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 August 31, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-12634 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP ------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 13-3161322 - - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 625 Madison Avenue, New York, New York 10022 - - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212)421-5333 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 [_] PART I Item 1. Financial Statements CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) ============================== August 31, February 28, ------------------------------ 1997 1997 ------------------------------ ASSETS Property and equipment, net of accumulated depreciation of $81,157,036 and $80,183,677, respectively $89,457,300 $93,530,519 Cash and cash equivalents 4,632,387 5,981,506 Certificates of deposit 203,594 201,986 Cash - restricted for tenants' security deposits 1,090,990 1,082,255 Mortgage escrow deposits 8,714,469 8,098,227 Rents receivable 299,672 303,172 Prepaid expenses and other assets 767,634 1,164,356 ------------- ------------- Total assets $105,166,046 $110,362,021 ============= ============= LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable 60,939,747 $63,599,388 Purchase money notes payable (Note 2) 55,499,956 56,929,115 Due to selling partners (Note 2) 64,136,987 63,552,033 Accounts payable, accrued expenses and other liabilities 4,301,998 4,448,032 Tenants' security deposits payable 1,090,990 1,082,255 Due to general partners of subsidiaries and their affiliates 821,511 1,152,253 Due to general partners and affiliates 2,188,896 1,742,027 Distribution payable 0 1,111,554 ------------- ------------- Total liabilities 188,980,085 193,616,657 ------------- ------------- Minority interest 65,851 80,374 ------------- ------------- Commitments and contingencies (Note 5) Partners' deficit: Limited partners (82,592,560) (82,053,129) General partners (1,287,330) (1,281,881) ------------- ------------- Total partners' deficit (83,879,890) (83,335,010) ------------- ------------- Total liabilities and partners' deficit $105,166,046 $110,362,021 ============= ============= See Accompanying Notes to Consolidated Financial Statements 2 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) ========================== ========================== Three Months Ended Six Months Ended August 31, August 31, -------------------------- -------------------------- 1997 1996* 1997 1996* -------------------------- -------------------------- Revenues Rentals, net $6,937,665 $7,466,372 $14,007,969 $14,913,050 Other 263,883 290,957 477,015 489,226 Gain on sale of of properties (Note 4) 483,618 1,714,132 483,618 1,714,132 ----------- ----------- ----------- ----------- Total revenues 7,685,166 9,471,461 14,968,602 17,116,408 ----------- ----------- ----------- ----------- Expenses Administrative and management 1,383,828 1,387,565 2,611,637 2,664,264 Administrative and management- related parties (Note 3) 698,084 482,345 1,385,097 956,753 Operating 1,057,915 1,261,901 2,513,372 2,671,766 Repairs and maintenance 1,943,506 2,083,083 3,692,931 3,809,052 Taxes and insurance 953,982 1,090,449 1,841,664 2,045,728 Interest 1,867,311 2,038,792 3,768,553 4,153,686 Depreciation 1,429,577 1,624,558 2,888,425 3,262,034 ----------- ----------- ----------- ----------- Total expenses 9,334,203 9,968,693 18,701,679 19,563,283 ----------- ----------- ----------- ----------- (1,649,037) (497,232) (3,733,077) (2,446,875) Minority interest in loss of subsidiaries 384 875 247 1,464 ----------- ----------- ----------- ----------- Loss before extraordinary item (1,648,653) (496,357) (3,732,830) (2,445,411) Extraordinary item- forgiveness of indebtedness income (Note 4) 3,187,950 1,077,053 3,187,950 1,077,053 ----------- ----------- ----------- ----------- Net income (loss) $1,539,297 $580,696 $(544,880) $(1,368,358) =========== =========== =========== =========== *Reclassified for comparative purposes See Accompanying Notes to Consolidated Financial Statements 3 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Consolidated Statement of Partners' Deficit (Unaudited) ================================================ Limited General Total Partners Partners ------------------------------------------------ Balance- March 1, 1997 $(83,335,010) $(82,053,129) $(1,281,881) Net loss- six months ended August 31, 1997 (544,880) (539,431) (5,449) ------------ ------------ ------------ Balance- August 31, 1997 $(83,879,890) $(82,592,560) $(1,287,330) ============ ============ ============ See Accompanying Notes to Consolidated Financial Statements 4 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Consolidated Statements of Cash Flows Increase (decrease) in Cash and Cash Equivalents (Unaudited) ============================= Six Months Ended August 31, ---------------------------- 1997 1996* ---------------------------- Cash flows from operating activities: Net loss $ (544,880) $(1,368,358) ----------- ----------- Adjustments to reconcile net loss to net cash provided by operating activities: Gain on sale of properties (Note 4) (483,618) (1,714,132) Extraordinary item - forgiveness of indebtedness income (Note 4) (3,187,950) (1,077,053) Depreciation 2,888,425 3,262,034 Minority interest in loss of subsidiaries (247) (1,464) (Increase) decrease in cash-restricted for tenants' security deposits (24,282) 11,482 Increase in mortgage escrow deposits (736,958) (441,615) Decrease in rents receivable 2,709 15,101 Decrease (increase) in prepaid expenses and other assets 369,714 (242,237) Increase in due to selling partners 2,517,232 2,715,161 Payments to selling partners (173,487) (302,501) (Decrease) increase in accounts payable, accrued expenses and other liabilities (114,689) 143,197 Increase in tenants' security deposits payable 24,118 15,510 Increase in due to general partners of subsidiaries and their affiliates 228,889 140,054 Decrease in due to general partners of subsidiaries and their affiliates (85,139) (134,185) Increase in due to general partners and affiliates 446,869 97,666 ----------- ----------- Total adjustments 1,671,586 2,487,018 ----------- ----------- Net cash provided by operating activities 1,126,706 1,118,660 ----------- ----------- *Reclassified for comparative purposes See Accompanying Notes to Consolidated Financial Statements 5 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Consolidated Statements of Cash Flows Increase (decrease) in Cash and Cash Equivalents (continued) (Unaudited) ============================ Six Months Ended August 31, --------------------------- 1997 1996* --------------------------- Cash flows from investing activities: (Increase) decrease in certificates of deposit (1,608) 54,517 Proceeds from sale of properties 100,000 4,546,398 Acquisitions of property and equipment (470,453) (525,306) ---------- ----------- Net cash (used in) provided by investing activities (372,061) 4,075,609 ---------- ---------- Cash flows from financing activities: Principal payments of mortgage notes payable (977,934) (3,596,937) Decrease in minority interest (14,276) (4,231) Distributions paid to partners (1,111,554) 0 Principal payment of purchase money notes payable 0 (1,227,941) ---------- ---------- Net cash used in financing activities (2,103,764) (4,829,109) ---------- ---------- Net increase (decrease) in cash and cash equivalents (1,349,119) 365,160 Cash and cash equivalents at beginning of period 5,981,506 4,277,246 ---------- ---------- Cash and cash equivalents at end of period $4,632,387 $4,642,406 ========== ========== *Reclassified for comparative purposes See Accompanying Notes to Consolidated Financial Statements - - - 6 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Consolidated Statements of Cash Flows Increase (decrease) in Cash and Cash Equivalents (continued) (Unaudited) ======================== Six Months Ended August 31, ------------------------ 1997 1996* ------------------------ Supplemental disclosures of noncash activities: Distributions to partners 0 0 Decrease in distributions payable (1,111,554) 0 ---------- ---------- Distribution paid to partners (1,111,554) 0 ========== ========== Forgiveness of indebtedness Decrease in purchase money notes payable (1,429,159) (72,059) Decrease in due to selling partners (1,758,791) (1,004,994) Summarized below are the components of the gain on sale of properties: Decrease in property and equipment, net of accumulated depreciation 1,655,247 2,825,280 Decrease in cash-restricted for tenants' security deposits 15,547 4,004 Decrease in mortgage escrow deposits 120,716 0 Decrease in rents receivable 791 564 Decrease in prepaid expenses and other assets 27,008 73,653 Decrease in mortgage notes payable (1,681,707) 0 Decrease in accounts payable, accrued expenses and other liabilities (31,345) (40,239) Decrease in tenants' security deposits payable (15,383) (30,996) Decrease in due to general partners of subsidiaries and their affiliates (474,492) 0 *Reclassified for comparative purposes See Accompanying Notes to Consolidated Financial Statements 7 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 1997 (Unaudited) Note 1 - General The consolidated financial statements for the six months ended August 31, 1997 include the accounts of Cambridge + Related Housing Properties Limited Partnership, a Massachusetts limited partnership (the "Partnership") and forty one subsidiary partnerships ("subsidiary partnerships" or "Local Partnerships"), one of which only has activity through the date of sale of the Partnership's interest on April 25, 1997 (see Note 4). The consolidated financial statements for the six months ended August 31, 1996 include the accounts of the Partnership and forty four subsidiary partnerships, one of which only has activity through the date of sale of its property and the related assets and liabilities on June 3, 1996 (see Note 4). The Partnership is a limited partner, with an ownership interest of 98.99% in each of the subsidiary partnerships. Through the rights of the Partnership and/or a General Partner, which General Partner has a contractual obligation to act on behalf of the Partnership, to remove the general partner of the subsidiary local partnerships and to approve certain major operating and financial decisions, the Partnership has a controlling financial interest in the subsidiary local partnerships. The Partnership's fiscal quarter ends August 31. All subsidiaries have fiscal quarters ending June 30. Accounts of the subsidiary partnerships have been adjusted for intercompany transactions from July 1 through August 31. All intercompany accounts and transactions have been eliminated in consolidation. Increases (decreases) in the capitalization of consolidated subsidiaries attributable to minority interest arise from cash contributions from and cash distributions to the minority interest partners. Losses attributable to minority interests which exceed the minority interests' investment in a subsidiary have been charged to the Partnership. Such losses aggregated approximately $500 and $8,800 and $5,500 and $13,000 for the three and six months ended August 31, 1997 and 1996, respectively. The Partnership's investment in each subsidiary is equal to the respective subsidiary's partners' equity less minority interest capital, if any. These unaudited financial statements have been prepared on the same basis as the audited financial statements included in the 8 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 1997 (Unaudited) Partnership's Form 10-K/A-1 for the year ended February 28, 1997. In the opinion of the General Partners, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Partnership as of August 31, 1997, the results of operations for the three and six months ended August 31, 1997 and 1996 and cash flows for the six months ended August 31, 1997 and 1996. However, the operating results for the six months ended August 31, 1997 may not be indicative of the results for the year. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership's February 28, 1997 Annual Report on Form 10-K/A-1. Note 2 - Purchase Money Notes Payable Nonrecourse Purchase Money Notes in the original amount of $61,029,115 were issued to the selling partners of the subsidiary partnerships as part of the purchase price, and are secured only by the Partnership's interest in the subsidiary partnership to which the note relates. On June 3, 1996 and September 17, 1996, the properties and the related assets and liabilities owned by two subsidiary partnerships were sold to third parties and on August 15, 1996 and on April 25, 1997 the Partnership's Local Partnership Interest in two other Local Partnership's were sold to a third party and the Local Partnership's general partners, respectively. A portion of the net proceeds were used to settle the associated purchase money notes and accrued interest thereon. The Purchase Money Notes, which provide for simple interest at the rate of 9% per annum through maturity, which will occur during the period July 1998 to December 1999, will not be in default during the basic term (generally fifteen years) if not less than 60% of the cash flow actually distributed to the Partnership by the corresponding subsidiary partnership (generated by the operations, as defined) is applied first to accrued interest and then to current interest thereon. Any interest not paid currently accrues, without further interest thereon, through the due date of the note. All accrued and unpaid interest must be paid on the due date of 9 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 1997 (Unaudited) the note, unless the Partnership exercises an extension right. Continued accrual of such interest without payment would impact the effective rate of the notes, specifically by reducing the current effective interest rate of 9%. The exact effect is not determinable inasmuch as it is dependent on the actual future interest payments and ultimate repayment dates of the notes. Unpaid interest of $64,011,939 and $63,426,985 at August 31, 1997 and February 28, 1997, respectively, has been accrued and is included in the caption due to selling partners. In general, the interest on and the principal of each Purchase Money Note is also payable to the extent of the Partnership's actual receipt of proceeds from the sale or refinancing of the Apartment Complex, or in some cases the Local Partnership Interest to which the Purchase Money Note relates. The Partnership may elect, upon the payment of an extension fee of 1 1/2% per annum of the outstanding principal amount, to extend the term of the Purchase Money Note for up to five additional years. The Partnership may also defer payment of any accrued and unpaid interest until the due date of the note. The Partnership expects that upon maturity it will be required to refinance or sell its investments in the Local Partnerships in order to pay the Purchase Money Notes and accrued interest thereon. Based on the historical operating results of the Local Partnerships and the current economic conditions including changes in tax laws, it is uncertain as to whether the proceeds from such sales will be sufficient to meet the outstanding balances. Management is working with the selling partners to restructure and/or refinance the notes. The Purchase Money Notes are without personal recourse to either the Partnership or any of its partners and the sellers' recourse, in the event of non-payment, would be to foreclose on the Partnership's interests in the respective Local Partnerships. During the six months ended August 31, 1997 and 1996, the Partnership received cash flow distributions aggregating $289,146 and $584,713 (which includes $0 and $80,546 held in escrow for expenses relating to refinancings or sales), respectively, of which $173,488 and $302,500 was used to pay interest on the purchase money notes. In addition, the Partnership received proceeds from the sale of its Local Partnership Interest in one Local Partnership and a distribution of proceeds from the sale of a property aggregating $100,000 and $1,953,406, respectively, of which $0 and $1,227,941 was used to pay principal on the Purchase Money Notes. 10 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 1997 (Unaudited) Note 3 - Related Party Transactions The costs incurred to related parties for the three and six months ended August 31, 1997 and 1996 were as follows: ======================== ======================== Three Months Ended Six Months Ended August 31, August 31, ------------------------ ------------------------ 1997 1996 1997 1996 ------------------------ ------------------------ Partnership management fees (a) $ 241,500 $ 30,412 $ 483,000 $ 60,825 Expense reimburse- ment (b) 72,625 50,440 130,625 109,863 Property management fees (c) 377,959 395,493 758,472 773,065 Local administra- tive fee (d) 6,000 6,000 13,000 13,000 ---------- ---------- ---------- ---------- $ 698,084 $ 482,345 $1,385,097 $ 956,753 ========== ========== ========== ========== (a) After all other expenses of the Partnership are paid, an annual partnership management fee of up to .5% of invested assets is payable to the Partnership's general partners and affiliates. Partnership management fees owed to the General Partners amounting to approximately $1,324,000 and $936,000 were accrued and unpaid as of August 31, 1997 and February 28, 1997. (b) The Partnership reimburses the General Partners and their affiliates for actual Partnership operating expenses incurred by the General Partners and their affiliates on the Partnership's behalf. The amount of reimbursement from the Partnership is limited by the provisions of the Partnership Agreement. Another affiliate of the Related General Partner performs asset monitoring for the Partnership. These services include site visits and evaluations of the subsidiary partnerships' performance. (c) Property management fees incurred by Local Partnerships to affiliates of the Local Partnerships amounted to $377,959 and $395,493 and $758,472 and $773,065 for the three and six months ended August 31, 1997 and 1996, respectively. Of such fees $67,226 and $80,477 and $134,818 and $158,371, respectively, 11 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 1997 (Unaudited) were incurred to a company which is also an affiliate of the Related General Partner. (d) Cambridge/Related Housing Associates Limited Partnership, the special limited partner of each of the subsidiary partnerships, owning .01%, is entitled to receive a local administrative fee of up to $2,500 per year from each subsidiary partnership. Note 4 - Sale of Properties On April 25, 1997, the Partnership's Local Partnership Interest in Los Caballeros Apartments ("Los Caballeros") was sold to the general partners of Los Caballeros for $100,000, resulting in a gain in the amount of $483,618. No proceeds were used to settle the associated Purchase Money Note and accrued interest thereon which had a total outstanding balance of $3,187,950, resulting in forgiveness of indebtedness income. For tax purposes, the entire gain to be realized by the Partnership is anticipated to be approximately $5,000,000. On June 3, 1996, the property and the related assets and liabilities of Roper Mountain Apartments Ltd. ("Roper Mountain") were sold to a third party for $4,735,000, resulting in a gain in the amount of $1,714,132. The Partnership used $1,227,941 of the net proceeds to settle the associated Purchase Money Note and accrued interest thereon which had a total outstanding balance of $2,304,994, resulting in forgiveness of indebtedness income of $1,077,053. Note 5 - Commitments and Contingencies There were no changes and/or additions to disclosures regarding the subsidiary partnerships which were included in the Partnership's Annual Report on Form 10-K/A-1 for the period ended February 28, 1997. a) Certificate of Deposit The Partnership has a Certificate of Deposit in the amount of $73,594 at August 31, 1997 to secure an overdraft in Town and Country's bank account. The amount of the overdraft was approximately $49,000 at June 30, 1997. 12 CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP AND SUBSIDIARIES Notes to Consolidated Financial Statements August 31, 1997 (Unaudited) b) Other Restricted Cash In addition, the Partnership and/or its subsidiary partnerships may from time to time use a portion of their cash or property to secure operating credit lines. As of August 31, 1997, $130,000 of the Partnership's funds have been so pledged to secure operating credit lines at seven subsidiary partnerships. Note 6 - Subsequent Event On March 14, 1996, South Munjoy Associates, Limited ("South Munjoy") entered into a purchase and sale of real estate agreement with Mainland Development Company of Portland, Maine ("Mainland Development") to sell the project for a sales price of approximately $3,000,000, subject to HUD approval and other contingencies. On September 9, 1997, the property and the related assets and liabilities of South Munjoy were sold to Montfort Housing Limited Partnership (which is an affiliate of Mainland Development) for $3,000,000, resulting in a loss in the amount of approximately $300,000. The Partnership used approximately $1,265,000 of the net proceeds to settle the associated Purchase Money Note and accrued interest thereon which had a total outstanding balance of approximately $3,248,000, resulting in forgiveness of indebtedness income of approximately $1,983,000. For financial reporting purposes, this transaction will be reflected in the financial statements in the third quarter coinciding with South Munjoy's fiscal quarter which includes the date of sale. For tax purposes, the entire gain to be realized by the Partnership is anticipated to be approximately $3,000,000. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources The Partnership's primary sources of funds are (i) cash distributions from operations of the Local Partnerships in which the Partnership has invested, (ii) interest earned on funds and (iii) cash in working capital reserves. All of these sources of funds are available to meet the obligations of the Partnership. During the six months ended August 31, 1997 and 1996, the Partnership received cash flow distributions aggregating approximately $289,000 and $585,000 (which includes approximately $0 and $81,000 held in escrow for expenses relating to refinancings or sales), respectively, of which approximately $173,000 and $303,000 was used to pay interest on the purchase money notes. In addition, the Partnership received proceeds from the sale of its Local Partnership Interest in one Local Partnership and a distribution of proceeds from the sale of a property aggregating approximately $100,000 and $1,953,000, respectively, of which approximately $0 and $1,228,000 was used to pay principal on the Purchase Money Notes. During the six months ended August 31, 1997, cash and cash equivalents of the Partnership and its forty one consolidated Local Partnerships decreased approximately $1,349,000. This decrease was primarily due to acquisitions of property and equipment ($470,000), principal payments of mortgage notes payable ($978,000) and distributions paid to partners ($1,112,000) which exceeded cash provided by operating activities ($1,127,000) and proceeds from sale of properties ($100,000). Included in the adjustments to reconcile the net loss to cash provided by operating activities is gain on sale of properties ($484,000), forgiveness of indebtedness income ($3,188,000) and depreciation ($2,888,000). The Partnership had a working capital reserve of approximately $1,138,000 and $1,211,000 (which does not include approximately $1,111,000 of net proceeds from sale of properties which was distributed to the limited partners and General Partners in March 1997) at August 31, 1997 and February 28, 1997, respectively, of which approximately $204,000 and $202,000, respectively, was restricted to secure an overdraft in Town and Country's bank account and to secure operating credit lines at seven other Local Partnerships. The working capital reserve is temporarily invested in bank certificates of deposits or money market accounts which can be easily liquidated to meet obligations as they arise. The General Partners believe that the Partnership's reserves, net proceeds from future sales and future cash flow distributions will be adequate for its operating needs, and plans to continue investing 14 available reserves in short term investments. In March 1997, a distribution of approximately $1,100,000 and $11,000 was paid to the limited partners and General Partners, respectively, from net proceeds from the sale of properties. Partnership management fees owed to the General Partners amounting to approximately $1,324,000 and $936,000 were accrued and unpaid as of August 31, 1997 and February 28, 1997. Nonrecourse Purchase Money Notes in the original amount of $61,029,115 were issued to the selling partners of the subsidiary partnerships as part of the purchase price, and are secured only by the Partnership's interest in the subsidiary partnership to which the note relates. On June 3, 1996, September 17, 1996 and September 9, 1997, the properties and the related assets and liabilities owned by three subsidiary partnerships were sold to third parties and on August 15, 1996 and on April 25, 1997 the Partnership's Local Partnership Interest in two other Local Partnerships were sold to a third party and the Local Partnership's general partners, respectively. A portion of the net proceeds were used to settle the associated purchase money notes and accrued interest thereon (see below). The Purchase Money Notes, which provide for simple interest at the rate of 9% per annum through maturity, which will occur during the period July 1998 to December 1999, will not be in default during the basic term (generally fifteen years) if not less than 60% of the cash flow actually distributed to the Partnership by the corresponding subsidiary partnership (generated by the operations, as defined) is applied first to accrued interest and then to current interest thereon. Any interest not paid currently accrues, without further interest thereon, through the due date of the note. All accrued and unpaid interest must be paid on the due date of the note, unless the Partnership exercises an extension right. Continued accrual of such interest without payment would impact the effective rate of the notes, specifically by reducing the current effective interest rate of 9%. The exact effect is not determinable inasmuch as it is dependent on the actual future interest payments and ultimate repayment dates of the notes. Unpaid interest of approximately $64,012,000 and $63,427,000 at August 31, 1997 and February 28, 1997, respectively, has been accrued and is included in the caption due to selling partners. In general, the interest on and the principal of each Purchase Money Note is also payable to the extent of the Partnership's actual receipt of proceeds from the sale or refinancing of the Apartment Complex, or in some cases the Local Partnership Interest to which the Purchase Money Note relates. 15 The Partnership may elect, upon the payment of an extension fee of 1 1/2% per annum of the outstanding principal amount, to extend the term of the Purchase Money Note for up to five additional years. The Partnership may also defer payment of any accrued and unpaid interest until the due date of the note. The Partnership expects that upon maturity it will be required to refinance or sell its investments in the Local Partnerships in order to pay the Purchase Money Notes and accrued interest thereon. Based on the historical operating results of the Local Partnerships and the current economic conditions including changes in tax laws, it is uncertain as to whether the proceeds from such sales will be sufficient to meet the outstanding balances. Management is working with the selling partners to restructure and/or refinance the notes. The Purchase Money Notes are without personal recourse to either the Partnership or any of its partners and the sellers' recourse, in the event of non-payment, would be to foreclose on the Partnership's interests in the respective Local Partnerships. The local partnerships which receive government assistance are subject to low-income use restrictions which limit the owners ability to sell or refinance the properties. In order to maintain the existing inventory of affordable housing, Congress passed a series of related acts including the Emergency Low Income Preservation Act of 1987, the Low-Income Housing Preservation and Resident Homeownership Act of 1990 (together the "Preservation Acts") and the Housing Opportunity Program Extension Act of 1996 (the "1996 Act"). In exchange for maintaining the aforementioned use restrictions, the Preservation Acts provide financial incentives for owners of government assisted properties. The 1996 Act provides financial assistance by funding the sale of such properties to not-for-profit owners and also restores the owners ability to prepay their HUD mortgage and convert the property to condominiums or market-rate rental housing. Local general partners have filed for incentives under the Preservation Acts or the 1996 Act for the following local partnerships: San Diego - Logan Square Gardens Company, Albuquerque - Lafayette Square Apts. Ltd., Westgate Associates Limited, Riverside Gardens, a Limited Partnership, Pacific Palms, a Limited Partnership, Canton Commons Associates, Rosewood Manor Associates, Bethany Glen Associates and South Munjoy Associates, Ltd. The South Munjoy Associates, Ltd. property was sold on September 9, 1997 (see below). The local general partners of the other properties are either negotiating purchase and sale contracts or exploring their alternatives under the 1996 Act. Funding for the 1996 Act is subject to appropriations by Congress. Congress did not allocate any funds for preservation for the 1998 fiscal year, effectively ending the preservation effort for the time 16 being. Management is working with the local general partners in an effort to find alternative exit strategies. The general partners of one subsidiary partnership, Westgate Associates, Limited ("Westgate"), have signed an option agreement to sell the project to the Vermont Housing Finance Agency, subject to HUD approval and other contingencies, on or before December 31, 1998. The Partnership's investment in Westgate was approximately $796,000 at August 31, 1997. Westgate's assets constituted approximately 2% of the consolidated total assets at August 31, 1997. On March 14, 1996, South Munjoy Associates, Limited ("South Munjoy") entered into a purchase and sale of real estate agreement with Mainland Development Company of Portland, Maine ("Mainland Development") to sell the project for a sales price of approximately $3,000,000, subject to HUD approval and other contingencies. On September 9, 1997, the property and the related assets and liabilities of South Munjoy were sold to Montfort Housing Limited Partnership (which is an affiliate of Mainland Development) for $3,000,000, resulting in a loss in the amount of approximately $300,000. The Partnership used approximately $1,265,000 of the net proceeds to settle the associated Purchase Money Note and accrued interest thereon which had a total outstanding balance of approximately $3,248,000, resulting in forgiveness of indebtedness income of approximately $1,983,000. For financial reporting purposes, this transaction will be reflected in the financial statements in the third quarter coinciding with South Munjoy's fiscal quarter which includes the date of sale. For tax purposes, the entire gain to be realized by the Partnership is anticipated to be approximately $3,000,000. On April 25, 1997, the Partnership's Local Partnership Interest in Los Caballeros Apartments ("Los Caballeros") was sold to the general partners of Los Caballeros for $100,000, resulting in a gain in the amount of $483,618. No proceeds were used to settle the associated Purchase Money Note and accrued interest thereon which had a total outstanding balance of $3,187,950, resulting in forgiveness of indebtedness income. For tax purposes, the entire gain to be realized by the Partnership is anticipated to be approximately $5,000,000. For a discussion of contingencies affecting certain Local Partnerships, see Note 5 to the financial statements. Since the maximum loss the Partnership would be liable for is its net investment in the respective Local Partnerships, the resolution of the existing contingencies is not anticipated to impact future results of operations, liquidity or financial condition in a material way. 17 Management is not aware of any trends or events, commitments or uncertainties which have not otherwise been disclosed that will or are likely to impact liquidity in a material way. Management believes the only impact would be from laws that have not yet been adopted. The portfolio is diversified by the location of the properties around the United States so that if one area of the country is experiencing downturns in the economy, the remaining properties in the portfolio may be experiencing upswings. However, the geographic diversifications of the portfolio may not protect against a general downturn in the national economy. Results of Operations - - --------------------- The results of operations of the Partnership, as well as the Local Partnerships, excluding Roper Mountain and Keller Plaza, which sold their properties on June 3, 1996 and September 17, 1996, Chickasha and Los Caballeros in which the Partnership's interest was sold on August 15, 1996 and April 25, 1997 and administrative and management-related parties remained fairly consistent during the three and six months ended August 31, 1997 and 1996. Contributing to the relatively stable operations at the Local Partnerships is the fact that a large portion of the Local Partnerships are operating under Government Assistance Programs which provide for rental subsidies and/or reductions of mortgage interest payments under HUD Section 8 and Section 236 Programs. The Partnership's primary source of income continues to be its portion of the local partnerships' operating results. The majority of local partnership income continues to be in the form of rental income with the corresponding expenses being divided among operations, depreciation, and mortgage interest. In addition, the Partnership incurred interest expense relating to the Purchase Money Notes issued when the Local Partnership Interests were acquired. Rental income decreased approximately 7% and 6% for the three and six months ended August 31, 1997 as compared to 1996. Excluding Roper Mountain, Keller Plaza, Chickasha and Los Caballeros, rental income increased approximately 1% for both the three and six months ended August 31, 1997 as compared to 1996 primarily due to rental rate increases. Total expenses excluding Roper Mountain, Keller Plaza, Chickasha, Los Caballeros and administrative and management-related parties expenses remained fairly consistent with a decrease of approximately 1% and an increase of approximately 1% for the three and six months ended August 31, 1997 as compared to 1996. 18 Administrative and management-related parties increased approximately $216,000 and $428,000 for the three and six months ended August 31, 1997 as compared to 1996 primarily due to an increase in partnership management fees payable to the General Partners. Operating expenses decreased approximately $204,000 for the three months ended August 31, 1997 as compared to 1996 primarily due to decreases relating to Roper Mountain, Keller Plaza, Chickasha and Los Caballeros. Excluding Roper Mountain, Keller Plaza, Chickasha and Los Caballeros, such expenses remained fairly consistent with a decrease of approximately 7% for the three months ended August 31, 1997 as compared to 1996. Taxes and insurance expense and depreciation expense decreased approximately $136,000 and $195,000 and $204,000 and $374,000, respectively, for the three and six months ended August 31, 1997 as compared to 1996 primarily due to decreases relating to Roper Mountain, Keller Plaza, Chickasha and Los Caballeros. Excluding Roper Mountain, Keller Plaza, Chickasha and Los Caballeros, such expenses remained fairly consistent with decreases of approximately 6% and 3%, and 3% and 3%, respectively, for the three and six months ended August 31, 1997 as compared to 1996. 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Partnership is a Plaintiff in the Oklahoma County District Court in Oklahoma against Jerry L. Womack and Womack Property Management, Inc., an Oklahoma corporation. In this action entitled Shearson + Related Housing Properties Limited Partnership and Shearson/Related Housing Associates Limited Partnership v. Jerry L. Womack and Womack Property Management, Inc., the Partnership seeks judgment for damages caused by the individual defendant's resignation as general partner of Rolling Meadows of Chickasha, Ltd. (Rolling Meadows), of which the Partnership was a limited partner, and by the corporate defendant's mismanagement of the apartment project owned by Rolling Meadows. The individual defendant has counterclaimed against the Plaintiffs, alleging that they breached an agreement to advance funds to Rolling Meadows sufficient to pay operating losses on the property, thereby damaging such defendant in an amount exceeding $10,000. The corporate defendant has counterclaimed against the Plaintiffs for unpaid management fees and expenses approximating $6,000. Both counterclaims seek costs and attorneys' fees. Discovery is continuing in the action. The Plaintiffs are responding vigorously to the counterclaims and intend to continue doing so. While it is impossible to predict with certainty, counsel believes the counter claims have no substantial merit and that an outcome unfavorable to the Partnership is unlikely. The U.S. Department of Housing and Urban Development ("HUD"), the holder of the mortgage on the Project, notified Rolling Meadows that such mortgage was in default and that HUD intended to commence foreclosure proceedings. On August 15, 1996, the Partnership's limited partnership interest in Chickasha was sold to a third party for $75,000, resulting in no net proceeds to the Partnership after expenses of the sale. Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None 20 Item 5. Other information Paul L. Abbott, ceased to serve as President, Chief Executive Officer and Chief Financial Officer of Government Assisted Properties, Inc. effective September 1, 1997. Effective September 1, 1997, Doreen D. Odell was elected President, Chief Executive Officer and Chief Financial Officer of Government Assisted Properties, Inc. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27 Financial Data Schedule (filed herewith) (b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter. 21 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. CAMBRIDGE + RELATED HOUSING PROPERTIES LIMITED PARTNERSHIP (Registrant) By: GOVERNMENT ASSISTED PROPERTIES, INC., a General Partner Date: October 14, 1997 By: /s/ Doreen D. Odell ------------------- Doreen D. Odell, President By: RELATED HOUSING PROGRAMS CORPORATION, a General Partner Date: October 14, 1997 By: /s/ Alan P. Hirmes ------------------ Alan P. Hirmes, Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf by the registrant and in the capacities and on the dates indicated: Signature Title Date - - ------------------------- -------------------- -------------- Vice President (principal financial officer) of /s/ Alan P. Hirmes Related Housing - - ------------------------- Programs Alan P. Hirmes Corporation Oct. 14, 1997 Treasurer (principal accounting officer) of /s/ Richard A. Palermo Related Housing - - ------------------------- Programs Richard A. Palermo Corporation Oct. 14, 1997 President, Chief Executive Officer (principal executive officer) and Chief /s/ Doreen D. Odell Financial Officer of - - ------------------------- Government Assisted Doreen D. Odell Properties, Inc. Oct. 14, 1997