1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 Commission File No. 0-16701 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II, A MICHIGAN LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) MICHIGAN 38-2593067 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 280 DAINES STREET, BIRMINGHAM, MICHIGAN 48009 (Address of principal executive offices) (Zip Code) (248) 645-9261 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: $20 per unit, units of beneficial assignments of limited partnership interest 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 [ ] As of March 1, 1998, 3,303,387 units of limited partnership interest of the registrant were outstanding and the estimated aggregate market value of the units as of such date held by non-affiliates, as estimated by the General Partner (based on a 1998 appraisal of Partnership properties), was approximately $44,839,000. DOCUMENTS INCORPORATED BY REFERENCE SEE ITEM 14. 2 PART I ITEM 1. BUSINESS General Development of Business Uniprop Manufactured Housing Communities Income Fund II, a Michigan Limited Partnership (the "Partnership"), acquired, maintains, operates and ultimately will dispose of income producing residential real properties consisting of nine manufactured housing communities (the "Properties"). The Partnership was organized and formed under the laws of the State of Michigan on November 7, 1986. Its principal offices are located at 280 Daines Street, Birmingham, Michigan 48009 and its telephone number is (248) 645-9261. The Partnership filed an S-11 Registration Statement in November 1986 which was declared effective by the Securities and Exchange Commission on December 23, 1986. The Partnership thereafter sold 3,303,387 units (the "Units") of beneficial assignment of limited partnership interest representing capital contributions by unit holders (the "Unit Holders") to the Partnership of $20 per unit. The sale of all 3,303,387 Units was completed in December, 1987, generating $66,067,740 of contributed capital to the Partnership. On April 1, 1987, the Partnership acquired Sunshine Village, a 356-space manufactured housing community located in Davie, Florida and Ardmor Village, a 339-space manufactured housing community located in Lakeville, Minnesota. On May 22, 1987, the Partnership acquired Camelot Manor, a 335-space manufactured housing community located in Grand Rapids, Michigan. On July 1, 1987, Country Roads, a 312-space manufactured housing community located in Jacksonville, Florida and Paradise Village, a 611-space manufactured housing community located in Tampa, Florida, were acquired by the Partnership. On September 1, 1987, Dutch Hills, a 278-space manufactured housing community located in Haslett, Michigan and Stonegate Manor, a 308-space manufactured housing community located in Lansing, Michigan, were acquired by the Partnership. On January 8 and 15, 1988, respectively, the Partnership acquired West Valley, a 420-space manufactured housing community, and El Adobe, a 371-space manufactured housing community, both located in Las Vegas, Nevada. The Partnership operates the Properties as manufactured housing communities with the primary investment objectives of: (1) providing cash from operations to investors; (2) obtaining capital appreciation; and (3) preserving capital of the Partnership. There can be no assurance that such objectives can be achieved. On December 27, 1993, the Partnership participated in a financing transaction (the "Mortgage Financing") which created mortgage financing for 28 manufactured housing communities (collectively, the "Projects," and individually, a "Project"). Seven (7) of the Projects are owned by the Partnership; thirteen (13) are owned by affiliates of Genesis Associates Limited Partnership, the general partner of the Partnership (the "General -2- 3 Partner"), and eight (8) are owned by unrelated third parties. The Projects owned by the Partnership (the "Fund II Projects") are as follows: Ardmor Village Camelot Manor Dutch Hills El Adobe Stonegate Sunshine Village West Valley Essentially, mortgage notes executed by the owners of each of the Projects were issued in favor of Neutron-Uniprop, Inc. ("Neutron"), a wholly-owned subsidiary of Uniprop, Inc. (an affiliate of the General Partner), and assigned by Neutron to an independent trustee of a newly-formed trust (the "Trust"). The specific purpose of the Trust is to hold the mortgage notes and the mortgages and other security provided in connection therewith for the benefit of the owners of the newly-issued Uniprop MHC Mortgage Pass-Through Certificates (the "Mortgage Certificates"). The proceeds derived from the sale of the Mortgage Certificates were used to fund the mortgage loans made to the Project owners and pay the various expenses of the transaction. Five classes of Mortgage Certificates were issued with varying seniority and carrying different interest rates. The interest rate on the senior securities (i.e. the Class A Certificates) floats and equals 1.67% in excess of the LIBOR rate, computed monthly. The Class B and D Certificates carry fixed rates of interest of 7.04% and 7.5%, respectively. The interest rate on the Class C Certificate floats and equals 2.5% in excess of the LIBOR rate, computed monthly. The Class R Certificates do not have a principal balance or accrue interest. The original principal amounts of the mortgage loans for the Fund II Projects and their terms are as follows: Ardmor Village $2,930,000 Camelot Manor $3,490,000 Dutch Hills $2,580,000 El Adobe $5,530,000 Stonegate $3,015,000 Sunshine Village $4,290,000 West Valley $8,210,000 -3- 4 Term: 30 years Amortization: Years 1-5; none Years 6-30; 25 year schedule Interest Rate: Weighted average cost of the Mortgage Certificates plus 135 basis points (the "Excess Interest"), computed monthly, but in no event greater than 9.9% per annum in years 1 through 10 and 10.9% per annum in years 11 through 30, or less than 7% per annum in years 1 through 10 or 8% per annum in years 11 through 30. After payment of certain servicing expenses and the costs of administering the Trust, the Excess Interest will be used to reduce the principal balance of the Mortgage Certificates, which could ultimately result in an increase in the value of the Class R Certificates. Prepayment: Penalty of 5%, 4%, 3%, 2%, and 1% of the principal amount outstanding for prepayment in years 1, 2, 3, 4, and 5, respectively. No prepayment penalty after year 5. All prepayments of principal made under any of the mortgage notes will be applied in reduction of the principal balance of the Mortgage Certificates according to their respective payment priorities. To the extent the Excess Interest is not used to pay servicing fees and other costs of the trustee and servicers, it will be applied first in reduction of the principal balance of the Class B Certificates and Class C Certificates, pro rata until reduced to zero, then in reduction of the principal balance of the Class A Certificates until reduced to zero, and then in reduction of the Class D Certificates until reduced to zero. As a result of the foregoing, the weighted average cost of the Mortgage Certificates and, therefore, the interest rate charged to each Project owner, may increase due to prepayment by another borrower and as the principal amount of the Mortgage Certificates is reduced. In addition, because the Fund II Projects all have a common owner, the loans to each of the Fund II Projects are cross-defaulted and cross-collateralized with one another, such that a default by Uniprop Income Fund II with respect to any one of its loans will permit the enforcement of remedies on behalf of the Trust against all seven (7) Fund II Projects and recovery against each Fund II Project in excess of the amount of its mortgage loan. As a condition to participating in the mortgage-backed securities transaction, each Project owner was required to use approximately 5% of its mortgage proceeds to purchase a subordinated portion of the mortgage-backed securities, the Class D Certificates. The Class D Certificates are not rated, carry a fixed interest rate of 7.5% per annum and are subordinated to the Class A, Class B and Class C Mortgage Certificates, although, as long as there are sufficient funds in the Trust, the holders of the Class D Certificates are entitled to receive monthly payments of interest. The Partnership was issued a Class D Certificate with a face amount of $1,502,250. -4- 5 The Class R Certificates, which constitute the residual interest in the Trust, are owned by Uniprop MHC Residual L.L.C., a newly created Michigan limited liability company (the "R Holder" or "LLC"). The owners of the R Holder are the respective owners of the Projects participating in this mortgage-backed securities financing, with their ownership interest determined based on the amount each Project owner contributes to the value of the Class R Certificates. Initially, the Partnership holds a 20.986% interest in the R Holder. Financial Information About Industry Segment The Partnership's business and only industry segment is the operation of its nine manufactured housing communities. Partnership operations commenced in April 1987 upon the acquisition of the first two Properties. For a description of the Partnership's revenues, operating profit and assets, please refer to Items 6 and 8. Narrative Description of Business General The Sunshine Village, Ardmor Village and Camelot Manor Properties were selected from 25 manufactured housing communities then owned by affiliates of Genesis Associates Limited Partnership, the General Partner of the Partnership (the "General Partner"). The other six communities were purchased from unaffiliated third parties. The Partnership rents space in the Properties to owners of manufactured homes thereby generating rental revenues. It was intended that the Partnership would hold the Properties for extended periods of time, originally anticipated to be seven to ten years after their acquisition. The General Partner has the discretion to determine when a Property is to be sold; provided, however, that the determination of whether a particular Property should be disposed of will be made by the General Partner only after consultation with Manufactured Housing Services Inc. (the "Consultant"). In making their decision, the General Partner and Consultant will consider relevant factors, including, current operating results of the particular Property and prevailing economic conditions, and will make the decision with a view to achieving maximum capital appreciation to the Partnership considering relevant tax consequences and the Partnership's investment objectives. Competition The business of owning and operating residential manufactured housing communities is highly competitive, and the Partnership may be competing with a number of established companies having greater financial resources. Moreover, there has been a trend for manufactured housing community residents to purchase (where zoning permits) their manufactured home sites on a collective basis. This trend may result in increased competition with the Partnership for tenants. In addition, the General Partner, its affiliates or both, has and may in the future participate directly or through other partnerships or investment vehicles in the acquisition, ownership, development, operation and sale of projects which may be in direct competition with one or more of the Properties. -5- 6 Each of the Properties competes with numerous similar facilities located in its geographic area. The Davie/Fort Lauderdale area contains approximately seven communities offering approximately 3,441 housing sites competing with Sunshine Village. Ardmor Village competes with approximately nine communities in the Lakeville, Minnesota area offering approximately 2,363 housing sites. Camelot Manor competes with approximately 16 communities in the Grand Rapids, Michigan area offering approximately 3,697 housing sites. In the Jacksonville, Florida area, Country Roads competes with approximately nine communities offering approximately 2,181 housing sites. The Tampa, Florida area contains approximately five communities offering approximately 1,566 housing sites competing with Paradise Village. Dutch Hills and Stonegate Manor compete with approximately 11 other communities in the Lansing, Michigan area offering approximately 3,386 housing sites. In the Las Vegas, Nevada area, West Valley and El Adobe compete with approximately 10 other communities offering approximately 2,897 housing sites. The Properties also compete against other forms of housing, including apartment and condominium complexes. Governmental Regulations The Properties owned by the Partnership are subject to certain state regulations regarding the conduct of the Partnership operations. For example, the State of Florida regulates agreements and relationships between the Partnership and the residents of Sunshine Village, Country Roads and Paradise Village. Under Florida law, the Partnership is required to deliver to new residents of those Properties a prospectus describing the property and all tenant rights, Property rules and regulations, and changes to Property rules and regulations. Florida law also requires minimum lease terms, requires notice of rent increases, grants to tenant associations certain rights to purchase the community if being sold by the owner and regulates other aspects of the management of such properties. The Partnership is required to give 90 days notice to the residents of Florida properties of any rate increase, reduction in services or utilities, or change in rules and regulations. If a majority of the residents object to such changes as unreasonable, the matter must be submitted to the Florida Department of Professional Business Regulations for mediation prior to any legal adjudication of the matter. In addition, if the Partnership seeks to sell Florida Properties to the general public, it must notify any homeowners association for the residents, and the association shall have the right to purchase the Property on the price, terms and conditions being offered to the public within 45 days of notification by the owner. If the Partnership receives an unsolicited bona fide offer to purchase the Property from any party that it is considering or negotiating, it must notify any such homeowners association that it has received an offer, state to the homeowners association the price, terms and conditions upon which the Partnership would sell the Property, and consider (without obligation) accepting an offer from the homeowners association. The Partnership has, to the best of its knowledge, complied in all material respects with all requirements of the States of Florida, Michigan, Minnesota and Nevada, where its operations are conducted. -6- 7 Employees The Partnership employs three part-time employees to perform Partnership management and investor relations services. The Partnership retains an affiliate, Uniprop, Inc., as the property manager for each of its Properties. Uniprop, Inc. is paid a fee equal to the lesser of 5% of the annual gross receipts from each of the Properties or the amount which would be payable to unaffiliated third parties for comparable services. Uniprop, Inc. retains local managers on behalf of the Partnership at each of the Properties. Salaries and fringe benefits of such local managers are paid by the Partnership and are not included in any property management fee payable to Uniprop, Inc. Local managers are employees of the Partnership and are paid semi-monthly. The yearly salaries and expenses for local managers range from $20,000 to $40,000. Local managers have no direct management authority, make no decisions regarding operations and act only in accordance with instructions from the property manager. They are utilized by the Partnership to provide on-site maintenance and administrative services. Uniprop, Inc., as property manager, has overall management authority for each Property. ITEM 2. PROPERTIES The Partnership purchased all nine manufactured housing communities for cash. As a result of the Mortgage Financing, seven of the nine Properties are encumbered with mortgages in the following original principal amounts: Ardmor Village $2,930,000 Camelot Manor $3,490,000 Dutch Hills $2,580,000 El Adobe $5,530,000 Stonegate $3,015,000 Sunshine Village $4,290,000 West Valley $8,210,000 Each of the Properties is a modern manufactured housing community containing lighted and paved streets, side-by-side off-street parking and complete underground utility systems. The Properties consist of only the underlying real estate and improvements, not the actual homes themselves. In January 1990, the Partnership did begin acquiring some homes in conjunction with its home purchase/lease program for Country Roads and Paradise Village. Each of the Properties has a community center which includes offices, meeting rooms and game rooms. The Ardmor Village community includes a resident manager's apartment. Country Roads has a 1,200 square foot rental cottage. Each of the Properties, except Stonegate Manor, has a swimming pool. Several of the Properties also have laundry rooms, playground areas, garage and maintenance areas and recreational vehicle or boat storage areas. -7- 8 The table below contains certain information concerning the Partnership's nine properties. PROPERTY NAME NUMBER AND LOCATION YEAR CONSTRUCTED ACREAGE OF SITES - ------------ ---------------- ------- -------- Ardmor Village Cedar Avenue S. Lakeville, MN 1974 74 339 Camelot Manor South Division Grand Rapids, MI 1973 57 335 Country Roads Townsend Road Jacksonville, FL 1967 37 312 Dutch Hills Upton Road Haslett, MI 1975 42.8 278 El Adobe N. Lamb Blvd. Las Vegas, NV 1975 36 371 Paradise Village Paradise Drive Tampa, FL 1971 91 611 Stonegate Manor Eaton Rapids Drive Lansing, MI 1968 43.6 308 Sunshine Village Southwest 5th St. Davie, FL 1972 45 356 West Valley W. Tropicana Ave Las Vegas, NV 1972 53 420 ITEM 3. LEGAL PROCEEDINGS In the opinion of the Partnership and its legal counsel, there are no material legal proceedings pending except such ordinary routine matters as are incident to the kind of business conducted by the Partnership. To the knowledge of the Partnership and its counsel, no legal proceedings have been instituted or are being contemplated by any governmental authority against the Partnership. -8- 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The voting privileges of the Unit Holders and limited partners are restricted to certain matters of fundamental significance to the Partnership. The Unit Holders and Limited Partners must approve certain major decisions of the General Partner if the General Partner proposes to act without the approval of the Consultant. The Unit Holders and Limited Partners also have a right to vote upon removal and replacement of the General Partner, dissolution of the Partnership, material amendments to the partnership agreement and the sale or other disposition of all or substantially all of the Partnership's assets, except in the ordinary course of the Partnership's disposing of the Properties. Such matters must be approved by Unit Holders and Limited Partners, as a group, holding more than 50% of the then outstanding interests. There have been no matters submitted to a vote of the limited partners during the last fiscal year. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS There is no established public trading market for the Units of the Partnership and it is not anticipated that one will ever develop. During the last twelve months, less than two and one-half percent (2.5%) of the Units have been transferred, excluding transfers on account of death or intra-family transfers. The Partnership believes there is no secondary market, or the substantial equivalent thereof, and none will develop. The General Partner calculates the estimated net asset value of each Unit by dividing (i) the amount of distributions that would be made to the Limited Partners in the event of the current sale of the Properties at their current appraised value, less the outstanding balances of the mortgages on the mortgaged Properties and sales expenses (but without consideration to tax consequences of the sale), by (ii) 3,303,387. In March, 1998, the Properties were appraised at an aggregate fair market value of $77,200,000. Assuming a sale of the nine properties in March 1998, at the appraised value, less payment of selling expenses and mortgage debt, the net aggregate proceeds available for distribution to the Unit Holders is estimated to be $44,839,000 or $13.57 per unit. There can be no assurance that the estimated net asset value could ever be realized. As of March 1, 1998, the Partnership had approximately 4,850 Limited Partners holding Units. -9- 10 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes selected financial data for the Partnership for the periods ended December 31, 1997, 1996, 1995, 1994 and 1993: FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED ENDED DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 31, 1997 31, 1996 31, 1995 31, 1994 31, 1993 ------------ ----------- ----------- ----------- ----------- Total Assets $52,652,238 $53,583,381 $54,472,196 $56,093,938 $80,219,220 =========== =========== =========== =========== =========== Long Term Debt $30,045,000 $30,025,487 $29,894,586 $29,786,033 $29,660,353 ----------- ----------- ----------- ------------ ------------ Income 11,922,526 11,250,156 11,210,541 11,302,229 10,114,080 Expenses (10,755,270) (10,854,181) (10,670,390) (9,857,350) (7,261,446) ------------- ------------ ------------ ---------- ----------- Net Income $1,167,256 $395,975 $540,151 $1,444,879 $2,852,634 ========== ======== ========= ========== =========== Distributions to Unit Holders, per Unit: $ .64 $.54 $.66 $7.60 $1.40 Income per Unit: $ .35 $.12 $.16 $.43 $.85 Weighted average number of Units outstanding: 3,303,387 3,303,387 3,303,387 3,303,387 3,303,387 -10- 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Liquidity The Partnership retains cash reserves which it considers adequate to maintain the Properties. All funds in excess of operating needs and cash reserves are distributed to the Unit Holders, quarterly. As of December 31, 1996, the Partnership had $1,962,609 in reserves. Through the 1997 calender year, the Partnership funded into reserves approximately $903,864. On December 31, 1997, the Partnership had $2,506,411 in reserves, of which $1,630,552 was in cash and $875,859 was in short term marketable securities. (See Note 1 to the Financial Statements). Capital Resources The capital formation phase of the Partnership began on April 1, 1987 when Sunshine Village and Ardmor Village were purchased by the Partnership and operations commenced. It ended on January 15, 1988 when El Adobe, the Partnership's last property, was purchased. The total capital raised through December 1987 was $66,067,740 of which approximately $58,044,000 was used to purchase the nine Properties after deducting sales commissions, advisory fees and other organization and offering costs. In an effort to provide Unit Holders with a return of capital and eliminate the cumulative preferred return deficit owed to them, the General Partner, with majority consent from the Unit Holders, mortgaged seven of its nine Properties through the Mortgage Financing at approximately 56.0% of their appraised value, or $30,045,000. On or around February 15, 1994, the Partnership distributed $23,119,767 to the Unit Holders or $7.00 per $20.00 Unit held. $13,572,978 (or $4.11 per Unit), restored the shortfall in the Unit Holders 10.0% cumulative preferred return, and $9,546,789 (or $2.89 per unit), was a partial return of the Limited Partners' original capital contributions. As described in Note 3 to the Financial Statements, the term of the mortgage notes executed in connection with the Mortgage Financing payable are for a period of 30 years with interest only payments required for the first 5 years. Beginning in 1999, principal and interest payments are required on a self amortizing basis through December of 2023. The minimum mortgage interest rate is 7.0% per annum through December 2003 and 8.0% thereafter. The maximum mortgage interest rate is 9.9% per annum through December 2003 and 10.9% thereafter. Each of the seven mortgaged Properties is cross- collateralized. As part of the Mortgage Financing, the Partnership was required to purchase $1,502,250 in mortgage-backed securities. These mortgage-backed securities equal -11- 12 approximately 5.0% of the seven mortgage notes payable and pay interest computed at a monthly fixed rate of 7.5% per annum. As described in Note 1 of the Financial Statements the interest income, as well as the future value of the Class D Certificates could be adversely affected by a foreclosure or a significant decline in operating results involving any of the twenty-eight properties participating in the financing transaction, (including any of the seven Properties mortgaged by the Partnership). The General Partner acknowledges that the mortgages impose some risks to the Partnership, but that such risks are not greater than risks typically associated with real estate financing. In addition, as a result of the borrowing, there is potential adverse impact on the amount of distributions to the Unit Holders in future years. However, the General Partner anticipates, based on 1998 projections, that distributions to the Unit Holders will be approximately 3.0% to 4.5% through 1998. Results of Operations Distributions For the year ended December 31, 1997, the Partnership made distributions to the Unit Holders equal, on an annualized basis, to 3.47% on their adjusted capital contributions, or $ .64 per $17.11 unit. Distributions paid to the Unit Holders totaled $2,114,171 in 1997, $1,783,868 in 1996, and $2,195,720 in 1995. Annual distributable cash from operations was less than the amount required for the annual 10.0% preferred return to the Unit Holders by approximatley $3,538,000. As described in Note 7 to the Partnership's financial statements, the cumulative preferred return deficit through December 1997 was approximatley $14,696,000. No distributions can be made to the General Partner until the cumulative preferred return deficit has been distributed to the Unit Holders. At December 31, 1997, the unpaid amount to be distributed to the General Partner from future capital transactions was approximately $6,100,000. In February 1994, $23,119,767, a part of the Mortgage Financing proceeds, was distributed to the Unit Holders, of which $13,572,978 represented the elimination of the preferred return deficit that existed and $9,546,789 represented a partial return of capital. Net Income The Partnership generated net income of $1,167,256 in 1997, $395,975 in 1996, and $540,151 in 1995. There were increases in net income between 1996 and 1997 at eight of the nine properties. The approximately 12.0% increase in 1997 combined net income at the properties resulted from higher occupancy and rental increases. The decline in net income from 1995 to 1996 was due to managements decision to no longer recognize any income associated with the equity interest in the LLC. (See Note 3 to the Financial Statements). -12- 13 Net income plus depreciation and amortization less distributions to Unit Holders, and Net Income from the LLC were $903,864, $556,384 and $(262,765). Approximately 12.0% of the distributions to the Unit Holders in 1995 were funded with cash reserves. Partnership Management Net expenses for the management of the Partnership (i.e. gross expenses for such management, less transfer fees, interest on reserves, interest on funds awaiting distribution, and certain non-recurring income) were $155,024 in 1997, $177,328 in 1996 and $149,523 in 1995. The increase from 1995 to 1996 was due to higher legal fees and lower interest income on cash reserves. The decrease from 1996 to 1997 was due to higher interest income on cash reserves and lower adminstrative expenses. Property Operations Overall, as illustrated in the table below, the Partnership's nine properties had a combined average occupancy of 92.5% (3,080/3,330 sites) as of December 1997, versus 91.0% in December 1996, and 88.2% in December 1995. The average monthly rent was approximately $333 per home site in December 1997, versus $327 in December 1996 and $316 in December 1995, an increase each year of 1.8% and 3.5%, respectively. TOTAL SITES OCCUPIED SITES OCCUPANCY RATE AVERAGE RENT ------ --------------------- -------------------- -------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- Ardmor Village 339 326 323 298 96.2% 95.3% 87.9% $306 $314 $304 Camelot Manor 335 323 325 316 96.4 97.0 94.3 308 299 290 Country Roads 312 288 273 265 92.3 97.5 84.9 225 215 205 Dutch Hills 278 260 266 260 93.5 95.7 93.5 309 297 289 El Adobe 371 366 360 347 98.7 97.0 93.5 374 359 347 Paradise Village 611 480 437 435 78.6 71.5 71.2 282 272 257 Stonegate Manor 308 293 298 292 95.1 96.8 94.8 312 299 291 Sunshine Village 356 326 331 331 91.6 93.0 93.0 399 381 368 West Valley 420 418 418 392 99.5 99.5 93.3 429 438 428 ------ ----- ------ ------ ------- ------- ------ ----- ---- ---- Overall 3,330 3,080 3,031 2,936 92.5% 91.0% 88.2% $333 $327 $316 ====== ===== ====== ====== ======= ======= ====== ===== ==== ==== -13- 14 The table below summarizes gross revenues and net operating income for the Partnership and Properties during 1997, 1996 and 1995. GROSS REVENUE NET OPERATING INCOME --------------------------------------- ----------------------------------- 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ---- Ardmor Village $1,129,735 $1,104,595 $1,058,592 $523,625 $ 613,967 $ 563,269 Camelot Manor 1,123,127 1,085,052 1,050,043 614,242 564,878 560,413 Country Roads 763,727 708,498 624,061 109,568 100,722 (43,518) Dutch Hills 918,958 886,536 859,073 481,335 458,055 449,811 El Adobe 1,646,510 1,542,026 1,436,567 1,051,448 955,055 902,642 Paradise Village 1,460,543 1,308,743 1,236,377 326,009 191,971 78,478 Stonegate Manor 1,035,924 973,178 956,926 578,851 440,726 474,846 Sunshine Village 1,513,820 1,462,935 1,448,518 901,389 850,925 881,978 West Valley 2,240,418 2,098,742 1,931,920 1,510,414 1,271,269 1,201,331 ------------ ------------ ------------ ------------ ----------- ----------- 1,832,762 11,170,305 10,602,077 6,096,881 5,447,568 5,069,250 Partnership Mgmt. 89,764 79,851 110,455 (155,024) (177,328) (149,523) Equity in Net Income of LLC(1) - - 498,099 - - 498,099 Other nonrecurring (262,257) (316,627) (229,647) expenses Debt Service (2,661,565) (2,613,361) (2,757,125) Depreciation and Amortization (1,850,779) (1,944,277) (1,890,903) ------------ ------------ ------------ ------------ ----------- ----------- TOTAL: $11,922,526 $11,250,156 $11,210,541 $ 1,167,256 $ 395,975 $ 540,151 (1) Refer to Note 3 of the Financial Statements As illustrated in the table above, the Partnership's nine properties generated net operating income of $6,096,881 or 51.5% of total revenues compared to $5,447,568 or 48.4% of total revenues; and $5,069,250 or 47.4% of total revenues, in 1997, 1996, and 1995 respectively. When compared, the following two Properties have not performed as well as the other seven Properties: Country Roads, in Jacksonville, Florida, reported an occupancy of 92.3% (288/312 sites) as of December 1997 compared to 87.5% in 1996 and 84.9% in 1995. The average rent in December 1997 was $225, versus $215 in 1996 and $205 in 1995, an increase of 4.7 and 4.9%, respectively. The property's 1997 net operating income of $109,568 represented 14.3% of revenues versus $100,722 or 14.2% of revenues in 1996 and a net operating income loss of ($43,518) or -7.0% of revenues in 1995. The increase in net operating income from 1996 to 1997 is primarily due to higher occupancy and higher average rent. -14- 15 Paradise Village, in Tampa, Florida, reported an occupancy of 78.6% (480/611 sites) as of December 1997 compared to 71.5% in 1996 and 71.2% in 1995. The average rent in December 1997 was $282, versus $272 in 1996 and $257 in 1995, an increase of 3.7% and 5.8%, respectively. The property's 1997 net operating income of $326,009 represented 22.3% of revenues compared to $191,971 or 14.7% of revenues in 1996 and $78,478 or 6.3% in 1995. The increase in net operating income from 1996 to 1997 was due to lower operating expenses, increased occupancy and higher average rents. It is management's belief that the properties listed above will continue to improve in occupancy and performance during 1998. Year 2000 Costs The Partnership, like most users of computer software, will be required to modify certain portions of its software so that it will function properly in the year 2000. Maintenance or modification costs will be expensed as incurred, while the costs of any new software will be capitalized and amortized over the software's useful life life. Management believes these "year 2000" costs will be immaterial. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Partnership's financial statements for the fiscal year ended December 31, 1997, 1996 and 1995, and supplementary data are filed with this Report under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in the Partnership's independent public accountants nor have there been any disagreements during the past two fiscal years. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership, as an entity, does not have any officers or directors. The General Partner, Genesis Associates Limited Partnership, is a Michigan limited partnership which has two general partners, Uniprop, Inc., the managing General Partner and Paul M. Zlotoff. Information concerning Mr. Zlotoff's age and principal occupations, as well as for other officers and directors of Uniprop, Inc., during the last five years or more is as follows: Paul M. Zlotoff, 48, is and has been an individual general partner of Genesis Associates since its inception in November 1986. Mr. Zlotoff became the Chairman of Uniprop, Inc. in May 1986 and was its President from 1979 through 1997. He is also an individual general partner of P.I. Associates Limited Partnership, the general partner of -15- 16 Uniprop Manufactured Housing Communities Income Fund, a public limited partnership which owns and operates four manufactured housing communities. Mr. Zlotoff currently, and in the past, has acted as the general partner for various other limited partnerships owning manufactured housing communities and some commercial properties. Peter J. Martz, 49, joined Uniprop, Inc. as Executive-Vice President and CEO on January 1, 1998. Mr. Martz will be active in all areas relating to the acquisition and financing of new and existing real estate projects. Mr. Martz graduated from the University of Detroit in 1970 with a B.S. in accounting. He became a tax partner with Ernst & Ernst in 1980, specializing in real estate transactions. In 1983, he became Executive Vice President and CFO of Lamb Technicon, a large, privately held, machine tool holding company. Since 1988, Mr. Martz has been with a private investment company specializing in mergers, acquisitions and real estate investments. Mr. Martz is a member of the Michigan Association of CPA's and the American Institute of CPA's. Steven P. Adler, 47, became President of Uniprop, Inc. on January 1, 1998. Previously, Mr. Adler had been Vice President - Acquisitions and Director of Operations for Uniprop, Inc. since 1984. Mr. Adler is a past member of the Michigan Mobile Home Commission. He has been involved in the manufactured housing industry since 1978. Mr. Adler's responsibilities on behalf of Uniprop, Inc. include property acquisitions, and the overall direction for the operation of properties, including management, marketing and construction. Mr. Adler obtained a B.A. from Bard College, a M.S. in Resource Management and a M.A. in Sociology from the University of New Hampshire. Gloria Koster, 44, became Chief Financial Officer of Uniprop, Inc. on January 1, 1998. Previously, Ms. Koster had been Vice President - Finance of Uniprop, Inc. since July 1989. She is responsible for accounting, financial controls, data processing, cash management, financial reporting, budgeting, financing, and tax matters. Prior to joining Uniprop, Inc., Ms. Koster had been with Michigan National Bank for 13 years, most recently as a first vice-president. She has an M.B.A. from the University of Detroit. Terry Winter, 38, became Chief Investment Officer of Uniprop, Inc. on January 1, 1998. Previously, Mr. Winter had been Vice President - Public Programs of Uniprop, Inc. since August 1990. He is responsible for financial analysis of properties, placement of investments, management and marketing for public and private programs. From March 1989 until August 1990, Mr. Winter was vice president of marketing/business development in Dallas, Texas, with Home Owners Funding Corp. of America, a mortgage banking originator and servicer specializing in loans for manufactured homes and manufactured housing communities. From February 1987 to March 1989, he had been Vice President of loan services at Home Owners. From July 1982 until February 1987, before assets of that company were acquired by Home Owners in 1987, Mr. Winter had been Vice President of real estate management with Commodore Financial Services Corp. Mr. Winter has a B.B.A. in finance from Wayne State University. -16- 17 ITEM 11. EXECUTIVE COMPENSATION The Partnership has no executive officers and therefore, no officers received a salary or remuneration exceeding $100,000 during the last fiscal year. The General Partner of the Partnership and an affiliate, Uniprop, Inc., received certain compensation and fees during the fiscal year in the amounts described in Item 13. Depending upon the results of operations and other factors, the Partnership anticipates that it will provide similar compensation to the General Partner and Uniprop, Inc. during the next fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Partnership is a limited partnership duly formed pursuant to the Uniform Limited Partnership Act, as amended, of the State of Michigan. The General Partner, Genesis Associates Limited Partnership, is vested with full authority as to the general management and supervision of business and the other affairs of the Partnership, subject to certain constraints in the partnership agreement and consulting agreement. Unit holders and/or limited partners have no right to participate in the management of the Partnership and have limited voting privileges only on certain matters of fundamental significance. No person owns of record or beneficially, more than five percent of the Partnership's Units. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following discussion describes all of the types of compensation, fees or other distributions paid by the Partnership or others to the General Partner or its affiliates from the operations of the Partnership during the last fiscal year, as well as certain of such items which may be payable during the next fiscal year. Certain of the following arrangements for compensation and fees were not determined by arm's length negotiations between the General Partner, its affiliates and the Partnership. Paul M. Zlotoff has an interest in the original sellers of Sunshine Village and Ardmor Village and is entitled to share in a contingent purchase price with respect to each Property, when and if the Properties are sold and the sellers become entitled thereto. The maximum amounts which could be payable to the sellers are as follows: Sunshine Village, $1,108,260 and Ardmor Village, $946,236. The cash purchase price and contingent purchase price for each Property were determined by reference to the average of two independent real estate appraisals which were obtained by the General Partner. Such appraisals are only estimates of value and are not necessarily indicative of the actual real estate. Each seller will become entitled to any unpaid contingent purchase price upon the sale, financing or other disposition of each such Property, but, only after the receipt by each Unit Holder and Limited Partner of aggregate distributions equal to the sum of (I) his 10% cumulative preferred return plus (ii) 125% of his capital contribution. The actual amounts to be received, if any, will depend upon the results of the Partnership's operations -17- 18 and the amounts received upon the sale, financing or other disposition of the Properties and are not determinable at this time. The Partnership does not anticipate any such amount will become payable during the next fiscal year. The Partnership will pay an incentive management interest to the General Partner for managing the Partnership's affairs, including: determining distributions, negotiating agreements, selling or financing properties, preparing records and reports, and performing other ongoing Partnership responsibilities. This incentive management interest is 15% of distributable cash from operations in any quarter. However, in each quarter, the General Partner's right to receive any net cash from operations is subordinated to the extent necessary to first provide each Unit Holder and Limited Partner his 10% cumulative preferred return. During the last fiscal year, the General Partner received no distributions on account of its incentive management interest from operations because distributions were approximately $3,538,000 less than the 10% cumulative preferred return due Unit Holders. Any such amounts unpaid in a taxable year will be accumulated and paid from distributable cash from capital transactions, but only after each Unit Holder and Limited Partner has first received his 10% cumulative preferred return and 125% of his capital contribution. For 1997, approximately $400,000 was accumulated for the General Partner, and the General Partner's aggregate accumulated incentive management interest as of December 1997 was approximately $6,100,000. The actual incentive management interest from operations to be accumulated or paid during the next fiscal year will depend upon the results of the Partnership's operations and is not determinable at this time. The Partnership does not anticipate any such amount will be distributed to the General Partner during the next fiscal year and will again be accumulated with payment deferred. No distributions could be made to the General Partner until an approximately $14,696,000, 10% cumulative preferred return deficit as of December 31, 1997, is first distributed to the Unit Holders. In February of 1994, as part of the Mortgage Financing, $23,119,767 was distributed to the Unit Holders, $13,572,978 of which eliminated the Unit Holders' preferred return deficit through December 31, 1993. The Partnership must also pay an incentive management interest from capital transactions to the General Partner for its services rendered to the Partnership. The General Partner will be entitled to receive its share of distributable cash from capital transactions after (I) each Unit Holder and Limited Partner has received aggregate distributions in an amount equal to the sum of (a) his 10% cumulative preferred return plus (b) 125% of his capital contribution, (ii) any contingent purchase prices have been paid, and (iii) any property disposition fees to Uniprop, Inc. have been paid. The General Partner's share of distributable cash from capital transactions so payable will be (I) 100% of such distributable cash from capital distributions until the General Partner's share of the aggregate capital distributions made under section 11c(iii) and 11c(v) of the partnership agreement equal 25% and (ii) thereafter, 25% of such distributable cash from capital transactions. No incentive management interest from capital transactions was paid to the General Partner for the fiscal year ended December 31, 1997. The Partnership does not anticipate that any such amounts will be paid or become payable to the General Partner during the next fiscal year. -18- 19 Uniprop, Inc. received and will receive property management fees for each Property managed by it. Uniprop, Inc. is primarily responsible for the day-to-day management of the Properties and for the payment of the costs of operating each Property out of the rental income collected. The property management fees are equal to the lesser of 5% of the annual gross receipts from the Properties managed by Uniprop, Inc., or the amount which would be payable to an unaffiliated third party for comparable services. During the last fiscal year, Uniprop, Inc. received the following property management fees totaling $585,394: Ardmor Village, $56,791; Camelot Manor, $55,433; Country Roads, $38,701; Dutch Hills, $45,230; El Adobe, $81,229; Paradise Village, $71,965; Stonegate Manor, $50,893; Sunshine Village, $74,669; and West Valley, $110,483. The actual amounts to be received during the next fiscal year will depend upon the results of the Partnership's operations and are not determinable at this time. Certain employees of affiliates of the General Partner were paid an aggregate of $177,046 during 1997 to perform local property management, data processing and investor relations services for the Partnership. It is anticipated comparable amounts will be paid in the next fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements The following financial statements and related documents are filed with this Report: (1) Report of Independent Certified Public Accountants (2) Balance Sheets as of December 31, 1997 and 1996 (3) Statements of Income for the fiscal years ended December 31, 1997, 1996 and 1995 (4) Statements of Partners' Equity for the fiscal years ended December 31, 1997, 1996 and 1995 (5) Statements of Cash Flows for the fiscal years ended December 31, 1997, 1996 and 1995 (6) Schedule III - Real Estate and Accumulated Depreciation for the fiscal years ended December 31, 1997, 1996 and 1995 (b) Reports on Form 8-K -19- 20 The Partnership did not file any Forms 8-K during the fourth quarter of 1997. (c) Exhibits The following exhibits are incorporated by reference to the S-11 Registration Statement of the Partnership filed November 12, 1986, as amended on December 22, 1986 and January 16, 1987: 3(a) Certificate of Limited Partnership for the Partnership 3(b) Uniprop Income Fund II Agreement of Limited Partnership 4(a) First Amendment to Uniprop Income Fund II Agreement of Limited Partnership (April 1, 1987) 10(a) Form of Management Agreement between the Partnership and Uniprop, Inc. 10(b) Form of Consulting Agreement between the Partnership, the General Partner and Consultant The following exhibits are incorporated by reference to the Form 8-K filed January 7, 1994: 28(a) Specimen Mortgage Note (without exhibit) 28(b) Specimen Open-End Mortgage, Deed of Trust, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents (without exhibits), with: Specimen Rider for properties located in Michigan; Specimen Rider for property located in Minnesota; Specimen Rider for property located in Florida; and Specimen Rider for properties located in Nevada 28(c) Specimen Assignment of Rents and Leases (without exhibits), with: Specimen Rider for property located in Minnesota; Specimen Rider for properties located in Nevada The following exhibits are attached to this Report: 4(b) Form of Beneficial Assignment Certificate (BAC) for the Partnership (As last submitted with Form 10-K for the fiscal year ended December 31, 1992 and originally submitted with Form 10-K for the fiscal year ended December 31, 1987.) 10(c) Contingent Purchase Price Agreement with Sunrise Broward Associates, Ltd. (As last submitted with Form 10-K for the fiscal year ended December 31, 1992.) -20- 21 10(d) Contingent Purchase Price Agreement with Ardmor Associates Limited Partnership. (As last submitted with Form 10-K for the fiscal year ended December 31, 1992.) 10(e) Incentive Acquisition Fee Agreement between the Partnership and Uniprop, Inc. (As last submitted with Form 10-K for the fiscal year ended December 31, 1992.) 27 Financial Data Schedule 28 Letter summary of the estimated fair market values of the Partnership's nine manufactured housing communities, as of March 1, 1998 (d) Other Financial Statements There are no other financial statements required by the instructions contained in Regulation S-X or, the information is included elsewhere in the financial statements or the notes thereto. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Uniprop Manufactured Housing Communities Income Fund II, a Michigan Limited Partnership, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Uniprop Manufactured Housing Communities Income Fund II, a Michigan Limited Partnership BY: Genesis Associates Limited Partnership, General Partner BY: Uniprop, Inc., Managing General Partner By: /s/ Paul M. Zlotoff ------------------------------------- Paul M. Zlotoff, Chairman Dated: March 30, 1998 -21- 22 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Gloria Koster By: /s/ Paul M. Zlotoff ----------------------------- ------------------------------------------ Gloria Koster Paul M. Zlotoff, Chairman of Uniprop, Inc. (Chief Financial Officer of Uniprop, Inc.) Dated: March 30, 1998 Dated: March 30, 1998 By: /s/ Andrew Feuereisen ----------------------------- Andrew Feuereisen (Controller of Uniprop, Inc.) Dated: March 30, 1998 -22- 23 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Partners Uniprop Manufactured Housing Communities Income Fund II (a Michigan limited partnership) We have audited the accompanying balance sheets of Uniprop Manufactured Housing Communities Income Fund II (a Michigan limited partnership), as of December 31, 1997 and 1996 and the related statements of income, partners' equity and cash flows for each of the three years in the period ended December 31, 1997. We have also audited the schedule listed under Item 14 of Form 10-K. These financial statements and the schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and the schedule 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 and the schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and the schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and the schedule. 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 Uniprop Manufactured Housing Communities Income Fund II at December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the schedule listed under Item 14 of Form 10-K presents fairly, in all material respects, the information set forth therein. BDO SEIDMAN, LLP Troy, Michigan February 12, 1998 24 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) BALANCE SHEETS December 31, 1997 1996 - --------------------------------------------------------------------------------------------------------------- ASSETS PROPERTY AND EQUIPMENT (Note 3) Buildings and improvements $ 49,099,290 $ 48,558,632 Land 11,644,103 11,644,603 Manufactured homes and improvements 2,082,250 2,535,831 Furniture and equipment 369,274 342,651 - --------------------------------------------------------------------------------------------------------------- 63,194,917 63,081,717 Less accumulated depreciation 17,057,071 15,329,988 - --------------------------------------------------------------------------------------------------------------- NET PROPERTY AND EQUIPMENT 46,137,846 47,751,729 Cash and cash equivalents 1,630,552 1,144,427 Marketable securities 875,859 818,182 Mortgage-backed securities (Note 3) 1,502,250 1,502,250 Unamortized financing costs 891,000 930,139 Investment (Note 3) 998,995 998,995 Other assets (Note 2) 615,736 437,659 - --------------------------------------------------------------------------------------------------------------- $ 52,652,238 $ 53,583,381 =============================================================================================================== LIABILITIES AND PARTNERS' EQUITY Notes payable (Note 3) $ 30,045,000 $ 30,025,487 Accounts payable 126,063 155,889 Other liabilities (Note 4) 1,220,472 1,194,387 - --------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 31,391,535 31,375,763 - --------------------------------------------------------------------------------------------------------------- PARTNERS' EQUITY Unit holders 21,030,515 21,989,103 General partner 230,188 218,515 - --------------------------------------------------------------------------------------------------------------- TOTAL PARTNERS' EQUITY 21,260,703 22,207,618 - --------------------------------------------------------------------------------------------------------------- $ 52,652,238 $ 53,583,381 =============================================================================================================== See accompanying notes to financial statements. 25 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) STATEMENTS OF INCOME Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- INCOME Rental $ 11,340,654 $ 10,824,604 $ 10,257,258 Interest 203,570 194,493 224,027 Equity in net income of LLC (Note 3) - - 498,099 Other 378,302 231,059 231,157 - --------------------------------------------------------------------------------------------------------------- 11,922,526 11,250,156 11,210,541 - --------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Property operations 4,347,873 4,417,300 4,230,166 Depreciation and amortization 1,850,779 1,944,277 1,890,903 Administrative (Note 5) 998,950 1,009,113 956,742 Property taxes 896,103 870,130 835,454 Interest 2,661,565 2,613,361 2,757,125 - --------------------------------------------------------------------------------------------------------------- 10,755,270 10,854,181 10,670,390 - --------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,167,256 $ 395,975 $ 540,151 =============================================================================================================== INCOME PER LIMITED PARTNERSHIP UNIT (Note 7) $ .35 $ .12 $ .16 =============================================================================================================== DISTRIBUTIONS PER LIMITED PARTNERSHIP UNIT (Note 7) $ .64 $ .54 $ .66 =============================================================================================================== NUMBER OF LIMITED PARTNERSHIP UNITS OUTSTANDING 3,303,387 3,303,387 3,303,387 =============================================================================================================== NET INCOME ALLOCABLE TO GENERAL PARTNER $ 11,673 3,960 $ 5,402 =============================================================================================================== DISTRIBUTIONS ALLOCABLE TO GENERAL PARTNER $ - $ - $ - =============================================================================================================== See accompanying notes to financial statements. 26 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 General Partner Unit Holders TOTAL - --------------------------------------------------------------------------------------------------------------- BALANCE, January 1, 1995 $ 209,153 $ 25,041,927 $ 25,251,080 Distributions to unit holders - (2,195,720) (2,195,720) Net income for the year 5,402 534,749 540,151 - --------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1995 214,555 23,380,956 23,595,511 Distributions to unit holders - (1,783,868) (1,783,868) Net income for the year 3,960 392,015 395,975 - --------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1996 218,515 21,989,103 22,207,618 Distributions to unit holders - (2,114,171) (2,114,171) Net income for the year 11,673 1,155,583 1,167,256 - --------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1997 $ 230,188 $ 21,030,515 $ 21,260,703 =============================================================================================================== See accompanying notes to financial statements. 27 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,167,256 $ 395,975 $ 540,151 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,792,127 1,778,930 1,747,977 Amortization 58,652 165,347 142,926 Equity in net income of LLC (Note 3) - - (498,099) Gain on sale of property and equipment (18,850) (40,188) (1,933) (Increase) decrease in other assets (178,077) 87,568 96,924 Increase (decrease) in accounts payable (29,826) 1,177 (85,176) Increase (decrease) in other liabilities 26,085 367,000 10,450 - --------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,817,367 2,755,809 1,953,220 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS USED IN INVESTING ACTIVITIES Purchase of property and equipment (982,115) (1,115,173) (961,537) Proceeds from sale of property and equipment 822,721 760,760 175,936 Purchase of marketable securities (507,677) (61,429) (481,753) Proceeds from redemption of marketable securities 450,000 200,000 525,000 - --------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (217,071) (215,842) (742,354) - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Distributions to unit holders (2,114,171) (1,783,868) (2,195,720) - --------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 486,125 756,099 (984,854) CASH AND CASH EQUIVALENTS, at beginning of year 1,144,427 388,328 1,373,182 - --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, at end of year $ 1,630,552 $ 1,144,427 $ 388,328 =============================================================================================================== See accompanying notes to financial statements. 28 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF ORGANIZATION AND BUSINESS ACCOUNTING POLICIES Uniprop Manufactured Housing Communities Income Fund II, a Michigan Limited Partnership (the "Partnership") acquired, maintains, operates and will ultimately dispose of income producing residential real properties consisting of nine manufactured housing communities (the "properties") located in Florida, Michigan, Nevada and Minnesota. The Partnership was organized and formed under the laws of the State of Michigan on November 7, 1986. In accordance with its Prospectus dated December 1986, the Partnership sold 3,303,387 units of beneficial assignment of limited partnership interest ("Units") for $66,067,740. The Partnership purchased the properties for an aggregate purchase price of approximately $56,000,000. Three of the properties costing approximately $16,008,000 were previously owned by entities which were affiliates of the general partner. The general partner is Genesis Associates Limited Partnership. Uniprop Beneficial Corporation was the initial limited partner who assigned to those persons purchasing units a beneficial limited partnership interest when the minimum number of units were sold. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and (2) revenues and expenses during the reporting period. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS The Partnership considers all highly liquid investments purchased with a maturity term of less than three months to be cash equivalents. 29 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, and marketable securities approximate fair value because of the relative short maturity of these items. The carrying amounts of notes payable approximate fair value because the interest rates change with market rates. The fair value of the mortgage-backed securities could not be reasonably estimated due to their lack of liquidity and their unique nature. The Partnership has the positive intent and ability to hold these securities to maturity (see "Mortgage-Backed Securities" below). PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the following estimated useful lives: Building and improvements 30 years Manufactured homes and improvements 30 years Furniture and equipment 3-10 years Accumulated depreciation for tax purposes was $15,210,638 and $13,658,919 as of December 31, 1997 and 1996, respectively. Long-lived assets such as property and equipment are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. No impairment loss recognition has been required through December 31, 1997. 30 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS MARKETABLE SECURITIES Marketable securities at December 31, 1997 include U.S. Government and Federal Agency Bonds with maturity dates ranging from April 1998 to May 1999. These securities are stated at amortized cost and management intends to hold such securities to maturity. The rate of return on these securities ranged from 6.37% to 7.87%. During 1997, $450,000 of marketable securities matured. MORTGAGE-BACKED SECURITIES In connection with the Partnership's 1993 financing transaction (see Note 3), the Partnership was required to use approximately 5% of its mortgage proceeds to purchase a subordinated portion of the trust fund's mortgage-backed securities ("Class D Certificates"). These Class D Certificates are not rated, carry a fixed interest rate of 7.5% per annum and are subordinated to the Class A, B and C mortgage certificates issued as part of the aforementioned financing transaction. The Partnership was issued a Class D Certificate in 1993 with a face amount of $1,502,250. These securities are carried at cost and the Partnership intends to hold such securities to maturity. The actual maturity date, which is dependent upon future interest rates and other factors, is anticipated to occur before or during the year 2023. The future value of the Class D Certificates would be adversely affected by a foreclosure or a significant decline in operating results involving any of the twenty-eight properties participating in the financing transaction (including any of the seven properties mortgaged by the Partnership) (see Note 3); however, all scheduled payments to the trust fund have been made to date by the participating properties and management is not aware of any situations that would adversely affect future scheduled payments. The Partnership currently intends to pay its notes payable underlying the Class D Certificates in accordance with their scheduled terms. FINANCING COSTS Costs to obtain financing have been capitalized and are amortized using the straight-line method over the 30-year term of the related mortgage notes payable. 31 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS INVESTMENT The "Investment" reflected on the Partnership's balance sheets represents a 20.98% residual interest ("Class R Certificates") of the trust fund which was established as part of the 1993 financing transaction (see Note 3). The owners of the Class R Certificates are the respective owners of the properties participating in the mortgage-backed securities transaction, with their ownership interest based on the amount each property contributed to the value of the Class R Certificates. These certificates have no principal or interest amount associated with them, but represent the amount which the Partnership will be entitled to receive after all other classes of certificates have been reduced to zero, which is anticipated to occur before or during the year 2023; the actual maturity date is dependent upon future interest rates and other factors. The future value of the Class R Certificates would be adversely affected by a foreclosure or a significant decline in operating results involving any of the twenty-eight properties participating in the financing transaction, including any of the seven properties mortgaged by the Partnership (see Note 3); however, all scheduled payments to the trust fund have been made to date by the participating properties and management is not aware of any situations that would adversely affect future scheduled payments. The Partnership currently intends to pay its notes payable underlying the Class R Certificates in accordance with their scheduled terms. The Partnership's "Investment" is accounted for using the equity method of accounting, whereby 20.98% of the trust fund's residual interest (which generally represents mortgage interest payments to the trust fund in excess of amounts paid to certificate holders) is recorded in the accompanying financial statements, subject to management's estimation of the carrying value of the investment (see Note 3). INCOME TAXES Federal income tax regulations provide that any taxes on income of a partnership are payable by the partners as individuals. Therefore, no provision for such taxes has been made at the partnership level. 32 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS 2. Other Assets At December 31, 1997 and 1996, "Other assets" included cash of approximately $216,000 and $88,000, respectively, in a security deposit escrow account for two of the Partnership's properties, which is required by the laws of the state in which they are located and is restricted from operating use. 3. Notes Payable Notes payable consisted of: December 31, 1997 1996 ---------------------------------------------------------------------------------- Mortgage notes payable totalling $30,045,000, less unamortized discount of $19,513 in 1996 (See further description below) $ 30,045,000 $ 30,025,487 ================================================================================== In December 1993, the Partnership mortgaged seven of its properties in connection with a financing transaction which involved twenty-one other properties, thirteen of which are owned in part by affiliates of the general partner. The borrowings, which are secured by the mortgages on the Partnership's properties as well as the mortgages on the other twenty-one properties, were funded through the issuance of mortgage-backed securities. As part of the financing, the Partnership was required to purchase $1,502,250 in mortgage-backed securities. The entity that issued these securities was a newly created trust fund. The proceeds of the mortgage notes payable were obtained primarily to eliminate the cumulative preferred return deficit owed to the unit holders that existed as of December 31, 1993, and also to distribute a return of capital to the unit holders. 33 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS The mortgage notes payable require monthly payments of interest only through December 1998. Thereafter, monthly payments of principal and interest are required through December 2023. Principal payments to be made in 1999, 2000, 2001 and 2002 are approximately $363,000, $395,000, $430,000 and $468,000, respectively. The minimum mortgage interest rate is 7.0% per annum through December 2003 and 8.0% thereafter. The maximum mortgage interest rate is 9.9% per annum through December 2003 and 10.9% thereafter. These minimum and maximum rates are determined based on formulas specified in the borrowing agreement. Each of the seven mortgaged properties of the Partnership is cross-collateralized under the terms of the agreement. The Partnership also has a 20.98% interest in the residual interest of the trust fund and will be entitled to receive a pro-rata share of the proceeds of the remaining assets of the trust fund after the principal balances of the regular security holders have been paid. The residual interest of the trust fund is a separate legal entity and is organized as a Limited Liability Corporation ("LLC") for federal income tax purposes. At December 31, 1997 and 1996, the Partnership's equity in the LLC reflected in the accompanying balance sheets was $998,995, which was determined using the equity method of accounting. The Partnership recognized its share of the net income of the LLC for financial statement purposes in the statements of income prior to 1996. In subsequent periods, the Partnership did not recognize any income related to the LLC due to management's belief that any further increases in the carrying amount of the investment may not be recoverable. Management anticipates that the current carrying value of $998,995 is fully recoverable and therefore no impairment loss has been recorded in these financial statements. During 1995, $498,099 was recognized in the statements of income; however, as reflected in the statements of cash flows, no cash was received by the Partnership for this amount. 34 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS 4. Other Other liabilities consisted of: Liabilities December 31, 1997 1996 ---------------------------------------------------------------------------------- Tenants' security deposits $ 502,086 $ 495,522 Accrued property taxes 339,508 344,090 Accrued interest 229,730 221,761 Other 149,148 133,014 ---------------------------------------------------------------------------------- TOTAL $ 1,220,472 $ 1,194,387 ================================================================================== 5. Related Party MANAGEMENT AGREEMENT Transactions The Partnership has an agreement with an affiliate of the general partner to manage the properties owned by the Partnership. The management agreement is automatically renewable annually, but may be terminated by either party upon sixty days written notice. The property management fee is the lesser of 5% of annual gross receipts from the properties managed, or the amount which would be payable to an unaffiliated third party for comparable services. REPORT OF FEES During the years ended December 31, 1997, 1996 and 1995, the affiliate earned property management fees of $585,394, $552,846 and $524,609, respectively, as permitted in the Agreement of Limited Partnership. These operating expenses are included with "Administrative" expenses in the respective statements of income. The Partnership was owed $19,765 and $13,559 by the affiliate at December 31, 1997 and 1996, respectively, for overpayments made. Certain employees of the Partnership are also employees of affiliates of the general partner. These employees were paid by the Partnership $177,046, $196,491 and $164,657 in 1997, 1996 and 1995, respectively, to perform local property management and investor relations services for the Partnership. 35 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS CONTINGENT PURCHASE PRICE A general partner of Genesis Associates Limited Partnership has an interest in the sellers of two of the properties acquired by the Partnership and is entitled to share in a contingent purchase price of approximately $2,054,000 with respect to these properties, when and if the properties are sold and the sellers become entitled thereto. The actual amounts to be received, if any, will depend upon the results of the Partnership's operations and the amounts received upon the sale, financing or other disposition of the properties, and are not determinable at this time. The Partnership does not anticipate any such amount will become payable during the next fiscal year. 6. Reconciliation Year Ended December 31, 1997 1996 1995 of Financial ------------------------------------------------------------------------------- Income and Income per the financial Taxable statements $ 1,167,256 $ 395,975 $ 540,151 Income Adjustments to depreciation for difference in methods 175,340 159,898 168,185 Adjustments for prepaid rent, meals and entertainment (3,100) 8,198 25,580 Adjustment for LLC income 576,904 530,069 - ------------------------------------------------------------------------------- Income Per the Partnership's Tax Return $ 1,916,400 $ 1,094,140 $ 733,916 =============================================================================== 7. Partners' Subject to the orders of priority under certain specified Capital conditions more fully described in the Agreement of Limited Partnership, distributions of partnership funds and allocations of net income from operations are principally determined as follows: DISTRIBUTIONS Distributable cash from operations in the Agreement (generally defined as net income plus depreciation and amortization) is to be distributed to unit holders until they have received a 10% cumulative preferred return. After the unit holders have received their 10% cumulative preferred return, all remaining cash from operations is distributed to the general partner until the total 36 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS amount received by the general partner is equal to 15% of the aggregate amount of cash distributed from operations in a given year. Amounts payable to but not paid to the general partner will be accumulated and paid from future capital transactions after the unit holders have first received their 10% preferred return and 125% of their capital contributions. Thereafter, 85% of distributable cash from operations is to be paid to the unit holders and 15% to the general partner. Annual distributable cash from operations was less than the amount required for the annual 10% preferred return to the unit holders by approximately $3,538,000 in 1997 and $3,868,000 in 1996. No distributions can be made to the general partner until the cumulative preferred return deficit of approximately $14,696,000 has been distributed to the unit holders. At December 31, 1997, the unpaid amount to be distributed to the general partner from future capital transactions was approximately $6.1 million. ALLOCATION OF NET INCOME Net income is principally allocated 99% to the unit holders and 1% to the general partner until the cumulative amount of net income allocated to the unit holders equals the aggregate cumulative amount of cash distributable to the unit holders. After sufficient net income has been allocated to the unit holders to equal the amount of cash distributable to them, all the net income is to be allocated to the general partner until it equals the amount of cash distributed to it. 8. Supplemental Interest paid during 1997, 1996 and 1995 was approximately Cash Flow $2,654,000, $2,621,000, and $2,760,000, respectively. Information 37 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 Column A Column B Column C Column D Column E - ---------------- ----------------- ----------------------------------- ------------------------- ------------------------------- Costs Capitalized Gross Amount at Which Carried Initial Cost Subsequent to Acquisition at Close of Period -------------------------------- -------------------------- ----------------------------------- Buildings and Buildings and Buildings and Description Encumbrance Land Improvements Land Improvements Land Improvements Total - ------------------------------------------------------------------------------------------------------------------------------------ Ardmor Village (Lakeville, MN) $ 2,930,000 $ 1,063,253 $ 4,253,011 $ - $ 843,906 $ 1,063,253 $ 5,096,917 $ 6,160,170 Sunshine Village (Davie, FL) 4,290,000 1,215,862 4,875,878 - 109,271 1,215,862 4,985,149 6,201,011 Camelot Manor (Grand Rapids, MI) 3,490,000 918,949 3,681,051 - 540,057 918,949 4,221,108 5,140,057 Country Roads (Jacksonville, FL) - 636,550 2,546,200 38,106 536,383 674,656 3,082,583 3,757,239 Paradise Village (Tampa, FL) - 1,760,000 7,040,000 279,053 1,002,185 2,039,053 8,042,185 10,081,238 Dutch Hills (Haslett, MI) 2,580,000 839,693 3,358,771 23,104 328,041 862,797 3,686,812 4,549,609 Stonegate Manor (Lansing, MI) 3,015,000 930,307 3,721,229 40,552 265,065 970,859 3,986,294 4,957,153 El Adobe (Las Vegas, NV) 5,530,000 1,480,000 5,920,000 39,964 354,499 1,519,964 6,274,499 7,794,463 West Valley (Las Vegas NV) 8,210,000 2,289,700 9,158,800 89,010 564,943 2,378,710 9,723,743 12,102,453 - ------------------------------------------------------------------------------------------------------------------------------------ $30,045,000 $11,134,314 $44,554,940 $ 509,789 $ 4,544,350 $ 11,644,103 $49,099,290 $60,743,393 ==================================================================================================================================== Column A Column F Column G Column H - ---------------- ------------- --------- ---------------- Life on Which Depreciation in Latest Income Accumulated Date Statement is Description Depreciation Acquired Computed - ---------------------------------------------------------------------- Ardmor Village (Lakeville, MN) $ 1,639,525 1987 30 years Sunshine Village (Davie, FL) 1,784,823 1987 30 years Camelot Manor (Grand Rapids, MI) 1,438,955 1987 30 years Country Roads (Jacksonville, FL) 1,029,976 1987 30 years Paradise Village (Tampa, FL) 2,634,809 1987 30 years Dutch Hills (Haslett, MI) 1,254,434 1987 30 years Stonegate Manor (Lansing, MI) 1,352,182 1987 30 years El Adobe (Las Vegas, NV) 2,074,665 1988 30 years West Valley (Las Vegas NV) 3,190,142 1988 30 years - ------------------------------------------------------------------ $16,399,511 ================================================================== 38 UNIPROP MANUFACTURED HOUSING COMMUNITIES INCOME FUND II (A MICHIGAN LIMITED PARTNERSHIP) NOTES TO SCHEDULE III DECEMBER 31, 1997 1. RECONCILIATION The following table reconciles the land from OF LAND January 1, 1995 to December 31, 1997: 1997 1996 1995 --------------------------------------------------------------------------------- BALANCE, at January 1 $ 11,644,603 $ 11,644,603 $ 11,562,361 Additions to land, net (500) - 82,242 --------------------------------------------------------------------------------- BALANCE, at December 31 $ 11,644,103 $ 11,644,603 $ 11,644,603 ================================================================================= 2. RECONCILIATION The following table reconciles the buildings and OF BUILDINGS improvements from January 1, 1995 to December 31, 1997: AND IMPROVEMENTS 1997 1996 1995 --------------------------------------------------------------------------------- BALANCE, at January 1 $ 48,558,632 $ 48,305,293 $ 47,691,900 Additions to buildings and improvements 540,658 253,339 613,393 --------------------------------------------------------------------------------- BALANCE, at December 31 $ 49,099,290 $ 48,558,632 $ 48,305,293 ================================================================================= 3. RECONCILIATION The following table reconciles the accumulated Depreciation OF ACCUMULATED from January 1, 1995 to December 31, 1997: DEPRECIATION 1997 1996 1995 --------------------------------------------------------------------------------- BALANCE, at January 1 $ 14,735,004 $ 13,080,592 $ 11,449,637 Current year depreciation expense 1,664,507 1,654,412 1,630,955 --------------------------------------------------------------------------------- BALANCE, at December 31 $ 16,399,511 $ 14,735,004 $ 13,080,592 ================================================================================= 4. TAX BASIS The aggregate cost of buildings and improvements for OF BUILDINGS federal income tax purposes is equal to the cost basis AND IMPROVEMENTS used for financial statement purposes. 39 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION METHOD OF FILING PAGE - ------- ----------- ---------------- ---- 3(a) Certificate of Limited Incorporated by reference to the Partnership for the S-11 Registration Statement of Partnership the Partnership filed November 12, 1986, as amended on December 22, 1986 and January 16, 1987 (the "Registration Statement"). 3(b) Uniprop Income Fund II Incorporated by reference Agreement of Limited to the Registration Statement. Partnership 4(a) First Amendment to Incorporated by reference Uniprop Income Fund II to the Registration Statement. Agreement of Limited Partnership (April 1, 1987) 4(b) Form of Beneficial Filed herewith. Assignment Certificate Under cover of Form SE (BAC) for the Partnership (originally filed with Form 10-K for the fiscal year ended December 31, 1987) 10(a) Form of Management Incorporated by reference to the Agreement between the Registration Statement. Partnership and Uniprop, Inc. 10(b) Form of Consulting Incorporated by reference Agreement between the to the Registration Statement. Partnership, the General Partner and Consultant 40 10(c) Contingent Purchase Price Filed herewith. Agreement with Sunrise Under cover of Form SE Broward Associates, Ltd. (originally filed with Form 10-K for the fiscal year ended December 31, 1987) 10(d) Contingent Purchase Price Filed herewith. Agreement with Ardmor Under cover of Form SE Associates Limited Partnership (originally filed with Form 10-K for the fiscal year ended December 31, 1987) 10(e) Incentive Acquisition Fee Filed herewith. Agreement between the Under cover of Form SE Partnership and Uniprop, Inc. (originally filed with Form 10-K for the fiscal year ended December 31, 1987) 27 Financial Data Schedule Filed herewith. 28 Letter summary of the Filed herewith. estimated fair market values of the Partnership's nine manufactured housing communities, as of March 1, 1998.