<PAGE> 1
=================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to _______
--------------------------------
Commission file number: 0-25600
--------------------------------
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Maryland 52-1394232
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7200 Wisconsin Avenue, 11th floor, Bethesda, Maryland 20814
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-654-3100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Beneficial Assignee Interests
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405) is not
contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
At December 31, 1998, the following classes of beneficial
assignee interests of Oxford Tax Exempt Fund II Limited
Partnership were outstanding; (i) 7,183,200 Beneficial Assignee
Interests ("BACs") with an aggregate market value of
$168,805,200, and (ii) 6,946 Status Quo BACs ("SQBs").
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents of the Registrant are
incorporated herein by reference as indicated:
Form 10-K Parts Document
- - -----------------------------------------------------------------
Parts I, II and III Portions of the 1998 Annual Report are
incorporated by reference into Parts I,
II and III.
Exhibit Index is on page 11.
Total number of pages is 48.
<PAGE> 2
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
PART I
Item 1. Business.
Information responsive to this Item is contained under the
headings "Notes to Financial Statements" at pages 26 through 45,
respectively, of the 1998 Annual Report of the Registrant
attached hereto as Exhibit 13 which is incorporated herein by
reference.
Item 2. Properties.
Information responsive to this Item is contained under the
heading "Investment in Tax-Exempt and Taxable Securities" in Note
7 to the Financial Statements at pages 37 through 42 in the 1998
Annual Report of the Registrant which is incorporated herein by
reference.
Item 3. Legal Proceedings.
Information responsive to this Item is contained under the
headings "Report of Management" at pages 15 through 20, and
"Notes to Financial Statements" at pages 26 through 45 of the
1998 Annual Report which is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market the Registrant's Partnership Interests and Related
Partnership Matters.
(a) Market Information.
Information responsive to this item is contained under
Note 8 "Quarterly Information" included at pages 43
through 44 of the 1998 Annual Report which is
incorporated herein by reference.
(b) Number of Security Holders.
The number of BAC Holders at December 31, 1998 was
15,075. The number of SQB holders at December 31, 1998
was 229.
(c) Dividend History and Restrictions.
The information regarding the frequency and amount of
cash distributions is included under the headings "Selected
Financial Data" at page 14 of the 1998 Annual Report,
"Report of Management" at pages 15 through 20, "Notes to
Financial Statements" at pages 26 through 45, and
"Distribution Information" at page 46 of the 1998 Annual
Report. The information contained under such headings is
incorporated herein by reference.
The Partnership expects to continue making cash
distributions to Partners pursuant to the provisions of its
limited partnership agreement.
Item 6. Selected Financial Data.
Information responsive to this Item is contained under the
heading "Selected Financial Data," included at page 14 of the
1998 Annual Report which is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Information responsive to this Item is contained under the
heading "Report of Management" at pages 15 through 20 of the 1998
Annual Report which is incorporated herein by reference.
<PAGE> 3
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
PART II (continued)
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Partnership, together with the
report thereon of PricewaterhouseCoopers LLP, independent
accountants, appearing at pages 21 through 45 of the 1998 Annual
Report, are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers
(a), (b), (c) and (e).
The Partnership has no directors or officers. The Managing
General Partner of the Partnership is Oxford Tax Exempt
Fund II Corporation. The sole directors and executive
officers of the Managing General Partner are as follows:
Name Age Position and Business Experience
- - -----------------------------------------------------------------
Leo E. Zickler 62 Chairman of the Board of Directors and
Chief Executive Officer since inception
and was Chairman and Chief Executive
Officer of the managing general partner
of Oxford Tax Exempt Fund Limited
Partnership, OTEF II's predecessor
("OTEF"). Since March 1982, he has been
Chairman of the Board of Directors and
Chief Executive Officer of Oxford
Development Corporation ("Oxford"), an
affiliate of the Partnership and a
national real estate firm that owns and
operates apartment and senior living
communities. Mr. Zickler served as
President of Oxford until February 28,
1994. Mr. Zickler continues to serve as
a director and officer of Oxford and
certain affiliated entities.
Francis P. Lavin 47 President since inception and President
of OTEF's managing general partner
since March 1, 1994. From October 1989
through January 1994, he was a Director
and President of ML Oxford Finance
Corporation, an affiliate of Merrill
Lynch & Company, Inc. From 1979 to
October 1989, Mr. Lavin held various
positions at subsidiaries of Merrill
Lynch & Company, including Director of
Merrill Lynch Capital Markets and Vice
President of Merrill Lynch, Hubbard
Inc. Since March 1, 1994, Mr. Lavin
has served as President of Oxford, as
well as a director and officer of
certain affiliated entities.
Robert B. Downing 44 Executive Vice President and Director
of the Managing General Partner since
inception. Mr. Downing is responsible
for the day-to-day investment and
financing activities of OTEF II. Since
1993, Mr. Downing has served as
Executive Vice President and Director
of various Oxford affiliates. Mr.
Downing joined Oxford in 1984.
<PAGE> 4
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
PART III (continued)
Name Age Position and Business Experience
- - -----------------------------------------------------------------
Stephen P. Gavula, Jr. 48 Director since May 1997. From June 1988
to September 1995, Mr. Gavula was
Chairman and Chief Executive Officer of
the JHM Group, which provided
specialized investment management
services to various financial
institutional and individual investors.
The JHM Group specialized in mortgage-
backed securities and was an affiliate
of The John Hancock Mutual Life
Insurance Company. In September 1995,
after accumulating over $2 billion in
assets under management, Mr. Gavula
sold his interest in JHM to The John
Hancock Mutual Life Insurance Company.
Presently, Mr. Gavula acts as Chairman
and Chief Executive Officer of JDS
Capital Corporation, a private
investment firm in McLean, Virginia.
Scot B. Barker 50 Director since May 1997. Mr. Barker is
the President and Director of Newman &
Associates, Inc., a Denver-based
financial services firm that arranges
debt financing for both commercial and
multifamily properties since 1984. Mr.
Barker has extensive experience in
financing HUD-insured and HUD-assisted
properties throughout the U.S. He has
been instrumental in designing a
variety of new financing programs for
the real estate sector.
Mark E. Schifrin 45 Executive Vice President of the
Managing General Partner since 1993.
Mr. Schifrin is responsible for the
asset management activities relating to
Oxford's property portfolio. Since
1993, Mr. Schifrin has served as
Executive Vice President and Director
of various Oxford affiliates. Mr.
Schifrin joined Oxford in 1984.
Richard R. Singleton 51 Senior Vice President since inception
and Chief Financial Officer since 1995.
Mr. Singleton serves as Senior Vice
President of various Oxford affiliates.
Mr. Singleton joined Oxford in 1979.
Marc B. Abrams 44 Senior Vice President, Secretary and
General Counsel since inception. Mr.
Abrams serves as Senior Vice President,
Secretary and General Counsel of
various Oxford affiliates. Mr. Abrams
joined Oxford in 1985.
<PAGE> 5
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
PART III (continued)
(d) Family Relationships. None.
(f) Involvement in Certain Legal Proceedings. None.
(g) Promoters and Controlling Persons. Not applicable.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires that the directors,
executive officers, and persons who own more than 10% of a
registered class of the equity securities of OTEF II or OTEF II
Corporation ("reporting persons") file with the Securities and
Exchange Commission initial reports of ownership, and reports of
changes in ownership, of OTEF II BACs, and options to purchase
OTEF II BACs. Reporting persons are required by Securities and
Exchange Commission rules to furnish OTEF II with copies of all
Section 16(a) reports they file.
Based solely upon a review of Section 16(a) reports
furnished to OTEF II for the fiscal year ended December 31, 1998
(the "1998 fiscal year"), or representations by reporting persons
that no other reports were required for the 1998 fiscal year,
OTEF II believes that all reporting persons timely filed all
reports required by Section 16(a) of the Exchange Act.
Item 11. Executive Compensation.
(a), (b), (c), and (d)
None of the executive officers of the Managing General
Partner, Oxford Tax Exempt Fund II Corporation, receives direct
compensation for services rendered to the Partnership. However,
certain directors and officers receive a portion of the cash
distributions made by OTEF II to its general partners. During
1998, the two independent directors received a total of $40,000
in directors' fees.
On May 21, 1997, OTEF II adopted an incentive option plan
(the "Incentive Option Plan") in order for the Managing General
Partner to attract and retain key employees and advisers. The
Incentive Option Plan authorizes the granting to the directors,
officers and employees of the Managing General Partner and
certain affiliates of options to purchase 652,125 options (on a
post-split basis). Such options are exercisable for 10 years.
The Managing General Partner has awarded all of the options
authorized under the terms of the Incentive Option Plan. Of the
652,125 options, 613,000 were fully vested upon issuance and
39,125 vest in equal annual amounts over 3 years commencing
January 1, 1998.
<PAGE> 6
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
PART III (continued)
Option Grants In Fiscal 1998
Shown below is information concerning option grants to the
executive officers of the Managing General Partner who were
granted options to purchase OTEF II BACs during OTEF II's 1998
fiscal year.
<TABLE>
Individual Grants
- - --------------------------------------------------------------------------------------------
<CAPTION>
% of
Total Potential Realizable Value
Number of Options at Assumed Annual Rates of
BACs Granted to Exercise BAC Price Appreciation
Underlying Employees or Base For Option Term
Options in Fiscal Price Expiration Compounded Annually
Name Granted <F1> 1997 ($/BAC) Date 5% 10%
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Leo E. Zickler 163,031 25.000% $23.88 5/21/07 $2,448,400 $6,204,727
Francis P. Lavin 163,031 25.000% $23.88 5/21/07 $2,448,400 $6,204,727
Robert B. Downing 82,150 12.597% $23.88 5/21/07 $1,233,729 $3,126,512
Mark E. Schifrin 75,620 11.596% $23.88 5/21/07 $1,135,661 $2,877,989
Marc B. Abrams 61,606 9.447% $23.88 5/21/07 $ 925,199 $2,344,636
Richard R. Singleton 47,997 7.360% $23.88 5/21/07 $ 720,819 $1,826,697
- - --------------------------------------------------------------------------------------------
<FN>
<F1> All options held by executive officers were granted prior to the effective
date of listing of the OTEF II BACs for trading on the American Stock
Exchange. The exercise price of each option grant was set at the average
of the American Stock Exchange closing bid prices of the OTEF II BACs for
the first 20 days of trading following the listing of the OTEF II BACs.
</FN>
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Values
Shown below is information with respect to certain unexercised
options to purchase OTEF II BACs held by the executive officers
of OTEF II Corporation as of the end of OTEF II's 1998 fiscal
year. None of the executive officers of OTEF II Corporation
exercised any options during OTEF II's 1998 fiscal year.
<TABLE>
- - -----------------------------------------------------------------------------
<CAPTION>
Number of BACs
Underlying Options at Value of Options at
End of Fiscal Year End of Fiscal 1998 <F1>
Name Exercisable Unexercisable Exercisable Unexercisable
- - -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leo E. Zickler 163,031 0 160,437 0
Francis P. Lavin 163,031 0 160,437 0
Robert B. Downing 82,150 0 80,843 0
Mark E. Schifrin 75,620 0 74,417 0
Marc B. Abrams 61,606 0 60,625 0
Richard R. Singleton 47,997 0 47,233 0
- - -----------------------------------------------------------------------------
TOTAL 593,435 0 583,992 0
=============================================================================
<FN>
<F1> Based on the market value of the OTEF II BACs on the last
trading day of 1998 (as measured by the American Stock
Exchange closing bid price of $23.50), minus the exercise
price.
<FN>
</TABLE>
(e) Termination of Employment and Change of Control Arrangements. None.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- - -------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
No person is known by the Partnership to own beneficially
more than 5% of the outstanding OTEF II BACs.
(b) Security Ownership of Management.
<PAGE> 7
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
PART III (continued)
The following table sets forth, as of 12/31/98, the number
and percentage of outstanding BACs beneficially owned by (i) each
director of OTEF II Corporation, (ii) each executive officer of
OTEF II Corporation, and (iii) all executive officers and
directors of OTEF II Corporation as a group. Each person named
in the table has sole voting and sole investment power with
respect to each of the OTEF II BACs beneficially owned by such
person.
<TABLE>
- - -----------------------------------------------------------------------------
<CAPTION>
Name and Address of Beneficial Ownership Percentage of
Beneficial Owner No. BACs <F1> Outstanding BACs <F2>
- - -----------------------------------------------------------------------------
<S> <C> <C>
Leo E. Zickler <F3> <F4>
7200 Wisconsin Avenue, Suite 1100
Bethesda, MD 20814 163,031 2.08%
Francis P. Lavin <F3> <F4>
7200 Wisconsin Avenue, Suite 1100
Bethesda, MD 20814 169,131 2.16%
Robert B. Downing <F3> <F4>
7200 Wisconsin Avenue, Suite 1100
Bethesda, MD 20814 91,150 1.16%
Stephen P. Gavula, Jr. <F3>
8300 Greensboro Drive, Suite 970
McLean, VA 22102 23,151 0.30%
Scot B. Barker <F3>
1801 California Street
Denver, CO 80202 13,261 0.17%
Mark E. Schifrin <F4>
7200 Wisconsin Avenue, Suite 100
Bethesda, MD 20814 78,920 1.01%
Marc B. Abrams <F4>
7200 Wisconsin Avenue, Suite 1100
Bethesda, MD 20814 63,606 0.81%
Richard R. Singleton <F4>
7200 Wisconsin Avenue, Suite 1100
Bethesda, MD 20814 49,997 0.64%
- - -----------------------------------------------------------------------------
All executive officers and
directors as a group (8 persons) 652,247 8.32%
- - -----------------------------------------------------------------------------
<FN>
<F1> Amount of beneficial ownership includes options to purchase OTEF
II BACs granted to directors and executive officers of OTEF II
Corporation which have vested and are exercisable as of May 21, 1997.
Accordingly, Mr. Zickler has 163,031 options vested and exercisable;
Mr. Lavin has 163,031 options vested and exercisable; Mr. Downing has
82,150 options vested and exercisable; Mr. Gavula has 3,261 options
vested and exercisable; Mr. Barker has 3,261 options vested and
exercisable; Mr. Schifrin has 75,620 options vested and exercisable;
Mr. Abrams has 61,606 options vested and exercisable; and Mr. Singleton
has 47,997 options vested and exercisable.
<F2> All percentages of OTEF II BACs were calculated to include options to
purchase OTEF II BACs vested and exercisable for those individual
directors and executive officers of OTEF II Corporation who had such
options.
<F3> Indicates a director of OTEF II Corporation.
<F4> Indicates an executive officer of OTEF II Corporation.
</FN>
</TABLE>
<PAGE> 8
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
PART III (continued)
(c) Changes in Control. None.
Item 13. Certain Relationships and Related Transactions.
(a) and (b) Transactions with Management and Others and
Certain Business Relationships.
Information responsive to this Item is contained under the
heading "Notes to Financial Statements" at pages 31 to 33
of the 1998 Annual Report of the Registrant which is
incorporated herein by reference.
(c) Indebtedness of Management. None.
(d) Transactions with Promoters. Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) The following documents are filed as part of this Report.
1. Financial Statements.
The following financial statements and notes thereto are
contained in the 1998 Annual Report and are incorporated
by reference into Part II, Item 8.
Sequentially
Numbered
Page(s)
-------------
Report of Independent Accountants. 21
Balance Sheets as of December 31,
1998 and 1997. 22
Statements of Income for the
years ended December 31, 1998,
1997 and 1996. 23
Statement of Partners' Capital
for the years ended December 31,
1998, 1997 and 1996 for OTEF II. 24
Statements of Cash Flows for the
years ended December 31, 1998,
1997 and 1996. 25
Notes to Financial Statements,
which include the information
required to be included in
Schedule IV - Mortgage Loans on
Real Estate. 26-45
<PAGE> 9
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
PART III (continued)
2. Financial Statement Schedules.
All other financial statement schedules are omitted
because they are inapplicable or because the required
information is included in the financial statements or
notes thereto.
3. Exhibits (listed according to the number
assigned in the table in Item 601 of Regulation S-K).
Exhibit No. 3 - Articles of Incorporation and Bylaws.
a.Articles of Incorporation for OTEF II Corporation
(incorporated by reference from Exhibit 3(a) to the
Registrant's Registration Statement on Form 10 dated
February 22, 1995).
b.Bylaws for OTEF II Corporation (incorporated by
reference from Exhibit 3(b) to the Registrant's
Registration Statement on Form 10 dated February 22,
1995).
c.Articles of Incorporation of OTEF II Assignor
Corporation (incorporated by reference from Exhibit
3(c) to the Registrant's Registration Statement
on Form 10 dated February 22, 1995).
d.Bylaws of OTEF II Assignor Corporation (incorporated by
reference from Exhibit 3(d) to the Registrant's
Registration Statement on Form 10 dated February 22,
1995).
Exhibit No. 4 - Instruments defining the rights of
security holders, including indentures.
a.Third Amended and Restated Agreement of Limited
Partnership of Oxford Tax Exempt Fund II Limited
Partnership (incorporated by reference from (Exhibit
4(a) to the registrant's quarterly report on form 10-
Q/A for the quarter ended March 31, 1997.
Exhibit No. 10 - Material contracts.
a.BAC Holder Rights Agreement.
b.Trust Indenture and Loan Agreement for Southridge-Oxford
Limited Partnership.
c.Stipulation of Settlement filed with the U.S. District
Court for the District of Maryland on November 18, 1996.
Exhibit No. 13 - Annual report to security holders, etc.
a.Annual Report for the year ended December 31, 1998
("filed" only to the extent material there from is
specifically incorporated by reference).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
fourth quarter of 1998.
(c) The list of Exhibits required by Item 601 of
regulation S-K is included in Item 14(a)(3) above.
(d) Financial Statement Schedules.
See Item 14(a)(2) above.
<PAGE> 10
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
CROSS REFERENCE SHEET
The item numbers and captions in Parts I, II, III, and IV
hereof and the page and/or pages in the referenced materials
where the corresponding information appears are as follows:
Sequentially
Numbered
Item Reference Materials Page(s)
- - -----------------------------------------------------------------
1. Business 1998 Annual Report pps 26-45
3. Legal Proceedings 1998 Annual Report pps 15-20
and 26-45
5. Market for Registrant's
Partnership Interest and pps 14, 15-20,
Related Matters 1998 Annual Report and 26-47
6. Selected Financial Data 1998 Annual Report pp 14
7. Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 1998 Annual Report pps 15-20
8. Financial Statements and
Supplementary Data 1998 Annual Report pps 21-45
11. Executive Compensation 1998 Annual Report pp 33
14. Exhibits, Financial
Schedules and Reports on
Form 8-K 1998 Annual Report pps 21-45
<PAGE> 11
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
EXHIBIT INDEX
(Listed according to the number assigned in the Exhibit Table in
Item 601 of Regulation S-K).
(13) 1998 Annual Report to Security Holders.
Oxford Tax Exempt Fund II Limited Partnership's Report dated
December 31, 1998, follows on sequentially numbered pages 13
through 48 of this report.
(27) Financial Data Schedule.
<PAGE> 12
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Oxford Tax Exempt Fund II Limited
Partnership
By: Oxford Tax Exempt Fund II Corporation
Managing General Partner of the
Registrant
Date: 3/31/99 By:/S/ Richard R. Singleton
------- ---------------------------------------
Richard R. Singleton
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: 3/31/99 By:/S/ Leo E. Zickler
------- ----------------------------------------
Leo E. Zickler
Chairman of the Board of Directors and
Chief Executive Officer
Date: 3/31/99 By:/S/Francis P. Lavin
------- ----------------------------------------
Francis P. Lavin
Director and President
Date: 3/31/99 By:/S/Robert B. Downing
------- ----------------------------------------
Robert B. Downing
Director and Executive Vice President
Date: 3/31/99 By:/S/Stephen P. Gavula, Jr.
------- ----------------------------------------
Stephen P. Gavula, Jr.
Director
Date: 3/31/99 By:/S/Scot B. Barker
------- ----------------------------------------
Scot B. Barker
Director
No proxy material has been sent to the Registrant's security
holders. The Partnership's 1998 Annual Report is expected to be
mailed to OTEF II BAC Holders before May 15, 1999.
<PAGE> 13
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
1998 Annual Report
CONTENTS
Selected Financial Data
Report of Management
Report of Independent Accountants
Balance Sheets
Statements of Income
Statement of Partners' Capital
Statements of Cash Flows
Notes to Financial Statements
Distribution Information
General Partnership Information
Instructions for Investors who wish to reregister or
transfer OTEF II BACs
<PAGE> 14
<TABLE>
- - --------------------------------------------------------------------------------------------------------------------------------
Selected Financial Data (in thousands, except per BAC) (Restated for the 25-for-1 stock split which occurred on July 1, 1997)
- - --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
OTEF II<F3> || OTEF<F1>
---------------------------------------------------------------------||-------------------------
For the years ended December 31, |Seven months||Five months|For the year
--------------------------------------------------------| ended || ended | ended
Pro Forma|December 31,|| May 31, | December 31,
FINANCIAL HIGHLIGHTS 1998 1997 1996 1995<F5>| 1995<F3> || 1995 | 1994
- - ----------------------------------------------------------------------------------------|------------||-----------|-------------
<S> <C> <C> <C> <C> | <C> || <C> | <C>
Total Assets $309,086 $270,663 $228,733 $174,034 | $174,034 || $163,856 | $168,568
Investment in Tax-Exempt | || |
Securities $213,900 $217,159 $215,529 $164,000 | $164,000 || $153,032 | $158,599
Investment in Tax-Exempt | || |
Securities Held in Trust $ 62,565 $ 38,820 $ 0 $ 0 | $ 0 || $ 0 | $ 0
Total Revenue $ 23,151 $ 19,130 $ 19,762 $ 16,626 | $ 9,610 || $ 2,452 | $ 4,137
Net Income $ 19,283 $ 16,642 $ 14,912 $ 15,210 | $ 8,369 || $ 2,277 | $ 3,727
Net Income Allocated to | || |
BAC Holders $ 18,509<F7> $ 15,893<F7> $ 14,614 $ 14,906 | $ 8,202 || $ 2,232 | $ 3,652
Net Income per BAC $ 2.576<F7> $ 2.188<F7> $ 1.948 $ 1.988 | $ 1.094 || $ 0.298 | $ 0.487
Net Income per BAC - | || |
assuming dilution $ 2.556<F8> $ 2.180<F8> $ 0 $ 0 | $ 0 || $ 0 | $ 0
Municipal Income (Tax Basis) $ 18,168 $ 16,983 $ 14,644 $ 16,210 | $ 8,369 || $ 7,841 | $ 16,911
Municipal Income Allocated | || |
to BAC Holders (Tax Basis) $ 17,422<F6> $ 16,041<F6> $ 14,351 $ 15,886 | $ 8,202 || $ 7,687 | $ 16,573
Municipal Income per BAC | || |
(Tax Basis) $ 2.425<F6><F7> $ 2.233<F6><F7> $ 1.914 $ 2.118 | $ 1.094 || $ 1.025 | $ 2.209
Cash Distributions per BAC<F2> $ 2.025<F7> $ 1.942<F7> $ 1.904 $ 1.904 | $ 1.428 || $ 0.476 | $ 1.800
Weighted Average OTEF II | || |
BACs Outstanding<F9> 7,185<F7> 7,264<F7> 7,500 7,500 | 7,500 || 7,500 | 7,500
Number of BAC Holders 15,075 16,009 15,678 15,061 | 15,061 || 15,249 | 15,359
=====================================================================================================||=========================
<CAPTION> ||
OTEF II<F3> || OTEF<F1>
---------------------------------------------------------------------||-------------------------
For the years ended December 31, |Seven months||Five months|For the year
--------------------------------------------------------| ended || ended | ended
RECONCILIATION OF NET Pro Forma|December 31,|| May 31, | December 31,
INCOME TO MUNICIPAL INCOME 1998 1997 1996 1995<F4>| 1995 || 1995 | 1994
- - ----------------------------------------------------------------------------------------|------------||-----------|-------------
<S> <C> <C> <C> <C> | <C> || <C> | <C>
Net Income per financial | || |
statements (GAAP) $ 19,283 $ 16,642 $ 14,912 $ 16,210 | $ 8,369 || $ 2,277 | $ 3,726
Add: | || |
Equity method adjustments: | || |
-- Equity Income <F3> $ 0 $ 0 $ 0 $ 0 | $ 0 || $ (2,305)| $ (3,949)
-- Interest received <F3> $ 0 $ 0 $ 0 $ 0 | $ 0 || $ 7,869 | $ 18,591
Taxable interest income (837)<F10> $ 0 $ 0 $ 0 | $ 0 || $ 0 | $ 0
Accrued base interest/ | || |
(reduction)/other $ (278)<F5> $ 341<F5> $ (268)<F5>$ 0 | $ 0 || $ 0 | $ (1,457)
- - ----------------------------------------------------------------------------------------|------------||-----------|-------------
Municipal income, | || |
net for tax reporting purposes $ 18,168 $ 16,983 $ 14,644 $ 16,210 | $ 8,369 || $ 7,841 | $ 16,911
================================================================================================================================
<FN>
<F1> Prior to June 1, 1995, OTEF accounted for its investment in the Operating Partnerships under the equity method, which
treated interest paid by the Operating Partnerships as a reduction in its investment, and also recorded as an increase or
reduction in its investment its equity interest in the aggregate income or losses of the Operating Partnerships.
<F2> See page 46 for analysis of historical quarterly distributions.
<F3> Effective June 1, 1995, with the transfer of all units of OTEF to OTEF II, OTEF II began accounting for its investments
in Existing MRBs in accordance with Statement of Financial Accounting Standards No. 115- Accounting for Certain
Investments in Debt and Equity Securities ("SFAS No. 115"), as more fully described in the Notes to Financial Statements.
For federal income tax purposes, OTEF II is considered a continued entity.
<F4> The unaudited Pro Forma financial information reflects the adoption of SFAS No. 115 as of January 1, 1995. Pro forma
total revenue and net income does not reflect $1 million in nonrecurring Oxford advances made to the Operating
Partnerships which used these funds to pay OTEF in January 1995, which is reflected in the Net Income per financial
statements (GAAP).
<F5> For 1996 represents (i) payment of legal fees in connection with the settlement of class action litigation totaling
$2.5 million expensed in 1996, but capitalized for income tax purposes in 1997; (ii) a portion of the Partnership's
1996 expenses, totaling approximately $1 million that was not expensed in 1996 for income tax purposes; and (iii)
write-off of prior years' tax accrual totaling $3.8 million. For 1997 this amount represents the tax capitalization of
class action litigation costs in conjunction with the appeal. For 1998 represents the reimbursement of 1996 and 1997
bond refunding costs which had been expensed for financial statement purposes and deferred for income tax purposes.
<F6> Municipal income does not reflect capital losses of $3.6 million and $3.8 million in 1998 and 1997, respectively, from
Financing Transactions (see page 16).
<F7> On April 1, 1997, 314,675 BACs were converted to 12,587 SQBs. Amounts presented for 1998 and 1997 are for BACs only.
<F8> Options granted but not exercised in 1997 are dilutive. The weighted average BACs outstanding assuming dilution is
7,241,414 in 1998 and 7,283,795 in 1997.
<F9> Restated to reflect the 25-for-1 stock split effective July 1, 1997.
<F10> Taxable interest income earned in 1998 on OTEF II new acquisitions from taxable interest on loans in the amount of
approximately $0.8 million is not included in municipal income.
</FN>
</TABLE>
<PAGE> 15
- - ----------------------------------------------------------------------------
Report of Management
- - ----------------------------------------------------------------------------
The following report provides additional information about the
financial condition of Oxford Tax Exempt Fund II Limited
Partnership, a Maryland limited partnership ("Oxford Tax Exempt
Fund II," "OTEF II," or the "Partnership"), as of December 31,
1998, and its results of operations and cash flows for the period
then ended. This report and analysis should be read together
with the financial statements and related notes thereto and the
selected financial data appearing elsewhere in this Annual
Report.
General Business
OTEF II is a publicly-traded partnership (AMEX: OTF) that
invests in tax-exempt bonds issued to finance high quality
apartment and senior living/health care communities, with the
objective of producing increasing income and quarterly
distributions for its shareholders. These distributions are
primarily exempt from federal income taxation.
While OTEF II acquires principally tax-exempt bonds and other
debt secured by these investment properties, its investment and
operational focus is similar to that of an equity real estate
investment trust ("REIT"). Like an equity REIT, OTEF II seeks
equity-like returns since its debt investments are generally
structured to capture most of a property's projected increases in
cash flow and appreciation in the form of increasing interest
payments. Also, like a REIT, OTEF II does not pay income taxes
at the company level.
OTEF II's investments are generally structured to give OTEF II
or its affiliates significant rights regarding property and
financing decisions. Typically, affiliated entities acquire
title to the properties or act as a joint venture partner with a
developer. With intensive asset management, OTEF II seeks to
maximize the economic growth achieved by these properties.
Unlike equity REITs, however, investments made by OTEF II are
structured in a manner designed to produce tax-exempt income,
which can increase substantially from the economic growth
achieved by the investment properties. To obtain income from its
investments that is primarily tax-exempt, OTEF II generally will
acquire tax-exempt bonds or other debt secured by such properties
and, because the federal tax laws prevent a property owner from
receiving tax-exempt interest income on bonds that finance its
property, an affiliated but unrelated entity will acquire title
to, or obtain control over, the real estate. The tax-exempt
bonds or other debt acquired by OTEF II will be structured or
restructured in a manner such that bonds or other debt will be
classified as indebtedness of the owner of the real estate for
federal income tax purposes, and most of any increase in
operating income and appreciation realized by the investment
property will be captured by OTEF II as interest on the debt
secured by such property.
Similar to many equity REITs, OTEF II distributes to its
shareholders most but not all of its cash flow, so as to maintain
cash reserves for future quarterly distributions or other
purposes. OTEF II's payout ratio, or percentage of net income
per BAC, that is distributed, varies from time to time. It is
currently approximately 80% of net income per BAC. Further, OTEF
II may employ moderate leverage to enhance its return on
investment. OTEF II's leverage level is currently approximately
15.4% of OTEF II's total assets, or 22.4% of OTEF II's total assets
if entities in which OTEF II has made a subordinated debt
investment are consolidated.
Recent Developments
Distribution for the Quarter ended December 31, 1998. On
December 16, 1998, the Managing General Partner declared a
distribution for the quarter ended December 31, 1998 in the
amount of $0.51 per BAC, and $12.38 per Status Quo BAC ("SQB").
Distributions for the fourth quarter were paid on February 12,
1999 to BAC Holders and SQB Holders of record on December 31,
1998. For BAC Holders, this distribution is in the same amount
as the second and third quarters of 1998 and represents a 3%
increase in the amount of the distribution paid for the first
quarter of 1998.
Investments made under the Liquidity & Growth Plan in 1998.
During 1998, OTEF II closed several investment transactions
totaling approximately $40.1 million. Two investment
transactions (Jacaranda and Summerwalk) involved, in the
aggregate, the acquisition of $4.2 million of subordinated tax-
exempt bonds and $10.2 million of grantor trust certificates
representing taxable securities. OTEF II is working on bond
refunding and refinancing transactions for the senior tax-exempt
bonds associated with these properties ($11.8 million for
<PAGE> 16
Jacaranda and $10 million for Summerwalk), which are currently
held by third parties. The letters of credit that secure these
bonds expire on August 15, 1999 for Jacaranda and December 15,
2000 for Summerwalk. For OTEF II to protect its investment, these
letters of credit must be replaced or, alternatively, OTEF II
must purchase the senior bonds. Based on its preliminary
discussions, the Managing General Partner anticipates
consummating refunding or refinancing transactions for these
properties where the requirement to maintain letters of credit is
eliminated and the bonds are refinanced or, in the case of
Summerwalk, possibly acquired by OTEF II as part of a
refinancing, although no assurances can be given that these
transactions can be consummated in a timely manner.
OTEF II also completed tax-exempt bond refunding transactions
for Carpenter and Dallas. In these transactions, OTEF II
acquired an aggregate of $24.4 million of tax-exempt refunding
bonds, and advanced a total of $1.6 million of taxable loan
proceeds to the owners of the properties that secure this debt.
See Note 7 to Financial Statements.
BAC Repurchase Program. On October 30, 1998, the Managing
General Partner authorized the repurchase, from time to time, of
up to 250,000 shares of BACs. OTEF II may purchase BACs in the
open market or through privately negotiated transactions. The
timing and amount of BACs purchased will be dependent on the
availability of BACs and other market factors. OTEF II will
purchase BACs only to the extent that they may be purchased at
favorable prices. Under this program, OTEF II acquired 2,000
BACs in December 1998 for approximately $0.05 million. Such
assets are reflected in other assets on the Balance Sheet.
Liquidity and Capital Resources
To pursue additional investment opportunities, OTEF II
requires additional capital from time to time. In addition to
proceeds from financings, OTEF II may generally acquire
additional investments ("New Assets"): (i) from the proceeds of
sales or other dispositions of Original Refunding Bonds (defined
below) and the Existing MRBs (as defined below) and the proceeds
from principal payments with respect to the Original Refunding
Bonds (except for the portion of such proceeds allocable to
SQBs), as well as bonds issued to refund any tax-exempt bonds
acquired by OTEF II pursuant to the Liquidity and Growth Plan;
(ii) from the proceeds of sales or other dispositions of New
Assets and the proceeds from principal payments with respect to
New Assets; (iii) from the proceeds of issuances of additional
equity securities, including additional BACs or other limited
partnership interests in OTEF II; (iv) by issuing additional
equity securities in exchange for New Assets; or (v) by borrowing
funds from lenders or by issuing evidences of indebtedness.
Current Position. OTEF II uses its cash receipts primarily
for distributions to BAC Holders, SQB Holders and its General
Partners, to pay administrative expenses, and to acquire New
Assets and pay the costs and expenses relating to such
transactions. As of December 31, 1998, OTEF II held approximately
$18 million in cash and cash equivalents, an increase of
approximately $6.3 million, or approximately 54%, from the $11.7
million in cash and cash equivalents held as of December 31,
1997. The increase in OTEF II's cash and cash equivalents was
primarily the result of two financing transactions which
generated $20.4 million in cash, and distributions to BAC Holders
of an amount that is less than the net income allocable to BAC
Holders. Total liabilities of OTEF II shown on this balance
sheet increased to approximately $52 million as of December 31,
1998 from approximately $34 million at December 31, 1997. The
increase in liabilities is due to the increase in financing debt
discussed below, and the 3% increase in quarterly distributions
offset by a reduction in accounts payable and operating expenses.
During the second quarter of 1998, OTEF II made a final payment
in the amount of $1.5 million to plaintiff's counsel in
connection with the OTEF II litigation discussed in prior
reports.
<PAGE> 17
Financing Transactions. OTEF II seeks to enhance its overall
return on investment and to generate proceeds which facilitate
the acquisition of New Assets. OTEF II has securitized
approximately $62.6 million of its Series A Bonds by assigning
these Series A Bonds to a Merrill Lynch affiliate which, in turn,
deposited them into trusts, including two transactions competed
during 1998. The trusts, in turn, sold to institutional
investors senior, floating rate securities credit enhanced by a
Merrill Lynch affiliate. These senior securities have first
priority on the debt service payments related to the Series A
Bonds. OTEF II acquired all the subordinated interests in these
trusts, aggregating approximately $15 million, and received the
proceeds, net of transaction costs from the sale of the senior
securities. OTEF II has certain rights to repurchase and/or
refinance the Series A Bonds and to repurchase the senior
securities and, therefore, retains a level of control over the
Series A Bonds. These securitization transactions provide low-
cost financing for OTEF II's growth. The portion of the net
proceeds from these transactions that is not invested in New
Assets is temporarily invested in liquid tax-exempt money market
securities.
In connection with these transactions, OTEF II converted the
interest rate mode on the Series A Bonds involved in these
transactions from an annual reset to weekly floaters. On August
22, 1997, and September 21, 1998, OTEF II purchased three-year
interest rate caps on a notional amount of approximately $27
million and $30 million, respectively, to minimize the effects of
interest rate volatility. Under these arrangements, if the
average short-term, tax-exempt interest rates during the term of
the cap increase above a specified level (6% and 4.5%,
respectively), the counter-party to the interest rate cap
transaction is required to pay directly to OTEF II the amount by
which such rates exceed the specified level.
For financial statement purposes, these transactions are
accounted for as financing transactions. The amount of the
Series A Bonds financed, approximately $62.6 million, is
reflected as Securities held in Trust, the net cash proceeds are
classified as Cash and Cash Equivalents and the difference
between the principal amount of the Series A Bonds financed and
the principal amount of the subordinated interests acquired by
OTEF II is classified as financing debt on OTEF II's balance
sheet. The aggregate financing debt at December 31, 1998 was
approximately $47.6 million, compared to $27.2 million as of
December 31, 1997. OTEF II's financing debt represents
approximately 15.4% of OTEF II's total assets (or 22.4% of OTEF
II's total assets if the entities in which OTEF II has made a
subordinated debt investment were consolidated with OTEF II).
Due to the credit enhancement provided by a Merrill Lynch
affiliate in connection with the securitization transactions, and
favorable underwriting characteristics (generally, low loan-to-
value and high debt coverage), this financing debt bears interest
at the BMA weekly floating bond index plus approximately 80 to 85
basis points (including credit enhancement, trustee and related
fees). This rate averaged 4.63% from the date of closing through
December 31, 1997 and 4.33% for the twelve months of 1998. The
credit enhancement associated with approximately $27.2 million of
this financing debt must be renewed or refinanced by August 21,
1999. The remaining $20.4 million of financial debt must be
renewed or refinanced by February 19, 2000 (approximately $9.6
million) and April 15, 2000 (approximately $10.8 million). While
OTEF II is not an obligor and, therefore, is not liable for
repayment of this financing debt, the Series A Bonds (in which
OTEF II owns approximately $15 million of subordinated interests
through the trusts) are in effect collateral for this financing
debt. Based on its preliminary discussions with financing
sources, the Managing General Partner believes that OTEF II will
be able to extend the credit enhancement or refinance this
financing debt, although no assurances can be given.
Costs associated with these financing transactions are being
amortized over ten years for financial statement purposes, and
costs associated with the interest rate cap are being amortized
over the life of each interest rate cap agreement, which is three
years. For federal income tax purposes, these transactions are
treated as sales by OTEF II of the applicable Series A Bonds and
a purchase of subordinated interests in the trusts.
Original Refunding Bonds. OTEF II has acquired refunding
bonds ("Original Refunding Bonds") for twelve of the fifteen
Existing MRBs, representing approximately 88% of the face amount
of the original bond portfolio. The Original Refunding Bonds
currently held by OTEF II consist of senior bonds ("Series A
Bonds") and subordinated bonds ("Series B Bonds"). This
senior/subordinated structure has allowed OTEF II to undertake
several financing transactions involving the Series A Bonds
allocable to BAC Holders ("Liquidity Assets"). OTEF II retained
the related Series B Bonds for the benefit of the BAC Holders,
and retained both the Series A Bonds and the Series B Bonds that
are designated as Status Quo Assets and held for the benefit of
SQB Holders.
Series A Bonds. The term of each Original Refunding Bond and,
accordingly, each Mortgage Loan is 30 years following the date of
refunding. The Series A Bonds require interest only payments
during the first three years and, thereafter, are subject to
annual sinking fund redemptions that will result in full
amortization of the Series A Bonds during the 27-year remaining
term. This annual sinking fund redemption begins April 15, 2000
for all twelve Series A Bonds. The Managing General Partner is
considering whether the elimination of this annual sinking fund
redemption would facilitate financing transactions involving
these assets or would otherwise be advantageous to OTEF II.
<PAGE> 18
Series A Bond Interest and Principal. The Series A Bonds
require pre-determined annual sinking fund redemptions based on a
27-year amortization schedule beginning in the fourth year,
calculated with an assumed rate of interest of 5.6% per year. In
the annual reset mode, Series A Bond interest was set initially
at closing of the refundings and is reset annually thereafter at
a market rate based upon a percentage of the then prevailing one-
year U.S. Treasury Bill rate, with a maximum rate of 5.6% per
annum. The initial interest rate on the Series A Bonds that have
been issued to date was 4.9%. The interest rate on seven of the
Series A Bonds retained by OTEF II was reset on November 1, 1998
to 3.75%; the interest rate on three Series A Bonds retained by
OTEF II was reset on December 1, 1998 to 4.01%. On January 1,
1999, the interest rate on one Series A Bond retained by OTEF II
was reset to 4.03%, and the interest rate on another Series A
Bond was reset on March 1, 1999 to 4.32%. The interest rate on
the Series A Bonds involved in the financing transactions
described above was converted from annual reset to a weekly
floating rate based on a spread over the BMA index. This rate
averaged 4.63% from the date of closing through December 31, 1997
and 4.33% for the twelve months of 1998. Upon a remarketing, the
Series A Bonds may be converted to a different interest rate mode
(fixed or floating) and the interest rates may be modified at
that time to reflect the prevailing market interest rates for
whatever rate mode and remaining term is then applicable.
Series B Bonds. The term of each Series B Bond and,
accordingly, each Mortgage Loan is 30 years following the date of
refunding.
Series B Bond Interest and Principal. The Series B Bonds
accrue interest equal to the product of the Combined Rate (as
defined below) multiplied by the total combined principal balance
of the Series A Bonds and the Series B Bonds for each Operating
Partnership, less the interest payable on the related Series A
Bonds; the resulting amount of interest divided by the principal
balance of the Series B Bonds equals the interest accrual rate on
the Series B Bonds. Interest-only is payable on the Series B
Bonds to the extent of available cash flow of the Operating
Partnership, with the entire principal balance and any unpaid
interest due at maturity.
Combined Rate. The Combined Rate represents that portion of
each Property's projected Cash Flow Before Debt Service ("CFBDS")
for each year (projected at the time of the refunding of each
Existing MRB) that may be applied to interest on the combined
Series A Bonds and Series B Bonds. See Note 7 to Financial
Statements for a schedule of the Combined Rates of the Original
Refunding Bonds over the next 10 years.
Other Sources. In connection with the closing of the Original
Refunding Bonds, the applicable Operating Partnerships entered
into certain pooling agreements which may provide under certain
circumstances additional sources of funds to enable them to pay
their respective debt service on the Series A Bonds and the
Series B Bonds and related fees and expenses. As of December 31,
1998, the aggregate amount of net excess cash flow held in the
Operating Partnership escrows was approximately $2.2 million,
including deposits from December's cash flow compared to $1.1
million at the end of 1997.
During 1998, Oxford advanced to certain Operating Partnerships
all remaining treasury strip proceeds in the amount of
approximately $1.34 million. Of this amount, approximately $0.01
million was advanced to the Allview operating partnership and
$0.45 million to the Colonel operating partnership. An
additional $0.28 million was advanced to various Operating
Partnerships to help defray their respective bond refunding costs
that were previously incurred. The final $0.51 million was
advanced to the San Bruno operating partnership to enable it to
pay a portion of the deferred bond interest owed to OTEF II,
which OTEF II reported as income in 1998.
Prior to 1998, certain of the original Operating Partnerships
made additional interest payments on their Existing MRBs and
funded certain costs associated with the bond refundings from two
additional sources: advances made by Oxford Development
Corporation ("Oxford") pursuant to its operating deficit
guarantees, and obligations of Oxford and the Operating
Partnerships under the Yield Maintenance Reserve ("YMR")
Agreement. At March 4, 1997 all such obligations were fully
satisfied.
Existing MRBs
As of December 31, 1998, OTEF II held Existing MRBs for two of
the Operating Partnerships. Although the Managing General
Partner is continuing its efforts to refund these Existing MRBs,
no assurances can be given that these bonds can or will be
refunded. As of December 31, 1998, the two Operating
Partnerships had cumulative unpaid Base Interest and interest on
interest at 8.25% per annum, compounded monthly, of approximately
$5.2 million with respect to these Existing MRBs. The unpaid
Base Interest is not accrued in the financial statements of OTEF
II.
<PAGE> 19
Status Quo BACs
Following receipt of an Information Memorandum furnished on
December 2, 1996 to BAC Holders, approximately 4.2% of the BAC
Holders made a timely election to convert their BACs to SQBs.
Effective April 1, 1997, OTEF II issued the SQBs, representing
12,587 shares, in uncertificated, book-entry form. Effective
July 31, 1997, OTEF II redeemed 5,484 SQBs at $540 per SQB for a
total of approximately $3.0 million. During 1998 OTEF II
redeemed an additional 122 SQBs at the price of $540 per SQB and
25 SQBs at the price of $550 per SQB. As of December 31, 1998,
there were 6,946 SQBs outstanding.
On February 8, 1999, OTEF II distributed to existing SQB
Holders an offering circular describing a voluntary offer to
exchange BACs for SQBs on a 25-for-1 basis. The offer expires on
May 30, 1999, unless extended. The Managing General Partner
believes the exchange offer is advantageous to OTEF II for
several reasons. First, elimination of SQBs would simplify OTEF
II's capital structure since they represent a small, non-traded
class of equity. Second, the inability of OTEF II to pledge or
otherwise finance a portion of certain assets that are segregated
for the benefit of SQB Holders can complicate the structuring of
financing transactions undertaken in connection with OTEF II's
Liquidity and Growth Plan. Finally, while SQBs represent
approximately a 2% interest in OTEF II's equity, they require a
substantially greater percentage of the time and effort of OTEF
II's accounting and reporting operations, as well as senior
management.
If all SQB Holders elected to exchange their SQBs for BACs,
OTEF II would issue an additional 173,650 BACs, or approximately
2.4% of the issued and outstanding BACs. This would increase the
total number of issued and outstanding BACs to 7,356,850 (without
giving effect to outstanding options). Any dilution of the
existing BACs, however, would be immaterial because the assets
currently segregated for SQB Holders, along with the income they
generate, would be released to the benefit of BAC Holders.
The Information Memorandum states that, subject to receipt of
a fairness opinion from OTEF II's independent real estate
consultant, non-tendered unexchanged SQBs will be purchased or
redeemed by OTEF II at such time as the Managing General Partner
believes that it would be in the best interests of OTEF II and
the holders of the non-tendered SQBs, but in no event later than
December 31, 2006, which date may be extended under certain
circumstances. The purchase or redemption price will be the fair
market value of the Status Quo Assets at the time of purchase or
redemption, less the costs of sale. As noted above, the Status
Quo Assets includes the Series A Bonds, Series B Bonds and
Existing MRBs allocable to SQB Holders, not the underlying real
estate.
Results of Operations
OTEF II's Operations.
1998 versus 1997. Distributions to Partners amounted to
approximately $15.2 million, or $2.025 per BAC and $49.52 per
SQB. For financial statement purposes, Net Income and Net Income
per BAC were approximately $19.3 million and $2.58, respectively,
for the year ended December 31, 1998, as compared to
approximately $16.6 million and $2.19, respectively, for the year
ended December 31, 1997. Net income per BAC for the year ended
December 31, 1998, assuming dilution for stock options granted in
1997, was $2.56 and $2.18 for 1997.
OTEF II's revenues for 1998 reflect an increase of
approximately $4 million, or 21%, compared to 1997 due primarily
to the Dallas, Carpenter, Jacaranda and Summerwalk transactions,
but also from the increased interest payments on the Original
Refunding Bonds and the Existing MRBs. In 1998, OTEF II also
received an additional $0.51 million from the San Bruno operating
partnership representing payment of deferred interest and an
expense reimbursement in the amount of $0.26 million representing
bond refunding costs previously advanced by OTEF II to certain
operating partnerships.
<PAGE> 20
For 1998, OTEF II's expenses increased by approximately $1.4
million, or 55%, compared to 1997. This increase in expenses
reflects nearly a $1.2 million increase in finance interest
expense and approximately $0.2 million increase in advisory fees,
compared to 1997.
1997 versus 1996. Distributions to Partners amounted to
approximately $14.7 million, or $1.942 per BAC and $36.50 per
SQB. For financial statement purposes, Net Income and Net Income
per BAC were approximately $16.6 million and $2.19, respectively,
for the year ended December 31, 1997, as compared to
approximately $14.9 million and $1.95, respectively, for the year
ended December 31, 1996. Net income per BAC for the year ended
December 31, 1997, assuming dilution for stock options granted in
1997, was $2.18.
OTEF II's revenues for 1997 reflect a decrease of
approximately $0.6 million, or 3%, from 1996. Due to the
refunding of ten Existing MRBs in 1996, OTEF II changed its
accounting method for these assets from cash to accrual. As a
result, OTEF II's revenues for 1996 reflect interest income for
13 months with respect to the Original Refunding Bonds, and for
1997 OTEF II's revenues reflect only 12 months of interest income
with respect to the Original Refunding Bonds.
For 1997, OTEF II's expenses decreased by approximately $2.4
million, or 49%, compared to 1996. This decrease in expenses
reflects nearly a $2.9 million decrease in litigation costs and a
$0.8 million decrease in administrative expenses, offset by
approximately $0.8 million of additional Liquidity and Growth
expenses. In addition, commencing in 1997, OTEF II is required
to report interest expense attributable to the financing
transaction that was completed on August 22, 1997.
Year 2000 Compliance
In accordance with the SEC's interpretive release "Statement
of the Commission Regarding Disclosure of Year 2000 Issues and
Consequences by Public Companies...," the Managing General Partner
of OTEF II has upgraded and tested the principal systems on which
OTEF II relies and believes that they are Year 2000 compliant as
of this date. The Managing General Partner is currently
contacting third parties with whom OTEF II does business to
evaluate their exposure to year 2000 issues. In addition, the
Managing General Partner is in the process of contacting it's
vendors to determine their compliance and is developing
contingency plans. The Managing General Partner believes that
such analysis will be completed in 1999.
THIS REPORT CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, AND SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND IS SUBJECT TO THE SAFE
HARBORS CREATED BY THOSE SECTIONS. THESE FORWARD-LOOKING
STATEMENTS REFLECT MANAGEMENT'S CURRENT VIEWS WITH RESPECT TO
FUTURE EVENTS AND FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS, AND WILL BE AFFECTED BY A VARIETY OF RISKS AND
FACTORS. THESE STATEMENTS ARE SUBJECT TO MANY UNCERTAINTIES AND
RISKS, AND SHOULD NOT BE CONSIDERED GUARANTEES OF FINANCIAL
PERFORMANCE. READERS SHOULD REVIEW CAREFULLY OTEF II's FINANCIAL
STATEMENTS AND THE NOTES THERETO, AS WELL AS RISK FACTORS
DESCRIBED IN THE SEC FILINGS. OTEF II DISCLAIMS ANY OBLIGATION
TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-
LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE FILING OF THE FORM 10 K
WITH THE SEC OR OTHERWISE TO REVISE OR UPDATE ANY ORAL OR WRITTEN
FORWARD-LOOKING STATEMENT THAT MAY BE MADE FROM TIME TO TIME BY
OR ON BEHALF OF OTEF II.
<PAGE> 21
- - -----------------------------------------------------------------
Report of Independent Accountants
- - -----------------------------------------------------------------
To the Partners and BAC Holders of Oxford Tax Exempt Fund II
Limited Partnership:
In our opinion, the accompanying balance sheets and related
statements of income, partners' capital and cash flows present
fairly, in all material respects, the financial position of
Oxford Tax Exempt Fund II Limited Partnership as of December 31,
1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Partnership's Managing General Partner;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management,
and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion expressed above.
PricewaterhouseCoopers LLP
/S/ PricewaterhouseCoopers LLP
- - ------------------------------
PricewaterhouseCoopers LLP
Washington, D.C.
February 12, 1999
<PAGE> 22
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
- - -----------------------------------------------------------------------------
Balance Sheets (in thousands, except per BAC and SQB amounts)
- - -----------------------------------------------------------------------------
December 31, 1998 1997
- - -----------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
Assets
Investments in tax-exempt securities $213,900 $217,159
Investments in tax-exempt securities
held in trust 62,565 38,820
Taxable investments and loans 11,840 0
Cash and cash equivalents 18,011 11,694
Bond and other interest receivables 1,579 1,439
Other assets 1,191 1,551
- - -----------------------------------------------------------------------------
Total Assets $309,086 $270,663
=============================================================================
Liabilities and Partners' Capital
Liabilities
Financing debt $ 47,614 $ 27,174
Distributions payable 3,826 3,719
Accounts payable and accrued expenses 573 2,988
- - -----------------------------------------------------------------------------
Total Liabilities 52,013 33,881
- - -----------------------------------------------------------------------------
Partners' Capital
General Partners' Interests (2,275) (2,356)
Limited Partners' Interests:
Beneficial Assignee Interests <F1>
(7,499,875 interests issued and
7,183,200 and 7,185,200 interests
outstanding as of December 31,
1998 and 1997, respectively) 160,632 156,672
SQB Interests (12,587 interests
issued and 6,946 and 7,093 interests
outstanding as of December 31, 1998
and 1997, respectively) 3,849 3,885
Accumulated other comprehensive income 94,867 78,581
- - -----------------------------------------------------------------------------
Total Partners' Capital 257,073 236,782
- - -----------------------------------------------------------------------------
Total Liabilities and Partners'Capital $309,086 $270,663
=============================================================================
<FN>
<F1> For comparative purposes, BAC Interests have been restated
to reflect the 25-for-1 split which occurred on July 1, 1997.
</FN>
The accompanying notes are an integral part of these financial
statements
</TABLE>
<PAGE> 23
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
- - -----------------------------------------------------------------------------
Statements of Income and Comprehensive Income (in thousands, except per BAC
amounts)
- - -----------------------------------------------------------------------------
<CAPTION>
OTEF II
For the years ended December 31,
-----------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Interest on investments in
tax-exempt securities $18,967<F1> $17,734<F2> $19,411<F3>
Interest on investments in
tax-exempt securities held in trust 2,459 667 0
Interest on taxable investments & loans 837 0 0
Other tax-exempt income 888 729 351
- - -----------------------------------------------------------------------------
Total Revenues 23,151 19,130 19,762
- - -----------------------------------------------------------------------------
Expenses
Governance and administrative expenses 1,020 921 1,692
Litigation and settlement costs 8 265 3,158<F4>
Other liquidity & growth expenses 1,031 840 0
Finance interest expense 1,809 462 0
- - -----------------------------------------------------------------------------
Total Expenses 3,868 2,488 4,850
- - -----------------------------------------------------------------------------
Net income $19,283 $16,642 $14,912
=============================================================================
Other comprehensive income:
Unrealized gains on investments $16,286 $16,084 $51,529
=============================================================================
Comprehensive income $35,569 $32,726 $66,441
=============================================================================
Net income allocated to BAC holders $18,509 $15,893 $14,614
=============================================================================
Net income per BAC <F6> $ 2.576 $ 2.188 $ 1.948
=============================================================================
Weighted average BACs outstanding <F6> 7,185 7,264 7,500
=============================================================================
Net Income per BAC - assuming
dilution <F5> <F6> $ 2.556 $ 2.182 $ N/A
=============================================================================
Weighted average BAC - assuming
dilution <F5> <F6> 7,241 7,284 N/A
=============================================================================
Distribution per BAC <F6> $ 2.025 $ 1.942 $ 1.904
=============================================================================
<FN>
<F1> Includes approximately $0.51 million of deferred interest payments
made by San Bruno-Oxford which were funded from the remaining treasury
strip proceeds as more fully described in note 7.
<F2> Includes approximately $0.24 million representing one additional
month accrual of bond interest on the two bonds which were refunded in
the first quarter of 1997 due to their conversion to "accrual"
basis accounting.
<F3> Includes approximately $1.1 million representing one additional
month accrual of bond interest on the 10 bonds which were refunded in
the fourth quarter of 1996 due to their conversion to "accrual"
basis accounting
<F4> Includes $2.5 million payable by OTEF II in payment of plaintiff's
counsel fees and reimbursement of expenses incurred.
<F5> Stock options were granted in 1997 but have not been exercised.
<F6> Restated to reflect the 25-for-1 stock split effective July 1, 1997.
</FN>
The accompanying notes are an integral part of these financial statements
</TABLE>
<PAGE> 24
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
- - -----------------------------------------------------------------------------
Statement of Partners' Capital (in thousands, except per BAC and SQB amounts)
- - -----------------------------------------------------------------------------
<CAPTION>
Limited Partner Accumulated
For the Years Ended Interests Other
December 31, 1998, 1997, General ---------------- Comprehensive
and 1996 Partners BACs SQBs Income Total
- - -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $(2,400) $161,331 $ 0 $10,968 $169,899
=============================================================================
Comprehensive income:
Net income 298 14,614 0 0 14,912
Unrealized gain on
investments 0 0 0 51,529 51,529
--------------------------------------------------
Total comprehensive
income 298 14,614 0 51,529 66,441
Distributions to Partners,
including $1.904 per BAC<F1> (291) (14,280) 0 0 (14,571)
- - -----------------------------------------------------------------------------
Balance, December 31, 1996 (2,393) 161,665 0 62,497 221,769
=============================================================================
Comprehensive income:
Net Income, including $2.188
per BAC <F1> and $43.62
per SQB 333 15,893 416 0 16,642
Unrealized gains on
investments 0 0 0 16,084 16,084
--------------------------------------------------
Total comprehensive
income 333 15,893 416 16,084 32,726
Allocation of SQB Capital 0 (6,809) 6,809 0 0
SQB Redemptions 0 26 (2,992) 0 (2,966)
Distributions to Partners,
including $1.942 per BAC<F1>
and $36.66 per SQB (296) (14,103) (348) 0 (14,747)
- - -----------------------------------------------------------------------------
Balance, December 31, 1997 (2,356) 156,672 3,885 78,581 236,782
=============================================================================
Comprehensive income:
Net Income, including $2.576
per BAC <F1> and $55.76
per SQB 385 18,509 389 0 19,283
Unrealized gains on
investments 0 0 0 16,286 16,286
--------------------------------------------------
Total comprehensive
income 385 18,509 389 16,286 35,569
SQB Redemptions 0 0 (80) 0 (80)
Distributions to Partners
including $2.025 per BAC<F1>
and $49.52 per SQB (304) (14,549) (345) 0 (15,198)
- - -----------------------------------------------------------------------------
Balance, December 31, 1998 $(2,275) $160,632 $3,849 $94,867 $257,073
=============================================================================
<FN>
<F1> BAC share amounts reflect the 25-for-1 stock split which occurred on
July 1, 1997.
</FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 25
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
- - -----------------------------------------------------------------------------
Statements of Cash Flows (in thousands)
- - -----------------------------------------------------------------------------
<CAPTION>
OTEF II
For the years ended December 31,
----------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $19,283 $16,642 $14,912
Adjustments to reconcile net income to net
cash provided by operating activities:
Changes in assets and liabilities:
Interest receivable and other (140) (307) (1,106)
Due from affiliates 0 0 310
Accounts payable and accrued expenses (877) (333) 2,829
- - -----------------------------------------------------------------------------
Net cash provided by operating activities 18,266 16,002 16,945
- - -----------------------------------------------------------------------------
Investing activities:
Investment in new assets (16,040) (24,366) 0
Redemption of SQBs (80) (2,966) 0
Litigation settlement payments <F1> (1,538) (962) 0
Other assets <F2> 360 (589) 0
- - -----------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (17,298) (28,883) 0
- - -----------------------------------------------------------------------------
Financing activities:
Net proceeds from debt refinancing 20,440 27,174 0
Distribution paid (15,091) (14,671) (14,571)
- - -----------------------------------------------------------------------------
Net cash (used) in financing activities 5,349 12,503 (14,571)
- - -----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 6,317 (378) 2,374
Cash and cash equivalents, beginning of period 11,694 12,072 9,698
- - -----------------------------------------------------------------------------
Cash and cash equivalents, end of period $18,011 $11,694 $12,072
=============================================================================
<FN>
<F1> In connection with the settlement of the OTEF II litigation discussed
in prior reports, OTEF II made a final payment of plaintiff's counsel
fees and expenses in the amount of $1.54 million in the second quarter
of 1998 upon the expiration of all appeal periods and dismissal of the
state court action.
<F2> Other assets represent primarily deferred costs incurred in
connection financing transactions, and acquisitions of BACs by OTEF II
under the previously announced repurchase program, none of which are
recurring operating activities. In 1998 approximately $0.3 million of
deferred costs were reclassified into the taxable loans which are
included in investment in new assets.
</FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 26
- - -----------------------------------------------------------------------------
Notes to Financial Statements
- - -----------------------------------------------------------------------------
Note 1. Financial Statements
The financial statements reflect all adjustments which, in the
opinion of the Managing General Partner of Oxford Tax Exempt
Fund II Limited Partnership ("Oxford Tax Exempt Fund II, "
"OTEF II," or the "Partnership"), are necessary to present fairly
OTEF II's financial position as of December 31, 1998 and 1997,
the Statements of Income and Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996, the Statement of
Partners' Capital as of December 31, 1998, 1997, and 1996, and
the Statements of Cash Flows for the years ended December 31,
1998 and 1997.
Note 2. Business
The Partnership, which was formed under the laws of the State
of Maryland, commenced operations on March 1, 1995, in
connection with a plan (the "1995 OTEF Restructuring Plan") to
restructure Oxford Tax Exempt Fund Limited Partnership, a
Maryland limited partnership ("OTEF," "Predecessor," or
"OTEF II's predecessor"). Oxford Tax Exempt Fund II Corporation,
a Maryland corporation, is the Managing General Partner of
OTEF II (the "Managing General Partner"). OTEF II Associates
Limited Partnership, a Maryland limited partnership, is the
associate general partner of OTEF II (together with the Managing
General Partner, the "General Partners").
General Business. OTEF II is a publicly-traded partnership
(AMEX: OTF) that invests in tax-exempt bonds issued to finance
high quality apartment and senior living/health care communities,
with the objective of producing increasing income and quarterly
distributions for its shareholders. These distributions are
primarily exempt from federal income taxation.
Investments made under the Liquidity & Growth Plan in 1998.
On October 27, 1998, OTEF II acquired $14.2 million Collin County
Housing Finance Corporation Multifamily Housing Mortgage Revenue
Bonds (Carpenter-Oxford Development) Series 1998 (the "Carpenter
Refunding Bonds"). As previously reported, on December 30, 1997,
OTEF II purchased, at a discount, $16.2 million of tax-exempt
bonds issued by the Texas Department of Housing and Community
Affairs. The bonds are collateralized by Steeple Chase
Apartments, a 368-unit apartment community located in Plano,
Texas, that is owned by a privately-held Maryland limited
partnership whose general partners are affiliates of OTEF II
("Carpenter Borrower"). In connection with the recent refunding
transaction, OTEF II exchanged the bonds that it acquired on
December 30, 1997 for the Carpenter Refunding Bonds. The
Carpenter Refunding Bonds bear tax-exempt interest at an annual
fixed rate of 7.25% for an initial term through October 1, 2005,
at which time the Carpenter Refunding Bonds must be remarketed.
The Carpenter Refunding Bonds mature on September 1, 2018,
subject to earlier redemption (optional and mandatory) upon the
occurrence of certain events. In addition, in 1998, OTEF II
funded to the Carpenter Borrower two taxable loans in the
aggregate amount of approximately $0.9 million. The Carpenter
Borrower will apply the net proceeds of this loan to fund certain
capital improvements, and pay transactional, bond refunding and
certain other costs. The taxable loan provides for monthly
payments of interest only at a fixed rate of 9.3% with principal
due at maturity. The taxable loan matures on the same date as
the Carpenter Refunding Bonds and is prepayable on the same terms
and conditions as the Carpenter Refunding Bonds.
On July 20, 1998, OTEF II acquired $10.3 million Texas
Department of Housing and Community Affairs Multifamily Mortgage
Revenue Refunding Bonds (Dallas-Oxford Development) Series 1998
(the "Dallas Refunding Bonds"). As previously reported, on
December 30, 1997, OTEF II purchased, at a discount, $11.7
million of tax-exempt bonds issued by the Texas Department of
Housing and Community Affairs. The bonds are collateralized by
Springhouse Apartments, a 372-unit apartment community located in
Dallas, Texas, that is owned by a privately-held Maryland limited
partnership whose general partners are affiliates of OTEF II
("Dallas Borrower"). In connection with the recent refunding
transaction, OTEF II exchanged the bonds that it acquired on
December 30, 1997 for the Dallas Refunding Bonds. The Dallas
Refunding Bonds bear tax-exempt interest at an annual fixed rate
of 7.25% for an initial term through July 1, 2005, at which time
the Dallas Refunding Bonds must be remarketed. The Dallas
Refunding Bonds mature on April 1, 2018, subject to earlier
redemption (optional and mandatory) upon the occurrence of
certain events. In addition, in 1998, OTEF II funded to the
Dallas Borrower two taxable loans in the aggregate amount of
approximately $0.7 million. The Dallas Borrower will apply the
net proceeds of this loan to fund certain capital improvements,
and pay transactional, bond refunding and certain other costs.
The taxable loan provides for monthly payments of interest only
at a fixed rate of 9.3% with principal due at maturity. The
taxable loan matures on the same date as the Dallas Refunding
Bonds and is prepayable on the same terms and conditions as the
Dallas Refunding Bonds.
<PAGE> 27
On May 28, 1998, Summerwalk Properties L.L.C. (the "Summerwalk
Borrower"), an affiliate of OTEF II, completed its acquisition of
Summerwalk at the Crossings Apartments, a 264-unit garden
apartment community located in a suburb of Atlanta, Georgia
("Summerwalk Transaction"). The total purchase price paid by the
Summerwalk Borrower was approximately $16.65 million. The
property is financed with $10 million of tax-exempt bonds that
bear interest at an adjustable one-year rate, which is currently
3.9%. This debt was assumed by the Summerwalk Borrower in
connection with the acquisition. The tax-exempt bonds are
secured by a first mortgage on the property and held by unrelated
third parties. OTEF II expects to purchase these bonds at a to-
be-determined future date. At the closing, OTEF II purchased a
certificate from a grantor trust, which represents all of the
economic interest of the trust in connection with the Summerwalk
Transaction. The trust made a taxable loan to the Summerwalk
Borrower in the amount of approximately $7.1 million bearing an
annual fixed accrual rate of interest of 12%, with the option of
additional advances to be made in the future. This loan will be
used by the Summerwalk Borrower to fund the balance of the
purchase price for the property, as well as various costs,
expenses, capital improvements and reserves. This taxable loan
is also secured by a subordinated mortgage on the property. The
terms of this loan are anticipated to result in substantially all
of the property's current and expected future increases in both
cash flow and property value being paid to OTEF II as interest on
this loan. OTEF II anticipates that it will restructure the tax-
exempt bonds and the taxable loan as soon as practicable
following the closing, which restructuring may include, among
other things, a refunding of the tax-exempt bonds and a
modification of the interest rate on the tax-exempt bonds to a
higher rate. OTEF II expects to purchase the restructured or
refunded bonds, and may sell or finance all or a portion of the
taxable loan.
On April 30, 1998, OTEF II and an affiliate closed an
investment transaction ("Jacaranda Transaction") involving the
acquisition by OTEF II of approximately $7 million of debt
secured by real estate simultaneously acquired by such affiliate
from a third party. In connection with this transaction,
Jacaranda-Oxford Limited Partnership ("Jacaranda Borrower"), a
Maryland limited partnership, purchased Harbour Town of
Jacaranda, a 280-unit garden apartment community located in
Plantation, Broward County, Florida. The total purchase price
paid by the Jacaranda Borrower was approximately $18.75 million.
The property is financed with $11.8 million of senior, tax-exempt
bonds that bear interest at a weekly floating rate based on a
spread over the applicable short-term, tax-exempt securities
index. The senior bonds are secured by a first mortgage on the
property and are currently held by third parties. OTEF II may
purchase these senior bonds at a future date. At closing, OTEF
II purchased from an unrelated third party $4.2 million of
subordinated, tax-exempt bonds, which currently bear an annual
fixed rate of interest of 6.25% and are secured by a subordinated
mortgage on the property. It is expected that the interest rate
on the subordinated, tax-exempt bonds held by OTEF II will be
increased during 1999. At closing, OTEF II purchased a
certificate from a grantor trust, which represents all of the
economic interest of the trust. The trust made a taxable loan to
the Borrower in the amount of approximately $3.2 million, due on
April 1, 2006, bearing an annual fixed accrual rate of interest
of 12%, with the option to make additional advances in the
future. This loan was used by the Jacaranda Borrower to fund a
portion of the purchase price for the property, as well as
various costs, expenses, capital improvements and reserves. This
loan is secured by a subordinated mortgage on the property. The
terms of this loan are anticipated to result in substantially all
of the property's current and expected future increases in cash
flow, remaining after payment of debt service on the senior and
subordinated bonds, and property value being paid to OTEF II as
interest on this loan.
As previously reported, OTEF II has begun working on bond
refunding and refinancing transactions with respect to the
Jacaranda and Summerwalk properties. The senior tax-exempt bonds
secured by these properties ($11.8 million for Jacaranda and $10
million for Summerwalk) are currently held by third parties. The
letters of credit that secure these bonds expire on August 15,
1999 for Jacaranda and December 15, 2000 for Summerwalk. If
substitute credit enhancement is not provided by such dates, the
senior bonds must be refunded or repaid. Based on its
preliminary discussions, the Managing General Partner anticipates
consummating refunding or refinancing transactions for these
properties where the requirement to maintain letters of credit is
eliminated and the bonds are refinanced or, in the case of
Summerwalk, possibly acquired by OTEF II as part of a
refinancing, although no assurances can be given that these
transactions can be consummated in a timely manner.
<PAGE> 28
Refunding. As of December 31, 1998, OTEF II had completed the
refunding of 12 of the Existing MRBs, which comprise
approximately 88% of the face amount of OTEF II's original bond
portfolio. Although the Managing General Partner is continuing
its efforts to cause the refunding of the remaining Existing
MRBs, no assurances can be given that these bonds can or will be
refunded.
The Original Refunding Bonds consist of senior bonds ("Series
A Bonds") and subordinated bonds ("Series B Bonds"). This
senior/subordinated structure has allowed OTEF II to undertake
several financing transactions involving the Series A Bonds
allocable to BAC Holders. OTEF II retained the related Series B
Bonds for the benefit of BAC Holders, and retained both the
Series A Bonds and Series B Bonds that are designated as Status
Quo Assets and held for the benefit of SQB Holders. See Note 7
to these Financial Statements.
Financing Transactions. OTEF II seeks to enhance its overall
return on investment and to generate proceeds which facilitate
the acquisition of New Assets. To pursue additional investment
opportunities, OTEF II requires additional capital from time to
time. In addition to proceeds from financings, OTEF II may
generally acquire New Assets: (i) from the proceeds of sales or
other dispositions of Original Refunding Bonds (defined below) and the
proceeds from principal payments with respect to the Original Refunding
Bonds (except for the portion of such proceeds allocable to
SQBs), as well as bonds issued to refund any tax-exempt bonds
acquired by OTEF II pursuant to the Liquidity and Growth Plan;
(ii) from the proceeds of sales or other dispositions of New
Assets and the proceeds from principal payments with respect to
New Assets; (iii) from the proceeds of issuances of additional
equity securities, including additional limited partnership
interests in OTEF II and additional BACs; (iv) by issuing
additional equity securities in exchange for New Assets; or (v)
by borrowing funds from lenders or by issuing evidences of
indebtedness.
OTEF II has securitized a total of approximately $62.6 million
of its Series A Bonds by assigning these Series A Bonds to a
Merrill Lynch affiliate which, in turn, deposited them into
trusts. See "Financing Transactions" in Note 3 below. The
trusts, in turn, sold to institutional investors senior, floating
rate securities credit enhanced by a Merrill Lynch affiliate.
These senior securities have first priority on the debt service
payments related to the Series A Bonds. OTEF II acquired all the
subordinated interests in these trusts in the aggregate amount of
approximately $15 million, and received the proceeds from the
sale of the senior securities, less certain transaction costs.
OTEF II has certain rights to repurchase and/or refinance the
Series A Bonds and to repurchase the senior securities and,
therefore, retains a level of control over the Series A Bonds.
These securitization transactions provide low-cost financing for
OTEF II's growth. The portion of the net proceeds from these
transactions that is not invested in New Assets is temporarily
invested in liquid tax-exempt money market securities.
On February 19, 1998, OTEF II closed the second in a series of
transactions with Merrill Lynch, securitizing approximately $12.8
million of Series A Bonds held in OTEF II's portfolio. OTEF II
also purchased a subordinated interest in this securitization
transaction for $3.2 million. OTEF II's net proceeds were
approximately $9.6 million from this transaction, after
transaction costs and the purchase of the subordinated interest.
A portion of these proceeds were used by OTEF II in connection
with the Jacaranda Transaction. On May 21, 1998, OTEF II closed
the third in a series of transactions with Merrill Lynch,
securitizing approximately $11 million of Series A Bonds held in
OTEF II's portfolio. OTEF II also purchased a subordinated
interest in this securitization transaction for $0.1 million.
OTEF II's net proceeds were approximately $10.8 million from this
transaction, after transaction costs and the purchase of the
subordinated interest. A portion of these proceeds were used by
OTEF II in connection with the Summerwalk Transaction. The
remaining proceeds will be used for additional transactions.
Due to the credit enhancement provided by a Merrill Lynch
affiliate in connection with the securitization transactions, and
favorable underwriting characteristics (generally, low loan-to-
value and high debt coverage), this financing debt bears interest
at the BMA weekly floating bond index plus approximately 80 to 85
basis points (including credit enhancement, trustee and related
fees). This rate averaged 4.63% from the date of closing through
December 31, 1997 and 4.33% for the twelve months of 1998. The
credit enhancement associated with approximately $27.2 million of
this financing debt must be renewed or refinanced by August 21,
1999. The remaining $20.4 million of financial debt must be
renewed or refinanced by February 19, 2000 (approximately $9.6
million) and April 15, 2000 (approximately $10.8 million). OTEF
II has certain rights to repurchase the Series A Bonds and the
senior interests involved in these securitization transactions.
While OTEF II is not an obligor and, therefore, is not liable for
repayment of this financing debt, the Series A Bonds (in which
OTEF II owns approximately $15 million of subordinated interests
through the trusts) are in effect collateral for this financing
debt. Based on its preliminary discussions with financing
sources, the Managing General Partner believes that OTEF II will
be able to extend the credit enhancement or refinance this
financing debt.
<PAGE> 29
In connection with these transactions, OTEF II converted the
interest rate mode on the Series A Bonds involved in these
transactions from an annual reset to weekly floaters. On August
22, 1997, and September 21, 1998, OTEF II purchased three-year
interest rate caps on a notional amount of approximately $27
million and $30 million, respectively, to minimize the effects of
interest rate volatility. Under these arrangements, if the
average short-term, tax-exempt interest rates for any month
during the term of the cap increase above a specified level (6%
and 4.5%, respectively), the counter-party to the interest rate
cap transaction is required to pay directly to OTEF II the amount
by which such rates exceed the specified level.
Note 3. Significant Accounting Policies
Method of Accounting. OTEF II's financial statements are
prepared in accordance with generally accepted accounting
principles.
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 dates of the financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates.
Income Taxes. No provision has been made for federal, state,
or local income taxes in the financial statements of OTEF II
since the Partners and OTEF II, formerly OTEF, BAC Holders
(collectively, "OTEF II BAC Holders") are required to report on
their individual tax returns their allocable share of taxable
income, gains, losses, deductions, and credits of OTEF II.
Comprehensive Income. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" which requires
the reporting of comprehensive income as part of a full set of
financial statements. Comprehensive income includes both "Net
Income" and "Other Comprehensive Income". OTEF's only source of
"other comprehensive income" is related to the valuation of its
tax-exempt investments to market which results in unrealized
gains or losses previously charged to an equity account under
SFAS 115 "Accounting for Certain Investments in Debt and Equity
Securities". SFAS 130 does not require presentation of
comprehensive earnings per share. OTEF recorded "Other
Comprehensive Income" from unrealized gains on its investment in
tax-exempt securities of approximately $16.3 million and $16.1
million 1998 and 1997, respectively.
Investments. As previously reported, on June 1, 1995, the
then Existing MRBs were transferred from OTEF to OTEF II at their book
value of approximately $153 million. The OTEF II Managing
General Partner estimated at December 31, 1998 that the fair
value of the Original Refunding Bonds and the Existing MRBs was approximately
$247.9 million and, accordingly, unrealized appreciation on these investments
of $94.9 million is recorded as a credit to partners' capital. The
current fair value of the Existing MRBs was determined by the
Managing General Partner using the same cash flow methodology
applied by a major investment banking firm in connection with
structuring advice rendered to OTEF II and its predecessor with
respect to the 1995 OTEF Restructuring Plan. The Series A Bonds
are valued at par based on comparable municipal bond securities,
and all other bonds (the Existing MRBs and the Series B Bonds)
are valued based on a discounted cash flow analysis. For this
purpose the applicable cash flows are based on certain
assumptions concerning the Properties and the markets in which
they are located, including the timing and realization of such
cash flows. The recently acquired Dallas, Carpenter and
Jacaranda bonds are recorded at cost, which approximates their
fair market values at December 31, 1998.
Investments are accounted for using the provisions of
Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). Under this method the investments are reflected at their
current estimated fair value, with cumulative unrealized gains or
losses being credited or charged as unrealized gains or losses on
investments directly to partners' capital, rather than the
Statement of Income. Interest on all bonds other than the
Existing MRBs are recorded as interest income when due. Interest
income on the Existing MRBs is recorded when received. Accrued
interest on the Series A and Series B Bonds as of December 31,
1998 and 1997 was $1.2 million and $1.4 million, respectively.
<PAGE> 30
Accounting for earnings per share. In February 1997, the Financial
Accounting Standards Board issued a Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings
per share, a measure required by the new standard, does not include
incentive BAC options as common share equivalents. Diluted
earnings per share reflects the potential dilution that could
occur if such options or other contracts to issue shares were
exercised or resulted in the issuance of an incremental amount of
new shares based on the Treasury Method. The Treasury Method
assumes that the proceeds from exercise of the options are used
to purchase shares at the average market price during the
reporting period, which was $26.14 and $25.2 for years ended 1998
and 1997, respectively. The incremental shares (the difference
between the number of shares assumed issued and the number of
shares assumed purchased) is included in the denominator of the
diluted earnings per share computation. In dilutive
"incremental" BAC shares were 7,241,000 in 1998 and 7,284,000 in
1997. For the impact of OTEF II's option plan, see Note 3. "Net
Income and Distributions per Beneficial Assignee Interest (BAC)
and SQB".
Net Income and Distributions per BAC and SQB. Net income and
distributions per BAC and net income and distributions per SQB
are based upon the weighted average number of BACs and SQBs
outstanding during the applicable year. For the first quarter of
1997, there were 7,499,875 BACs outstanding. On April 1, 1997,
314,675 BACs were converted to 12,587 SQBs, leaving 7,185,200
BACs outstanding at December 31, 1997. In December 1998, OTEF II
purchased 2,000 BACs on the open market in accordance with the
previously announced BAC repurchase program, leaving 7,183,200
BACs outstanding at December 31, 1998. During 1998, OTEF II
redeemed an additional 122 SQBs at the price of $540 per SQB and
25 SQBs at the price of $550 per SQB. As of December 31, 1998
there were 6,946 SQBs outstanding. See "Accounting for SQBs"
below.
Statements of cash flows. The statements of cash flows are
intended to reflect only cash receipts and cash payment activity.
The statements do not reflect investing and financing activity
that affect recognized assets or liabilities and do not result in
cash receipts or cash payments. This non-cash activity consists
of distributions payable to Partners, SQB holders and OTEF II BAC
Holders of $3.8 million, $3.7 million, and $3.6 million at
December 31, 1998, 1997, and 1996, respectively. Non-cash
investing activity includes a change in unrealized gain on
investments of approximately $16.3, $ 16.1 and $ 51.5 million for
years ended December 31, 1998, 1997 and 1996, respectively.
Cash and cash equivalents. Cash and cash equivalents consist
of all demand deposits and tax-exempt money market funds stated
at cost, which approximates market value, with original
maturities of three months or less at date of purchase.
Financing Transactions. For financial statement purposes,
the financing transactions described in Note 2 are accounted for
as financing transactions. The amount of the Series A Bonds
financed of approximately $62.6 million is reflected as
Securities Held in Trust, the net cash proceeds are classified as
cash and cash equivalents and the difference between the
principal amount of the Series A Bonds financed and the principal
amount of the subordinated interests acquired by OTEF II is
classified as financing debt on the accompanying balance sheet.
Costs associated with these financing transactions are being
amortized over ten years for financial statement purposes, and
costs associated with the interest rate cap are being amortized
over the life of each interest rate cap agreement, which is three
years. For federal income tax purposes, these transactions are
treated as sales by OTEF II of the applicable Series A Bonds and
a purchase of subordinated interests in the trusts.
Accounting for SQBs. The SQBs are designed to replicate, to
the extent possible, the economic interest that SQB Holders would
have had in the Existing MRBs, as refunded, if the partnership
agreement for Oxford Tax Exempt Fund Limited Partnership
("OTEF"), OTEF II's predecessor, had continued to govern and the
Liquidity and Growth Plan was not implemented.
<PAGE> 31
Following receipt of an Information Memorandum furnished on
December 2, 1996 to BAC Holders, approximately 4.2% of the BAC
holders made a timely election to convert their BACs to SQBs.
Effective April 1, 1997, OTEF II issued the SQBs, representing
12,587 shares, in uncertificated, book-entry form. Effective
August 1, 1997, OTEF II redeemed 5,484 SQBs for approximately
$3.0 million. The redeemed SQB Holders received a final prorated
amount of the distribution that was declared for the quarter
ended September 30, 1997, paid on November 14, 1997. During 1998
OTEF II redeemed an additional 122 SQBs at the price of $540 per
SQB and 25 SQBs at the price of $550 per SQB. As of December 31,
1998 there were 6,946 SQBs outstanding.
The Information Memorandum states that, subject to receipt of
a fairness opinion from OTEF II's independent real estate
consultant, non-tendered unexchanged SQBs will be purchased or
redeemed by OTEF II at such time as the Managing General Partner
believes that it would be in the best interests of OTEF II and
the holders of the non-tendered SQBs, but in no event later than
December 31, 2006, which date may be extended under certain
circumstances. The purchase or redemption price will be the fair
market value of the Status Quo Assets at the time of purchase or
redemption, less the costs of sale. As noted above, the Status Quo Assets
includes the Series A Bonds, Series B Bonds and Existing MRBs allocable to
SQB Holders, not the underlying real estate.
For financial statement purposes, the SQBs are treated as a
separate class of equity and, accordingly, net income allocated
to SQB holders, net income per SQB, and distribution per SQB are
reflected separately from the OTEF II BAC Holders on the
Statement of Partners' Capital. The SQBs were not split as were
the OTEF II BACs on July 1, 1997. The redeemed SQBs are
reflected as a reduction of Partners' Capital and were offset
against the SQB Holders' interests when redeemed.
The SQB Holders do not share in the growth or other benefits
expected to be achieved under the Liquidity and Growth Plan. In
addition, the SQBs are not allocated any capital losses for
federal income tax purposes that may result from the disposition
of the Refunding Bonds or interests therein or new assets in
connection with a financing undertaken pursuant to the Liquidity
and Growth Plan. A schedule of SQB income as of December 31,
1998 is as follows:
<TABLE>
- - ------------------------------------------------------------------------------
STATEMENT OF STATUS QUO BAC INCOME BY QUARTER (in thousands, except per
interest) (Unaudited)
- - ------------------------------------------------------------------------------
<CAPTION>
For the Three Months Ended in 1998
--------------------------------------------
March 31 June 30 September 30 December 31
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Interest on Investments in
tax-exempt securities $ 109 $ 103 $ 108 $ 126
Other tax-exempt income 3 3 3 8
- - ------------------------------------------------------------------------------
112 106 111 134
Expenses
Governance and Administration 22 13 16 22
Litigation and Settlement 1 0 0 0
- - ------------------------------------------------------------------------------
23 13 16 22
Net income allocation to
SQB holders $ 89 $ 93 $ 95 $ 112
==============================================================================
Other comprehensive income;
Unrealized gains on investment $ 3 $ 35 $ 114 $ 225
==============================================================================
Comprehensive income $ 92 $ 128 $ 209 $ 337
==============================================================================
Net income per SQB interest $12.63 $13.31 $13.77 $16.05
==============================================================================
Distribution per SQB interest $12.38 $12.38 $12.38 $12.38
==============================================================================
Weighted average SQB shares
outstanding 7,025 6,961 6,946 6,946
==============================================================================
</TABLE>
Note 4. Related Party Transactions
Interests in OTEF II and the Operating Partnerships. The
General Partners own interests in OTEF II that entitle them to
receive a share of OTEF II's cash flow and possibly of sale,
refinancing and liquidation proceeds. Distributions to the
General Partners totaled approximately $0.3 million for December
31, 1998, 1997 and 1996.
<PAGE> 32
Affiliates of the Managing General Partner that are general
and limited partners of the Operating Partnerships have an
interest in the Operating Partnerships that entitles them to
receive a share of any cash flow and sale, refinancing and
liquidation proceeds of the Operating Partnerships. Since
inception, the original Operating Partnerships have not been able
to make any distributions of cash flow to their respective
partners. In addition, in connection with the 1995 OTEF
Restructuring Plan and after each Existing MRB is refunded, all
cash flow from each such Operating Partnership that is
attributable to these interests will be pledged for the benefit
of OTEF II. At the end of 1997, OTEF II acquired the tax-exempt
bonds that are collateralized by the properties owned by the
Carpenter Borrower and the Dallas Borrower, both of which are
affiliates of the Managing General Partner of OTEF II.
Affiliates of the Managing General Partner receive fees from
these partnerships and serve as their general partners, which
entitles them to a share of any cash flow and refinancing and
liquidation proceeds from these partnerships.
Compensation and Fees. During the year ended December 31, 1998
total compensation paid to Oxford Realty Financial Group, Inc.
("ORFG") and other Oxford affiliates by OTEF II amounted to
approximately $0.6 million with no such compensation accruing in
the years 1997 and 1996, as discussed below.
As discussed above, ORFG provides various management services
relating to the Existing Mortgaged Properties and OTEF II's
investment therein. It also provides additional services in
connection with OTEF II's investment in New Assets, as described
below. The fees payable to ORFG for the services it is providing
currently (the "Existing Fees") are operating expenses of the
Operating Partnerships that are payable prior to the payment of
interest on the Existing MRBs.
ORFG receives an acquisition fee from OTEF II for finding,
analyzing and acquiring a New Asset. The acquisition fee,
which is payable on the closing of any transaction in which
OTEF II acquires a New Asset, is equal to 1.0% of (i) the
purchase price paid by OTEF II for the New Asset, or (ii) with
respect to a New Asset which is subordinated in payment to senior
indebtedness, the sum of (A) the purchase price paid by OTEF II
for its subordinated interest and (B) the principal amount of the
senior interest, if any; provided, however, that no acquisition
fee shall be paid with respect to the principal amount of any
such senior interest if OTEF II has not purchased the senior
interest and neither the Managing General Partner nor any of its
affiliates had any material involvement in the negotiation,
structuring or closing of the purchase of the senior interest.
In the case of a New Asset which is subordinated in payment to
senior indebtedness as of the closing of the transaction in which
OTEF II acquires its interest, the maximum acquisition fee
payable shall be equal to 2.5% of the purchase price paid by
OTEF II for such interest as of the date of closing. ORFG's
acquisition fees were earned and paid by the Carpenter Borrower
and the Dallas Borrower in 1998 upon closing of the bond
refunding transactions. Total acquisition fees paid by OTEF II
to ORFG in 1998 were approximately $0.35 million.
OTEF II also pays ORFG an advisory fee for managing OTEF II's
New Assets after their acquisition. The advisory fee, which is
payable monthly, is equal to 0.5% of (i) the purchase price paid
by OTEF II for a New Asset, or (ii) with respect to a New Asset
which is subordinated in payment to senior indebtedness, the sum
of (A) the purchase price paid by OTEF II for its subordinated
interest and (B) the principal amount of the senior interest;
provided, however, that if an affiliate of the Managing General
Partner is receiving fees for property management services
pursuant to a property management agreement entered into with the
owner of an additional mortgaged property ("Additional Mortgaged
Property") the advisory fee will be equal to 0.5% of the purchase
price paid by OTEF II for the related New Asset. In addition, if
the Managing General Partner receives in any year compensation or
fees from an unaffiliated person that serves as the property
manager for the Additional Mortgaged Property, the amount of the
advisory fee payable with respect to the related New Asset shall
be reduced by 50% of any such compensation or fees received by
the Managing General Partner. The advisory fees associated with
the acquisition of the Dallas, Carpenter, Jacaranda and
Summerwalk investments commenced in 1998. Total advisory fees
paid by OTEF II to ORFG in 1998 were approximately $0.25 million.
For the year ended December 31, 1998, the Operating
Partnerships, including the Carpenter Borrower and the Dallas
Borrower, paid ORFG total asset management fees of approximately
$0.8 million. In December 31, 1997 and 1996, the original
Operating Partnerships paid ORFG total asset management fees of
approximately $0.6 million, respectively. The original Operating
<PAGE> 33
Partnerships also paid ORFG, in the aggregate, $0.7 million of
fees pursuant to the OTEF Restructuring Plan Administration/Asset
Management Fee Agreement, which amount is equal to 0.25% per
annum of the principal amount of the bonds collateralized by the
properties owned by the original Operating Partnerships
("Existing Mortgaged Properties"). Oxford affiliates may also
receive other fees and expense reimbursements from entities other
than OTEF II in connection with the acquisition, financing or
refinancing, operation, repair, replacement and improvement of
Mortgaged Properties.
Expense Reimbursements. OTEF II and the Operating
Partnerships also reimburse ORFG for certain expenses it incurs
in providing services with respect to the mortgaged properties
and the administration of OTEF II's affairs. Total
reimbursements to the General Partners and their affiliates for
the years ended December 31, 1998, 1997 and 1996 were
approximately $0.7 million, $0.6 million, and $0.4 million,
respectively. The Managing General Partner anticipates that the
amount of expense reimbursements payable by OTEF II will increase
in accordance with the terms of OTEF II's partnership agreement
due, in part, to the additional acquisition and financing
activities relating to the Liquidity and Growth Plan. The
portion of the expense reimbursement relating to salaries is
determined based on the actual time the officers and employees
devote to OTEF II based upon their respective wage rate.
Incentive Option Plan. On May 21, 1997, OTEF II adopted an
incentive option plan (the "Incentive Option Plan") in order for
the Managing General Partner to attract and retain key employees
and advisers. The Incentive Option Plan authorizes the granting
to the directors, officers and employees of the Managing General
Partner and certain affiliates of options to purchase 652,125
OTEF II BACs (on a post-split basis), representing approximately
8.3% of the outstanding OTEF II BACs on a fully diluted basis.
Such options are exercisable for 10 years. The Managing General
Partner has awarded all of the OTEF II BACs authorized under the
terms of the Incentive Option Plan. Of the 652,125 options,
613,000 were fully vested upon issuance and 39,125 are vested
equally over 3 years commencing January 1, 1998. The exercise
price for all options is $23.88 per BAC, which approximated the
fair market value at the date of grant. At December 31, 1998 the
market price of $23.50 was less than the exercise price. Since
the date of grant, no options have been exercised.
Note 5. Capital, Profits, Losses, and Cash Distributions
The following discussion summarizes certain rights of the BAC
Holders and the SQB Holders following the SQB Issuance Date.
Rights to Allocations and Distributions
Capital Accounts. Following the Status Quo BAC Issuance Date,
the BAC Holders who retained their OTEF II BACs initially had
the same Capital Accounts as they had prior to the Status Quo BAC
Issuance Date. Their Capital Accounts and the Capital Accounts
of the other BAC Holders (the "Liquidity Capital Accounts") are
increased by Profits relating to the Liquidity Assets and the New
Assets ("Liquidity Profits"), but not by any Profits relating to
the Status Quo Assets ("Status Quo Profits"), and are reduced by
the amount of all distributions made to them by OTEF II (which
distributions are made only from cash flow attributable to the
Liquidity Assets and the New Assets, the "Liquidity Cash Flow")
and Losses relating only to the Liquidity Assets and the New
Assets ("Liquidity Losses"), but not by any Losses relating to
the Status Quo Assets ("Status Quo Losses").
SQB Holders also initially had the same Capital Accounts as
they had prior to the conversion of their OTEF II BACs into SQBs.
Their Capital Accounts (the "Status Quo Capital Accounts") are
increased by the Status Quo Profits, but not by any Liquidity
Profits, and are reduced by the amount of all distributions made
to them by OTEF II (which distributions will be made only from
cash flow attributable to the Status Quo Assets, the "Status Quo
Cash Flow") and all Status Quo Losses, but not by any Liquidity
Losses. OTEF II maintains two Capital Accounts (a Liquidity
Capital Account and a Status Quo Capital Account) for BAC Holders
who elected to convert only a portion of their OTEF II BACs into
SQBs.
Distributions of Cash Flow. Liquidity Cash Flow and Status
Quo Cash Flow are distributed as described below.
<PAGE> 34
Liquidity Cash Flow. Liquidity Cash Flow in any year will
first be distributed 98% to the BAC Holders and 2% to the General
Partners until the BAC Holders as a class (other than the
holder(s) of the Affiliated OTEF II BACs) have received, during
such year, a noncumulative 11% preferred return on the BAC
Holders' Preference Amount (as defined below) and, thereafter,
during such year, 90% to the BAC Holders as a class and 10% to
the General Partners. The "BAC Holders' Preference Amount" means
an amount equal to the total capital contributions of the BAC
Holders to OTEF or OTEF II, reduced by any distributions of
residual proceeds previously made to them by OTEF, and further
reduced by all distributions of Liquidity Residual and
Liquidation Proceeds (defined below) made by OTEF II to the BAC
Holders.
Status Quo BAC Cash Flow. All Status Quo Cash Flow in any
year will first be distributed 98% to the SQB Holders as a class
and 2% to the General Partners until the SQB Holders as a class
(other than the holder(s) of the Affiliated SQBs, if any) have
received a noncumulative return in such year equal to 11% of the
SQB Holders' Preference Amount (defined below) and, thereafter,
during such year, 90% to the SQB Holders as a class and 10% to
the General Partners. The "SQB Holders' Preference Amount" means
an amount equal to the total capital contributions of the SQB
Holders to OTEF, reduced by any distributions of residual
proceeds previously made to them by OTEF, and further reduced by
all distributions of Status Quo Residual and Liquidation Proceeds
(defined below) made by OTEF II to the SQB Holders.
Distributions of Residual Proceeds and Liquidation Proceeds.
All Residual Proceeds, which in general, means the cash OTEF II
receives from the sale of a Mortgaged Property or New Asset
("Sale") or the repayment of the principal and interest payable
upon maturity or remarketing of a Mortgage Revenue Bond
("Repayment") other than a Sale or Repayment that occurs in
connection with the liquidation of OTEF II, will be designated as
"Liquidity Residual Proceeds" to the extent such Residual
Proceeds relate to the Liquidity and New Assets and as "Status
Quo Residual Proceeds" to the extent that they relate to the
Status Quo Assets. The Liquidity Residual Proceeds, but not the
Status Quo Residual Proceeds, may be reinvested in New Assets at
the discretion of the Managing General Partner. The Liquidity
Residual Proceeds, to the extent they are not reinvested, and the
Status Quo Residual Proceeds will be applied and distributed
generally as described below.
Liquidity Residual and Liquidation Proceeds. The Liquidity
Residual Proceeds shall be applied to the payment of the expenses
allocable to the BACs or reinvested in New Assets at the
discretion of the Managing General Partner, and to the extent not
so applied or reinvested, shall be available for distribution, in
which case such amounts generally shall be applied and
distributed in the following amounts and order of priority:
(a) 100% to the payment of all debts and obligations of OTEF II
that are then due and owing related to the Liquidity and New
Assets (other than loans from the General Partners and their
affiliates) and to any additions to the Liquidity Working Capital
Reserve that the Managing General Partner may determine to be
necessary;
(b) 100% to the BAC Holders as a class (other than the holder(s)
of the Affiliated OTEF II BACs) until the BAC Holders (other than
the holder(s) of the Affiliated OTEF II BACs) receive aggregate
distributions from Liquidity Residual Proceeds equal to the BAC
Holders' Preference Amount;
(c) 100% to the holder(s) of the Affiliated OTEF II BACs in
an amount equal to $1,000 times the number of Affiliated
OTEF II BACs, less any prior distributions of Residual
Proceeds with respect to such Affiliated OTEF II BACs;
(d) 100% to the General Partners and their affiliates to
repay loans, if any, from them to OTEF II, with interest
thereon, except to the extent the proceeds of any such
loans were used to pay amounts relating to the Status Quo
Assets or OTEF II's ownership thereof;
(e) 100% to the General Partners until the General Partners
receive aggregate distributions from Liquidity Residual
Proceeds and Status Quo Residual Proceeds equal to the
General Partners' Preference Amount (generally, an amount
equal to the total capital contributions of the General
Partners to OTEF II reduced by all distributions of
Liquidity Residual and Liquidation Proceeds and Status Quo
Residual and Liquidation Proceeds); and
<PAGE> 35
(f) the remainder, if any, 98% to the BAC Holders and 2% to
the General Partners, except that the 2% return to the
General Partners generally is deferred until the BAC
Holders receive an amount (when combined with all prior
distributions of Liquidity Cash Flow and Liquidity Residual
Proceeds) equal to an average annual noncompounded return
of 10% on the BAC Holders' Preference Amount.
Liquidity Liquidation Proceeds (which, in general, means all
cash receipts of OTEF II arising from the dissolution of OTEF II
and liquidation of the Liquidity and New Assets) generally will
be distributed in the same order of priority as Liquidity
Residual Proceeds, except the first application of Liquidity
Liquidation Proceeds will be to establish certain reserves.
If Liquidity Residual Proceeds or Liquidity Liquidation
Proceeds are insufficient to make any payment set forth in a
particular paragraphs (b) through (f) above, then Liquidity
Residual Proceeds or Liquidity Liquidation Proceeds available to
make the payment will be distributed proportionately among the
parties entitled to the payment under such paragraph.
Status Quo Residual and Liquidation Proceeds. Status Quo
Residual Proceeds shall be applied to the payment of the expenses
allocable to the SQBs, and to the extent not so applied, shall be
available for distribution, in which case such amounts generally
shall be applied and distributed in the following amounts and
order of priority:
(a) 100% to the payment of all debts and obligations of
OTEF II that are then due and owing related to the Status
Quo Assets (other than loans from the General Partners and
their affiliates) and to any additions to the Status Quo
Working Capital Reserve that the Managing General Partner
may determine to be necessary;
(b) 100% to the SQB Holders as a class (other than the
holder(s) of the Affiliated SQBs, if any) until the SQB
Holders (other than the holder(s) of the Affiliated SQBs,
if any) receive aggregate distributions from Status Quo
Residual Proceeds equal to the SQB Holders' Preference
Amount;
(c) 100% to the holder(s) of the Affiliated SQBs in an amount
equal to $1,000 times the number of Affiliated SQBs, less
any prior distributions of Residual Proceeds (and prior
distributions of residual proceeds by OTEF) with respect to
such Affiliated SQBs;
(d) 100% to the General Partners and their affiliates to
repay loans, if any, from them to OTEF II, the proceeds of
which were used to pay amounts relating to the Status Quo
Assets or OTEF II's ownership thereof;
(e) 100% to the General Partners until the General Partners
receive aggregate distributions from Liquidity Residual
Proceeds and Status Quo Residual Proceeds equal to the
General Partners' Preference Amount; and
(f) 98% to the SQB Holders as a class and 2% to the General
Partners until the SQB Holders as a class have received an
amount (when combined with all prior distributions of cash
flow and residual proceeds) equal to an average annual
noncompounded return of 11% on the SQB Holders' Preference
Amount, except that the amounts otherwise payable to the
General Partners hereunder shall be deferred until the SQB
Holders as a class have received an amount (when combined
with all prior distributions of cash flow and residual
proceeds) equal to an average annual noncompounded return
of 10% on the SQB Holders' Preference Amount.
<PAGE> 36
Status Quo Liquidation Proceeds (which, in general, means all
cash receipts of OTEF II arising from the dissolution of OTEF II
and liquidation of the Status Quo Assets) generally will be
distributed in the same order of priority as Status Quo Residual
Proceeds, except the first application of Status Quo Liquidation
Proceeds will be to establish certain reserves.
If Status Quo Residual Proceeds or Status Quo Liquidation
Proceeds are insufficient to make any payment set forth in a
particular paragraphs (b) through (f) above, then Status Quo
Residual Proceeds or Status Quo Liquidation Proceeds available to
make the payment will be distributed proportionately among the
parties entitled to the payment under such paragraph.
Allocation of Profits and Losses. Liquidity Profits from
operations generally will be allocated between the BAC Holders
and the General Partners as follows: first, in accordance with
distributions of Liquidity Cash Flow, until the cumulative
Liquidity Profits so allocated are equal to the cumulative
Liquidity Cash Flow distributions, and thereafter 2% to the
General Partners and 98% to the BAC Holders. Liquidity Losses
from operations generally will be allocated 2% to the General
Partners and 98% to the BAC Holders. Liquidity Profits and
Liquidity Losses arising from a Sale or Repayment (including
Liquidity Profits which represent the receipt of interest income
on a Mortgage Revenue Bond) or liquidation of OTEF II generally
will be allocated in a manner so as to cause the Liquidity
Capital Account balances of the General Partners and BAC Holders
to equal the amounts that would be distributable to them.
Status Quo Profits from operations generally will be allocated
between the SQB Holders and the General Partners as follows:
first, in accordance with distributions of Status Quo Cash Flow,
until the cumulative Status Quo Profits so allocated are equal to
the cumulative Status Quo Cash Flow distributions, and thereafter
2% to the General Partners and 98% to the SQB Holders. Status
Quo Losses from operations generally are allocated 2% to the
General Partners and 98% to the SQB Holders. Status Quo Profits
and Losses arising from a Sale or Repayment of a Status Quo Asset
(including Status Quo Profits which represent the receipt of
interest income on a Mortgage Revenue Bond) or liquidation of
OTEF II generally will be allocated in a manner so as to cause
the Status Quo Capital Account balances of the General Partners
and SQB Holders to equal the amounts that would be distributable
to them.
The above allocations of Liquidity and Status Quo Profits and
Losses will be subject to compliance with the principles of the
Internal Revenue Code of 1986 (the "Code") sections 704(b)
(containing rules concerning the determination of a partner's
distributive share and capital account maintenance) and 704(c)
(containing rules for reflecting disparities in the adjusted tax
basis and the fair market value of property contributed or
revalued by a partnership) and the regulations promulgated
thereunder.
Note 6. BAC Holder Rights Plan
OTEF II and the Managing General Partner entered into a BAC
Holder Rights Agreement dated May 30, 1995 with Crestar Bank
which governs the terms of the BAC Holder Rights Plan. Under the
BAC Holder Rights Plan, one Right was issued for each outstanding
BAC to BAC Holders of record immediately following the
distribution of the BACs to the holders of OTEF BACs. Each Right
entitles the holder thereof to buy one OTEF II BAC at an exercise
price of $1,000, subject to adjustment, until May 30, 2005, or an
earlier redemption by OTEF II.
In the event OTEF II issues additional BACs, the BAC Holder
Rights Plan provides that Rights will be issued to the holders of
such OTEF II BACs in accordance with the BAC Holder Rights
Agreement. Rights will not be issued with respect to the SQBs
and the Rights previously issued with respect to BACs that are
converted into SQBs will be canceled.
The Rights could cause substantial dilution to a person or
group that attempts to acquire OTEF II in a manner or on terms
not approved by the Managing General Partner and therefore may
make it more costly or difficult to acquire control of OTEF II,
which could have the effect of discouraging takeover attempts and
make it more difficult to remove the existing management of
OTEF II. The Rights, however, should not deter any prospective
offeror willing to negotiate in good faith with the Managing
General Partner.
<PAGE> 37
As part of the settlement of the OTEF II Litigation, the
Managing General Partner has agreed to amend the OTEF II
partnership agreement to provide that, if the Managing General
Partner or an affiliate of the Managing General Partner (other
than OTEF II), initiates a tender offer in which the Managing
General Partner or its affiliate offers to purchase more than 10%
of the BACs then outstanding, and at the time such tender offer
is initiated there is not pending any public offer to purchase
OTEF II BACs by any person, then the Managing General Partner
will not employ the OTEF II BAC Holder Rights Plan so as to
prevent the closing of any subsequent competing offer to purchase
BACs that may be published and that is outstanding prior to the
published termination date of the tender offer by the Managing
General Partner or an affiliate (regardless of any earlier
termination of the offer by the Managing General Partner or an
affiliate).
Note 7. Investments in Tax-Exempt and Taxable Securities
As shown in the tables below, at December 31, 1998, OTEF II
owned beneficial interests, whether direct or indirect, in the
following financial assets: (i) $276.5 million of tax-exempt
bonds, and $11.8 million of taxable loans. The $276.5 million of
tax-exempt bonds includes the following: (i) $154.6 million of
Original Refunding Bonds, (ii) $62.6 million of Securities Held
in Trust, (iii) $30.7 million of Existing MRBs, (iv) $24.4
million of recently acquired senior refunding bonds, and (v) $4.2
million of recently acquired subordinated bonds. These financial
assets are collateralized by mortgage loans on the properties to
which this debt relates. The safekeeping and administration of
these financial assets is performed by various trustees under the
terms of the Trust Indentures.
Other Sources. In connection with the closing of each
Original Refunding Bond, the applicable Operating Partnerships
entered into certain pooling agreements which may provide under
certain circumstances additional sources of funds to enable them
to pay their respective debt service on the Series A Bonds and
the Series B Bonds and related fees and expenses. As of December
31, 1998, the aggregate amount of net excess cash flow held in
the Operating Partnership escrows was approximately $2.2 million,
including deposits from the December 1998 cash flow.
During 1998, Oxford Development Corporation ("Oxford") advanced
to certain of the original Operating Partnerships all remaining
treasury strip proceeds in the amount of approximately $1.34
million. Of this amount, approximately $0.10 million was
advanced to the Allview operating partnership and $0.45 million
to the Colonel operating partnership. An additional $0.28
million was advanced to various operating partnerships to help
defray their respective bond refunding costs that were previously
incurred. The final $0.51 million was advanced to the San Bruno
operating partnership to enable it to pay a portion of the
deferred bond interest owed to OTEF II, which OTEF II reported as
income in 1998.
Prior to 1998, certain of the original Operating Partnerships
made additional interest payments on their Existing MRBs and
funded certain costs associated with the bond refundings from two
additional sources: advances made by Oxford pursuant to its
operating deficit guarantees, and obligations of Oxford and the
Operating Partnerships under the Yield Maintenance Reserve
("YMR") Agreement. All YMR obligations were satisfied in full on
March 4, 1997.
Existing MRBs. As of December 31, 1998, OTEF II held Existing
MRBs for two of the original Operating Partnerships. The
Managing General Partner is continuing its efforts to cause the
refunding of these Existing MRBs.
The table below sets forth the cumulative Unpaid Base Interest
and Interest on Unpaid Base Interest as of December 31, 1998 for
Existing MRBs:
<TABLE>
- - -----------------------------------------------------------------------------
<CAPTION>
(In thousands)
-----------------------------------
Interest on Unpaid
Unpaid Base
Property Name/Partnership Name Base Interest Interest Total
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
San Bruno (San Bruno) (2 Existing MRB's) $ 208 $ 448 $ 656
The Harbour (Apollo) 1,622 2,948 4,570
- - -----------------------------------------------------------------------------
Total $1,830 $3,396 $5,226
=============================================================================
</TABLE>
The above unpaid interest has not been accrued or recorded as income.
<PAGE> 38
Original Refunding Bonds (Series A Bonds). The term of each
Original Refunding Bond and, accordingly, each Mortgage Loan is
30 years following the date of refunding. The Series A Bonds
require interest only payments during the first three years and,
thereafter, are subject to annual sinking fund redemptions that
will result in full amortization of the Series A Bonds during the
27-year remaining term. This annual sinking fund redemption
begins April 15, 2000 for all twelve Series A Bonds. The
Managing General Partner is considering whether the elimination
of this annual sinking fund redemption would facilitate financing
transactions involving these assets or would otherwise be
advantageous to OTEF II.
Series A Bond Interest and Principal. The Series A Bonds
require pre-determined annual sinking fund redemptions based on a
27-year amortization schedule beginning in the fourth year,
calculated with an assumed rate of interest of 5.6% per year. In
the annual reset mode, Series A Bond interest was set initially
at closing of the refundings and is reset annually thereafter at
a market rate based upon a percentage of the then prevailing one-
year U.S. Treasury Bill rate, with a maximum rate of 5.6% per
annum. The initial interest rate on the Series A Bonds that have
been issued to date was 4.9%. The interest rate on seven of the
Series A Bonds retained by OTEF II was reset on November 1, 1998
to 3.75%; the interest rate on three Series A Bonds retained by
OTEF II was reset on December 1, 1998 to 4.01%. On January 1,
1999, the interest rate on one Series A Bond retained by OTEF II
was reset to 4.03%, and the interest rate on another Series A
Bond was reset on March 1, 1999 to 4.32%. The interest rate on
the Series A Bonds involved in the financing transactions
described above was converted from annual reset to a weekly
floating rate based on a spread over the BMA index. This rate
averaged 4.63% from the date of closing through December 31, 1997
and 4.33% for the twelve months of 1998. Upon a remarketing, the
Series A Bonds may be converted to a different interest rate mode
(fixed or floating) and the interest rates may be modified at
that time to reflect the prevailing market interest rates for
whatever rate mode and remaining term is then applicable.
Original Refunding Bonds (Series B Bonds). The term of each
Series B Bond and, accordingly, each Mortgage Loan is 30 years
following the date of refunding.
Series B Bond Interest and Principal. The Series B Bonds
accrue interest equal to the product of the Combined Rate (as
defined below) multiplied by the total combined principal balance
of the Series A Bonds and the Series B Bonds for each Operating
Partnership, less the interest payable on the related Series A
Bonds; the resulting amount of interest divided by the principal
balance of the Series B Bonds equals the interest accrual rate on
the Series B Bonds. Interest-only is payable on the Series B
Bonds to the extent of available cash flow of the Operating
Partnerships, with the entire principal balance due at maturity.
<TABLE>
The Combined Rates on the Original Refunding Bonds over the next 10 years
are as follows:
- - ----------------------------------------------------------------------------------
<CAPTION>
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Akron 9.04% 8.38% 8.73% 9.07% 9.43% 9.82% 10.22% 10.65% 11.11% 11.60%
Allview <F1> 7.77% 7.24% 7.54% 7.82% 8.12% 8.44% 8.77% 9.12% 9.50% 9.89%
Colonel 4.61% 4.23% 4.90% 5.08% 5.26% 5.46% 5.66% 5.87% 6.09% 6.32%
Fox Valley <F1> 7.50% 6.95% 7.23% 7.51% 7.79% 8.10% 8.42% 8.75% 9.11% 9.49%
Middletown 7.67% 7.13% 7.42% 7.70% 8.00% 8.31% 8.64% 8.99% 9.36% 9.75%
Ocala 8.94% 8.35% 8.70% 9.04% 9.39% 9.77% 10.17% 10.60% 11.05% 11.53%
Schaumburg <F1> 6.38% 5.84% 6.09% 6.32% 6.56% 6.81% 7.08% 7.36% 7.65% 7.97%
Southridge 5.53% 5.11% 5.32% 5.52% 5.72% 5.93% 6.16% 6.39% 6.64% 6.89%
Tidewater <F1> 7.57% 6.98% 7.27% 7.56% 7.85% 8.16% 8.49% 8.84% 9.21% 9.60%
Travis 5.63% 5.14% 5.36% 5.56% 5.76% 5.98% 6.21% 6.45% 6.70% 6.96%
Westridge <F1> 6.46% 5.97% 6.22% 6.45% 6.69% 6.95% 7.22% 7.50% 7.80% 8.12%
Williamsburg <F1> 8.05% 7.47% 7.78% 8.09% 8.40% 8.74% 9.09% 9.47% 9.86% 10.29%
- - ----------------------------------------------------------------------------------
<FN>
<F1> Note that even though the Series A Bonds bears interest at a
spread over the weekly BMA floating rate index, as previously
described under "Financing Transaction", the rate associated
with the related Series B Bonds must fluctuate to maintain the
"Combined Rate" stated above. Consequently, the financing
transaction has no effect on the combined rate of these select
bonds.
</FN>
</TABLE>
<PAGE> 39
The Combined Rates decrease in the fourth year following the
date of refunding due to the principal payments commencing under
the Original Refunding Bonds and, thereafter, the Combined Rates
increase every year through the remaining term of the Original
Refunding Bonds.
The table below sets forth the cumulative taxable investments
and loans as of December 31, 1998:
<TABLE>
=============================================================================
Schedule of Taxable Investments and Loans (in thousands except interest rate)
=============================================================================
<CAPTION>
Principal at Annualized Monthly
Property December 31, 1998 Interest Rate Interest <F1>
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Dallas $ 680 9.30% $ 5
Carpenter 915 9.30% 7
Jacaranda 3,174 12.00% 32
Summerwalk 7,070 12.00% 71
- - -----------------------------------------------------------------------------
Total $11,839 N/A $115
- - -----------------------------------------------------------------------------
<FN>
<F1> Monthly interest is accrued at the stated interest rate. Payments are
received according to cash availability.
</FN>
</TABLE>
Guarantees. In connection with the Summerwalk investment, OTEF II,
along with the operating partnership that owns this property, executed a
guaranty agreement relating to payment of issuer and trustee fees and
expenses (including expenses of their respective counsel), as well as an
indemnity agreement relating to environmental matters pertaining to the
property. OTEF II obtained Phase I environmental site assessment reports
for the Summerwalk and Jacaranda investments which, subject to the
limitations stated therein, conclude generally that no adverse
environmental conditions requiring remediation exist at either site.
Accordingly, the Managing General Partner believes that OTEF II does not
have material financial exposure under these agreements. OTEF II may
execute similar agreements in connection with new investments made after
the date of this report.
<PAGE> 40
Notes to Financial Statements
Note 7. Investments in Bonds (continued)
<TABLE>
Information on the Bonds as of December 31, 1998 and 1997 (in thousands) and the related properties is as follows:
<CAPTION>
Carrying Value at 12/31/98 1998 1997 Total Monthly Interest
Combined -------------------------- Unrealized Unrealized Carrying----------------
Maturity Face Other A B Gain or Gain or Value @ Other A B
Bond Investment Date Amount Bond Bond Bond Total (Loss) (Loss) 12/31/97 Bond Bond Bond
- - --------------------------------------------------------------------------------------------------------------------------------
REFUNDED BONDS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Chesapeake Landing, November 2026 $ 25,450 $ 0 $ 13,102 $ 12,264 $ 25,366 $11,253 $ 9,407 $ 23,520 $ 0 $ 41 $ 118
Fox Valley-Oxford L.P.<F1>
Hunt Club, December 2026 20,270 0 8,732 6,814 15,546 2,791 1,801 14,557 0 29 66
Travis One-Oxford L.P.
Savannah Trace, November 2026 23,400 0 11,232 9,229 20,461 5,755 4,264 18,970 0 35 89
Schaumburg-Oxford L.P.<F1>
Windrift at Seaview Ridge, December 2026 29,430 0 11,258 10,126 21,384 2,948 1,582 20,018 0 37 98
Southridge-Oxford L.P.
Chambrel at Pinecastle, November 2026 9,500 0 5,458 4,042 9,500 4,043 4,859 10,316 0 17 54
Ocala-Oxford L.P.
Chambrel at Montrose, December 2026 12,800 0 7,354 5,446 12,800 4,325 5,492 13,967 0 25 72
Akron One Retirement-
Oxford L.P.
Chambrel at Club Hill, March 2027 25,430 0 8,673 7,739 16,412 1,491 523 15,444 0 31 67
Colonel I-Oxford L.P.
Northwoods, January 2027 21,700 0 11,126 10,574 21,700 12,129 10,775 20,346 0 37 101
Middletown-Oxford L.P
Reflections, November 2026 25,644 0 13,998 11,646 25,644 12,553 11,335 24,426 0 44 118
Tidewater-Oxford L.P.<F1>
Island Club, November 2026 11,300 0 5,744 5,556 11,300 6,675 6,030 10,655 0 18 55
Allview-Oxford L.P.<F1>
Windsor Park, November 2026 14,000 0 6,333 5,743 12,076 6,428 5,552 11,200 0 20 56
Westridge-Oxford L.P.<F1>
<PAGE> 41
Notes to Financial Statements
Note 7. Investments in Bonds (continued)
Information on the Bonds as of December 31, 1998 and 1997 (in thousands) and the related properties is as follows:
<CAPTION>
Carrying Value at 12/31/98 1998 1997 Total Monthly Interest
Combined -------------------------- Unrealized Unrealized Carrying----------------
Maturity Face Other A B Gain or Gain or value @ Other A B
Bond Investment Date Amount Bond Bond Bond Total (Loss) (Loss) 12/31/97 Bond Bond Bond
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Chambrel at Williamsburg, November 2026 $ 25,000 $ 0 $ 13,708 $ 11,292 $ 25,000 $ 9,563 $ 9,377 $ 24,814 $ 0 $ 43 $ 125
Williamsburg-Oxford L.P.<F1>
Springhouse, April 2018 10,300 10,296 0 0 10,296 0 0 10,296 62 0 0
Dallas-Oxford L.P.<F3>
Steeplechase, September 2018 14,200 14,070 0 0 14,070 0 0 14,070 86 0 0
Carpenter-Oxford L.P.<F3>
UNREFUNDED BONDS:
San Bruno, November 2009 25,000 24,658 0 0 24,658 14,267 7,971 18,362 172 0 0
San Bruno-Oxford L.P.<F2> December 2009 1,060 1,045 0 0 1,045 604 338 779 7 0 0
The Harbour, November 2009 8,710 5,006 0 0 5,006 42 (725) 4,239 60 0 0
Apollo-Oxford Associates L.P.<F2>
Harbor Town Jacaranda, April 2006 4,200 4,200 0 0 4,200 0 0 0 22 0 0
Jacaranda-Oxford L.P.<F4>
--------------------------------------------------------------------------------------
Total $307,394 $59,275 $116,718 $100,472 $276,465 $94,867 $78,581 $255,979 $409 $377 $1,019
======================================================================================
<FN>
<F1> Financing Transaction. On August 22, 1997 OTEF II securitized approximately $38.8 million of Series A Bonds
collateralized by four properties and on February 14, 1998 and May 21, 1998 OTEF II securitized an additional $23.8
million of Series A Bonds collaterizing by the underlying properties Fox Valley and Schaumburg. OTEF II retained
all of its interest in the corresponding Series B Bonds. In addition, OTEF II applied approximately $15 million
of the proceeds to the purchase of a subordinated interest in the securitized transactions. OTEF II also
retained certain rights to reacquire the securitized assets. In connection with this transaction, OTEF II converted
the interest rate mode on these six Series A Bonds from an annual reset to weekly floaters. For financial
statement purposes, these transactions are accounted for as a financing transaction and, accordingly, the amount
of the Series A Bonds financed of $62.6 million is reflected as Securities Held in Trust, the net cash
proceeds are classified as Cash and Cash Equivalents and the difference between the principal amount of the
Series A Bonds financed and the principal amount of the subordinated interest acquired by OTEF is classified as
financing debt. The financing debt bears interest at the Banking Marketing Association weekly floating bond rate
("BMA") plus approximately 80 to 85 basis points which averaged 4.41% from the date of closing through December
31, 1998. For federal income tax purposes, these transactions are treated as a sale by OTEF II of the Series A
Bonds and a purchase of the subordinated interests, which resulted in capital losses in 1998 and 1997, of $3.6
million and $3.8 million, respectively. -
<F2> The Managing General Partner is continuing its efforts to refund these bonds.
<F3> The Dallas and Carpenter bonds acquired in December of 1997 were refinanced in 1998, canceling approximately $3.4
million in combined face amount. The Carpenter Refunding Bonds and the Dallas Refunding Bonds each bear fixed
interest at the annual rate of 7.25% for an initial term through October 1, 2005 and July 1, 2005, respectively, at
which time the bonds must be remarketed.
<F4> On April 30, 1998, OTEF II purchased an unrelated third party $4.2 million tax exempt bond in connection with the
Jacaranda transaction discussed above. This bond currently bears an annual fixed rate of 6.25%, however, the
Managing General Partner anticipates that it will be able to increase the interest rate during 1999 in connection
with a refinancing or refunding.
</FN>
</TABLE>
<PAGE> 42
Notes to Financial Statements
Note 7. Investments in Bonds (continued)
<TABLE>
Information on the Bonds as of December 31, 1998 and 1997 (in thousands) and the related properties is
summarized as follows:
Schedule of Tax-Exempt Securities Summary
- - -----------------------------------------
<CAPTION>
Carry Value at 12/31/98 Total
Combined -------------------------- 1998 1997 Carrying
Face Other A B Unrealized Unrealized Value @
Bond Investment Amount Bond Bond Bond Total Gain Gain 12/31/97
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments in tax-exempt securities $307,394 $59,275 $ 54,153 $100,472 $213,900 $67,711 $61,223 $217,159
Investments in tax-exempt securities
held in trust 0 0 62,565 0 62,565 27,156 17,628 38,820
----------------------------------------------------------------------
Total Bonds $307,394 $59,275 $116,718 $100,472 $276,465 $94,867 $78,851 $255,979
======================================================================
</TABLE>
<PAGE> 43
<TABLE>
Note 8. Quarterly Results and Market Information (in thousands, except per BACs
and Market Prices) (Unaudited)
<CAPTION>
For the Three Months Ended in 1998
---------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Interest on Investment in
tax-exempt securities $4,727 $4,335 $4,593 $ 5,312
Interest on Investments in
tax-exempt sercurities held
in trust 474 669 665 651
Interest on taxable and loans 20 153 318 346
Other tax-exempt income 121 162 157 448
- - -----------------------------------------------------------------------------
Total Revenues 5,342 5,319 5,733 6,757
- - -----------------------------------------------------------------------------
Expenses
Governance and
administrative expenses 234 207 214 365
Litigation and settlement costs 5 2 1 0
Other liquidity and growth
expense 215 170 251 395
Finance interest expense 331 489 500 489
- - -----------------------------------------------------------------------------
Total Expenses 785 868 966 1,249
- - -----------------------------------------------------------------------------
Net income $4,557 $4,451 $4,767 $ 5,508
- - -----------------------------------------------------------------------------
Other comprehensive income:
Unrealized gains on
investments $ 135 $1,502 $4,913 $ 9,736
- - -----------------------------------------------------------------------------
Comprehensive income: $4,692 $5,953 $9,680 $15,244
=============================================================================
Net income allocated to
BAC holders $4,377 $4,269 $4,576 $ 5,287
=============================================================================
Net income per BAC $0.609 $0.594 $0.637 $ 0.736
=============================================================================
Weighted average BACs
outstanding 7,185 7,185 7,185 7,185
=============================================================================
Net income per BAC -
assuming dilution <F1> $0.603 $0.587 $0.631 $ 0.735
=============================================================================
Weighted average BACs
outstanding - assuming
dilution <F1> 7,262 7,271 7,252 7,187
=============================================================================
Distribution per BAC $0.495 $0.510 $0.510 $ 0.510
=============================================================================
Market Information:
Opening Price $25.31 $26.75 $27.75 $ 25.75
High $27.81 $28.88 $28.31 $ 25.88
Low $25.31 $26.31 $24.00 $ 22.50
Closing Price $26.75 $27.75 $25.75 $ 23.50
=============================================================================
<FN>
<F1> As required by FASB 128, net income per BAC assuming dilution has
been presented as if the stock options awarded on May 21, 1997 had been
exercised. The effect would be to increase the number of shares
outstanding and effectively decrease earnings. See Notes 1 and 4 for
further discussion.
</FN>
</TABLE>
<PAGE> 44
<TABLE>
Note 8. Quarterly Results and Market Information (in thousands, except per
BACs and Market Prices) (Unaudited) (Continued)
<CAPTION>
For the Three Months Ended in 1997 <F2>
-------------------------------------------
March 31 June 30 September 30 December 31
-------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Interest on Investments in
tax-exempt securities $4,605 $4,629 $4,387 $4,113
Interest on Investments in
tax-exempt securities held
in trust 0 0 202 465
Other tax-exempt income 91 113 187 338
- - -----------------------------------------------------------------------------
Total Revenues 4,696 4,742 4,776 4,916
- - -----------------------------------------------------------------------------
Expenses
Governance and
administrative expenses 312 185 151 274
Litigation and settlement costs 98 106 37 24
Other liquidity and growth
expense 20 127 435 258
Finance interest expense 0 0 139 322
- - -----------------------------------------------------------------------------
Total Expenses 430 418 762 878
- - -----------------------------------------------------------------------------
Net income $4,266 $4,324 $4,014 $4,038
=============================================================================
Net income allocated to
BAC holders $4,181 $4,054 $3,801 $3,857
=============================================================================
Net income per BAC $0.557 $0.565 $0.529 $0.537
=============================================================================
Weighted average BACs
outstanding 7,500 7,185 7,185 7,185
=============================================================================
Net income per BAC -
assuming dilution <F3> $0.557 $0.564 $0.526 $0.535
=============================================================================
Weighted average BACs outstanding
-assuming dilution <F3> 7,500 7,197 7,219 7,219
=============================================================================
Distribution per BAC $0.476 $0.476 $0.495 $0.495
=============================================================================
Market Information:
Opening Price <F1> N/A N/A $20.00 $26.31
High N/A N/A $27.63 $26.44
Low N/A N/A $21.38 $25.19
Closing Price N/A N/A $26.31 $25.31
=============================================================================
<FN>
<F1> OTEF II began trading on the American Stock Exchange on July 22, 1997.
<F2> On April 1, 1997, 314,675 BACs were converted to 12,587 SQB shares in
accordance with the class action litigation settlement discussed in Note
9. Consequently, the number of BACs decreased from 7,499,875 in the first
quarter to 7,185,200 in the second quarter.
<F3> As required by FASB 128, net income per BAC assuming dilution has
been presented as if the stock options awarded on May 21, 1997 had been
exercised. The effect would be to increase the number of shares
outstanding and effectively decrease earnings.
</FN>
</TABLE>
<PAGE> 45
Note 9. Other Events
As previously reported, OTEF II and certain of its affiliates
(collectively, "Defendants") were Defendants in putative class
and derivative lawsuits consolidated as In re Oxford Tax Exempt
Fund Securities Litigation, No. WMN 95-3643 (D.Md.). These
complaints alleged breach of OTEF's partnership agreement, breach
of fiduciary duty by the general partners, and breach of Federal
and state securities laws, and sought unspecified monetary
damages and various forms of equitable relief. The plaintiffs
and the Defendants in the consolidated action entered into a
Stipulation of Settlement (the "Settlement"), which was filed
with the U.S. District Court for the District of Maryland
("Court") on November 18, 1996. At a hearing held on November
21, 1996, the Court entered an order granting preliminary
approval of the Settlement and providing certification for
settlement purposes only of a class consisting of all OTEF II BAC
Holders as of the record date. On January 31, 1997, the Court
issued an order granting final approval of the terms of the
settlement of the OTEF II litigation. An appeal was filed with
the United States Court of Appeals for the Fourth Circuit by an
OTEF II BAC Holder who was appearing pro se and on February 24,
1998, the United States Court of Appeals for the Fourth Circuit
affirmed the lower court decision by per curiam opinion. In June
1998, OTEF II made the final payment of plaintiff's counsel fees
and expenses in the amount of $1.54 million upon the expiration
of all appeal periods and dismissal of the state court action.
Note 10. Subsequent Events
On February 12, 1999, OTEF II made a quarterly cash
distribution of approximately $3.8 million or $0.510 per BAC to
BAC Holders of record and $12.38 to SQB holders of record as of
December 31, 1998.
On February 8, 1999, OTEF II distributed to existing SQB
Holders an offering circular describing a voluntary offer to
exchange BACs for SQBs on a 25-for-1 basis. The offer expires on
May 30, 1999, unless extended. See Notes 2 and 3. If all SQB
Holders elected to exchange their SQBs for BACs, OTEF II would
issue an additional 173,650 BACs, or approximately 2.4% of the
issued and outstanding BACs. This would increase the total
number of issued and outstanding BACs to 7,356,850 (without
giving effect to outstanding options). Any dilution of the
existing BACs, however, would be immaterial because the assets
currently segregated for SQB Holders would be released to the
benefit of BAC Holders.
<PAGE> 46
The following table sets forth, on a quarterly basis, all distributions
declared by OTEF II and OTEF.
<TABLE>
Amount Distributed <F1>
- - --------------------------------------------------------------------------------
<CAPTION>
BAC Per SQB
Quarterly Per BAC Holders SQB Holders General
Quarter Ended <F1> Payments <F5> <F2> <F6> <F6> Partners
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
December 31, 1998 53 $ 0.5100 $ 3,663,432 $12.38 $ 85,991 $ 76,519
September 30, 1998 52 $ 0.5100 $ 3,664,452 $12.38 $ 85,991 $ 76,540
June 30, 1998 51 $ 0.5100 $ 3,664,452 $12.38 $ 85,991 $ 76,540
March 31, 1998 50 $ 0.4950 $ 3,556,674 $12.38 $ 86,549 $ 74,351
-------- ------------ ------ --------- ----------
$ 2.0250 $ 14,549,010 $49.52 $344,522 $ 303,950
- - --------------------------------------------------------------------------------
1997
December 31, 1997 49 $ 0.4950 $ 3,556,674 $12.38 $ 87,811 $ 74,378
September 30, 1997 48 $ 0.4950 $ 3,556,674 $12.38 $110,566 $ 74,842
June 30, 1997 47 $ 0.4760 $ 3,420,155 $11.90 $149,785 $ 72,856
March 31, 1997 46 $ 0.4760 $ 3,569,940 $ N/A $ N/A $ 72,856
-------- ------------ ------ --------- ----------
$ 1.9420 $ 14,103,443 $36.66 $348,162 $ 294,932
- - --------------------------------------------------------------------------------
1996
December 31, 1996 45 $ 0.4760 $ 3,569,940 $ N/A $ N/A $ 72,856
September 30, 1996 44 $ 0.4760 $ 3,569,940 $ N/A $ N/A $ 72,856
June 30, 1996 43 $ 0.4760 $ 3,569,940 $ N/A $ N/A $ 72,856
March 31, 1996 42 $ 0.4760 $ 3,569,940 $ N/A $ N/A $ 72,856
-------- ------------ ------ -------- ----------
$ 1.9040 $ 14,279,760 $ N/A $ N/A $ 291,424
- - --------------------------------------------------------------------------------
1995
For the 4 quarters ended 38-41 $ 1.9040 $ 14,279,760 $ N/A $ N/A $ 291,424
- - --------------------------------------------------------------------------------
1994
For the 4 quarters ended 34-37 $ 1.8000 $ 13,499,776 $ N/A $ N/A $ 275,504
- - --------------------------------------------------------------------------------
1993
For the 4 quarters ended 30-33 $ 1.7628 $ 13,220,779 $ N/A $ N/A $ 269,813
- - --------------------------------------------------------------------------------
1992
For the 4 quarters ended 26-29 $ 1.7008 $ 12,755,787 $ N/A $ N/A $ 260,323
- - --------------------------------------------------------------------------------
1991
For the 4 quarters ended 22-25 $ 1.6512 $ 12,384,000 $ N/A $ N/A $ 252,736
- - --------------------------------------------------------------------------------
1990
For the 4 quarters ended 18-21 $ 1.6512 $ 12,384,000 $ N/A $ N/A $ 252,736
- - --------------------------------------------------------------------------------
1989
For the 4 quarters ended 14-17 $ 1.6512 $ 12,384,000 $ N/A $ N/A $ 252,736
- - --------------------------------------------------------------------------------
1988 <F3>
For the 4 quarters ended 10-13 $ 2.4760 $ 18,570,000 $ N/A $ N/A $ 378,980
- - --------------------------------------------------------------------------------
1987
For the 4 quarters ended 6-9 $ 3.4124 $ 25,593,000 $ N/A $ N/A $ 522,306
- - --------------------------------------------------------------------------------
1986
For the 4 quarters ended 2-5 $ 3.4000 $ 25,500,000 $ N/A $ N/A $ 520,408
- - --------------------------------------------------------------------------------
1985 <F4>
December 31, 1985 1 $ 0.5952 $ 3,894,287 $ N/A $ N/A $ 79,475
- - --------------------------------------------------------------------------------
Total $27.8758 $207,397,602 $86.18 $692,684 $4,246,747
================================================================================
<FN>
<F1> Distributions in all cases were paid in the quarter immediately
following the quarter to which the distribution relates.
<F2> The aggregate amount distributed to BAC Holders since inception is
$207,397,602, or approximately 69% based on an original investment of
$1,000 per BAC.
<F3> Excludes the $507,450 ($0.068 per BAC) distributed on August 15, 1988
as a return of capital.
<F4> Assumes BAC Holders were admitted on October 10, 1985.
<F5> All periods have been restated to reflect the 25-for-1 stock split
effectuated on July 22, 1997.
<F6> On April 1, 1997, in accordance with the class action litigation, OTEF
granted the option to BAC Holders to elect SQB status. Of the 12,587
units held as SQBs as of April 1, 1997, 5,484 elected to be redeemed as
of August 1, 1997. SQBs were not affected in the 25-for-1 stock split
on July 1, 1997. There were 7,093 SQBs outstanding at 12/31/97, and
6,946 SQBs outstanding at 12/31/98.
</FN>
</TABLE>
<PAGE> 47
General Partnership Information
Legal Counsel
Shaw, Pittman, Potts & Trowbridge
Washington, D.C.
Independent Accountants
PricewaterhouseCoopers LLP
Washington, D.C.
Transfer Agent and Registrar
Registrar & Transfer Company
ATTN: William Tatler, Vice President
Stock Transfer Department
10 Commerce Drive
Cranford, NJ 07016
1-800-368-5948
Managing General Partner
Oxford Tax Exempt Fund II Corporation
7200 Wisconsin Avenue, 11th floor
Bethesda, Maryland 20814
The Annual Report on Form 10-K for the
year ended December 31, 1998, filed with
the Securities and Exchange Commission,
is available to SQB and OTEF II BAC Holders and may be
obtained by writing:
Investor Services
Oxford Tax Exempt Fund II Limited Partnership
7200 Wisconsin Avenue, 11th floor
Bethesda, MD 20814
1-888-321-OTEF
<PAGE> 48
Instructions for Investors who wish to reregister or transfer
OTEF II BACs or SQBs
On July 22, 1997, the American Stock Exchange began trading
OTEF II BACs under the ticker symbol, OTF. Please follow
the instructions below to expedite the reregistration or transfer
of ownership of any OTEF II BACs or SQBs ("SQB") that you may
own.
IF YOU DO NOT HOLD CERTIFICATES
Your shares are being held by your brokerage firm in "street
name". To register a change of ownership of OTEF II BACs held
in such accounts, please have your account representative or
financial consultant request the necessary transfer documents.
YOU MUST HAVE THE PROPER TRANSFER DOCUMENTS FROM YOUR
BROKERAGE FIRM. Additionally, please contact your account
representative or financial consultant for address changes.
IF YOU HOLD CERTIFICATES
Effective July 1, 1997, OTEF II appointed Registrar and
Transfer Company ("R&T") as the sole registrar and transfer
agent with respect to the OTEF II BACs and SQBs.
All notices, claims, certificates, requests, demands and other
communications relating to transfers of OTEF II BACs and SQBs
should be sent to:
Registrar and Transfer Company
Attn: William Tatler, Vice President
Stock Transfer Department
10 Commerce Drive
Cranford, NJ 07016
All phone calls relating to such transfers should be directed
to:
Registrar and Transfer Company
Stock Transfer Department
1-800-368-5948
GENERAL INFORMATION
All general inquiries relating to OTEF II should be directed
to OTEF II Investor Services at 1-888-321-OTEF.
The Annual Report on Form 10-K for the year ended December 31,
1998, filed with the Securities and Exchange Commission, is
available to SQB and OTEF II BAC Holders and may be obtained
by writing:
Investor Services
Oxford Tax Exempt Fund II Limited Partnership
7200 Wisconsin Avenue, 11th Floor
Bethesda, Maryland 20814
ALSO VISIT OUR WEB PAGE AT WWW.OTEF.COM
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at December 31, 1998 and the Statements of Income and
Comprehensive Income for the Year ended December 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,011
<SECURITIES> 288,305
<RECEIVABLES> 1,579
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,191
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 309,086
<CURRENT-LIABILITIES> 52,013
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 257,073
<TOTAL-LIABILITY-AND-EQUITY> 309,086
<SALES> 0
<TOTAL-REVENUES> 23,151
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,283
<EPS-PRIMARY> 2.58
<EPS-DILUTED> 2.56
</TABLE>
