SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) _ |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities - Exchange Act of 1934 For the quarterly period ended June 30, 1995 or _ |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ___________ Commission file number 0-12138 New England Realty Associates Limited Partnership (Exact name of registrant as specified in its charter) Massachusetts 04-2619298 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 39 Brighton Ave., Allston, Massachusetts 02134 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 783-0039 Not applicable (Former name, former address and former fiscal year, if changed since last report) 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 INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements. Balance Sheets - June 30, 1995 3 and December 31, 1994 Statements of Operations - Three and 4 Six Months Ended June 30, 1995 and June 30, 1994 Statements of Changes in Partners' 5 Capital - Three Months Ended June 30, 1995 and June 30, 1994 Statements of Cash Flows - Six Months 6 Ended June 30, 1995 and June 30, 1994 Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of 17 Financial Condition and Results of Operations. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. 21 SIGNATURES 22 BALANCE SHEETS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP June 30, December 31, 1995 1994 (Unaudited) ____________ _____________ ASSETS Rental Properties (Notes 1, 3 and 10) $ 55,256,969 $ 23,782,167 Deposit on Acquisition (Note 3) - 1,898,200 Cash and Cash Equivalents (Notes 1 and 6) 800,860 996,353 Short-term Investments (Notes 1 and 5) 47,399 45,555 Rents Receivable (Note 10) 588,063 643,104 Real Estate Tax Escrows 153,268 23,558 Prepaid Expenses and Other Assets (Note 4) 1,797,139 488,783 Investment in Joint Venture (Notes 1 and 5) 141,419 165,340 Financing and Leasing Fees (Note 1) 739,932 278,756 ____________ ____________ TOTAL ASSETS $ 59,525,049 $ 28,321,816 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Mortgages Payable (Note 6) $ 50,388,784 $ 17,567,909 Note Payable - Related Party (Note 3) - 1,175,000 Accounts Payable and Accrued Expenses 381,100 620,989 Advance Rental Payments and Security Deposits (Notes 4 and 7) 586,909 556,939 ____________ ___________ Total Liabilities 51,356,793 19,920,837 Commitments and Contingent Liabilities (Note 9 and Note 12) Partners' Capital (Note 8): 177,152 units outstanding 8,168,256 8,400,979 ____________ ____________ TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 59,525,049 $ 28,321,816 ============ ============ See notes to financial statements. STATEMENTS OF OPERATIONS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP Three Months Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 (Unaudited) (Unaudited) ________________________ ________________________ Revenues: Rental income (Notes 2 and 10) $ 2,274,773 $ 2,011,455 $ 4,519,007 $ 4,052,191 Laundry income 34,273 34,427 68,526 58,618 ----------- ----------- ----------- ----------- 2,309,046 2,045,882 4,587,533 4,110,809 ----------- ----------- ----------- ----------- Expenses: Administrative (Note 4) 171,080 170,261 314,689 280,815 Depreciation and amortization 431,826 395,343 853,114 799,803 Interest 580,526 407,640 1,060,782 805,256 Management fees (Note 4) 96,652 82,906 198,853 169,031 Operating 191,010 202,964 470,807 539,556 Renting 42,240 34,468 72,189 68,522 Repairs & maintenance 422,013 376,784 745,012 640,260 Taxes & insurance 283,342 265,081 540,319 533,254 ----------- ----------- ----------- ----------- 2,218,689 1,935,447 4,255,765 3,836,497 ----------- ----------- ----------- ----------- Income from Operations 90,357 110,435 331,768 274,312 ----------- ----------- ----------- ----------- Other income(loss): Interest income 13,775 13,677 25,023 24,684 Income(loss) from investment in the joint venture (Note 5) ( 748) 13,782 8,852 23,420 ----------- ----------- ----------- ----------- 13,027 27,459 33,875 48,104 ----------- ----------- ----------- ----------- Net Income $ 103,384 $ 137,894 $ 365,643 $ 322,416 =========== =========== =========== =========== Net Income per Unit $ .58 $ .78 $ 2.06 $ 1.81 =========== =========== =========== =========== Weighted Average Number of Units Issued and Outstanding (Note 8) 177,152 177,664 177,152 177,664 =========== =========== =========== =========== See notes to financial statements. STATEMENTS OF CASH FLOWS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP Six Months Ended June 30, (Unaudited) 1995 1994 __________ __________ Cash Flows from Operating Activities: Net income $ 365,643 $ 322,416 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 853,114 799,803 (Income) on investment in partnerships & joint venture ( 8,852) ( 23,420) Decrease in rents receivable 55,041 222,793 (Increase) in financing and leasing fees ( 518,108) ( 8,017) (Decrease) in accounts payable ( 239,889) ( 146,263) Other items, net (1,407,139) ( 273,242) __________ __________ Total Adjustments (1,265,833) 571,654 __________ __________ Net cash provided by (used in) operating activities ( 900,190) 894,070 __________ __________ Cash Flows from Investing Activities: Distribution from joint venture 32,773 36,980 Payment for purchase of rental properties (30,375,585) ( 822,881) Maturity of short-term investments - 793,787 Purchase of short-term investments - ( 395,555) __________ __________ Net cash (used in) investing activities (30,342,812) ( 387,669) __________ __________ See notes to financial statements. STATEMENTS OF CASH FLOWS (CONTINUED) NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP Six Months Ended June 30, (Unaudited) 1995 1994 ___________ __________ Cash Flows from Financing Activities: Principal payments and early repayment of mortgages payable ( 3,256,125) ( 151,690) Proceeds from refinancing of Partnership properties 13,450,000 - Decrease in notes payable to related party ( 1,175,000) - Distribution to partners ( 598,366) ( 601,356) Increase in mortgages payable 22,627,000 - Stock buyback (Note 8) - ( 33,520) ___________ ___________ Net cash provided by (used in) financing activities 31,047,509 ( 786,566) ___________ ___________ Net (Decrease) in Cash and Cash Equivalents ( 195,493) ( 280,165) Cash and Cash Equivalents, Beginning 996,353 1,571,964 ___________ ___________ Cash and Cash Equivalents, Ending $ 800,860 $ 1,291,799 =========== =========== See notes to financial statements. STATEMENTS OF CHANGES IN PARTNERS' CAPITAL NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP (Unaudited) Partners' Capital _______________________________________________ Limited General ________________________ __________ Class A Class B Class C Total ___________ ___________ __________ ___________ Balance, January 1, 1994 $ 6,821,992 $ 1,648,030 $ 86,736 $ 8,556,758 Distributions to Partners (Note 8) ( 481,085) ( 114,258) ( 6,013) ( 601,356) Net Income 257,933 61,259 3,224 322,416 Stock buyback (Note 8) - ( 31,860) ( 1,660) ( 33,520) ___________ ___________ __________ ___________ Balance, June 30, 1994 $ 6,598,840 $ 1,563,171 $ 82,287 $ 8,244,298 =========== =========== ========== =========== Units authorized and issued, net of 2,561 Treasury Units, at June 30, 1994 142,131 33,756 1,777 177,664 ======= ====== ===== ======= Balance, January 1, 1995 $ 6,717,849 $ 1,598,946 $ 84,184 $ 8,400,979 Distributions to Partners (Note 8) ( 478,693) ( 113,690) ( 5,983) ( 598,366) Net Income 292,514 69,472 3,657 365,643 ___________ ___________ __________ ___________ Balance, June 30, 1995 $ 6,531,670 $ 1,554,728 $ 81,858 $ 8,168,256 =========== =========== ========== =========== Units authorized and issued, net of 3,073 Treasury Units at June 30, 1995 141,722 33,659 1,771 177,152 ======= ====== ===== ======= See notes to financial statements NOTES TO FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP NOTE 1--SIGNIFICANT ACCOUNTING POLICIES ("NERA" OR THE "PARTNERSHIP") Revenue Recognition: Certain leases of the commercial properties provide for increasing stepped minimum rents which are accounted for on a straight-line basis over the term of the lease. Rental Properties: Rental properties are stated at cost less accumulated depreciation. Maintenance and repairs are charged to expense as incurred; improvements and additions are capitalized. When assets are retired or otherwise disposed of, the cost of the asset and related accumulated depreciation are eliminated from the accounts, and any gain or loss on such disposition is included in income. Rental properties are depreciated on the straight-line method over their estimated useful lives. Investment in Joint Venture: The Partnership accounts for investment in the joint venture on the equity method. Financing and Leasing Fees: Financing fees are capitalized and amortized over the life of the related mortgages. Leasing fees are capitalized and amortized over the life of the related lease. Income Taxes: The financial statements have been prepared under the basis that NERA is entitled to tax treatment as a partnership. Accordingly, no provision for income taxes on income has been recorded. Cash Equivalents: The Partnership considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Short Term Investments: The Partnership considers short term investments as bank certificates of deposit, treasury obligations or commercial paper with maturities between three and twelve months. These investments are considered to be trading account securities and are carried at fair value. Concentration of Credit Risks and Financial Instruments: The Partnership's tenants are located in New England and the Partnership is subject to the general economic risks related thereto. No single tenant accounted for more than 5% of the Partnership's revenue in 1995 and 1994. The Partnership invests its temporary cash investments with high credit quality financial institutions or purchases U.S. Government backed commercial paper. Basis of Presentation: The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management the accompanying financial statements include all adjustments, consisting of NOTES TO FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP NOTE 1--SIGNIFICANT ACCOUNTING POLICIES ("NERA" OR THE "PARTNERSHIP") (CONTINUED) normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and changes in financial position for the periods presented. Please refer to the audited financial statements and footnotes thereto included in the Partnership Annual Report on Form 10-K for the year ended December 31, 1994. NOTE 2--LINE OF BUSINESS NERA was organized in Massachusetts during 1977. It owns and operates various residential apartment buildings, condominium units and commercial properties located in Massachusetts, Connecticut, New Hampshire and Maine. NERA has also made investments in other real estate partnerships and has participated in other real estate related activities primarily located in Massachusetts. NOTE 3--RENTAL PROPERTIES Rental properties consist of the following: June 30, December 31, Useful 1995 1994 Life _____________ ___________ ____________ Land $ 7,538,599 $ 4,153,599 -- Buildings 49,499,354 20,649,836 25-31 years Building improvements 9,372,675 9,426,477 15-31 years Kitchen cabinets 1,294,555 1,270,295 5-10 years Carpets 1,139,561 1,098,770 5-10 years Air conditioning 135,455 135,455 7-10 years Land improvements 427,163 423,414 10-31 years Laundry equipment 80,592 79,490 5-7 years Elevators 16,842 16,842 20 years Swimming pools 42,450 42,450 10 years Equipment 152,268 140,909 5-7 years Motor vehicles 79,816 78,842 5 years Fences 99,748 96,447 5-10 years Furniture and fixtures 106,127 98,594 5-7 years Smoke alarms 42,083 42,083 5-7 years ___________ ___________ 70,027,288 37,753,503 Less accumulated depreciation 14,770,319 13,972,472 ___________ ___________ $55,256,969 $23,781,031 =========== =========== NOTES TO FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP NOTE 3--RENTAL PROPERTIES (CONTINUED) On June 30, 1995, the Partnership purchased for $30,376,000 five properties containing an aggregate of 809 residential apartments. The purchase was paid for in part with the proceeds of the refinancing of nine of the Partnership's properties and the issuance of new 8.375% mortgage notes payable aggregating $22,627,000 and maturing in ten years. The properties were acquired from a trust owned nominally by the majority shareholder of NERA's general partner. In substance the properties were owned by the trust's secured lender under a previous restructuring agreement whereby the lender received all of the operating income from the properties as well as the proceeds from the sale to NERA. The Partnership has recorded the purchase at the amount paid for the properties. Included in rental properties at June 30, 1995 is a building in Newton, Massachusetts acquired by the Partnership on January 25, 1995. The building consists of 21,223 square feet of commercial space, 9 residential units and 29 parking spaces for a total purchase price of $1,925,000. This building was acquired from an entity in which the majority shareholder of NERA's general partner had a substantial ownership interest. The Partnership's management company received a fee of approximately $11,000 from the seller in this transaction. To facilitate this acquisition, the Partnership's management company, an entity owned by the majority shareholder of NERA's general partner, loaned the Partnership $1,175,000 in December 1994. In May 1995, the Partnership refinanced this property and obtained a mortgage payable in 10 years with interest at 9.25%, and paid off the existing loan of $1,175,000 to the management company. NOTE 4--RELATED PARTY TRANSACTIONS The Partnership properties are managed by an entity which is owned by the majority shareholder of the general partner (see Note 12). The management fee is equal to 4% of rental revenue and laundry income. Total fees paid were $198,853 and $169,031 for the six months ended June 30, 1995 and 1994, respectively. Advance rental payments and security deposits are held in escrow by the management company (see Note 7). The management company also receives a mortgage servicing fee equal to an annual rate of 1/2% of the monthly outstanding balance of mortgages receivable resulting from the sale of property. There were no mortgage servicing fees paid in 1995 or 1994. The Partnership Agreement also permits the general partner or management company to charge the costs of professional services (such as counsel, accountants, contractors) to NERA. In the second quarter of 1995, approximately $42,000 was charged to NERA for legal, maintenance, architectural services, and supervision of capital improvements. NOTES TO FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP NOTE 4--RELATED PARTY TRANSACTIONS (CONTINUED) During the year ended December 31, 1994, approximately $74,000 was capitalized in leasehold improvements and the balance of $56,000 was included in administrative expense. Additionally in 1994, the Partnership paid to the management company $30,000 for accounting services previously provided by an outside company. The Partnership Agreement entitles the general partner or the management company to receive commissions upon the sale of partnership property only to the extent that total commissions do not exceed 3%. No such commissions were paid in 1995 or 1994. Included in prepaid expenses and other assets were amounts due from related parties of $55,744 at June 30, 1995 and $55,582 at December 31, 1994 representing Massachusetts tenant security and prepaid rent deposits, which are held for the Partnership by another entity also owned by one of the shareholders of the general partner (see Note 7). Also included in prepaid expenses and other assets is an insurance reserve account funded by the Partnership and held by the management company. The insurance reserve includes funds from other properties which are also owned by the related parties. The balance in the reserve was $44,783 at June 30, 1995 and $39,212 at December 31, 1994. See Note 10 for rental arrangements with the Timpany Plaza joint venture. As described in Note 5, the Partnership has interests in certain entitites in which the majority shareholder of the general partner is also involved. NOTE 5--INVESTMENTS The short term investment totalling $47,399 at June 30, 1995 and $45,555 at December 31, 1994 is carried at cost which approximates fair value. Such investment at June 30, 1995 is a 6% certificate of deposit maturing in February 1996. The issuer and amount of this investment is as follows: June 30, December 31, 1995 1994 ___________ __________ Citizens Bank - Certificate of deposit $ 47,399 $ 45,555 ========== ========== The carrying value of the Partnership's 50% interest in the Timpany Plaza Joint Venture, at equity, is $141,419 and $165,340 at June 30, 1995 and December 31, 1994, respectively. NOTES TO FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP NOTE 5--INVESTMENTS (CONTINUED) The Partnership owns a 10% interest in four real estate partnerships accounted for by the equity method and reduced to a carrying value of zero. Losses in excess of cost in limited partnerships have not been recorded as the Partnership is not liable for such amounts. The majority shareholder of the general partner is also the majority owner of these partnerships (see Note 12). There can be no assurance that any of NERA's partnership investments will be realizable in the future in excess of their carrying value. NOTE 6--MORTGAGES PAYABLE At June 30, 1995 and December 31, 1994, the mortgages payable consisted of various loans, substantially all of which were secured by first mortgages, on rental properties referred to in Note 3, with interest ranging from 8.25% to 10.99% and prime plus 1.5%, payable in monthly installments currently aggregating approximately $422,000, including interest, to various dates through 2005. The Partnership has pledged tenant leases as additional collateral for certain of its mortgages. Approximate annual maturities are as follows: 1996 - current maturities $ 3,056,638 1997 912,219 1998 4,715,863 1999 510,637 2000 557,329 Thereafter 40,636,098 ___________ $50,388,784 =========== In September 1994 the Partnership refinanced the mortgage on the shopping mall in Lewiston, Maine. The new loan of $5,060,000 is collateralized by the Lewiston Mall and the Clovelly apartments in Nashua, New Hampshire. The loan matures in February 1998. Interest is charged at 1.5% over the prime rate and principal payments are based on a fifteen year amortization. The mortgage calls for additional principal payments of $250,000 each in July 1995 and January 1996. The Partnership did not make the principal payment of $250,000 in July 1995. The Partnership intends to refinance the shopping mall located in Lewiston, Maine in August 1995 and the bank granted the Partnership an extension on this principal payment. NOTES TO FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP NOTE 6--MORTGAGES PAYABLE (CONTINUED) This loan contains certain covenants, including an aggregate debt service coverage on the mortgaged properties of no less than 1.3 to 1, a loan to value ratio of no greater than 70%, or have on deposit funds at the lender bank which is adequate to cover any shortfall; a minimum partnership net worth of $7,000,000 and minimum partnership cash and cash equivalents of $700,000. As of June 30, 1995 the Partnership had on deposit the required funds and was in compliance with the loan covenants. Included in prepaid expense and other assets at December 31, 1994 is $140,000 not yet received on a previously refinanced mortgage. This amount was collected in April 1995 as a result of the completion of certain improvements to the property underlying the mortgage. NOTE 7--ADVANCE RENTAL PAYMENTS AND SECURITY DEPOSITS The lease agreements for certain properties require tenants to maintain a one-month advance rental payment and security deposit. The funds are held in escrow by another entity owned by the majority shareholder of the general partner (see Notes 4 and 12). NOTE 8--PARTNERS' CAPITAL The Partnership has two categories of limited partners (Classes A and B) and one category of general partner (Class C). Under the terms of the Partnership Agreement, Classes B and C must represent 19% and 1%, respectively of the total units outstanding. All classes have equal profit sharing and distribution rights in proportion to their ownership interests. The Partnership declared distributions of $3.38 per unit in the first quarters of 1995 and 1994 respectively. The Partnership has entered into a deposit agreement with a bank to facilitate public trading of limited partners' interests in Class A units. Under the terms of this agreement, the holders of Class A units have the right to exchange each Class A unit for ten depositary receipts. The following is information of the net income per depositary receipt: Six Months Ended June 30, 1995 1994 ---- ---- Net Income Per Depositary Receipt $.21 $.18 ==== ==== NOTES TO FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP NOTE 8--PARTNERS' CAPITAL (CONTINUED) In March 1993, the Partnership announced that it would offer to purchase Depositary Receipts from all holders of less than 100 Depositary Receipts. A total of 23,391 depositary receipts were purchased at $5 per receipt. In 1994 the Class A, B, and C units were restored to the required percentage relationship mentioned above by the purchase of B and C units at $50 per unit ($5 per receipt). NOTE 9--COMMITMENTS AND CONTINGENCIES From time to time, the Partnership is involved in various ordinary routine litigation incidental to its business. The Partnership is not involved in any material pending legal proceedings. NOTE 10--RENTAL INCOME In 1995, approximately 72% of rental income is related to residential apartment and condominium units with leases of one year or less. The remaining 28% is related to commercial properties which have minimum future rental income on noncancellable operating leases as follows: Commercial Property Leases Land Leases Total 1996 $1,347,168 $ 130,000 $1,477,168 1997 1,192,310 130,000 1,322,310 1998 1,007,918 130,000 1,137,918 1999 754,555 130,000 884,555 2000 531,480 130,000 661,480 Thereafter 2,126,681 1,625,833 3,752,514 __________ __________ __________ $6,960,112 $2,275,833 $9,235,945 ========== ========== ========== In August 1988, the Partnership entered into a land lease agreement, with an existing tenant, in the Timpany Shopping Plaza Center in Gardner, Massachusetts. As part of this lease, the tenant, at its cost, demolished approximately one-third of the mall and replaced it with a new store of comparable size. The minimum fixed term of this lease is for 20 years which commenced with the opening of the new store in December 1989. NOTES TO FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP NOTE 10--RENTAL INCOME (CONTINUED) The minimum annual rents are $110,000 per year for the first five years and increase each subsequent five-year period with the average being $137,500 per year for the minimum twenty-year term. Included in rents receivable at June 30, 1995 and December 31, 1994 is $151,250 and $137,500, respectively, representing the deferred rental income of $27,500 per year from this lease. There are also contingent rents based upon sales volume, common area maintenance, and other charges. This lease also provides for six extension periods of five years each at increased rents. The minimum rents pertaining to this agreement are reflected in the foregoing table. The ownership of this new building addition transfers to the Partnership at the termination of the lease. Accordingly, the Partnership included in property assets approximately $1,400,000 of book value of the demolished building allocable to the Partnership leasehold interest and is depreciating this amount on a straight-line basis over a 20-year period. Concurrently, the Partnership entered into a joint venture with this same tenant relating to the space formerly leased by the tenant. Under this arrangement, the two parties have agreed to relet space and divide the net income or loss after paying to the Partnership an annual minimum rent of $84,546. The Partnership's share of income was approximately $9,000 and $23,000 for the six months ended June 30, 1995 and 1994 respectively. The aggregate minimum future rental income does not include contingent rentals which may be received under various leases in connection with percentage rents, common area charges and real estate taxes. Aggregate contingent rentals were approximately $401,000 and $371,000 for the six months ended June 30, 1995 and 1994 respectively. NOTE 11--CASH FLOW INFORMATION During the six months ended June 30, 1995 and 1994, cash paid for interest was $1,114,582 and $796,108, respectively. NOTE 12--BANKRUPTCY OF RELATED PARTIES As described in notes 4, 5 and 7, the Partnership had transactions with and has interests in certain entities in which the majority shareholder of the general partner is involved. Such shareholder had guaranteed certain notes receivable and had agreed to indemnify the Partnership for losses incurred from certain partnerships in which New England Realty Associates Limited Partnership is a general partner. During March 1991, this shareholder, the Partnership's management company, and other related entities filed for protection from their creditors under Chapter 11 of the Federal Bankruptcy Code. NOTES TO FINANCIAL STATEMENTS NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP NOTE 12--BANKRUPTCY OF RELATED PARTIES In September 1992, the U.S. Bankruptcy Court confirmed a reorganization plan pursuant to which this shareholder was discharged of all liabilities including all guarantees and indemnifications. Certain of the partnership investments described in Note 5 are subject to restructuring stipulations with their respective lenders. There can be no assurance that the investment partnerships will realize any future value. As part of the restructuring, management of the NERA properties was transferred to a newly formed partnership owned 1% by the majority shareholder of NERA's general partner. In August 1993, this majority shareholder purchased the other 99% ownership interest. The management of the Partnership believes that the proceedings described above will not adversely affect the Partnership's properties or operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Results of Operations Income from operations for the second quarter of 1995 was approximately $90,000, compared to approximately $110,000 for the same period in 1994, a decrease of approximately $20,000. For the six months ended June 30, 1995, income from operations was approximately $332,000 compared to approximately $274,000 for the same period in 1994, an increase of approximately $58,000. Net cash used by operations during the six months ended June 30, 1995 was approximately $900,000 compared to cash provided by operations of approximately $894,000 during the same period in 1994, a decrease of approximately $1,794,000. This change is due to the acquisition of rental properties in June 1995 which required funding real estate tax escrow accounts and insurance reserves for these properties. The Partnership also refinanced 9 properties in May and June 1995 and the prepaid financing fees related to the refinancing have also affected the Partnership's cash flow. Rental income during the second quarter of 1995 was approximately $2,275,000 compared with approximately $2,011,000, for the same period in 1994, an increase of approximately $264,000. For the six months ended June 30, 1995, rental income was approximately $4,519,000 compared to approximately $4,052,000 for the same period in 1994, an increase of approximately $467,000. These rental income increases are due primarily to the acquisition of a commercial building in Newton, Massachusetts in January 1995, as well as increases in the occupancy levels at the Westgate apartments in Woburn, the shopping mall in Lewiston, Maine and the Timpany Plaza in Gardiner, Massachusetts. Expenses for the second quarter of 1995 were approximately $2,219,000 compared to approximately $1,935,000 for the same period in 1994, an increase of approximately $284,000. This increase reflects an increase in interest expense of approximately $173,000 due to the significant increase in the mortgages payable as a result of refinancing Partnership properties, as described above, resulting in additional debt; an increase of approximately $45,000 in repairs and maintenence expenses due to the ongoing repairs to the Partnership properties; an increase of approximately $36,000 in depreciation and amortization due to acquisitions and ongoing capital improvements to the Partnership properties; an increase in taxes and insurance of approximately $18,000 due to the additional real estate taxes and insurance on the Lincoln Street property which was acquired in January 1995; and an increase in the management fee of approximately $14,000 due to the increase in rental income. Expenses for the first six months of 1995 were approximately $4,256,000 compared with approximately $3,836,000 for the same period in 1994, an increase of approximately $420,000. This represents an increase in interest expense of approximately $256,000; an increase in repairs and maintenence expenses of approximately $105,000; an increase in depreciation and amortization of approximately $53,000; and an increase in the management fee of approximately $30,000. The reason for the increase in these expenses are discussed in the preceeding paragraph. These increases are offset by a decrease in operating expenses of approximately $69,000 due to lower utility and snow removal costs as a result of a milder winter in 1995. Interest income for each of the three months ended June 30, 1995 and 1994 was approximately $14,000. Interest income for each of the six months ended June 30, 1995 and 1994 was approximately $25,000. This represents a decrease in the cash available for investment offset by an increase in the interest rates. Investment in partnerships and the Timpany Plaza joint venture represents NERA's interest in commercial real estate not wholly-owned by the Partnership. NERA is not liable for losses in excess of its investment in limited partnerships in which it is a limited partner. NERA's investment in the partnerships has been reduced to zero due to losses incurred since the time of investment. There has been no loss recorded on the investment in the partnerships since 1991. The Partnership's investment in the Timpany Plaza joint venture represents less than 1% of NERA's assets. The Partnership's share of loss in the joint venture at the Timpany Plaza Shopping Center was approximately $1,000 for the second quarter of 1995 compared to income of approximately $14,000 for the second quarter of 1994. For the six months ended June 30, 1995, the Partnership's share of income from the joint venture at Timpany Plaza Shopping Center was approximately $9,000 compared to approximately $23,000 for the same period in 1994. These decreases in income represent an increase in the expenses, primarily the real estate taxes and the common area charges, in connection with the joint venture. As a result of the changes discussed above, net income for the three months ended June 30, 1995 was $103,384 compared to $137,894 for the same period in 1994, a decrease of $34,510. Liquidity and Capital Resources The Partnership's principal source of cash during 1995 and 1994 has been the collection of rents and the refinancing of Partnerhip properties. The majority of cash and cash equivalents totalling $800,860 at June 30, 1995 and $996,353 at December 31, 1994 is invested in commercial paper and certificates of deposit maturing in less than 90 days. Additionally, the Partnership purchased a short term investment valued at $47,399 at June 30, 1995 and $45,555 at December 31, 1994. This investment is a certificate of deposit which matures in February 1996. In June 1995, the Partnership acquired 5 buildings consisting of 809 residential units. The buildings were purchased from an entity in which the majority shareholder of NERA's general partner had a substantial ownership interest. The total purchase price for the 5 buildings was $30,376,000. The Partnership obtained 5 individual mortgages which total $22,627,000. Each mortgage has a maturity of 10 years with an interest rate of 8.375%. The balance of $7,749,000 was paid in cash. In connection with this acquisition, the Partnership refinanced 9 other Partnership properties for which it incurred prepaid financing fees of approximately $498,000. The amount of this refinancing was $13,450,000 of which approximately $3,000,000 was used to pay off the existing debt and the remaining $10,450,000 was used in connection with the acquisition of the new buildings. These transactions have had, and are expected to continue to have, a negative impact on the Partnership's cash flow. In September 1994, the Partnership refinanced the mortgage on the shopping mall in Lewiston, Maine. The new loan of $5,060,000 is collateralized by the shopping mall in Lewiston, Maine and the Clovelly apartments in Nashua, New Hampshire. The new loan matures in February 1998. Interest is charged at 1.5% over the prime rate and principal payments are based on a fifteen year amortization. The mortgage calls for principal payments of $250,000 in July 1995 and January 1996. The Partnership did not make the principal payment in July 1995. The Partnership intends to refinance this property in August 1995 and the bank granted the Partnership an extension on this principal payment. The loan also contains certain covenants with which the Partnership must comply. The Partnership was in compliance with these covenants at June 30, 1995. The outstanding principal on the mortgage at June 30, 1995 was $4,935,303. During the second quarter of 1995, the Partnership completed certain improvements to its properties at a total cost of approximately $349,000. These improvements were funded from cash reserves. The most significant improvements were made at the Westgate apartments in Woburn, Massachusetts for a total cost of approximately $150,000, as well as improvements of approximately $26,000 at the shopping mall in Lewiston, Maine, approximately $23,000 at the River Drive apartments in Danvers, Massachusetts and approximately $17,000 at the Timpany Plaza Shopping Center in Gardiner, Massachusetts. The Partnership plans to invest an additional $186,000 in capital improvements at the Westgate apartments in Woburn, Massachusetts and an additional $210,000 at the shopping mall in Lewiston, Maine. These improvements will be funded from cash reserves. The Partnership anticipates that available cash and interest-bearing investments, collection of rents, and proceeds from the sale and refinancing of Partnership properties will be sufficient to finance future routine improvements to properties, as well as overall operations for the remainder of 1995. Unanticipated increases in expenses or a loss of a significant tenant could have a negative impact on the Partnership's cash flow. Since the Partnership's long term goals include the acquisition of additional properties, a portion of the proceeds from the refinancing and sale of properties is reserved for this purpose. If the cash required for such acquisition is not available as needed, the General Partner will consider refinancing mortgaged properties which have lower debt-to-equity ratios in order to raise the necessary cash. The General Partner will also consider refinancing mortgaged properties in the event there is insufficient cash available from cash reserves to repay such obligations as they mature. NERA's net income may fluctuate dramatically from year to year as a result of the acquisition or sale of properties. The Partnership paid a distribution of $3.38 per Partnership unit ($0.34 per depository receipt) during each of the six months ended June 30, 1995 and 1994. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. Exhibit 27 - Financial Data Schedule b. Reports on Form 8-K. On July 14, 1995, the Registrant filed a Form 8-K Current Report dated June 30, 1995, including "Item 2. Acquisition or Disposition of Assets" and "Item 7. Financial Statements and Exhibits," with respect to its acquisition of certain residential properties. SIGNATURES Pursuant to the requirements 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. NEW ENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP By: NEWREAL, INC., its General Partner* Date: August 11, 1995 By: /s/ Ronald Brown Ronald Brown, President *Functional equivalent of Chief Executive Officer, Principal Financial Officer and Principal Accounting Officer. EXHIBIT INDEX Exhibit Number and Title Page No. Exhibit 27 -- Financial Data Schedule