UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1995 Commission file number: 0-15725
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SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1449733
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(State of organization) (I.R.S. Employer Identification No.)
218 North Charles Street, Suite 500, Baltimore, Maryland 21201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 962-0595
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
None None
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Securities registered pursuant to Section 12(g) of the Act: None
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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 [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) 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.
Yes [X]
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The Registrant is a partnership. Accordingly, no voting stock is held
by non-affiliates of the Registrant.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part of the
Form 10-K Document Incorporated by Reference
- ----------- -----------------------------------
I. Pages 25-30 of the Series I Prospectus of the Registrant
dated June 3, 1986 (the "Prospectus") filed with the
Commission pursuant to Rule 424(b).
Pages S-3 through S-10 of the Supplement to the Prospectus
dated June 3, 1986 filed with the Commission pursuant to
Rule 424(b).
Pages 2-3 and 6-9 of the Supplement to the Prospectus dated
October 6, 1986 included in Post-Effective Amendment No.1
to the Partnership's Registration Statement on Form S-11,
filed with the Commission on November 3, 1986.
Pages 2-8, 10-13 and 14-18 of the Supplement to the
Prospectus dated November 28, 1986 included in
Post-Effective Amendment No. 3 to the Partnership's
Registration Statement on Form S-11, filed with the
Commission on February 3, 1987.
Pages 4 of the 1987 Form 10-K filed with the Commission
on March 30, 1988.
Pages 10-16 of the 1987 Annual Report to Investors.
Pages 4 of the 1988 Form 10-K filed with the Commission on
March 31, 1989.
Page A-18 of the 1988 Form 10-K filed with the Commission
on March 31, 1989.
Page A-25 and A-26 of the 1989 Form 10-K filed with the
Commission on April 2, 1990.
Page A-23 through A-25 of the 1990 Form 10-K filed with
the Commission on April 1, 1991.
Page A-27 and A-28 of the 1991 Form 10-K filed with the
Commission on March 30, 1992.
Page A-36 and A-37 of the 1992 Form 10-K filed with the
Commission on March 30, 1993.
III. Pages 15-17 and 49-52 of the Prospectus.
<PAGE>
PART I
ITEM 1. BUSINESS.
Description of Business
The SCA Tax Exempt Fund Limited Partnership (the "Partnership")
was organized in 1986 and had two public offerings of Beneficial Assignee
Certificates ("BACs") representing the assignment of limited partnership
interests. The Partnership was organized for the purpose of acquiring a
portfolio of tax-exempt mortgage revenue bonds issued by various state or
local governments or their agencies or authorities. The portfolio is made up
of two distinct pools ("Series I and Series II") of mortgage revenue bonds.
SCA Realty I, Inc. is the .01% Managing General Partner and SCA
Associates 86 Limited Partnership is the .99% Associate General Partner
(collectively, the "General Partners").
The Partnership previously has presented financial statements for each
of Series I and Series II reflecting the pool of investments attributable to
each Series. Following a review of the Partnership's financial statements in
1995, the Staff of the Securities and Exchange Commission (the "SEC") concluded,
and the Managing General Partner agreed, that the Partnership would present
financial statements comprising both Series I and Series II. Financial
information with respect to each Series is set forth supplementally in Note 9
to the Partnership's financial statements included herein.
The consolidated financial statements of the Partnership include the
Partnership (comprising both Series I and Series II), the SCA Tax Exempt
Trust (the "Trust") and MLP III Investment Limited Partnership ("MLP III").
The Trust and MLP III are discussed in more detail in Note 3 to the
Partnership's financial statements included herein.
The only business of the Partnership is investing in mortgage revenue
bonds. As discussed more fully herein, the Partnership has acquired 23
mortgage revenue bonds utilizing the proceeds of its public offering. The
Partnership continues to adhere to its investment objectives and policies as
described at pages 25-30 of the Prospectus under the caption "Business
Objectives and Investment Policies," which is incorporated herein by
reference. A general description of the mortgage revenue bonds, a summary
of the mortgage revenue bonds owned by the Partnership, and more complete
descriptions of the specific mortgage revenue bonds together with the
underlying mortgaged properties are set forth within the following documents
which descriptions are incorporated by reference herein:
Pages S-3 to S-10 of the Supplement to the Prospectus dated
June 3, 1986
Pages 2-3 and 6-9 of the Supplement to the Prospectus dated
October 6, 1986
Pages 2-8, 10-13 and 14-18 of the Supplement to the
Prospectus dated November 28, 1986
Pages 4 of the 1987 Form 10-K filed with the Commission on
March 30, 1988
Pages 10-16 of the 1987 Annual Report to Investors
Pages 4 of the 1988 Form 10-K filed with the Commission on
March 31, 1989.
In addition, certain information with respect to the mortgage revenue
bonds, and the properties securing the mortgage revenue bonds, is set forth
herein.
In order to provide loan funds for transaction costs which could not
be covered within the tax-exempt mortgage revenue bonds due to changes
contained in the Tax Reform Act of 1986, the Partnership has used a small
portion of BAC proceeds, approximately 1% in Series I and 3% in Series II,
to provide taxable working capital loans to the developers of mortgaged
properties. Each of the original working capital loans is payable on the same
terms and conditions as the corresponding mortgage revenue bonds, but
interest on the working capital loans is taxable and results in a portion of the
income to be realized by the BAC Holders being included in their gross
income for federal income tax purposes.
During 1988, as a result of workout negotiations initiated by the
borrowing entity, a limited partnership with SCA Successor, Inc. (the "New
Borrower"), an affiliate of the Managing General Partner, as general partner,
received the deed to the Barkley Place property in lieu of the Partnership
pursuing foreclosure actions against the borrower. A discussion of this
transaction is described at page A-18 of the 1988 Form 10-K filed with the
Commission on March 31, 1989, and is included herein by reference.
During 1989, the borrowing entities for both the Montclair and the
Newport Village properties initiated workout negotiations with the
Partnership due to various circumstances. These negotiations resulted in the
transfer of the properties' deeds to New Borrowers in lieu of foreclosure by
the Partnership. A discussion of these transactions is included on pages A-25
and A-26 of 1989 Form 10-K filed with the Commission on April 2, 1990
and is included herein by reference.
In September 1989, just prior to the occurrence of a monetary
default, the borrower for the Steeplechase Falls project declared bankruptcy.
The Managing General Partner took appropriate steps to protect the
Partnership's interest in this property, and on March 18, 1993 negotiated
terms of a transfer of deed-in-lieu of foreclosure to a New Borrower. A
discussion of this transaction is included on page A-36 of 1992 Form 10-K
filed with the Commission on March 30, 1993 and is included herein by
reference.
In May 1990, the Managing General Partner and the original
borrowers of Gilman Meadows, Mallard Cove I and Mallard Cove II entered
into an agreement that provided for an affiliate of the Managing General
Partner to assume management of the properties and for the borrowers to
grant deeds-in-lieu of foreclosure to New Borrowers. A discussion of these
transactions is included on page A-37 of the 1992 Form 10-K filed with the
Commission on March 30, 1993 and is included herein by reference.
During 1990 the Managing General Partner entered into negotiations
with St. Louis Park Housing Partners, the borrowing partnership for
Newport on Seven, a Series I property. These negotiations were concluded
in 1991 and are discussed on page A-28 of 1991 Form 10-K filed with the
Commission on March 30, 1992 and is included herein by reference.
In December 1990, the Managing General Partner successfully
negotiated with the original borrower to transfer the deed to the Nicollet
Ridge property in lieu of foreclosure to a New Borrower. This action
resulted after a series of actions taken against the borrower when the
property came into monetary default. A discussion of these transactions is
included on pages A-24 and A-25 of 1990 Form 10-K filed with the
Commission on April 1, 1991 and is included herein by reference.
In March 1991, at the request of the Managing General Partner, a
receiver was appointed by the court to take control of the Creekside property
from the original borrower. On February 9, 1994, a New Borrower received
the deed to the Creekside property in lieu of the Partnership pursuing
foreclosure actions against the borrower.
In August 1991, the borrowing partnership for The Meadows was
declared in default for failure to pay its full base interest. After subsequent
workout discussions, the borrower transferred the deed to the property to a
New Borrower on March 2, 1992. A more complete discussion of this
property is included on page A-28 of the 1991 Form 10-K filed with the
Commission on March 30, 1992 and is included herein by reference.
In September 1991, the borrowing partnerships for North Pointe
(formerly Shandin Hills) and Whispering Lake were declared in default for
failure to pay their full base interest. After the guarantor for each property
indicated its inability to fully fund, on a current basis, the operating
deficits for either property, the Managing General Partner entered into workout
discussions with the guarantor and respective borrowers. As a result of these
negotiations, settlement agreements were executed with the guarantor and
respective borrowers for each property. A more complete discussion of these
transactions are included as set forth on pages A-36 and A-37 of the 1992
Form 10-K filed with the commission on March 30, 1993 and is included
herein by reference.
During 1993, the borrowing partnerships for Willowgreen and
Hamilton Chase were declared in default for failure to pay the full base
interest, and the guarantors were unable to fully fund the deficit. Therefore,
the Managing General Partner entered into workout discussions with the
guarantors and respective borrowers. On February 24, 1994, an agreement
was reached whereby an affiliate of the Managing General Partner replaced
the managing general partner of the original borrowing partnership for the
Hamilton Chase property. The amended partnership agreement was executed
on June 13, 1994 thus completing the workout negotiations. On November
21, 1994 the deed to Willowgreen was transferred to a New Borrower in lieu
of foreclosure by the Partnership.
During 1994, property level reserves on Lakeview Gardens were
exhausted and the original borrower refused to fund the operating deficits of
the property. The Managing General Partner, in anticipation of the pending
default, initiated workout discussions with the original borrower in the fourth
quarter of 1994. The transfer of the deed to a New Borrower was completed
on April 19, 1995.
On January 1, 1995, SCA Successor, Inc., the General Partner of the
New Borrowers, withdrew and was replaced by SCA Successor II, Inc., an
affiliate of the Managing General Partner, as sole General Partner for the
following New Borrowers: Barkley Place, The Montclair, Newport Village,
Nicollet Ridge and Steeplechase Falls, all Series I bonds; and, Gilman
Meadows, Mallard Cove I, Mallard Cove II, The Meadows, Hamilton Chase
and Whispering Lake, all Series II bonds.
The Managing General Partner has the authority to extend additional
working capital loans to borrowers out of undistributed income and, where
available, Partnership reserves. The interest paid on all such working capital
loans is fully taxable. The Managing General Partner evaluates requests for
working capital loans on a case-by-case basis, considering economic
necessity in covering project operating expenses (excluding debt service) or
capital improvements. Interest on additional working capital loans is payable
at a maximum rate of 8% per annum.
Prior to 1992, the Managing General Partner extended additional
working capital loans of approximately $1,255,000 to the Montclair and
Barkley Place for the purpose of covering the operating deficits before debt
service of each project. No additional working capital loans were made to
any property since 1991.
Currently, the Managing General Partner anticipates making no
additional working capital loans to any properties since all properties are now
able to fully pay their operating expenses out of operational cash flow. The
Managing General Partner has the ability to make loans to cover deficits from
debt service but, to date, has not found it in the Partnership's best interest
to do so.
The Managing General Partner is responsible for a full range of loan
servicing and asset management functions for each property whose mortgage
revenue bonds are held by the Partnership. A monthly debt service
collections system provides the Managing General Partner with the ability to
monitor the timely receipt of all debt service payments and to promptly notify
a Borrower of any delinquency, deficiency or default. An extensive reporting
system allows the Managing General Partner to review and analyze the
revenue, expenses and leasing activity of each property on a monthly basis.
In addition, the Managing General Partner inspects each property and market
area at least once a year.
The loan servicing and asset management oversight is designed to
allow the Managing General Partner the ability to track the performance of
each property and to alert the Managing General Partner to potential
problems. While actions will vary depending upon the nature of an individual
problem, the Managing General Partner generally notifies the Borrower of
any problems or concerns and recommends corrective action.
The Partnership responds to defaults on mortgage revenue bonds on
a case-by-case basis, attempting, in all instances, to structure a resolution
that is in the best interests of the Partnership. After sending requisite
default notices, discussions with the developer are typically commenced. In the
event that the Managing General Partner determines that the developer
remains committed to the project and capable of successful operations, a
workout or other forbearance arrangement may be negotiated. Where the
Managing General Partner determines successful operations with the current
developer are not feasible, negotiations for the transfer of a deed-in-lieu of
foreclosure may be undertaken. To facilitate rapid transfer of a problem
property and to preserve the tax-exempt status of the bonds, New
Borrowers, with affiliates of the Managing General Partner as general
partner, are typically designated to accept the deed-in-lieu of foreclosure.
New Borrowers accept the deed-in-lieu of foreclosure subject to all of the
terms of the original loan transaction as set forth in the loan agreement and
bond indenture except for the obligations under the limited operating deficit
guarantees. In the absence of operating deficit guarantees, the Partnership
may face additional risk from operations with respect to properties for which
the New Borrowers have accepted a deed-in-lieu of foreclosure. This may
require subsidies from Partnership reserves to cover potential operating
deficits before debt service. The Partnership does not currently anticipate
that any such operating deficits before debt service will occur.
Employees
The Partnership does not have any employees. Services are
performed for the Partnership by the Managing General Partner and agents
retained by it.
Property Performance
Of the portfolio of 23 bonds held by the Partnership, 12 of the bonds
not refunded as part of the Financing (discussed under "New Business") are
structured to pay distributions from base and contingent interest payments
made by the borrowers. The remaining 11 bonds included in the Financing
pay distributions from Series B Bond interest payments made by the
borrowers. At the end of 1995, aggregate occupancy in Series I properties
was 93.6%, up from 92.1% a year ago. Aggregate occupancy in all Series
II properties was 95.9%, having increased from 95.5% in 1994. The
aggregate occupancy for retirement and elderly properties at the end of 1995
was 95.8%, having increased from 95.6% a year ago. Aggregate Series I
and Series II occupancy at the end of 1995 was 94.4% having increased from
93.3% in 1994.
Due to a variety of factors including the favorable investment climate
for rental real estate in the early 1980s, the ready availability of financing
from thrifts and institutional lenders, and the decision of many developers to
take advantage of favorable tax treatment for rental properties, unanticipated
over building of apartments occurred during the late 1980's in many localities
throughout the country. This oversupply affected a number of the markets
in which the Partnership's investments are located. Where this condition
existed, there was, until recently, an inability to raise rents as originally
anticipated because of the considerable competition. In addition, the general
economic recession that occurred in 1990 and continued into 1992
compounded the problems created by an oversupply of apartment units in
some markets. Consequently, the net cash flow from most of the properties
has been insufficient to pay the base interest due causing the Managing
General Partner to draw funds from project level sources such as reserves
and guarantees or to declare a monetary default and initiate loan workout
discussions in instances where no project level sources existed.
The large capital base of the Partnership has permitted potential risk
to be spread over a relatively large number of acquisitions to provide some
protection against unanticipated problems with a few properties. The
diversity in the geographic locations of the Partnership's properties also
provides some protection against regional economic difficulties which may
impact a single property's performance. Construction starts for new
apartment units have declined significantly throughout the United States since
the mid 1980's and fell to a record low in 1993. This decline in new
construction and the economic recovery are bringing about tightening
markets, stabilized and higher occupancies and an ability to realize greater
rent increases.
Investment Summary, Series I and Series II
Certain information with respect to the income from mortgage
revenue bonds as of December 31, 1995, including Base Interest due and
paid, the source of such payments, as well as, revenue and expense
information, is set forth in the Table below. The general loan terms for each
property are set forth in Notes 3 and 4 to the financial statements included
herein.
<PAGE>
<TABLE>
<CAPTION>
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| | | | | Total | Total | Total | Total |
Mortgaged | | | Occupancy |Occupancy| Operating | Operating | Operating | Operating |
Property Name & | Loan | Total | as of | as of | Revenues | Revenues |Expenses (1) |Expenses (1) |
Location | Amount | Units | 12/31/95 |12/31/94 |1/95 to 12/95|1/94 to 12/94|1/95 to 12/95|1/94 to 12/94|
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SERIES I | | | | | | | | |
Alban Place | 10,500,000 | 194 | 87.6%| 95.4%| 1,605,059 | 1,547,418 | 781,186 | 755,003 |
Frederick, MD | | | | | | | | |
Barkley Place | 9,630,000 | 156 | 92.9%| 94.9%| 2,972,525 | 2,798,059 | 2,121,967 | 1,919,862 |
Fort Myers, FL | | | | | | | | |
Creekside Village | 11,985,000 | 296 | 95.3%| 94.6%| 1,515,882 | 1,561,986 | 880,200 | 831,544 |
Sacramento, CA | | | | | | | | |
Lakeview Garden | 9,307,500 | 180 | 92.2%| 95.0%| 1,164,534 | 1,199,223 | 786,530 | 607,198 |
Dade County, FL | | | | | | | | |
The Montclair | 15,465,000 | 159 | 99.4%| 98.1%| 2,576,352 | 2,441,634 | 1,413,079 | 1,297,602 |
Springfield, MO | | | | | | | | |
Newport Village | 10,880,000 | 220 | 91.8%| 98.2%| 1,543,033 | 1,457,545 | 882,187 | 773,146 |
Thornton, CO | | | | | | | | |
Newport on Seven | 10,800,000 | 167 | 98.8%| 98.2%| 1,511,055 | 1,439,834 | 946,292 | 824,326 |
St. Louis Park, MN| | | | | | | | |
Nicollet Ridge | 20,340,000 | 339 | 96.8%| 99.1%| 2,813,967 | 2,612,751 | 1,854,995 | 1,707,705 |
Burnsville, MN | | | | | | | | |
North Pointe | 25,850,000 | 540 | 92.6%| 70.6%| 2,648,467 | 2,803,023 | 1,956,484 | 1,949,262 |
San Bernardino, CA| | | | | | | | |
Northridge Park II | 8,950,000 | 128 | 88.3%| 94.5%| 1,038,209 | 975,723 | 489,311 | 425,011 |
Salinas, CA | | | | | | | | |
Riverset Apartments | 6,535,000 | 120 | 97.4%| 96.6%| 866,433 | 826,480 | 339,004 | 291,549 |
Memphis, TN | | | | | | | | |
Steeplechase Falls | 18,100,000 | 450 | 90.7%| 94.2%| 2,976,103 | 2,807,188 | 1,436,478 | 1,433,618 |
Knoxville, TN | | | | | | | | |
Villa Hialeah | 10,250,000 | 245 | 96.7%| 95.1%| 1,763,819 | 1,763,623 | 943,444 | 991,212 |
Hialeah, FL | | | | | | | | |
Willowgreen | 9,450,000 | 241 | 92.9%| 96.7%| 1,368,701 | 1,376,104 | 750,671 | 750,439 |
Fife, WA | | | | | | | | |
- -----------------------------------------------------------|---------|--------------------------------------------------------
TOTALS: | 178,042,500 | 3,435 |-------------|---------| 26,364,139 | 25,610,591 | 15,581,828 | 14,557,477 |
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
| | | |
| | |1/95 to 12/95|
Mortgaged |1/95 to 12/95 |1/95 to 12/95| Cash |
Property Name & |Debt Service |Debt Service |Available for|
Location | Due ($) |Paid ($) (3) | SCATEF (4) |
- ------------------------------------------------------------------
<S> <C> <C> <C>
SERIES I | | | |
Alban Place | 826,875 | 826,875 | 826,875 |
Frederick, MD | | | |
Barkley Place | 1,217,151 (2)| 1,032,431 | 398,780 |
Fort Myers, FL | | | |
Creekside Village | 898,875 | 737,177 | 737,177 |
Sacramento, CA | | | |
Lakeview Garden | 721,331 | 404,125 | 404,125 |
Dade County, FL | | | |
The Montclair | 1,507,179 (2)| 1,540,747 | 613,772 |
Springfield, MO | | | |
Newport Village | 954,678 (2)| 1,024,906 | 316,153 |
Thornton, CO | | | |
Newport on Seven | 877,500 | 559,100 | 559,100 |
St. Louis Park, MN| | | |
Nicollet Ridge | 2,064,553 (2)| 2,164,053 | 1,143,116 |
Burnsville, MN | | | |
North Pointe | 2,035,688 | 752,559 | 752,559 |
San Bernardino, CA| | | |
Northridge Park II | 671,250 | 671,250 | 671,250 |
Salinas, CA | | | |
Riverset Apartments | 514,631 | 514,631 | 514,631 |
Memphis, TN | | | |
Steeplechase Falls | 2,162,401 (2)| 2,061,218 | 818,962 |
Knoxville, TN | | | |
Villa Hialeah | 807,188 | 807,180 | 807,180 |
Hialeah, FL | | | |
Willowgreen | 756,000 | 643,559 | 643,559 |
Fife, WA | | | |
Cash from Other | | | |
Sources (5) | | | 2,187,329 |
- ------------------------------------------------------------------
TOTALS: | 16,015,300 | 13,739,811 | 11,394,568 |
- ------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
| | | | | Total | Total | Total | Total |
Mortgaged | | | Occupancy |Occupancy| Operating | Operating | Operating | Operating |
Property Name & | Loan | Total | as of | as of | Revenues | Revenues |Expenses (1) |Expenses (1) |
Location | Amount | Units | 12/31/95 |12/31/94 |1/95 to 12/95|1/94 to 12/94|1/95 to 12/95|1/94 to 12/94|
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SERIES II | | | | | | | | |
Emerald Hills | 7,250,000 | 130 | 94.6%| 98.5%| 1,041,954 | 1,044,895 | 528,981 | 503,731 |
Issaquah, WA | | | | | | | | |
Gilman Meadows | 7,100,000 | 125 | 99.2%| 93.6%| 1,098,373 | 1,024,228 | 567,970 | 504,411 |
Issaquah, WA | | | | | | | | |
Hamilton Chase | 13,975,000 | 300 | 94.7%| 90.0%| 2,029,139 | 1,942,885 | 1,248,314 | 1,168,785 |
Chattanooga, TN | | | | | | | | |
Mallard Cove I | 2,610,000 | 63 | 95.2%| 95.2%| 356,434 | 356,864 | 228,469 | 244,564 |
Everett, WA | | | | | | | | |
Mallard Cove II | 6,740,000 | 135 | 95.6%| 95.6%| 874,043 | 883,721 | 510,163 | 550,292 |
Everett, WA | | | | | | | | |
The Meadows | 7,200,000 | 200 | 93.0%| 99.5%| 1,216,658 | 1,126,260 | 611,860 | 587,195 |
Memphis, TN | | | | | | | | |
Riverset Apartments | 12,640,000 | 232 | 97.4%| 96.6%| 1,675,918 | 1,598,637 | 655,725 | 563,936 |
Memphis, TN | | | | | | | | |
Southfork Village | 10,550,000 | 200 | 99.5%| 98.5%| 1,853,433 | 1,707,236 | 911,443 | 907,126 |
Lakeville, MN | | | | | | | | |
Whispering Lake | 18,190,000 | 384 | 95.1%| 95.3%| 2,270,271 | 2,037,730 | 1,212,352 | 1,046,973 |
Kansas City, MO | | | | | | | | |
- --------------------------------------------------------------|---------|--------------------------------------------------------
TOTALS: | 86,255,000 | 1,769 |-------------|---------| 12,416,223 | 11,722,456 | 6,475,277 | 6,077,013 |
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
| | |1/95 to 12/95|
Mortgaged |1/95 to 12/95 |1/95 to 12/95| Cash |
Property Name & |Debt Service |Debt Service |Available for|
Location | Due ($) |Paid ($) (3) | SCATEF (4) |
- -----------------------------------------------------------------
<S> <C> <C> <C>
SERIES II | | | |
Emerald Hills | 561,875 | 561,875 | 561,875 |
Issaquah, WA | | | |
Gilman Meadows | 620,435 (2)| 695,449 | 260,655 |
Issaquah, WA | | | |
Hamilton Chase | 1,123,210 (2)| 1,159,236 | 397,687 |
Chattanooga, TN | | | |
Mallard Cove I | 235,261 (2)| 240,462 | 122,661 |
Everett, WA | | | |
Mallard Cove II | 545,577 (2)| 565,987 | 213,779 |
Everett, WA | | | |
The Meadows | 951,578 (2)| 806,284 | 432,234 |
Memphis, TN | | | |
Riverset Apartments | 995,400 | 995,400 | 995,400 |
Memphis, TN | | | |
Southfork Village | 830,813 | 830,813 | 830,813 |
Lakeville, MN | | | |
Whispering Lake | 1,807,152 (2)| 1,919,663 | 766,578 |
Kansas City, MO | | | |
Cash from Other | | | |
Sources (5) | | | 1,553,797 |
- ------------------------------------------------------------------
TOTALS: | 7,671,301 | 7,775,169 | 6,135,479 |
- ------------------------------------------------------------------
<FN>
FOOTNOTES:
(1) "Total Expenses" include normal operating expenses (excluding depreciation)
plus escrows for real estate taxes and insurance, reserve for replacement
payments, servicing fees, bond issuer fees, guarantor fees, collateral agent
expenses and capital improvements (offset by the amount of any draw on the
reserve for replacement account to fund the improvements).
Total Operating Revenues and Total Operating Expenses for 1994 as reported
in this quarterly report may differ from those reported in last year's
quarterly report due to revisions to property operating statements or
reclassification of certain expenses.
(2) "Debt Service Due" includes interest on Series A Bonds, Series B Bonds
and principal and interest on Demand Notes.
(3) "Debt Service Paid" equals, generally, debt service paid from property
operations, property level reserves and other sources during the reporting
period including interest payments on Series A and B Bonds and interest and
principal payments on Demand Notes. For puposes of this table, these receipts
are compared to debt servuce due in the same reporting period. Therefore, the
cumulative debt service shortfall for a property may exceed the resulting the
shortfall for the reporting period.
(4) "Cash Available for SCATEF" represents total debt service paid by the
properties less any interest on Series A Bonds paid.
(5) "Cash from Other Sources" includes cash received from investments
subsequent to the reporting period.
</TABLE>
<PAGE>
New Business
On February 14, 1995, the Partnership consummated a transaction in
which it raised gross proceeds through the sale of $67,700,000 in aggregate
principal amount of Multifamily Mortgage Revenue Bond Receipts,
(collectively, the "Receipts"), referred to as the "Financing." See Note 3 to
financial statements included herein at Item 8 - Financial Statements and
Supplemental Data.
ITEM 2. PROPERTIES.
Other than the investments in mortgage revenue bonds set forth in
Item 1 above, the Partnership does not own any property.
ITEM 3. LEGAL PROCEEDINGS.
In response to the Refunding and Financing, a class action complaint
entitled Gerald J. Osher, et al. v. SCA Realty, Inc., et al. was filed on May
18, 1995 in the Superior Court for the State of California, for the County of
Los Angeles. The action alleged, inter alia, that by consummating the
Financing, the Defendants - the Managing General Partner, the Associate
General Partner and Shelter Corporation of Canada Limited, (the
"Defendants") - breached the Partnership Agreement and their fiduciary
duties. On July 21, 1995, the parties to the action stipulated to its dismissal
without prejudice. The parties also stipulated that plaintiff could refile the
action in the Superior Court for the District of Columbia.
On July 24,1995, the action was refiled in the District of Columbia
Superior Court, Civil Division, Washington, D.C. The complaint is entitled
"Class Action Complaint for Breach of Partnership Agreement and Breach
of Fiduciary Duties and Alternatively, Derivative Action for Breach of
Fiduciary Duties" (the "Complaint"). It is brought by plaintiff Dr. Gerald J.
Osher, individually and on behalf of all others similarly situated, and by the
Partnership, derivatively through the plaintiff (jointly, the "Plaintiffs"), and
names as defendants each of the Defendants.
In the Complaint, Plaintiffs allege that the Financing was entered into
without proper authority under the Partnership Agreement and without
obtaining the consent of the BAC Holders by a majority vote, allegedly in
violation of various provisions of the Partnership Agreement. In addition,
Plaintiffs allege that Defendants failed to distribute to the BAC Holders the
proceeds of the Financing, as allegedly required by the Partnership
Agreement, and also failed to inform the BAC Holders of their purported
right to the proceeds of the Financing in recent public filings and in
correspondence with the BAC Holders. Based on these allegations, Plaintiffs
assert purported claims for breach of the Partnership Agreement and of the
Defendants' purported fiduciary duties and seeks, inter alia, an accounting
of the Financing, the immediate distribution of the Financing proceeds,
compensatory and punitive damages, attorneys' fees, and pre- and post-judgement
interest. In addition, based on the allegations regarding the
Defendants' purported breach of their fiduciary duties by entering into the
Financing, the Complaint asserts a derivative claim seeking inter alia, an
accounting of the Financing, compensatory and punitive damages, attorneys'
fees, and pre- and post-judgement interest. The General Partners believe that
the allegations are without merit.
On September 22, 1995, Defendants removed the action to the United
States District Court for the District of Columbia (the "Court"). In
November, 1995, the parties agreed to a settlement of the action in
consideration of certain modifications to the terms of and disclosure with
respect to the Transaction (disclosed in the Prospectus/Consent Solicitation
filed with the SEC on March 28, 1996), as set forth in a stipulation of
settlement filed with the Court. The settlement is conditioned on, among
other things, the consummation of the Transaction. On March 13, 1996, the
Court held a status conference in the action. At that time, all conditions
necessary for the settlement to proceed have not yet occurred and, for
reasons of case administration, the Court dismissed the action without
prejudice and with leave to the parties to reinstate the action on or before
May 1, 1996 in order to proceed with the settlement or the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
None.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Registrant is a partnership and thus has no common stock. There
is no established public trading market for the BACs. Trading in the BACs
is sporadic and occurs solely through private transactions. As of March 22,
1996, there were 9,607 record holders of BACs in Series I and 4,172 record
holders of BACs in Series II.
Semi-annual distributions of cash flow (as defined in the Partnership
Amended and Restated Agreement of Limited Partnership the "Partnership
Agreement") are payable within 45 days after the end of each six month
period. All cash flow with respect to each six month period of the calendar
year is paid, first, 99% to the BAC Holders and 1% to the General Partners
until the BAC Holders receive a non-compounded return in such calendar
year equal to 8.5% of their Adjusted Capital Contributions (as defined in the
Partnership Agreement); second, 1% to the BAC Holders and 99% to the
General Partners until the General Partners receive an amount equal to .5%
per annum of the aggregate outstanding principal amount of all mortgage
loans, commencing in and cumulative from January 1, 1990; third, 99% to
the BAC Holders and 1% to the General Partners until the BAC Holders
receive a non-compounded cumulative return for each calendar year equal to
10% per annum of their Adjusted Capital Contributions, and fourth,
thereafter during such year, 90% to the BAC Holders and 10% to the
General Partners. There are no restrictions on the present or future ability of
the Partnership to make distributions of cash flow.
For the years ended December 31, 1995, 1994 and 1993, cash
distributions paid or accrued to the Series I BAC Holders as a group totaled
$10,500,000, $10,000,000 and $10,000,000, respectively. Of the amount
paid to Series I BAC Holders in 1995, approximately $1,100,000
represented a return of investor capital and was not subject to the cash flow
distribution splits described above. Cash distributions paid or accrued to the
Series II BAC Holders as a group for the years ended December 31, 1995,
1994 and 1993, totaled $5,294,080, $5,294,080 and $5,775,361,
respectively. Of these amounts paid to Series II BAC Holders in 1995, 1994
and 1993, approximately $100,000, $300,000 and $500,000, respectively,
represented a return of investor capital and this was not subject to the cash
flow distribution splits described above.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
As of and for the year ended December 31,
INCOME STATEMENT DATA (000s):
Interest on mortgage revenue bonds and
parity working capital loans $13,574 $17,380 $7,614 $8,214 $12,617
Equity investment in MLP II Acquisition LP 3,150 - - - -
Equity investment in real estate partnerships - - 5,185 4,440 2,535
Total revenues 17,713 17,590 12,996 12,897 15,616
Other-than-temporary impairments and valuation
adjustments related to investment in mortgage
revenue bonds and real estate partnerships - (2,014) (6,050) (6,800) (3,900)
Income before cumulative effect of accounting
change 13,204 13,211 5,698 4,801 9,932
Cumulative effect of accounting change for mortgage
revenue bonds - (11,881) - - -
Net income (loss) $13,204 $1,330 $5,698 $4,801 $9,932
PER BAC DATA:
Series I:
Income before cumulative effect of accounting
change $43.74 $41.79 $14.18 $5.16 $36.21
Cumulative effect of accounting change for mortgage
revenue bonds - (47.40) - - -
Net income (loss) $43.74 ($5.61) $14.18 $5.16 $36.21
Series II:
Income before cumulative effect of accounting
change $44.91 $49.04 $29.15 $38.66 $26.91
Cumulative effect of accounting change for mortgage
revenue bonds - (23.71) - - -
Net income $44.91 $25.33 $29.15 $38.66 $26.91
BALANCE SHEET DATA (000s):
Investments in mortgage revenue bonds $146,142 $213,842 $74,233 $97,383 $109,143
Investments in MLP II Acquisition LP 65,299 - - - -
Investments in real estate partnerships - - 157,389 143,601 141,560
Total assets $224,815 $230,282 $242,210 $252,410 $264,457
BOOK VALUE PER BAC*
Series I $699.30 $716.35 $769.92 $805.74 $851.83
Series II $799.02 $816.00 $835.85 $866.70 $890.55
CASH DISTRIBUTIONS PER BAC DISTRIBUTED
EACH YEAR AS FOLLOWS:
Series I:
August $26.25 $25.00 $25.00 $26.25 $27.50
February $26.25 $25.00 $25.00 $25.00 $25.00
Series II:
August $27.50 $27.50 $30.00 $32.50 $35.00
February $27.50 $27.50 $30.00 $30.00 $35.00
OTHER BAC DATA:
Series I:
BACs outstanding 200,000 200,000 200,000 200,000 200,000
Number of BAC Holders 9,607 9,739 10,491 9,935 9,920
Series II:
BACs outstanding 96,256 96,256 96,256 96,256 96,256
Number of BAC Holders 4,172 4,226 4,569 4,299 4,269
*Calculation of Book Value per BAC for 1995 and 1994 includes BAC Holders' proportional share of the unrealized loss.
</TABLE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (Continued) BY:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
As of and for the year ended December 31,
SERIES I:
INCOME STATEMENT DATA (000s):
Interest on mortgage revenue bonds and
parity working capital loans $8,992 $11,812 $4,108 $4,708 $6,884
Equity investment in MLP II Acquisition LP 1,842 - - - -
Equity investment in real estate partnerships - - 4,117 3,474 2,293
Total revenues 11,702 11,946 8,331 8,307 9,406
Other-than-temporary impairments and valuation
adjustments related to investment in mortgage
revenue bonds and real estate partnerships - (2,014) (4,600) (6,350) (850)
Income before cumulative effect of accounting change 8,837 8,443 2,864 1,043 7,316
Cumulative effect of accounting change for mortgage
revenue bonds - (9,576) - - -
Net income (loss) $8,837 ($1,133) $2,864 $1,043 $7,316
BALANCE SHEET DATA (000s):
Investments in mortgage revenue bonds $97,536 $138,211 $44,608 $53,883 $65,643
Investments in MLP II Acquisition LP 38,966 - - - -
Investments in real estate partnerships - - 107,971 105,801 102,485
Total assets $145,141 $148,673 $158,859 $166,089 $175,356
SERIES II:
INCOME STATEMENT DATA (000s):
Interest on mortgage revenue bonds and
parity working capital loans $4,582 $5,568 $3,506 $3,506 $5,733
Equity investment in MLP II Acquisition LP 1,308 - - - -
Equity investment in real estate partnerships - - 1,068 966 242
Total revenues 6,011 5,644 4,665 4,590 6,210
Other-than-temporary impairments and valuation
adjustments related to investment in mortgage
revenue bonds and real estate partnerships - - (1,450) (450) (3,050)
Income before cumulative effect of accounting change 4,367 4,768 2,834 3,758 2,616
Cumulative effect of accounting change for mortgage
revenue bonds - (2,305) - - -
Net income $4,367 $2,463 $2,834 $3,758 $2,616
BALANCE SHEET DATA (000s):
Investments in mortgage revenue bonds $48,606 $75,631 $29,625 $43,500 $43,500
Investments in MLP II Acquisition LP 26,333 - - - -
Investments in real estate partnerships - - 49,418 37,800 39,075
Total assets $79,674 $81,609 $83,351 $86,321 $89,101
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Business
The SCA Tax Exempt Fund Limited Partnership (the "Partnership")
was organized in 1986 and had two public offerings of Beneficial Assignee
Certificates ("BACs") representing the assignment of limited partnership
interests. The Partnership was organized for the purpose of acquiring a
portfolio of tax-exempt mortgage revenue bonds issued by various state or
local governments or their agencies or authorities. The portfolio is made
up of two distinct pools ("Series I" and "Series II") of mortgage revenue
bonds (the "Bonds"). SCA Realty I, Inc. is the 0.01% Managing General
Partner and SCA Associates 86 Limited Partnership is the 0.99% Associate
General Partner (collectively, the "General Partners").
The Partnership previously has presented financial statements for
each of Series I and Series II reflecting the pool of investments attributable
to each Series. Following a review of the Partnership's financial statements
in 1995, the Staff of the Securities and Exchange Commission (the "SEC")
concluded, and the Managing General Partner agreed, that the Partnership
would present financial statements comprising both Series I and Series II.
Financial information with respect to each Series is set forth supplementally
in Note 9 to the Partnership's financial statements included herein. The
consolidated financial statements of the Partnership include the Partnership
(comprising both Series I and Series II), the SCA Tax Exempt Trust (the
"Trust") and MLP III Investment Limited Partnership ("MLP III"). The
Trust and MLP III are discussed in more detail in Note 3 to the
Partnership's financial statements included herein.
The Bonds are secured by nonrecourse participating first mortgage
loans on multifamily residential properties. The total return to the
Partnership is generally dependent upon the net cash flow and the net
capital appreciation of the underlying properties. Therefore, the rate of
return to the Partnership depends upon the economic performance of the
underlying properties collateralizing the mortgage loans, which are in
competition with other income-producing properties of the same type in the
same geographic area, and which are affected by prevailing market
conditions.
The apartment over building of the 1980s, the economic recession
and the modest recovery beginning in 1991 have significantly affected
general property performance. Unless the market conditions and property
operating results begin to improve dramatically and for an extended period
of time, it is probable that the full amount of BAC Holder invested capital
may not be recoverable on some of the Bonds through net sale or
refinancing proceeds at the expiration of the originally anticipated holding
period. Consequently, the Managing General Partner will likely extend the
holding periods for certain Bonds to maximize the recovery of invested
proceeds and accrued base interest, and, therefore, BAC Holder capital,
consistent with the original bond indentures.
The secondary market for limited partnership interests is very
limited. For BAC Holders, it consists of services offered by various
partnership trading groups and the trades occur intermittently and at widely
varying prices. Nonetheless, these trades reflect the only verifiable evidence
of current BAC pricing. The average trading price for BACs for the year
ended December 31, 1995, as disclosed in the Stanger Report, which
follows a number of these trading services, was $527 for Series I BACs,
with a high of $575 and a low of $440, and $558 for Series II BACs, with
a high of $605 and a low of $504. The Managing General Partner is not
representing these market prices as the value of the BACs, but is providing
them so that BAC Holders are informed.
Although it has not previously directly provided any estimates of
current BAC value to the BAC Holders, the Managing General Partner
understands that in the past representations of BAC value have been
reported on investor statements based upon information provided by the
Managing General Partner. These representations have not included any
explanation of the basis of the value. The methodology used was based
upon the BACs being held through the originally anticipated holding period
of the bonds and was contingent upon various assumptions of trends in
property performance, capitalization rates and discount rates. The
estimates of BAC value were developed by calculating the present value of
projected cash flows from the individual Bonds through sale or refinancing
at the end of the originally anticipated holding period and then discounting
the present value to reflect the relative illiquidity of the secondary market.
The estimates of BAC value do not reflect the fair value of the assets held
by the Partnership.
Significant Events
The Financing
As discussed in previous reports, the Managing General Partner
consummated a transaction on February 14, 1995 (the "Financing"), which
raised gross proceeds through the sale of $67,700,000 in aggregate
principal amount of Multifamily Mortgage Revenue Bond Receipts
(collectively, the "Receipts"). The Receipts are collateralized by a pool of
eleven of the original Bonds held by the Partnership (five for Series I,
specifically, The Montclair, Newport Village, Nicollet Ridge, Steeplechase
Falls and Barkley Place, and six for Series II, specifically, Mallard Cove I,
Mallard Cove II, Whispering Lake, Gilman Meadows, Hamilton Chase and
The Meadows). These eleven Bonds all relate to properties that defaulted
on their original debt obligations. The cash stream from one additional
Bond, Creekside Village ("Creekside"), which also defaulted on its original
debt obligation, has been pledged as further security for the Financing. The
other Bonds held by the Partnership are unaffected by the Financing.
It is currently intended that the net Financing proceeds will be
invested, on behalf of the Partnership, in additional mortgage revenue bonds
that finance multi-family properties. Although the Managing General
Partner believes that the permanent investment of the net Financing
proceeds will generate cash flows in excess of the annual costs of the
Financing and, thereby, increase the cash flow available to BAC Holders,
as with any investment involving income producing real estate, no
assurances can be given as to what the returns will be over time. A more
detailed description of the Financing is included in Note 3 to the
Partnership's financial statements included herein.
Proposed New Investment Structure
On March 29, 1996, the Partnership filed on Form S-4 a
Prospectus/Consent Solicitation under the Securities Act of 1933. The
Prospectus/Consent Solicitation describes a business strategy for the future
of the Partnership's investments and a new investment structure developed
by the Managing General Partner to maximize the value of BAC Holder
investments. The transaction will provide BAC Holders with different
investment choices designed to fit their individual investment objectives.
These choices will provide BAC Holders with the opportunity to exchange
their BACs for: a) liquid, growth-oriented securities, b) securities which are
substantially similar to BACs subsequent to the Financing, but assume a
special capital distribution, and/or c) securities whose distributions are
substantially similar to BACs as they existed prior to the Financing. The
Partnership anticipates presenting the transaction to BAC Holders for
consideration in the near future. For the year ended December 31, 1995,
approximately $1.5 million was expensed related to the preparation of the
Prospectus/Consent Solicitation.
The Cumulative Effect of Accounting Change
In 1994, the Partnership adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," ("FAS 115") and applied them
to its short-term investments. Following such adoption, the Partnership (as
did others in the industry) continued to account for its investments in
mortgage revenue bonds as either investments in real estate partnerships or
real estate loans, depending on whether or not the Managing General
Partner had directed its affiliates to take deed to the underlying property in
lieu of the Partnership foreclosing.
In conjunction with the review of the Partnership's financial
statements by the SEC Staff in 1995 discussed previously, the Partnership
agreed that it would account for all of its investments in mortgage revenue
bonds as debt securities under the provisions of FAS 115 effective January
1, 1994, and restated its 1994 financial statements to reflect this change.
Accordingly, effective January 1, 1994, all investments in mortgage revenue
bonds, regardless of their status, are classified and accounted for as
available for sale debt securities and carried at fair value; unrealized holding
gains or losses are included as a separate component of Partners' Capital
and other-than-temporary impairments are recorded through operations.
The cumulative effect of adopting this accounting was to decrease Partners'
Capital by approximately $19.9 million as of January 1, 1994; of such
amount, approximately $11.9 million was attributable to operations prior
to January 1, 1994 and is reflected in the income statement as a cumulative
effect of the accounting change and approximately $8.0 million was
attributable to an unrealized holding loss as of such date. The cumulative
effect adjustment discussed above does not affect the cash flow generated
from property operations, distributions to BAC Holders, the
characterization of the tax-exempt income stream or the financial
obligations under the Bonds.
Indicated impairments must be considered as other-than-temporary
when it becomes probable that all amounts due under a Bond will not be
collected in accordance with the Bond's contractual terms. In any event,
FAS 115 requires that bonds be accounted for at fair value. Such fair value
is not necessarily indicative of the anticipated recovery of the Bond's
principal and interest obligations on a gross cash flow basis.
Litigation
On May 24, 1995, the General Partners were served with a
Complaint filed in the Superior Court of the State of California, for the
County of Los Angeles, by a BAC Holder claiming a breach of the
Partnership Agreement and breach of fiduciary duties in connection with the
Financing. The plaintiff subsequently dismissed the California action but
refiled it, in July 1995, in the Superior Court of the District of Columbia.
The action was removed by the General Partners in September 1995 to the
United States District Court for the District of Columbia. The plaintiff
claims inter alia that the Partnership's participation in the Financing was not
authorized under the Partnership Agreement and that the proceeds received
should be distributed immediately to the BAC Holders. The plaintiff
purports to bring the action derivatively on behalf of the Partnership and
also seeks to be appointed representative of the BAC Holders as a class.
The General Partners believe that the allegations are without merit.
On November 8, 1995, the parties agreed to the settlement of the action in
consideration of certain modifications to the terms of and disclosure with
respect to the Transaction disclosed in the Prospectus/Consent Solicitation.
The settlement is conditioned on, among other things, the consummation
of the Transaction. On March 13, 1996, the Court held a status conference
in the action. At that time, all conditions necessary for the settlement to
proceed had not yet occurred and, for reasons of case administration, the
Court dismissed the action without prejudice and with leave to the parties
to reinstate the action on or before May 1, 1996 in order to proceed with
the settlement or the litigation.
Financial Condition and Liquidity
As of December 31, 1995, the Partnership's capital is primarily
invested in 23 Bonds and related parity working capital loans ("Parity
Working Capital Loans") totaling $192,958,000 of face value. Of these
investments, 14 Bonds and related Parity Working Capital Loans (totaling
$135,838,000 of face value) were acquired with Series I proceeds while
nine Bonds and related Parity Working Capital Loans (totaling
$57,120,000 of face value) were acquired with Series II proceeds. To the
extent that offering proceeds exceeded organization and offering expenses
and initial project investments, the Managing General Partner created
Partnership working capital reserves.
The original Partnership working capital reserves, as a result of
supplementing distributions to BAC Holders and providing additional
working capital loans to the properties, were exhausted during 1992 and
1994, for Series I and Series II, respectively. As a result of the February
1995 Financing, additional Partnership working capital reserves (of
approximately $4.4 million) were established of which $1.5 million
($850,000 in Series I and $600,000 in Series II) were utilized to pay for
one-time Financing origination costs in 1995. For Series I, reserves of
approximately $1.1 million were used during 1995 to pay distributions
declared in excess of cash generated from operations. For Series II,
reserves of approximately $100,000, $300,000 and $500,000 were used
during 1995, 1994 and 1993, respectively, to pay distributions declared in
excess of the cash generated by operations. As of December 31, 1995, the
Partnership's working capital reserves (including cash generated from
operations in excess of distributions paid of approximately $200,000 for
Series I) approximated $1.9 million (approximately $900,000 in Series I and
approximately $1.0 million in Series II)
Distributions are affected by the Partnership's ability to collect
interest from the cash flow of the properties securing the Bonds and the
ability of the Managing General Partner to control operating expenses.
Cash collected by the Partnership does not necessarily reflect property
operating results to the extent that debt service can be paid from other
sources, including property reserves and guarantees and, for those
properties subject to the Financing, investment income and swap income.
Similarly, some of the cash generated by property operations may not be
available to pay debt service as it may be utilized for Series A Bond
principal and interest and related items, capital expenditures, escrows or
prepaid expenses. Distributions are also affected by the investment income
generated by the net Financing proceeds as compared to the reduction in
revenues caused by the sale of the Receipts in the Series A Bonds.
On December 31, 1995, the Managing General Partner declared
semi-annual distributions of $26.25 and $27.50 per BAC for Series I and
Series II, respectively. These amounts, which were paid on February 9,
1996, represent an annualized primarily tax-exempt distribution rate of
5.25% for Series I and 5.50% for Series II. These distribution rates for
Series I and Series II remained unchanged from the previous semi-annual
distributions.
At December 31, 1995, the Partnership's liquid assets approximated
$9.8 million. These funds primarily consist of undistributed funds generated
from operations during the second half of 1995 and working capital
reserves.
Results of Operations
Revenues
With respect to Series I Bonds, for the years ended December 31,
1995, 1994 and 1993, approximately $9.2 million, $11.6 million and $10.9
million, respectively, of interest was paid to Series I. Of these amounts,
approximately $8.8 million , $11.1 million and $10.6 million, respectively,
were generated from Series I property operations. With respect to Series
II Bonds, for the years ended December 31, 1995, 1994 and 1993,
approximately $4.6 million, $5.8 million and $5.6 million, respectively, of
interest was paid to Series II. Of these amounts, approximately $4.5
million, $5.5 million and $5.3 million, respectively, were generated from
Series II property operations. The differences between interest paid and
cash generated from operations are due to payments from sources other
than property operations. The table, in Item 1. Business - Investment
Summary Series I and Series II, at the beginning of this report should be
referenced for more information regarding the specific Bond interest
payment information.
The reduction in the interest income paid to the Partnership by the
Series I and Series II properties during 1995 (approximately $3.7 million)
is primarily due to the Financing whereby the Receipts in the Series A
Bonds were sold. However, this reduction is substantially offset by the
short-term investment income of approximately $3.2 million generated by
the investment of the net Financing proceeds.
Expenses
Partnership operating expenses are either specifically identified by
Series or allocated to each Series based on the original net offering
proceeds. Partnership operating expenses increased by approximately $2.1
million in 1995 versus 1994 and by approximately $1.1 million in 1994
versus 1993. These increases primarily reflect a) the annual incremental
increases in the costs recognized on the refunding and Financing (excluding
those sales costs netted with the gain on sale of A Bond receipts)
consummated on February 14, 1995 (approximately $250,000 in 1995 over
1994 and approximately $900,000 in 1994 over 1993) and b) the $1.5
million of expenses incurred in 1995 with respect to the Prospectus/Consent
Solicitation as discussed above. In addition, the Partnership incurred
approximately $200,000 in legal expenses with respect to the litigation
(discussed above) in 1995 which was not incurred in 1994.
Other
In response to a 1991 Supreme Court case, the IRS issued proposed
regulations in connection with the modification or implied modification of
debt instruments. If the proposed regulations are adopted in their present
form, they would alter existing authority, and limit the type and extent of
modifications and implied modifications that could be made by a Bond
owner/lender without adversely affecting the tax-exempt status of the Bond.
It is not clear at this time what effect the proposed regulations may have on
the Partnership with respect to Bonds secured by properties transferred to
New Borrowers, as some of the terms of the transfers could be viewed by
the IRS under the proposed regulations as implied modifications to the
Bonds. However, the IRS has stated that the regulations will apply only to
modifications or implied modifications made on or after thirty days from the
publication of the final regulations in the Federal Register. As of March 28,
1995, the regulations had not appeared in their final form in the Federal
Register. The Managing General Partner will continue in its efforts to
protect the tax-exempt status of the bonds and the interest thereon;
however, there can be no assurances the Managing General Partner will be
successful in its efforts.
The following is a discussion of events which affect the properties
that collateralize the Partnership's investments.
Series I
During 1994, the property level reserves on Lakeview Gardens were
exhausted, and the original borrower refused to fund the operating deficits
of the property. The Managing General Partner initiated workout
discussions with the original borrower in the fourth quarter of 1994. As a
result, when it became apparent that the Bond and Parity Working Capital
Loan would default under their contractual terms, the Partnership
recognized an other-than-temporary impairment and a valuation adjustment
aggregating approximately $2.1 million to Lakeview Gardens' Bond and
Parity Working Capital Loan during the year ended December 31, 1994.
On April 19, 1995, the deed was successfully transferred to a New
Borrower.
Except for the cumulative effect of accounting change, discussed
above, and Lakeview Gardens in 1994, there were no other-than-temporary
impairments or valuation adjustments recorded through income for Bonds
and Parity Working Capital Loans during 1995 or 1994. In 1993, a
valuation adjustment of $4.6 million was recorded for the North Pointe
Bond and Parity Working Capital Loan. Also, as discussed in previous
reports, a settlement agreement was signed on November 23, 1992 whereby
Shelter Canada and Winnipeg Financial and Management, Inc., the third
party guarantors, are to perform fully under the terms of the limited
operating deficit guarantee for North Pointe. During 1995, scheduled
payments totaling $116,000 were received in accordance with the
settlement agreement and recorded as income by the Partnership. In
addition, the settlement agreement provides for the accrual of interest
compounded quarterly on the unpaid and unaccrued balance.
Series II
In 1993, Series II recorded valuation adjustments for the Mallard
Cove I Bond and Parity Working Capital Loan ($250,000) and the
Hamilton Chase Bond and Parity Working Capital Loan ($1,200,000).
As discussed in previous reports, a settlement agreement was signed
on November 23, 1992 whereby Shelter Canada, the third party guarantor,
is to perform fully under the terms of the limited operating deficit guarantee
for Whispering Lake. During 1995, scheduled payments totaling $165,000
were received in accordance with the settlement agreement and recorded
as income by the Partnership. In addition, the settlement agreement
provides for the accrual of interest on the unpaid and unaccrued balance.
The other-than-temporary impairments and valuation adjustments
discussed above do not affect the cash flow generated from property
operations, distributions to BAC Holders, the characterization of the
tax-exempt income stream nor the financial obligations under the Bonds.
The Managing General Partner will continue to evaluate the need for
other-than-temporary impairments and valuation allowances in the future
as circumstances change.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Financial Statements, together with the report thereon of
Price Waterhouse dated March 28, 1996, which are filed as a part of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.
(a) and (b) Identification of directors and executive officers:
The following table sets forth the names, ages and positions held by
the directors and executive officers of the Managing General Partner:
Position Held with
Name Managing General Partner Age
- ---- ------------------------- -----
Garrett G. Carlson Chairman and Director 60
Mark K. Joseph President/Treasurer and Director 57
Thomas R. Hobbs Senior Vice President, Partnership
General Manager and Director 55
Marilynn K. Duker Vice President 40
All of these individuals have served in an executive capacity since the
organization of the Managing General Partner. Messrs. Carlson and Joseph
have served as directors since the organization of the Managing General
Partner and Mr. Hobbs was elected as a director effective April 5, 1994. All
of these individuals will continue to serve in their current capacities until
their successors are elected and qualified.
(c) Identification of certain significant employees:
None.
(d) Family Relationships:
None.
(e) Business Experience:
SCA Realty I, Inc. was incorporated in Maryland in January 1986.
The background and experience of the executive officers and directors of
SCA Realty I, Inc., the Managing General Partner are as follows:
Garrett G. Carlson, age 60, is Chairman of the Board of Directors of
the Managing General Partner. Mr. Carlson has been in the real estate
development business since 1962. He has been responsible for the
production and acquisition of several thousand units of rental housing over
the last two decades. Prior to 1979, Mr. Carlson served as President and
Chairman of the Board of Shelter Corporation of America, Inc., a
publicly-owned company involved in all facets of real estate development.
From 1964 until 1970, Mr. Carlson was Director of Real Estate and
Development for Bor-Son Construction, Inc. and in that capacity participated
in commercial, office, retail and industrial developments. Mr. Carlson is a
graduate of the University of Minnesota. Mr. Carlson is also a director of
CRI Insured Mortgage Association, Inc.
Mark K. Joseph, age 57, is President, Treasurer and a director of the
Managing General Partner since 1986. He has been in the real estate business
for over two decades. Prior to the founding of the Managing General Partner
and its affiliated entities, Mr. Joseph was Chairman of the Executive
Committee and a partner in the law firm of Gallagher, Evelius & Jones,
where he was engaged in the practice of real estate and corporate law.
Before his entry into the private sector, Mr. Joseph previously served first as
Baltimore's Deputy Housing Commissioner and then as Development
Director and Counsel to the Mayor. From 1975 to 1980, Mr. Joseph headed
the Baltimore City Board of School Commissioners. As President of that
Board, he chaired the nation's seventh largest school system. Mr. Joseph
graduated with honors from Brown University and the Harvard Law School.
He has been a member of the faculty and Board of Visitors of the University
of Maryland Law School. He also authored the law creating Maryland's
housing financing agency. Mr. Joseph has served on numerous private and
public boards. Currently he is President for the Public Policy of the Greater
Baltimore Committee and a member of its Board. He also serves on the
Boards of Provident Bankshares Corporation and the Associated Jewish
Charities.
Thomas R. Hobbs, age 55, is a Senior Vice President of the Managing
General Partner and the General Manager of the Partnership since 1986 and
as director of the Managing General Partner since 1994. From 1978 until
joining the Managing General Partner in June 1986, Mr. Hobbs served as
Manager of the Baltimore Field Office of the U.S. Department of Housing
and Urban Development ("HUD"). This responsibility included the approval
of HUD loans and grants and the commitment of FHA mortgage insurance.
The multifamily mortgage insurance portfolio of the Baltimore Field Office
was $1.2 billion. Mr. Hobbs served HUD in various other capacities since
1967, including for periods acting as manager of the Washington, D.C. and
Philadelphia offices. Mr. Hobbs is a graduate of the University of Virginia
and holds a Master's Degree in Regional Planning from the University of
North Carolina at Chapel Hill. Between 1987 and 1991 he served as the
Chairman of the Maryland State Housing Policy Commission and since 1987
has served as a member of the State Housing Finance Review Committee.
Marilynn K. Duker, age 40, is a Vice President of the Managing
General Partner and Senior Vice President of Shelter Development Corp.
("SDC"). Prior to joining SDC in 1982, she served as special assistant to the
Director of the HUD area office in Baltimore. She has worked in both the
regional and central offices of HUD and for the Boston Housing Authority
as well. Ms. Duker is a graduate of the College of Wooster and has a
Master's Degree in City Planning from the Massachusetts Institute of
Technology.
(f) Involvement in certain legal proceedings:
None.
(g) Promoters and Control Person:
None.
ITEM 11. EXECUTIVE COMPENSATION.
The General Partners and their affiliates are entitled to receive various
cash distributions, allocations of taxable income or loss and expense
reimbursements from the Partnership. In addition, the General Partners have
earned and are expected to continue to earn various fees payable by
borrowers in connection with the acquisition and servicing of the mortgage
revenue bonds. The amounts of these items and the times at which they are
payable are described at pages 15-17 and 49-52 of the Prospectus under the
captions "Compensation and Fees" and "Profits, Losses and Cash
Distributions," which descriptions are incorporated herein by reference.
The following table sets forth the amounts of the fees, commissions
and cash distributions which the Partnership paid to or accrued for the
account of the General Partners and their affiliates for the year ended
December 31, 1995:
Amount of
Receiving Entity Type of Compensation Compensation
- ------------------ ----------------------- --------------
SCA Realty I, Inc. Interest in Cash Flow $1,446
SCA Associates 86
Limited Partnership Interest in Cash Flow 143,137
--------------
TOTAL $144,583
==============
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
(a) Security ownership of certain beneficial owners:
The General Partners own all the outstanding general partnership
interests. No person or group is known by the Partnership to be the
beneficial owner of more than 5% of the outstanding BACs at December 31,
1995.
(b) Security ownership of management:
As of the date hereof, none of the directors and officers of the
Managing General Partner own any BACs issued by the Partnership.
Pursuant to the Partnership Agreement, the General Partners and their
affiliates and employees of their affiliates may purchase BACs aggregating up
to 1% of any additional BACs offered by the Partnership.
(c) Changes in control:
There exists no arrangement known to the Partnership the operation
of which may at a subsequent date result in a change in control of the
Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
(a) Transactions with management and others:
Since the Registrant is a limited partnership, it has no directors or
officers. In addition, the registrant has had no transactions with individual
officers or directors of the Managing General Partner other than any indirect
interest such officers and directors may have in the compensation paid to the
Managing General Partner, or its affiliates by virtue of (i) their indirect
stock ownership in the Managing General Partner, (ii) their ownership in 177061
Canada Ltd.("Shelter Canada"), formerly Shelter Corporation of Canada
Limited Partnership , a stockholder of the Managing General Partner, or (iii)
their partnership interests in SCA Associates 86-II Limited Partnership, a
limited partner of the Associate General Partner. Item 11 of this report
which contains a discussion of the amounts and times fees and other
compensation are paid or accrued by the Partnership to the General Partners
or their affiliates is incorporated herein by reference.
As a result of defaults under the terms of the loan agreements by the
original borrowing partnerships, the Managing General Partner negotiated
transfers of ownership of certain properties underlying the Partnership's
investments in mortgage revenue bonds to New Borrowers (or an affiliate of
the Managing General Partner replaced the managing general partner of the
original borrowing partnership) for Barkley Place, The Montclair, Newport
Village, Nicollet Ridge, Newport-On-Seven, North Pointe (formerly Shandin
Hills), Mallard Cove I, Mallard Cove II, Gilman Meadows, The Meadows,
Whispering Lake, Steeplechase, Creekside, Hamilton Chase, Willowgreen
and Lakeview Gardens. Effective January 1, 1995, SCA Successor, Inc.
withdrew as General Partner and was replaced by SCA Successor II, Inc. for
the following partnerships: Barkley Place, The Montclair, Newport Village,
Nicollet Ridge, Mallard Cove I, Mallard Cove II, Gilman Meadows, The
Meadows, Whispering Lake, Steeplechase, Creekside, and Hamilton Chase.
Shelter Canada, was, prior to the time the Partnership acquired the
Whispering Lake Apartments, the Meadows Apartments, and North Pointe
mortgage revenue bonds, either a limited or general partner of the developer
partnership for those projects. Prior to the time the Partnership acquired
these mortgage revenue bonds, Shelter Canada withdrew from the respective
developer partnerships in return for contingent purchase payments for its
interest, payable from certain revenue of the borrower. These revenues may
include a portion of the developers' overhead allowance funded out of
proceeds of the mortgage revenue bonds to the extent such funds remain
unused for cost overruns or other obligations of the borrower upon
completion of construction and the achieving of sustaining occupancy.
Payments to Shelter Canada are fully subordinated to all payments to the
Partnership.
In addition, Shelter Canada is contractually obligated to nonaffiliated
borrowers of North Pointe and Whispering Lake to fund operating deficits
under guarantees totaling $1,292,500 and $1,819,000, respectively. The
Managing General Partner entered into workout negotiations with the
guarantor and respective borrowers of these properties as the guarantor has
indicated its inability at this time to fully fund operating deficits. These
negotiations resulted in a settlement agreement which provides for the
payment of $1,215,143 under the guarantee obligations over a five year
period with interest.
(b) Certain business relationships:
The Partnership's response to Item 13(a) is incorporated herein by
reference. In addition, the Registrant has no business relationship with
entities of which the directors of the Managing General Partnership are
officers, directors or ten percent equity owners other than as set forth in the
Registrant's response to Item 13(a).
(c) Indebtedness of management:
None.
(d) Transactions with promoters:
None.
<PAGE>
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 Financial Statements listed on the
accompanying Index to Financial Statements and Schedule are filed as a part
of this Annual Report on Form 10-K.
2. Exhibits - The Exhibits listed in the accompanying Index to
Exhibits are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
1. There were no reports on Form 8-K filed during the quarter ended
December 31, 1995.
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Title of Document
-------- -----------------
2. Not applicable.
3. Amended and Restated Agreement of Limited
Partnership of SCA Tax Exempt Fund Limited
Partnership, dated as of June 3, 1986 (incorporated
herein by reference to Exhibit A of the Prospectus of
the Registrant dated June 3, 1986 (the "Prospectus")
filed with the Commission pursuant to Rule 424(b)).
4. Amended and Restated Agreement of Limited
Partnership of SCA Tax Exempt Fund Limited
Partnership, dated as of June 3, 1986 (incorporated
herein by reference to Exhibit A of the Prospectus of
the Registrant dated June 3, 1986 (the "Prospectus")
filed with the Commission pursuant to Rule 424(b)).
9. Not applicable.
10. Not applicable.
11. Not applicable.
12. Not applicable.
13. Not applicable.
16. Not applicable.
18. Not applicable.
21. Not applicable.
22. Not applicable.
23. Not applicable.
24. Not applicable.
27. Financial Data Schedules.
28. Not applicable.
99. Documents incorporated by reference pursuant to
Rule 12b-23:
P A. Pages 15-17, 25-30, and 49-52 of the
Prospectus.
P B. Pages S-3 through S-10 of the Supplement to
the Prospectus dated June 3, 1986 filed with
the Commission pursuant to Rule 424(b).
P C. Pages 2-3 and 6-9 of the Supplement to the
Prospectus dated October 6, 1986 included in
Post-Effective Amendment No. 1 to the
Partnership's Registration Statement on Form
S-11, filed with the Commission on
November 3, 1986.
P D. Pages 2-8, 10-13, and 14-18 of the
Supplement to the Prospectus dated
November 28, 1986 included in
Post-Effective Amendment No. 3 to the
Partnership's Registration Statement on Form
S-11, filed with the Commission on February
3, 1987.
P E. Page 4 of the 1987 Form 10-K filed with the
Commission on March 30, 1988.
P F. Pages 10-16 of the 1987 Annual Report to
Investors.
P G. Page 4 of the 1988 Form 10-K filed with the
Commission on March 31, 1989.
P H. Page A-18 of the 1988 Form 10-K filed with
the Commission on March 31, 1989.
P I. Page A-25 and A-26 of the 1989 Form 10-K
filed with the Commission on April 2, 1990.
P J. Page A-23 and A-25 of the 1990 Form 10-K
filed with the Commission on April 1, 1991.
P K. Page A-27 and A-28 of the 1991 Form 10-K
filed with the Commission on March 30,
1992.
P L. Page A-36 and A-37 of the 1992 Form 10-K
filed with the Commission on March 30,
1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
By: SCA REALTY I, INC.
Date: March 26, 1996 By: /s/ Mark K. Joseph
Mark K. Joseph
President/Treasurer, Director
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 set forth below opposite
their respective names.
Signatures Title Date
/s/ Garrett G. Carlson Chairman of the Board March 26, 1996
Garrett G. Carlson of Directors
/s/ Mark K. Joseph President/Treasurer, March 26, 1996
Mark K. Joseph Director
<PAGE>
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1994
Statements of Income for the three years ended December 31, 1995, 1994,
and 1993
Statements of Cash Flows for the three years ended December 31, 1995,
1994, and 1993
Statement of Changes in Partners' Capital for the three years ended
December 31, 1995
Separate financial statements of MLP II Acquisition Limited Partnership,
accounted for on the equity method, are set forth in Note 3 to the financial
statements of the Registrant.
All schedules prescribed by Regulation S-X have been omitted as the
required information is inapplicable or the information is presented elsewhere
in the financial statements or related notes.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Partners of SCA Tax Exempt Fund Limited Partnership
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in partners'
capital present fairly, in all material respects, the consolidated financial
position of SCA Tax Exempt Fund Limited Partnership (the "Partnership"),
SCA Tax Exempt Trust and MLP III Investment Limited Partnership at
December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995,
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 the opinion expressed above.
As discussed under "Investments in Mortgage Revenue Bonds" in Note 2, the
Partnership's 1994 financial statements have been restated to account for its
investments in mortgage revenue bonds as debt securities.
As explained in "Investments in Mortgage Revenue Bonds" in Note 2, the
financial statements include mortgage revenue bonds valued at $146,142,000
(65% of total assets) and $213,842,000 (93% of total assets) at
December 31, 1995 and 1994, respectively, which values have been estimated by
the Partnership's Managing General Partner in the absence of readily
ascertainable market values. We have reviewed the procedures used by the
Partnership's Managing General Partner in arriving at its estimate of value
of such mortgage revenue bonds and have inspected underlying documentation,
and, in the circumstances, we believe the procedures are reasonable and the
documentation appropriate. However, those estimated values may differ
significantly from the values that would have been used had a ready market
for the mortgage revenue bonds existed, and the differences could be material.
Price Waterhouse LLP
Baltimore, Maryland
March 28, 1996
<PAGE>
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
BALANCE SHEETS
IN THOUSANDS, EXCEPT BAC DATA
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $9,810 $7,855
Interest receivable 434 770
Investment in mortgage revenue bonds (Notes 2, 3 and 4) 146,142 213,842
Investment in parity working capital loans, net of valuation
allowance of $600 in 1995 and $1,196 in 1994 (Notes 2, 3 and 5) 2,890 6,689
Investment in MLP II (Note 3) 65,299 -
Other assets 240 1,126
--------------- ---------------
TOTAL ASSETS $224,815 $230,282
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $544 $1,110
Distributions payable 7,977 7,713
Due to affiliates (Note 7) 9 95
--------------- ---------------
TOTAL LIABILITIES 8,530 8,918
--------------- ---------------
Minority Interest (Note 1) 3 -
--------------- ---------------
Partners' Capital
Unrealized gain (loss) on mortgage revenue bonds available
for sale (including cumulative effect of accounting change
of ($8,028) as of January 1, 1994) (Note 2) (981) 1,366
General partners (477) (464)
Limited partners:
Series I (beneficial assignee certificates- issued
and outstanding 200,000 certificates) 141,111 142,862
Series II (beneficial assignee certificates- issued
and outstanding 96,256 certificates) 76,629 77,600
--------------- ---------------
TOTAL PARTNERS' CAPITAL 216,282 221,364
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 5, 6 & 8)
TOTAL LIABILITIES AND PARTNERS' CAPITAL $224,815 $230,282
=============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
IN THOUSANDS, EXCEPT PER BAC DATA
<TABLE>
<CAPTION>
For the year endedFor the year endedFor the year ended
December 31, December 31, December 31,
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
INCOME
Interest on mortgage revenue bonds and
parity working capital loans $13,574 $17,380 $7,614
Net gain on sale of A bond receipts 623 - -
Interest on short-term investments 366 210 197
Equity in MLP II 3,150 - -
Equity in property net income - - 5,185
--------------- --------------- ---------------
TOTAL INCOME 17,713 17,590 12,996
--------------- --------------- ---------------
EXPENSES
Operating expenses (Note 3) 4,491 2,365 1,248
Other-than-temporary impairments and valuation adjustments
related to investment in mortgage revenue bonds and
investment in real estate partnerships - 2,014 6,050
Minority interest 18 - -
--------------- --------------- ---------------
TOTAL EXPENSES 4,509 4,379 7,298
--------------- --------------- ---------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 13,204 13,211 5,698
CUMULATIVE EFFECT ON PRIOR YEARS (to January 1, 1994) OF CHANGE
IN ACCOUNTING FOR MORTGAGE REVENUE BONDS (NOTE 2) - (11,881) -
--------------- --------------- ---------------
NET INCOME $13,204 $1,330 $5,698
=============== =============== ===============
NET INCOME ALLOCATED TO GENERAL PARTNERS $132 $14 $57
=============== =============== ===============
NET INCOME (LOSS) ALLOCATED TO LIMITED PARTNERS:
SERIES I $8,749 ($1,122) $2,835
=============== =============== ===============
SERIES II $4,323 $2,438 $2,806
=============== =============== ===============
SERIES I EARNINGS PER BAC:
Income before cumulative effect of accounting change $43.74 $41.79 $14.18
Cumulative effect on prior years (to January 1, 1994) of change
in accounting for mortgage revenue bonds (Note 2) - (47.40) -
--------------- --------------- ---------------
NET INCOME (LOSS) PER BAC ALLOCATED TO SERIES I $43.74 ($5.61) $14.18
=============== =============== ===============
SERIES II EARNINGS PER BAC:
Income before cumulative effect of accounting change $44.91 $49.04 $29.15
Cumulative effect on prior years (to January 1, 1994) of change
in accounting for mortgage revenue bonds (Note 2) - (23.71) -
--------------- --------------- ---------------
NET INCOME PER BAC ALLOCATED TO SERIES II $44.91 $25.33 $29.15
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
IN THOUSANDS
<TABLE>
<CAPTION>
For the year endedFor the year endedFor the year ended
December 31, December 31, December 31,
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $13,204 $1,330 $5,698
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in MLP II net income (3,150) - -
Equity in property net income - - (5,185)
Income allocated to minority interest 18 - -
Recovery of valuation allowance on parity working capital loans - (46) -
Net realized gain on sale of A bond receipts (2,347) - -
Interest receivable transferred to investment
in real estate partnerships - - (327)
Other-than-temporary impairments and valuation adjustments
related to investment in mortgage revenue bonds
and investment in real estate partnerships - 2,014 6,050
Cumulative effect of accounting change - 11,881 -
Interest distributions from investment in
real estate partnerships - - 9,100
Decrease in interest receivable 336 84 123
(Increase) decrease in other assets 38 (1,100) 20
Increase (decrease) in accounts payable
and accrued expenses (566) 996 49
Increase (decrease) in due to affiliates (86) 71 (15)
--------------- --------------- ---------------
Net cash provided by operating activities 7,447 15,230 15,513
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in MLP II (61,000) - -
Distributions from MLP II 3,499 - -
Proceeds from sale of A bond receipts 67,700 - -
--------------- --------------- ---------------
Net cash provided by investing activities 10,199 - -
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (15,691) (15,692) (15,931)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,955 (462) (418)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 7,855 8,317 8,735
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $9,810 $7,855 $8,317
=============== =============== ===============
DISCLOSURE OF NON-CASH ACTIVITIES:
Contribution of parity working capital loans and
other assets to MLP II $4,647 - -
=============== =============== ===============
Transfer of investment in mortgage revenue bonds and
working capital loans to investment in real
estate partnerships - - $23,425
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
SCA TAX EXEMPT LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIOD DECEMBER 31, 1992 THROUGH DECEMBER 31, 1995
IN THOUSANDS
<TABLE>
<CAPTION> SERIES I SERIES II
LIMITED PARTNERS LIMITED PARTNERS UNREALIZED GAIN (LOSS)
BENEFICIAL BENEFICIAL ON MORTGAGE REVENUE
ASSIGNEE ASSIGNEE GENERAL BONDS AVAILABLE
CERTIFICATES CERTIFICATES PARTNERS FOR SALE, NET TOTAL
---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $161,149 $83,425 ($236) $0 $244,338
Net income 2,835 2,806 57 - 5,698
Distribution to partners (10,000) (5,775) (155) - (15,930)
---------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1993 153,984 80,456 (334) - 234,106
Cumulative effect on prior years
(to January 1, 1994) of change
in accounting (Note 2) - - - (8,028) (8,028)
Net income (1,122) 2,438 14 - 1,330
Distribution to partners (10,000) (5,294) (144) - (15,438)
Change in market value of mortgage
revenue bonds available for sale, net - - - 7,380 7,380
Realization of other-than-temporary
impairment on mortgage revenue bonds
available for sale - - - 2,014 2,014
---------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1994 142,862 77,600 (464) 1,366 221,364
Net income 8,749 4,323 132 - 13,204
Distribution to partners (10,500) (5,294) (145) - (15,939)
Net realized gains on sale of
A bond receipts - - - (2,347) (2,347)
---------------- --------------- --------------- --------------- ---------------
Balance, December 31, 1995 $141,111 $76,629 ($477) ($981) $216,282
================ =============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(SERIES I AND SERIES II)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Partnership
SCA Tax Exempt Fund Limited Partnership (the "Partnership"), was
organized on January 10, 1986, under the Delaware Revised Uniform Limited
Partnership Act for the purpose of investing in a portfolio of tax-exempt
mortgage revenue bonds (the "bonds") issued by various state or local
governments or their agencies or authorities, and secured by nonrecourse
participating first mortgage loans on real estate projects. The Partnership
will terminate on December 31, 2036, or sooner, in accordance with the
terms of the Partnership Agreement. SCA Realty I, Inc. is the .01%
Managing General Partner and SCA Associates 86 Limited Partnership is the
.99% Associate General Partner (collectively, the "General Partners").
The Series
The Partnership has had two offerings ("Series I" and "Series II") of
Beneficial Assignee Certificates ("BACs") which represent the assignment of
limited partnership interests in the Partnership. Because the rights and
obligations of BAC Holders are those of limited partners in the Partnership,
they are considered such for purposes of these financial statements. A total
of 200,000 BACs in Series I and 96,256 BACs in Series II were issued at a
stated value of $1,000 each and the net proceeds from each of these offerings
were invested in two separate pools of investments. In accordance with the
Partnership Agreement, the Managing General Partner is required to maintain
records for each such pool of investments and to report the results of such
investments to the Series I and Series II BAC Holders.
Other Entities
As more fully described in Note 3, certain new entities were created
to facilitate the Financing. A brief description of each such entity follows:
SCA Tax Exempt Trust (the "Trust") - The Trust was created to hold
certain assets of the Partnership, which is the sole holder of the
Certificate of Participation in the corpus and income of the Trust.
MLP III Investment Limited Partnership ("MLP III") - MLP III is a
Maryland limited partnership owned by the Partnership through a
99% general partner interest and SCA Limited Partner Corporation
("SCALPC"), an affiliate of the Managing General Partner, through
a 1% limited partner interest.
MLP II Acquisition Limited Partnership ("MLP II") - MLP II is a
Maryland limited partnership owned by MLP III through a 98.99%
limited partner interest (39.996% annual profits and distributions
interest), SCALPC through a .01% limited partner interest (.004%
annual profits and distributions interest) and MLP I (see below)
through a 1% general partner interest (60% annual profits and
distributions interest). Distributions of capital proceeds, as defined,
after payment of all debts, liabilities and expenses and after any
reserves deemed necessary, are distributed to the partners pro rata up
to an amount equal to their unreturned capital contributions.
MLP I LLC ("MLP I") - MLP I is a Maryland limited liability
company ("LLC"), whose members comprise the operating
partnerships that are the ultimate debtors in the bonds involved in the
Financing.
Basis of Presentation
The Partnership previously has presented financial statements for each
of Series I and Series II reflecting the pool of investments attributable to
each Series. Following a review of the Partnership's financial statements in
1995, the Staff of the Securities and Exchange Commissions (the "SEC")
concluded, and the Managing General Partner agreed, that the Partnership
would present financial statements comprising both Series I and Series II.
Financial information with respect to each Series is set forth supplementally
in Note 9. The consolidated financial statements of the Partnership include
the Partnership (comprising Series I and Series II), the Trust and MLP III.
MLP II is accounted for under the equity method and financial information
with respect to MLP II is set forth in Note 3. The minority interest
represents SCALPC's limited partner proportionate share of the equity in
MLP III. All significant intercompany transactions are eliminated.
Partnership Distributions
Cash flow, as defined in the Partnership Agreement, is distributable
and net income is allocable 1% to the Partnership's general partnership
interests and 99% to its limited partnership interests until the BAC Holders
have received an 8.5% non-cumulative return on their adjusted capital
contribution as defined. Thereafter, cash flow is distributable and income is
allocable based on varying percentages as defined in the Partnership
Agreement. The Partnership is not, however, precluded from making
distributions to BAC Holders in excess of annual cash flow. The Partnership
is required to pay distributions declared within 45 days following the end of
each six-month period of the calendar year. Proceeds from sale, repayment
or liquidation, as defined in the Partnership Agreement, are distributable
substantially in the same manner as other cash flow, after repayment of the
partners' adjusted capital contributions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Set forth below are the more significant accounting policies followed
by the Partnership in its consolidated financial statements and by MLP II.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of investments in money
market mutual funds and short-term marketable securities with original
maturities of 90 days or less, both of which are readily convertible to known
amounts of cash in seven days or less. The carrying amount of cash and cash
equivalents approximates fair value.
Short-Term Investments
Short-term investments are classified as trading securities and carried
at fair value; unrealized gains or losses are recorded through results of
operations. The Managing General Partner places short-term investments
in highly-rated commercial paper and limits the amount of credit exposure
with any one issuer. The Managing General Partner actively evaluates the
creditworthiness of the issuers in which it invests. The estimated fair value
of short-term investments approximates carrying value.
Investments in Mortgage Revenue Bonds
In 1994, the Partnership adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," ("FAS 115") and applied them
to its short-term investments. Following such adoption, the Partnership (as
did others in the industry) continued to account for its investments in
mortgage revenue bonds as either investments in real estate partnerships or
real estate loans, depending on whether or not the Managing General Partner
had directed its affiliates to take deed to the underlying property in lieu of
the Partnership foreclosing.
In conjunction with the review of the Partnership's financial
statements by the SEC Staff in 1995 as discussed in Note 1, the Partnership
agreed that it would account for all of its investments in mortgage revenue
bonds as debt securities under the provisions of FAS 115 effective January
1, 1994, and restated its 1994 financial statements to reflect this change.
Accordingly, effective January 1, 1994, all investments in mortgage revenue
bonds, regardless of their status, are classified and accounted for as available
for sale debt securities and carried at fair value; unrealized holding gains or
losses are included as a separate component of Partners' Capital and
other-than-temporary impairments are recorded through operations. The
cumulative effect of adopting this accounting was to decrease Partners'
Capital by approximately $19.9 million as of January 1, 1994; of such
amount, approximately $11.9 million was attributable to operations prior to
January 1, 1994 and is reflected in the income statement as a cumulative
effect of the accounting change and approximately $8.0 million was
attributable to an unrealized holding loss as of such date. The cumulative
effect adjustment discussed above does not affect the cash flow generated
from property operations, distributions to BAC Holders, the characterization
of the tax-exempt income stream or the financial obligations under the bonds.
In connection with a Consent Solicitation and Proxy to be filed with the
SEC on March 29, 1996, the Partnership requested an independent appraisal
firm to conduct appraisals as of May 1, 1995 of all of the properties
collateralizing the Partnership's investments in mortgage revenue bonds.
Because only a limited market exists for such bonds and they are wholly
collateral dependent, the Partnership used such appraisals as the basis for its
estimates of fair values of the bonds. In connection with the adoption of FAS
115 as of January 1, 1994 and its application to the accompanying financial
statements, the Managing General Partner used such estimates, as adjusted
for intervening changes in circumstances, in making its estimates of fair value
for the mortgage revenue bonds at various dates throughout 1994 and 1995.
The Managing General Partner will continue to use its best efforts in
estimating the fair value of the Partnership's mortgage revenue bonds.
For those mortgage revenue bonds where estimated fair value has
declined to an amount below amortized cost, the Managing General Partner
considers the following in determining whether the indicated decline is
other-than-temporary. With respect to bonds that are not performing in
accordance with their contractual terms established at the time of issuance,
the Partnership considers all declines in fair value, if any, to be
other-than-temporary as required under the provisions of FAS 115. Indicated
impairments of performing bonds are evaluated on an individual basis, but,
in the absence of contrary evidence, are generally considered to be
temporary.
Base interest on the mortgage revenue bonds is recognized as revenue
as it accrues; contingent interest is recognized when received. Although no
debt service obligations have been forgiven, delinquent mortgage revenue
bonds are placed on non-accrual status for financial reporting purposes when
collection of interest is in doubt. Interest payments on non-accrual mortgage
revenue bonds are applied first to previously recorded accrued interest and,
once previously accrued interest is satisfied, is then recognized as income
when received. The accrual of interest income is reinstated once a property's
ability to perform is adequately demonstrated. For tax purposes, the
Partnership recognizes interest income on the mortgage revenue bonds at
rates negotiated at the time such investments were made. Interest recognized
on the bonds is exempt for federal income tax purposes to the partners.
Investments in Parity Working Capital Loans
The Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan" ("FAS 114") effective January 1, 1994. The provisions of FAS 114
clarify that a creditor should evaluate the collectability of both interest and
principal receivable when assessing the need for a valuation allowance. FAS
114 requires a creditor to base its measure of loan impairment on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or the fair value of the collateral if the loan is collateral dependent. A
valuation allowance is provided to record the loan impairment with a
corresponding charge to net income. The cumulative effect of adopting FAS
114 was not significant.
Base interest on the parity working capital loans is recognized as
revenue as it accrues; contingent interest is recognized when received.
Although no debt service obligations have been forgiven, delinquent parity
working capital loans are placed on non-accrual status for financial reporting
purposes when collection of interest is in doubt. Interest payments on
non-accrual parity working capital loans are applied first to previously
recorded accrued interest and, once previously accrued interest is satisfied, is
then recognized as income when received. The accrual of interest income is
reinstated once a property's ability to perform is adequately demonstrated.
For tax purposes, the Partnership recognizes interest income on the loans at
rates negotiated at the time such investments were made. For income tax
purposes, interest recognized on the parity working capital loans is taxable
to the partners.
Equity in Property Income (Loss)
Prior to the adoption of FAS 115 on January 1, 1994, the Partnership
reclassified investments in mortgage revenue bonds to investments in real
estate partnerships whenever it became apparent that the underlying
properties were unable to continue to support their entire debt service
obligation, and the other sources of debt service, including property level
reserves and operating deficit guarantees, were considered insufficient to
meet mortgage loan obligations. Once reclassified to investments in real
estate partnerships, the investments were accounted for using the equity
method of accounting. The carrying value of these investments was
increased or decreased, and income or loss was recognized, for the
Partnership's share of the underlying property's income or loss. Interest
collected from investment in real estate partnerships was recorded not as
interest income, but as a distribution which decreased the investment's
carrying value.
Earnings per BAC
Earnings per BAC are calculated on a Series basis using the income
or loss attributable to Series I and Series II and the average outstanding
BACs in each Series. For each of the three years ended December 31, 1995,
1994 and 1993, 200,000 and 96,256 BACs were outstanding for Series I and
Series II, respectively.
Income Taxes
No recognition has been given to income taxes in the accompanying
financial statements as the distributive share of the Partnership's income,
deductions and credits is included in each partner's income tax returns. The
Managing General Partner believes that the Partnership is not subject to
income taxes. The tax basis of the Partnership's net assets exceeds the
carrying value for book purposes by approximately $69 million, of which
approximately $57 million and approximately $12 million is attributable to
Series I and Series II, respectively.
Significant Risks and Uncertainties
The Partnership's assets are primarily invested in tax-exempt
mortgage revenue bonds, secured by non-recourse loans on real estate
projects. Accordingly, the value of the Partnership's assets is subject to all
of the factors affecting bond and real estate values, including interest rate
changes, demographics, local real estate markets and individual property
performance.
The use of estimates is inherent in the preparation of all financial
statements, but is especially important in the case of the Partnership, which
is required under FAS 115 to carry a substantial portion of its assets at fair
value, even though only a limited market exists for them. Because only a
limited market exists for the Partnership's investment in mortgage revenue
bonds, fair value is estimated by the Managing General Partner. These
estimates involve uncertainties and matters of judgment, and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect estimates.
NOTE 3 - THE FINANCING/INVESTMENT IN MLP II
As discussed in previous reports, on February 14, 1995, the
Partnership consummated a transaction which raised gross proceeds through
the sale of $67,700,000 in aggregate principal amount of Multifamily
Mortgage Revenue Bond Receipts (the "Financing"). The Multifamily
Mortgage Revenue Bond Receipts (collectively, the "Receipts") are
collateralized by a pool of eleven of the Partnership's 23 original mortgage
revenue bonds (five in Series I and six in Series II). (The Partnership's 12
remaining mortgage revenue bonds not refunded in the Financing are
discussed in Note 4.) These eleven bonds all relate to properties that
defaulted on their original debt obligations. The cash stream from one
additional bond, Creekside Village ("Creekside"), which also defaulted on its
original debt obligation, has been pledged as further security for the
Financing transaction. The operating partnerships for the underlying
properties that collateralize these bonds, including Creekside, were controlled
by SCA Successor, Inc., an affiliate of the Managing General Partner. On
January 1, 1995, SCA Successor, Inc., the General Partner of these operating
partnerships, withdrew and was replaced by SCA Successor II, Inc., an
affiliate of the Managing General Partner, as sole General Partner.
Eleven bonds, in the aggregate principal amount of $126,590,000,
were refunded by the issuers of such bonds. As a result, a Series A Bond and
a Series B Bond (whose aggregate principal amount equals that of the
original bonds) were exchanged for each of the original bonds. The
aggregate principal amount of the Series A Bonds and Series B Bonds is
$67,700,000 and $58,890,000, respectively. Each Series B Bond is
subordinate to the related issue of Series A Bonds. In addition, the maturity
date for each bond has been extended to January 2030. The specific bonds
as of December 31, 1995 are as follows:
<PAGE>
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
MORTGAGE REVENUE REFUNDING BONDS
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
A Bond B Bond B Bond B Bond
Interest Total A Bond B Bond Amortized Unrealized Fair
Rate Face Amount Face Amount Face Amount Cost Gain (Loss) Value
(000's) (000's) (000's) (000's) (000's) (000's)
-------- --------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Montclair 7.10% $15,340 $8,500 $6,840 $1,691 $0 $1,691
Newport Village 7.10% 10,425 6,250 4,175 2,973 287 3,260
Nicollet Ridge 7.10% 20,340 7,925 12,415 6,075 475 6,550
Steeplechase Falls 7.125% 17,950 12,650 5,300 5,851 267 6,118
Barkley Place 7.05% 8,830 5,350 3,480 2,445 - 2,445
--------------- --------------- --------------- --------------- --------------- ---------------
Total Series I 72,885 40,675 32,210 19,035 1,029 20,064
--------------- --------------- --------------- --------------- --------------- ---------------
Mallard Cove I 7.40% 2,470 800 1,670 942 80 1,022
Mallard Cove II 7.40% 6,450 2,700 3,750 2,590 284 2,874
Whispering Lake 7.10% 17,400 8,900 8,500 4,779 - 4,779
Gilman Meadows 7.40% 6,875 4,000 2,875 2,530 176 2,706
Hamilton Chase 7.35% 13,875 7,625 6,250 4,140 - 4,140
Meadows 7.35% 6,635 3,000 3,635 3,716 103 3,819
--------------- --------------- --------------- --------------- --------------- ---------------
Total Series II 53,705 27,025 26,680 18,697 643 19,340
--------------- --------------- --------------- --------------- --------------- ---------------
TOTAL $126,590 $67,700 $58,890 $37,732 $1,672 $39,404
=============== =============== =============== =============== =============== ===============
</TABLE>
<PAGE>
The Series A Bonds bear interest at various fixed rates per annum, as
detailed on the schedule above, and are due and payable monthly. The Series
A Bonds are subject to mandatory sinking fund redemptions commencing
January 1, 2001 and continuing through maturity.
The Series B Bonds, except for the Series B Bonds relating to
Steeplechase Falls, Barkley Place and The Meadows, bear interest equal to
the greater of (a) three percent (3%) per annum ("base interest") or (b) the
amount of available cash flow not exceeding 16% per annum. To the extent
annual interest paid on these Series B Bonds for the period is less than 16%,
the difference between 16% and the greater of: a) actual interest collected,
and b) base interest shall be payable on the earlier of the maturity date or the
redemption date for the Series B Bonds. The Series B Bonds relating to
Steeplechase Falls, Barkley Place and The Meadows bear interest equal to
16%. Principal amortization on the Series B Bonds is permitted but not
required. However, in any event, Series B Bond principal will be required to
be repaid or refinanced in a lump sum payment at maturity, January 2030.
To the extent the operating partnerships have available cash flow, as defined,
interest on the principal amount shall be due and payable monthly. For the
year ended December 31, 1995 approximately $3.4 million of interest was
received on the Series B Bonds.
The Partnership deposited each of the Series A Bonds and Series B
Bonds with the Trust which was created to hold these assets. A Certificate
of Participation in the corpus and the income of the Trust was issued
representing interests in the two series of bonds. The Partnership is the sole
holder of the Certificate of Participation.
The Series A Bonds were then deposited by the Trust with a
custodian and the additional proceeds were raised through the sale of
Receipts in the Series A Bonds to Receipt holders. As a result of the sale of
Receipts in the Series A Bonds, the Partnership recognized a gain of
approximately $623,000. Included in this amount is a portion of the net
unrealized gain associated with the refunded bonds of approximately $2.3
million, net of selling expenses of approximately $1.7 million. The portion
of the unrealized gain (loss) recognized for each bond was determined by
allocating the net carrying amount at the time of sale to the Series A Bond
and the Series B Bond based upon their relative fair values, using the
concepts outlined in the Financial Accounting Standard Board's Emerging
Issues Task Force Issue No. 88-11. The Receipts are credit enhanced by
Financial Security Assurance Inc. ("FSA") and are rated AAA and Aaa by
Standard and Poors and Moody's, respectively.
Through the Series A Bonds, held by the custodian, the Receipt
holders have a fixed interest rate and preferred return position so that a
guaranteed, preferred, fixed-rate tax-exempt return will be paid by the
operating partnerships. The operating partnerships entered into an interest
rate swap agreement whereby a portion of the fixed interest rate under the
Series A Bonds was swapped for a floating tax-exempt interest rate through
2004. This mechanism is intended to allow the Partnership to realize the
potential benefit of traditionally lower floating tax-exempt interest rates by
lowering the effective cost of the Series A Bonds to the operating
partnerships which, for 1995, enabled the operating partnerships to pay an
additional $1.3 million in Series B Bond interest payments to the Partnership.
Under this interest rate swap, the operating partnerships are obligated to pay
a floating rate equivalent to the PSA Municipal Swap Index, an index of
weekly tax-exempt variable rate issues. Also, an interest rate cap was
purchased for approximately $4.2 million by the operating partnerships to
limit their exposure (and ultimately the Partnership's) resulting from the
floating tax-exempt interest rate obligation.
In order to obtain credit enhancement and an investment grade rating
of the Receipts, the cash stream from the eleven properties collateralizing the
bonds was pledged to FSA. In addition, the Creekside bond has been
pledged to FSA as further security. Any cash in excess of the amount needed
to pay interest on the Receipts is then paid for the benefit of BAC Holders
through the Notes, as defined below, and the Series B Bonds. The cash flow
generated on assets acquired with the new proceeds, as discussed below, and
any net proceeds received under the swap agreement also will be for the
benefit of BAC Holders. These cash streams are not pledged to the Receipt
holders.
In return for the sale of Receipts in the Series A Bonds, the Trust, for
the benefit of the Partnership, received $67.7 million. The proceeds from the
sale of the Receipts have been invested in MLP III. MLP III invested the net
proceeds from the sale of the Receipts, approximately $61 million (net of
$6.7 million in proceeds used to finance transaction costs and Partnership
reserves) in MLP II. MLP II, in turn, loaned the operating partnerships
approximately $4.2 million (the "Load Loan Notes") to purchase an interest
rate cap, as discussed above.
It is currently intended that MLP II will be the vehicle for investment
should the Partnership permanently invest the net proceeds of approximately
$56.8 million primarily in additional mortgage revenue bonds that finance
multi-family properties. The purpose of the MLP structure is to enable the
BAC Holders, through the Partnership, to participate from substantially all
of the investment income generated from the net proceeds on a primarily
tax-exempt basis. On January 19, 1996, the Partnership, through MLP II, made
its first acquisition of an additional mortgage revenue bond when $7,238,000
of the net Financing proceeds was invested in a bond collateralized by
Riverset II, a multi-family property located in Memphis, Tennessee. The
remaining net proceeds held by MLP II are currently invested in various
short-term investments.
The operating partnerships included in the Financing have entered
into a cross-collateralization agreement among themselves. This
cross-collateralization agreement may result in the operating partnerships being
obligated under the Series A Bond obligations of the other operating
partnerships included in the Financing due to shortfalls in their cash flows or
required debt service coverage ratios. Based upon information currently
available, the Managing General Partner does not anticipate that any
payments will be required under the cross-collateralization agreement.
Unpaid and unaccrued base interest receivable of approximately $15.5
million on the eleven original bonds, and the related parity working capital
loans (see Notes 1 and 5) and unpaid and unaccrued interest thereon,
aggregating approximately $4.8 million, were converted to Accrued Interest
Notes and Working Capital Notes, respectively, in equivalent principal
amounts. The Partnership contributed the Accrued Interest Notes and
Working Capital Notes to MLP III, which recorded them at the Partnership's
carrying values of $-0- and approximately $3.8 million, respectively, and
contributed them, in turn, to MLP II, which recorded them at the same
carrying values because all of these entities are under common control of the
Managing General Partner. As discussed above, MLP II loaned the operating
partnerships approximately $4.2 million (the Load Loan Notes). In addition,
MLP II paid approximately $755,000 in various financing costs on behalf of
the operating partnerships included in the Financing. The Accrued Interest
Notes, Working Capital Notes and Load Loan Notes, (collectively the
"Notes") in the aggregate principal face amount of approximately $24.5
million, are due on demand, but in any case not later than January 2030. The
Notes bear interest at a compound annual rate equal to the Blended Annual
Rate in effect for that calendar year as published by the Internal Revenue
Service. To the extent the operating partnerships have available cash flow,
interest on the principal amount and scheduled principal payments shall be
due and payable monthly. For financial reporting purposes, income is
recognized for the portion of principal payments received on the Notes by
MLP II in excess of the carrying value recorded by MLP II. For the period
ended December 31, 1995, approximately $2.2 million was received by MLP
II for principal payments on the Notes, of which approximately $1.4 was
recorded as income. Principal payments recognized as income by MLP II are
allocated to the partners of MLP II based on their pro rata unreturned capital
contributions as discussed in Note 1.
The Notes and the Series B Bonds are subordinate in priority and
right of payment to the Series A Bonds and payable only to the extent of cash
flow. Payments of principal and interest on the Notes and the Series B
Bonds are prioritized as follows: (i) interest payments due to MLP II on the
Notes, pro rata between the Notes; (ii) scheduled principal payments due to
MLP II on the Notes, pro rata between the Notes; (iii) interest payments due
to the Trust on the Series B Bonds; and (iv) the principal payment of the
Series B Bonds due January 2030. For the year ended December 31, 1995,
approximately $3.4 million was received for Series B Bond interest. As of
December 31, 1995, all of the Series B Bonds were on non-accrual status.
Additional interest income that would have been recognized by the
Partnership had these bonds not been placed on non-accrual status was
approximately $802,000 for the year ended December 31, 1995.
In accordance with the Partnership Agreement, the Managing General
Partner continues to maintain records for each pool of investments originally
acquired for Series I and Series II and to report the results of such
investments to the Series I and Series II BAC Holders. Income generated
from the net Financing proceeds is allocated approximately 60.1% to Series
I and approximately 39.9% to Series II. Such percentages are based on the
face amount of the Series A Bonds of each respective Series which generated
the Financing proceeds.
The Trust and MLP III are included in the consolidated financial
statements of the Partnership. Financial information for MLP II, which is
accounted for under the equity method, is set forth below. MLP II follows
the same accounting policies followed by the Partnership, and has incurred
organizational costs of approximately $93,000, which have been deferred and
are being amortized over five years.
<PAGE>
MLP II ACQUISITION LIMITED PARTNERSHIP
BALANCE SHEET
IN THOUSANDS
<TABLE>
<CAPTION>
December 31,
1995
-----------------
<S> <C>
ASSETS
Cash and cash equivalents $348
Short-term investments 56,893
Interest receivable from short-term investments 343
Notes receivable from operating partnerships 7,250
Due from operating partnerships 755
Other assets 216
-----------------
TOTAL ASSETS $65,805
=================
LIABILITIES AND PARTNERS' CAPITAL
Due to affiliates $120
Distributions payable 20
-----------------
TOTAL LIABILITIES 140
-----------------
Partners' Capital
General partner - MLP I 366
Limited partners - MLP III and SCALPC 65,299
-----------------
TOTAL PARTNERS' CAPITAL 65,665
-----------------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND PARTNERS' CAPITAL $65,805
=================
</TABLE>
<PAGE>
MLP II ACQUISITION LIMITED PARTNERSHIP
STATEMENT OF INCOME
IN THOUSANDS
<TABLE>
<CAPTION>
For the year ended
December 31,
1995
-----------------
<S> <C>
INTEREST INCOME $5,850
OPERATING EXPENSES 18
-----------------
NET INCOME $5,832
=================
NET INCOME ALLOCATED TO GENERAL PARTNER (MLP I) $2,681
=================
NET INCOME ALLOCATED TO LIMITED PARTNERS (MLP III and SCALPC) $3,151
=================
</TABLE>
<PAGE>
MLP II ACQUISITION LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
IN THOUSANDS
<TABLE>
<CAPTION>
For the year ended
December 31,
1995
-----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,832
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 17
(Increase) in interest receivable on short-term investments (343)
(Increase) in other assets (140)
Increase in due to affiliates 120
-----------------
Net cash provided by operating activities 5,486
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (56,893)
Issuance of load loans to operating partnerships (4,233)
Principal payments on notes receivable from
operating partnerships 782
-----------------
Net cash used in investing activities (60,344)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from partners 61,001
Distribution to partners (5,795)
-----------------
Net cash provided by financing activities 55,206
-----------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 348
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD - -
-----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $348
=================
DISCLOSURE OF NON-CASH ACTIVITIES:
Contribution of working capital loans and other
assets from MLP III Investment Limited
Partnership $4,647
=================
Transfer of other assets to
operating partnerships $755
=================
</TABLE>
<PAGE>
MLP II ACQUISITION LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIOD JANUARY 1, 1995 THROUGH DECEMBER 31, 1995
IN THOUSANDS
<TABLE>
<CAPTION>
LIMITED PARTNERS GENERAL PARTNER
(MLP III and SCALPC) (MLP I) TOTAL
------------------ ----------------- -----------------
<S> <C> <C> <C>
Balance, January 1, 1995 $0 $0 $0
Net contributions 65,647 1 65,648
Net income 3,151 2,681 5,832
Distribution to partners (3,499) (2,316) (5,815)
------------------ ----------------- -----------------
Balance, December 31, 1995 $65,299 $366 $65,665
================== ================= =================
</TABLE>
<PAGE>
NOTE 4 - INVESTMENT IN MORTGAGE REVENUE BONDS
As of December 31, 1995, the Partnership continued to hold 23
mortgage revenue bonds, 14 for Series I and nine for Series II. Of the 14
bonds for Series I and nine bonds for Series II, ten and six, respectively,
were unable to support their entire debt service obligation, after other
sources of debt service other than property operations. As a result, the deeds
to the properties collateralizing the mortgage revenue bonds were transferred
by deed in lieu of foreclosure to "New Borrowers." These New Borrowers
are partnerships whose general partner is SCA Successor, Inc., a corporation
which is an affiliate of the Managing General Partner. In certain instances,
instead of the formal transfer of the property to a New Borrower, SCA
Successor, Inc. has been designated as the general partner of the original
borrowing entity. On January 1, 1995, SCA Successor, Inc. withdrew as
general partner of the operating partnerships included in the Financing and
was replaced by SCA Successor II, Inc., an affiliate of the Managing General
Partner, as sole general partner. For those properties owned by partnerships
controlled by SCA Successor, Inc. and SCA Successor II, Inc., although the
Partnership has not waived default, the Managing General Partner has no
plans or intentions to accelerate the maturity of the mortgage loans. In
addition, the Partnership is responsible for the post-transfer operating
deficits of New Borrowers. No operating deficits were funded for the three
years ended December 31, 1995, 1994 and 1993.
General Mortgage Loan Terms
The proceeds from the issuance of the bonds were used to make
nonrecourse participating first mortgage loans on multi-family housing
developments. The Partnership's rights under the mortgage revenue bonds
are defined by and dependent on the terms and conditions of the mortgage
loans. The mortgage loans are assigned to the Partnership to secure the
payment of principal and interest on the mortgage revenue bonds. This
assignment includes an assignment of a first mortgage on the property and an
assignment of rents. Additional collateral was provided in the form of
property level operating reserves funded from construction period cash flow
and by operating deficit guarantees. Of the additional collateral originally
provided, the property level operating reserves have been exhausted on all
but three of the loans, and all but one of the operating deficit guarantees have
expired.
Of the 23 mortgage revenue bonds, the 12 bonds not refunded in the
Financing transaction (and the 11 bonds discussed in Note 3 for the period
prior to the Financing) provide for the payment of base interest and additional
contingent interest. In addition, the bonds provide for the Partnership to hold
the mortgage revenue bonds and the related mortgage loans for 14 years or
more. Principal on the mortgage loans will not be amortized while held by
the Partnership, but will be required to be repaid or refinanced in a lump sum
payment at the end of the holding period or at such earlier time as the
Partnership may require. The mortgage loans are non-assumable except with
the consent of the Partnership. Prepayment is prohibited during the first
seven years of the mortgage loan. Between years eight and eleven, the
mortgage loan may be prepaid at the option of the borrower subject to a
declining penalty. Prepayments after the twelfth year, subject to par value,
are allowed without regard to whether or not the mortgaged property is sold
or refinanced. The Partnership may also require prepayment of the mortgage
loan upon the occurrence of an event which would cause significant risk that
the interest on the mortgage revenue bonds would be subject to federal
income taxation. The remaining 11 Series B Bonds are discussed in Note 3.
The mortgage loans bear interest at base rates determined by arms
length negotiations that reflect market conditions at the time the mortgage
revenue bonds were purchased by the Partnership. Each loan provides for
contingent interest in an amount equal to the difference between the stated
base interest rate and 16%. During the construction period, each bond bore
interest at base rates that were separately negotiated, and payment of any
construction period contingent interest was deferred until the project was
sold or refinanced. Contingent interest (other than contingent interest during
the construction period) is payable during the year from 100% of the project
cash flow until the Partnership's aggregate non-compounded interest rate
equals the base interest rate plus 1.5% to 2.5%(first tier contingent interest),
as the case may be, on each mortgage loan. Any remaining cash flow is split
equally with the owner until the Partnership reaches its 16% per annum limit.
To the extent that the aggregate of all interest payments, including contingent
interest, for any year does not equal 16% per annum, the difference is
deferred until the mortgaged property is sold or the mortgage loan is repaid.
Sale or repayment proceeds remaining after the repayment of principal and
other specified payments are paid 100% to the Partnership to the extent
necessary for the Partnership to recover the base rate plus first tier
contingent interest previously deferred; thereafter, 50% of any excess sale or
repayment proceeds is paid to the Partnership until it reaches its 16% per annum
limit. Accordingly, the ability of the Partnership to collect contingent
interest on the mortgage revenue bonds is dependent upon the level of project
cash flow and sale or repayment proceeds. Pursuant to the refundings, the
mortgage loan terms outlined above have been modified with respect to the
Series B Bonds, as discussed in Note 3.
With respect to the 23 original mortgage revenue bonds held by the
Partnership prior to the refundings, at December 31, 1994, there were eight
bonds for Series I and six bonds for Series II placed on non-accrual status.
Additional interest income that would have been recognized had these bonds
not been placed on non-accrual status was approximately $3,241,000 for the
year ended December 31, 1994 (approximately $2,150,000 and $1,091,000
for Series I and Series II, respectively). For 1993, there were no bonds on
non-accrual status. On February 14, 1995, five of the Series I bonds and all
of the Series II bonds placed on non-accrual status were refunded in
connection with the Financing, as discussed in Note 3. During 1995, two
additional bonds for Series I were place on non-accrual status. Thus as of
December 31, 1995, of the 12 remaining original mortgage revenue bonds,
there were five bonds for Series I on non-accrual status and no bonds for
Series II on non-accrual status. Additional interest income that would have
been recognized had these bonds not been placed on non-accrual status was
approximately $2.2 million for the year ended December 31, 1995, all related
to Series I.
Descriptions of the 12 mortgage revenue bonds not refunded in the
Financing at December 31, 1995 are provided in the following table. Refer
to Note 3 for description of the 11 Series B Bonds and discussion of general
mortgage loan terms amended by the Financing for the Series B Bonds.
<PAGE>
<TABLE>
<CAPTION>
Series I
Base First Tier Face Amortized Unrealized Fair
Investment in Mortgage Interest Contingent Maturity Amount Cost Gain (Loss) Value
Revenue Bonds (Note 4) Rate Rate Date (000's) (000's) (000's) (000's)
- ----------------------------------- ------------ --------------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Alban Place Apartments 7.875 2.375 Oct. 2008 $10,065 $10,065 ($336) $9,729
Frederick, MD
Alban Place Limited Partnership
Northridge Park Apartments 7.500 2.000 June 2012 8,815 8,815 (1,625) 7,190
Salinas, CA
Northridge Park Phase II
Lakeview Garden Apartments 7.750 2.500 Aug. 2007 9,003 6,988 - 6,988
Dade Co., FL
SCA Lakeview Apartments
Limited Partnership
Riverset Apartments 7.875 2.100 Nov. 1999 6,475 6,475 (778) 5,697
Memphis, TN
Auction Street Associates
Limited Partnership
Villa Hialeah 7.875 2.375 Oct. 2009 10,250 10,250 (725) 9,525
Hialeah, FL
Shelter Group South East -
Hialeah, A Limited Partnership
Newport-on-Seven 8.125 2.375 Aug. 2008 10,125 7,898 - 7,898
St. Louis Park, MN
St. Louis Park Housing Partners,
A Limited Partnership
North Pointe Apartments 7.875 2.375 Aug. 2006 25,185 12,739 1,170 13,909
San Bernardino, CA
Cal-Shel Limited Partnership
Creekside Village Apartments 7.500 2.250 Nov. 2009 11,760 8,635 - 8,635
Sacramento, CA
Creekside Village Limited
Partnership
Willowgreen Apartments 8.000 2.250 Dec. 2010 9,275 7,901 - 7,901
Tacoma, WA
Willowgreen I & II
Limited Partnership
Series B Mortgage Revenue Bonds (Note 3) 32,210 19,035 1,029 20,064
---------- ------------ ------------ ------------
Subtotal Series I Investment in
Mortgage Revenue Bonds $133,163 $98,801 ($1,265) $97,536
---------- ------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Series II
Base First Tier Face Amortized Cost Unrealized Fair
Investment in Mortgage Interest Contingent Maturity Amount Cost Gain (Loss) Value
Revenue Bonds (Note 4) Rate Rate Date (000's) (000's) (000's) (000's)
- ----------------------------------- ------------ --------------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Riverset Apartments 7.875 2.100 Nov. 1999 $12,525 $12,525 (1,477) $11,048
Memphis, TN
Auction Street Associates
Limited Partnership
Southfork Village Apartments 7.875 2.375 Jan. 2009 10,375 10,375 492 10,867
Lakeville, MN
Southfork Apartments
Limited Partnership
Emerald Hills Apartments 7.750 2.500 Apr. 2008 6,725 6,725 626 7,351
Issaquah, WA
Axelrod Emerald Hills Association
Limited Partnership
Series B Mortgage Revenue Bonds (Note 3) 26,680 18,697 643 19,340
---------- ------------ ------------ ------------
Subtotal Series II Investment in
Mortgage Revenue Bonds $56,305 $48,322 $284 $48,606
---------- ------------ ------------ ------------
Total Investment in Mortgage
Revenue Bonds $189,468 $147,123 ($981) $146,142
========== ============ ============ ============
</TABLE>
<PAGE>
NOTE 5 - INVESTMENT IN PARITY WORKING CAPITAL LOANS
As of December 31, 1995, the Partnership held 11 parity working
capital loans, eight for Series I and three for Series II. The remaining loans
(four for Series I and six for Series II) were contributed to MLP II as
discussed in Note 3. In general, the terms of the loans unaffected by the
Financing are similar to the mortgage revenue bonds to which they relate.
The carrying value of the Partnership's investment in parity working capital
loans reflects valuation allowances of $600,000 and $1,196,000 at December
31, 1995 and 1994, respectively.
Of the 21 parity working capital loans, at December 31, 1994, there
were seven parity working capital loans for Series I and six for Series II
placed on non-accrual status. Additional interest income that would have
been recognized had these parity working capital loans not been placed on
non-accrual status was approximately $71,000 for the year ended December
31, 1994 (approximately $44,000 and $27,000 for Series I and Series II,
respectively). For 1993, there were no parity working capital loans on
non-accrual status. On February 14, 1995, four of the Series I loans and all of
the Series II loans placed on non-accrual status were contributed to MLP II in
connection with the Financing discussed in Note 3. During 1995, two
additional loans for Series I were place on non-accrual status. Thus as of
December 31, 1995, there were five loans for Series I on non-accrual status
and none for Series II on non-accrual status. Additional interest income that
would have been recognized had these loans not been placed on non-accrual
status was approximately $68,000 for the year ended December 31, 1995, all
related to Series I.
NOTE 6 - EQUITY IN PROPERTY INCOME (LOSS)
As more fully described in Note 2, prior to the adoption of FAS 115
effective January 1, 1994, the Partnership accounted for certain investments
in mortgage revenue bonds as investments in real estate partnerships under
the equity method of accounting. This accounting treatment was for financial
reporting purposes only and did not affect the income reported for federal
income tax purposes, the amount of distributions to investors or the
Managing General Partner's intentions related to other matters including
ongoing legal actions, if any.
Properties classified as investments in real estate partnerships typically
had been transferred by deed in lieu of foreclosure to New Borrowers. In
certain instances, instead of the formal transfer of the property to a New
Borrower, SCA Successor, Inc. has been designated as the general partner
of the original borrowing entity. The Managing General Partner has taken
the position that these transactions do not affect the tax-exempt nature of the
income received by the Partnership on any of the loans, nor does it change
the character of the Partnership's income for tax purposes. This position was
consistent with industry practice, and the Managing General Partner was not
aware of any contrary rulings. As with all federal income tax matters, the
Internal Revenue Service may choose to review and rule on the subject at a
later date.
Summarized Financial Information
Combined unaudited results of operations for the year ended
December 31, 1993 are presented. The combined results of operations for
1993 includes nine properties for Series I and six properties for Series II.
<PAGE>
Combined Results of Operations
For the year ended December 31, 1993
(in 000's)
(unaudited)
Series I Series II Total
------------ ------------ --------------
Revenues $17,314 $5,153 $22,467
Operating expenses 13,197 4,085 17,282
------------ ------------ --------------
Net Income $4,117 $1,068 $5,185
============ ============ ==============
<PAGE>
NOTE 7 - RELATED PARTY TRANSACTIONS
The Managing General Partner and its affiliates are entitled to
reimbursement for all costs and expenses paid by them on behalf of the
Partnership for administrative services necessary for the prudent operation
of the Partnership. The Partnership does not employ any personnel. All staff
required by the Partnership are employees of the Managing General Partner
or its affiliates which receive direct reimbursement from the Partnership for
all costs related to such personnel, including payroll taxes, workers'
compensation and health insurance and other fringe benefits, as summarized
in the table below. Amounts so charged to the Partnership attributed to
Series I and Series II represent actual amounts expended or allocations based
on time spent, usage, original net offering proceeds or other reasonable
measures.
<TABLE>
<CAPTION>
For the year For the year For the year
ended ended ended
December 31, December 31, December 31,
1995 1994 1993
(000's) (000's) (000's)
--------------- --------------- ---------------
<S> <C> <C> <C>
Charged to Series I:
Salaries of noncontrolling persons &
related expenses $458 $439 $327
Other administrative expenses 95 109 92
--------------- --------------- ---------------
Expenses reimbursed $553 $548 $419
=============== =============== ===============
Charged to Series II:
Salaries of noncontrolling persons &
related expenses $220 $212 $157
Other administrative expenses 46 52 44
--------------- --------------- ---------------
Expenses reimbursed $266 $264 $201
=============== =============== ===============
Total:
Salaries of noncontrolling persons &
related expenses $678 $651 $484
Other administrative expenses 141 161 136
--------------- --------------- ---------------
Expenses reimbursed $819 $812 $620
=============== =============== ===============
</TABLE>
<PAGE>
Included in Due to Affiliates in the accompanying balance sheets are
amounts payable to the Managing General Partner and its affiliates related to
such costs. At December 31, 1995, the amounts due approximated $7,000
while at December 31, 1994, they were approximately $95,000.
Affiliates of the Managing General Partner receive fees for mortgage
servicing from the limited partnerships owning the mortgaged properties.
The fees attributable to affiliates paid by all borrowing partnerships
approximated $1,479,000 for the years ended December 31, 1995, 1994 and
1993 irrespective of any ownership changes in the underlying partnership.
Also, an affiliate of the Managing General Partner has been engaged as MLP
II's exclusive project acquisition and servicing agent. The affiliate will
receive as compensation project selection and acquisition fees (one percent
of the gross acquisition proceeds) and annual mortgage servicing fees to the
extent the net proceeds raised by the Financing, as discussed in Note 3, are
permanently invested. As of December 31, 1995, there were no fees paid by
MLP II to the affiliate for acquisitions or mortgage servicing.
As a result of their general partnership interests, the General Partners are
entitled to an allocation of the Fund's profits, losses and cash distributions
as specified in the Partnership Agreement. As of December 31, 1995, the
Partnership declared its cash distributions for the six months then ended to
the General Partners of $72,891. These amounts represent the General
Partners' portion of the $7,969,931 ($5,296,587 for Series I and $2,673,344
for Series II) semi-annual distributions declared at December 31, 1995.
The operating expenses for various properties accounted for as
investments in mortgage revenue bonds include property management fees
paid to affiliates of the Managing General Partner. During the years ended
December 31, 1995, 1994 and 1993, these fees approximated $950,000 for
11 properties, $707,000 for 10 properties and $539,000 for 8 properties,
respectively.
In addition, 177061 Canada Ltd. (formerly Shelter Corporation of
Canada Limited Partnership), a general partner of the Associate General
Partner, is contractually obligated to the nonaffiliated borrowers of North
Pointe and Whispering Lake to fund operating deficits under guarantees to
the Partnership. The unaccrued and unpaid balances due under the limited
operating deficit guarantees, including interest as of December 31, 1995,
totaled $176,000 and $245,000 for North Pointe and Whispering Lake,
respectively. Scheduled payments totaling $116,000 and $119,000 were
received on the North Pointe obligation and recorded as income during 1995
and 1994, respectively. Under the Whispering Lake obligation, $165,000 and
$168,000 were received and recorded as income during 1995 and 1994,
respectively.
NOTE 8 - LITIGATION
In response to the Refunding and Financing, a class action complaint
entitled Gerald J. Osher, et al. v. SCA Realty, Inc., et al. was filed on May
18, 1995 in the Superior Court for the State of California, for the County of
Los Angeles. The action alleged, inter alia, that by consummating the
Financing, the Defendants - the Managing General Partner, the Associate
General Partner and Shelter Corporation of Canada Limited, (the
"Defendants") - breached the Partnership Agreement and their fiduciary
duties. On July 21, 1995, the parties to the action stipulated to its dismissal
without prejudice. The parties also stipulated that plaintiff could refile the
action in the Superior Court for the District of Columbia.
On July 24,1995, the action was refiled in the District of Columbia
Superior Court, Civil Division, Washington, D.C. The complaint is entitled
"Class Action Complaint for Breach of Partnership Agreement and Breach
of Fiduciary Duties and Alternatively, Derivative Action for Breach of
Fiduciary Duties" (the "Complaint"). It is brought by plaintiff Dr. Gerald J.
Osher, individually and on behalf of all others similarly situated, and by the
Partnership, derivatively through the plaintiff (jointly, the "Plaintiffs"), and
names as defendants each of the Defendants.
In the Complaint, Plaintiffs allege that the Financing was entered into
without proper authority under the Partnership Agreement and without
obtaining the consent of the BAC Holders by a majority vote, allegedly in
violation of various provisions of the Partnership Agreement. In addition,
Plaintiffs allege that Defendants failed to distribute to the BAC Holders the
proceeds of the Financing, as allegedly required by the Partnership
Agreement, and also failed to inform the BAC Holders of their purported
right to the proceeds of the Financing in recent public filings and in
correspondence with the BAC Holders. Based on these allegations, Plaintiffs
assert purported claims for breach of the Partnership Agreement and of the
Defendants' purported fiduciary duties and seeks, inter alia, an accounting
of the Financing, the immediate distribution of the Financing proceeds,
compensatory and punitive damages, attorneys' fees, and pre- and post-judgement
interest. In addition, based on the allegations regarding the
Defendants' purported breach of their fiduciary duties by entering into the
Financing, the Complaint asserts a derivative claim seeking inter alia, an
accounting of the Financing, compensatory and punitive damages, attorneys'
fees, and pre- and post-judgement interest. The General Partners believe that
the allegations are without merit.
On September 22, 1995, Defendants removed the action to the United
States District Court for the District of Columbia (the "Court"). In
November, 1995, the parties agreed to a settlement of the action in
consideration of certain modifications to the terms of and disclosure with
respect to the Transaction (disclosed in the Prospectus/Consent Solicitation
filed with the SEC on March 28, 1996), as set forth in a stipulation of
settlement filed with the Court. The settlement is conditioned on, among
other things, the consummation of the Transaction. On March 13, 1996, the
Court held a status conference in the action. At that time, all conditions
necessary for the settlement to proceed have not yet occurred and, for
reasons of case administration, the Court dismissed the action without
prejudice and with leave to the parties to reinstate the action on or before
May 1, 1996 in order to proceed with the settlement or the litigation.
NOTE 9- SUPPLEMENTAL INFORMATION FOR SERIES I AND
SERIES II
As discussed in Note 1, the Series I and Series II BAC Holders are
effectively limited partners in the Partnership, even though they have invested
in two separate pools of investments. The Managing General Partner
maintains records for each such pool of investments for each Series of BAC
Holders. Information for each of Series I and Series II for each of the two
years in the period ended December 31, 1995 is set forth below. Information
for 1993 has not been presented because it is not comparable following the
accounting change for investments in mortgage revenue bonds discussed in
Note 2.
<PAGE>
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
BALANCE SHEETS
IN THOUSANDS, EXCEPT BAC DATA
<TABLE>
<CAPTION>
Series I Series I Series II Series II
December 31, December 31, December 31, December 31,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $6,169 $5,240 $3,641 $2,615
Interest receivable 235 571 199 199
Investment in mortgage revenue bonds 97,536 138,211 48,606 75,631
Investment in parity working capital loans, net
of valuation allowances 2,075 4,029 815 2,660
Investment in MLP II 38,966 - 26,333 -
Other assets 160 622 80 504
------------ ------------ ------------ ------------
TOTAL ASSETS $145,141 $148,673 $79,674 $81,609
============ ============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $365 $663 $179 $447
Distributions payable 5,301 5,044 2,676 2,669
Due to affiliates 5 64 4 31
------------ ------------ ------------ ------------
TOTAL LIABILITIES 5,671 5,771 2,859 3,147
------------ ------------ ------------ ------------
Minority Interest 2 - 1 -
------------ ------------ ------------ ------------
Partners' Capital
Unrealized gain (loss) on mortgage revenue bonds
available for sale (1,265) 412 284 954
General Partners (378) (372) (99) (92)
Limited Partners (beneficial assignee certificates-
issued and outstanding 200,000 certificates for
Series I and 96,256 certificates for Series II) 141,111 142,862 76,629 77,600
------------ ------------ ------------ ------------
TOTAL PARTNERS' CAPITAL 139,468 142,902 76,814 78,462
------------ ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND PARTNERS' CAPITAL $145,141 $148,673 $79,674 $81,609
============ ============ ============ ============
</TABLE>
<PAGE>
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
IN THOUSANDS, EXCEPT PER BAC DATA
<TABLE>
<CAPTION>
Series I Series I Series II Series II
For the year For the year For the year For the year
ended ended ended ended
December 31, December 31, December 31, December 31,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME
Interest on mortgage revenue bonds and
parity working capital loans $8,992 $11,812 $4,582 $5,568
Net gain (loss) on sale of A bond receipts 641 - (18) -
Interest on short-term investments 227 134 139 76
Equity in MLP II 1,842 - 1,308 -
------------ ------------ ------------ ------------
TOTAL INCOME 11,702 11,946 6,011 5,644
------------ ------------ ------------ ------------
EXPENSES
Operating expenses 2,854 1,489 1,637 876
Other-than-temporary impairments related to
investment in mortgage revenue bonds - 2,014 - -
Minority interest 11 - 7 -
------------ ------------ ------------ ------------
TOTAL EXPENSES 2,865 3,503 1,644 876
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 8,837 8,443 4,367 4,768
CUMULATIVE EFFECT ON PRIOR YEARS (to January 1, 1994)
OF CHANGE IN ACCOUNTING FOR MORTGAGE REVENUE BONDS - (9,576) - (2,305)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $8,837 ($1,133) $4,367 $2,463
============ ============ ============ ============
NET INCOME (LOSS) ALLOCATED TO GENERAL PARTNERS $88 ($11) $44 $25
============ ============ ============ ============
NET INCOME(LOSS) ALLOCATED TO LIMITED PARTNERS $8,749 ($1,122) $4,323 $2,438
============ ============ ============ ============
EARNINGS PER BAC:
Income before cumulative effect of accounting change $43.74 $41.79 $44.91 $49.04
Cumulative effect on prior years (to January 1, 1994)
of change in accounting for mortgage revenue bonds - (47.40) - (23.71)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER BAC $43.74 ($5.61) $44.91 $25.33
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE PARTNERSHIP AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO BOTH THOSE FINANCIAL STATEMENTS AND THE FOOTNOTES
PROVIDED WITHIN THIS SCHEDULE.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 9,810,000<F1>
<SECURITIES> 0
<RECEIVABLES> 434,000<F2>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,244,000<F3>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 224,815,000<F4>
<CURRENT-LIABILITIES> 8,530,000<F5>
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 216,282,000<F6>
<TOTAL-LIABILITY-AND-EQUITY> 224,815,000<F7>
<SALES> 0
<TOTAL-REVENUES> 17,713,000<F8>
<CGS> 0
<TOTAL-COSTS> 4,509,000<F9>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,204,000<F10>
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,204,000<F11>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,204,000<F12>
<EPS-PRIMARY> 88.65<F13>
<EPS-DILUTED> 0
<FN>
<F1> SERIES I SERIES II
---------- -----------
CASH 6,169,000 3,641,000
<F2>RECEIVABLES 235,000 199,000
<F3>CURRENT ASSETS 6,404,000 3,840,000
<F4>TOTAL ASSETS 145,141,000 79,674,000
<F5>CURRENT LIABILITIES 5,671,000 2,859,000
<F6>OTHER S-E 139,468,000 76,814,000
<F7>TOTAL LIABILITIES
& EQUITY 145,141,000 79,674,000
<F8>TOTAL REVENUE 11,702,000 6,011,000
<F9>TOTAL COSTS 2,865,000 1,644,000
<F10>INCOME- PRETAX 8,837,000 4,367,000
<F11>INCOME-CONTINUING 8,837,000 4,367,000
<F12>NET INCOME 8,837,000 4,367,000
<F13>EPS 43.74 44.91
</FN>
</TABLE>
