 1. Organization Kenilworth Associates, Ltd., a Limited Partnership (the "Partnership"), was formed as a limited partnership under the laws of the District of Columbia on November 30, 1985, for the purpose of acquiring, rehabilitating and operating a rental housing project under Section 221(d)(4) of the National Housing Act. The project consists of 569 units located in Washington, D.C. and is currently operating under the name of Mayfair Mansions Apartments. 2. Summary of Significant Accounting Policies Real Estate Land, buildings and improvements are recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets for financial reporting purposes. Depreciable lives used are twenty- seven and one-half years for buildings, fifteen years for land improvements, and five to seven years for personal property. Expenditures for maintenance and repairs are charged to operations as incurred; expenditures for improvements are added to the property accounts. The Partnership's records impairment on losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less then the carrying amount of those assets. Based on management's estimation process, no impairment losses were recorded as of December 31, 1998. Deferred Mortgage Costs Deferred mortgage costs include fees and costs incurred to obtain and modify the mortgage loan and are being amortized using the straight-line method which approximates the effective interest method. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Income Taxes No provision or benefit for federal income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Cash and Cash Equivalents For purposes of the statement of cash flows, the Partnership considers all highly liquid instruments with a maturity of three months or less to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. Mortgages Payable The first mortgage note is insured under Section 221(d)(4) of the National Housing Act, and secured by a first deed of trust on the rental property. The first mortgage note is funded by tax-exempt bonds issued by the District of Columbia Housing Finance Agency. The original bond issuance funding for the first mortgage note bore interest at a rate of 8.75% per annum. Principal and interest were payable by the Partnership in equal monthly installments of $104,345 through July 2030. The original bond issuance was refunded on June 2, 1998 with a new bond issue which bears interest of a lower rate of 6.07% per annum. With this refunding, the Partnership's principal and interest payments have been reduced to equal monthly installments of $82,045 through July 2030. In connection with the refunding, the Partnership incurred an extraordinary loss of $1,068,304 on extinguishment of debt. This amount is comprised of fees paid to the underwriters for the refunding bond issuance expenses and the unamortized issuance costs on the original bonds. The extraordinary loss has been included in Other Entity Expenses in the accompanying Statement of Profit and Loss. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 3. Mortgages Payable (continued) The mortgage was funded by proceeds from a $14,555,000 bond issued by the District of Columbia Housing Finance Agency. In accordance with the terms of the indenture, the mortgage servicer makes deposits into the bond fund for bond principal and interest payments. At December 31, 1998, bond funds held by the trustee are included in other reserves in the accompanying balance sheet and consisted of the following: 1998 ----------------- Bond fund $ 421,161 Debt service reserve fund 800,043 ================= $1,221,204 ================= If the trustee determines that the deposits into the bond fund as provided for under the mortgage are over or under the amounts necessary to meet the debt service requirements, principal and interest payments under the mortgage will be increased or decreased as appropriate. The Partnership is responsible for payment of the trustee's fees and administrative expenses incurred in excess of those provided for in the bond indenture. Any funds remaining after repayment of all the bonds and any related agency and trustee charges will be transferred to the Partnership. In addition to trustee's fees and administrative expenses associated with the bond fund, the Partnership is required to pay loan administration fees associated with the mortgage loan. These expenses have been reflected in Miscellaneous Financial Expense in the accompanying Statement of Profit and Loss. The second mortgage note is insured under Section 236 of the National Housing Act and secured by a second deed of trust on the rental property. The note bears interest at the rate of 7% per annum. The Partnership entered into an interest subsidy agreement, which reduces the effective interest rate to approximately 1% over the term of the loan. During 1998, interest reduction payments of $399,917 were applied against interest expense. The reduced payments are due in equal, monthly installments of $18,330 through June 2014. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 3. Mortgages Payable (continued) Under agreements with the mortgage lenders and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage notes is limited to the underlying value of the real estate collateral plus other amounts deposited with the lenders. Annual maturities of the mortgages payable for each of the five years following December 31, 1998 are as follows: 221(d)(4) 236 Loan ------------------- ---------------------- Loan Total - ------------------ 1999 $ 217,111 $ 149,575 $ 366,686 - ------------------ 2000 232,805 158,912 391,717 - ------------------ 2001 249,635 168,832 418,467 - ------------------ 2002 267,682 179,368 447,050 - ------------------ 2003 287,032 190,565 477,597 - ------------------ Thereafter 4,654,271 12,976,089 17,630,360 - ------------------ ================================================================= Total $ 5,908,536 $ 13,823,341 $ 19,731,877 ================================================================= 4. Residual Receipts Note The residual receipts note bears interest at 3% per annum commencing September 1, 1991. Principal and interest are due in full on June 9, 2009 or on the maturity date of the first deed of trust, whichever is later, provided, however, that if the first trust is prepaid in full, the holder of the residual receipts note may at its option declare the principal balance and accrued interest thereon due and payable. Further, this note shall become due and payable if there is a change in the identity of the maker, refinancing of any indebtedness of the project, or transfer or sale of the project unless prior written approval from the holder is obtained. Prepayment of the principal of this note shall be made from residual Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 4. Residual Receipts Note (continued) receipts, as defined by the U.S. Department of Housing and Urban Development ("HUD"), available in any one year, after annual distributions of surplus cash of $56,222, as limited by HUD (see Note 10), or a lesser amount if approved by the holder. Annual prepayments shall not exceed an aggregate amount of $130,804. 5. Uncertainty-HUD Housing Assistance Payment (HAP) Contracts The Partnership recorded $1,521,523 of its revenues during 1998 from HUD under the terms of a HAP contract, which provides for rental assistance to the Partnership on behalf of low-income tenants who meet certain qualifications. The terms of the HAP contracts outstanding as of December 31, 1998 are as follows: Contract Number Units Covered Expiration Date DC39-M000-043 113 September, 1999 DC39-L000-015 207 December, 1999 HUD has new regulations that govern the continuance of project-based subsidies. Under the new regulations, owners with HAP contracts expiring after September 30, 1998 may elect to (1) renew contract without restructuring for one year, (2) opt out of the contract, or (3) enter into the Mark-to-Market program, which includes a potential restructuring of the mortgage and renewal of the contract. At this time it is not possible to determine which option the Partnership will elect, and accordingly, it is not possible to determine the ultimate impact on the operations of the Partnership. 6. Related Party Transactions Management Agreement The property is managed by Urban Realty and Development Corporation, an affiliate of the general partner, pursuant to a management agreement approved by HUD. The management agreement provides for a managementfee of 5.5% of monthly rents and other collections related to the project's operations. Such fees charged to operations during 1998 amounted to $202,044. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 6. Related Party Transactions (continued) Additionally, the Partnership Agreement provides that the management fee shall be equal to the lesser of,(i) the HUD approved management fee or, (ii) 5.5% of the gross revenues of the project provided, however, that such fee may be greater than 5.5% of such gross revenues up to the HUD approved fee in any year in which the full cumulative Priority Distribution has been distributed to the Limited Partners. 7. Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value financial information about certain financial instruments, whether or not recognized on the balance sheet. The carrying amounts reported in the balance sheet for cash-operations, tenant security deposits held in trust fund and funded reserves approximate those assets' fair value. Payment of other long-term liabilities are generally dependent upon the Partnership's ability to achieve cash flow, the partners providing additional funds, the sale of the project or refinancing of the mortgage at the end of the Regulatory Agreement. Management believes that estimating the fair value of these long-term liabilities is either not appropriate or, because of excess costs, considers estimation of fair value to otherwise be impracticable. 8. Working Capital Loans If the Partnership requires funds to pay project expenses subsequent to December 31, 1993, the end of the Initial Operating Period, the General Partners are obligated to make Working Capital Loans to the project up to $100,000. Such loans, if made, bear interest at the prime rate as established by the First National Bank of Boston. As of December 31, 1998, no working capital loans were made to the Partnership. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 9. Distributions of Surplus Cash The Partnership is subject to a limitation on distributions of surplus cash as defined by HUD. Annual distributions are limited to $191,472. Surplus cash is to be distributed pursuant to the Partnership Agreement as follows: To repay any Working Capital Loans and Voluntary Loans including interest. To pay a priority distribution to the General and Limited Partners in the amount of $56,222 to be shared in accordance with their percentage ownership interests. At December 31, 1998, the cumulative unpaid priority distributions were $56,222. To repay any Project Expense Loans. To pay the Incentive Management Fee (see Note 11). The balance is distributed to the Partners in accordance with their percentage interests. Distributions of $61,915 and $6,944 (including Incentive Management Fee of $6,321-see Note 11) surplus cash were made to the Limited Partner and General Partners, respectively, during 1998. 10. Guaranteed Priority Distribution The General Partners guarantee to pay the Limited Partner a minimum Guaranteed Priority Distribution of $35,000 annually if funds are not available from surplus cash. This amount is cumulative and is not to be considered a capital contribution or loan. No such Guaranteed Priority Distributions were made by the General Partners for 1998. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 11. Incentive Management Fee The General Partners are entitled to receive an Incentive Management Fee from distributable cash based on 50% of the remaining distributable cash after payment of the Priority Distribution of $56,222. The Incentive Management Fee is limited to 15% of gross collected income in any one year. Incentive Management Fees distributed during 1998 from the 1997 surplus cash were $6,321 and have been included in Other Entity Expenses in the accompanying Statement of Profit and Loss. 12. Year 2000 Readiness (unaudited) The Year 2000 Issue is the result of computer programs using two digits rather than four to define the applicable year. Any of the Partnership's computer programs that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Partnership believes it has identified all of its information to assess their Year 2000 readiness. The Partnership has not incurred any significant Year 2000 costs and is not aware of any significant problems that would materially impact the Partnership's results of operations, liquidity or capital resources as a result of the Year 2000 issue. 33 FINANCIAL STATEMENTS, ADDITIONAL INFORMATION AND ADDITIONAL REPORTS Kenilworth Associates Ltd. A Limited Partnership (a.k.a. Mayfair Mansions) FHA Project No. 000-44160/000-35349 Year ended December 31, 1997 Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Financial Statements, Additional Information and Additional Reports Year ended December 31, 1997 Table of Contents Report of Independent Auditors 3 Financial Statements: Balance Sheet 4 Statement of Profit and Loss (on HUD form No. 92410) 6 Statement of Partners' Equity 8 Statement of Cash Flows 9 Notes to Financial Statements 12 Ernst & Young LLP Report of Independent Auditors To the Partners Kenilworth Associates Ltd. We have audited the accompanying balance sheet of Kenilworth Associates Ltd., a Limited Partnership, FHA Project No.000-44160/000-35349 ( the "Partnership"), as of December 31, 1997, and the related statements of profit and loss (on HUD Form No. 92410), partners' equity, and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards 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 the 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 Kenilworth Associates Ltd., a Limited Partnership, as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in the report, referred to as "Supplementary Information" in the accompanying Table of Contents, is presented for the purpose of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, unless otherwise noted, and in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued our report dated January 30, 1998, on our consideration of Kenilworth Associates Ltd.s, a Limited Partnership, internal control over financial reporting and our report dated January 30, 1998 on its compliance with certain laws, regulations and contracts. /S/ Ernst & Young LLP January 30, 1998 Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Balance Sheet December 31, 1997 Assets Current assets: 1120 Cash in bank $ 384,711 1130 Tenant accounts receivable 40,886 1160 Interest receivable 2,542 428,139 Deposits held in trust: 1191 Tenant security deposits held in trust fund 192,251 Prepaid expenses: 1240 Property and liability insurance 46,214 1250 Mortgage insurance 9,305 1270 Real estate taxes 93,860 1290 Workmens' compensation insurance 1,457 150,836 Restricted deposits and funded reserves: 1310 Mortgage insurance 28,296 1311 Real estate taxes 69,709 1312 Hazard insurance 62,940 1320 Reserve for replacements 880,867 1340 Residual receipts 5,985 1370 Bond & debt service reserves fund 1,455,838 2,503,635 Rental property: 1410 Land 2,080,022 1420 Buildings and improvements 27,960,920 1430 Building equipment---fixed 123,228 30,164,170 Less: accumulated depreciation (9,714,212) 20,449,958 Other assets: Mortgage costs, less accumulated amortization of $338,130 755,210 Total assets $ 24,480,029 See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Balance Sheet (continued) December 31, 1997 Liabilities and partners' equity Current liabilities: 2110 Accounts payable $ 76,396 2120 Accrued payroll and taxes 12,061 2130 Accrued interest payable 100,532 2190 Payable to management agent 19,603 2320 Mortgage notes payable-current maturities 278,583 2390 Real estate taxes payable to HUD 67,922 555,097 Deposits and prepayment liability: 2191 Tenant security deposits 153,515 2191 Accrued interest on tenant security deposits 34,047 2210 Prepaid rents 44,023 231,585 Long - term liabilities: 2130 Accrued interest on residual receipts note 361,950 2300 Residual receipts note 1,905,000 2320 Mortgage note payable, net of current maturities 13,398,563 2320 Mortgage note payable, net of current maturities 5,908,549 2326 Bond and debt service reserve funds 1,455,838 23,029,900 Partners' equity 3130 Partners' equity 663,447 Total liabilities and equity 24,480,029 See accompanying notes. Statement of Profit and Loss U.S. Department of Housing and Urban Development Office of Housing Federal Housing Commissioner OMB Approval No. 2502-0052 ( Exp. 9/30/98) Public Reporting Burden for this collection of information is estimated to average 1.0 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden to the Reports Management Officer, Office of Information Policies and Systems, U.S. Department of Housing and Urban Development, Washington D.C. 20410-3600. This agency may not collect this information and you are not required to complete this form unless it displays a currently valid OMB control number. For Month/Period: Beginning 1/1/97 and Ending 12/31/97 Project Number : 000-44160-000-35349 Project Name: Kenilworth Associates Ltd. Rental Income 5100 Apartments or member carrying charges (Coops) 5120 $ 2,290,809 Tenant assistance programs 5121 1,541,332 Furniture and equipment 5130 Stores and commercial 5140 Garage and parking spaces 5170 Flexible subsidy income 5180 Miscellaneous (specify) over basic rents 5190 31,343 Total rent revenue Potential at 100% occupancy 3,863,484 Vacancies 5200 Apartment 5220 (122,806) Furnitire and equipment 5230 Stores and commercial 5240 Garage and parking spaces 5270 Miscellaneous (specify) 5290 Total vacancies (122,806) Net rental revenue (rent revenue less vacancies) 3,740,678 Elderly and Congregate Services Income - 5300 Total Service Income (Schedule Attached) 5300 Financial Revenue 5400 Interest income - project operations 5410 20,508 Income from investments - residual receipt 5430 Income from investments - reserve for replacement 5440 20,830 Income from investments - painting 5490 Interest income - other 5491 8,059 Total financial reserve 49,397 Other Revenue 5900 Laundry and Vending 5910 11,632 NSF Late Charges 5920 14,713 Damages and Cleaning fees 5930 Forfeited tenant security deposits 5940 Other revenue (specify) 5990 9,334 Total other revenue 35,679 Total Revenue 3,825,754 Administrative Expenses 6200/6300 Advertising 6210 3,372 Other Administrative expense 6250 3,679 Office salaries 6310 77,536 Office supplies 6311 13,604 Office or model apartment (rent) 6312 Management 6320 205,241 Manager or superintendent salaries 6330 33,188 Manager or superintendent rent free unit 6331 7,056 Legal expenses (project) 6340 36,237 Auditing expenses (project) 6350 28,460 Bookkeeping fees/accounting services 6351 Telephone and answering service 6360 12,815 Bad debts 6370 34,592 Miscellaneous Administrative expenses (specify) 6390 5,062 Total Administrative Expenses 460,842 Utilities Expense 6400 Fuel oil /coal 6420 Electricity (Light and Misc. Power) 6450 51,338 Water 6451 256,086 Gas 6452 117,986 Sewer 6453 Total Utilities Expense 425,410 Operating and Maintenance expense 6500 Janitor and cleaning payroll 6510 65,074 Janitor and cleaning supplies 6515 9,898 Janitor and cleaning contract 6517 Exterminating payroll/contract 6519 12,620 Exterminating supplies 6520 Garbage and trash removal 6525 55,862 Security payroll/contract 6530 145,638 Grounds payroll 6535 25,613 Grounds supplies 6536 Grounds contract 6537 117,450 Repairs payroll 6540 67,128 Repairs material 6541 54,231 Repairs contract 6542 68,545 Elevator maintenance/contract 6545 Heating/cooling repairs and maintenance 6546 24,247 Swimming pool maintenance/ contract 6547 25,446 Snow removal 6548 Decorating Payroll/contract 6560 65,247 Decorating supplies 6561 5,228 Other 6570 386 Miscellaneous operating and maintenance expenses 6590 8,920 Total operating and maintenance expenses 751,533 Taxes and Insurance 6700 Real estate taxes 6710 188,094 Payroll/taxes/ FICA 6711 31,608 Miscellaneous taxes, licenses and permits 6719 13,935 Property and liability insurance (hazard) 6720 98,728 Fidelity Bond insurance 6721 Workman's compensation 6722 9,576 Health insurance and other employee benefits 6723 Other insurance (specify) 6729 7,507 Total taxes and insurance 349,448 Financial Expenses 6800 Interest on bonds payable 6810 Interest on mortgage payable 6820 1,214,057 Interest on notes payable (long term) 6830 57,150 Interest on notes payable (short term) 6840 Mortgage insurance premium/service charge 6850 99,513 Miscellaneous financial expenses 6890 43,056 Total financial expenses 1,413,776 Elderly & congregate service expenses 6900 Total service expenses 6900 Total cost of operations before depreciation 3,401,009 Profit/(loss) before depreciation 424,745 Depreciation (Total) - 6600 (Specify) 1,096,214 Operating Profit or (Loss) (671,469) Corporate or mortgagor entity expenses 7100 Officer Salaries 7110 Legal expenses (entity) 7120 Taxes (fed, state, entity) 7130-32 Other expenses (entity) 7190 33,722 Total Corporate expenses 33,722 Net Profit or (Loss) (705,191) Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Partners' Equity Year ended December 31, 1997 Partners' equity, beginning of year $1,430,957 Distributions (62,319) Net Loss (705,191) Partners' equity, end of year $ 663,447 Percentage of partnership interest: General 1% Limited 99% See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160-35349 Statement of Cash Flows Year ended December 31, 1997 Cash flows from operating activities Rental receipts $ 3,772,498 Interest receipts 49,473 Other receipts 35,679 Administrative expenses (144,877) Administrative salaries (110,724) Management fees (203,509) Utilities (398,065) Operating and maintenance expenses (448,080) Operating and maintenance payroll (303,453) Real estate taxes (177,459) Payroll taxes (28,760) Miscellaneous taxes (13,935) Property insurance (97,954) Miscellaneous insurance (17,083) Interest on mortgage notes (1,215,587) Mortgage insurance premium (98,424) Miscellaneous financial expense (43,056) Net cash provided by rental operating activities 556,684 Tenant security deposits (270) Mortgagor entity expenses (9,094) (9,364) Net cash provided by operating activities $ 547,320 Cash flows from investing activities Acquisition of building improvements $ (35,925) Acquisitions of equipment (25,887) Deposits to reserve for replacements (101,790) Net cash used in investing activities (163,602) Cash flows from financing activities Mortgage principal payments (258,566) Distribution to partners (62,319) Net cash used in financing activities (320,885) Net increase in cash 62,833 Cash, beginning of the year 321,878 Cash, end of year 384,711 See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Cash Flows (continued) Year ended December 31, 1997 Reconciliation of net loss to net cash provided by operating activities: Net loss $ (705,191) Adjustment to reconcile net loss to net cash provided by operating activities: Depreciation 1,096,214 Amortization 24,628 Accrued interest on residual receipts note 57,150 Decrease (increase) in: Interest receivable 76 Tenant accounts receivable (581) Accounts receivable 5,720 Tenant security deposits held in trust fund 6,681 Prepaid property and liability insurance (986) Prepaid mortgage insurance 935 Prepaid real estate taxes 406 Prepaid workmens' compensation insurance 146 Real estate tax escrow 10,229 Hazard insurance escrow 1,760 Mortgage insurance escrow 154 Increase (decrease) in: Accounts payable 27,345 Payable to management agent 1,732 Accrued payroll and taxes 2,702 Accrued interest payable (1,530) Prepaid rents 26,681 Tenant security deposits (6,951) Total adjustments 1,252,511 Net cash provided by operating activities $ 547,320 See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements Year ended December 31, 1997 1. Organization Kenilworth Associates Ltd., a limited partnership (the "partnership"), was formed as a limited partnership under the laws of the District of Columbia on November 30, 1985, for the purpose of acquiring, rehabilitating and operating a rental housing project under section 221(d)(4) of the National Housing Act. The project consists of 569 units located in Washington D.C. and is currently operating under the name of Mayfair Mansions Apartments. 2. Summary of Significant Accounting Policies Depreciation Depreciation of buildings, improvements and equipment is computed using the straight - line and accelerated methods over the estimated useful lives of the assets for financial reporting purposes. Depreciable lives used are twenty-seven and one-half years for buildings, fifteen years for land improvements, and seven years for personal property. Amortization Mortgage costs are amortized over the term of the mortgage loan using the straight-line method. Income Taxes No provision or benefit for federal taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by the partners individually. Cash and cash Equivalents For purposes of the statement of cash flows, the Partnership considers all highly liquid instruments with a maturity of three months or less to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Long-Lived Assets The partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less then the carrying amount of those assets. Based on management's estimation process, no impairment losses were recorded as of December 31, 1997. 3. Mortgages Payable The first mortgage note is insured under Section 221 (d)(4) of the National Housing Act and secured by a first deed of trust on the rental property. The note bears interest at the rate of 8.75% per annum. Principal and interest are payable by the partnership in equal monthly installments of $104,345 through July 2030. The mortgage was funded by proceeds of a $14,475,000 bond issued by the District of Columbia Housing Finance Agency. In accordance with the terms of the indenture, the mortgage servicer makes deposits into the bond fund for bond principal and interest payments. At December 31, 1997 bond funds held by the trustee consisted of the following: 1997 Bond fund $317,363 Debt service reserve fund 1,138,475 $1,455,838 If the trustee determines that the deposits into the bond fund as provided for under the mortgage areover or under the amounts necessary to meet the debt service requirements, principal and interest payments under the mortgage will be increased or decreased as appropriate. The Partnership is responsible for payment of the trustee's fees and administrative expenses incurred in excess of thoseprovided for in the bond indenture. Any funds remaining after repayment of all the bonds and any related agency and trustee charges will be transferred to the Partnership. In addition the trustee's fees and administrative expenses associated with the bond fund, the Partnership is required to pay loan administration fees associated with the mortgage loan. These expenses have been reflected in Miscellaneous Financial Expense in the accompanying Statement of Profit and Loss. The second mortgage note is insured under Section 236 of the National Housing Act and secured by a second deed of trust on the rental property. The note bears interest at the rate of 7% per annum. The Partnership entered into an interest subsidy agreement, which reduces the effective interest rate to approximately 1% Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 3. Mortgages Payable (continued) over the term of the loan. During 1997, interest reduction payments of $401,142 were applied against interest expense. The reduced payments are due in equal, monthly installments of $18,330 through June 2014. Under agreements with the mortgage lenders and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage notes is limited to the underlying value of the real estate collateral plus other amounts deposited with the lenders. Annual maturities of the mortgages payable for each of the five years following December 31, 1997 are as follows: 221 (D)(4) 236 Loans Loan Total 1998 $ 202,473 $ 76,110 $ 278,583 1999 217,111 83,044 300,155 2000 232,805 90,609 323,414 2001 249,635 98,863 348,498 2002 267,682 107,871 375,553 Thereafter 4,941,316 13,018,176 17,959,492 Total $ 6,111,022 $ 13,474,673 $ 19,585,695 4. Residual Receipts Note The residual receipt note bears interest at 3% per annum commencing September 1, 1991. Principal and interest are due in full on June 9, 2009 or on the maturity date of the first deed of trust, whichever is later, provided, however, that if the first trust is prepaid in full, the holder of the residual receipts note may at its option declare the principal balance and accrued interest thereon due and payable. Further, this note shall become due and payable if there is a change in the identity of the maker, refinancing of any indebtedness of the project, or transfer or sale of the project unless prior written approval from the holder is obtained. Prepayment of the principal of this note shall be made from residual receipts, as defined by the U.S. Department of Housing and Urban Development ("HUD"), available in any one year, after annual Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 4. Residual Receipts Note (continued) distributions of surplus cash of $56,222, as limited by HUD (see Note 10), or a lesser amount if approved by the holder. Annual prepayments shall not exceed an aggregate amount of $130,804. 5. Receivables from Tenants Delinquent receivables from tenants are summarized as follows: Number of Days Tenants Past Due Amount 114 Under 31 $ 30,461 32 31-60 5,976 9 Over 60 4,449 155 $ 40,886 6. Uncertainty-Housing Assistance Agreement HUD has contracted under Section 8 of the Housing Assistance Payments ("HAP") Program of the United States Housing Act of 1937 to make housing assistance payments to the Partnership on behalf of low-income tenants who meet certain qualifications. There are two housing assistance agreements with five-year terms, which expire on September 30, 1999 and December 31, 1999. The Partnership received $1,541,332 of its revenue during 1997 from HUD under the terms of the HAP contracts. HUD is considering various alternatives to continuing project- based subsidies which may include the non-renewal of the existing HAP contracts between the Partnership and HUD. HUD has proposed alternative plans to replace project-based HAP contracts, including issuing rent vouchers directly to the tenants, which the tenant could then use for rent at the project of their choice. At this time, there is no assurance that the HAP contracts will be extended by the HUD. The ultimate impact of HUD's proposal plans to the partnership cannot presently be determined. 7. Related Party Transactions Management Agreement The property is managed by Urban Realty and Development Corporation, an affiliate of the general partner, pursuant to a management agreement approved by HUD. The management agreement provides for a management fee of 5.5% of monthly rents and other collections related to the project's operations. Such fees charged to operations during 1997 amounted to $205,241. Additionally, the Partnership Agreement provides that the management fee shall be equal to the lesser of, (I) the HUD approved management fee or, (ii) 5.5% of the gross revenues of the project provided, however that such fee may be greater than 5.5% of such gross revenues up to the HUD approved fee in any year in which the full cumulative Priority Distribution has been distributed to the Limited Partners. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 8. Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of financial Instruments", requires disclosures of fair value financial information about certain financial instruments, whether or not recognized on the balance sheet. The carrying amounts reported in the balance sheet for those financial instruments described in the schedule of funds in financial institutions included in the supporting data required by HUD listed on the contents page, approximate those assets' fair value. Payment of other long-term liabilities are generally dependent upon the Partnership's ability to achieve cash flow, the partners providing additional funds, the sale of the project or refinancing of the mortgage at the end of the Regulatory Agreement. Management believes that estimating the fair value of these long-term liabilities is either not appropriate or, because of excess costs, considers estimation of fair value to otherwise be impracticable. 9. Working Capital Loans If the Partnership requires funds to pay project expense subsequent to December 31, 1993, the end of the Initial Operating Period, the General Partners are obligated to make Working Capital Loans to the project up to $100,000. Such loans, if made, bear interest at the prime rate as established by the First national Bank of Boston. As of December 31, 1997, no working capital loans were made to the Partnership. 10. Distributions of Surplus Cash The Partnership is subject to a limitation on distributions of surplus cash as defined by HUD. Annual distributions are limited to $191,472. Surplus cash is to be distributed pursuant to the Partnership Agreement as follows: To repay any Working Capital Loans and Voluntary Loans including interest. To pay a priority distribution to the General and Limited Partners in the amount of $56,222 to be shared in accordance with their percentage ownership interests. At December 31, 1997, the cumulative unpaid priority distributions were $56,222. To repay any Project Expense Loans. To pay the Incentive Management Fee (see Note 12). The balance is distributed to the partners in accordance with their percentage interests. Distributions of $61,696 and $6,714 surplus cash were made to the investor Limited Partner and General Partners, respectively, during 1997. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 11. Guaranteed Priority Distribution The General Partners guarantee to pay the Investor Limited Partner a minimum Guaranteed Priority Distribution of $35,000 annually if funds are not available from surplus cash. This amount is cumulative and is not to be considered a capital contribution or loan. No such Guaranteed Priority Distributions were made by the General Partners for 1997. 12. Incentive Management Fee The General Partners are entitled to receive an Incentive Management Fee from distributable cash based on 50% of the remaining distributable cash after payment of the Priority Distribution of $56,222. The Incentive Management Fee is limited to 15% of gross collected income in any one year. Incentive Management Fee distributed during 1997 from the 1996 surplus cash were $6,091 and have been included in Other Entity Expenses in the accompanying Statement of Profit and Loss. Financial Statements, Additional Information and Additional Reports Kenilworth Associates Ltd. A Limited Partnership (a.k.a. Mayfair Mansions) FHA Project No. 000-44160/000-35349 Year ended December 31, 1996 Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Financial Statements, Additional Information and Additional Reports Year ended December 31, 1996 Contents Report of Independent Auditors.................................................3 Financial Statements: Balance Sheet.............................................................4-5 Statement of Profit and Loss (on HUD Form No. 92410)......................6-7 Statement of Partners' Equity...............................................8 Statement of Cash Flows..................................................9-11 Notes to Financial Statements...........................................12-19 Report of Independent Auditors To the Partners Kenilworth Associates Ltd. We have audited the accompanying balance sheet of Kenilworth Associates Ltd., a Limited Partnership, FHA Project No. 000-44160/000-35349 (the "Partnership"), as of December 31, 1996, and the related statements of profit and loss (on HUD Form No.92410), partners' equity, and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards 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 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 Kenilworth Associates Ltd., a Limited Partnership, FHA Project No. 000-44160/000-35349, as of December 31, 1996, and the results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have issued a report dated January 31, 1997, on our consideration of Kenilworth Associates Ltd.'s, a Limited Partnership, FHA Project No. 000-44160/000-35349 internal control and a report dated January 31, 1997, on its compliance with applicable laws and regulations. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in the report, as referred to in the Table of Contents, is presented for the purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, unless otherwise noted, and in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. January 31, 1997 Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Balance Sheet December 31, 1996 Assets Current assets: 1120 Cash in bank $ 321,878 1130 Tenant accounts receivable 40,305 1150 Accounts receivable-HUD 5,720 1160 Interest receivable 2,618 ---------------------- 370,521 Deposits held in trust: 1191 Tenant security deposits held in trust fund 198,932 Prepaid expenses: 1240 Property and liability insurance 45,228 1250 Mortgage insurance 10,240 1270 Real estate taxes 94,266 1290 Workmens compensation insurance 1,603 ---------------------- 151,337 Restricted deposits and funded reserves: 1310 Mortgage insurance 28,450 1311 Real estate taxes 79,938 1312 Hazard insurance 64,700 1320 Reserve for replacements 779,077 1340 Residual receipts 5,985 1370 Bond & debt service reserves fund 1,637,734 ---------------------- 2,595,884 Rental property: 1410 Land 2,080,022 1420 Buildings and improvements 27,924,995 1430 Building equipment-fixed 97,341 ---------------------- 30,102,358 Less: accumulated depreciation (8,617,998) ---------------------- 21,484,360 Other assets: 1900 Mortgage costs, less accumulated amortization of $313,502 779,838 ---------------------- Total assets $25,580,872 ====================== See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Balance Sheet (continued) December 31, 1996 Liabilities and partners' equity Current liabilities: 2110 Accounts payable $ 49,051 2120 Accrued payroll and taxes 9,359 2130 Accrued interest payable 102,062 2190 Payable to management agent 17,871 2320 Mortgage notes payable-current maturities 258,580 2390 Real estate taxes payable to HUD 67,922 ----------------------- 504,845 Deposits and prepayment liability: 2191 Tenant security deposits 160,466 2191 Accrued interest on tenant security deposits 34,047 2210 Prepaid rents 17,342 ----------------------- 211,855 Long-term liabilities: 2130 Accrued interest on residual receipts note 304,800 2300 Residual receipts note 1,905,000 2320 Mortgage note payable, net of current maturities 13,474,673 2320 Mortgage note payable, net of current maturities 6,111,008 2326 Bond and debt service reserve funds 1,637,734 ----------------------- 23,433,215 Partners' equity: 3100 Partners' equity 1,430,957 ----------------------- Total liabilities and equity $25,580,872 ======================= See accompanying notes. Statement of U.S. Department of Housing Profit and Loss and Urban Development Office of Housing Federal Housing Commissioner OMB Approval No. 2502-0052 (Exp. 8/31/92) - -------------------------------------------------------------------------------------------------------------------------- Public Reporting Burden for this collection of information is estimated to average 1.0 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to the Reports Management Officer, Office of Information Policies and Systems, U.S. Department of Housing and Urban Development, Washington D.C. 20410-3600 and to the Office of Management and Budget, Paperwork Reduction Project (2502-0052), Washington D.C. 20503. Do not send this completed form to either of these addresses. - -------------------------------------------------------------------------------------------------------------------------- - ------------------------------- ---------------------- ------------------------------------------------------------------- For Month/Period Project Number: Project Name: Beginning: 01/31/96 000-44160/000-35349 Kenilworth Associates Ltd. Ending: 12/31/96 - ------------------------------- ---------------------- ------------------------------------------------------------------- Part Description of Account Acct. No. Amount* I - ----- ------------------------------------------------ ----------- ------------------------------------------------------- ------------------------------------------------ ----------- Apartments or Member Carrying Charges (Coops) 5120 $ 2,297,505 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Tenant Assistance Payments 5121 $ 1,415,415 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Furniture and Equipment 5130 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- RentalStores and Commercial 5140 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- IncomeGarage and Parking Spaces 5170 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 5100 Flexible Subsidy Income 5180 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Miscellaneous (specify) Over Basic Rents 5190 $ 43,406 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Rent Revenue Potential at 100% Occupancy $ 3,756,326 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Apartments 5220 ( 96,063) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Furniture and Equipment 5230 ( ) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- VacancStores and Commercial 5240 ( ) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 5200 Garage and Parking Spaces 5270 ( ) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Miscellaneous (specify) 5290 ( ) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Vacancies ( 96,063) ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Net Rental Revenue Rent Revenue Less Vacancies $ 3,660,263 ------------------------------------------------ ----------- -------------------------- - ----- ------------------------------------------------ ----------- -------------------------- ---------------------------- Elderly and Congregate Services Income - 5300 Total Service Income (Schedule Attached) 5300 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Interest Income- Project Operations 5410 $ 23,650 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- FinancIncome from Investments - Residual Receipts 5430 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- RevenuIncome from Investments - Reserve for 5440 $ 14,021 Replacement ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 5400 Income from Investments - Painting 5490 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Interest Income - Other 5491 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Financial Reserve 37,671 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Laundry and Vending 5910 $ 20,205 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- NSF and Late Charges 5920 $ 26,084 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Other Damages and Cleaning Fees 5930 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- RevenuForfeited Tenant Security Deposits 5940 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Other Revenue (specify) 5990 $ 9,537 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Other Revenue 55,826 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Revenue 3,753,760 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Advertising 6210 $ 2,342 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Other Administrative Expense 6250 $ 4,092 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Office Salaries 6310 $ 75,777 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Office Supplies 6311 $ 14,654 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Office or Model Apartment Rent 6312 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- AdminiManagement 6320 $ 200,486 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ExpensManager or Superintendent Salaries 6330 $ 31,153 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 6200/6Manager or Superintendent Rent Free Unit 6331 $ 6,720 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Legal Expenses (Project) 6340 $ 36,282 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Auditing Expenses (Project) 6350 $ 25,000 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Bookkeeping Fees/Accounting Services 6351 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Telephone and Answering Service 6360 $ 11,684 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Bad Debts 6370 $ 33,655 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Miscellaneous Administrative Expenses (specify) 6390 $ 4,593 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Administrative Expenses 446,438 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Fuel Oil/Coal 6420 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- UtilitElectricity (Light and Misc. Power) 6450 $ 50,247 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ExpensWater 6451 $ 237,145 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 6400 Gas 6452 $ 114,844 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Sewer 6453 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Utilities Expense 402,236 - ----- ------------------------------------------------ ----------- -------------------------- ---------------------------- * All amounts must be rounded to the nearest dollar; $.50 and Page 1 of 2 form HUD-92410 (7/91) over, round up- $.49 and below, round down. ref Handbook 4370.2 - ------------------------------- ---------------------- ------------------------------------------------------------------- For Month/Period Project Number: Project Name: Beginning: 01/31/96 000-44160/000-35349 Kenilworth Associates Ltd. Ending: 12/31/96 - ------------------------------- ---------------------- ------------------------------------------------------------------- Part Description of Account Acct. No. Amount* I - ----- ------------------------------------------------ ----------- ------------------------------------------------------- ------------------------------------------------ ----------- -------------------------- Janitor and Cleaning Payroll 6510 $ 53,649 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Janitor and Cleaning Supplies 6515 $ 8,566 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Janitor and Cleaning Contract 6517 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Exterminating Payroll/Contract 6519 $ 6,200 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Exterminating Supplies 6520 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Garbage and Trash Removal 6525 $ 66,515 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Security Payroll/Contract 6530 $ 144,849 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Grounds Payroll 6535 $ 20,544 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Grounds Supplies 6536 $ 138 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- OperatGrounds Contract 6537 $ 117,800 and ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- MainteRepairs Payroll 6540 $ 71,408 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ExpensRepairs Material 6541 $ 49,981 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 6500 Repairs Contract 6542 $ 73,889 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Elevator Maintenance/Contract 6545 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Heating/Cooling Repairs and Maintenance 6546 $ 6,834 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Swimming Pool Maintenance/Contract 6547 $ 23,525 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Snow Removal 6548 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Decorating Payroll/Contract 6560 $ 66,485 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Decorating Supplies 6561 $ 5,111 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Other 6570 $ 1,612 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Miscellaneous Operating and Maintenance 6590 $ 22,046 Expenses ------------------------------------------------ ----------- -------------------------- ---------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Operating and Maintenance Expenses $ 739,152 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Real Estate Taxes 6710 $ 188,177 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Payroll Taxes (FICA) 6711 $ 35,876 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Miscellaneous Taxes, Licenses and Permits 6719 $ 14,134 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Taxes Property and Liability Insurance (Hazard) 6720 $ 98,379 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- and Fidelity Bond Insurance 6721 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- InsuraWorkmen's Compensation 6722 $ 9,530 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 6700 Health insurance and Other Employee Benefits 6723 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Other Insurance (specify) 6729 $ 2,979 ------------------------------------------------ ----------- -------------------------- ---------------------------- ------------------------------------------------ ----------- -------------------------- Total Taxes and Insurance $ 349,075 ------------------------------------------------ ----------- -------------------------- - ----- ------------------------------------------------ ----------- -------------------------- ---------------------------- Interest on Bonds Payable 6810 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Interest on Mortgage Payable 6820 $ 1,233,496 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- FinancInterest on Notes Payable (Long-Term) 6830 $ 57,150 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ExpensInterest on Notes Payable (Short-Term) 6840 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- 6800 Mortgage Insurance Premium/Service Charge 6850 $ 100,729 ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- Miscellaneous Financial Expenses 6890 $ 40,721 ------------------------------------------------ ----------- -------------------------- ---------------------------- ------------------------------------------------ ----------- -------------------------- Total Financial Expenses $ 1,432,096 - ----- ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- Total Service Expenses - Schedule Attached 6900 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- ElderlTotal Cost of Operations Before Depreciation $ 3,368,997 & ------------------------------------------------ ----------- -------------------------- ---------------------------- ------------------------------------------------ ----------- -------------------------- CongreProfit (Loss) Before Depreciation $ 384,763 ------------------------------------------------ ----------- -------------------------- ---------------------------- ------------------------------------------------ ----------- -------------------------- ServicDepreciation (Total) - 6600 (specify) 6600 $ 1,092,811 $ 1,092,811 Expenses ------------------------------------------------ ----------- -------------------------- --------------------------------------------------------------------------------------- ---------------------------- 6900 Operating Profit or (Loss) $ (708,048) - ----- --------------------------------------------------------------------------------------- ---------------------------- ------------------------------------------------ ----------- -------------------------- Officer Salaries 7110 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- CorporLegal Expenses (Entity) 7120 $ or ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- MortgaTaxes (Federal-State-Entity) 7130-32 $ ------------------------------------------------ ----------- -------------------------- ------------------------------------------------ ----------- -------------------------- EntityOther Expenses (Entity) 7190 $ 66,294 ------------------------------------------------ ----------- -------------------------- ---------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- ExpensTotal Corporate Expense $ 66,294 ------------------------------------------------ ----------- -------------------------- ---------------------------- ------------------------------------------------ ----------- -------------------------- ---------------------------- 7100 Net Profit or (Loss) $ (774,342) - ----- ------------------------------------------------ ----------- -------------------------- ---------------------------- Warning: HUD will prosecute false claims and statements. Conviction may result in criminal and/or civil penalties. (18 U.S.C. 1001, 1010, 1012; 31 U.S.C. 3729, 3802) Miscellaneous or other Income and Expense Sub-account Groups. If miscellaneous or other income and/or expense sub-accounts (5190, 5290, 5940, 5990, 6390, 6590, 6729, 6890, and 7190) exceed the Account Groupings by 10% or more, attach a separate schedule describing or explaining the miscellaneous income or expense. - -------------------------------------------------------------------------------------------------------------------------- Part II - --------------------------------------------------------------------------------------------- ---------------------------- 1. Total principal payments required under the mortgage, even if payments under a Workout $ 239,918 Agreement are less or more than those required under the mortgage. - --------------------------------------------------------------------------------------------- ---------------------------- 2. Replacement Reserve deposits required by the Regulatory Agreement of Amendments $ 80,856 thereto, even if payments may be temporarily suspended or waived. - --------------------------------------------------------------------------------------------- ---------------------------- 3. Replacement or Painting Reserve releases which are included as expense items on this $ - Profit and Loss statement - --------------------------------------------------------------------------------------------- ---------------------------- 4. Project Improvement Reserve Releases under the Flexible Subsidy Program that are $ - included as expense items on this Profit and Loss Statement. - --------------------------------------------------------------------------------------------- ---------------------------- *U.S. Government Printing Office: 1992 - 312-128/60160 Page 2 of 2 form HUD-92410 Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Partners' Equity Year ended December 31, 1996 Partners' equity, beginning of year $2,302,203 Distributions (96,904) Net loss (774,342) -------------------- Partners' equity, end of year $1,430,957 ==================== Percentage of partnership interests: General 1% Limited 99% See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Cash Flows Year ended December 31, 1996 Cash flows from operating activities Rental receipts $ 3,663,478 Interest receipts 38,119 Other receipts 55,826 Administrative expenses (139,239) Administrative salaries (106,930) Management fees (200,130) Utilities (454,829) Operating and maintenance expenses (593,551) Operating and maintenance payroll (145,601) Real estate taxes (180,308) Payroll taxes (40,397) Miscellaneous taxes (14,134) Property insurance (97,173) Miscellaneous insurance (12,509) Interest on mortgage notes (1,269,383) Mortgage insurance premium (99,727) Miscellaneous financial expense (6,253) --------------------- Net cash provided by rental operating activities 397,259 Tenant security deposits (769) Mortgagor entity expenses (41,666) --------------------- (42,435) --------------------- Net cash provided by operating activities $ 354,824 --------------------- See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Cash Flows (continued) Year ended December 31, 1996 Cash flows from investing activities Acquisitions of building improvements $ (17,600) Acquisitions of equipment (31,061) Deposits to reserve for replacements (94,882) Withdrawals from paint reserve 73 ------------------------ Net cash used in investing activities (143,470) ------------------------ Cash flows from financing activities Mortgage principal payments (240,025) Distribution to partners (96,904) ------------------------ Net cash used in financing activities (336,929) ------------------------ Net decrease in cash (125,575) Cash, beginning of year 447,453 ------------------------ Cash, end of year $ 321,878 ======================== Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Statement of Cash Flows (continued) Year ended December 31, 1996 Reconciliation of net loss to net cash provided by operating activities: Net loss $ (774,342) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 1,092,811 Amortization 24,628 Accrued interest-residual receipts note 57,150 Decrease (increase) in: Interest receivable 448 Accounts receivable-tenants 526 Accounts receivable-HUD (5,720) Tenant security deposits held in trust (5,294) Prepaid property insurance 46 Prepaid mortgage insurance 892 Prepaid real estate taxes (329) Prepaid workmens' compensation insurance (46) Real estate tax escrow 8,199 Property insurance escrow 1,160 Mortgage insurance escrow 109 Increase (decrease) in: Accounts payable-trade (52,593) Accounts payable-management agent 356 Accounts payable-salary/payroll (4,475) Accrued interest payable (1,419) Prepaid rent 8,409 Tenant security deposits payable 4,525 Accrued interest on tenant security deposits (217) ------------------------ Total adjustments 1,129,166 Net cash provided by operating activities $ 354,824 ======================== See accompanying notes. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements Year ended December 31, 1996 1. Organization Kenilworth Associates, Ltd., a Limited Partnership (the "Partnership"), was formed as a limited partnership under the laws of the District of Columbia on November 30, 1985, for the purpose of acquiring, rehabilitating and operating a rental housing project under Section 221(d)(4) of the National Housing Act. The project consists of 569 units located in Washington, D.C. and is currently operating under the name of Mayfair Mansions Apartments. 2. Summary of Significant Accounting Policies Depreciation Depreciation of buildings,improvements and equipment is computed using straight- line and accelerated methods over the estimated useful lives of the assets for financial reporting purposes. Depreciable lives used are twenty-seven and one- half years for buildings, fifteen years for land improvements, and five to seven years for personal property. Amortization Mortgage costs are amortized over the term of the mortgage loan using the straight-line method. Income Taxes No provision or benefit for federal income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Cash and Cash Equivalents For purposes of the statement of cash flows, the Partnership considers all highly liquid instruments with a maturity of three months or less to be cash equivalents. Kenilworth Associates Ltd. A Limited Partnership FHA Project No. 000-44160/000-35349 Notes to Financial Statements (continued) 2. 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 the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Long-Lived Assets The Partnership's records impairment on losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less then the carrying amount of those assets. Based on management's estimation process, no impairment losses were recorded as of December 31, 1996. 3. Mortgages Payable The first mortgage note is insured under Section 221(d)(4) of the National Housing Act and secured by a first deed of trust on the rental property. The note bears interest at the rate of 8.75% per annum. Principal and interest are payable by the Partnership in equal monthly installments of $104,345 through July 2030. The mortgage was funded by proceeds of a $14,745,000 bond issued by the District of Columbia Housing Finance Agency. In accordance with the terms of the indenture, the mortgage servicer makes deposits into the bond fund for bond principal and interest payments. At December 31, 1996, bond funds held by the trustee consisted of the following: Bond fund $ 499,259 Debt service reserve fund 1,138,475 ---------------------- $ 1,637,734 ====================== Mortgages Payable (continued) If the trustee determines that the deposits into the bond fund as provided for under the mortgage are over or under the amounts necessary to meet the debt service requirements, principal and interest payments under the mortgage will be increased or decreased as appropriate. The Partnership is responsible for payment of the trustee's fees and administrative expenses incurred in excess of those provided for in the bond indenture. Any funds remaining after repayment of all the bonds and any related agency and trustee charges will be transferred to the Partnership. In addition to trustee's fees and administrative expenses associated with the bond fund, the Partnership is required to pay loan administration fees associated with the mortgage loan. These expenses have been reflected in Miscellaneous Financial Expense in the accompanying Statement of Profit and Loss. The second mortgage note is insured under Section 236 of the National Housing Act and secured by a second deed of trust on the rental property. The note bears interest at the rate of 7% per annum. The Partnership entered into an interest subsidy agreement, which reduces the effective interest rate to approximately 1% over the term of the loan. During 1996, interest reduction payments of $402,046 were applied against interest expense. The reduced payments are due in equal, monthly installments of $18,330 through June 2014. Under agreements with the mortgage lenders and FHA, the Partnership is required to make monthly escrow deposits for taxes, insurance and replacement of project assets, and is subject to restrictions as to operating policies, rental charges, operating expenditures and distributions to partners. The liability of the Partnership under the mortgage notes is limited to the underlying value of the real estate collateral plus other amounts deposited with the lenders. 3. Mortgages Payable (continued) Annual maturities of the mortgages payable for each of the five years following December 31, 1996 are as follows: 221(d)(4) 236 Loan ------------------- ---------------------- Loan Total - ------------------ 1997 $ 188,824 $ 69,756 $ 258,580 - ------------------ 1998 202,473 76,110 278,583 - ------------------ 1999 217,111 83,044 300,155 - ------------------ 2000 232,805 90,609 323,414 - ------------------ 2001 249,635 98,863 348,498 - ------------------ Thereafter 5,208,984 13,126,047 18,335,031 - ------------------ ================================================================= Total $6,299,832 $13,544,429 $19,844,261 ================================================================= 4. Residual Receipts Note The residual receipts note bears interest at 3% per annum commencing September 1, 1991. Principal and interest are due in full on June 9, 2009 or on the maturity date of the first deed of trust, whichever is later, provided, however, that if the first trust is prepaid in full, the holder of the residual receipts note may at its option declare the principal balance and accrued interest thereon due and payable. Further, this note shall become due and payable if there is a change in the identity of the maker, refinancing of any indebtedness of the project, or transfer or sale of the project unless prior written approval from the holder is obtained. Prepayment of the principal of this note shall be made from residual receipts, as defined by the U.S. Department of Housing and Urban Development ("HUD"), available in any one year, after annual distributions of surplus cash of $56,222, as limited by HUD (see Note 10), or a lesser amount if approved by the holder. Annual prepayments shall not exceed an aggregate amount of $130,804. Receivables from Tenants Delinquent receivables from tenants are summarized as follows: Number of Days Tenants ------------------- ---------------- Past Due Amount 65 Under 31 $ 24,441 32 31-60 5,199 51 Over 60 10,665 ========================== ================ 148 $ 40,305 ========================== ================ 6. Uncertainty-Housing Assistance Agreement HUD has contracted under Section 8 of the Housing Assistance Payments ("HAP") Program of the United States Housing Act of 1937 to make housing assistance payments to the Partnership on behalf of low-income tenants who meet certain qualifications. There are two housing assistance agreements with five-year terms, which expire on December 31, 1999 and September 30, 1999. The Partnership received $1,415,415 of its revenue during 1996 from HUD under the terms of the HAP contracts. HUD is considering various alternatives to continuing project-based subsidies which may include the non-renewal of the existing HAP contracts between the Partnership and HUD. HUD has proposed alternative plans to replace project-based HAP contracts, including issuing rent vouchers directly to the tenants, which the tenant could then use for rent at the project of their choice. At this time, there is no assurance that the HAP contract will be extended by HUD. The ultimate impact of HUD's proposed plans to the Partnership cannot presently be determined. 7. Related Party Transactions Management Agreement The property is managed by Urban Realty and Development Corporation, an affiliate of the general partner, pursuant to a management agreement approved by HUD. The management agreement provides for a management fee of 5.5% of monthly rents and other collections related to the project's operations. Such fees charged to operations during 1996 amounted to $200,486. Additionally, the Partnership Agreement provides that the management fee shall be equal to the lesser of, (i) the HUD approved management fee or, (ii) 5.5% of the gross revenues of the project provided, however, that such fee may be greater than 5.5% of such gross revenues up to the HUD approved fee in any year in which the full cumulative Priority Distribution has been distributed to the Limited Partners. 8. Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value financial information about certain financial instruments, whether or not recognized on the balance sheet. The carrying amounts reported in the balance sheet for those financial instruments described in the schedule of funds in financial institutions included in the supporting data required by HUD listed on the contents page, approximate those assets' fair value. Payment of other long-term liabilities are generally dependent upon the Partnership's ability to achieve cash flow, the partners providing additional funds, the sale of the project or refinancing of the mortgage at the end of the Regulatory Agreement. Management believes that estimating the fair value of these long-term liabilities is either not appropriate or, because of excess costs, considers estimation of fair value to otherwise be impracticable. Working Capital Loans If the Partnership requires funds to pay project expenses subsequent to December 31, 1993, the end of the Initial Operating Period, the General Partners are obligated to make Working Capital Loans to the project up to $100,000. Such loans, if made, bear interest at the prime rate as established by the First National Bank of Boston. As of December 31, 1996, no working capital loans were made to the Partnership. 10. Distributions of Surplus Cash The Partnership is subject to a limitation on distributions of surplus cash as defined by HUD. Annual distributions are limited to $191,472. Surplus cash is to be distributed pursuant to the Partnership Agreement as follows: To repay any Working Capital Loans and Voluntary Loans including interest. To pay a priority distribution to the General and Limited Partners in the amount of $56,222 to be shared in accordance with their percentage ownership interests. At December 31, 1996, the cumulative unpaid priority distributions were $56,222. To repay any Project Expense Loans. To pay the Incentive Management Fee (see Note 12). The balance is distributed to the Partners in accordance with their percentage interests. Distributions of $95,816 and $41,751 from 1995 surplus cash were made to the Investor Limited Partner and General Partners, respectively, during 1996. 11. Guaranteed Priority Distribution The General Partners guarantee to pay the Investor Limited Partner a minimum Guaranteed Priority Distribution of $35,000 annually if funds are not available from surplus cash. This amount is cumulative and is not to be considered a capital contribution or loan. No such Guaranteed Priority Distributions were made by the General Partners for 1996. 12. Incentive Management Fee The General Partners are entitled to receive an Incentive Management Fee from distributable cash based on 50% of the remaining distributable cash after payment of the Priority Distribution of $56,222. The Incentive Management Fee is limited to 15% of gross collected income in any one year. Incentive Management Fees distributed during 1996 from the 1995 surplus cash were $40,663 and have been included in Other Entity Expenses in the accompanying Statement of Profit and Loss. 56 7