-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A9+ERvVTl77wZ7Nq/OhKWupQrRhgC7UNS93VB0lLSjg1k+uFnz5B9VsehJR+pE7a 3l9NEcMDDZZ6KfWTwaJyCw== 0000950148-97-002940.txt : 19971120 0000950148-97-002940.hdr.sgml : 19971120 ACCESSION NUMBER: 0000950148-97-002940 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971119 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTURY HILLCRESTE APARTMENT INVESTORS L P CENTRAL INDEX KEY: 0000835596 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 954166241 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-22857 FILM NUMBER: 97724098 BUSINESS ADDRESS: STREET 1: 9090 WILSHIRE BLVD STE 201 CITY: BEVERLY HILLS STATE: CA ZIP: 90211 BUSINESS PHONE: 3102782191 MAIL ADDRESS: STREET 1: 9090 WILSHIRE BLVD STREET 2: STE 201 CITY: BEVERLY HILLS STATE: CA ZIP: 90211 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended SEPTEMBER 30, 1997 Commission File Number 33-22857 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A California Limited Partnership) I.R.S. Employer Identification No. 95-4166241 9090 WILSHIRE BLVD., SUITE 201 BEVERLY HILLS, CALIF. 90211 Registrant's Telephone Number, Including Area Code (310) 278-2191 Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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 ---- ---- 2 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART I. FINANCIAL INFORMATION Item 1. Financial Statements and Notes to Financial Statements Balance Sheets, September 30, 1997 and December 31, 1996 .................1 Statements of Operations, Nine and Three Months Ended September 30, 1997 and 1996.............2 Statement of Partners' Capital (Deficiency) Nine Months Ended September 30, 1997 ...............................3 Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996.......................4 Notes to Financial Statements ............................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...............................14 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................15 Item 6. Exhibits and Reports on Form 8-K.........................................17 Signatures ..........................................................................18
3 CENTURY HILLCRESTE APARTMENTS INVESTORS, L.P. (a California limited partnership) BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 ASSETS
1997 1996 (Unaudited) (Audited) ---------- ---------- RENTAL PROPERTY (Notes 1, 2 and 3) $34,189,715 $34,337,025 CASH AND CASH EQUIVALENTS (Note 1) 3,749,814 3,490,463 RESTRICTED CASH (Notes 1 and 5) 158,700 158,700 OTHER ASSETS (Note 5) 75,871 54,598 ---------- ---------- $38,174,100 $38,040,786 =========== =========== LIABILITIES AND PARTNERS' CAPITAL ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (Note 4) $ 359,009 $ 413,457 PREPAID RENT 33,350 75,583 SECURITY DEPOSITS 302,682 315,244 ---------- ---------- 695,041 804,284 COMMITMENTS AND CONTINGENCIES (Note 5) PARTNERS' CAPITAL (Note 1) 37,479,059 37,236,502 ---------- ---------- $38,174,100 $38,040,786 =========== ===========
The accompanying notes are an integral part of these financial statements. 1 4 CENTURY HILLCRESTE APARTMENTS INVESTORS, L.P. (a California limited partnership) STATEMENTS OF INCOME NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited)
NINE MONTHS THREE MONTHS NINE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED Sept. 30, 1997 Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 199 -------------- -------------- ------------- ------------- REVENUES Rental income $4,364,707 $1,508,091 $3,966,912 $1,364,743 Interest and other income (Note 200,428 69,306 178,793 46,967 --------- --------- --------- --------- 4,565,135 1,577,397 4,145,705 1,411,710 --------- --------- --------- --------- EXPENSES Operating (Note 4) 909,943 202,535 859,409 333,754 Property taxes 270,128 134,551 312,340 178,818 Management fee - (Note 4) 130,169 59,805 150,550 71,038 General and administrative (Note 725,343 100,711 325,400 90,870 Depreciation 529,167 176,389 529,166 176,389 --------- ------- --------- ------- 2,564,750 673,991 2,176,865 850,869 --------- ------- --------- ------- NET INCOME 2,000,385 $ 903,406 $1,968,840 $ 560,841 ========= ========== ========== ========== NET INCOME PER DEPOSITORY UNIT 0.28 $ 0.12 $ 0.27 $ 0.08 ========= ========== ========== ==========
The accompanying notes are an integral part of these financial statement 2 5 CENTURY HILLCRESTE APARTMENTS INVESTORS, L.P. (a California limited partnership) STATEMENT OF PARTNERS' CAPITAL (DEFICIENCY) NINE MONTHS ENDED SEPTEMBER 30, 1997 (Unaudited)
SPECIAL LIMITED GENERAL LIMITED PARTNER PARTNERS PARTNERS (NOTE 1) TOTAL ------------ ------------- ---------------- ----------- DEPOSITORY UNITS, September 30, 1997 7,258,000 ============ BALANCE, January 1, 1997 $ (278,165) $ 37,514,667 $ - $ 37,236,502 Distributions (17,578) (1,740,250) (1,757,828) Net income for the nine months ended September 30, 1997 20,004 1,980,381 - 2,000,385 ----------- --------- ------- --------- BALANCE, September 30, 19 $ (275,739) $ 37,754,798 $ - $ 37,479,059 =========== ============ ======= ============
The accompanying notes are an integral part of these financial statements. 3 6 CENTURY HILLCRESTE APARTMENTS INVESTORS, L.P. (a California limited partnership) STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited)
1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,000,385 $ 1,968,840 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 529,167 529,166 Increase in other assets (21,273) (77,410) Decrease in accounts payable and accrued liabilities (54,448) 219,773 Decrease in due to general partner -- (150,000) (Decrease) increase in security deposits (12,562) 18,427 (Decrease) increase in prepaid rent (42,233) 23,480 ----------- ----------- Net cash provided by operating activities 2,399,036 2,532,276 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments receivable pursuant to the minimum distribution guarantee -- 175,000 Increase in rental property (381,857) (180,000) ----------- ----------- Net cash used in investing activities (381,857) (5,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to partners (1,757,828) (1,668,326) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 259,351 858,950 CASH AND CASH EQUIVALENTS, beginning of period 3,490,463 2,738,045 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 3,749,814 $ 3,596,995 =========== ===========
The accompanying notes are an integral part of these financial statemen 4 7 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL The information contained in the following notes to the financial statements is condensed from that which would appear in the annual financial statements; accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and related notes thereto contained in the Annual Report for the year ended December 31, 1996 prepared by Century HillCreste Apartment Investors, L.P. (the "Partnership"). Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year. In the opinion of NAPICO, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the financial position as of September 30, 1997, and the results of operations for the nine and three months then ended and changes in cash flows for the nine months then ended. ORGANIZATION The Partnership, a California limited partnership, was formed on June 6, 1988, with National Partnership Investments Corp. ("NAPICO" or the "Managing General Partner"), and HillCreste Properties Inc. (the "Non-Managing General Partner") as the general partners. On October 26, 1988, the Partnership issued to investors (the "Limited Partners") 7,258,000 depositary units (each depositary unit being entitled to the beneficial interest of a limited partnership interest) for a total amount raised of $72,580,000, through a public offering. Concurrent with the issuance of the depositary units, the Partnership purchased a 315-unit luxury apartment complex in the Century City area of Los Angeles, California (the "Property") from Casden Properties (the "Seller"). To complete the purchase of the Property, the Seller purchased a 10 percent special limited partnership interest in the Partnership for $6,855,000 and became the Special Limited Partner of the Partnership. Among other things, the Partnership Agreement provides that the 10 percent special limited partnership interest is subordinate to the other Limited Partners' specified priority return in the case of distributions of net cash flow from operations, plus the other Limited Partners' return of capital in the case of net sales or refinancing distribution proceeds. Casden Investment Corporation, an affiliate of the Seller, owns 100 percent of the outstanding common stock of the Managing General Partner. 5 8 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. MINIMUM DISTRIBUTION GUARANTEE The minimum distribution guarantee payments from the seller have been reflected as a reduction in the carrying amount of the Property. For its contribution of $6,855,000, the Seller has rights to receive an allocation of the Partnership's net cash from operations after the Limited Partners receive a specified priority return. DEPRECIATION Depreciation is reported using the straight-line method over the estimated useful lives of the buildings and equipment as follows: Buildings 35 years Furniture and equipment 5 years
CASH AND CASH EQUIVALENTS Cash and cash equivalents consists of cash and bank certificates of deposit with an original maturity of three months or less. The Partnership has its cash and cash equivalents on deposit primarily with one money market mutual fund. Such cash and cash equivalents are uninsured. RESTRICTED CASH Restricted cash consists of bank certificates of deposits assigned to the City of Los Angeles in lieu of purchasing a subdivision improvement bond to effectuate the privatization of city streets located within the Property's perimeter (see Note 5). INCOME TAXES No provision has been made for income taxes in the accompanying financial statements as such taxes, if any, are the liability of the individual partners. 6 9 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER DEPOSITORY UNIT Net income per depository unit was computed by dividing the limited partners' share of net income (99 percent) by the number of depository units outstanding during the year. The number of depository units was 7,258,000 for the periods presented. IMPAIRMENT OF LONG-LIVED ASSETS The Partnership adopted Statement of Financial Accounting Standards No. 121, Accounting for the Improvement of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of as of January 1, 1996 without a significant effect on its financial statements. The Partnership reviews long-lived assets to determine if there has been any permanent impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the assets, the Partnership recognizes an impairment loss. NOTE 2 - RENTAL PROPERTY Rental property is carried at cost and consists of the following at September 30, 1997 and December 31, 1996:
1997 1996 ------------ ------------ Land $ 16,175,000 $ 16,175,000 Building 24,694,402 24,694,402 Furniture and equipment 3,870,000 3,870,000 Improvements 827,107 445,250 ------------ ------------ 45,566,509 45,184,652 Less accumulated depreciation (11,376,794) (10,847,627) ------------ ------------ $ 34,189,715 $ 34,337,025 ============ ============
In December 1996, Everest HillCreste Investors, LLC, an affiliate of Everest Century Investors, LLC, ("Everest"), commenced a proxy solicitation of the Limited Partners seeking to obtain sufficient votes in order to (a) authorize Everest to notify the General Partners on behalf of Limited Partners to call for a special meeting of the Limited Partners, and (b) adopt a resolution at such meeting approving Everest's proposal to purchase the Property for $40 million subject to certain material conditions. On January 9, 1997, the Managing General Partner advised the limited partners that the proposed purchase price was less than the Property `s appraised value of $46.9 million as of February 1996, and that four other, non-binding purchase proposals had been received for prices ranging from $40.2 million to $44.7 million, each subject to various contingencies and conditions. The Managing General Partner also informed the limited partners that Casden Properties, an affiliate of the Managing General 7 10 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 2 - RENTAL PROPERTY (CONTINUED) Partner and the Special Limited Partner of the Partnership, has under the terms of the Amended and Restated Agreement of limited partnership (the "Partnership Agreement"), a right of first refusal to acquire the Property for the proposed sales price and terms (the "Right of First Refusal"). Subsequently, Everest has increased its offer by $7 million to $47 million (the "Everest Proposal"). Additionally, the Partnership has just received (a) a report from an independent real estate appraisal firm that the Property's current market value is approximately $47 million, (b) a non-binding proposal from one of the four prior offerees proposing to increase its offer to purchase the Property to $47.4 million, and (c) a fifth non-binding purchase offer from an affiliate of the current property manager for $48 million. The Managing General Partner makes no recommendation as to the Everest Proposal. The Managing General Partner has been informed that its affiliate, the Special Limited Partner, plans, subject to obtaining reasonable financing, to exercise the aforementioned Right of First Refusal in the event the Everest Proposal is approved. NOTE 3 - MINIMUM DISTRIBUTION GUARANTEE RECEIVABLE FROM PARTNER The Minimum Distribution Guarantee Agreement (the "Guarantee Agreement") required the Seller, who is also the Special Limited Partner, to make payments to the Partnership, if and when necessary, in an amount sufficient to enable the Partnership to provide the Limited Partners with distributions sufficient to achieve a minimum annual return upon the Limited Partners' investment in the Partnership, through December 31, 1993, as follows:
Years Ended December 31, Annual Return on Investment ------------------------ --------------------------- 1988 8.0% 1989 8.0% 1990 8.5% 1991 9.0% 1992 9.0% 1993 9.0%
Pursuant to a Memorandum of Understanding entered into on August 11, 1995, the Seller agreed to pay to the Partnership the sum of $350,000 in two equal installments of $175,000 each; the first such $175,000 payment was made in August 1995 and the second payment was made in May 1996. These payments represent the amount of a real estate tax refund received in 1994 for overpayment of prior year taxes which had previously been offset against amounts receivable from the Seller under the Guarantee Agreement. In addition, in August 1995, the Seller made an additional payment of $135,000 pursuant to the Memorandum of Understanding representing interest on late guarantee payments. This has been included in interest income. 8 11 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 3 - MINIMUM DISTRIBUTION GUARANTEE RECEIVABLE FROM PARTNER (CONTINUED) Through December 31, 1996, the Seller has funded a total of $13,130,998 directly to the Partnership for distributions to the Limited Partners pursuant to the Guarantee Agreement, which includes the $350,000, referred to above. This amount has been reflected as a reduction in the carrying amount of the property. The period covered by the Guarantee Agreement expired on December 31, 1993. Except with respect to the payments made in 1995 and 1996 pursuant to the Memorandum of Understanding, commencing in 1994, distributions to the Partners have been made from cash flow from operations. NOTE 4 - FEES PAID TO GENERAL PARTNERS AND AFFILIATES In accordance with the Partnership Agreement certain fees and reimbursements are paid to the general partners and their affiliates as follows: (a) A Partnership management fee payable to the Managing General Partner of $50,000 annually. The fee is included in general and administrative expenses. (b) Partnership expense reimbursements, payable to the Non-Managing General Partner, not to exceed $50,000 annually. The Non-Managing General Partner expense reimbursements for 1990 through 1996 in the amount of $350,000, which were previously disputed, were paid in the nine months ended September 30, 1997. Of this amount, $50,000 was expensed in 1990 and was included in accounts payable and accrued liabilities at December 31, 1996. The balance of $300,000 was expensed and included in general and administrative expenses for 1997. In addition, $37,500 has been accrued for the nine months ended September 30, 1997. (c) The Partnership is obligated to pay fees to the Managing General Partner or its affiliates upon sale of the Property. The payment of such fees are subordinated to certain preferred returns to the Limited Partners. (d) The Managing General Partner is entitled to receive 1 percent of distributions (as defined in the Partnership Agreement). This is paid quarterly by the Partnership to the Managing General Partner. (e) At December 31, 1995, $150,000 was estimated as due to the Non-Managing General Partner for reimbursement of professional fees paid on behalf of the Partnership in connection with issues raised in the Memorandum of Understanding. The actual amount paid in 1996 was $90,000, with the balance reversed against expenses. 9 12 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 5 - COMMITMENTS AND CONTINGENCIES (a) Construction Contracts Approvals from the City of Los Angeles were obtained to "privatize" the streets and alleys providing access to the Property and to construct wrought iron security fencing with controlled entrances into the Property. As a condition to its approval of the proposed "privatization", the City of Los Angeles required the construction of a storm drain and related improvements, for which an improvement agreement and guarantee in the amount $158,700 has been filed with the City of Los Angeles. The Partnership has pledged a Certificate of Deposit in such amount to the City to secure the improvement guarantee. Contracts in the amount of $767,000 and $60,685 were awarded to construct the wrought iron security fencing and to construct a storm drain and related improvements, respectively, for which construction work commenced in September 1996 and was to be completed in October, 1997. As of September 30, 1997, $827,107 has been paid to the contractor. (b) Litigation The Managing General Partner of the Partnership is a plaintiff in various lawsuits and has also been named as a defendant in other lawsuits arising from transactions in the ordinary course of business. In the opinion the Managing General Partner, the claims are not expected to result in any material liability to the Partnership. In addition, the Partnership is involved in the actions described below: (c) J/B Lawsuit On February 13, 1997, J/B Investment Partners ("J/B") filed an action in the Los Angeles Superior Court (the "J/B Lawsuit"), against the Managing General Partner and its directors, and Casden Properties and certain of its affiliates (collectively, the "Defendants"). The J/B Lawsuit is styled as a class action brought against the Defendants on behalf of all limited partners of the Partnership, and commenced a proxy solicitation of the Limited Partners seeking to obtain sufficient votes in order to (a) authorize Everest to notify the General Partners on behalf of Limited Partners to call for a special meeting of the Limited Partners, and (b) adopt a resolution at such meeting approving Everest's proposal to purchase the Property for $40 million subject to certain material conditions. The J/B Lawsuit is styled as a class action brought against the Defendants on behalf of all limited partners of the Partnership and a derivative action brought on behalf of the Partnership itself. The Partnership is named as a "nominal defendant." The complaint in the J/B Lawsuit contains four causes of action: (a) breach of fiduciary duty; (b) breach of contract; (c) unjust enrichment; and (d) equitable relief. 10 13 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED) The alleged wrongdoing of the Defendants as set forth in the J/B Lawsuit relates to the following issues: 1. J/B alleges misappropriation and misuse of Partnership funds which were the subject of a previous lawsuit (the "Prior Lawsuit") filed in the Los Angeles Superior Court in June 1995 by HillCreste Properties, Inc., the non-managing general partner of the Partnership (the "Non-Managing General Partner"). The Managing General Partner vigorously denied these allegations, and without admission of any wrongdoing the Prior Lawsuit was settled by a Memorandum of Understanding executed in August 1995, with final settlement documentation executed in April 1996, at which time the Prior Lawsuit was dismissed with prejudice as to all defendants. Additionally, J/B alleges that the Defendants have wrongfully caused the Partnership to pay legal fees on behalf of the Managing General Partner or certain of its affiliates relating to a regulatory investigation discussed above. 2. J/B alleges that the Defendants have failed to explore transactions that would maximize the value of the limited partners' investment in the Partnership, including the four unsolicited offers to purchase the Property, implementation of an auction process regarding the potential sale of the Property and obtaining financing with respect to the Property. 3. J/B alleges that the January 1997 letter from the Managing General Partner to the Limited Partners contained misleading statements about the original Everest proxy solicitation and about the Special Limited Partner's Right of First Refusal. Specifically, J/B contends that the January letter failed to disclose the Managing General Partner's advice and opinions regarding the response of the Limited Partners to the original Everest offer and contained misstatements about certain provisions of the Partnership Agreement pertaining to actions permitted or required to be taken by the Limited Partners of the Partnership. J/B states that the Limited Partners are not authorized, by vote of a majority-in-interest or otherwise, to bind, compel, or require the Partnership to enter into any contract for the sale of the Property, including the proposed sales contract with Everest. In other words, J/B asserts that the Everest Proposal cannot be implemented as proposed because it is beyond the Limited Partners' authority under the Partnership Agreement. Consequently, J/B claims that the conditions to the Special Limited Partner's Right of First Refusal to purchase the Property for a price and on terms equal to those contained in the Everest Proposal cannot under the Partnership Agreement be fulfilled, and, therefore, no such Right of First Refusal could be exercised. J/B seeks damages in the J/B Lawsuit in a unspecified amount and equitable relief, including, among other things, a declaration judgment as to whether or not there exists a Right of First Refusal. 11 14 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED) The Managing General Partner strenuously disputes all of the accusations of wrongdoing against it and its affiliates alleged in the J/B Lawsuit, and defends the existence and integrity of the Right of First Refusal, which was an integral and material part of the financial structure of the Partnership and was disclosed to the Limited Partners, in the prospectus at the time of the original sale of units in the Partnership. The Managing General Partner further intends to vigorously defend the settlement of the Prior Lawsuit. It appears that J/B purchased or was assigned certain rights with respect to 200 units in the Partnership in or about 1995. The Special Limited Partnership has advised the Managing General Partner and the Non-Managing General Partner that the Right of First Refusal was a material inducement to the Special Limited Partner's sale of the Property to the Partnership, its purchase of a subordinated special limited partnership interest in the Partnership for $6,855,000, and its agreement to provide the Partnership with a Minimum Distribution Guarantee pursuant to which the Special Limited Partner paid a total of approximately $13,130,000 to the Partnership to support distributions to the Limited Partners. If, as a result of the J/B Lawsuit or otherwise, the Special Limited Partner is not entitled to exercise the Right of First Refusal with respect to the Everest Proposal or in response to other similar situations, the Special Limited Partner believes that it would be entitled to return of its investment and all sums paid under the Minimum Distribution Guarantee, together with interest thereon. Moreover, the settlement of the Prior Lawsuit was reached after extensive negotiations with the Non-Managing General Partner which negotiated on behalf of the Partnership a binding and conclusive settlement. If, as a result of the J/B Lawsuit or otherwise, the settlement of the Prior Lawsuit is set aside, the Managing General Partner and its affiliates would seek a return of all funds paid to the Partnership as a result of such settlement. On April 1, 1997, Defendants filed pleadings with the Court in which they challenged J/B's standing to pursue the J/B Lawsuit as well as the legal sufficiency of the complaint in the J/B Lawsuit. Prior to the hearing on those pleadings, J/B filed an amended complaint. In the amended complaint, J/B dismissed the J/B Lawsuit against six of the nine defendants, but asserted claims against the Managing General Partner, Casden Properties and an individual. 12 15 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED) On June 27, 1997, the remaining Defendants again filed pleadings in which they challenged J/B's standing to pursue the J/B Lawsuit as well as the legal sufficiency of the amended complaint in the J/B Lawsuit. On August 7, 1997, the Court conducted a hearing on, among other things, Defendants' assertion that J/B lacks standing to pursue the J/B Lawsuit. The Court recognized that it appeared that under California law, a limited partner but not a unitholder has standing to pursue a class and derivative action, and that J/B had not clearly alleged whether it was a limited partner or a unitholder. The Court ordered J/B to file a second amended complaint in which it alleges whether it is a substitute limited partner or a unitholder, as those terms are defined in the partnership agreement and under California law. The Managing General Partner does not believe that J/B has been admitted as a substitute limited partner. J/B has until October 6, 1997 to file a second amended complaint. J/B failed to file a second amended complaint. Accordingly, the remaining defendants have filed a motion to dismiss the case which is set for hearing on November 25, 1997. The J/B Lawsuit could result in delaying, complicating, or preventing any significant transactions with respect to the sale of the Property, and diminishing future distributions to the Limited Partners until such case is resolved. In addition, the Partnership is expected to incur significant legal fees and expense to the extent of its responsibilities to indemnify and hold the Defendants harmless under certain provisions in the Partnership Agreement. NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments. The carrying amount of assets and liabilities reported on the balance sheets that require such disclosure approximates fair value due to their short-term maturity. 13 16 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY The Partnership raised proceeds of $72,580,000 from the sale of depository units, pursuant to a public offering and received additional capital contributions from the General Partners of $1,050 and from the special limited partner of $6,855,000. Currently, the only sources of Partnership income consist of income from rental operations at the Property and interest earned on Partnership reserves. In conjunction with the acquisition of the Property, the Partnership received a Guarantee from the Special Limited Partner, (now an affiliate of the Managing General Partner), which guarantee agreement (the "Guarantee Agreement") required the Special Limited Partner to make payments as provided in the Guarantee Agreement if and when necessary, in an amount sufficient to enable the Partnership to provide the Limited Partners with minimum distributions through December 1993. Pursuant to the Memorandum of Understanding entered into on August 11, 1995, the Special Limited Partner agreed to pay to the Partnership the sum of $350,000 in two equal installments of $175,000 each; the first such $175,000 payment was made in August 1995 and the second payment was made in May 1996. These payments represent the amount of a real estate tax refund received in 1994 for overpayment of prior year taxes which had previously been offset against amounts receivable from the Special Limited Partner under the Guarantee Agreement. Through September 30, 1997, the Special Limited Partner has funded $13,130,998 directly to the Partnership for distributions to the Limited Partners pursuant to the Guarantee Agreement, which includes the $350,000 referred to above. In addition, during 1995 the Partnership made a special distribution to the Limited Partners in the amount of $135,000 representing interest on late guarantee payments. Commencing in 1994, except with respect to the $350,000 and $135,000 described above, contributions to the partners have been made from cash flow from operations. Approvals from the City of Los Angeles were obtained to "privatize" the streets and alleys providing access to the Property and to construct wrought iron security fencing with controlled entrances into the Property. As a condition to its approval of the proposed "privatization", the City of Los Angeles required the construction of a storm drain and related improvements, for which an improvement agreement and guarantee in the amount $158,000 has been filed with the City of Los Angeles. The Partnership has pledged a Certificate of Deposit in such amount to the City to secure the improvement guarantee. The construction of the wrought iron security fencing, storm drain and related improvements commenced in September 1996 and completed in October, 1997. The City of Los Angeles will release the Certificate of Deposit after completion of inspection. Occupancy averaged 97 percent and 95 percent for the nine months ended September 30, 1997 and 1996, respectively, which explains the increase in rental income in 1997. Expenses in 1997 increased primarily due to an increase in bad debt and commission expense of $51,000, which is included in operating expenses, and expense reimbursements of $387,500 to the Non-Managing General partner, which is included in general and administrative expenses. 14 17 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1997 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As of September 30, 1997, NAPICO, the Managing General Partner, was a plaintiff or defendant in several lawsuits, which are unrelated to the Partnership. In addition, the Partnership is involved in the actions described below: Securities and Exchange Commission The Partnership, NAPICO, and several of NAPICO's officers, directors and affiliates consented to the entry, on June 25, 1997, of an administrative cease and desist order by the U.S. Securities and Exchange Commission, (the "Commission"), without admitting or denying any of the findings made by the Commission. The order concerns, in part, the treatment of Partnership funds deposited between September 1991 and July 1993 in a master disbursement account used by the Partnership's previous property management company. The Commission found that those funds should have been recorded on the Partnership's books and reported in its financial statements as related party accounts receivable rather than as cash as done so by the Partnership's auditors. Although the Commission found that this misclassification of current assets violated federal securities laws, the Commission did not find that these violations were intentional nor did the Commission find that limited partners had suffered any loss or damage as a result of these violations. Moreover, the Commission's order does not impose any cost, burden or penalty on the Partnership and does not impact NAPICO's ability to serve as the Partnership's Managing General Partner. The events that gave rise to the Commission's order occurred in or before 1993. Subsequent corrective action by the Partnership and its general partners precludes any recurrence of the cash management issues described in the Commission's order. J/B Lawsuit On February 13, 1997, J/B Investment Partners ("J/B") filed an action in the Los Angeles Superior Court (the "J/B Lawsuit"), against the Managing General Partner and its directors, and Casden Properties and certain of its affiliates (collectively, the "Defendants"). The J/B Lawsuit is styled as a class action brought against the Defendants on behalf of all limited partners of the Partnership, and a derivative action brought on behalf of the Partnership itself. The Partnership is named as a "nominal defendant." The complaint in the J/B Lawsuit contains four causes of action: (a) breach of fiduciary duty; (b) breach of contract; (c) unjust enrichment; and (d) equitable relief. The alleged wrongdoing of the Defendants as set forth in the J/B Lawsuit relates to the following issues: 1. J/B alleges misappropriation and misuse of Partnership funds which were the subject of a previous lawsuit (the "Prior Lawsuit") filed in the Los Angeles Superior Court in June 1995 by HillCreste Properties, Inc., the non-managing general partner of the Partnership (the "Non-Managing General Partner"). The Managing General Partner vigorously denied these allegations, and without admission of any wrongdoing the Prior Lawsuit was settled by a Memorandum of Understanding executed in August 1995, with final settlement documentation executed in April 1996, at which time the Prior 15 18 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1997 ITEM 1. LEGAL PROCEEDINGS (CONTINUED) Lawsuit was dismissed with prejudice as to all defendants. Additionally, J/B alleges that the Defendants have wrongfully caused the Partnership to pay legal fees on behalf of the Managing General Partner or certain of its affiliates relating to a regulatory investigation discussed above. 2. J/B alleges that the Defendants have failed to explore transactions that would maximize the value of the limited partners' investment in the Partnership, including the four unsolicited offers to purchase the Property, implementation of an auction process regarding the potential sale of the Property and obtaining financing with respect to the Property. 3. J/B alleges that the January 1997 letter from the Managing General Partner to the Limited Partners contained misleading statements about the original Everest proxy solicitation and about the Special Limited Partner's Right of First Refusal. Specifically, J/B contends that the January letter failed to disclose the Managing General Partner's advice and opinions regarding the response of the Limited Partners to the original Everest offer and contained misstatements about certain provisions of the Partnership Agreement pertaining to actions permitted or required to be taken by the Limited Partners of the Partnership. J/B states that the Limited Partners are not authorized, by vote of a majority-in-interest or otherwise, to bind, compel, or require the Partnership to enter into any contract for the sale of the Property, including the proposed sales contract with Everest. In other words, J/B asserts that the Everest Proposal cannot be implemented as proposed because it is beyond the Limited Partners' authority under the Partnership Agreement. Consequently, J/B claims that the conditions to the Special Limited Partner's Right of First Refusal to purchase the Property for a price and on terms equal to those contained in the Everest Proposal cannot under the Partnership Agreement be fulfilled, and, therefore, no such Right of First Refusal could be exercised. J/B seeks damages in the J/B Lawsuit in a unspecified amount and equitable relief, including, among other things, a declaration judgment as to whether or not there exists a Right of First Refusal. The Managing General Partner strenuously disputes all of the accusations of wrongdoing against it and its affiliates alleged in the J/B Lawsuit, and defends the existence and integrity of the Right of First Refusal, which was an integral and material part of the financial structure of the Partnership and was disclosed to the Limited Partners, in the prospectus at the time of the original sale of units in the Partnership. The Managing General Partner further intends to vigorously defend the settlement of the Prior Lawsuit. It appears that J/B purchased or was assigned certain rights with respect to 200 units in the Partnership in or about 1995. The Special Limited Partnership has advised the Managing General Partner and the Non-Managing General Partner that the Right of First Refusal was a material inducement to the Special Limited Partner's sale of the Property to the Partnership, its purchase of a subordinated special limited partnership interest in the Partnership for $6,855,000, and its agreement to provide the Partnership with a Minimum Distribution Guarantee pursuant to which the Special Limited Partner paid a total of approximately $13,130,000 to the Partnership to support distributions to the Limited Partners. If, as a result of the J/B Lawsuit or otherwise, the Special Limited Partner is not entitled to exercise the Right 16 19 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1997 ITEM 1. LEGAL PROCEEDINGS (CONTINUED) of First Refusal with respect to the Everest Proposal or in response to other similar situations, the Special Limited Partner believes that it would be entitled to return of its investment and all sums paid under the Minimum Distribution Guarantee, together with interest thereon. Moreover, the settlement of the Prior Lawsuit was reached after extensive negotiations with the Non-Managing General Partner which negotiated on behalf of the Partnership a binding and conclusive settlement. If, as a result of the J/B Lawsuit or otherwise, the settlement of the Prior Lawsuit is set aside, the Managing General Partner and its affiliates would seek a return of all funds paid to the Partnership as a result of such settlement. On April 1, 1997, Defendants filed pleadings with the Court in which they challenged J/B's standing to pursue the J/B Lawsuit as well as the legal sufficiency of the complaint in the J/B Lawsuit. Prior to the hearing on those pleadings, J/B filed an amended complaint. In the amended complaint, J/B dismissed the J/B Lawsuit against six of the nine defendants, but asserted claims against the Managing General Partner, Casden Properties and an individual. On June 27, 1997, the remaining Defendants again filed pleadings in which they challenged J/B's standing to pursue the J/B Lawsuit as well as the legal sufficiency of the amended complaint in the J/B Lawsuit. On August 7, 1997, the Court conducted a hearing on, among other things, Defendants' assertion that J/B lacks standing to pursue the J/B Lawsuit. The Court recognized that it appeared that under California law, a limited partner but not a unitholder has standing to pursue a class and derivative action, and that J/B had not clearly alleged whether it was a limited partner or a unitholder. The Court ordered J/B to file a second amended complaint in which it alleges whether it is a substitute limited partner or a unitholder, as those terms are defined in the partnership agreement and under California law. The Managing General Partner does not believe that J/B has been admitted as a substitute limited partner. J/B has until October 6, 1997 to file a second amended complaint. J/B failed to file a second amended complaint. Accordingly, the remaining defendants have filed a motion to dismiss the case which is set for hearing on November 25, 1997. The J/B Lawsuit could result in delaying, complicating, or preventing any significant transactions with respect to the sale of the Property, and diminishing future distributions to the Limited Partners until such case is resolved. In addition, the Partnership is expected to incur significant legal fees and expense to the extent of its responsibilities to indemnify and hold the Defendants harmless under certain provisions in the Partnership Agreement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) No reports on Form 8-K were filed during the quarter ended September 30, 1997. 17 20 CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (A CALIFORNIA LIMITED PARTNERSHIP) SEPTEMBER 30, 1997 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. CENTURY HILLCRESTE APARTMENT INVESTORS, L.P. (a California limited partnership) By: National Partnership Investments Corp. Managing General Partner ---------------------------------- Bruce Nelson President Date: --------------------------------- ------------------------------------ Charles H. Boxenbaum Chief Executive Officer Date: --------------------------------- 18 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE PARTNERSHIP'S STATEMENT OF EARNINGS AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 3,908,514 0 0 0 0 3,984,385 45,566,509 11,376,794 38,174,100 359,009 0 0 0 0 37,479,059 38,174,100 0 4,565,135 0 0 2,564,750 0 0 2,000,385 0 2,000,385 0 0 0 2,000,385 0 0
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