UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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
----------------- -------
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
- ------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1449733
----------------------- ------------------------------------
(State of organization) (I.R.S. Employer Identification No.)
218 North Charles Street, Suite 500, Baltimore, Maryland 21201
- --------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 962-0595
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
None None
-------- --------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 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.
[X]
-----
The Registrant is a partnership. Accordingly, no voting stock is held
by non-affiliates of the Registrant.
DESCRIPTION OF AMENDMENT:
AMENDMENT #1 (All changes included herein are a result of the SEC
Staff Comments dated April 19, 1996 and comments from the Chief
Accountant of Corporate Finance dated April 25, 1996 and May 13, 1996.):
A) References to "Documents Incorporated by Reference" in Item 1.
Business and Item 11. Executive Compensation have been deleted.
The related information has been disclosed in the applicable Items
accordingly. The Index to Exhibits has also been amended to reflect
the deletion of Exhibit 99.
B) Item 1. Business, New Business has been amended to include a brief
description of the proposed new investment structure under the
caption "Proposed New Investment Structure."
C) Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters has been amended to reflect per BAC
distributions.
D) Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations has been amended as follows:
a) to expand the Registrant's discussion of the Financing transaction
consummated on February 14, 1995 including, but not limited to,
effects of cross-collateralization, use of Financing proceeds and risks
and uncertainties related to a particular Series as a result of the
Financing; and, b) to disclose the amount and sources of cash used
to pay interest on the Series I and Series II Bonds under "Revenues."
E) Item 8. Financial Statements and Supplementary Data has been
amended to reflect changes to Note 3 - The Financing/Investment in
MLP II, Note 4 - Investment in Mortgage Revenue Bonds and Note
5 - Investment in Parity Working Capital Loans including applicable
schedules.
<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.
Mortgage Revenue Bonds
The Partnership is engaged in the business of investing in mortgage
revenue bonds, including the refunding and financing of existing bonds and
investing in new mortgage investments. As discussed more fully herein, the
Partnership has acquired 23 mortgage revenue bonds, utilizing the proceeds
of its two public offerings which occurred in 1986. The bonds are secured
by nonrecourse participating first mortgage loans on multi-family 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. A general description of the terms
and amounts of the mortgage revenue bonds and a summary of the mortgage
revenue bonds owned by the Partnership are discussed in Note 3 and Note
4 to the financial statements included herein. General descriptions of the
underlying mortgaged properties collateralizing the mortgage revenue bonds
are discussed below.
<PAGE>
ALBAN PLACE - Frederick, Maryland
Borrower: Alban Place Limited Partnership
General Partner: Arthur S. Lazerow
Alban Place is located on a 19-acre site in the city of Frederick, Maryland.
The property consists of 22 buildings with a total of 194 units. This
family-oriented townhouse community is conveniently located near shopping and
business areas. Schools and day care centers are within walking distance of
the property.
Alban Place continues to be owned by the original borrowing partnership.
1995 1994 1993
Total Revenues ($) 1,605,000 1,547,000 1,513,000
% Change from Prior Year +3.7 +2.2 +1.8
Total Expenses ($) 781,000 755,000 688,000
% Change from Prior Year +3.5 +9.8 -1.4
Debt Service Paid from
Operations ($) 827,000 827,000 827,000
% Change from Prior Year 0.0 0.0 0.0
Occupancy @ Year End (%) 87.6 95.4 84.5
Average Occupancy (%) 94.2 96.9 95.1
Rental Housing Market - The Frederick rental housing market has remained stable
with small increases in rents and decreased use of rental concessions. Occupancy
has decreased slightly compared to 1994. Because mortgage interest rates
have remained low throughout 1995, vacancy loss attributable to home buying
continues to affect Alban Place. New construction in the Frederick market
continues to consist of single-family detached, townhouse and condominium
units. To the best of the Managing General Partner'knowledge, no new rental
communities were built in Frederick in 1995 and no apartment construction is
anticipated in 1996.
1995 Property Operating Results - Total revenues increased due to rent
increases for existing residents and an increase in the number of corporate
apartments which generate increased revenue. Operating cash flow continues
to support 100% of the debt service obligation.
<PAGE>
BARKLEY PLACE - Fort Myers, Florida
New Borrower: Barkley Place II Limited Partnership
General Partner: SCA Successor II, Inc.
Barkley Place is a 156 unit rental retirement community located off of U.S.
Route 42 in the city of Fort Myers. The apartments are in two three-story
elevator buildings which are joined by an activities building. The property
has a full service dining room, kitchen, activities and exercise rooms,
billiard lounge, community room, beauty salon and administrative offices.
Residents receive one to three meals each day (depending upon their chosen meal
plan), all utilities, weekly maid and linen service, scheduled transportation,
planned activities and 24-hour security and nursing response. Assisted care
services are provided to residents in 30 of the apartments. Those residents
receive all of the above services plus assistance with daily living
activities, medication monitoring and case management.
The deed to the property was transferred to a SCA Successor-controlled
partnership in September 1988.
1995 1994 1993
Total Revenues ($) 2,973,000 2,798,000 2,614,000
% Change from Prior Year +6.3 +7.0 +7.7
Total Expenses ($) 2,122,000 1,920,000 1,825,000
% Change from Prior Year +10.5 +5.2 +1.4
Debt Service Paid from
Operations ($) 889,000 912,000 772,000
% Change from Prior Year -2.5 +18.1 +47.3
Occupancy @ Year End (%) 92.9 94.9 99.4
Average Occupancy (%) 94.3 97.5 98.1
Rental Housing Market - There are three other full service rental retirement
communities similar to Barkley Place in Fort Myers. All were built in the
1980's and each reported high occupancy in 1995, with small declines evident
compared to 1994 due to higher turnover. To the best of the Managing General
Partner's knowledge, there is only one comparable property planned or under
construction in the Fort Myers area. This is a small (40 unit) assisted
living property that could start construction late in 1996. This property,
if developed, is not expected to negatively affect Barkley Place.
1995 Property Operating Results - Total revenues grew as a result of increases
in the property's market rents and rent increases for existing residents.
Market rents were increased approximately 2.5% in 1995. Revenues also grew
due to the increase in the number of assisted living units, which command
significant rent premiums. Total expenses grew due to higher payroll,
advertising, food service, insurance and financing costs. The increase in
financing costs resulted from the February 1995 Financing. The expense
increases and lower occupancy caused debt service payments from property
operations to decline slightly compared to 1994.
<PAGE>
CREEKSIDE VILLAGE - Sacramento, California
New Borrower: Creekside Village Limited Partnership
General Partner: SCA Successor II, Inc.
Creekside Village is located on a 17 acre site in Sacramento, California.
The property is conveniently located to Highway 99, a major thoroughfare.
Shopping and medical facilities are within walking distance of the site. The
property consists of two-story garden walkups and three-story elevator
buildings with a total of 296 units. Creekside Village's amenities include
a recreation building with a lounge, kitchen and game rooms, swimming pool,
laundry facilities, covered parking and security gate system.
The deed to the property was transferred to a SCA Successor-controlled
partnership in February of 1994.
1995 1994 1993
Total Revenues ($) 1,516,000 1,562,000 1,476,000
% Change from Prior Year -2.9 +5.8 +0.3
Total Expenses ($) 880,000 832,000 782,000
% Change from Prior Year + 5.8 +6.4 -5.6
Debt Service Paid from
Operations ($) 619,000 743,000 693,000
% Change from Prior Year -16.7 +7.2 +11.8
Occupancy @ Year End (%) 95.3 94.6 97.3
Average Occupancy (%) 93.5 97.2 93.5
The Rental Market - Creekside Village is designed for seniors age 55 and
older. There are only a few facilities like it in Sacramento, none of which
are located close to Creekside. Creekside's competition in 1995 came
primarily from subsidized properties for seniors and the family-oriented
apartment properties located nearby. To the best of the Managing General
Partner's knowledge, there are no properties like Creekside currently under
construction or planned for the south Sacramento area in 1996.
The Sacramento rental market showed mixed results in 1995, with the apartment
occupancy rate continuing its three-year climb to 96%, but market rents
showing no increase. Increases in occupancy over the last several years have
occurred hand-in-hand with historically low levels of new apartment
construction. Only about 2,000 units were constructed in the Sacramento
region over the last three years, and only 300 units were under construction
at year-end. In the south Sacramento submarket, the occupancy rate fluctuated
in 1995 and at year-end was unchanged from a year ago at about 93%. Market
rents were flat both in south Sacramento and at Creekside.
1995 Property Operating Results - Creekside's total revenues declined due to
lower occupancy. Total expenses grew due to an increase in repairs and
maintenance and capital improvements.
<PAGE>
EMERALD HILLS - Issaquah, Washington
Borrower: Axelrod-Emerald Hills Associates Limited Partnership
General Partner: The Axelrod Company
Emerald Hills is located in Issaquah, a suburb 16 miles east of Seattle. The
property consists of two- and three-story garden-style buildings and townhouses
totaling 130 units. Property amenities include underground and covered
parking, a clubhouse with exercise equipment and meeting rooms and an outdoor
spa.
Emerald Hills continues to be owned by the original borrowing partnership.
1995 1994 1993
Total Revenues ($) 1,042,000 1,045,000 978,000
% Change from Prior Year -0.3 +6.9 +4.8
Total Expenses ($) 529,000 504,000 505,000
% Change from Prior Year +5.0 -0.2 +3.5
Debt Service Paid from
Operations ($) 527,000 544,000 460,000
% Change from Prior Year -3.1 +18.3 -1.9
Occupancy @ Year End (%) 94.6 98.5 93.1
Average Occupancy (%) 94.8 98.0 95.8
The Rental Market - Apartment construction in King County continued to decline
in 1995 with the completion of approximately 1,400 new apartment units;
however, this number is projected to double to almost 3,000 new units in 1996.
One 128-unit property was completed in Issaquah in 1995 but, based on the
pricing of its units, this property is not considered to be a direct
competitor of Emerald Hills. To the best of the Managing General Partner's
knowledge, no new construction is planned for Issaquah in 1996.
In 1995, the occupancy rate in King County increased to 95%. Occupancy in the
Eastside submarket, where Emerald Hills is located, increased to 96.4%.
Compared with 1994, the rental occupancy rate remained unchanged in Issaquah
at 96% which reflects the strength of the Eastside rental market. At the same
time, the use of rental concessions in Emerald Hills' submarket declined in
1995 compared with the previous year and average rents increased by 5%.
1995 Property Operating Results - Total revenues decreased slightly as a
result of lower occupancy. Total expenses increased due to an increase in
capital improvements. Debt service payments from operations decreased
slightly and property level reserves were drawn to pay base interest in those
months when occupancy was lowest.
<PAGE>
GILMAN MEADOWS - Issaquah, Washington
New Borrower: Gilman Meadows Limited Partnership
General Partner: SCA Successor II, Inc.
Gilman Meadows is located in Issaquah, a suburb 16 miles east of Seattle.
The property consists of 19 two-story buildings totaling 125 units.
Property amenities include a swimming pool, a clubhouse with an exercise
room, playground and covered parking.
The deed to the property was transferred to a SCA Successor-controlled
partnership in July 1992.
1995 1994 1993
Total Revenues ($) 1,098,000 1,024,000 976,000
% Change from Prior Year +7.2 +4.9 +10.0
Total Expenses ($) 568,000 504,000 560,000
% Change from Prior Year +12.7 -10.0 +1.3
Debt Service Paid from
Operations ($) 561,000 515,000 411,000
% Change from Prior Year +8.9 +25.3 +81.9
Occupancy @ Year End (%) 99.2 93.6 90.4
Average Occupancy (%) 95.5 92.1 92.5
The Rental Market - Apartment construction in King County continued to decline
in 1995 with the completion of approximately 1,400 new apartment units;
however, this number is projected to double to almost 3,000 new units in 1996.
One 128-unit property was completed in Issaquah in 1995 but, based on the
pricing of its units, this property is not considered to be a direct
competitor of Gilman Meadows. To the best of the Managing General Partner's
knowledge, no new construction is planned for Issaquah in 1996.
In 1995, the occupancy rate in King County increased to 95%. Occupancy in
the Eastside submarket, where Gilman Meadows is located, increased to 96.4%.
Compared with 1994, the rental occupancy rate remained unchanged in Issaquah
at 96% which reflects the strength of the Eastside rental market. At the
same time, the use of rental concessions in Gilman Meadows' submarket declined
in 1995 compared with the previous year and average rents increased by 5%.
1995 Property Operating Results - Total revenues for the property increased
on the strength of higher occupancy, higher market rents (2-5% increases
depending on unit type) and rent increases for existing residents. Total
expenses increased compared with 1994 which reflects increased maintenance
expenses, capital expenditures and financing costs. The increase in financing
costs resulted from the February 1995 Financing.
<PAGE>
HAMILTON CHASE - Chattanooga, Tennessee
Borrower: Hamilton Grove Limited Partnership
General Partner: SCA Successor II, Inc.
Hamilton Chase is located approximately 13 miles from downtown Chattanooga.
The property consists of 17 two-story garden apartment buildings totaling 300
units. The property offers a large clubhouse, a fully-equipped exercise room,
racquetball court, jacuzzi, swimming pool and a jogging trail circling the
site.
Control of the Hamilton Grove Limited Partnership and the property was
achieved in June 1994 when SCA Successor, Inc. replaced the general partner
of the borrower.
1995 1994 1993
Total Revenues ($) 2,029,000 1,943,000 1,987,000
% Change from Prior Year +4.4 -2.2 +3.3
Total Expenses ($) 1,248,000 1,169,000 876,000
% Change from Prior Year +6.8 +33.4 +15.0
Debt Service Paid from
Operations ($) 839,000 709,000 948,000
% Change from Prior Year +18.3 -25.2 -12.9
Occupancy @ Year End (%) 94.7 90.0 95.7
Average Occupancy (%) 95.5 93.2 94.7
Rental Housing Market - The construction of new rental units in the
Chattanooga region has been limited to small townhouse developments which
have been converted to rental properties. To the best of the Managing
General Partner's knowledge, no new construction of multi-family rental
units occurred in 1995, nor is any anticipated in 1996. Given the absence of
any new apartment construction in this market, average occupancy and market
rents increased in 1995. Hamilton Chase's performance has mirrored, if not
exceeded, that of the region.
1995 Property Operating Results - Total revenues increased due to an increase
in occupancy, increases in market rents (4-6% increases, depending on unit
type) and increases in rents for existing residents. Total expenses increased
due to the completion of major capital improvements (which increased
the property's curb appeal) and financing costs. The increase in financing
costs resulted from the February 1995 Financing.
<PAGE>
LAKEVIEW GARDEN APARTMENTS - Dade County, Florida
New Borrower: SCA Lakeview Apartments Limited Partnership
General Partner: SCA Successor, Inc.
Located south of Miami, in the Saga Bay area, Lakeview was built on a 7.8 acre
waterfront site. The property consists of 180 units in three four-story
buildings. Lakeview is conveniently located near Burger King's World
Headquarters and a major Dade County office annex. There is easy access to
the Florida Turnpike from the site. Lakeview Apartments offers one and two
bedroom units with kitchen pantries, walk-in closets, washer/dryer facilities,
open balconies and wall-to-wall carpeting. Amenities include a swimming pool,
security gate, volley ball court, picnic pavilion and covered parking.
The deed to the property was transferred to a SCA Successor-controlled
partnership in April 1995.
1995 1994 1993
Total Revenues ($) 1,165,000 1,199,000 1,312,000
% Change from Prior Year -2.8 -8.6 +17.1
Total Expenses ($) 787,000 607,000 533,000
% Change from Prior Year +29.7 +13.9 -2.6
Debt Service Paid from
Operations ($) 404,000 551,000 721,000
% Change from Prior Year -26.7 -23.6 +24.3
Occupancy @ Year End (%) 92.2 95.0 91.6
Average Occupancy (%) 94.4 91.1 [1
[1 Due to Hurricane Andrew the property was not occupied for several months
in 1993.
Rental Housing Market - Apartment construction in the Dade County market
increased again in 1995 to the highest level since the late 1980's. The
apartment occupancy rate continued its several year decline and market rents
were flat or increased slowly. However, although lower than the last several
years, the occupancy rate stood at a healthy 95% and market rents were able
to sustain the high levels that followed Hurricane Andrew. In Lakeview's
submarket, the apartment occupancy rate declined again to 93%, market rents
did not increase and rental concessions were widely marketed during the year.
There were no comparable apartments built in Lakeview's vicinity in 1995 nor,
to the best of the Managing General Partner's knowledge, are any anticipated
in 1996.
1995 Property Operating Results - Total revenues fell slightly due to a
decline in non-rental income. Operating expenses were increased in order to
maintain the property at a first class level. Real estate taxes increased as
the property's post-reconstruction increase in value was captured in higher
assessments. Insurance costs increased as insurer's recouped their Hurricane
Andrew-related losses. Numerous physical improvements were made in order to
increase the property's appeal and competitiveness. These increase in
expenses caused a steep reduction in debt service payments from property
operations.
<PAGE>
MALLARD COVE - Everett, Washington
New Borrower: Mallard I & II Limited Partnerships
General Partner: SCA Successor II, Inc.
Mallard Cove is located on a 9.3-acre site in the Everett submarket, north of
Seattle. Interstate-5 is only minutes from the site, which provides easy
access to Seattle and the Boeing Aircraft Plant in Everett. The property
consists of 198 units in three-story garden style buildings. Project
amenities include a natural lake, swimming pool, exercise room, community
building, jacuzzi and covered parking.
The property (which is divided into two phases of 63 and 135 units) was
acquired through two separate bond issues. Both phases were transferred to
SCA Successor-controlled partnerships in July 1992.
1995 1994 1993
Total Revenues ($) 1,230,000 1,241,000 1,203,000
% Change from Prior Year -0.9 +3.2 +6.9
Total Expenses ($) 739,000 795,000 713,000
% Change from Prior Year -7.0 +11.5 +15.7
Debt Service Paid from
Operations ($) 512,000 450,000 455,000
% Change from Prior Year +13.8 -1.1 +8.9
Occupancy @ Year End (%) 95.5 95.5 92.4
Average Occupancy (%) 95.0 93.1 91.9
The Rental Market - There were less than 100 units completed in Snohomish
County in 1995. According to published reports, however, approximately 500
new units are expected to be constructed in 1996, with as many as 180 of
these rental units to be built in Mallard Cove's submarket. This level of
building activity is considerably less than that which was projected in late
1994.
In 1995, the Snohomish County apartment market was characterized by a low
rental occupancy rate (93%), minimal average rent increases (1%), and an
increase in the use of concessions. Mallard Cove's submarket mirrored that
of the County with an occupancy rate of 92%, minimal rent increases and
approximately 75% of the apartment properties offering some form of rental
concessions.
1995 Property Operating Results - Total revenues decreased due to the
increased use of rental concessions in the last quarter of 1995. Expenses
decreased in nearly all operating and capital expense categories, as
expected, after the Managing General Partner changed management companies
at mid-year. In light of this reduction in expenses, debt service paid from
operations increased in 1995.
<PAGE>
THE MEADOWS - Memphis, Tennessee
New Borrower: SCA Meadows Limited Partnership
General Partner: SCA Successor II, Inc.
The Meadows is located on the northeast side of Memphis, approximately 25
miles from downtown Memphis. The property consists of ten two-story
buildings totaling 200 units. The Meadows' amenity package consists of a
swimming pool, whirlpool, tennis courts and clubhouse with tanning bed,
sauna and exercise room. Each apartment is equipped with a fireplace,
ceiling fan, microwave and a hookup for washer/dryers.
The deed to the property was transferred to a SCA Successor-controlled
partnership in March 1992.
1995 1994 1993
Total Revenues ($) 1,217,000 1,126,000 1,063,000
% Change from Prior Year +8.1 +5.9 +6.4
Total Expenses ($) 612,000 587,000 542,000
% Change from Prior Year +4.3 +8.3 +0.2
Debt Service Paid from
Operations ($) 548,000 578,000 528,000
% Change from Prior Year -5.2 +9.5 +43.4
Occupancy @ Year End (%) 93.0 99.5 95.6
Average Occupancy (%) 98.7 98.4 95.6
Rental Housing Market - New apartment construction in the Memphis/Shelby
County market increased significantly in 1995. A total of 1,100 apartment
units were completed in the region compared with 300 units a year earlier.
This trend is accelerating as an additional 2,000 units are scheduled for
completion in 1996. Within the Meadows' submarket, 40 units were completed
in 1995 but, based on their location, they did not negatively impact The
Meadows.
In 1995, average occupancy in the Memphis region (for units built since 1984)
remains high at 95.7% and market rents in the region increased by 3.7%. In
The Meadows' submarket, year-end occupancy was 97.2% and rents increased by
3.6%. The Meadows' overall performance continues to mirror that of its
submarket.
1995 Property Operating Results - Total revenues increased as a result of
increases in the property's market rents and rent increases for existing
residents. Total expenses increased due to increases in general operating
and financing costs. The increase in financing costs resulted from the
February 1995 Financing. The decrease in debt service paid from operations
in 1995 is attributable to a change in the timing of debt service payments
in 1994 and is unrelated to property operations.
<PAGE>
THE MONTCLAIR - Springfield, Missouri
New Borrower: Montclair Limited Partnership
General Partner: SCA Successor II, Inc.
The Montclair is a 159 unit retirement community located near Springfield's
prestigious "Medical Mile", an area with a heavy concentration of medical
service providers. Residents of The Montclair receive three meals each day,
all utilities, biweekly maid service, scheduled transportation, use of
community rooms, planned activities, 24-hour security and the use of an
exclusive home-health program sponsored by the area's largest medical system,
St. John's Regional Health Center.
The deed to the property was transferred to a SCA Successor- controlled
partnership in February 1989.
1995 1994 1993
Total Revenues ($) 2,576,000 2,442,000 2,269,000
% Change from Prior Year +5.5 +7.6 +7.9
Total Expenses ($) 1,413,000 1,298,000 1,191,000
% Change from Prior Year +8.9 +9.0 +6.3
Debt Service Paid from
Operations ($) 1,191,000 1,204,000 1,098,000
% Change from Prior Year -1.1 +9.7 +15.1
Occupancy @ Year End (%) 99.4 98.1 98.7
Average Occupancy (%) 97.2 97.7 97.8
Rental Housing Market - The established rental retirement communities in
Springfield which compete with The Montclair reported high occupancy and
increasing rents again in 1995. To the best of the Managing General
Partner's knowledge, no competing properties were constructed in Springfield
in 1995 nor are any expected to be built in 1996.
1995 Property Operating Results - Total revenues rose as a result of increases
in the property's market rents and rent increases for existing residents.
The Montclair's market rents were increased approximately 3% during the year.
Total expenses grew due to increased payroll, administrative, insurance and
financing costs. The increase in financing costs resulted from the February
1995 Financing.
<PAGE>
NEWPORT-ON-SEVEN - St. Louis Park, Minnesota
Borrower: St. Louis Park Housing Partners
General Partner: SCA Successor, Inc.
Newport-On-Seven is located on a 6.7 acre site in St. Louis Park, Minnesota,
a mature first-ring suburb of Minneapolis. Downtown Minneapolis is within
ten miles of the property and the site is easily accessed and visible from
Route 7. Newport-On-Seven is a 167 unit mid-rise elevator building. Its
amenities include a large enclosed whirlpool, exercise room, sauna,
media/library room, tanning bed, sun room, a guest suite and an entertainment
room with kitchen facilities. A heated underground garage offers convenient
access to the building.
SCA Successor, Inc. took control of the property in August 1991 when it
replaced the general partner of the borrowing partnership.
1995 1994 1993
Total Revenues ($) 1,511,000 1,440,000 1,368,000
% Change from Prior Year +4.9 +5.3 +8.1
Total Expenses ($) 946,000 824,000 860,000
% Change from Prior Year +14.8 -4.2 +9.8
Debt Service Paid from
Operations ($) 559,000 598,000 500,000
% Change from Prior Year -6.5 +19.6 +8.7
Occupancy @ Year End (%) 98.8 98.2 97.6
Average Occupancy (%) 96.4 97.6 96.8
Rental Housing Market - Approximately 2,600 new apartments were completed in
the Minneapolis/St. Paul region in 1995, which is down slightly from 1994.
Apartment completions averaged 2,400 units annually over the last five years.
There are about 1,500 multifamily units under construction now in the
metropolitan region, with none located near Newport-on-Seven. To the best of
the Managing General Partner's knowledge, no new properties are anticipated
to begin construction in the vicinity of Newport-on-Seven in 1996.
The rental occupancy rate in the Minneapolis region increased slightly to
97.2% in 1995. In Newport-on-Seven's submarket, the rental occupancy rate
was largely unchanged at 98.6%. Rents increased 4.2% over the year in the
region and 3.4% in Newport-on-Seven's submarket. No rent concessions were
offered at Newport-on-Seven in 1995 and concessions were virtually
non-existent in the metropolitan region at year-end.
1995 Property Operating Results - Total revenues increased due to higher
market rents and rent increases for existing residents. Total expenses grew
due to higher marketing and apartment turnover costs and real estate taxes.
Capital improvements also contributed to the increase in total expenses, as
repairs were made to preserve the asset.
<PAGE>
NEWPORT VILLAGE - Thornton, Colorado
New Borrower: Newport Village Limited Partnership
General Partner: SCA Successor II, Inc.
Newport Village is located in the city of Thornton, a suburb north of Denver.
The property consists of 220 units with a mix of traditional three-story
walkups and cottage style apartments. Apartment amenities include security
systems, fireplaces, vaulted ceilings, washer/dryers and patios or balconies.
The deed to the property was transferred to a SCA Successor-controlled
partnership in August 1989.
1995 1994 1993
Total Revenues ($) 1,543,000 1,458,000 1,354,000
% Change from Prior Year +5.8 +7.7 +9.4
Total Expenses ($) 882,000 773,000 773,000
% Change from Prior Year +14.1 0.0 +0.4
Debt Service Paid from
Operations ($) 712,000 640,000 577,000
% Change from Prior Year +11.3 +10.9 +19.5
Occupancy @ Year End (%) 91.8 98.2 95.9
Average Occupancy (%) 96.7 95.8 98.4
Rental Housing Market - The Denver rental market continued to be strong with
an apartment occupancy rate of 96% at year-end, market rent increases of
almost 7% and a surge in apartment completions to about 5,000 units during
the year. However, the recent surge in construction is renewing fears of
overbuilding as it contributes to somewhat lower occupancy, a slowing in the
rate of market rent increases and a noticeable increase in the marketing of
rental concessions compared to the early 1990's. A high volume of apartment
construction is anticipated for the Denver region again in 1996.
Newport Village is located in the Northglenn/Thornton submarket. Occupancy
in this submarket continued to decline, falling to about 94% at year-end
compared to 98% several years ago. Market rents increased at a double digit
pace in 1995; however, rental concessions were widely offered to support
occupancy. Over the last several years, none of the new apartments built in
the Denver region were located close enough to Newport Village to compete
directly with it. However, this may change as almost 700 new units may be
built in Newport's submarket in the next two years.
1995 Property Operating Results - Total revenues grew due to increased market
rents and rent increases for existing residents. Market rents were increased
approximately 11% during the year. Total expenses grew due to increases in
capital improvements, professional fees and financing costs. The increase in
financing costs resulted from the February 1995 Financing.
<PAGE>
NICOLLET RIDGE - Burnsville, Minnesota
New Borrower: Nicollet Ridge Limited Partnership
General Partner: SCA Successor II, Inc.
Nicollet Ridge is located on a 30 acre site in Burnsville, Minnesota.
Burnsville is a suburb approximately 16 miles south of downtown Minneapolis.
Regional shopping centers, schools and health and day care facilities are in
close proximity.
Nicollet Ridge consists of five three-story elevator buildings totaling 339
units. Outdoor recreational amenities include a swimming pool and tennis
courts. Apartment amenities include washer/dryers, vaulted ceilings and
security alarm systems. There is a community clubhouse with a party room,
full kitchen facilities, an exercise room, racquetball court, tanning bed and
whirlpool. Underground garage parking is available for all residents.
The deed to the property was transferred to a SCA Successor-controlled
partnership in December 1990.
1995 1994 1993
Total Revenues ($) 2,814,000 2,613,000 2,610,000
% Change from Prior Year +7.7 +0.1 +3.9
Total Expenses ($) 1,855,000 1,708,000 1,675,000
% Change from Prior Year +8.6 +2.0 -1.9
Debt Service Paid from
Operations ($) 1,021,000 912,000 908,000
% Change from Prior Year +12.0 +0.4 +10.7
Occupancy @ Year End (%) 96.8 99.1 93.8
Average Occupancy (%) 99.0 95.6 96.1
Rental Housing Market - About 2,600 new apartments were completed in the
Minneapolis/St. Paul region in 1995, which is down slightly from 1994.
Apartment completions averaged 2,400 units annually over the last five years.
There are about 1,500 multifamily units under construction now in the
metropolitan region, of which none are near Nicollet Ridge. To the best of
the Managing General Partner's knowledge, no new properties are anticipated
to begin construction in the vicinity of Nicollet in 1996.
The rental occupancy rate in the Minneapolis region increased slightly to
97.2% in 1995. In Nicollet's submarket, the rental occupancy rate was
unchanged from a year ago at a high 97.9%. Rents increased 4.2% over the
year in the region and 6.1% in Nicollet's submarket. Rent concessions were
offered very sparingly at Nicollet in 1995 and were virtually non-existent
in the metropolitan region at year end.
1995 Property Operating Results - Total revenues grew due to higher occupancy,
higher market rents and rent increases for existing residents. Total
expenses grew due to increases in operating, real estate and financing costs.
The increase in financing costs resulted from the February 1995 Financing.
<PAGE>
NORTH POINTE (formerly Shandin Hills) - San Bernardino, California
Borrower: Cal Shel Limited Partnership
General Partner: SCA Successor, Inc.
North Pointe is located 75 miles east of Los Angeles off of Interstate 215
North in San Bernardino. The property consists of 59 two-story garden
apartment buildings totaling 540 units. North Pointe's amenities include
two pools and three whirlpool spas. The clubhouse contains a sauna, tanning
bed, racquetball court and weight and exercise equipment. North Pointe is
unique in that it is one of the few communities in the area that offers
apartments with fireplaces.
SCA Successor, Inc. took control of the property in November of 1992 when it
replaced the general partner of the borrowing partnership.
1995 1994 1993
Total Revenues ($) 2,648,000 2,803,000 2,749,000
% Change from Prior Year -5.5 +2.0 -7.3
Total Expenses ($) 1,956,000 1,949,000 2,093,000
% Change from Prior Year +0.4 -6.9 +21.9
Debt Service Paid from
Operations ($) 653,000 922,000 639,000
% Change from Prior Year -29.2 +44.3 -46.7
Occupancy @ Year End (%) 92.6 70.6 87.2
Average Occupancy (%) 81.6 80.3 80.6
Rental Housing Market - North Pointe and its competitors are still feeling
the effects of California's economic recession and the severe overbuilding
of apartments that occurred in the late 1980's. Market rents are stagnant
or declining at some properties, vacancy rates run high and rental concessions
are widely used to stimulate leasing activity. Market rents in San
Bernardino are no higher than they were six years ago and the vacancy rate
hovers around 10%.
Fortunately, California's and San Bernardino's economies are showing signs
of recovery as unemployment falls and the rate of job creation increases.
Improvement in the rental market should be evident over the next several
years as the economy grows, population and households increase and apartment
construction stays at very low levels. Less than 500 new apartments were
constructed in the San Bernardino region in 1995 and little construction is
expected again in 1996. No apartments were built near North Pointe in 1995,
and, to the best of the Managing General Partner's knowledge, none are
anticipated in 1996.
1995 Property Operating Results - North Pointe's occupancy in 1995 was
similar to 1994; however, total revenues fell because rental concessions
were more widely employed to stimulate leasing activity and move-ins. The
decline in revenues caused debt service payments from property operations to
fall compared to 1994. As 1995 ended, North Pointe was at its highest
occupancy (92%) in several years and the use of rental concessions had been
greatly curtailed.
<PAGE>
NORTHRIDGE PARK - Salinas, California
Borrower: Northridge Park Phase II
General Partner: A. F. Evans Co., Inc.
Northridge Park is located on a 5.4 acre site five miles north of downtown
Salinas. The property has convenient access to shopping and major
thoroughfares, specifically the Northridge Regional Mall and California
Route 101.
The property consists of two-story garden apartment buildings totaling 128
units. Northridge's popular design and comprehensive amenities include
fireplaces, cable television, washer/dryers, carports, lighted tennis courts,
and a clubhouse and recreation building with exercise equipment, racquetball
court and swimming pool.
The property continues to be owned by the original borrowing partnership.
The developer, as a requirement of the loan, has posted operating deficit
letters of credit which remain in place until the property achieves a
positive cash flow.
1995 1994 1993
Total Revenues ($) 1,038,000 976,000 992,000
% Change from Prior Year +6.4 -1.6 -2.5
Total Expenses ($) 489,000 425,000 381,000
% Change from Prior Year +15.1 +11.5 -4.8
Debt Service Paid from
Operations ($) 575,000 560,000 612,000
% Change from Prior Year +2.7 -8.5 -2.1
Occupancy @ Year End (%) 88.3 94.5 89.1
Average Occupancy (%) 94.7 94.0 94.5
The Rental Market - Stimulated by the recovering California and local
economies, the Salinas rental market continued its slow recovery in 1995.
Apartment occupancy rates ranged from 95% to 97%. Rental concessions were
minimal and market rents were increased slightly; however, at year-end, the
marketing of concessions and some rent reductions were observed in response
to falling occupancy. At Northridge, occupancy also declined late in 1995,
but rebounded to 94% early in 1996.
There were no apartments constructed in the Salinas area in 1995, nor, to
the best of the Managing General Partner's knowledge, are any expected to be
built in 1996.
1995 Property Operating Results - Total revenues increased due to higher
occupancy and an increase in the number of corporate apartments (which
command higher rents). Total expenses grew due to higher payroll, repairs
and maintenance, corporate apartment and tax and insurance costs. The
property was repainted in 1995. This improvement increases the property's
curb appeal and should contribute to higher occupancy and rents in 1996.
<PAGE>
RIVERSET - Memphis, Tennessee
Borrower: Auction Street Associates Limited Partnership
General Partner: Venture Technology Properties
Riverset Apartments is located on a 25-acre site on a Mississippi River
Island adjacent to downtown Memphis. It offers suburban living in an urban
location; for this reason, a high percentage of Riverset's residents are
employed in downtown Memphis. The property consists of garden-style
apartment buildings totaling 352 units. Riverset's amenity package includes
a 7,000-square foot clubhouse with an exercise and weight room, racquetball
court, jacuzzi, sauna, steam room and billiard room. There are four swimming
pools, three tennis courts, a convenience store and a jogging trail on site.
Apartment features include fireplaces, vaulted ceilings, ceiling fans, patios,
decks and sun rooms.
The property continues to be owned by the original borrowing partnership.
The success of Riverset's Phase I led the developers to build Phase II
consisting of 148 units whereby both Phases share common amenities and
recreational facilities.
1995 1994 1993
Total Revenues ($) 2,542,000 2,425,000 2,325,000
% Change from Prior Year +4.8 +4.3 +4.6
Total Expenses ($) 995,000 855,000 758,000
% Change from Prior Year +16.4 +12.8 -1.4
Debt Service Paid from
Operations ($) 1,510,000 1,490,000 1,510,000
% Change from Prior Year +1.3 -1.3 +9.4
Occupancy @ Year End (%) 97.4 96.6 97.4
Average Occupancy (%) 97.7 97.2 95.4
Rental Housing Market - New apartment construction in the Memphis/Shelby
County market increased significantly in 1995. A total of 1,100 apartment
units were completed in the region compared with 300 units a year earlier.
This trend is accelerating as an additional 2,000 units are scheduled for
completion in 1996. Apartment construction in the downtown Memphis submarket
during 1995 included the completion of the rehabilitation of a 156-unit
building and the start of the rehabilitation of another 202-unit building.
The completion of these units did not affect occupancy at Riverset. Plans
were announced for the construction of a 198-unit property at the north end
of Mud Island and, although it will not have the recreational facilities of
Riverset, the property is expected to have an impact on Riverset's occupancy
in late 1996 and 1997.
In 1995, average occupancy in the Memphis region (for units built after 1984)
remains high at 95.7% and market rents in the region increased by 3.7%. In
Riverset's downtown submarket, year-end occupancy was 96% and rents increased
by 5.9%. Riverset's performance closely mirrored that of its submarket.
1995 Property Operating Results - Total revenues increased due to higher
occupancy, higher market rents (5% increase) and increases in rents for
existing residents. Total expenses increased due to the completion of major
capital improvements which were designed to preserve the asset and increase
its curb appeal. The property continues to pay most of its base interest
obligation from property operations, with the balance coming from
property-level reserves.
<PAGE>
SOUTHFORK VILLAGE APARTMENTS - Lakeville, Minnesota
Borrower: Southfork Apartments Limited Partnership
General Partner: HRC Company, Inc.
Southfork Village Apartments is located on a 25 acre site in Lakeville,
Minnesota, near the intersection of Interstate 354 and Minnesota Highway 50.
Both are major access routes to downtown Minneapolis and St. Paul, which are
located approximately 20 miles to the north. The Interstate 494 office
corridor, the new Mall of America and the Minneapolis/St. Paul International
Airport are approximately ten miles to the north. Southfork Village
Apartments consist of 25 buildings totaling 200 units. They are designed
with individual garages and a private entrance to each unit. Project
amenities include a recreation building with a fireplace and kitchen
facilities, a swimming pool, tot lot and a natural pond.
The property is owned by the original borrowing partnership.
1995 1994 1993
Total Revenues ($) 1,853,000 1,707,000 1,648,000
% Change from Prior Year +8.6 +3.6 +4.5
Total Expenses ($) 911,000 907,000 853,000
% Change from Prior Year +0.4 +6.3 +4.4
Debt Service Paid from
Operations ($) 831,000 801,000 785,000
% Change from Prior Year +3.7 +2.0 +7.4
Occupancy @ Year End (%) 99.5 98.5 96.5
Average Occupancy (%) 98.8 98.0 97.7
Rental Housing Market - About 2,600 new apartments were completed in the
Minneapolis/St. Paul region in 1995, which is down slightly from 1994.
Apartment completions averaged 2,400 units annually over the last five years.
There are about 1,500 multifamily units under construction now in the
metropolitan region, with none near Southfork Village. To the best of the
Managing General Partner's knowledge, no new properties are anticipated to
begin construction in the vicinity of Southfork in 1996.
The rental occupancy rate in the Minneapolis region increased slightly to
97.2% in 1995. In Southfork's submarket, the rental occupancy rate was
unchanged from a year ago at a high 97.9%. Rents increased 4.2% over the
year in the region and 6.1% in Southfork's submarket. Rent concessions were
not offered at Southfork in 1995 and were virtually non-existent in the
metropolitan region at year-end.
1995 Property Operating Results - Total revenues increased due to higher
market rents and rent increases for existing residents. Southfork's market
rents were increased 9.0% during 1995. The property was able to pay all of
its base interest from property operations and contingent interest payments
are expected in 1996.
<PAGE>
STEEPLECHASE FALLS - Knoxville, Tennessee
New Borrower: Steeplechase Falls II Limited Partnership
General Partner: SCA Successor II, Inc.
Steeplechase Falls is located on a rolling, 48-acre site north of Knoxville
overlooking the Smokey Mountains. The property is conveniently located off
of Interstate-75, approximately 15 minutes from downtown Knoxville. The
property consists of 450 units in a combination of garden apartments and
townhouses. Steeplechase offers several creative floor plans which feature
vaulted ceilings, sunken living rooms and fireplaces. The property's
amenities include a clubhouse, a weight and exercise room, two pools, a
heated jacuzzi, tennis and volleyball courts, a lake with a fountain and a
picnic area.
The deed to the property was transferred to a SCA Successor-controlled
partnership in July 1993.
1995 1994 1993
Total Revenues ($) 2,976,000 2,807,000 2,633,000
% Change from Prior Year +6.0 +6.6 +2.5
Total Expenses ($) 1,436,000 1,434,000 1,314,000
% Change from Prior Year +0.1 +9.1 -1.0
Debt Service Paid from
Operations ($) 1,617,000 1,354,000 1,317,000
% Change from Prior Year +19.4 +2.8 +17.3
Occupancy @ Year End (%) 90.7 94.2 95.6
Average Occupancy (%) 93.3 94.7 96.2
Rental Housing Market - There was no new construction of traditional,
garden-style apartment communities in Knoxville in 1995; however, one
property was built which caters solely to University of Tennessee students.
Although Steeplechase does not have a large student population, this new
construction did have a negative impact on occupancy throughout the year.
According to published sources, there is one 100-unit property under
construction which will begin leasing in the spring of 1996 but, given its
distance from Steeplechase, it is not expected to compete with Steeplechase.
The region's occupancy rate decreased from 96.5% in 1994 to 94.3% in 1995.
Similarly, the occupancy rate in Steeplechase's submarket decreased slightly
from 97% in 1994 to 96% in 1995. Steeplechase's experience mirrored that of
its submarket where the use of rental concessions and vacancy increased due
to weakening market conditions at year-end.
1995 Property Operating Results - Total revenues increased due to higher
market rents (3.2% increase) and rent increases for existing residents.
Total expenses increased minimally resulting in a significant increase in
debt service paid from operations.
<PAGE>
VILLA HIALEAH - Hialeah, Florida
Borrower: Shelter Group Southeast-Hialeah, A Limited Partnership
General Partner: Shelter Group Southeast, Inc.
Villa Hialeah is located on a ten acre parcel in Hialeah, Florida. The site
is conveniently located ten miles from the Miami International Airport and
approximately 15 miles north of downtown Miami. The property is situated
between the Florida Turnpike and the Palmetto Expressway. Villa Hialeah
consists of 39 two-story townhouse units plus 206 apartments in two,
four-story elevator buildings. The complex is enclosed by a security fence.
Amenities at Villa Hialeah include a swimming pool, sundeck and clubhouse/
activity center. The clubhouse has complete kitchen facilities.
The property continues to be owned by the original borrowing partnership.
1995 1994 1993
Total Revenues ($) 1,764,000 1,764,000 1,685,000
% Change from Prior Year 0.0 +4.7 +7.4
Total Expenses ($) 943,000 991,000 918,000
% Change from Prior Year -4.8 +8.0 -2.2
Debt Service Paid from
Operations ($) 762,000 750,000 772,000
% Change from Prior Year +1.6 -2.8 +19.0
Occupancy @ Year End (%) 96.7 95.1 100.0
Average Occupancy (%) 96.4 97.2 99.8
Rental Housing Market - The number of apartments constructed in the Dade
County market increased again in 1995 to the highest level since the late
1980's. The apartment occupancy rate continued its several year decline and
market rents were flat or increased slowly. However, although lower than the
last several years, the occupancy rate stood at a healthy 95% and market
rents were able to sustain the high levels that followed Hurricane Andrew.
In the Hialeah submarket, apartment occupancy stood at 97% at year end,
although the offering of rental concessions was prevalent. Market rents were
largely unchanged. Several small properties totaling several hundred units
were completed in Hialeah in 1995.
1995 Property Operating Results - Total revenues did not increase because
occupancy was lower compared to 1994. Total expenses decreased as a result
of lower payroll, utilities and insurance costs. The property was able to
pay 94.4% of its base interest obligation from property operations, with the
remainder coming from property-level reserves.
<PAGE>
WHISPERING LAKE - Kansas City, Missouri
New Borrower: Whispering Lake Limited Partnership
General Partner: SCA Successor II, Inc.
Whispering Lake is located off of Interstate 70 in a quiet suburb 15 minutes
east of Kansas City. The property is only one mile east of the Truman Sports
Complex which houses two professional sports teams. The property consists of
16 multiple story garden style buildings totaling 384 units. The property
has a well equipped clubhouse which overlooks a lake. This facility includes
a health club with complete exercise facilities, spa, weight room and sauna.
A swimming pool adjacent to the clubhouse is also available for resident's
use, and tennis courts are located nearby. Covered parking is available for
70% of the residents. Apartment unit amenities include washer/dryers,
microwaves and fireplaces.
The deed to the property was transferred to a SCA Successor-controlled
partnership in September 1992.
1995 1994 1993
Total Revenues ($) 2,270,000 2,038,000 1,966,000
% Change from Prior Year +11.4 +3.7 -0.9
Total Expenses ($) 1,212,000 1,047,000 1,188,000
% Change from Prior Year +15.8 -11.8 -1.1
Debt Service Paid from
Operations ($) 1,161,000 924,000 685,000
% Change from Prior Year +25.6 +34.9 +6.0
Occupancy @ Year End (%) 95.1 95.3 88.3
Average Occupancy (%) 96.3 92.5 90.8
Rental Housing Market - The number of new apartments built has increased
over each of the last four years, with about 1,400 new units being completed
in the Kansas City region in 1995. None of these properties were built in
Whispering Lake's submarket nor, to the best of the Managing General
Partner's knowledge, are any expected to be built there in 1996.
Occupancy rose to 96.0% and market rents increased about 4.7% in the region
during the year. In Whispering Lake's southeast market area, occupancy
climbed to 93.6% from 89% a year ago, while rents increased about 7%.
1995 Property Operating Results - Total revenues increased due to higher
occupancy and market rents and rent increases for existing residents. Market
rents were increased 3% during the year. Total expenses rose due to
increases in payroll, real estate tax, insurance and financing costs. The
increase in financing costs resulted from the February 1995 Financing.
<PAGE>
WILLOWGREEN - Fife, Washington
New Borrower: Willowgreen Limited Partnership
General Partner: SCA Successor, Inc.
Willowgreen Apartments is located on a ten-acre site in Fife, a suburb of
Tacoma. The property is adjacent to Interstate-5 which provides easy access
to Tacoma's port, educational and medical facilities and is only 30 minutes
south of Seattle. The property consists of 18 two-story garden apartment
buildings totaling 241 units. The property has a clubhouse, swimming pool,
racquetball court and covered parking.
The deed to the property was transferred to a SCA Successor-controlled
partnership in November 1994.
1995 1994 1993
Total Revenues ($) 1,369,000 1,376,000 1,365,000
% Change from Prior Year -0.5 +0.8 +9.5
Total Expenses ($) 751,000 750,000 692,000
% Change from Prior Year +0.1 +8.4 -3.6
Debt Service Paid from
Operations ($) 644,000 637,000 665,000
% Change from Prior Year +1.1 -4.2 +25.5
Occupancy @ Year End (%) 92.9 96.7 93.4
Average Occupancy (%) 92.5 94.0 93.9
Rental Housing Market - Apartment construction in Pierce County increased
significantly in 1995 as approximately 1,000 units were completed. The
majority of this construction (880 units) occurred in the Lakewood and
Puyallup Valley submarkets. A similar level of apartment construction
(approximately 1,000 units) is projected in 1996 with 300 of these units
expected to be built in Willowgreen's submarket. To the best of the Managing
General Partner's knowledge, none of these units will be constructed near
Willowgreen.
The rental occupancy rate in Pierce County decreased from 94.5% in late 1994
to 92.4% in late 1995. The occupancy rate in Willowgreen's submarket showed
a less severe change decreasing from 95% occupancy at year-end 1994 to 93.5%
occupancy at year-end 1995. Market rents showed minimal increases and the
use of concessions increased in both the Pierce County and the Willowgreen
submarkets.
1995 Property Operating Results - Total revenues declined slightly due to
lower occupancy and an increase in the use of rental concessions. Total
expenses were largely unchanged from 1994 and debt service paid from property
operations increased slightly.
<PAGE>
Designated Successor General Partner
In order to avoid a disruption to the activities of an original borrower
of a mortgage loan in the event of the bankruptcy of its general partner, the
Partnership may require that each partnership agreement of an original
borrower require the designation of an entity, acceptable to the Partnership,
to act as a successor general partner (or successor managing general
partner). Such successor can be neither (1) a BAC Holder, nor (2) a
general nor limited partner of the Partnership, nor (3) a parent, child or
spouse of any one of the foregoing. An affiliate of the General Partners,
however, may act as a successor general partner. The bankrupt general
partner will have its interest converted to that of a limited partner. The
successor general partner(if it is not an affiliate of the General Partners) may
succeed to any fees payable to the prior general partner but will not receive
any other fees in connection with its acting as successor general partner. If
the successor general partner is an affiliate of the General Partners, it may
succeed only to any builder and developer's overhead allowance and
property management fee otherwise payable to the predecessor general
partner. Also, the General Partners can require the original borrower to
transfer the deed in lieu of the Partnership pursuing foreclosure action to a
New Borrower, whose general partner is an affiliate of the General Partners.
In addition, certain information with respect to the mortgage revenue
bonds, and the properties securing the mortgage revenue bonds, is set forth
herein.
During 1988, the Partnership entered into workout negotiations with
the borrower of the Barkley Place project. This transfer of deed was the
result of borrower-initiated workout negotiations as a result of financial
difficulties and differences among the individual partners within the original
borrowing entity. As a result, on September 8, 1988, 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. The original borrower transferred the deed in
exchange for release from their operating deficit guarantee.
During 1989, the borrowing entities for both the Montclair and the
Newport Village properties initiated workout negotiations with the
Partnership. The original borrower of the Montclair property sought
workout negotiations with the Partnership after the Partnership had called
$447,903 in a letter of credit collateralizing operating losses and after
funding approximately $60,000 in operating deficits. On March 3, 1989, the
original borrower for the Montclair transferred the deed of the property in
lieu of foreclosure to a New Borrower. The original borrower of the
Newport Village property sought workout negotiations with the Partnership
after the guarantor experienced personal financial difficulties. On August
31, 1989, the original borrower for Newport Village transferred the deed in
lieu of foreclosure to a New Borrower in order to avoid the bankruptcy of
the original borrowing partnership and the principal.
In September 1989, just prior to the occurrence of a monetary
default, the borrower for the Steeplechase Falls project declared bankruptcy
in an attempt to abandon the property and thereby relieve the guarantors of
their obligation under the operating deficit guarantees. A trustee was
appointed by the bankruptcy court to preside over the property and the
operations. Prior to the release of the trustee in November 1989, an affiliate
of the Managing General Partner was appointed by the trustee to assume the
management function of the property. On March 18, 1993 the Partnership
successfully transferred the deed in lieu of foreclosure to a New Borrower.
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
on August 6, 1991, whereby the general partner of the original borrower
was replaced by an affiliate of the Managing General Partner, SCA
Successor, Inc. As a result, the operating deficit guarantee was released in
return for a pledge of approximately $390,000 in syndication proceeds to be
obtained from the limited partners of the original partnership. All
syndication proceeds have been collected.
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. One of the three guarantors under the
limited operating deficit guarantee had declared bankruptcy and a receiver
was appointed to preside over the property's operations. At the time the
transfer was executed, the original borrower was released from the operating
deficit guarantee.
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. The appointment of the receiver was
sought because of debt service delinquency and the guarantors' failure to
perform under the limited operating deficit guarantee during 1991. Various
legal delays on the part of the original borrower delayed the transfer of
the deed to a New 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 May 1991, the Managing General Partner and the original
borrowers of Gilman Meadows, Mallard Cove I and Mallard Cove II, all of
which were controlled by the same general partner, entered into an
agreement that provided for an affiliate of the Managing General Partner to
assume management of the properties effective June 1, 1991, and for the
borrowers to grant deeds-in-lieu of foreclosure to New Borrowers. On June
1, 1992, the deeds were successfully transferred to New Borrowers.
In August 1991, the borrowing partnership for The Meadows was
declared in default for failure to pay its full base interest. Project level
reserves available to supplement interest payments from operations had been
exhausted prior to that date. The guarantor fulfilled its obligations to fund
operating deficits through January 1991 and was therefore not legally
obligated to fund the subsequent deficits. The principals of the original
borrower indicated an unwillingness to make voluntary capital contributions
to pay the deficit in interest. Accordingly, after subsequent workout
discussions, the original borrower transferred the deed to the property to a
New Borrower on March 2, 1992.
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. Under a settlement agreement
dated November 23, 1992, the third party guarantor of both original
borrowers, agreed to perform fully under the limited operating deficit
guarantee. The Managing General Partner required that the amounts due
under the limited operating deficit guarantees be paid from the assignment
of a partnership interest which has predictable income. To date, the third
party guarantor has continued to perform in accordance with the settlement
agreement. On September 2, 1992 the deed to the Whispering Lake
property was transferred to a New Borrower in lieu of foreclosure by the
Partnership. On November 11, 1992, SCA Successor, Inc., an affiliate of
the Managing General Partner, replaced the managing general partner of the
original borrower.
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. In the third
quarter of 1993, the Partnership in anticipation of pending default, initiated
workout discussions with the borrowing partnership of Willowgreen in an
effort to induce the principals to either make advances to cover the
anticipated shortfalls or to transfer the property's deed to a New Borrower.
The original borrower did not make the necessary advances, and
accordingly, on November 21, 1994 the deed to Willowgreen was
transferred to a New Borrower in lieu of foreclosure by the Partnership. 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. This
agreement resulted from the original borrower's failure to pay its full debt
service obligation. Prior to the default, the original borrower fully
performed on its operating deficit guarantee and voluntarily supplemented
debt service payments for over a year. The amended partnership agreement
was executed on June 13, 1994 thus completing the workout negotiations.
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.
Parity Working Capital Loans
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.
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.
Operating Reserves and Operating Deficit Guarantees
The Partnership required the borrowers of to-be-constructed
mortgage properties to establish an operating reserve to be funded, to the
extent available, from a portion of income generated from operations of the
mortgage property during the construction period. Funds from the
operating reserves, if any, are withdrawn as necessary to cover operating
deficits of the mortgage property and are used to make payments of base
interest on the property's mortgage loan.
In addition, the borrower or an affiliate of the borrower under all
mortgage loans has provided the Partnership with operating deficit
guarantees as additional security for all mortgage loans. Such guarantees
are to cover operating deficits of the mortgage properties (calculated
without deducting fees paid to the developer) for a period of three years
following the completion of construction of the mortgaged property, up to
a maximum amount outstanding at any one time which (when combined with
interest on advances under such guarantees) equals 5% of the total principal
amount of the mortgage loan on the mortgaged property. Such advances
shall bear interest at either the prime interest rate as established by a
previously agreed upon commercial bank or the interest rate at which the
guarantor borrowed to obtain the funds to make such advances,
compounded annually, and will be required to be repaid, with interest upon
an applicable sale or repayment. The amount due will reduce the amount of
sale or repayment proceeds used in calculating the deferred contingent
interest due on such date.
Administration of Mortgage Loans
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>
- ------------------------------------------------------------------------------------------------------------------------------
| | | | | Total | Total | Total | Total |
Mortgaged | | | Occupancy |Occupancy| Operating | Operating | Operating | Operating |
Property Name & | Loan | Total | as of | as of | Revenues(1)| Revenues(1)|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(1)| Revenues(1)|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
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
The Financing
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.
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 which, while there can be no assurances,
is anticipated to enhance 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.
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 per BAC to the Series I BAC Holders were
$52.50, $50.00 and $50.00, respectively. Of the amount paid to Series I
BAC Holders in 1995, approximately $5.50 per BAC represented a return
of investor capital and was not subject to the cash flow distribution splits
described above. Cash distributions paid or accrued per BAC to the Series
II BAC Holders for the years ended December 31, 1995, 1994 and 1993,
were $55.00, $55.00 and $60.00, respectively. Of these amounts paid to
Series II BAC Holders in 1995, 1994 and 1993, approximately $1.03, $3.12
and $5.19 per BAC, 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):
<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 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.
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 below.
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 properties
collateralizing these 12 Bonds are owned by operating partnerships whose
general partners are SCA Successor II, Inc., an affiliate of the Managing
General Partner. The other Bonds held by the Partnership are unaffected by
the Financing.
The eleven Bonds, in the aggregate principal amount of
$126,590,000, were refunded by the issuers of such Bonds (the
"Refunding"). 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.
Under the Financing, as a result of selling the Receipts in the Series
A Bonds to unrelated investors, the Partnership no longer has any interests
in the Series A Bonds. The Series A Bonds bear interest at various fixed
rates per annum, ranging from 7.05% to 7.40%, 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.
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 no longer has any interests
in the Series A Bonds. Consequently, 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 Receipts
are credit enhanced by Financial Security Assurance Inc. ("FSA") and are
rated AAA and Aaa by Standard and Poors and Moody's, respectively. The
General Partners believe that the transaction costs, all of which were paid to
independent third parties, incurred pursuant to the Financing were
appropriate and consistent with transactions of similar size and
characteristics.
Through the Series A Bonds, held by the custodian, the Receipt
holders have a preferred return position so that a guaranteed, 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, funded from a loan from MLP II (see
below), the source of which was a portion of the net Financing proceeds.
This interest rate cap serves to limit the operating partnerships' 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 (and the Creekside Bond) was pledged to FSA. 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, which have been allocated between Series I
(60.1%) and Series II (39.9%) in accordance with the relative fair values of
the refunded Bonds as reflected in the proceeds of the Receipts, have been
invested in MLP III, a Maryland limited partnership. MLP III is 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 III invested the net
proceeds from the sale of the Receipts, approximately $61 million (net of
$6.7 million in proceeds used for Financing transaction costs and additional
Partnership reserves) in MLP II Acquisition Limited Partnership ("MLP II"),
a Maryland limited partnership. MLP II is owned by MLP III through a
98.99% limited partner interest, (98.99% capital interest, 39.996% annual
profits and annual distributions interest), MLP I LLC ("MLP I"), a Maryland
limited liability company, through a 1% general partner interest (1% capital
interest, 60% annual profits and annual distributions interest) and SCALPC
through a .01% limited partner interest (.01% capital interest, .004% annual
profits and annual distributions interest). MLP I is owned by the 12
operating partnerships affected by the Financing. 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.
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 (approximately $56.8
million) on a primarily tax-exempt basis. In addition to the Partnership's
40% profits and annual distributions interest in MLP II (through MLP III),
the Partnership receives substantially all of the operating partnerships' 60%
profits and annual distribution interest in MLP II (through MLP I) as
additional Series B Bond debt service payments. MLP I was allocated a
60% annual profits and annual distributions interest in MLP II in exchange
for providing a variety of services, including, but not limited to, investment
advisory services, asset management services and loan servicing. However,
to the extent the proposed new investment structure (described below) is
consummated, it is anticipated that the MLP structure will be eliminated
because it would no longer be required to protect the tax benefits of the
transaction in the new investment structure.
As previously discussed, the net Financing proceeds allocated to
each Series was dependent upon the fair values of the refunded Bonds as
reflected in the proceeds of the Receipts (and not face values, as they may
be different). The Financing proceeds generated by each Series, specifically,
$40,675,000 or 60.1% from Series I Bonds and $27,025,000 or 39.9% from
Series II Bonds, were independently determined through a review of the
cash flows, market conditions and physical characteristics of the properties
which collateralize such Bonds. These percentages are being used to
determine each Series' interest in the net Financing proceeds currently held
by MLP II. Consequently, the proportion of fair values attributable to Series
I and Series II, with respect to the refunded Bonds and the net Financing
proceeds, were identical immediately prior and subsequent to the Financing.
Since the other Partnership assets were unaffected by the Financing, the
proportion of Partnership assets attributed to Series I and Series II remains
unchanged. In summary, neither the Financing or the Refunding enhanced
the benefits of one Series at the expense of the other. It should be noted that
the pledging of the Creekside Bond resulted in an increase to Series I's gross
Financing proceeds above what it would have been without this additional
security (as discussed in greater detail below).
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.
Since each Series is part of one entity (the Partnership), either or
both Series may be obligated to honor creditor claims against the
Partnership, even if that claim resulted from the other Series. Prior to the
Financing, except for short term inter-Series borrowing for working capital
purposes, the Series' never extended credit or provided guarantees (although
not prohibited from doing so) to one another since the performance (and
operating risks) of each Series was largely independent from the other. As
part of the Financing, the affected operating partnerships entered into a
cross-collateralization agreement among themselves. While the Managing
General Partner believes that the likelihood of required performance under
the cross-collateralization agreement is remote because of the significant
current Series A Bond debt service coverages, this agreement may result in
the affected operating partnerships being obligated under the Series A Bond
obligations of the other affected operating partnerships included in the
Financing due to shortfalls in their cash flows or required Series A Bond
debt service coverage ratios. Consequently, as a result of this
cross-collateralization agreement entered into as part of the Financing, even
though the likelihood of required performance is considered remote, the
performance of one Series may impact the performance of the other.
However, to the extent that there is performance under the
cross-collateralization agreement, the Managing General Partner will make every
effort to limit the performance of the operating partnerships within the
affected Series (that is, have a Series I operating partnership perform for a
Series I obligation and vice-versa). Nonetheless, if there is
performance under the cross-collateralization agreement, the performing
operating partnership will be repaid by the "non-performing" operating
partnership with its first available cash flow.
The cross-collateralization agreement did not conflict the Series, but
rather benefitted both Series because it had the effect of increasing the
amount of gross Financing proceeds and lowering the operating partnerships'
Series A Bond interest obligations. As a result of their lower Series A Bond
interest obligations, the operating partnerships utilize their additional cash
flow to make larger debt service payments to the Partnership on the Series
B Bonds. The pledging of the Creekside Bond, directly resulting from FSA's
concern about cash flow weaknesses of the pledged Series I properties,
resulted in an increase to Series I's gross Financing proceeds above what it
would have been without it.
Unpaid and unaccrued base interest receivable of approximately
$15.5 million on the eleven original Bonds, and the related parity working
capital loans 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. The
fair value of these Notes have been estimated by the Managing General
Partner (in the absence of an appraisal and an active market) by discounting
the anticipated future cash streams of such Notes. As of February 14, 1995,
the estimated fair values for the Accrued Interest Notes and Working Capital
Notes approximated $12.2 million and $3.8 million, respectively. As of
December 31, 1995, the estimated fair values for the Accrued Interest Notes
and Working Capital Notes approximated $11.3 million and $3.5 million,
respectively. 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. 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 by MLP II for the portion of principal payments collected on
the Notes in excess of its carrying value.
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. For 1995, the Blended Annual Rate
approximated 6.6% and generated approximately $1.3 million of taxable
income to MLP II. Of this amount, approximately 40% or $510,000 was
allocated to the Partnership. Considering that, for tax purposes, the working
capital loans contributed to MLP II previously generated approximately
$284,000 of taxable income to the Partnership per year, during 1995, as a
result of the Financing and Refunding transactions, there was an incremental
increase of approximately $226,000 to the taxable income allocated to the
Partnership relating to the Notes. In addition, as a result of the net
Financing proceeds being temporarily invested in taxable short term
securities during 1995, the Partnership was allocated an additional $1.3
million of taxable income. The taxable income allocated to the Partnership
should decrease over time as Notes are amortized and as the net Financing
proceeds are permanently invested in tax-exempt bonds.
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.
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.
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.
Proposed New Investment Structure
On April 26, 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 which, while there can be no assurances,
is anticipated to enhance 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 $8.6 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 $4.2 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. Specifically, property level operating deficit guarantees
of approximately $207,000, $263,000 and $145,000, respectively, for Series
I and $142,000, $136,000 and $121,000, respectively, for Series II were
used to pay interest for the years ended December 31, 1995, 1994 and 1993.
In addition, draws on project level reserves and excess property escrow
deposits of approximately $399,000, $267,000 and $186,000, respectively,
for Series I and $204,000, $160,000 and $169,000, respectively, for Series
II were used to pay interest for the years ended December 31, 1995, 1994
and 1993. 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,
1996, 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/Secretary 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 Limited
Liability Company ("SDLLC"). Prior to joining SDLLC 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 discussed below.
Distributions of Cash Flow
First, 1% of all cash flow with respect to each six month period of
the calendar year will be paid to the General Partners until the BAC Holders
receive a noncompounded return in such calendar year equal to 8.5% of
their adjusted capital contributions; second, 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, 1989, third, 1% to the General Partners
until the BAC Holders receive a noncumulative return in each calendar year
equal to 10% per annum of their adjusted capital contributions, and fourth,
thereafter during such year, 10% to the General Partners.
Distributions of Residual Proceeds and Liquidation Proceeds
Except as otherwise discussed, residual proceeds shall be distributed
to the General Partners as follows:
(a) to repay loans, if any, from the General Partners to the Partnership
with interest thereon after: (i) all payment of debts and obligations
of the Partnership including any additions to working capital
reserves as the Managing General Partner shall deem necessary; (ii)
to BAC Holders (other than the affiliate of Merrill Lynch holding
BACs) to repay their adjusted capital contributions; (iii) to the
affiliate of Merrill Lynch holding BACs to the extent of $1,000 (less
any prior distributions of residual proceeds) per BAC hold by it;
(b) to repay their adjusted capital contributions;
(c) 1% to the General Partners until the BAC Holders have received an
average annual noncompounded amount (when combined with prior
distributions of cash flow and residual proceeds, other than a return
of capital) equal to 10% on their adjusted capital contributions,
provided, however, that the 1% payable to the General Partners shall
be deferred until the BAC Holders have received an average annual
noncompounded amount (when combined with all prior distributions
of cash flow and residual proceeds, other than a return of capital)
equal to 10% of their aggregate adjusted capital contributions;
(d) 99% to the General Partners until the General Partners have received
an amount equal to the aggregate amount of .5% per annum of the
principal amount of all mortgage loans outstanding during each
Partnership calendar year commencing in and cumulative from
January 1, 1989, but only to the extent such amount has not been
previously distributed to the General Partners from cash flow; and
(e) thereafter, 10% to the General Partners.
Allocations of Profits and Losses
Profits not attributable to a sale or repayment or liquidation of the
Partnership will be allocated to the General Partners in accordance with the
distribution of cash flow. Losses will be allocated 1% to the General
Partners. Profits arising from a sale or repayment or liquidation of the
Partnership will be allocated to the General Partners after allocation to the
BAC Holders. Losses arising from a sale or repayment or liquidation of the
Partnership shall be allocated 1% to the General Partners.
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
Whispering Lake, the Meadows, 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.
<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: May 16, 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 May 16, 1996
Garrett G. Carlson of Directors
/s/ Mark K. Joseph President/Treasurer, May 16, 1996
Mark K. Joseph Director
<PAGE>
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
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. 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>
<PAGE>
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 capital interest (39.996% annual profits and annual
distributions interest), SCALPC through a .01% limited partner
capital interest (.004% annual profits and annual distributions
interest) and MLP I (see below) through a 1% general partner
capital interest (60% annual profits and annual 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 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. 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 filed with the
SEC on March 28, 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 Series A Bonds
bear interest at various fixed rates per annum, ranging from 7.05% to
7.40%, 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.
As a result of the Financing and the sale of the Receipts in the Series
A Bonds to unrelated investors, the Partnership no longer has any interest
in the Series A Bonds. The specific Series B 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>
B Bond B Bond B Bond
B Bond Amortized Unrealized Fair
Face Amount Cost Gain (Loss) Value
(000's) (000's) (000's) (000's)
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Montclair $6,840 $1,691 $0 $1,691
Newport Village 4,175 2,973 287 3,260
Nicollet Ridge 12,415 6,075 475 6,550
Steeplechase Falls 5,300 5,851 267 6,118
Barkley Place 3,480 2,445 - 2,445
--------------- --------------- --------------- ---------------
Total Series I 32,210 19,035 1,029 20,064
--------------- --------------- --------------- ---------------
Mallard Cove I 1,670 942 80 1,022
Mallard Cove II 3,750 2,590 284 2,874
Whispering Lake 8,500 4,779 - 4,779
Gilman Meadows 2,875 2,530 176 2,706
Hamilton Chase 6,250 4,140 - 4,140
Meadows 3,635 3,716 103 3,819
--------------- --------------- --------------- ---------------
Total Series II 26,680 18,697 643 19,340
--------------- --------------- --------------- ---------------
TOTAL $58,890 $37,732 $1,672 $39,404
=============== =============== =============== ===============
</TABLE>
<PAGE>
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. The General Partners
believe that the transaction costs, all of which were paid to third parties,
incurred pursuant to the Financing were appropriate and consistent with
transactions of similar size and characteristics.
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, which have been allocated between Series I (60.1%)
and Series II (39.9%) in accordance with the relative fair values of the
refunded bonds as reflected in proceeds 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 additional 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.
The purpose of the MLP structure is to enable the BAC Holders,
through the Partnership, to participate in substantially all of the
investment income generated from the remaining net proceeds
(approximately $56.8 million) on a primarily tax-exempt basis. In addition
to the Partnership's 40% profits and annual distributions interest in MLP II
(through MLP III), the Partnership receives substantially all of the operating
partnerships' 60% profits and annual distribution interest in MLP II (through
MLP I) as additional Series B Bond debt service payments. MLP I was
allocated a 60% annual profits and annual distributions interest in MLP II in
exchange for providing a variety of services, including, but not limited to,
investment advisory services, asset management services and loan servicing.
As previously discussed, the net Financing proceeds allocated to
each Series were dependent upon the fair values of the refunded Bonds as
reflected in the proceeds of the Receipts (and not face values as they may be
different). The Financing proceeds generated by each Series, specifically,
$40,675,000 or 60.1% from Series I bonds and $27,025,000 or 39.9%
from Series II bonds, were independently determined through a review of
the cash flows, market conditions and physical characteristics of the
properties which collateralize such bonds. These percentages are being used
to determine each Series' interest in the net Financing proceeds currently
held by MLP II. Consequently, the proportion of fair values attributable to
Series I and Series II, with respect to the refunded bonds and the net
Financing proceeds, was identical immediately prior and subsequent to the
Financing. Since the other Partnership assets were unaffected by the
Financing, the proportion of Partnership assets attributed to Series I and
Series II remains unchanged. In summary, neither the Financing or the
refunding enhanced the benefits of one Series at the expense of the other.
It should be noted that the pledging of the Creekside bond resulted in an
increase to Series I's gross Financing proceeds above what they would have
been without it (as discussed in greater detail below). The following table
details the effect of the Refunding and Financing on the fair values of the
Partnership assets.
<PAGE>
<TABLE>
<CAPTION>
Fair Value at Fair Value at Fair Value at
February 14, 1995 February 14, 1995 February 14, 1995
Pre-Refunding and Post-Refunding and Post-Refunding and
Pre-Financing Pre-Financing Post-Financing
Bonds and Net Financing Proceeds (000's) (000's) (000's)
- ------------------------------------------ ----------------- ----------------- -----------------
<S> <C> <C>
Series I Bonds Refunded:
Barkley Place $7,795 $7,795 $2,445
The Montclair 10,191 10,191 1,691
Newport Village 9,511 9,511 3,260
Nicollet Ridge 14,475 14,475 6,550
Steeplechase Falls 18,767 18,767 6,118
----------------- ----------------- -----------------
Subtotal Series I Bonds Refunded 60,739 60,739 20,064
Plus: Net Proceeds from
Financing Transaction - - 36,668
----------------- ----------------- -----------------
Subtotal of Series I Bonds Refunded
and Net Financing Proceeds 60,739 60,739 56,732
Series I Bonds not Refunded 77,472 77,472 77,472
----------------- ----------------- -----------------
Total Series I Bonds and Net Financing
Proceeds (% of Total Series I and
Series II) 138,211 65% 138,211 65% 134,204 65%
----------------- ----------------- -----------------
Series II Bonds Refunded:
Mallard Cove I 1,822 1,822 1,022
Mallard Cove II 5,574 5,574 2,874
Gilman Meadows 6,706 6,706 2,706
The Meadows 6,819 6,819 3,819
Whispering Lake 13,679 13,679 4,779
Hamilton Chase 11,765 11,765 4,140
----------------- ----------------- -----------------
Subtotal Series II Refunded 46,365 46,365 19,340
Plus: Net Proceeds from
Financing Transaction - - 24,365
----------------- ----------------- -----------------
Subtotal of Series II Bonds Refunded
and Net Financing Proceeds 46,365 46,365 43,705
Series II Bonds not Refunded 29,266 29,266 29,266
----------------- ----------------- -----------------
Total Series II Bonds and Net Financing
Proceeds (% of Total Series I and
Series II) 75,631 35% 75,631 35% 72,971 35%
----------------- ------ ----------------- ----- ----------------- ------
Total Series I and II Bonds and
Net Financing Proceeds $213,842 100% $213,842 100% $207,175 100%
================= ====== ================= ===== ================= ======
<PAGE>
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.
Since each Series is part of one entity (the Partnership), either or
both Series may be obligated to honor claims against the Partnership even
if that claim resulted from the other Series. Prior to the Financing, except
for short term inter-Series borrowing for working capital purposes, although
not prohibited from doing so, the Series never extended credit or provided
guarantees to one another. As part of the Financing, the affected operating
partnerships entered into a cross-collateralization agreement among
themselves. While the Managing General Partner believes that the likelihood
of required performance under the cross-collateralization agreement is
remote because of the significant current Series A Bond debt service
coverages, this agreement may result in the affected operating partnerships
being obligated under the Series A Bond obligations of the other affected
operating partnerships included in the Financing due to shortfalls in their
cash flows or required Series A Bond debt service coverage ratios.
However, to the extent that there is performance under the
cross-collateralization agreement, the Managing General Partner will make every
effort to limit the performance of the operating partnerships within the
affected Series (that is, have a Series I operating partnership perform for a
Series I obligation and vice-versa). Nonetheless, if there is performance
under the cross-collateralization agreement, the performing operating
partnership will be repaid by the "non-performing" operating partnership
with its first available cash flow.
The cross-collateralization agreement did not conflict the Series, but
rather benefitted both Series because it had the effect of increasing the
amount of gross Financing proceeds and lowering the operating partnerships'
Series A Bond interest obligations. As a result of their lower Series A Bond
interest obligations, the operating partnerships utilize their additional cash
flow to make larger debt service payments to the Partnership on the Series
B Bonds. The pledging of the Creekside Bond, directly resulting from FSA's
concern about cash flow weaknesses of the pledged Series I properties,
resulted in an increase to Series I's gross Financing proceeds above what they
would have been without it.
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 2 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. The fair value of these Accrued Interest Notes and
Working Capital Notes, as of February 14, 1995, approximated $12.2
million and $3.8 million, respectively. The fair value of these Notes has been
estimated by the Managing General Partner (in the absence of an appraisal
and an active market) by discounting the anticipated future cash streams of
such Notes. As of December 31, 1995, the fair value of the Accrued
Interest Notes and Working Capital Notes approximated $11.3 million and
$3.5 million, respectively. 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. 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 by MLP II for the portion of principal payments collected on
the Notes in excess of the carrying value. 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 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. For 1995, the Blended Annual Rate
approximated 6.6% and generated approximately $1.3 million of taxable
income to MLP II. Of this amount, approximately 40% or $510,000 was
allocated to the Partnership. Considering that, for tax purposes, the working
capital loans contributed to MLP II previously generated approximately
$284,000 of taxable income to the Partnership per year, during 1995, as a
result of the Financing and Refunding transactions, there was an incremental
increase of approximately $226,000 to the taxable income allocated to the
Partnership relating to the Notes. In addition, as a result of the net
Financing proceeds being temporarily invested in taxable short term
securities during 1995, the Partnership was allocated an additional $1.3
million of taxable income. The taxable income allocated to the Partnership
should decrease over time as the Notes are amortized and as the net Financing
proceeds are permanently invested in tax exempt bonds.
The Notes and the Series B Bonds are subordinate in priority and
right of payment to the Series A Bonds and are 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, while three of the 11 Series B Bonds (those that bear
interest at 16%) were delinquent on the debt service obligations and,
therefore, in default of their bond terms, all 11 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.
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>
<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 and 1994 are provided in the following
table. Also included in the table are descriptions of the 11 refunded bonds
included in the Financing at December 31, 1994. Refer to Note 3 for
description of the 11 bonds included in the Financing and discussion of
general mortgage loan terms amended by the Financing for the Series B
Bonds. The Series B Bonds continue to be separately reported by Series
since the Managing General Partner believes that the likelihood of
performance under the cross-collateralization is remote.
<PAGE>
<TABLE>
<CAPTION>
December 31, 1994
December 31, 1995 and February 14, 1995
Series I ----------------------------------- -----------------------------------
Base Face Amortized Unrealized Fair Amortized Unrealized Fair
Investment in Mortgage Interest Maturity Amount Cost Gain (Loss) Value Cost Gain (Loss) Value
Revenue Bonds (Note 4) Rate Date (000's) (000's) (000's) (000's) (000's) (000's) (000's)
- ------------------------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds not Refunded:
Alban Place 7.875 Oct. 2008 $10,065 $10,065 ($336) $9,729 $10,065 ($336) $9,729
Northridge Park 7.500 June 2012 8,815 8,815 (1,625) 7,190 8,815 (1,625) 7,190
Lakeview Garden 7.750 Aug. 2007 9,003 6,988 - 6,988 6,988 - 6,988
Riverset 7.875 Nov. 1999 6,475 6,475 (778) 5,697 6,475 (778) 5,697
Villa Hialeah 7.875 Oct. 2009 10,250 10,250 (725) 9,525 10,250 (725) 9,525
Newport-on-Seven 8.125 Aug. 2008 10,125 7,898 - 7,898 7,898 - 7,898
North Pointe 7.875 Aug. 2006 25,185 12,739 1,170 13,909 12,739 1,170 13,909
Creekside Village 7.500 Nov. 2009 11,760 8,635 - 8,635 8,635 - 8,635
Willowgreen 8.000 Dec. 2010 9,275 7,901 - 7,901 7,901 - 7,901
----------- ----------- ----------- ----------- ----------- -----------
Subtotal Bonds not Refunded 79,766 (2,294) 77,472 79,766 (2,294) 77,472
----------- ----------- ----------- ----------- ----------- -----------
Bonds Refunded:
Prior to Financing and
Refunding (Note 4)
Barkley 8.000 May 2011 8,830 7,795 - 7,795
Montclair 7.875 Dec 2015 15,340 10,191 - 10,191
Newport Village 7.875 Dec 2010 10,425 8,672 838 9,510
Nicollet 7.875 Dec 2010 20,340 13,425 1,050 14,475
Steeplechase Falls 7.875 Dec 2008 17,950 17,950 818 18,768
----------- ----------- -----------
Subtotal Series I Bonds Refunded 58,033 2,706 60,739
----------- ----------- -----------
Subsequent to Financing and
Refunding (Note 3) 32,210 19,035 1,029 20,064 - - -
----------- ----------- ----------- ----------- ----------- -----------
Subtotal Series I Investment in
Mortgage Revenue Bonds $98,801 ($1,265) $97,536 $137,799 $412 $138,211
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1994
December 31, 1995 and February 14, 1995
Series II ----------------------------------- -----------------------------------
Base Face Amortized Unrealized Fair Amortized Unrealized Fair
Investment in Mortgage Interest Maturity Amount Cost Gain (Loss) Value Cost Gain (Loss) Value
Revenue Bonds (Note 4) Rate Date (000's) (000's) (000's) (000's) (000's) (000's) (000's)
- ------------------------- ---------- ---------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bonds not Refunded:
Riverset 7.875 Nov. 1999 $12,525 $12,525 (1,477) $11,048 $12,525 (1,477) $11,048
Southfork Village 7.875 Jan. 2009 10,375 10,375 492 10,867 10,375 492 10,867
Emerald Hills 7.750 Apr. 2008 6,725 6,725 626 7,351 6,725 626 7,351
----------- ----------- ----------- ----------- ----------- -----------
Subtotal Bonds not Refunded 29,625 (359) 29,266 29,625 (359) 29,266
----------- ----------- ----------- ----------- ----------- -----------
Bonds Refunded:
Prior to Financing and
Refunding (Note 4)
Gilman Meadows 8.000 Apr 2007 6,875 6,270 436 6,706
Hamilton Chase 8.000 Aug 2006 13,875 11,765 - 11,765
Mallard Cove I 7.300 Jan 2006 2,470 1,680 142 1,822
Mallard Cove II 8.094 Jan 2006 6,450 5,023 551 5,574
Meadows 7.625 Jan 2008 6,635 6,635 184 6,819
Whisperng Lake 7.625 Dec 2007 17,400 13,679 - 13,679
----------- ----------- -----------
Subtotal Series II Bonds Refunded 45,052 1,313 46,365
----------- ----------- -----------
Subsequent to Financing and
Refunding (Note 3) 26,680 18,697 643 19,340 - - -
----------- ----------- ----------- ----------- ----------- -----------
Subtotal Series II Investment in
Mortgage Revenue Bonds 48,322 284 48,606 74,677 954 75,631
----------- ----------- ----------- ----------- ----------- -----------
Total Investment in Mortgage
Revenue Bonds $147,123 ($981) $146,142 $212,476 $1,366 $213,842
=========== =========== =========== =========== =========== ===========
</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 approximates fair value and 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 five 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
============ ============ ==============
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.
<PAGE>
<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 paid to affiliates by all borrowing partnerships approximated
$1,972,000 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 Partnership'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>
