UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 33-9921
SENIOR INCOME FUND L. P.
Exact name of Registrant as specified in its charter
Delaware 13-3392077
State or other jurisdiction
of incorporation or organization I.R.S. Employer Identification No.
3 World Financial Center, 29th Floor
New York, NY Attn.: Andre Anderson 10285
Address of principal executive offices zip code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
4,827,500 DEPOSITORY UNITS OF LIMITED PARTNERSHIP INTEREST
Title of Class
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 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 is not contained herein,
and will not be contained, to the best of the 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
State the aggregate market value of the voting stock held by non-
affiliates of the registrant: Not applicable.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of Parts I, II,
III and IV are incorporated by reference to the Partnership's
Annual Report to Unitholders for the year ended
December 31, 1996.
PART I
Item 1. Business
(a) General Development of Business
Senior Income Fund L.P. (the "Partnership", formerly Shearson
Lehman Senior Income Fund Limited Partnership), a Delaware
limited partnership, was formed on October 14, 1986 pursuant to a
Limited Partnership Agreement, as amended and restated on
March 17, 1987 pursuant to an Amended and Restated Limited
Partnership Agreement (the "Partnership Agreement"). The
Partnership was formed for the purpose of acquiring a general
partnership interest in Shearson August Property Partnership, a
California general partnership (the "Property Partnership"), with
August Financial Partners II ("AFP-II") an affiliate of August
Financial Corporation ("August").
The general partner of the Partnership is Senior Income Fund Inc.
(the "General Partner", formerly Shearson Lehman Senior Income
Fund, Inc.), a Delaware corporation, and wholly owned subsidiary
of Lehman Brothers Inc. (formerly Shearson Lehman Brothers Inc.).
The other general partner, through November 21, 1996, of the
Property Partnership was AFP-II, an affiliate of August. On
November 21, 1996, the Partnership purchased the general
partnership interest of the successor to AFP-II for a purchase
price of $850,000. As a result of such purchase, the Property
Partnership will be dissolved and all of its assets will be
distributed to the Partnership. Accordingly, all sale proceeds
received upon a sale of any property will belong to the
Partnership and no amount will be owed to AFP-II. The
Partnership will continue until December 31, 2036 unless
terminated earlier pursuant to the provisions of the Partnership
Agreement.
The Property Partnership was formed to acquire, operate and
ultimately sell four specified residential properties for senior
citizens (the "Properties"). For a breakdown of the purchase
price of each of the Properties, see Note 7, "Real Estate," to
the Consolidated Financial Statements of the Partnership's Annual
Report to Unitholders for the year ended December 31, 1996
included in Item 14 of this report.
The Partnership commenced marketing the Properties for sale
during 1996. See Item 2 "Sale of Properties" for a discussion of
the status of such marketing efforts. Additional information is
incorporated by reference to Item 7 of this report.
(b) Financial Information about Industry Segments
Substantially all of the Partnership's revenues, operating profit
or loss and assets relate solely to its interest as general
partner of the Property Partnership whose operating profit or
loss and assets relate to its ownership and operation of the
Properties, until November 21, 1996, at which time the
Partnership purchased AFP-II's general partner interest in the
Property Partnership, as noted in Item 1(a).
(c) Narrative Description of Business
The Partnership's principal objectives, until the recent
commencement of marketing the Properties for sale were:
(1) to provide quarterly cash distributions a portion of
which will be "tax sheltered;"
(2) to preserve and protect capital;
(3) to achieve long-term appreciation in the value of the
Properties for distributions upon sale of the Properties.
Presently, the Partnership expects to sell the Properties,
distribute the net sales proceeds and thereafter dissolve the
Partnership.
(d) Employees
The Partnership has no employees.
(e) Competition
The Partnership's properties compete with a variety of retirement
living complexes within their primary geographic markets,
including continuing care and lifecare facilities, which offer
higher levels of personal care, and often skilled nursing, in
addition to independent living units. However, continuing care
and lifecare facilities usually require up-front accommodation
fees, and place greater emphasis on health and well-being rather
than on independent lifestyle and community activities. In order
to raise visibility of the Properties and attract potential
tenants, the operator, Leisure Care, Inc., (the "Operator")
emphasizes strong community-oriented programs to build a strong
community presence with hospital administrators, church groups
and civic groups.
(f) Property Management
The Operator is among the leading retirement center management
companies in size, experience and profit history. The Operator
supervises the day-to-day management of the Properties, including
employing the operating personnel on behalf of the Partnership,
according to a property management agreement (the "Property
Management Agreement") and acts as the non-exclusive leasing
agent for all four Properties. An extension to the Property
Management Agreement, which expired on December 31, 1993, was
executed and can be terminated by either party upon sixty days
notice. Certain terms of the Property Management Agreement have
been modified as set forth in the extension. On June 30, 1996,
the extension of the original Property Management Agreement
expired and a new extension was executed between the General
Partner and the Operator which is effective through July 1, 1997.
All of the terms and conditions of the original extension of the
Management Agreement shall remain in full force and effect
through the new expiration date. See Note 5, "Property
Management," to the Consolidated Financial Statements of the
Partnership's Annual Report to Unitholders for the year ended
December 31, 1996 included in Item 14 of this report.
Item 2. Properties
Ocean House
Ocean House is a ten-story property adjacent to Santa Monica
Beach in Santa Monica, California. Many of the property's 121
units feature balconies and ocean views. Ocean House provides
residents with various amenities including an assisted living
program. The property is located in an upscale area with an
established senior population and faces competition from three
other retirement facilities within its market. The property
competes at the higher end of the price scale based on its
location and level of service. The property enjoys a competitive
advantage due to its assisted living program, many activity
programs and community involvement.
Prell Gardens
Prell Gardens is a two-story, 102-unit retirement facility
surrounding a courtyard and garden located in Van Nuys,
California. Daily meals, maid service, a beauty salon and
transportation services are some of the many amenities available
at the property. Prell Gardens enjoys a strong reputation within
the San Fernando Valley, and competes with two facilities
offering similar services. The property competes in the higher
end of the market as a result of aggressive marketing efforts and
strong ties to the local community.
Pacific Inn
Pacific Inn is a three-story retirement facility located in an
affluent section of Torrance, California. The property has 134
units with private balconies or patios, and features services and
amenities including a visiting doctor, beauty salon, dining
services and daily maid service. Pacific Inn competes with three
older retirement facilities in its primary location. The
facility's reputation has enabled the property to charge premium
rents and maintain a strong profit margin.
Nohl Ranch Inn
Nohl Ranch Inn, located in Anaheim Hills, California, an upscale
community, is a three-story, 133-unit facility featuring an
interior courtyard and landscaped grounds. Nohl Ranch is
affordably priced for its market and engages in an extensive
community outreach program to enhance the property's visibility
and referral network. The property includes such features as a
beauty salon, daily meal and maid service. The assisted living
program, which provides assistance for residents who require help
with their daily routines, has been very successful in growing
the property's tenant base. The property's competitor, which is
located across the street from Nohl Ranch, currently offers an
assisted living program.
Sale of Properties
The Partnership is marketing the Properties for sale and expects
to sell the Properties in 1997. The General Partner has received
numerous bids and serious expressions of interest from
unaffiliated third party buyers. The Partnership is in the
process of analyzing the bids it received. Should a transaction
be consummated, one or more cash distributions of the net sale
proceeds together with any remaining cash on hand will be made to
all Unitholders as soon as practicable. However, there can be no
assurance that any transaction will be consummated or as to the
price thereof.
1994 Earthquake
As a result of an earthquake that struck the greater Los Angeles
area on January 17, 1994, damages were sustained at two of the
Properties, Ocean House and Prell Gardens. Additional
information is incorporated by reference to Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," and Note 11, "Earthquake Loss and Insurance
Settlement" to the Consolidated Financial Statements of the
Partnership's Annual Report to Unitholders for the year ended
December 31, 1996 included in Item 14 of this report.
Government Regulations
Two of the properties, Ocean House and Nohl Ranch, maintain
assisted living programs which require licensing. Accordingly,
these properties are subject to the periodic licensing
requirements and inspection procedures of the California State
Department of Social Services. California law prescribes a list
of services which must be provided in rental retirement
facilities such as: (i) assistance with daily living activities
in the combinations which meet the needs of residents, (ii)
helping residents gain access to appropriate supportive services
in the community, (iii) being aware of the residents' general
whereabouts, (iv) monitoring the activities of the residents
while they are under the supervision of the facility to ensure
their general health, safety, well being, and (v) encouraging the
residents to maintain and develop their maximum functional
ability through participation in planned activities. Both
criminal and civil penalties may be imposed in the event of
violation of any of these duties. Currently there are no
restrictions on the level of rents, nor on rent increases.
Neither Prell Gardens nor Pacific Inn are currently subject to
the foregoing requirements.
Item 3. Legal Proceedings
On September 15, 1995, litigation was initiated by the
Partnership in Los Angeles Superior Court against the
Partnership's insurance carrier and insurance broker as a result
of the insurance company's preliminary indication that it would
not reimburse the Partnership for property damage related to
earthquake damage sustained at two of the Partnership's
properties, Ocean House and Prell Gardens, in January of 1994.
On November 19, 1996, the Partnership and General Partner
executed a Mutual Release and Settlement Agreement (the
"Settlement Agreement") with the insurance carrier, whereby the
Partnership agreed to release the insurance carrier from all
claims pending under the lawsuit and to assign its remaining
claims against the insurance broker to the insurance carrier.
The Partnership received $3,200,000, from the insurance carrier
pursuant to the Settlement Agreement. Costs associated with the
litigation which include legal, expert witness and engineering
fees were offset against the $3,200,000, resulting in net
insurance settlement income of approximately $2,318,387.
Additional information is incorporated by reference to Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Note 11, "Earthquake Loss and
Insurance Settlement" to the Consolidated Financial Statements of
the Partnership's Annual Report to Unitholders for the year ended
December 31, 1996 included in Item 14 of this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the holders of Units
("Limited Partners") during the fourth quarter of the year for
which this report is filed.
PART II
Item 5. Market for the Partnership's Limited Partnership
Interests and Related Security Holder Matters
(a) Market Price Information
There is no established trading market for the units nor is there
anticipated to be.
(b) Holders
As of December 31, 1996, there were 3,760 Limited Partners of
record.
(c) Cash Distributions per Unit (1)
1996 1995
1st Quarter 0.075 0.075
2nd Quarter 0.075 0.075
3rd Quarter 0.075 0.075
Special Distribution(2) 0.600 --
4th Quarter 0.075 0.075
Total $0.900 $0.300
(1) The amount and timing of distribution payments is reviewed
on a quarterly basis. Distributions are paid approximately
forty-five days following the period for which they are
declared.
(2) Distribution from cash reserves held pending a settlement
with the Partnership's insurance carrier regarding certain
claims for earthquake damage at Prell Gardens and Ocean
House.
Item 6. Selected Financial Data
(Dollars in thousands,
except per Unit data) 1996 1995 1994 1993 1992
Rental Income $10,782 $10,838 $10,387 $9,526 $9,120
Interest Income 205 199 98 36 15
Total Income 13,305(2) 11,037 10,485 9,561 9,135
Net Income (Loss) 3,154 (7,877)(3) 137 518 (44)
Net Income (Loss) Per Unit (1) .65 (1.63) .03 .11 (.01)
Cash Distributions Per Unit .90 .30 .30 .30 .13
Total Assets $22,574 $22,976 $32,459 $33,465 $34,033
(1)Total Units outstanding 4,827,500.
(2)Includes net insurance settlement income of $2,318,387, in
connection with the Partnership's settlement of its
litigation with its insurance carrier in November 1996.
(3)Includes the recognition of a $8,712,292 loss on the write-
down of real estate assets in compliance with Financial
Accounting Standards No. 121 in 1995.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(a) Liquidity and Capital Resources
The Partnership is marketing the Properties for sale and expects
to sell the Properties in 1997. The General Partner has received
numerous bids and serious expressions of interest from
unaffiliated third party buyers. The Partnership is in the
process of analyzing the bids it has received. As a result of
the pending sale, the Properties were reclassified on the
consolidated balance sheet as of December 31, 1996, as Real
estate assets held for disposition. However, there can be no
assurance that any transaction will be consummated or as to the
price thereof.
As a result of the Northridge earthquake that struck the greater
Los Angeles area on January 17, 1994, damage was sustained at two
of the Properties, Ocean House and Prell Gardens. The General
Partner pursued reimbursement from the insurance carrier for the
repair costs, less the deductible, under the Partnership's
insurance policy. However, the insurance carrier refused to
cover the cost to bring the buildings into compliance with
building codes enacted after the Northridge Earthquake. The
insurance carrier also disputed the amount of damage the
buildings sustained. As a result, on September 15, 1995, the
General Partner initiated litigation against the insurance
carrier and insurance broker. On November 19, 1996, the
Partnership and General Partner, executed a Mutual Release and
Settlement Agreement (the "Settlement Agreement") with the
insurance carrier, whereby the Partnership agreed to release the
insurance carrier from all claims pending under the lawsuit and
to assign its remaining claim against the insurance broker to the
insurance carrier. The Partnership received $3,200,000 from the
insurance carrier pursuant to the Settlement Agreement. Costs
associated with the litigation which include legal, expert
witness and engineering fees were offset against the $3,200,000,
resulting in net insurance settlement income of approximately
$2,318,387. Additional information is incorporated by reference
to Note 11, "Earthquake Loss and Insurance Settlement" to the
Consolidated Financial Statements of the Partnership's Annual
Report to Unitholders for the year ended December 31, 1996
included in Item 14 of this report.
The Partnership paid a distribution in the amount of $0.60 per
Unit on December 9, 1996 to Limited Partners of record as of
December 3, 1996. The distribution represented the portion of
its cash reserves that the Partnership had been retaining to
cover necessary repairs pending the outcome of the litigation.
In light of the Partnership's sales efforts, it is anticipated
that the Partnership will sell all of its properties prior to
completion of the repair work at Prell Gardens and prior to
beginning work at Ocean House. As such, the Partnership
anticipates selling Prell Gardens and Ocean House on an "as is"
and "where is" basis.
The General Partner declared a cash distribution of $.075 per
Unit for the quarter ended December 31, 1996, which was paid to
the Limited Partners on February 12, 1997. Since inception,
limited partners have received cash distributions totaling $5.41
per original $10.00 Unit. Until the sale of the Properties is
complete, the level of future distributions will be determined on
a quarterly basis and will be based on cash flow from operations,
tempered by the Partnership's capital needs, including those
necessitated by the earthquake related repairs. Should a sale of
the Properties be consummated, one or more cash distributions of
the net sale proceeds together with any remaining cash on hand
will be made to all Unitholders as soon as practicable.
Prepaid expenses were $168,259 and $136,282 at December 31, 1996
and 1995, respectively. The increase is mainly due to a refund
received for workman's compensation insurance in 1996.
At December 31, 1996 accounts payable and accrued expenses were
$1,033,316 compared to $250,413 at year-end 1995. The increase
is primarily due to higher expenses related to services rendered
by the Partnership's engineering firm in connection with
earthquake related repair work at Ocean House and Prell Gardens
in the amount of approximately $428,154, higher legal expenses
associated with the insurance litigation and various tender
offers in the amount of approximately $344,822, as well as the
timing of payments for incentive management fees payable to
Leisure Care, Inc. in 1996.
On November 21, 1996, the Partnership purchased the general
partnership interest of the successor to AFP-II for a purchase
price of $850,000. The Partnership's purchase of the general
partnership interest was funded from cash reserves. As a result
of such purchase, the Property Partnership will be dissolved and
all of its assets will be distributed to the Partnership.
Accordingly, all sale proceeds received upon a sale of any
property will belong to the Partnership and no amount will be
owed to AFP-II.
On November 8, 1996, an unaffiliated third party, LAVRA, Inc., a
Delaware corporation ("LAVRA"), a wholly-owned subsidiary of ARV
Assisted Living, Inc., a California Corporation, commenced a
tender offer to purchase up to 2,207,550 Units (42% of the total
outstanding Units) at a price of $5.00, net of any distributions
paid to limited partners after the date of the offer and until
its expiration. This tender offer was subsequently modified
several times and ultimately changed to purchase all of the
outstanding Units at a net cash price of $5.90 per Unit. On
January 31, 1997, the tender offer as modified, expired with
LAVRA accepting for purchase 607,844 and one half Units, or
approximately 12.6% of the outstanding Units.
On February 20, 1996, based upon, among other things, the advice
of legal counsel, the General Partner adopted a resolution that
states, among other things, if a Change of Control (as defined
below) occurs, the General Partner may distribute the
Partnership's cash balances not required for its ordinary
day-to-day operations. "Change of Control" means any purchase or
offer to purchase more than 10% of the Units that is not approved
in advance by the General Partner. In determining the amount of
the distribution, the General Partner may take into account all
material factors. In addition, the Partnership will not be
obligated to make any distribution to any partner and no partner
will be entitled to receive any distribution until the General
Partner has declared the distribution and established a record
date and distribution date for the distribution.
(b) Results of Operations
1996 versus 1995
Partnership operations for the year ended December 31, 1996
resulted in net income of $3,154,499 compared to a net loss of
$7,877,298 for 1995. The change from net loss to net income in
1996 is the result of the Partnership's net insurance settlement
income of $2,318,387 in 1996 and the recognition of a $8,712,292
loss on the write-down of real estate assets in compliance with
Financial Accounting Standards No. 121 in 1995.
Rental income was $10,782,123 for the year ended December 31,
1996, compared to $10,838,267 for 1995. The decrease is the
result of lower average occupancy at Prell Gardens as anticipated
during the earthquake repair work at the property. The decrease
in rental income at Prell Gardens was partially offset by higher
rental income from each of the other properties, notably Nohl
Ranch and Pacific Inn. Interest income for the year was
$204,526, largely unchanged from $199,078 in 1995.
Total expenses for the year ended December 31, 1996 were
$10,150,537, compared to $18,914,643 for the year ended December
31, 1995. The decrease is largely the result of the
Partnership's recognition of a $8,712,292, loss on the write-down
of Prell Gardens, Ocean House and Nohl Ranch, in compliance with
Financial Accounting Standards No. 121, in 1995. Depreciation
was $1,507,326 for the year ended December 31, 1996 compared to
$1,797,858 for the year ended December 31, 1995. The decrease
reflects the adjusted basis of the properties required at year-
end 1995 in connection with the write-down of the properties.
General and administrative expenses were $1,774,183 in 1996,
compared to $1,633,797 in 1995. The increase is the result of
legal, printing and postage expenses incurred in connection with
various tender offers, the AFP-II buyout, and other legal fees.
For the years ended December 31, 1996, 1995 and 1994, the average
occupancy levels for the properties were as follows:
Property 1996 1995 1994
Ocean House 91% 92% 95%
Pacific Inn 98% 97% 94%
Prell Gardens 72% 93% 97%
Nohl Ranch 98% 95% 83%
Average Occupancy 91% 94% 92%
1995 versus 1994
Partnership operations generated a net loss of $7,877,298 for the
year ended December 31, 1995, compared to net income of $137,035.
The change from net income to net loss was primarily attributable
to a $8,712,292 loss recognized on the write down of Prell
Gardens, Ocean House and Nohl Ranch, implemented in compliance
with Financial Accounting Standards No. 121, a new accounting
standard which was issued in March 1995. This was partially
offset by a provision for earthquake loss in 1994 of $750,000
related to the earthquake repairs at Ocean House and Prell
Gardens in the amounts of $500,000 and $250,000, respectively,
and higher total income in 1995.
Rental revenue for the year ended December 31, 1995 was
$10,838,267, compared with $10,386,764 in 1994. The 4.3%
increase was mainly the result of higher occupancy at Nohl Ranch
and Pacific Inn. For the year ended December 31, 1995 interest
income was $199,078, compared with $97,928 in 1994. The increase
reflected higher average cash balances maintained in 1995.
For the year ended December 31, 1995, total expenses were
$18,914,643, compared with $10,347,657 in 1994. Total expenses
increased in 1995 as a result of the above mentioned write-down
of real estate in 1995. Total expenses in 1994 included a
provision for earthquake loss in the amount of $750,000, the
Partnership's deductible under its insurance policy. General and
administrative expenses for the year ended December 31, 1995 were
$1,633,797, compared with $1,427,356 in 1994. The increase was
primarily a result of higher insurance costs and higher
management incentive fees at all four of the Partnership's
properties. For the year ended December 31, 1995, repairs and
maintenance expense was $616,998, compared with $490,095 in 1994.
The increase was mainly the result of property improvements
completed in 1995. Supplies expenses were $1,122,448, and
$1,020,782, respectively, for the years ended December 31, 1995
and 1994. The increase in 1995 was primarily attributable to
higher costs associated with the food services department as a
result of increased average occupancy in 1995.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1996, which is filed
as an exhibit under Item 14.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
The Partnership has no directors or officers. The General
Partner has general responsibility for all aspects of the
Partnership's operation. Certain of the officers and directors
of the General Partner are also officers and employees of Lehman
Brothers Inc.
Certain officers and directors of the General Partner are now
serving (or in the past have served) as officers or directors of
entities which act as general partners of a number of limited
partnerships which have sought protection under the provisions of
the Federal Bankruptcy Code. The partnerships which have filed
bankruptcy petitions own assets which have been adversely
affected by the economic conditions in the markets in which that
asset is located and, consequently, the partnerships sought
protection of the bankruptcy laws to protect the partnerships'
assets from loss through foreclosure.
The directors and principal officers of the General Partner are
listed below.
Name Office
Moshe Braver Director and President
Sean F. Donahue Vice President, Chief Financial Officer and Director
Lawrence M. Ostow Vice President
Moshe Braver, 43, is currently a Managing Director of Lehman
Brothers and has held such position since October 1985. During
this time, he has held positions with the Business Analysis
Group, International and Capital Markets Administration and
currently, with the Diversified Asset Group. Mr. Braver joined
Shearson Lehman Brothers in August 1983 as Senior Vice President.
Prior to joining Shearson, Mr. Braver was employed by the
accounting firm of Coopers & Lybrand from January 1975 through
August 1983 as an Audit Manager. He received a Bachelor of
Business Administration degree from Bernard Baruch College in
January 1975 and is a Certified Public Accountant.
Sean F. Donahue, 34, is currently a Vice President of Lehman
Brothers in the Diversified Asset Group. Mr. Donahue joined
Lehman in April 1986 as an Assistant Vice President with the
Realty Finance Group. Mr. Donahue has been actively involved in
real estate investment, management, marketing and workouts. From
December 1985 to April 1986, Mr. Donahue was Assistant Treasurer
of The Patrician Group and was actively involved with the
company's banking relationships and real estate acquisitions.
Prior to that, Mr. Donahue was employed by Peat Marwick Mitchell
& Co. as a consultant in the firm's Real Estate Practice Group.
Mr. Donahue received a B.B.A. degree from Pace University in
1983.
Lawrence M. Ostow, 29, is a Vice President of Lehman Brothers and
is responsible for the management of commercial real estate in
the Diversified Asset Group. Mr. Ostow joined Lehman Brothers in
September 1992. Prior to that, Mr. Ostow was a Senior Consultant
with Arthur Andersen & Co. in the Real Estate Services Group,
beginning in July 1990. Mr. Ostow is a candidate for an M.B.A.
from the Stern School of Business in 1997 and earned a B.A.
degree in Economics from the University of Michigan in 1990.
Item 11. Executive Compensation
The Directors and Officers of the General Partner do not receive
any salaries or other compensation from the Partnership. See
Item 13, "Certain Relationships and Related Transactions," for a
description of certain transactions of the General Partner and
its affiliates with the Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security ownership of certain beneficial owners.
According to the records of the Partnership's transfer agent, at
December 31, 1996, no investor held more than 5% of the
outstanding Units. However, LAVRA's schedule 14D-1 filed on
December 23, 1996, states that LAVRA is the beneficial owner of
424,272.5 units or approximately 8.8% of the Partnership's
outstanding units.
Name and address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
- -------------------------------------------------------------------------------
Units of Limited LAVRA, Inc. 424,272.5 Units owned 8.8%
Partnership Interest 245 Fischer Avenue, beneficially and of record
Suite D-1
Costa Mesa, CA 92626
(b) Security ownership of management.
Officers and Directors of the General Partner owned no units of
the Partnership as of December 31, 1996.
(c) Changes in control.
None.
Item 13. Certain Relationships and Related Transactions
For fees paid and reimbursed to the General Partner or its
affiliates during 1996, 1995 and 1994, see Note 6, "Transactions
with Related Parties," to the Consolidated Financial Statements
in Item 8, "Financial Statements and Supplementary Data," which
is incorporated by reference to the Partnership's Annual Report
to Unitholders for the year ended December 31, 1996, which is
filed as an exhibit under Item 14.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
(a)(1) Financial Statements:
Consolidated Balance Sheets - At December 31, 1996 and 1995 (1)
Consolidated Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1996, 1995 and 1994 (1)
Consolidated Statements of Operations - For the years ended
December 31, 1996, 1995 and 1994 (1)
Consolidated Statements of Cash Flows - For the years ended
December 31, 1996, 1995 and 1994 (1)
Notes to the Consolidated Financial Statements (1)
Report of Independent Accountants (1)
(a)(2) Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation (F-1)
Report of Independent Accountants (F-2)
(1) Incorporated by reference to the Partnership's Annual Report
to Unitholders for the year ended December 31, 1996, filed as
an exhibit under Item 14.
(b) Reports on Form 8-K:
An 8-K was filed on December 4, 1996, disclosing information
about the Partnership's purchase of the general partnership
interest in Shearson August Property Partnership, the legal
settlement with the Partnership's insurance carrier, and an
amendment to a tender offer commenced by LAVRA Inc. to
purchase up to 51% of the outstanding Units.
(c) Exhibits
3.1 The Partnership's Amended and Restated Agreement of Limited
Partnership, Dated March 17, 1987, is hereby incorporated by
reference to Exhibit A to the Prospectus contained in
Registration Statement No. 33-9921, which registration
Statement (the "Registration Statement") was declared
effective by the Securities and Exchange Commission on
January 30, 1987.
3.2 The Capital Contribution Agreement by and among the General
Partner and Shearson Group is hereby incorporated by
reference to Exhibit 3.2 to the Registration Statement.
10.1 Form of the Management Agreement dated as of April 5, 1988
between the Partnership and the Operator is incorporated by
reference to Exhibit 10.2 to the Registration Statement.
10.2 The form of Property Partnership Agreement between the
Partnership and the Property Partner is hereby incorporated
by reference to Exhibit 10.6 to the Registration Statement.
10.3 The form of Purchase Agreement concerning the acquisition of
the Properties is hereby incorporated by reference to
Exhibit No. 10.4 to the Registration Statement.
10.4 Form of the Amended Management Agreement dated as of January
1, 1990 between the Partnership and the Operator hereby
incorporated by reference to Exhibit 10.5 to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1989, as filed with the Securities and Exchange
Commission on March 30, 1990.
10.5 Form of the Settlement Agreement Dated December 18, 1989
between the Partnership and class members hereby
incorporated by reference to Exhibit 10.6 to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1989, as filed with the Securities and Exchange
Commission on March 30, 1990.
13.1 Annual Report to Unitholders for the year ended December 31, 1996.
27 Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Partnership has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SENIOR INCOME FUND L.P.
BY: SENIOR INCOME FUND INC.
General Partner
Date: March 27, 1997 BY: /s/ Moshe Braver
Name: Moshe Braver
Title: Director and President
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SENIOR INCOME FUND L.P.
BY: SENIOR INCOME FUND INC.
General Partner
Date: March 27, 1997 BY: /s/ Moshe Braver
Name: Moshe Braver
Title: Director and President
Date: March 27, 1997 BY: /s/ Sean Donahue
Name: Sean Donahue
Title: Vice President, Chief Financial
Officer and Director
Date: March 27, 1997 BY: /s/ Lawrence M. Ostow
Name: Lawrence M. Ostow
Title: Vice President
Senior Income Fund L.P. (the "Partnership") raised $48,275,000
during its offering period in 1987 and acquired four congregate
care facilities in Southern California. The Partnership has
retained Leisure Care, Inc., one of the leading retirement center
management companies in the country, to assist with the day-to-
day management of the facilities.
Average
Occupancy Rental Income * Percent
Property 1996 1995 1996 1995 change
Ocean House 91% 92% $3,450 $3,417 1%
Pacific Inn 98% 97% 3,685 3,572 3%
Prell Gardens 72% 93% 1,294 1,675 (23%)
Nohl Ranch Inn 98% 95% 2,353 2,174 8%
* in thousands
Contents
1 Message to Investors
3 Consolidated Financial Statements
6 Notes to the Consolidated Financial Statements
14 Report of Independent Accountants
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn.: Financial Communications
800-223-3464 800-223-3464
Message to Investors
Presented for your review is the 1996 Annual Report for Senior
Income Fund L.P. This report includes an update on the
Partnership's efforts to sell its properties, a review of the
Partnership's operations and audited financial statements for the
year ended December 31, 1996.
Update on Property Sales
As previously announced, the Partnership is marketing its four
properties for sale and expects to sell the properties in 1997.
As such, all of the Partnership's properties have been
reclassified on the Partnership's balance sheets as held for
disposition. The General Partner has received numerous bids and
serious expressions of interest from unaffiliated third party
buyers, including ARV Assisted Living, Inc. ("ARV"), the entity
which previously commenced two tender offers for your units under
the name "LAVRA". While the bids received are preliminary and
subject to further due diligence, all of the offers being
considered, including ARV's, are at prices that would result in
cash distributions to all Unitholders substantially in excess of
that previously offered by ARV.
The Partnership is in the process of analyzing the bids it
received. It is the goal of the General Partner to weigh all of
the relevant factors and to structure the best transaction
possible for the Unitholders by examining, among other things,
the price offered and the probability of consummating a
transaction with each particular bidder. The General Partner is
very pleased with the response to the competitive bidding
process, however, there can be no assurance that any transaction
will be consummated or as to the price of such a transaction.
Should a transaction be consummated, one or more cash
distributions of the net sale proceeds together with any
remaining cash on hand will be made to all Unitholders as soon as
practicable.
Cash Distributions
Cash distributions for 1996 totaled $0.90 per $10.00 Unit,
including the fourth quarter distribution which was paid to
limited partners on February 12, 1997, in the amount of $0.075
per $10.00 Unit. On December 9, 1996, the Partnership paid a
special distribution in the amount of $0.60 per Unit from excess
cash reserves which had been held pending a resolution of the
Partnership's claim against its insurance carrier, as discussed
below. Since inception, limited partners have received cash
distributions totaling $5.41 per Unit. Until the sale of the
Partnership's properties is complete, the level of future
distributions will be determined on a quarterly basis and will be
based on cash flow from operations, tempered by the Partnership's
capital needs, including those necessitated by any earthquake
related repairs.
Earthquake Repairs
In January 1994, an earthquake struck the greater Los Angeles
area causing damage at two of the Partnership's properties, Prell
Gardens and Ocean House. Earthquake related repairs are underway
at Prell Gardens and the General Partner is in the process of
obtaining contractor bids for the repairs to Ocean House.
However, in light of the Partnership's sales efforts and the
General Partner's receipt of several credible offers from
numerous purchasers, it is anticipated that the Partnership will
sell all of its properties prior to completion of the repair work
at Prell Gardens and prior to beginning work at Ocean House. The
Partnership intends to sell Prell Gardens and Ocean House on an
"as is" and "where is" basis.
Insurance Settlement
As previously reported, in November 1995, the General Partner
initiated litigation against the insurance carrier and insurance
broker, as a result of the insurance carrier's refusal to
reimburse the Partnership for the cost of the earthquake related
repair work, less the deductible, under the Partnership's
insurance policy. The Partnership reached a settlement with the
insurance carrier on November 19, 1996, whereby the Partnership
received a payment totaling $3.2 million. Accordingly, the
Partnership was able to fund the special $0.60 per Unit
distribution, referred to above, from a portion of the cash
reserves it had retained to cover the necessary repairs pending
the outcome of the litigation.
Financial Highlights
For the years ended December 31,
1996 1995
Rental income $10,782,123 $10,838,267
Total expenses 10,150,537 18,914,643
Net income (loss) 3,154,499 (7,877,298)
Cash distributions per Unit * $.90 $.30
* There are 4,827,500 Units outstanding
- - Rental income was slightly lower in 1996 due to lower
average occupancy at Prell Gardens as a result of the earthquake
related repair work at the property. The decrease in rental
income at Prell Gardens was partially offset by an increase in
rental income from the other properties, particularly Nohl Ranch
and Pacific Inn.
- - The change from net loss to net income in 1996 was primarily
due to the recognition of net insurance settlement income of
approximately $2.3 million in 1996, the recognition in 1995 of
the above-mentioned loss on the write-down of real estate asset,
and lower depreciation expense in 1996.
- - The decrease in total expenses was largely the result of the
Partnership's recognition of a $8,712,292 loss on the write-down
of real estate assets in compliance with Financial Accounting
Standards No. 121 in 1995, and lower depreciation expense in 1996
reflecting the adjusted basis of the properties required at year-
end 1995 in connection with the write-down of the properties.
Summary
The General Partner is analyzing the bids received for the
properties and anticipates negotiating and closing a sale in
1997. In the interim, the General Partner will continue to focus
on effectively managing the Partnership's properties. An update
on our progress will be provided in future correspondence.
Very truly yours,
Senior Income Fund Inc.
The General Partner
/s/ Moshe Braver
Moshe Braver
President
March 27, 1997
Consolidated Balance Sheets At December 31, At December 31,
1996 1995
Assets
Real estate:
Land $ - $ 4,824,699
Buildings and improvements - 18,767,614
- 23,592,313
Less accumulated depreciation - (4,896,442)
- 18,695,871
Real estate assets held for disposition 18,301,085 -
Cash and cash equivalents 4,104,695 4,143,727
Prepaid expenses 168,259 136,282
Total Assets $22,574,039 $ 22,975,880
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 1,033,316 $ 250,413
Deferred rent payable 1,191,169 1,145,774
Due to affiliates 190,609 189,835
Security deposits payable 148,700 145,475
Distribution payable 365,720 365,720
Total Liabilities 2,929,514 2,097,217
Partners' Capital (Deficit):
General Partner (54,910) (42,568)
Limited Partners (4,827,500 units outstanding) 19,699,435 20,921,231
Total Partners' Capital 19,644,525 20,878,663
Total Liabilities and Partners' Capital $22,574,039 $22,975,880
Consolidated Statement of Partners' Capital (Deficit)
For the years ended December 31, 1996, 1995 and 1994
General Limited
Partner Partners Total
Balance at December 31, 1993 $(14,678) $31,559,364 $31,544,686
Net income 1,370 135,665 137,035
Distributions (14,630) (1,448,250) (1,462,880)
Balance at December 31, 1994 (27,938) 30,246,779 30,218,841
Net loss - (7,877,298) (7,877,298)
Distributions (14,630) (1,448,250) (1,462,880)
Balance at December 31, 1995 (42,568) 20,921,231 20,878,663
Net income 31,545 3,122,954 3,154,499
Distributions (43,887) (4,344,750) (4,388,637)
Balance at December 31, 1996 $(54,910) $19,699,435 $19,644,525
Consolidated Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rental $10,782,123 $10,838,267 $ 10,386,764
Insurance settlement, net 2,318,387 - -
Interest 204,526 199,078 97,928
Total Income 13,305,036 11,037,345 10,484,692
Expenses
Payroll 3,074,006 2,967,168 2,884,586
General and administrative 1,774,183 1,633,797 1,427,356
Rent and utilities 1,607,967 1,652,520 1,621,004
Depreciation 1,507,326 1,797,858 1,790,033
Supplies 1,136,163 1,122,448 1,020,782
Repairs and maintenance 627,158 616,998 490,095
Real estate taxes 380,439 375,926 323,412
Travel and entertainment 43,295 35,636 40,389
Earthquake loss - - 750,000
Loss on write-down of real estate - 8,712,292 -
Total Expenses 10,150,537 18,914,643 10,347,657
Net Income (Loss) $ 3,154,499 $(7,877,298) $ 137,035
Net Income (Loss) Allocated:
To the General Partner $ 31,545 $ - $ 1,370
To the Limited Partners 3,122,954 (7,877,298) 135,665
$ 3,154,499 $(7,877,298) $ 137,035
Per limited partnership unit
(4,827,500 outstanding) $.65 $(1.63) $.03
Consolidated Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities:
Net income (loss) $3,154,499 $(7,877,298) $ 137,035
Adjustments to reconcile net
income (loss) to net
cash provided by operating activities:
Insurance settlement, net (2,318,387) - -
Depreciation 1,507,326 1,797,858 1,790,033
Provision for earthquake loss - - 750,000
Loss on write-down of real estate - 8,712,292 -
Loss on disposal of asset - 6,998 -
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Prepaid expenses (31,977) 18,084 (5,408)
Accounts payable and accrued expenses 124,883 (223,778) 225,864
Deferred rent payable 45,395 45,395 45,396
Due to affiliates 774 2,159 (628)
Security deposits payable 3,225 (300) 1,000
Net cash provided by operating activities 2,485,738 2,481,410 2,943,292
Cash Flows From Investing Activities:
Proceeds from insurance settlement 3,200,000 - -
Legal fees and payment on
construction contract (223,593) - -
Purchase of general partnership interest (850,000) - -
Additions to real estate (262,540) (190,674) (233,075)
Proceeds from disposal of asset - 10,000 -
Net cash provided by (used for)
investing activities 1,863,867 (180,674) (233,075)
Cash Flows From Financing Activities:
Distributions paid to partners (4,388,637) (1,462,880) (1,462,880)
Net cash used for financing activities (4,388,637) (1,462,880) (1,462,880)
Net increase (decrease) in cash
and cash equivalents (39,032) 837,856 1,247,337
Cash and cash equivalents,
beginning of year 4,143,727 3,305,871 2,058,534
Cash and cash equivalents,
end of year $4,104,695 $4,143,727 $3,305,871
Supplemental Disclosure of Non-Cash
Investing Activities:
Settlement costs funded through
accounts payable $ 658,020 $ - $ -
Capital expenditures funded
through accounts payable $ - $ 33,500 $ 47,829
Notes to the Consolidated Financial Statements
December 31, 1996, 1995 and 1994
1. Organization
Senior Income Fund L.P. (the "Partnership"), a Delaware limited
partnership (see below), was formed on October 14, 1986 for the
purpose of acquiring a general partnership interest in Shearson
August Property Partnership (the "Property Partnership"), a
California general partnership. The Property Partnership was
formed to acquire and operate four specified senior residential
properties (the "Properties", see Note 7). The General Partner
of the Partnership is Senior Income Fund Inc., (the "General
Partner"), a Delaware corporation, and an affiliate of Lehman
Brothers Inc. (see below). The other general partner, through
November 21, 1996 as discussed below, of the Property Partnership
is August Financial Partners II ("AFP-II"), an affiliate of
August Financial Corporation ("August"). The Partnership will
continue until December 31, 2036, unless terminated sooner in
accordance with the terms of the Partnership Agreement.
The initial capital contributions to the Partnership totaled
$110, representing capital contributions of $100 by the General
Partner and $10 by Senior Income Depositary Inc., formerly known
as Shearson Lehman Senior Depositary, Inc. (the Assignor Limited
Partner).
The agreement of limited partnership authorized the issuance of
4,827,500 depositary units at $10 per unit, which represent
assignments of economic and certain other rights attributable to
the partnership interests. The offering period ended on March
17, 1987, at which time 4,827,500 depositary units had been
issued.
On March 25, 1987, the Property Partnership acquired the
Properties from Senior Inns of America Venture, an affiliate of
August, for an aggregate purchase price of $40,400,000, which was
reduced by $1,491,664, the amount of purchase price holdback used
to cover the minimum yield guaranty (see Note 4). In addition,
an affiliate of the General Partner received $2,400,000 (see Note
7) in connection with the acquisition of the Properties. In
December 1986, August had purchased a 100% interest in Senior
Inns of America Venture for $38,000,000.
On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of
its domestic retail brokerage and asset management businesses to
Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney").
Subsequent to the sale, Shearson changed its name to Lehman
Brothers Inc. ("Lehman Brothers"). The transaction did not
affect the ownership of the General Partner. However, the assets
acquired by Smith Barney included the name "Shearson."
Consequently, effective October 29, 1993, the Shearson Lehman
Senior Income Fund, Inc. General Partner changed its name to
Senior Income Fund Inc., and effective December 23, 1993,
Shearson Lehman Senior Income Fund Limited Partnership changed
its name to Senior Income Fund L.P.
On February 20, 1996, based upon, among other things, the advice
of legal counsel, Skadden, Arps, Slate, Meagher & Flom, the
General Partner adopted a resolution that states, among other
things, if a Change of Control (as defined below) occurs, the
General Partner may distribute the Partnership's cash balances
not required for its ordinary course day-to-day operations.
"Change of Control" means any purchase or offer to purchase more
than 10% of the Units that is not approved in advance by the
General Partner. In determining the amount of the distribution,
the General Partner may take into account all material factors.
In addition, the Partnership will not be obligated to make any
distribution to any partner and no partner will be entitled to
receive any distribution until the General Partner has declared
the distribution and established a record date and distribution
date for the distribution.
On November 21, 1996, the Partnership purchased the general
partnership interest of the successor to AFP-II for a purchase
price of $850,000. The Partnership's purchase of the general
partnership interest was funded from cash reserves. As a result
of such purchase, the Property Partnership will be dissolved and
all of its assets will be distributed to the Partnership.
Accordingly, all sale proceeds received upon a sale of any
property will belong to the Partnership and no amount will be
owed to AFP-II.
2. Significant Accounting Policies
Financial Statements - The consolidated financial statements
include the accounts of the Partnership and the Property
Partnership from inception through November 21, 1996. The effect
of transactions between the Partnership and the Property
Partnership have been eliminated in consolidation. As described
in Note 1, as of November 21 ,1996, the Property Partnership will
be dissolved.
Cash and Cash Equivalents - Cash and cash equivalents consist of
short-term highly liquid investments, including commercial paper,
which have maturities of three months or less from the date of
purchase. The carrying value approximates fair value because of
the short maturity of these instruments. Certain cash and cash
equivalents reflected on the Partnership's balance sheet were on
deposit with an affiliate of the General Partner during a portion
of 1996 and all of 1995. At December 31, 1996, no cash and cash
equivalents were on deposit with an affiliate of the General
Partner.
Concentration of Credit Risk - Financial instruments which
potentially subject the Partnership to a concentration of credit
risk principally consist of cash and cash equivalents in excess
of the financial institutions' insurance limits. The Partnership
invests available cash with high credit quality financial
institutions.
Real Estate Investments - Real estate investments are stated at the
lower of cost, less accumulated depreciation, or fair value.
Cost includes the initial purchase price of the property, legal
fees, acquisition and closing costs. Depreciation is computed
using the straight-line method based upon the estimated useful
lives of the properties. Maintenance and repairs are charged to
operations as incurred. Significant betterments and improvements
are capitalized and depreciated over their useful lives.
For assets sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in income for the period. In
1994, (see Note 11), two of the Partnership's properties suffered
earthquake damages and consequently, a net building basis
adjustment and corresponding reduction in depreciation expense
resulted.
Accounting for Impairment - In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"),
which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. FAS
121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Partnership adopted FAS 121 in
the fourth quarter of 1995.
Real Estate Assets Held for Disposition - Real estate assets held
for disposition are carried at the lower of carrying value or
fair market value less costs to sell. During the fourth quarter
of 1996, all real estate assets were reclassified as held for
disposition and will no longer be depreciated. No adjustment to
carrying value resulted from the reclassification.
Leases - Leases are accounted for under the operating method.
Under this method, revenue is recognized as rentals are earned
and expenses (including depreciation) are charged to operations
when incurred. Leases are generally for terms of one year or
less.
Fair Value of Financial Instruments Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("FAS 107"), requires that the Partnership
disclose the estimated fair values of its financial instruments.
Fair values generally represent estimates of amounts at which a
financial instrument could be exchanged between willing parties
in a current transaction other than in forced liquidation.
Fair value estimates are subjective and are dependent on a number
of significant assumptions based on management's judgment
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments, and other factors. In addition, FAS 107 allows a
wide range of valuation techniques, therefore, comparisons
between entities, however similar, may be difficult.
Income Taxes No provision for income taxes has been made in the
consolidated financial statements since income, losses and tax
credits are passed through to the individual partners.
Use of Estimates The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications - Certain prior year amounts have been
reclassified in order to conform to the current year's
presentation.
3. Property Partnership and Partnership Agreements
Property Partnership Agreement
With respect to the Property Partnership, the Partnership had a
100% interest, during the guaranty period (through December 31,
1989), in the income, losses and cash distributions of the
Property Partnership, other than expenses and deductions
allocable to AFP-II to the extent of its funding of the Minimum
Yield Guaranty (see Note 4). After the guaranty period, all
income, losses and cash distributions were to be allocated 100%
to the Partnership until it received its Cumulative Preferred
Return, as defined, and thereafter 99.5% to the Partnership and
.5% to AFP-II.
Distributions of Net Cash Flow from Operations, Net Proceeds from
Interim Capital Transactions and Net Proceeds upon Dissolution
were to be distributed 95% to the Partnership and 5% to AFP-II.
On November 21, 1996, the Partnership purchased AFP-II's interest
in the Property Partnership. Accordingly, all Net Cash Flow from
Operations, Net Proceeds from Interim Capital Transactions and
Net Proceeds from Dissolution will be paid to the Partnership and
no amount will be owed to AFP-II.
Partnership Agreement
The Partnership Agreement provides for the allocation of Income,
Losses, Net Cash Flow from Operations, Net Proceeds from Interim
Capital Transactions and Net Proceeds upon Dissolution, as
follows:
Income is allocated 99% to the Limited Partners and 1% to the
General Partner until the Limited Partners have received their
Preferred Return, as defined. The balance is allocated 95% to
the Limited Partners and 5% to the General Partner.
Losses are allocated to the General Partner and Limited Partners
in proportion to, and to the extent of their positive capital
account balances, as defined. At such time as the partners'
capital account balances are zero, losses will be allocated in
the same proportion as distributions.
Net Cash Flow from Operations with respect to each fiscal year
will generally be distributed 99% to the Limited Partners and 1%
to the General Partner, until such time as each Limited Partner
has received an amount equal to his Preferred Return, as defined.
The Partnership's share of any remaining Net Cash Flow from
Operations will be distributed 95% to the Limited Partners and 5%
to the General Partner.
Net Proceeds from Interim Capital Transactions, as defined,
generally will be distributed 99% to the Limited Partners and 1%
to the General Partner until each Limited Partner has received an
amount equal to his unpaid Cumulative Preferred Return and
Unrecovered Capital, as defined. The Partnership's share of any
excess Net Proceeds will be distributed 95% to the Limited
Partners and 5% to the General Partner.
Net Proceeds upon Dissolution will be made in proportion to
partners' capital accounts. It is anticipated that Net Proceeds
from any final liquidation of the Partnership's assets generally
will be distributed 99% to the Limited Partners and 1% to the
General Partner until each Limited Partner has received an amount
equal to any unpaid Preferred Return and his Unrecovered Capital
as defined. The Partnership's share of any excess Net Proceeds
generally will be distributed 95% to the Limited Partners and 5%
to the General Partner.
4. Minimum Yield Guaranty and Litigation Settlement
In connection with the acquisition of the Properties, AFP-II,
through December 31, 1989, provided the Partnership a minimum
yield guaranty that the Properties would generate sufficient
revenues to fund all operating expenses and pay the Partnership a
minimum 9.09% yield on its Invested Capital, as defined. To the
extent net operating cash flows were not sufficient to provide
the minimum yield, additional amounts were to be funded by
AFP-II. On February 15, 1989, the Partnership was informed by
AFP-II and August that they were financially unable to meet any
continuing minimum yield obligations. Subsequently, several
class action lawsuits were commenced against the Partnership. In
October 1989, the Partnership entered into a Stipulation and
Agreement of Compromise and Settlement (the "Settlement"). Under
the terms of the Settlement, AFP-II was required to pay
$2,500,000 which amount was deemed to be additional invested
capital and was fully offset by an expense allocation. AFP-II
has no further obligation to fund any amounts under the minimum
yield guaranty. Additional amounts owed to the partners under
the minimum yield guaranty for the default period amounted to
$1,750,000 and were paid directly by the Lehman Brothers Group,
Inc. ("Group"), an affiliate of the General Partner in February
1990. The Group's share of the minimum yield guaranty has not
been reflected in the accompanying financial statements, since
Group, while an affiliate of the General Partner, is not a
partner.
Additional terms of the Settlement stipulate the following: (1)
Group will provide a minimum yield guaranty to the partners of
4.5% and 5.25% for the years ended December 31, 1990 and 1991,
respectively; (2) the Property Partnership Agreement has been
amended, reducing to 5% AFP-II's share of potential distributions
on dissolution and liquidation of the Property Partnership (see
Note 3); and (3) any amounts of unpaid Preferred Return (see Note
3) which accrue after January 1, 1990 through the dissolution and
liquidation of the Partnership shall earn a 9% return, up to a
maximum of $10,000,000. Previously, the unpaid preferred return
was non-interest bearing
5. Property Management
As of April 6, 1988, the Partnership entered into a Property
Management Agreement with Leisure Care, Inc., (the "Operator"),
which is not affiliated with the General Partner or AFP-II. The
Operator supervises the day-to-day management of the Properties
and acts as nonexclusive leasing agent for the Properties.
On December 31, 1993, the original Property Management Agreement
expired and an extension was executed between the General Partner
and the Operator effective through June 30, 1995. Certain terms
of the original Property Management Agreement have been modified
as set forth in the extension. Changes with respect to
compensation and/or fees are summarized herein:
(i) for services rendered by the Operator, a base monthly management fee will
be paid for each property equal to 3% of the monthly collected gross income
from each property;
(ii) for any remodel or addition to any of the properties costing in excess of
$10,000, the Owner shall pay Operator additional fees equal to 10% of the total
cost of the work managed by Operator. The fees shall be paid monthly to
Operator as costs are incurred;
(iii) the performance incentive fee has been replaced with the
following terms: The Operator shall be entitled to payment of
three different types of performance incentive fees which shall
be paid on an estimated basis each month based on the year-to-
date figures available for that month. The Net Profit Incentive
Fee, as defined in the Property Management Agreement, equals 100%
of the amount, if any, by which net profit for all properties
exceeds a yearly threshold amount. The Post-Replacement Reserve
Incentive Fee, as defined in the Property Management Agreement,
equals 100% of the total excess net profit, if any, for all of
the properties after deducting an amount equal to 2% of the gross
income. The Profit Sharing Incentive Fee, as defined in the
Property Management Agreement, equals 25% of the final profit
amount, if any, for all of the properties. However, each of the
three incentive fees will not exceed 1% of the total gross income
for all of the properties in any one year. Each of the parties
may terminate the agreement for any reason or no reason at all,
upon 60 days prior written notice to the other party. In
addition, the Operator will also be reimbursed for certain
expenses incurred in connection with the Properties.
On June 30, 1995, the extension to the original Property
Management Agreement expired and a new extension was executed
between the General Partner and the Operator which was effective
through July 1, 1996. Effective June 30, 1996, a new extension was
executed between the General Partner and the Operator for an
additional year which expires on July 1, 1997. All of the terms
and conditions of the original extension of the Management
Agreement shall remain in full force and effect through the new
expiration date.
Management fees for the years ended December 31, 1996, 1995 and
1994 amounted to approximately $323,000, $325,000 and $312,000,
respectively. The Operator was owed approximately $87,000,
$59,000 and $55,000 at December 31, 1996, 1995 and 1994,
respectively.
For the years ended December 31, 1996, 1995 and 1994, the
Operator earned $169,545, $298,415 and $264,953, respectively, in
performance incentive fees.
6. Transactions with Related Parties
The Partnership reimburses the General Partner or its affiliates
for certain administrative expenses. For the years ended
December 31, 1996, 1995 and 1994, the General Partner or its
affiliates were reimbursed approximately $27,000, $13,000, and
$8,000, respectively. The General Partner or its affiliates were
owed approximately $191,000, $190,000 and $188,000 at December
31, 1996, 1995 and 1994, respectively.
7. Real Estate
The following table sets forth the purchase price for each of the
Properties, which amounts do not include the amount of the
purchase price holdback and related acquisition expenses:
Initial
# of Acquisition
Property Name Units Location Cost
Pacific Inn 134 Torrance, California $13,927,368
Nohl Ranch Inn 133 Anaheim, California 12,864,211
Ocean House 121 Santa Monica, California 7,761,053
Prell Gardens 102 Van Nuys, California 5,847,368
$40,400,000
The acquisition fee of $2,400,000 paid to Lehman Brothers, and
certain other costs of $631,868 related to the acquisition of the
Properties have been allocated on a pro rata basis to the assets
acquired.
Pursuant to the requirements of FAS 121 and to obtain further
support in connection with the Partnership's insurance claim and
engineering studies (see Note 11), during the fourth quarter of
1995 the Partnership obtained preliminary estimates of fair
market value from an independent appraiser. Such estimates of
fair value make use of a combination of certain generally
accepted valuation techniques, including direct capitalization
and comparative sales analyses, and, in the instances of
Ocean House and Prell Gardens, have considered the structural
damage caused by the Northridge earthquake (see Note 11). As a
consequence of this valuation process, and pursuant to the
requirements of FAS 121, the Partnership recognized an impairment loss of
$8,712,292 as of December 31, 1995. The losses of $4,809,497,
$2,081,900 and $1,820,895, aggregating the $8,712,292, are
attributable to Ocean House, Prell Gardens and Nohl Ranch Inn,
respectively.
On November 21, 1996, the Partnership purchased the general
partnership interest of the successor to AFP-II for a purchase
price of $850,000. Accordingly, the purchase resulted in an
additional investment of $850,000 in the Properties.
The General Partner is currently marketing the Properties for
sale and it is expected that a sale will be completed during
1997. Accordingly, the Properties have been reclassified on the
Consolidated Balance Sheet as "Real estate assets held for
disposition".
8. Distributions Paid
Cash distributions, per the consolidated statements of partners'
capital, are recorded on the accrual basis, which recognize
specific record dates for payments within each calendar year.
The consolidated statements of cash flows recognize actual cash
distributions paid during the calendar year. The following table
discloses the annual amounts as presented on the consolidated
financial statements:
Distributions Distributions
Payable Distributions Distributions Payable
Beginning of Year Declared Paid December 31
1996 $365,720 $4,388,637 $4,388,637 $365,720
1995 365,720 1,462,880 1,462,880 365,720
1994 $365,720 $1,462,880 $1,462,880 $365,720
9. Commitments
The land on which Ocean House is located is leased to the
Partnership under a ground lease which expires in 2016. The
lease carries renewal options for two 33-year periods. Under the
ground lease, a sale of Ocean House by the Partnership will
require the consent of the lessor, which consent shall not be
unreasonably withheld. The Partnership is recording ground rent
expense on a straight-line basis, at an annual amount of
$921,396, resulting in deferred ground rent payable.
Future minimum rental payments to be paid under the ground lease
at December 31, 1996 are as follows:
Year Amount
1997 $876,000
1998 876,000
1999 876,000
2000 876,000
2001 876,000
Thereafter 14,855,000
$19,235,000
10. Reconciliation of Net Income (Loss) to Taxable Income
The following is a reconciliation of the net income (loss) for
consolidated financial statement purposes to net income for
federal income tax purposes for the years ended December 31,
1996, 1995 and 1994:
1996 1995 1994
Net income (loss) per consolidated
financial statements $3,154,499 $(7,877,298) $137,035
Depreciation deducted for tax
purposes in excess of
depreciation expense per
consolidated financial statements (172,815) (48,925) (69,673)
Tax basis Property Partnership
net income (loss) in excess of GAAP
basis Property Partnership consolidated
net income (1,548,903) 1,228,748 1,003,399
Consolidated financial statement loss on
write-down of real estate over tax
basis loss on write-down of real estate - 8,712,292 -
Other - 861 514
Taxable net income $1,432,781 $2,015,678 $1,071,275
The following is a reconciliation of consolidated partners'
capital for consolidated financial statement purposes to
partners' capital for federal income tax purposes as of December
31, 1996, 1995 and 1994:
1996 1995 1994
Partners' capital per consolidated
financial statements $19,644,525 $20,878,663 $30,218,841
Adjustment for cumulative
difference between tax basis
net income and net income (loss)
per consolidated financial statements 5,714,323 7,436,041 (2,456,074)
Partners' capital per tax return $25,358,848 $28,314,704 $27,762,767
11. Earthquake Loss and Insurance Settlement
As a result of the Northridge earthquake that struck the greater
Los Angeles area on January 17, 1994, damages were sustained at
two of the properties, Ocean House and Prell Gardens. The
Partnership has earthquake insurance with a deductible equal to
5% of the replacement costs of the properties, as determined by
an independent appraisal. The General Partner engaged an
independent appraiser to determine the replacement costs, and the
Partnership's deductibles, which were estimated not to exceed
$500,000 and $250,000 for Ocean House and Prell Gardens,
respectively. The provision for earthquake loss of $750,000,
which was recorded in 1994, represents the estimated insurance
deductibles for the two properties.
The Partnership engaged an independent structural and seismic
engineer who advised the General Partner, and the City of Santa
Monica as it relates to Ocean House, that the repairs to date, at
both Ocean House and Prell Gardens, have rendered both buildings
safe for continued occupancy. However, the engineer concluded
that additional structural improvements would be needed to make
both buildings less vulnerable to future earthquakes, and to
bring them into compliance with building codes enacted subsequent
to the construction of the properties (the "Retrofit Work") and
building codes that were enacted after the January 1994
earthquake (the "Structural Enhancements"). The total revised
cost to complete the work at both buildings is estimated to be
approximately $2,850,000. This revised total is inclusive of the
cost of the initial work already completed, the estimated cost of
the Retrofit Work and Structural Enhancements and the cost to
complete other less immediate earthquake-related repair work.
The total revised approximate cost is based on the most recent
contract as it relates to Prell Gardens and engineering estimates
as it relates to Ocean House. The repairs are structural in
nature, and are not expected to enhance the overall value of the
buildings.
With respect to Prell Gardens, the City of Los Angeles recently
approved the Partnership's plans and granted the Partnership the
necessary permits to begin work, which is currently underway.
The Partnership's contractor estimates that the work will cost
approximately $360,000 and will require 3 to 6 months to
complete. The Retrofit Work and Structural Enhancements have not
yet begun at the Ocean House property. Plans pertaining to the
repairs at Ocean House have been prepared and submitted to the
City of Santa Monica, where the property is located. In June
1994, the City of Santa Monica enacted a new building ordinance
as a result of the Northridge Earthquake. However, due to
pressure from numerous Santa Monica property owners, the City is
currently considering a revision of this new ordinance and to
date no revision has been made. The Partnership's construction
plans have been prepared in accordance with the new ordinance.
The possible revision being considered by the City of Santa
Monica could reduce the scope and final cost of the work.
The General Partner pursued reimbursement from the insurance
carrier for the additional repair costs, less the deductible,
under the Partnership's insurance policy. However, the insurance
carrier refused to cover the cost to bring the buildings into
compliance with building codes enacted after the Northridge
Earthquake. The insurance carrier also disputed the amount of
damage the buildings sustained. As a result, on September 15,
1995, the General Partner initiated litigation against the
insurance carrier and insurance broker. On November 19, 1996,
the Partnership and General Partner, executed a Mutual Release
and Settlement Agreement (the "Settlement Agreement") with the
Insurance Company of North America ("INA"), whereby the
Partnership agreed to release INA from all claims pending under
the lawsuit and to assign its remaining claim against the
insurance broker to the insurance carrier. The Partnership
received $3,200,000 from INA pursuant to the Settlement
Agreement. Costs associated with the litigation which include
legal, expert witness and engineering fees and a payment on the
construction contract for Prell Gardens were offset against the
$3,200,000 resulting in net insurance settlement income of
$2,318,387.
During November 1995, the insurance carrier determined that the
damage sustained at the Prell Gardens property was in excess of
the applicable $250,000 deductible, leaving a net claim of
$28,531 which was paid to the Partnership and applied against
building basis. The net claim of $28,531 represents the
undisputed amount under this claim, notwithstanding the separate
claims relating to the structural improvements required at Prell
Gardens. The insurance carrier determined for the Ocean House
property that the damage sustained was less than the applicable
deductible of $500,000.
The building basis costs of Ocean House and Prell Gardens were
reduced by the $750,000 provision for earthquake loss in 1994.
As repairs were incurred, the basis of the buildings were being
restored to their original levels. At December 31, 1996, Ocean
House and Prell Gardens have, cumulatively, incurred earthquake
repairs of $231,163 and $40,039, respectively, which primarily
represents initial earthquake repairs incurred in 1994 and 1995.
Report of Independent Accountants
To the Partners of
Senior Income Fund Limited Partnership:
We have audited the consolidated balance sheets of Senior Income
Fund Limited Partnership, a Delaware limited partnership, and
Consolidated Venture as of December 31, 1996 and 1995, and the
related consolidated statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the
period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Senior Income Fund Limited Partnership, a
Delaware limited partnership and Consolidated Venture as of
December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
March 19, 1997
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1996
Real Estate Assets held for Disposition:
Residential
Property (1): Ocean Prell Nohl
House Gardens Pacific Inn Ranch Inn Total
Location Santa Monica, CA Van Nuys, CA Torrance, CA Anaheim, CA NA
Construction date NA NA NA NA NA
Acquisition date 03-25-87 03-25-87 03-25-87 03-25-87 NA
Life on which
depreciation
in latest income
statements is computed (2) (2) (2) (2) NA
Encumbrances (3) $- $- $- $- $-
Initial cost to
Partnership:
Land - 1,441,614 2,402,690 816,915 4,661,219
Buildings and
improvements 7,496,394 4,613,166 11,436,807 12,157,614 35,703,981
Costs capitalized
subsequent to
acquisition:
Land - 103,834 173,057 58,840 335,731
Buildings and
improvements 1,134,934 1,102,629 1,006,076 1,122,879 4,366,518
Other charges (4):
Land - (53,274) (79,703) (30,188) (163,165)
Buildings and
improvements (8,607,013)(4,579,455) 418,274 (7,431,237)(20,199,431)
Gross amount at which
carried at close of period (5):
Land $- $1,492,174 $2,496,044 $845,567 $4,833,785
Buildings and
improvements 24,315 1,136,340 12,861,157 5,849,256 19,871,068
24,315 2,628,514 15,357,201 6,694,823 24,704,853
Accumulated
depreciation (5) $2,773 $53,384 $6,144,159 $203,452 $6,403,768
(1) These properties are senior residential properties.
(2) Buildings and improvements - 40 years; personal property - 10 years.
(3) The property partnership purchased the properties on an all cash basis.
(4) a) In 1990, the purchase price was reduced by the amount of the purchase
price holdback used to cover the minimum yield guaranty in the amount of
$1,491,664; b) In 1994, the building basis costs of Ocean House and Prell
Gardens were reduced by the provision for earthquake loss in the amount of
$750,000 and increased by earthquake repairs of $271,202, resulting in a net
building basis reduction of $478,798. The balance at Nohl Ranch Inn includes
the disposition of transportation equipment; c) During 1995, the Partnership
recognized a write-down of the carrying value of Ocean House, Prell Gardens and
Nohl Ranch Inn of $4,809,497, $2,081,900 and $1,820,895, respectively,
aggregating $8,712,292. The net book value adjusted for the write-down,
becomes the new carrying value for the properties; d) In 1996, the Partnership
purchased the general partnership interest of the successor to AFP-II for a
purchase price of $850,000. The building basis and land of Pacific Inn were
increased by $840,914 and $9,086, respectively.
(5) For Federal income tax purposes, the aggregate cost of real estate and the
amount of accumulated depreciation is $40,972,953 and $18,248,682,
respectively.
A reconciliation of the carrying amount of real estate and
accumulated depreciation for the years ended
December 31, 1996, 1995, and 1994 follows:
1996 1995 1994
Real estate investments:
Beginning of year $23,592,313 $42,664,480 $43,133,576
Additions 1,112,540 99,636 80,031
Less disposition - (25,820) -
Write down of real estate - (19,270,521) -
Write down for earthquake - 124,538 (549,127)
End of year $24,704,853 $23,592,313 $42,664,480
Accumulated depreciation:
Beginning of year $ 4,896,442 $13,665,635 $11,875,602
Depreciation expense 1,507,326 1,797,858 1,790,033
Disposition - (8,822) -
Write down of real estate - (10,558,229) -
End of year $ 6,403,768 $ 4,896,442 $13,665,635
Report of Independent Accountants
Our report on the consolidated financial statements of Senior
Income Fund Limited Partnership, a Delaware limited partnership,
and Consolidated Venture has been incorporated by reference in
this Form 10-K from the Annual Report to Unitholders of Senior
Income Fund Limited Partnership for the year ended
December 31, 1996. In connection with our audit of such
financial statements, we have also audited the related financial
statement schedule listed in the index of this Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
March 19, 1997
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<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 4,104,695
<SECURITIES> 000
<RECEIVABLES> 000
<ALLOWANCES> 000
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<OTHER-SE> 19,644,525
<TOTAL-LIABILITY-AND-EQUITY> 22,574,039
<SALES> 10,782,123
<TOTAL-REVENUES> 13,305,036
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