-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NsrWvdUwRr5gDoiDIdKURO2e+wFk2CGIzRdFEnf9o5JC53Q8wfi6hJQO9YYjXNMj oU05aY/TUz5LC4hZTr7DBg== 0000806641-95-000081.txt : 19951010 0000806641-95-000081.hdr.sgml : 19951010 ACCESSION NUMBER: 0000806641-95-000081 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19951006 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCA TAX EXEMPT FUND LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000806641 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 521449733 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15725 FILM NUMBER: 95579019 BUSINESS ADDRESS: STREET 1: 218 N CHARLES ST STE 500 CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 3019620595 MAIL ADDRESS: STREET 1: 218 N CHARLES STREET STREET 2: SUITE 500 CITY: BALTIMORE STATE: MD ZIP: 21201 10-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A- AMENDMENT #2 Annual Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934 For the period ended: December 31, 1994 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 AMENDMENTS: AMENDMENT #1 (Changes included herein): A) The Series II December 31, 1994 Proforma Joint Investment Pool amount has been adjusted by approximately $300,000 to record the write off of debt costs related to the original Hamilton Chase debt. B) The proforma combined balance sheet of the joint investment pool at December 31, 1994 was revised to show the components of the underlying properties that was originally shown as an investment in real estate partnerships. AMENDMENT #2: The following changes were made pursuant to SEC Comments dated August 18, 1995. A) In Note 4, Investment in Real Estate Partnerships, summarized financial information has been adjusted to reflect depreciation as a charge against operating income. B) Attached are the 1993 Financial Statements and Audit Reports of the properties that had a change of accountants in 1994: Barkley Place Limited Partnership Montclair Limited Partnership Newport Village Limited Partnership Nicollet Ridge Limited Partnership Steeplechase Falls Limited Partnership Hamilton Grove Limited Partnership C) In accordance with SAB Topic 1I, attached is the 1994 Financial Statements and Audit Report for Auction Street Associates Limited Partnership. 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/A- AMENDMENT #2. 2. Financial Statement - Schedule. Note 3 to the Financial Statements included herein includes the information required to be included in Schedule of Mortgage Loans on Real Estate as of December 31, 1994 pursuant to Rule 12-29 of Regulation S-X at Note 3. 3. Exhibits - The Exhibits listed in the accompanying Index to Exhibits were filed as part of the 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, 1994. INDEX TO EXHIBITS Exhibit Number Title of Document 2. Not applicable. 3. Amended and Restated Agreement of Limited Partnership of SCA Tax Exempt Fund Limited Partnership, dated as of June 3, 1986 (incorporated herein by reference to Exhibit A of the Prospectus of the Registrant dated June 3, 1986 (the "Prospectus") filed with the Commission pursuant to Rule 424 (b)). 4. Amended and Restated Agreement of Limited Partnership of SCA Tax Exempt Fund Limited Partnership, dated as of June 3, 1986 (incorporated herein by reference to Exhibit A of the Prospectus of the Registrant dated June 3, 1986 (the "Prospectus") filed with the Commission pursuant to Rule 424(b)). 9. Not applicable. 10. Not applicable. 11. Not applicable. 12. Not applicable. 13. Not applicable. 16. Not applicable. 18. Not applicable. 21. Not applicable. 22. Not applicable. 23. Not applicable. 24. Not applicable. 27. Financial Data Schedules. 28. Not applicable. 99. Documents incorporated by reference pursuant to Rule 12b-23: A. Pages 15-17, 25-30, and 49-52 of the Prospectus. B. Pages S-3 through S-10 of the Supplement to the Prospectus dated June 3, 1986 filed with the Commission pursuant to Rule 424(b). C. Pages 2-3 and 6-9 of the Supplement to the Prospectus dated October 6, 1986 included in Post-Effective Amendment No. 1 to the Partnership's Registration Statement on Form S-11, filed with the Commission on November 3, 1986. D. Pages 2-8, 10-13, and 14-18 of the Supplement to the Prospectus dated November 28, 1986 included in Post-Effective Amendment No. 3 to the Partnership's Registration Statement on Form S-11, filed with the Commission on February 3, 1987. E. Page 4 of the 1987 Form 10-K filed with the Commission on March 30, 1988. F. Pages 10-16 of the 1987 Annual Report to Investors. G. Page 4 of the Form 10-K filed with the Commission on March 31, 1989. H. Page A-18 of the 1988 Form 10-K filed with the Commission on March 31, 1989. I. Page A-25 and A-26 of the 1989 Form 10-K filed with the Commission on April 2, 1990. J. Page A-23 through A-25 of the 1990 Form 10-K filed with the Commission on April 1, 1991. K. Page A-27 and A-28 of the 1991 Form 10-K filed with the Commission on March 30, 1992. L. Page A-36 and A-37 of the 1992 Form 10-K filed with the Commission on March 30, 1993. 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: October 6, 1995 By: /s/ Thomas R. Hobbs Thomas R. Hobbs Senior Vice President Signing on behalf o fthe registrant and as acting chief financial officer. SCA TAX EXEMPT FUND LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Report of Independent Accountants Balance Sheets as of December 31, 1994 and 1993 - Series I Statements of Income for the three years ended December 31, 1994, 1993, and 1992 - Series I Statements of Cash Flows for the three years ended December 31, 1994, 1993, and 1992 - Series I Statements of Changes in Partners' Capital for the three years ended December 31, 1994 Balance Sheets as of December 31, 1994 and 1993 - Series II Statements of Income for the three years ended December 31, 1994, 1993, and 1992 - Series II Statements of Cash Flows for the three years ended December 31, 1994, 1993, and 1992 - Series II Statements of Changes in Partners' Capital for the three years ended December 31, 1994 - Series II Notes to Financial Statements - The footnotes include the information required to be included in the Schedule of Mortgage Loans on Real Estate as of December 31, 1994 pursuant to Rule 12-29 of Regulation S-X at Note 3 Financial Statements of Various Properties including reports of Independent Accountants. 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. REPORT OF INDEPENDENT ACCOUNTANTS To The Partners of SCA Tax Exempt Fund Limited Partnership: In our opinion, the accompanying balance sheets (including the proforma balance sheets as of December 31, 1994) and the related statements of income, of cash flows and of changes in partners' capital present fairly, in all material respects, the financial position of SCA Tax Exempt Fund Limited Partnership (the "Partnership"), Series I and Series II, at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; 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 described more fully in Note 7, on February 14, 1995, the Partnership consummated a financing transaction. The proforma balance sheets reflect the effect of this transaction on the Partnership's financial position had the transaction occurred on December 31, 1994. Price Waterhouse LLP Baltimore, Maryland March 30, 1995 SCA TAX EXEMPT FUND LIMITED PARTNERSHIP BALANCE SHEETS SERIES I
Proforma (Note 7) --------------------------------- December 31, December 31, December 31, 1994 Adjustments 1994 1993 --------------- --------------- --------------- --------------- ASSETS Cash and cash equivalents $5,239,782 $2,619,488 (a) $7,859,270 $5,032,089 Interest receivable 357,783 357,783 296,040 Investment in mortgage revenue bonds, net of valuation allowance of $1,430,000 in 1994 and $0 in 1993 (Note 3) 43,177,900 43,177,900 44,607,900 Investment in parity working capital loans (Note 3) 934,600 934,600 934,600 Investment in real estate partnerships (Note 4) 104,708,977 (57,605,914)(b) 47,103,063 107,970,711 Joint investment pool (Note 7) - 54,563,816 (c) 54,563,816 Other assets (Note 7) 622,212 (603,887)(d) 18,325 18,060 --------------- --------------- --------------- --------------- TOTAL ASSETS $155,041,254 ($1,026,497) $154,014,757 $158,859,400 =============== =============== =============== =============== LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses $663,087 - $663,087 $71,793 Distributions payable 5,044,283 5,044,283 5,052,141 Due to affiliates (Note 6) 63,845 63,845 16,051 --------------- --------------- --------------- --------------- TOTAL LIABILITIES 5,771,215 - 5,771,215 5,139,985 --------------- --------------- --------------- --------------- Partners' Capital General Partners (304,746) ($10,265) (315,011) (263,970) Limited Partners (beneficial assignee certificates- issued and outstanding 200,000 certificates) 149,574,785 (1,016,232) 148,558,553 153,983,385 --------------- --------------- --------------- --------------- TOTAL PARTNERS' CAPITAL 149,270,039 (1,026,497) 148,243,542 153,719,415 --------------- --------------- --------------- --------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4, 5, 6 & 7) TOTAL LIABILITIES AND PARTNERS' CAPITAL $155,041,254 ($1,026,497) $154,014,757 $158,859,400 =============== =============== =============== =============== The accompanying notes are an integral part of these financial statements.
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP STATEMENTS OF INCOME SERIES I
For the For the For the year ended year ended year ended December 31, December 31, December 31, 1994 1993 1992 --------------- --------------- --------------- INCOME Interest on mortgage revenue bonds $3,468,563 $4,025,063 $4,613,425 Interest on parity working capital loans 72,712 83,212 94,653 Non-taxable interest on short-term investments 27,087 38,534 46,721 Taxable interest on short-term investments 107,053 67,790 77,790 Equity in property net income 4,890,052 4,116,773 3,473,978 --------------- --------------- --------------- TOTAL INCOME 8,565,467 8,331,372 8,306,567 --------------- --------------- --------------- EXPENSES Operating expenses (Note 6) 1,487,588 867,459 913,243 Valuation adjustment related to investment in mortgage revenue bonds and real estate partnerships (Notes 3 & 4) 1,430,000 4,600,000 6,350,000 --------------- --------------- --------------- TOTAL EXPENSES 2,917,588 5,467,459 7,263,243 --------------- --------------- --------------- NET INCOME $5,647,879 $2,863,913 $1,043,324 =============== =============== =============== NET INCOME ALLOCATED TO GENERAL PARTNERS $56,479 $28,639 $10,433 =============== =============== =============== NET INCOME ALLOCATED TO LIMITED PARTNERS $5,591,400 $2,835,274 $1,032,891 =============== =============== =============== NET INCOME PER BAC $27.96 $14.18 $5.16 =============== =============== =============== The accompanying notes are an integral part of these financial statements.
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS SERIES I
For the For the For the year ended year ended year ended December 31, December 31, December 31, 1994 1993 1992 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $5,647,879 $2,863,913 $1,043,324 Adjustments to reconcile net income to net cash provided by operating activities: Equity in property net income (4,890,052) (4,116,773) (3,473,978) Interest receivable transferred to investment in real estate partnerships - (63,949) - - Other changes in investment in real estate partnerships 144 (448) 712 Valuation adjustments related to investment in real estate partnerships - 4,600,000 6,350,000 Valuation adjustments related to investment in mortgage revenue bonds 1,430,000 - - - Interest distributions from investment in real estate partnerships 8,151,642 6,861,779 5,791,714 (Increase) decrease in interest receivable (61,743) 29,264 251,803 (Increase) decrease in other assets (604,152) 20,320 51,304 Increase (decrease) in accounts payable and accrued expenses 591,294 22,690 7,929 Increase (decrease) in due to affiliates 47,794 (12,346) 25,009 --------------- --------------- --------------- Net cash provided by operating activities 10,312,806 10,204,450 10,047,817 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of short-term investments - - 900,000 --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Distribution to partners (10,105,113) (10,103,816) (10,343,674) --------------- --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 207,693 100,634 604,143 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,032,089 4,931,455 4,327,312 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,239,782 $5,032,089 $4,931,455 =============== =============== =============== DISCLOSURE OF NON-CASH ACTIVITIES: Transfer of investment in mortgage revenue bonds and working capital loans to investment in real estate partnerships - $9,450,000 $11,985,000 =============== =============== =============== The accompanying notes are an integral part of these financial statements.
SCA TAX EXEMPT LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL SERIES I FOR THE PERIOD DECEMBER 31, 1991 THROUGH DECEMBER 31, 1994
LIMITED PARTNERS BENEFICIAL ASSIGNEE GENERAL CERTIFICATES PARTNERS TOTAL ---------------- --------------- --------------- Balance, December 31, 1991 $170,365,220 ($102,125) $170,263,095 Net income 1,032,891 10,433 1,043,324 Distribution to partners (10,250,000) (98,581) (10,348,581) ---------------- --------------- --------------- Balance, December 31, 1992 161,148,111 (190,273) 160,957,838 Net income 2,835,274 28,639 2,863,913 Distribution to partners (10,000,000) (102,336) (10,102,336) ---------------- --------------- --------------- Balance, December 31, 1993 153,983,385 (263,970) 153,719,415 Net income 5,591,400 56,479 5,647,879 Distribution to partners (10,000,000) (97,255) (10,097,255) ---------------- --------------- --------------- Balance, December 31, 1994 $149,574,785 ($304,746) $149,270,039 ================ =============== =============== The accompanying notes are an integral part of these financial statements.
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP BALANCE SHEETS SERIES II Proforma (Note 7)
--------------------------------- December 31, December 31, December 31, 1994 Adjustments 1994 1993 --------------- --------------- --------------- --------------- ASSETS Cash and cash equivalents $2,614,899 $1,740,512 (a) $4,355,411 $3,284,869 Interest receivable 198,907 198,907 200,107 Investment in mortgage revenue bonds (Note 3) 29,624,600 29,624,600 29,624,600 Investment in parity working capital loans (Note 3) 815,400 815,400 815,400 Investment in real estate partnerships (Note 4) 47,981,147 (47,981,147)(b) - 49,417,599 Joint investment pool (Note 7) - 45,761,499 (c) 45,761,499 - Other assets (Note 7) 503,770 (495,630)(d) 8,140 8,140 --------------- --------------- --------------- --------------- TOTAL ASSETS $81,738,723 ($974,766) $80,763,957 $83,350,715 =============== =============== =============== =============== LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued expenses $447,072 - $447,072 $41,804 Distributions payable 2,668,631 2,668,631 2,915,280 Due to affiliates (Note 6) 30,662 30,662 7,291 --------------- --------------- --------------- --------------- TOTAL LIABILITIES 3,146,365 - 3,146,365 2,964,375 --------------- --------------- --------------- --------------- Partners' Capital General Partners (81,346) ($9,748) (91,094) (69,624) Limited Partners (beneficial assignee certificates- issued and outstanding 96,256 certificates) 78,673,704 (965,018) 77,708,686 80,455,964 --------------- --------------- --------------- --------------- TOTAL PARTNERS' CAPITAL 78,592,358 (974,766) 77,617,592 80,386,340 --------------- --------------- --------------- --------------- COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4, 5, 6 & 7) TOTAL LIABILITIES AND PARTNERS' CAPITAL $81,738,723 ($974,766) $80,763,957 $83,350,715 =============== =============== =============== =============== The accompanying notes are an integral part of these financial statements.
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP STATEMENTS OF INCOME SERIES II
For the For the For the year ended year ended year ended December 31, December 31, December 31, 1994 1993 1992 --------------- --------------- --------------- INCOME Interest on mortgage revenue bonds $2,324,531 $3,434,531 $3,434,531 Interest on parity working capital loans 63,557 71,557 71,557 Non-taxable interest on short-term investments 20,380 44,784 86,214 Taxable interest on short-term investments 55,404 46,671 32,319 Equity in property net income 2,006,691 1,067,729 965,521 --------------- --------------- --------------- TOTAL INCOME 4,470,563 4,665,272 4,590,142 --------------- --------------- --------------- EXPENSES Operating expenses (Note 6) 923,270 380,955 381,759 Valuation adjustment related to investment in mortgage revenue bonds and real estate partnerships (Notes 3 & 4) - 1,450,000 450,000 --------------- --------------- --------------- TOTAL EXPENSES 923,270 1,830,955 831,759 =============== =============== =============== NET INCOME $3,547,293 $2,834,317 $3,758,383 =============== =============== =============== NET INCOME ALLOCATED TO GENERAL PARTNERS $35,473 $28,343 $37,584 =============== =============== =============== NET INCOME ALLOCATED TO LIMITED PARTNERS $3,511,820 $2,805,974 $3,720,799 =============== =============== =============== NET INCOME PER BAC $36.48 $29.15 $38.66 =============== =============== =============== The accompanying notes are an integral part of these financial statements.
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS SERIES II
For the For the For the year ended year ended year ended December 31, December 31, December 31, 1994 1993 1992 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $3,547,293 $2,834,317 $3,758,383 Adjustments to reconcile net income to net cash provided by operating activities: Equity in property net income (2,006,691) (1,067,729) (965,521) Interest receivable transferred to investment in real estate partnerships - (263,600) - Valuation adjustment related to investment in real estate partnerships - 1,450,000 450,000 Interest distributions from investment in real estate partnerships 3,443,143 2,238,308 1,790,474 Amortization expense 1,149 (Increase) decrease in interest receivable 1,200 94,360 14,814 (Increase) in other assets (495,630) - - Increase (decrease) in accounts payable and accrued expenses 405,268 26,015 (2,040) Increase (decrease) in due to affiliates 23,371 (3,824) 9,484 --------------- --------------- --------------- Net cash provided by operating activities 4,917,954 5,307,847 5,056,743 --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Distribution to partners (5,587,924) (5,826,744) (6,546,458) --------------- --------------- --------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (669,970) (518,897) (1,489,715) --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,284,869 3,803,766 5,293,481 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,614,899 $3,284,869 $3,803,766 =============== =============== =============== The accompanying notes are an integral part of these financial statements. DISCLOSURE OF NON-CASH ACTIVITIES: Transfer of investment in mortgage revenue bonds and working capital loans to investment in real estate partnerships - $13,975,000 - =============== =============== ===============
SCA TAX EXEMPT LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL SERIES II FOR THE PERIOD DECEMBER 31, 1991 THROUGH DECEMBER 31, 1994
LIMITED PARTNERS BENEFICIAL ASSIGNEE GENERAL CERTIFICATES PARTNERS TOTAL ---------------- --------------- --------------- Balance, December 31, 1991 $85,720,552 ($32,191) $85,688,361 Net income 3,720,799 37,584 3,758,383 Distribution to partners (6,016,000) (50,224) (6,066,224) ---------------- --------------- --------------- Balance, December 31, 1992 83,425,351 (44,831) 83,380,520 Net income 2,805,974 28,343 2,834,317 Distribution to partners (5,775,361) (53,136) (5,828,497) ---------------- --------------- --------------- Balance, December 31, 1993 80,455,964 (69,624) 80,386,340 Net income 3,511,820 35,473 3,547,293 Distribution to partners (5,294,080) (47,195) (5,341,275) ---------------- --------------- --------------- Balance, December 31, 1994 $78,673,704 ($81,346) $78,592,358 ================ =============== =============== The accompanying notes are an integral part of these financial statements.
SCA TAX EXEMPT FUND LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (SERIES I AND SERIES II) NOTE 1 - THE PARTNERSHIP 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 net proceeds from these offerings were used to acquire two separate portfolios ("Series I" and "Series II") of tax- exempt mortgage revenue bonds issued by various state or local governments or their agencies or authorities. The Partnership separately reports the operating activity of each Series by preparing separate 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. SCA Realty I, Inc. is the 0.1% Managing General Partner and SCA Associates 86 Limited Partnership is the 0.99% Associate General Partner (collectively, the "General Partners"). 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 Basis of Presentation The financial statements of the Partnership are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Cash and Cash Equivalents and Short-Term Investments Cash and cash equivalents consist principally of investments in money market mutual funds and short-term marketable securities which are readily convertible to known amounts of cash in seven days or less. In May 1993, the Financial Accounting Standards Board (FASB) issued Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities ("Statement No. 115"). Statement No. 115 is effective for fiscal years beginning after December 15, 1993, with earlier adoption permitted. The Partnership adopted Statement No. 115 in 1994; there was no cumulative effect and no effect in the current year. The Partnership, through its joint investment pool, has invested in various short-term investments. These investments are classified as trading securities and are recorded at fair value in accordance with Statement No. 115 in the proforma information described in Note 7. Investments in Mortgage Revenue Bonds and Parity Working Capital Loans Investments in mortgage revenue bonds and parity working capital loans are carried at the lower of cost or estimated net realizable value. Estimated net realizable value is based upon the anticipated net sale or refinancing proceeds. The Managing General Partner periodically evaluates the carrying values of investments in mortgage revenue bonds and working capital loans. In 1994, the Partnership adopted the provisions of FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"). FAS 114 amends FASB Statement No. 5, "Accounting for Contingencies," to clarify that a creditor should evaluate the collectibility of both interest and principal receivable when assessing the need for a loss provision. FASB Statement No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings" was also amended to require a creditor to measure all loans that are restructured in a troubled debt restructuring involving a modification of terms. Accordingly, the provisions of FAS 114 require 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. A valuation allowance is provided to record the loan impairment with a corresponding charge to net income. There was no cumulative effect and no effect in the current year except for the classification of Lakeview Gardens discussed in Note 3. Base interest on the bonds and the parity working capital loans is recognized as revenue as it accrues; contingent interest is recognized as property performance meets the criteria for payment. Although no debt service obligations have been forgiven, delinquent bonds and parity working capital loans are placed on nonaccrual status for financial reporting purposes when collection of interest is in doubt. Interest payments on nonaccrual loans are applied first to previously recorded accrued interest and 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 both the bonds and the loans at rates negotiated at the time such investments were made. Interest recognized on the bonds is exempt for federal income tax purposes while interest on the working capital loans is taxable to the partners. Investments in Real Estate Partnerships Prior to the adoption of FAS 114, 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 that the other sources of debt service, including property level reserves and operating deficit guarantees, were considered insufficient to meet mortgage loan obligations. After the adoption of FAS 114, mortgage revenue bonds are not reclassified to investments in real estate partnerships until the deed to the properties collateralizing the mortgage revenue bonds has been transferred to New Borrowers. Once reclassified to investment in real estate partnerships, the investment is accounted for using the equity method of accounting. Subsequent to deed transfer, valuation adjustments are recorded for investments in real estate partnerships if the carrying values exceed estimated net sale or refinancing proceeds. The carrying value of these investments is increased or decreased, and income or loss is recognized, for the Partnership's share of the underlying property's income or loss. Interest collected from investment in real estate partnerships is recorded not as interest income, but as a distribution which decreases the investment's carrying value. Earnings per BAC Earnings per BAC have been calculated based on 200,000 and 96,256 BACs outstanding for the three years ended December 31, 1994, 1993 and 1992 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 $48.3 million and $12.6 million for Series I and Series II, respectively, at December 31, 1994. Reclassifications Certain amounts in 1993 and 1992 have been reclassified to conform to the 1994 presentation. NOTE 3 - INVESTMENT IN MORTGAGE REVENUE BONDS AND PARITY WORKING CAPITAL LOANS As of December 31, 1994, Series I held 14 mortgage revenue bonds. Five of the bonds are treated as investments in mortgage revenue bonds and have a carrying value of $43,177,900, net of a valuation allowance of $1,430,000. Series II held nine mortgage revenue bonds at December 31, 1994, three of which are treated as investments in mortgage revenue bonds aggregating $29,624,600. The remaining Series I and Series II mortgage revenue bonds are treated as investments in real estate partnerships as required by generally accepted accounting principles (see also Note 4). 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 four of the loans, and all but one of the operating deficit guarantees have expired. The terms of the mortgage loans provide for the payment of base interest and additional contingent interest. In addition, they provide for the Partnership to hold the mortgage revenue bonds and the related mortgage loans for 14 years. 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 nonassumable 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 may be prepaid at the option of the borrower subject to a declining penalty. Prepayments after the twelfth year 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 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 is 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 refinancing 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. Descriptions of the various mortgage revenue bonds and working capital loans owned by the Partnership at December 31, 1994 are provided in the following table. In addition, the table provides the dates of in- substance foreclosure/reclassification for those mortgage revenue bonds and working capital loans that are classified as investments in real estate partnerships. See Note 4 for additional discussion of investments in real estate partnerships.
Series I Investment in Mortgage Base First Tier Revenue Bonds and Parity Interest Contingent Maturity Face Carrying Working Capital Loans (Note 3) Rate Rate Date Amount Amount - ----------------------------------- --------------- ---------- ---------- ------------ --------------- Alban Place Apartments 7.875 2.375 Oct. 2008 $10,500,000 $10,500,000 Frederick, MD Alban Place Limited Partnership Northridge Park Apartments 7.500 2.000 June 2012 8,950,000 8,950,000 Salinas, CA Northridge Park Phase II Lakeview Garden Apartments 7.750 2.500 Aug. 2007 9,307,500 7,877,500 Dade Co., FL Lakeview Garden Apartments Limited Partnership Riverset Apartments 7.875 2.100 Nov. 1999 6,535,000 6,535,000 Memphis, TN Auction Street Associates Limited Partnership Villa Hialeah 7.875 2.375 Oct. 2009 10,250,000 10,250,000 Hialeah, FL Shelter Group South East - Hialeah, A Limited Partnership ------------ --------------- Series I Mortgage Revenue Bond and Parity Working Capital Loan Investment Total $45,542,500 $44,112,500 (1) ============ ===============
Date of In- Base First Tier Series I Investment in Real Substance Interest Contingent Maturity Face Carrying Estate Partnerships (Note 4) Foreclosure Rate Rate Date Amount Amount - ----------------------------------- --------------- ---------- ---------- ------------ --------------- --------------- Barkley Place Sept. 7, 1988 8.000 2.250 May 2011 9,630,000 7,246,644 Fort Myers, FL Barkley Place Limited Partnership The Montclair Mar. 3, 1989 7.875 2.375 Dec. 2015 15,465,000 9,233,040 Springfield, MO Montclair Limited Partnership Newport Village Aug. 31, 1989 7.875 2.375 Dec. 2010 10,880,000 8,760,497 Thornton, CO Newport Village Limited Partnership Nicollet Ridge Sept. 1, 1990 7.875 2.375 Dec. 2010 20,340,000 15,578,276 Burnsville, MN Nicollet Ridge Limited Partnership Newport-on-Seven Dec. 1, 1991 8.125 2.375 Aug. 2008 10,800,000 7,600,916 St. Louis Park, MN St. Louis Park Housing Partners, A Limited Partnership Steeplechase Falls Apartments Feb. 1, 1991 7.875 2.375 Dec. 2008 18,100,000 16,787,457 Knoxville, TN Steeplechase Falls Limited Partnership North Pointe Apartments Dec. 31, 1991 7.875 2.375 Aug. 2006 25,850,000 19,965,765 San Bernardino, CA Cal-Shel Limited Partnership Creekside Village Apartments Dec. 31, 1992 7.500 2.250 Nov. 2009 11,985,000 10,328,030 Sacramento, CA Creekside Village Limited Partnership Willowgreen Apartments Sep. 30, 1993 8.000 2.250 Dec. 2010 9,450,000 9,208,352 Tacoma, WA Willowgreen Associates Limited Partnership --------------- --------------- Series I Investment in Real Estate Partnerships Total 132,500,000 104,708,977 --------------- --------------- Series I Total $178,042,500 $148,821,477 =============== ===============
Series II Investment in Mortgage Base First Tier Revenue Bonds and Parity Interest Contingent Maturity Face Carrying Working Capital Loans (Note 3) Rate Rate Date Amount Amount - ----------------------------------- --------------- ---------- ---------- ------------ --------------- Riverset Apartments 7.875 2.100 Nov. 1999 $12,640,000 $12,640,000 Memphis, TN Auction Street Associates Limited Partnership Southfork Village Apartments 7.875 2.375 Jan. 2009 10,550,000 10,550,000 Lakeville, MN Southfork Apartments Limited Partnership Emerald Hills Apartments 7.750 2.500 Apr. 2008 7,250,000 7,250,000 Issaquah, WA Axelrod Emerald Hills Association Limited Partnership ------------ --------------- Series II Mortgage Revenue Bond and Working Capital Loan Investment Total $30,440,000 $30,440,000 (2) ============ ===============
Date of In- Base First Tier Series II Investment in Real Substance Interest Contingent Maturity Face Carrying Estate Partnerships (Note 4) Foreclosure Rate Rate Date Amount Amount - ----------------------------------- --------------- ---------- ---------- ------------ --------------- --------------- Mallard Cove I June 1, 1991 7.300 2.375 Jan. 2006 2,610,000 2,146,507 Everett, WA Mallard Cove I Limited Partnership Mallard Cove II June 1, 1991 8.094 2.376 Jan. 2006 6,740,000 6,225,791 Everett, WA Mallard Cove II Limited Partnership Gilman Meadows Apartments June 1, 1991 8.000 2.250 Apr. 2007 7,100,000 6,640,994 Issaquah, WA Gilman Meadows Limited Partnership The Meadows Apartments Sept. 30, 1991 7.625 2.500 Jan. 2008 7,200,000 6,808,705 Memphis, TN Meadows Limited Partnership Whispering Lake Dec. 31, 1991 7.625 2.250 Dec. 2007 18,190,000 13,394,493 Kansas City, MO Whispering Lake Limited Partnership Hamilton Chase Dec. 31, 1993 8.000 2.250 Aug. 2006 13,975,000 12,764,657 Chattanooga, TN Hamilton Grove Limited Partnership --------------- --------------- Series II Investment in Real Estate Partnerships Total 55,815,000 47,981,147 --------------- --------------- Series II Total $86,255,000 $78,421,147 =============== =============== (1) Amount includes $43,177,900 of mortgage revenue bonds and $934,600 of parity working capital loans. (2) Amount includes $29,624,600 of mortgage revenue bonds and $815,400 of parity working capital loans.
Interest income of approximately $488,000 in Series I was not recognized for the year ended December 31, 1992 because of bonds on nonaccrual status. During 1994 and 1993 there were no bonds in either series on nonaccrual status, and there were no Series II bonds on nonaccrual status during 1992. During 1994, the property level reserves on Lakeview Gardens (Series I) 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 is expected to take place in April 1995. As a result, the Partnership recorded a valuation adjustment of $1,430,000 on the Lakeview Gardens bond in the fourth quarter of 1994. No other adjustments were recorded to investments in mortgage revenue bonds during 1994. In 1993, a valuation adjustment of $1,200,000 was recorded on the Hamilton Chase bond (Series II). In 1992, a mortgage revenue bond valuation adjustment of $900,000 was recorded for Creekside Village, a Series I investment. These valuation adjustments do not affect the cash flow generated from property operations, the characterization of the tax-exempt income stream nor the financial obligations under the mortgage revenue bonds. The Managing General Partner will continue to evaluate the need for valuation allowances in the future as circumstances change. NOTE 4 - INVESTMENT IN REAL ESTATE PARTNERSHIPS The Partnership accounts for certain investments in mortgage revenue bonds as investments in real estate partnerships. This accounting treatment is for financial reporting purposes only and does 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 have been or are expected to be transferred by foreclosure or 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. The Partnership continues to share in earnings of properties treated as investments in real estate partnerships in accordance with the original terms of the mortgage loans collateralizing the mortgage revenue bonds. For those properties owned by partnerships controlled by SCA Successor, 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, 1994, 1993 and 1992. 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 is consistent with industry practice, and the Managing General Partner is 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. For investments accounted for as investments in real estate partnerships, Series I recognized operating income of approximately $4,890,000, $4,117,000 and $3,474,000 and collected approximately $8,152,000, $6,862,000 and $5,792,000 in interest payments for the years ended December 31, 1994, 1993 and 1992, respectively. For those same periods, Series II recognized operating income of approximately $2,007,000, $1,068,000 and $965,000 and collected approximately $3,443,000, $2,238,000 and $1,790,000 in interest payments, respectively. During 1994, no valuation adjustments were made to investments in real estate partnerships. In 1993, valuation adjustments were recorded for North Pointe ($4,600,000), (formerly Shandin Hills), a Series I property and for Mallard Cove I ($250,000), a Series II property. The Partnership recorded valuation adjustments in 1992 for three properties, Newport on Seven ($1,750,000) and Nicollet Ridge ($3,700,000) in Series I and Whispering Lake ($450,000) in Series II. Summarized Financial Information Combined financial information for the investments in real estate partnerships is presented below. This summary has been derived from the financial records of the individual partnerships and does not reflect related valuation adjustments and other basis differences recorded by the Partnership in its financial statements. Results of operations of the properties are included subsequent to their respective effective dates for reclassification to investments in real estate partnerships. In Series I, the combined results of operations includes nine properties for 1994, eight for 1993 and eight for 1992 while in Series II it includes six, five and five for 1994, 1993 and 1992, respectively. The table in Note 3 should be referenced for the effective dates of reclassification.
Series I Combined Financial Position- (unaudited) December 31, December 31, (in 000's) 1994 1993 ------------ ------------ Land, buildings and equipment, net of accumulated depreciation $114,160 $116,212 Other assets 2,057 2,342 ------------ ------------ Total Assets $116,217 $118,554 ============ ============ Liabilities due to the Partnership including bonds $146,996 $148,070 Other liabilities 2,351 2,566 Partners' deficit (33,130) (32,082) ------------ ------------ Total liabilities and partners' deficit $116,217 $118,554 ============ ============
Combined Results of Operations -(unaudited) (in 000's) For the year For the year For the year ended ended ended December 31, December 31, December 31, 1994 1993 1992 ------------ ------------ -------------- Revenues $19,421 $17,314 $15,032 Operating expenses 11,543 10,409 9,124 Depreciation 2,988 2,788 2,434 ------------ ------------ -------------- Net Operating Income $4,890 $4,117 $3,474 ============ ============ ==============
Series II Combined Financial Position- (unaudited) December 31, December 31, (in 000's) 1994 1993 ------------ ------------ Land, buildings and equipment, net of accumulated depreciation $45,616 $47,097 Other assets 1,219 998 ------------ ------------ Total Assets $46,835 $48,095 ============ ============ Liabilities due to the Partnership including bonds $57,572 $55,729 Other liabilities 1,220 1,473 Partners' deficit (11,957) (9,107) ------------ ------------ Total liabilities and partners' deficit $46,835 $48,095 ============ ============
Combined Results of Operations- (unaudited) (in 000's) For the year For the year For the year ended ended ended December 31, December 31, December 31, 1994 1993 1992 ------------ ------------ -------------- Revenues $7,368 $5,153 $5,150 Operating expenses 3,843 3,022 3,129 Depreciation 1,518 1,063 1,056 ------------ ------------ -------------- Net Operating Income $2,007 $1,068 $965 ============ ============ ============== Legal and Other The following summarizes the status of legal and other matters relating to the properties as of December 31, 1994. Series I Creekside Village: As a culmination of the workout negotiations initiated by the Managing General Partner during 1993, the transfer of Creekside Village was executed on February 9, 1994. Thus, the New Borrower assumed the mortgage. Willowgreen: As a culmination of the workout negotiations initiated by the Managing General Partner during 1993, the transfer of Willowgreen was executed on November 21, 1994. Thus, the New Borrower assumed the mortgage. Series II Hamilton Chase: On June 13, 1994, workout negotiations were completed and the New Borrower assumed the role of the General Partner in the original borrowing entity. During 1994, the Managing General Partner spent approximately $100,000 in legal expenses related to the transfer of the property. Additionally, upon the transfer of the property, the New Borrower determined that approximately $150,000 needed to be spent on physical improvements. As of December 31, 1994, approximately $25,000 of these repairs had been completed. The remaining repairs will be funded by property operations and are to be completed by the Summer of 1995. NOTE 5 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures about Fair Value of Financial Instruments." SFAS No. 107 extends existing fair value disclosure practices for some instruments by requiring the Partnership to disclose the fair value of all financial instruments for which it is practicable to estimate value. A description of the methods and assumptions used to estimate the fair value of each class of the Partnership's financial instruments for which it is practicable to estimate fair value follows: Cash and Cash Equivalents: The carrying value is a reasonable estimate of fair value. Short-term Investments: Fair value is based on currently quoted market prices. Investment in Mortgage Revenue Bonds and Working Capital Loans: Because no active market exists for the Partnership's investment in mortgage revenue bonds and working capital loans, fair value is estimated by discounting the expected future cash flows from the borrowers' payment of debt service and ultimate repayment of debt based on the projected performance of the underlying property using the interest rates commensurate with the tax exempt nature of the financing. Fair values for these investments are based on judgments regarding future expected repayment, current economic conditions, risk characteristics and other factors. These estimates involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect estimates. Management will continue to assess the methodology utilized and the assumptions employed and revise them as appropriate in future years.
December 31, 1994 December 31, 1993 Carrying Value Fair Value Carrying Value Fair Value ------------------------------- -------------------------------- Series I Cash and cash equivalents $ 5,239,782 $ 5,239,782 $ 5,032,089 $ 5,032,089 Investments in mortgage revenue bonds and parity working capital loans $ 44,112,500 $ 46,099,809 $ 45,542,500 $ 48,370,000 Series II Cash and cash equivalents $ 2,614,899 $ 2,614,899 $ 3,284,869 $ 3,284,869 Investments in mortgage revenue bonds and parity working capital loans $ 30,440,000 $ 32,494,273 $ 30,440,000 $ 32,074,000
NOTE 6 - 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.
For the year For the year For the year ended ended ended December 31, December 31, December 31, 1994 1993 1992 --------------- --------------- --------------- Series I Salaries of noncontrolling persons & related expenses $439,589 $326,718 $339,772 Other administrative expenses 108,674 91,775 95,944 --------------- --------------- --------------- Expenses reimbursed $548,263 $418,493 $435,716 =============== =============== =============== Series II Salaries of noncontrolling persons & related expenses $211,664 $157,237 $163,701 Other administrative expenses 52,301 43,753 46,746 --------------- --------------- --------------- Expenses reimbursed $263,965 $200,990 $210,447 =============== =============== ===============
The accompanying balance sheets include amounts payable to the Managing General Partner and its affiliates at December 31 as follows: 1994 1993 -------- -------- Series I $ 63,845 $ 16,051 Series II $ 30,662 $ 7,291 As previously detailed in the Partnership's Prospectus, affiliates of the Managing General Partner receive fees for mortgage servicing from the limited partnerships owning the mortgaged properties. With respect to the investments in real estate partnerships (See Note 4), the payment of these fees has continued after the reclassification from investments in mortgage revenue bonds, since the bonds are still owned by the Partnership and there has been no modification of the individual loan terms. The fees paid by all borrowing partnerships approximated $1,479,000 for the years ended December 31, 1994, 1993 and 1992 irrespective of any ownership changes in the underlying partnership. As a result of their general partnership interests, the General Partners are entitled to an allocation of the Fund's profits, losses and cash distributions as specified in the Partnership Agreement. As of December 31, 1994, the Partnership declared its cash distributions for the six months then ended to the General Partners of Series I and Series II in the amounts of $44,283 and $21,591, respectively. These amounts represent the General Partners' portion of the $5,044,283 and $2,668,631 semi-annual distributions in Series I and Series II declared at December 31, 1994. The operating expenses for various properties accounted for as investments in real estate partnerships include property management fees paid to affiliates of the Managing General Partner. During the years ended December 31, 1994, 1993 and 1992, these fees approximated $707,000 for 10 properties, $539,000 for 8 properties and $785,000 for 11 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 (formerly Shandin Hills) and Whispering Lake to fund operating deficits under guarantees. The unpaid balances due under the limited operating deficit guarantees, including accrued interest as of December 31, 1994, totalled $276,000 and $387,000 for North Pointe and Whispering Lake, respectively. Scheduled payments totalling $119,000 and $115,000 were received on the North Pointe obligation during 1994 and 1993, respectively. Under the Whispering Lake obligation, $168,000 and $163,000 were received during 1994 and 1993, respectively. NOTE 7 - SUBSEQUENT EVENT As discussed in previous reports, the Managing General Partner has continued to pursue actively a means to provide BAC Holders with additional current income while enhancing investment value with a prudent level of risk. On February 14, 1995, the Partnership consummated a financing transaction which the Managing General Partner believes can achieve these goals. Additional proceeds were raised through the offering 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 mortgage revenue bonds held by the Partnership. These eleven bonds all relate to properties that defaulted on their original debt obligation. The cash stream from one additional property, Creekside Village ("Creekside"), which also defaulted on its original debt obligation, has been pledged as further security for the transaction. These bonds, including Creekside, are currently classified as investments in real estate and the operating partnerships for the underlying properties that collateralize the bonds 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. The other bonds in the Partnership are unaffected. The specific bonds are as follows: SCA TAX EXEMPT FUND LIMITED PARTNERSHIP MORTGAGE REVENUE REFUNDING BONDS
A Bond Interest A Bond B Bond Total Rate Face Amount Face Amount Face Amount ------------ ---------------- ---------------- ---------------- Montclair 7.10% $ 8,500,000 $ 6,840,000 $ 15,340,000 Newport Village 7.10% 6,250,000 4,175,000 10,425,000 Nicollet Ridge 7.10% 7,925,000 12,415,000 20,340,000 Steeplechase Falls 7.125% 12,650,000 5,300,000 17,950,000 Barkley Place 7.05% 5,350,000 3,480,000 8,830,000 ---------------- ---------------- ---------------- Total Series I 40,675,000 32,210,000 72,885,000 ---------------- ---------------- ---------------- Mallard Cove I 7.40% 800,000 1,670,000 2,470,000 Mallard Cove II 7.40% 2,700,000 3,750,000 6,450,000 Whispering Lake 7.10% 8,900,000 8,500,000 17,400,000 Gilman Meadows 7.40% 4,000,000 2,875,000 6,875,000 Hamilton Chase 7.35% 7,625,000 6,250,000 13,875,000 Meadows 7.35% 3,000,000 3,635,000 6,635,000 ---------------- ---------------- ---------------- Total Series II 27,025,000 26,680,000 53,705,000 ---------------- ---------------- ---------------- TOTAL 67,700,000 58,890,000 126,590,000 Creekside Village N/A N/A 11,760,000 ---------------- ---------------- ---------------- TOTAL with Creekside $ 67,700,000 $ 58,890,000 $ 138,350,000 ================ ================ ================
As stated above, 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 as part of the refunding to January 2030. The Series A Bonds bear interest at various fixed rates per annum, as detailed on the schedule above, which is 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 bear interest equal to the greater of (a) three percent (3%) per annum or (b) the amount of available cash flow not exceeding 16% per annum. Principal on the Series B Bonds will not be amortized, but 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, 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 SCA Tax Exempt Trust (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 new investors. The Receipts are credit enhanced by Financial Security Assurance Inc. ("FSA") and are rated AAA and Aaa by Standard and Poors and Moody's, respectively. Through the Series A Bonds, 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 from the interest collected. 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. This mechanism will allow the Partnership to realize the potential benefit of traditionally lower floating interest rates. 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 by the operating partnerships to limit their exposure resulting from the floating tax exempt interest rate obligation. In order to obtain credit enhancement and an investment grade rating of the Receipts, the Partnership was required to pledge the eleven bonds, as well as the cash stream from the eleven properties collateralizing the bonds to FSA. In addition, the cash stream from Creekside 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. 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 new investors. In return for the sale of Receipts in the Series A Bonds, the Trust, for the benefit of the Partnership, received $67.7 million. The proceeds from the sale of the Receipts have been invested in MLP III Investment Limited Partnership ("MLP III"), a Maryland limited partnership. MLP III is owned by the Partnership through a 99% general partner interest and SCA Limited Partner Corporation, an affiliate of the Managing General Partner, through a one percent (1%) limited partner interest. MLP III invested the net proceeds from the sale of the Receipts, approximately $56.8 million, 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 (40% annual profits and distributions interest), MLP I LLC ("MLP I"), a Maryland limited liability company, through a one percent (1%) general partner interest (60% annual profits and distributions interest) and SCA Limited Partner Corp., an affiliate of the Managing General Partner, through a .01% limited partner interest. MLP I is owned collectively by the operating partnerships. MLP III and MLP II are both affiliates of the Managing General Partner. The net proceeds held by MLP II are currently invested in various short-term investments; the Managing General Partner expects that they will be invested in additional mortgage revenue bonds that finance multi-family properties. The cash stream from these investments will benefit BAC Holders in the form of additional tax exempt or tax deferred distributions. Approximately $10.9 million was used to finance transaction costs, Partnership reserves and the interest rate cap. As part of the financing transaction, the operating partnerships entered into a cross-collateralization agreement among themselves. This cross- collateralization agreement may result in the operating partnerships being obligated under the Series A Bond obligations of the other operating partnerships due to shortfalls in their cash flows or required debt service coverage ratios. Based upon information currently available, the Managing General Partner does not anticipate that any payments will be required under the cross-collateralization agreement. Unpaid accrued base interest receivable of approximately $15.5 million on the eleven original bonds and the Parity Working Capital Loans, and interest thereon, of 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 who contributed them, in turn, to MLP II. In addition, MLP II loaned the operating partnerships approximately $4.2 million (the "Load Loan Notes") to purchase an interest rate cap which will serve to limit the operating partnerships' obligation under the floating rate obligations discussed above. The Accrued Interest Notes, Working Capital Notes and Load Loan Notes, (collectively the "Notes") in the aggregate principal amount of approximately $24.5 million, are due on demand, but in any case not later than January 2030. The Notes bear interest at a compound annual rate equal to the Blended Annual Rate in effect for that calendar year as published by the Internal Revenue Service. To the extent the operating partnerships have available cash flow, interest on the principal amount and scheduled principal payments shall be due and payable monthly. The Notes and the Series B Bonds (collectively the "Junior Obligations") 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 Junior Obligations are prioritized as follows: (i) interest payments due to MLP II on the Notes, prorata between the Notes; (ii) principal payments due to MLP II on the Notes, prorata between the Notes; (iii) interest payments due to Trust on the Series B Bonds; and (iv) the principal payment of the Series B Bonds due January 2030. The Partnership will continue to report Series I and Series II separately after the financing transaction with each Series having an interest in the joint investment pool as described below. Income generated from the additional proceeds will be allocated approximately 60.1% to Series I and approximately 39.9% to Series II. Such percentages are based on the face amount of the Series A Bonds related to the refunded bonds of each respective Series. The proforma balance sheets for Series I and Series II include the results of the financing transaction as if it had occurred on December 31, 1994. The proforma adjustments are summarized as follows: (a) Cash and cash equivalents. Represents amounts transferred to the Partnership from the additional proceeds to fund additional working capital reserves of approximately $2.6 million and $1.7 million for Series I and Series II, respectively. (b) Investments in real estate partnerships. Represents the carrying value at December 31, 1994, which the Managing General Partner believes approximates the carrying value at February 14, 1995, of the original eleven bonds refunded as part of the financing transaction of approximately $57.6 million and $47.7 million for Series I and Series II, respectively. (c) Joint investment pool. Represents the interest in the investments jointly held by Series I and Series II after the financing transaction of approximately $54.6 million and $45.8 million, respectively. Series II's interest in the joint investment pool reflects the write-off of approximately $292,000 in unamortized debt issue costs related to the original mortgage note for the Hamilton Chase property. (d) Other assets. In connection with the financing transaction, approximately $4.5 million of costs were incurred. As of December 31, 1994, approximately $1 million was expensed and approximately $1.1 million was capitalized. In the first quarter of 1995, approximately $1.7 million was expensed and approximately $.7 million was capitalized. Capitalized costs include organizational costs, debt issue costs and costs associated with obtaining the credit enhancement. All capitalized costs have been included in the joint investment pool after the financing transaction was consummated. As discussed above, the joint investment pool comprises the operating partnerships, MLP I, MLP II, MLP III and the Trust. The proforma combined balance sheet of the joint investment pool at December 31, 1994 shown below reflects all related valuation adjustments and other basis differences recorded by the Partnership in its financial statements through that date. All significant intercompany balances and transactions have been eliminated. ASSETS Land & land improvements $ 10,844,584 Buildings & improvements 103,912,818 Furniture & fixtures 3,457,926 ------------- Subtotal 118,215,328 Less accumulated depreciation (12,611,716) Total land, building and furniture ------------- & fixtures 105,603,612 Cash and cash equivalents 2,095,391 Short-term investments 56,761,654 Accounts receivable 91,553 Prepaid expenses 114,135 Other assets 5,953,648 ------------- TOTAL ASSETS $170,619,993 ============= LIABILITIES AND EQUITY Accounts payable and accrued expenses $ 2,594,678 Custody receipts outstanding 67,700,000 ------------- TOTAL LIABILITIES 70,294,678 ------------- Equity: Series I 54,563,816 Series II 45,761,499 ------------- TOTAL EQUITY 100,325,315 ------------- TOTAL LIABILITIES AND EQUITY $170,619,993 ============= BARKLEY PLACE LIMITED PARTNERSHIP FINANCIAL REPORT DECEMBER 31, 1993 C O N T E N T S PAGE INDEPENDENT AUDITOR'S REPORT 3 FINANCIAL STATEMENTS Balance Sheets 4 Statements of Operations 5 Statements of Partners' Deficit 6 Statements of Cash Flows 7 Notes to Financial Statements 8 - 10 INDEPENDENT AUDITOR'S REPORT To the Partners Barkley Place Limited Partnership Baltimore, Maryland We have audited the accompanying balance sheets of Barkley Place Limited Partnership as of December 31, 1993 and 1992, and the related statements of operations, partners' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Barkley Place Limited Partnership as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. C.W. Amos and Company Bethesda, Maryland February 17, 1994 BARKLEY PLACE LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1993 and 1992 ASSETS 1993 1992 Investment in Real Estate, at cost (Note 3) Building - net of accumulated depreciation of $881,738 in 1993 and $711,079 in 1992 $ 5,944,621 $ 6,115,281 Furniture, fixtures and equipment - net of accumulated depreciation of $187,583 in 1993 and $142,561 in 1992 269,024 300,229 Land 1,126,448 1,126,448 Other Assets Cash 28,685 78,373 Restricted cash (Note 2) 75,371 67,443 Prepaid expenses 16,727 18,751 Other 11,443 13,864 ------------ ------------ TOTAL ASSETS $ 7,472,319 $ 7,720,389 LIABILITIES AND PARTNERS' DEFICIT Liabilities Mortgage revenue bond payable (Note 3) $ 8,830,000 $ 8,830,000 Working capital loans payable (Notes 3 and 4) 1,252,347 1,252,347 Debt service payable (Notes 3 and 4) 1,456,052 1,506,536 Accounts payable and accrued expenses 44,182 43,499 Security deposit liability 39,650 39,986 Due to affiliates (Note 4) 4,964 20,402 ------------ ------------ TOTAL LIABILITIES $ 11,627,195 $ 11,692,770 Commitment and contingencies (Note 3) Partners' deficit (Note 4) $( 4,154,876) $( 3,972,381) TOTAL LIABILITIES AND ------------ ------------ PARTNERS' DEFICIT $ 7,472,319 $ 7,720,389 The accompanying notes are an integral part of these financial statements. - 4 - BARKLEY PLACE LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS Years ended December 31, 1993 and 1992 1993 1992 REVENUE Gross rent potential (Note 3) $ 2,416,625 $ 2,289,971 Less: Vacancies (75,354) (120,227) Add: Other rental income 15,526 14,683 ----------- ----------- Net rental income $ 2,356,797 $ 2,184,427 Interest 7,892 6,357 Other income 249,377 240,860 ----------- ----------- TOTAL REVENUE $ 2,614,066 $ 2,431,644 EXPENSES Debt service (Notes 3 and 4) $ 770,400 $ 770,400 Marketing 70,195 85,713 Administrative (Note 4) 403,082 395,817 Depreciation 215,681 216,946 Taxes and insurance 303,188 274,093 Utilities 168,560 158,677 Assisted living 203,297 188,689 Maintenance 45,918 53,795 Restaurant 413,924 419,270 Operating 133,841 124,128 Mortgage servicing fees (Note 4) 68,475 68,475 ----------- ----------- TOTAL EXPENSES $ 2,796,561 $ 2,756,003 ----------- ----------- NET LOSS $ (182,495) $ (324,359) The accompanying notes are an integral part of these financial statements. - 5 - BARKLEY PLACE LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT Years ended December 31, 1993 and 1992 General Limited Partner Partners Total Partners' Deficit, December 31, 1991 $( 36,480) $(3,611,542) $(3,648,022) Net Loss ( 3,244) ( 321,115) ( 324,359) Partners' Deficit, ----------- ----------- ----------- December 31, 1992 $( 39,724) $(3,932,657) $(3,972,381) Net Loss ( 1,825) ( 180,670) ( 182,495) Partners' Deficit, ----------- ----------- ----------- December 31, 1993 $( 41,549) $(4,113,327) $(4,154,876) The accompanying notes are an integral part of these financial statements. - 6 - BARKLEY PLACE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS Years ended December 31, 1993 and 1992 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $( 182,495) $( 324,359) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 215,681 216,946 Change in assets and liabilities: Decrease (increase) in prepaid expenses 2,024 ( 9,053) Decrease in other assets 2,421 4,754 (Decrease) increase in debt service payable ( 50,484) 264,231 Increase (decrease) in accounts payable and accrued expenses 683 ( 40,339) NET CASH (USED IN) PROVIDED BY ----------- ----------- OPERATING ACTIVITIES $( 12,170) $ 112,180 CASH FLOWS FROM INVESTING ACTIVITIES (Increase) decrease in restricted cash $( 7,928) $ 2,782 Purchases of furniture, fixtures and equipment ( 13,816) ( 11,038) NET CASH USED IN INVESTING ----------- ----------- ACTIVITIES $( 21,744) $( 8,256) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in security deposits $( 336) $ 1,836 Decrease in due to affiliates ( 15,438) (101,449) NET CASH USED IN FINANCING ----------- ----------- ACTIVITIES $( 15,774) $ ( 99,613) NET (DECREASE) INCREASE IN CASH $( 49,688) $ 4,311 CASH, BEGINNING OF YEAR 78,373 74,062 ----------- ----------- CASH, END OF YEAR $ 28,685 $ 78,373 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 820,884 $ 506,169 The accompanying notes are an integral part of these financial statements. - 7 - NOTES TO FINANCIAL STATEMENTS Note 1. Organization Barkley Place Limited Partnership (the "Partnership") was organized on July 1, 1988 pursuant to the Laws of the State of Maryland for the purpose of acquiring and operating a residential rental project in Ft. Myers, Florida. All operating profits and losses are allocated in accordance with the percentage of partnership interest, as set forth in the Partnership Agreement. Any gains or losses recognized upon the sale, exchange, or other disposition of real property in the project shall also be allocated as set forth in the Partnership Agreement. As of September 8, 1988, the Partnership entered into a Transfer Agreement with the Heritage House of Ft. Myers Limited Partnership ("Heritage House"), whereby the title to Barkley Place, a senior living community located in Ft. Myers, Florida, was transferred from Heritage House to the Partnership in lieu of foreclosure. Through this Agreement, the Partnership acquired all of Heritage House's right, title, and interest in the property and assumed all of Heritage House's obligations under the Mortgage Note, the Parity Working Capital Loan Note, all other mortgage loan documents and the Regulatory Agreement. The Partnership did not, however, assume any of the obligations relating to the guarantors of Heritage House. The acquisition was accounted for as a purchase in conformity with Opinion No. 16 of the Accounting Principles Board. Accordingly, the aggregate acquisition consideration was allocated to the assets acquired and the liabilities assumed based on their estimated fair values. This estimate was based upon the projected net operating income before the costs of financing plus the estimated proceeds at sale or refinancing discounted at 8.0%. This rate was determined to be an appropriate tax- exempt rate commensurate with the tax-exempt financing attached thereto. Note 2. Summary of Significant Accounting Policies A summary of the Partnership's significant accounting policies not disclosed elsewhere in the financial statements is as follows: Cash and Restricted Cash: The cash balance represents cash resources which are available to fund current operations. Restricted cash consists of the following: 1993 1992 Real estate tax and insurance escrow $ 30,118 $ 24,486 Security deposits 43,953 42,957 Replacement reserve 1,300 - -------- -------- $ 75,371 $ 67,443 Replacement reserves represent amounts available to fund future replacements and repairs as defined in the loan agreement. Depreciation: Depreciation is provided for by the use of the straight-line method over the estimated useful lives of the assets. Income Taxes: No benefit for income taxes has been included in these financial statements since the tax loss passes through to, and is reported by, the partners individually. Note 3. Debt The project was originally financed with the proceeds from the issuance and sale of tax-exempt mortgage revenue bonds by the Housing Finance Authority of Lee County, Florida for a total of $8,830,000 and a $300,000 working capital loan from SCA Tax Exempt Fund Limited Partnership ("SCA"), an affiliate of the Partnership. The provisions of this working capital loan are identical to those of the mortgage revenue bonds. Both loans are collateralized by a first mortgage on the real property and an assignment of rents. Principal payments on the loans are due in May, 2011. The loans may be prepaid in whole, but not in part, on or after the seventh anniversary of the initial purchase of the bonds. Interest on the original loans is unconditionally payable at a base rate of 8%. Commencing on May 29, 1989, the second anniversary date of the mortgage revenue bonds, contingent interest is payable during the year from 100% of the project cash flow after payment of base interest, at a rate of 2.25%. Any remaining cash flow is split equally with the lender until the lender reaches its 16% per annum limit. To the extent the aggregate of all interest payments, including contingent interest, for any year does not equal 16%, the interest 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 lender to the extent necessary in order to pay the base rate of interest on the original mortgage revenue bonds and working capital loan plus 2.25% per annum. Fifty (50) percent of any excess sale or redemption proceeds after payment of the base rate plus 2.25% are paid to the lender to satisfy any previously unpaid amounts from the 16% per annum interest rate previously deferred. The Partnership has been unable to pay all base interest to date, accordingly, it is uncertain, based upon historical results, whether project cash flows would be sufficient to pay contingent interest. As a result, no contingent interest has been accrued at December 31, 1993. Aggregate unpaid potential contingent interest at December 31, 1993 and 1992 is $3,347,666 and $2,617,266, respectively. SCA provided the Partnership with an additional $500,000 loan on November 8, 1988. This loan carries an annual base interest rate of 8% simple interest. Interest expense charged to operations in both 1993 and 1992 on this loan was $40,000. This loan does not, however, carry any contingent interest provisions and can be paid back from project cash flows at any time prior to June, 2011. In addition, the Partnership realized operating deficits (exclusive of debt service) prior to 1992 and consequently required additional funding from SCA in the form of additional working capital loans. These loans totalled $452,347 and carry a rate of 8% simple interest which is payable to the extent that excess sale or refinancing proceeds exceed the sum of the aggregate principal and unpaid base interest on the original debt. To date, there has not been any accrual of interest on these loans. These loans are not included within the contingent interest provisions described above and are due upon remarketing, redemption, or acceleration of the related outstanding bonds to the extent not previously called by SCA. The repayment of these loans and any interest thereon is subordinate to the base interest outstanding on both original loans and the $500,000 SCA loan. Note 4. Related Party Transactions Additional amounts due to SCA are as follows: 1993 1992 Working capital loans $1,252,347 $1,252,347 Debt service payable 1,456,052 1,506,536 Out of pocket expenses 4,964 20,402 ---------- ---------- $2,713,363 $2,779,285 The Partnership is due $495 from the Limited Partners and $5 from the General Partner based upon their capital contribution percentages. The Partnership paid property management fees of $129,953 and $121,177 to an affiliate in 1993 and 1992, respectively. These amounts are included in administrative expenses in the accompanying statements of operations. As required by the Indenture of Trust, the Partnership paid mortgage servicing fees of $68,475 to an affiliated partnership in both 1993 and 1992. Note 5. Retirement Plan Effective in 1992, Shelter Properties Corporation Limited, the managing agent, adopted a 401(k) retirement plan covering all eligible employees of the Partnership. Employer contributions are at the discretion of the Partnership. The Partnership elected not to make contributions to the plan for the years ended December 31, 1993 and 1992. MONTCLAIR LIMITED PARTNERSHIP FINANCIAL REPORT DECEMBER 31, 1993 C O N T E N T S PAGE INDEPENDENT AUDITOR'S REPORT 3 FINANCIAL STATEMENTS Balance Sheets 4 Statements of Operations 5 Statements of Partners' Deficit 6 Statements of Cash Flows 7 Notes to Financial Statements 8 - 11 INDEPENDENT AUDITOR'S REPORT To the Partners Montclair Limited Partnership Baltimore, Maryland We have audited the accompanying balance sheets of Montclair Limited Partnership as of December 31, 1993 and 1992, and the related statements of operations, partners' deficit, and cash flows, for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Montclair Limited Partnership as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. C.W. Amos and Company Bethesda, Maryland February 17, 1994 MONTCLAIR LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1993 and 1992 1993 1992 ASSETS Investment in Real Estate, at cost (Note 3) Building - net of accumulated depreciation of $1,215,262 in 1993 and $954,903 in 1992 $ 8,737,284 $ 8,997,644 Furniture, fixtures and equipment - net of accumulated depreciation of $62,337 in 1993 and $51,175 in 1992 (Note 4) 50,925 54,936 Land improvements - net of accumulated depreciation of $26,689 in 1993 and $19,067 in 1992 49,533 57,155 Land 625,169 625,169 Other Assets Cash 55,547 61,946 Restricted cash (Note 2) 107,414 89,894 Partners capital contributions due (Note 5) 500 500 Other 19,996 16,624 ------------ ------------ TOTAL ASSETS $ 9,646,368 $ 9,903,868 LIABILITIES AND PARTNERS' DEFICIT Liabilities Mortgage revenue bonds payable (Note 3) $ 15,340,000 $ 15,340,000 Working capital loans payable (Notes 3 and 5) 427,245 427,245 Debt service payable (Notes 3 and 5) 2,872,880 2,766,339 Accounts payable and accrued expenses 53,266 53,599 Note payable, bank (Note 4) - 6,713 Security deposit liability 98,171 60,007 ------------ ------------ TOTAL LIABILITIES $ 18,791,562 $ 18,653,903 Commitments and Contingencies (Notes 3 and 6) Partners' Deficit (Note 5) $( 9,145,194) $( 8,750,035) TOTAL LIABILITIES AND ------------ ------------- PARTNERS' DEFICIT $ 9,646,368 $ 9,903,868 The accompanying notes are an integral part of these financial statements. - 4 - MONTCLAIR LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS Years Ended December 31, 1993 and 1992 1993 1992 REVENUE Gross rent potential (Note 3) $ 2,327,371 $ 2,133,127 Less: Vacancies (55,437) (18,998) Less: Concessions and allowances (74,085) (77,141) Add: Other rental income 42,401 26,130 ----------- ----------- Net rental income $ 2,240,250 $ 2,063,118 Interest 8,033 8,518 Other income 22,465 25,288 ----------- ----------- TOTAL REVENUE $ 2,270,748 $ 2,096,924 EXPENSES Debt service (Note 3) $ 1,217,869 $ 1,217,869 Marketing 54,645 44,372 Administrative (Note 5) 306,349 267,203 Depreciation 279,144 278,076 Taxes and insurance 134,225 147,815 Utilities 135,135 118,423 Maintenance 39,637 35,079 Restaurant 382,922 381,399 Mortgage servicing fees (Note 5) 115,981 115,990 ----------- ----------- TOTAL EXPENSES $ 2,665,907 $ 2,606,226 ----------- ----------- NET LOSS $ (395,159) $ (509,302) The accompanying notes are an integral part of these financial statements. - 5 - MONTCLAIR LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT Years Ended December 31, 1993 and 1992 General Limited Partner Partner Total Partners' Deficit, December 31, 1991 $ (82,407) $(8,158,326) $(8,240,733) Net Loss (5,093) (504,209) (509,302) Partners' Deficit, ------------ ----------- ----------- December 31, 1992 $ (87,500) $(8,662,535) $(8,750,035) Net Loss (3,952) (391,207) (395,159) Partners' Deficit, ------------ ----------- ---------- December 31, 1993 $ (91,452) $(9,053,742) $9,145,194) The accompanying notes are an integral part of these financial statements. - 6 - MONTCLAIR LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS Years Ended December 31, 1993 and 1992 CASH FLOWS FROM OPERATING ACTIVITIES 1993 1992 Net loss $ (395,159) $ (509,302) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 279,144 278,076 Changes in assets and liabilities: Increase in other assets (3,372) (7,355) Increase in debt service payable 106,541 202,709 (Decrease) increase in accounts payable and accrued expenses (333) 27,111 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES $ (13,179) $ (8,761) CASH FLOWS FROM INVESTING ACTIVITIES (Increase) decrease in restricted cash $ (17,520) $ 4,475 Purchase of furniture, fixtures and equipment (7,151) (7,060) Purchase of land improvements - (10,408) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES $ (24,671) $ (12,993) CASH FLOWS FROM FINANCING ACTIVITIES Reduction of note payable, bank $ (6,713) $ (6,182) Increase (decrease) in security deposits 38,164 (1,976) NET CASH PROVIDED BY (USED IN) ----------- ----------- FINANCING ACTIVITIES $ 31,451 $ (8,158) NET DECREASE IN CASH $ (6,399) $ (29,912) CASH, BEGINNING OF YEAR 61,946 91,858 ----------- ----------- CASH, END OF YEAR $ 55,547 $ 61,946 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 1,111,328 $ 1,015,860 The accompanying notes are an integral part of these financial statements. - 7 - NOTES TO FINANCIAL STATEMENTS Note 1. Organization Montclair Limited Partnership (the "Partnership") was organized on February 9, 1989 pursuant to the Laws of the State of Maryland for the purpose of acquiring and operating a residential rental project in Springfield, Missouri. All operating profits and losses are allocated in accordance with the percentage of partnership interest, as set forth in the Partnership Agreement. Any gains and losses recognized upon the sale, exchange, or other disposition of real property in the project are also allocated as set forth in the Partnership Agreement. As of February 28, 1989, the Partnership entered into a Transfer Agreement with Independent Living Centers of Springfield ("ILC") and Independent Living Centers of North America ("ILCNA"), whereby the title to the Montclair, an adult congregate rental living community located in Springfield, Missouri, was transferred from ILC and ILCNA to the Partnership in lieu of foreclosure. Through this Agreement, the Partnership acquired all of ILC's and ILCNA's rights, title, and interest in the property, and assumed all of ILC's and ILCNA's obligations under, the Mortgage Note, the Parity Working Capital Loan Note, all other mortgage loan documents and the Regulatory Agreement. The Partnership did not, however, assume any of the obligations relating to the guarantors of ILC or ILCNA. The acquisition was accounted for as a purchase in conformity with Opinion No. 16 of the Accounting Principles Board. Accordingly, the aggregate acquisition consideration was allocated to the assets acquired and the liabilities assumed, based on their estimated fair values. This estimate was based upon the projected net operating income before the costs of financing plus the estimated proceeds at sale or refinancing discounted at 8.0%. This rate was determined to be an appropriate tax- exempt rate commensurate with the tax-exempt financing attached thereto. Note 2. Summary of Significant Accounting Policies A summary of the Partnership's significant accounting policies not disclosed elsewhere in the financial statements is as follows: Cash and Restricted Cash: The cash balance represents cash resources which are available to fund current operations. Restricted cash consists of the following: 1993 1992 Real estate tax and insurance escrow $ 13,076 $ 22,332 Security deposits 94,338 67,562 ------- ------- $107,414 $ 89,894 Credit Risk: As of December 31, 1993, the Partnership has funds on deposit in a financial institution in excess of amounts insured by the Federal Insurance Corporation. Depreciation: Depreciation is provided for by the use of the straight- line method over the estimated useful lives of the assets. Income Taxes: No benefit for income taxes has been included in these financial statements since the tax loss passes through to, and is reported by, the partners individually. Note 3. Debt The project was originally financed with the proceeds from the issuance and sale of tax-exempt mortgage revenue bonds by The Industrial Development Authority of the City of Springfield, Missouri for a total of $15,340,000 and a $125,000 working capital loan from SCA Tax Exempt Fund Limited Partnership ("SCA"), an affiliate of the Partnership. The provisions of this working capital loan are identical to those of the mortgage revenue bonds. Both loans are collateralized by a first mortgage on the real property and an assignment of rents. Principal payments on the loans are due in December, 2015. The loans may be prepaid in whole, but not in part, on or after the seventh anniversary of the initial purchase of the bonds. Interest on the original loans is unconditionally payable at a base rate of 7.875%. Commencing on October 28, 1988, the second anniversary date of the mortgage revenue bonds, contingent interest is payable during the year from 100% of the project cash flow after payment of base interest, at a rate of 2.375%. Any remaining cash flow is split equally with the lender until the lender reaches its 16% per annum limit. To the extent the aggregate of all interest payments, including contingent interest, for any year does not equal 16%, the interest 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 lender to the extent necessary in order to pay the base rate of interest on the original mortgage revenue bonds and working capital loan plus 2.375% per annum. Fifty (50) percent of any excess sale or redemption proceeds after payment of the base rate plus 2.375% are paid to the lender to satisfy any previously unpaid amounts from the 16% per annum interest rate previously deferred. The Partnership has been unable to pay all base interest to date. Accordingly, it is uncertain, based upon historical results, whether project cash flows would be sufficient to pay contingent interest. As a result, no contingent interest has been accrued. Aggregate unpaid potential contingent interest at December 31, 1993 and 1992 is $6,492,078 and $5,235,546, respectively. In addition, the Partnership realized operating deficits (exclusive of debt service) during 1989 and consequently required additional funding from SCA in the form of additional working capital loans. These loans totalled $302,245 and carry a rate of 8% simple interest to the extent of excess sale or refinancing proceeds over the sum of the aggregate principal and unpaid base interest on the original debt. To date, there has not been any accrual of interest on the additional working capital loans of $302,245. These loans are not included within the contingent interest provisions described above and are due upon remarketing, redemption, or acceleration of the related outstanding bonds to the extent not previously called by SCA. The repayment of these loans and any interest thereon is subordinate to any base interest outstanding on both original loans. Note 4. Note Payable, Bank Note payable, bank represents a vehicle loan which was repaid in full in 1993. Note 5. Related Party Transactions Additional amounts due to SCA are as follows: 1993 1992 Working capital loans $ 427,245 $ 427,245 Debt service payable 2,872,880 2,766,339 ---------- ---------- $3,300,125 $3,193,584 The Partnership is due $495 from the Limited Partner and $5 from the General Partner based upon their capital contribution percentages. As required by the Indenture of Trust, the Partnership paid mortgage servicing fees of $115,981 and $115,990 to an affiliated Partnership in 1993 and 1992, respectively. Management services for the year ended December 31, 1992 and for the six months ended June 30, 1993 were provided by an affiliate of the Partnership at no charge to the Partnership. For the six months ended December 31, 1993, the Partnership paid property management fees of $35,057 to an affiliate. This amount is included in administrative expenses in the accompanying statements of operations for the year ended December 31, 1993. Note 6. Retirement Plan Effective in 1992, Shelter Properties Corporation Limited, adopted a 401(k) retirement plan covering all eligible employees of the Partnership. Employer contributions are at the discretion of the Company. The Partnership elected not to make contributions to the plan for the years ended December 31, 1993 and 1992. NEWPORT VILLAGE LIMITED PARTNERSHIP FINANCIAL REPORT DECEMBER 31, 1993 C O N T E N T S PAGE INDEPENDENT AUDITOR'S REPORT 3 FINANCIAL STATEMENTS Balance Sheets 4 Statements of Operations 5 Statements of Partners' Deficit 6 Statements of Cash Flows 7 Notes to Financial Statements 8 - 10 INDEPENDENT AUDITOR'S REPORT To the Partners Newport Village Limited Partnership Baltimore, Maryland We have audited the accompanying balance sheets of Newport Village Limited Partnership as of December 31, 1993 and 1992, and the related statements of operations, partners' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Newport Village Limited Partnership as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. C.W. Amos and Company Bethesda, Maryland February 16, 1994 NEWPORT VILLAGE LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1993 and 1992 1993 1992 ASSETS Investment in Real Estate, at cost (Note 3) Buildings - net of accumulated depreciation of $1,038,777 in 1993 and $801,334 in 1992 $ 8,516,107 $ 8,753,550 Furniture, fixtures and equipment - net of accumulated depreciation of $76,339 in 1993 and $58,723 in 1992 100,886 118,502 Land 1,215,199 1,215,199 Other Assets Cash 51,441 41,848 Restricted cash (Note 2) 161,819 143,555 Other 11,013 2,016 Partners' capital contributions receivable (Note 4) 500 500 ------------ ------------ TOTAL ASSETS $ 10,056,965 $ 10,275,170 LIABILITIES AND PARTNERS' DEFICIT Liabilities Mortgage revenue bonds payable (Note 3) $ 10,425,000 $ 10,425,000 Working capital loans payable (Notes 3 and 4) 455,000 455,000 Debt service payable (Notes 3 and 4) 1,786,243 1,505,956 Accounts payable and accrued expenses 148,881 126,830 Security deposit liability (Note 2) 57,195 50,200 Due to affiliates (Note 4) 965 965 ------------ ------------ TOTAL LIABILITIES $ 12,873,284 $ 12,563,951 Commitments and contingencies (Note 3) Partners' deficit (Note 4) (2,816,319) (2,288,781) TOTAL LIABILITIES ------------ ------------ AND PARTNERS' DEFICIT $ 10,056,965 $ 10,275,170 The accompanying notes are an integral part of these financial statements. - 4 - NEWPORT VILLAGE LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS Years Ended December 31, 1993 and 1992 1993 1992 REVENUE Gross rent potential (Note 3) $ 1,362,785 $ 1,254,425 Less: Vacancies (7,860) (19,415) Less: Concessions and allowances (20,410) (26,665) ----------- ----------- Net rental income $ 1,334,515 $ 1,208,345 Interest 2,758 3,367 Other income 20,722 16,201 ----------- ----------- TOTAL REVENUE $ 1,357,995 $ 1,227,913 EXPENSES Debt Service (Note 3) $ 856,800 $ 856,800 Marketing 84,629 86,050 Administrative (Note 4) 84,962 81,924 Depreciation 255,059 255,059 Taxes and insurance 152,093 115,272 Utilities 80,612 73,749 Maintenance 276,546 273,804 Advertising 13,232 11,756 Mortgage servicing fees (Note 4) 81,600 81,600 ----------- ----------- TOTAL EXPENSES $ 1,885,533 $ 1,836,014 NET LOSS $ (527,538) $ (608,101) The accompanying notes are an integral part of these financial statements. - 5 - NEWPORT VILLAGE LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT Years Ended December 31, 1993 and 1992 General Limited Partner Partner Total Partners' Deficit, December 31, 1991 $ (16,807) $(1,663,873) $(1,680,680) Net Loss (6,081) (602,020) (608,101) Partners' Deficit, ----------- ----------- ----------- December 31, 1992 $ (22,888) $(2,265,893) $(2,288,781) Net Loss (5,275) (522,263) (527,538) Partners' Deficit, ----------- ----------- ----------- December 31, 1993 $ (28,163) $(2,788,156) $(2,816,319) The accompanying notes are an integral part of these financial statements. - 6 - NEWPORT VILLAGE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS Years Ended December 31, 1993 and 1992 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (527,538) $ (608,101) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 255,059 255,059 Changes in assets and liabilities: Increase in debt service payable 280,287 373,801 Increase (decrease) in accounts payable and accrued expenses 22,051 (2,604) Increase in other assets (8,997) (75) NET CASH PROVIDED BY ----------- ----------- OPERATING ACTIVITIES $ 20,862 $ 18,080 CASH FLOWS FROM INVESTING ACTIVITIES Increase in restricted cash $ ( 18,264) $ ( 29,530) CASH FLOWS FROM FINANCING ACTIVITIES Increase in security deposits $ 6,995 $ 1,250 ----------- ----------- NET INCREASE (DECREASE) IN CASH $ 9,593 $( 10,200) CASH, BEGINNING OF YEAR 41,848 52,048 ----------- ----------- CASH, END OF YEAR $ 51,441 $ 41,848 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 576,513 $ 482,999 The accompanying notes are an integral part of these financial statements. - 7 - NOTES TO FINANCIAL STATEMENTS Note 1. Organization Newport Village Limited Partnership (the "Partnership") was organized on August 31, 1989 pursuant to the Laws of the State of Maryland for the purpose of acquiring and operating a residential rental project in Denver, Colorado. The Partnership was formed through initial capital contributions totalling $500 from SCA Successor, Inc., (the 1% General Partner) and Shelter Development Corporation (the 99% Limited Partner). All operating profits and losses are allocated in accordance with the percentage of partnership interest, as set forth in the Partnership Agreement. Any gains and losses recognized upon the sale, exchange, or other disposition of real property in the project are also allocated as set forth in the Partnership Agreement. As of August 31, 1989, the Partnership entered into a Transfer Agreement with Catalina Venture III, Ltd. (Catalina), whereby the title to Catalina Cottages and Apartments located in Denver, Colorado, was transferred from Catalina to the Partnership in lieu of foreclosure. Through this Agreement, the Partnership acquired all of Catalina's rights, title, and interest in the property, and assumed all of Catalina's obligations under the Mortgage Note, the Parity Working Capital Loan Note, all other mortgage loan documents, and the Regulatory Agreement. The Partnership did not, however, assume any of the obligations relating to the guarantors of Catalina. The acquisition was accounted for as a purchase in accordance with Opinion No. 16 of the Accounting Principles Board. Accordingly, the aggregate consideration was allocated to the assets acquired and the liabilities assumed, based on their estimated fair values. This estimate was based upon the projected net operating income before the costs of financing plus the estimated proceeds at sale or refinancing discounted at 8.0%. This rate was determined to be an appropriate tax-exempt rate commensurate with tax-exempt financing attached thereto. Note 2. Summary of Significant Accounting Policies A summary of the Partnership's significant accounting policies not disclosed elsewhere in the financial statements are as follows: Cash and Restricted Cash: The cash balance represents cash resources which are available to fund current operations. Restricted cash consists of the following: 1993 1992 Real estate tax and insurance escrow $ 69,880 $ 75,012 Security deposits 50,304 49,626 Replacement reserve 41,635 18,917 --------- --------- $ 161,819 $ 143,555 Replacement reserve represents amounts available to fund future replacements and repairs as defined in the loan agreement. Depreciation: Depreciation on buildings and equipment is provided for by the use of the straight-line method over the estimated useful lives of the assets. Income Taxes: No benefit for income taxes has been included in these financial statements since the tax loss passes through to, and is reported by, the partners individually. Credit Risk: As of December 31, 1993, the Partnership had funds on deposit in financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. Reclassification: Certain amounts in the prior year's financial statements have been reclassified to conform with the current year presentation. Note 3. Debt The project was originally financed with the proceeds from the issuance and sale of tax-exempt mortgage revenue bonds by the City of Thornton, Colorado for a total of $10,425,000 and a $455,000 working capital loan from SCA Tax Exempt Fund Limited Partnership ("SCA"), an affiliate of the Partnership. The provisions of this working capital loan are identical to those of the mortgage revenue bonds. All loans are collateralized by a first mortgage on the real property and an assignment of rents. Principal payments on the loans are due in December, 2010. The loans may be prepaid in whole, but not in part, on or after the seventh anniversary of the initial purchase of the bonds. Interest on the original loans is unconditionally payable at a base rate of 7.875%. Commencing on December 10, 1988, the second anniversary date of the mortgage revenue bonds, contingent interest is payable during the year from 100% of the project cash flow after payment of base interest, at a rate of 2.375%. Any remaining cash flow is split equally with the lender until the lender reaches its 16% per annum limit. To the extent the aggregate of all interest payments, including contingent interest, for any year does not equal 16%, the interest 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 lender to the extent necessary in order to pay the base rate of interest on the original mortgage revenue bonds and working capital loan plus 2.375% per annum. Fifty (50) percent of any excess sale or redemption proceeds after payment of the base rate plus 2.375% are paid to the lender to satisfy any previously unpaid amounts from the 16% per annum interest rate previously deferred. The Partnership has been unable to pay all base interest to date. Accordingly, it is uncertain, based upon historical results, whether project cash flows would be sufficient to pay contingent interest. As a result, no contingent interest has been accrued. Aggregate unpaid potential contingent interest as of December 31, 1993 and 1992 is $4,456,833 and $3,572,833, respectively. Note 4. Related Party Transactions Additional amounts due to SCA are as follows: 1993 1992 Working Capital loans $ 455,000 $ 455,000 Debt service payable 1,786,243 1,505,956 Other 965 965 ---------- ---------- $2,242,208 $1,961,921 The Partnership is due $495 from the Limited Partner and $5 from the General Partner based upon their capital contribution percentages. The Partnership paid property management fees of $53,876 and $54,003 to an affiliate in 1993 and 1992, respectively. These amounts are included in administrative expenses in the accompanying statements of operations. As required by the Indenture of Trust, the Partnership paid mortgage servicing fees of $81,600 to an affiliate in 1993 and 1992. NICOLLET RIDGE LIMITED PARTNERSHIP FINANCIAL REPORT DECEMBER 31, 1993 C O N T E N T S PAGE INDEPENDENT AUDITOR'S REPORT 3 FINANCIAL STATEMENTS Balance Sheets 4 Statements of Operations 5 Statements of Partners' Deficit 6 Statements of Cash Flows 7 Notes to Financial Statements 8 - 10 INDEPENDENT AUDITOR'S REPORT To the Partners Nicollet Ridge Limited Partnership Baltimore, Maryland We have audited the accompanying balance sheets of Nicollet Ridge Limited Partnership as of December 31, 1993 and 1992, and the related statements of operations, partners' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nicollet Ridge Limited Partnership as of December 31, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. C.W. Amos and Company Bethesda, Maryland February 16, 1994 NICOLLET RIDGE LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1993 and 1992 ASSETS 1993 1992 Investment in Real Estate, at cost (Note 3) Building - net of accumulated depreciation of $1,370,110 in 1993 and $920,182 in 1992 $ 16,627,016 $ 17,076,944 Furniture, fixtures and equipment - net of accumulated depreciation of $25,122 in 1993 and $18,506 in 1992 41,035 47,651 Land 1,914,869 1,914,869 Other Assets Cash 11,271 8,176 Restricted cash (Note 2) 190,744 168,541 Partners' capital contributions receivable (Note 4) 500 500 Prepaid expenses 14,799 15,893 Other assets 3,148 - ------------ ------------ TOTAL ASSETS $ 18,803,382 $ 19,232,574 LIABILITIES AND PARTNERS' DEFICIT Liabilities Mortgage revenue bond payable (Note 3) $ 20,340,000 $ 20,340,000 Lien claims payable 31,979 31,979 Debt service payable (Notes 3 and 4) 2,981,088 2,311,407 Accounts payable and accrued expenses 544,621 603,105 Security deposit liability 64,987 82,552 Due to affiliates (Note 4) 5,047 5,047 ------------ ------------ TOTAL LIABILITIES $ 23,967,722 $ 23,374,090 Commitment and contingency (Note 3) Partners' deficit (Note 4) (5,164,340) (4,141,516) TOTAL LIABILITIES ------------ ------------ AND PARTNERS' DEFICIT $ 18,803,382 $ 19,232,574 The accompanying notes are an integral part of these financial statements. - 4 - NICOLLET RIDGE LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS Years Ended December 31, 1993 and 1992 1993 1992 REVENUE Gross rent potential (Note 3) $ 2,623,282 $ 2,531,845 Less: Vacancies (68,311) (63,602) Less: Concessions and allowances (87,480) (91,340) Add: Other rental income 123,617 117,209 ----------- ----------- Net rental income $ 2,591,108 $ 2,494,112 Interest 4,086 4,216 Other income 13,279 4,712 ----------- ----------- TOTAL REVENUE $ 2,608,473 $ 2,503,040 EXPENSES Debt service (Note 3) $ 1,601,775 $ 1,601,577 Payroll 237,104 221,422 Administrative (Note 4) 210,365 221,955 Depreciation 456,544 456,544 Taxes and insurance 496,746 589,494 Utilities 200,013 194,690 Maintenance 276,200 368,561 Mortgage servicing fees (Note 4) 152,550 152,550 ----------- ----------- TOTAL EXPENSES $ 3,631,297 $ 3,806,793 NET LOSS $(1,022,824) $(1,303,753) The accompanying notes are an integral part of these financial statements. - 5 - NICOLLET RIDGE LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' DEFICIT Years Ended December 31, 1993 and 1992 General Limited Partner Partners Total Partners' Deficit, December 31, 1991 $( 28,378) $(2,809,385) $(2,837,763) Net Loss ( 13,038) (1,290,715) (1,303,753) Partners' Deficit, ----------- ----------- ----------- December 31, 1992 $( 41,416) $(4,100,100) $(4,141,516) Net Loss ( 10,228) (1,012,596) (1,022,824) Partners' Deficit, ----------- ----------- ----------- December 31, 1993 $( 51,644) $(5,112,696) $(5,164,340) The accompanying notes are an integral part of these financial statements. - 6 - NICOLLET RIDGE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS Years Ended December 31, 1993 and 1992 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $(1,022,824) $(1,303,753) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 456,544 456,544 Change in assets and liabilities: Increase in rent receivable - 7,797 Decrease (increase) in prepaid expenses 1,094 (7,860) Increase in debt service payable 669,681 795,170 (Decrease) increase in accounts payable and accrued expenses (58,484) 52,791 Increase in other assets (3,148) - NET CASH PROVIDED BY ---------- ---------- OPERATING ACTIVITIES $ 42,863 $ 689 CASH FLOWS FROM INVESTING ACTIVITIES (Increase) decrease in restricted cash $ (22,203) $ 1,333 CASH FLOWS FROM FINANCING ACTIVITIES Decrease in security deposits (17,565) (98) ---------- ---------- NET INCREASE IN CASH $ 3,095 $ 1,924 CASH, BEGINNING OF YEAR 8,176 6,252 ---------- --------- CASH, END OF YEAR $ 11,271 $ 8,176 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 932,094 $ 806,407 The accompanying notes are an integral part of these financial statements. - 7 - NOTES TO FINANCIAL STATEMENTS Note 1. Organization Nicollet Ridge Limited Partnership (the "Partnership") was organized on October 3, 1990 pursuant to the Laws of the State of Maryland for the purpose of acquiring, owning and operating a multifamily residential apartment project located in Burnsville, Minnesota. All operating profits and losses are to be allocated in accordance with the percentage of partnership interest, as set forth in the Partnership Agreement. Any gains and losses recognized upon the sale, exchange or other disposition of real property in the project shall also be allocated as set forth in the Partnership Agreement. As of December 1, 1990, the Partnership entered into a Transfer Agreement with Burnsville Woods Partnership ("Burnsville"), whereby the title to Nicollet Ridge, a 339 unit apartment project located in Burnsville, Minnesota, was transferred to the Partnership in lieu of foreclosure. Through this agreement, the Partnership acquired all of Burnsville's rights, title and interest in the property, and assumed all of Burnsville's obligations under the Mortgage Note, all other mortgage loan documents and the Regulatory Agreement. The Partnership did not, however, assume any of the obligations relating to the guarantors of Burnsville. The acquisition was accounted for as a purchase in conformity with Opinion No. 16 of the Accounting Principles Board. Accordingly, the aggregate consideration was allocated to the assets acquired and the liabilities assumed, based on their estimated fair values. This estimate was based upon the projected net operating income before the costs of financing plus the estimated proceeds at sale or refinancing discounted at 8.0%. This rate was determined to be an appropriate tax-exempt rate commensurate with tax-exempt financing attached thereto. Note 2. Summary of Significant Accounting Policies A summary of the Partnership's significant accounting policies not disclosed elsewhere in the financial statements are as follows: Cash and Restricted Cash: The cash balance represents cash resources which are available to fund current operations. Restricted cash consists of the following: 1993 1992 Real estate tax and insurance escrow $ 91,342 $ 85,969 Security deposits 65,266 82,572 Replacement reserve 34,136 - --------- --------- $ 190,744 $ 168,541 Replacement reserve represents amounts available to fund future replacements and repairs as defined in the loan agreement. Credit risk: As of December 31, 1993, the Partnership had funds on deposit in a financial institution in excess of amounts insured by the Federal Deposit Insurance Corporation. Depreciation: Depreciation on buildings and equipment is provided for by the use of the straight-line method over the estimated useful lives of the assets. Income Taxes: No benefit for income taxes has been included in these financial statements since the tax loss passes through to, and is reported by, the partners individually. Reclassification: Certain amounts in the prior year's financial statements have been reclassified to conform with the current year presentation. Note 3. Debt The project was originally financed with the proceeds from the issuance and sale of tax-exempt mortgage revenue bonds by the City of Burnsville, Minnesota for a total of $20,340,000. The mortgage revenue bonds, are collateralized by a first mortgage on the real property and an assignment of rents. Principal payments on the bonds are due in December, 2010. The bonds may be prepaid in whole, but not in part, on or after the seventh anniversary of the initial purchase of the bonds. Interest on the original bonds is payable at a base rate of 7.875%. Commencing on December 1, 1988, the second anniversary date of the mortgage revenue bonds, contingent interest is payable during the year from 100% of the project cash flow after payment of base interest, at a rate of 2.375%. Any remaining cash flow is split equally with the lender until the lender reaches its 16% per annum limit. To the extent the aggregate of all interest payments, including contingent interest, for any year does not equal 16%, the interest 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 lender to the extent necessary in order to pay the base rate of interest on the original mortgage revenue bond plus 2.375% per annum. Fifty (50) percent of any excess sale or redemption proceeds after payment of the base rate plus 2.375% are paid to the lender to satisfy any previously unpaid amounts from the 16% per annum interest rate previously deferred. The Partnership has been unable to pay all base interest to date, accordingly, it is uncertain, based upon historical results, whether project cash flows would be sufficient to pay contingent interest. As a result, no contingent interest has been accrued. Aggregate unpaid potential contingent interest as of December 31, 1993 and 1992 is $8,400,844 and $6,748,219, respectively. Note 4. Related Party Transactions Additional amounts due to SCA Tax Exempt Fund limited partnership are as follows: 1993 1992 Debt service payable $2,981,088 $2,311,407 Other 5,047 5,047 ---------- ---------- $2,986,135 $2,316,454 The Partnership is due $495 from the Limited Partners and $5 from the General Partner based upon their capital contribution percentages. The Partnership paid property management fees of $104,093 and $101,176 to an affiliate in 1993 and 1992, respectively. These amounts are included in administrative expenses in the accompanying statements of operations. As required by the Indenture of Trust, the Partnership paid mortgage servicing fees of $152,550 to an affiliate in 1993 and 1992. STEEPLECHASE FALLS LIMITED PARTNERSHIP FINANCIAL REPORT DECEMBER 31, 1993 C O N T E N T S PAGE INDEPENDENT AUDITOR'S REPORT 3 FINANCIAL STATEMENTS Balance Sheet 4 Statement of Operations 5 Statement of Partners' Deficit 6 Statement of Cash Flows 7 Notes to Financial Statements 8 - 11 INDEPENDENT AUDITOR'S REPORT To the Partners Steeplechase Falls Limited Partnership Baltimore, Maryland We have audited the accompanying balance sheet of Steeplechase Falls Limited Partnership as of December 31, 1993, and the related statements of operations, partners' deficit, and cash flows for the period July 12, 1993 through December 31, 1993. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Steeplechase Falls Limited Partnership as of December 31, 1993, and the results of its operations and its cash flows for the period July 12, 1993 through December 31, 1993 in conformity with generally accepted accounting principles. C.W. Amos and Company Bethesda, Maryland February 17, 1994 STEEPLECHASE FALLS LIMITED PARTNERSHIP BALANCE SHEET December 31, 1993 ASSETS Investment in Real Estate, at cost (Note 3) Building - net of accumulated depreciation of $215,838 $ 17,051,209 Furniture, fixtures and equipment - net of accumulated depreciation of $24,778 470,790 Land improvements - net of accumulated depreciation of $862 16,375 Land 1,782,925 Other Assets Cash 43,000 Restricted cash (Note 2) 628,047 Partners' capital contributions due (Note 4) 500 Other assets 20,667 ------------ TOTAL ASSETS $ 20,013,513 LIABILITIES AND PARTNERS' DEFICIT Liabilities Mortgage revenue bonds payable (Note 3) $ 17,950,000 Working capital loan payable (Notes 3 and 4) 150,000 Debt service payable (Notes 3 and 4) 1,699,358 Accounts payable and accrued expenses 377,782 Security deposit liability 105,508 Due to affiliate (Note 4) 3,498 ------------ TOTAL LIABILITIES $ 20,286,146 Commitments and Contingencies (Notes 3 and 5) Partners' deficit $ (272,633) TOTAL LIABILITIES AND ------------ PARTNERS' DEFICIT $ 20,013,513 The accompanying notes are an integral part of this financial statement. - 4 - STEEPLECHASE FALLS LIMITED PARTNERSHIP STATEMENT OF OPERATIONS Period July 12, 1993 through December 31, 1993 REVENUES Gross rent potential (Note 3) $ 1,354,333 Less: Vacancies (42,175) Less: Concessions and allowances (6,810) Add: Other rental income 14,178 Net rental income $ 1,319,526 Interest 4,624 Other income 33,580 ------------ TOTAL REVENUE $ 1,357,730 EXPENSES Debt service (Note 3) $ 712,677 Marketing 30,800 Administrative (Note 4) 217,278 Depreciation 241,478 Taxes and insurance 212,142 Utilities 79,845 Maintenance 68,768 Mortgage servicing fees (Note 4) 67,875 ------------ TOTAL EXPENSES $ 1,630,863 ------------ NET LOSS $ (273,133) The accompanying notes are an integral part of this financial statement. - 5 - STEEPLECHASE FALLS LIMITED PARTNERSHIP STATEMENT OF PARTNERS' DEFICIT Period July 12, 1993 through December 31, 1993 General Limited Partner Partner Total Partners' Capital, Beginning of period $ 5 $ 495 $ 500 Net Loss (2,731) (270,402) (273,133) Partners' Deficit, --------- --------- ---------- End of period $ (2,726) $(269,907) $ (272,633) The accompanying notes are an integral part of these financial statements. - 6- STEEPLECHASE FALLS LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS Period July 12, 1993 through December 31, 1993 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (273,133) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 241,478 Change in assets and liabilities: Increase in other assets (13,480) Increase in debt service payable 54,175 Decrease in due to affiliate (4,009) Increase in accounts payable and accrued expenses 175,189 NET CASH PROVIDED BY ---------- OPERATING ACTIVITIES $ 180,220 CASH FLOWS FROM INVESTING ACTIVITIES Increase in restricted cash $ (174,350) Purchases of furniture, fixtures and equipment (15,595) NET CASH USED IN ---------- INVESTING ACTIVITIES (189,945) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in security deposit liability $ (2,251) ---------- NET DECREASE IN CASH $ (11,976) ---------- CASH, BEGINNING OF PERIOD 54,976 ---------- CASH, END OF PERIOD $ 43,000 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 658,502 The accompanying notes are an integral part of this financial statement. - 7 - NOTES TO FINANCIAL STATEMENTS Note 1. Organization Steeplechase Falls Limited Partnership was organized pursuant to the Laws of the State of Maryland for the purpose of acquiring and operating a residential rental project in Knoxville, Tennessee. The project of Steeplechase Falls Apartments was deeded to Steeplechase Falls Ventures Ltd., the original borrower, who on September 29, 1989 filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. Through this filing, Steeplechase Falls Ventures Ltd. attempted through special provisions of the bankruptcy code (section 363(C)) to relieve the guarantors of their obligation under the operating deficit guarantee. The lender filed a motion to dismiss the bankruptcy filing, but the court upheld the bankruptcy filing. While the action was upheld, the original borrower continued to hold the title to the property as no attempt was made to transfer the title. Subsequent to the above and through July 12, 1993, Shelter Properties Corporation Limited, was appointed by a trustee of the U.S. Bankruptcy Court to manage the property until transfer of title was allowed. In addition, the bond trustee and lender retained Shelter Properties Corporation Limited as the managing agent. On March 18, 1993, an affiliate of the Partnership, negotiated the terms of a transfer of the deed in lieu of foreclosure to Steeplechase Falls Limited Partnership (the Partnership). On July 12, 1993, the Partnership recorded the deed and acquired all of Steeplechase Falls Ventures Ltd. right, title and interest in the property and assumed all of Steeplechase Falls Ventures Ltd. obligations under the Mortgage Note, the Parity Working Capital Loan Note, all other mortgage loan documents and the Regulatory Agreement. The assets and liabilities of the project as of July 12, 1993, were transferred to and recorded on the Partnership's opening balance sheet. The Partnership did not, however, assume any of the obligations relating to the guarantors of Steeplechase Falls Ventures Ltd.. The acquisition was accounted for as a purchase in conformity with Opinion No. 16 of the Accounting Principles Board. Accordingly, the aggregate acquisition consideration was allocated to the assets acquired and the liabilities assumed based on their estimated fair values. This estimate was based upon the projected net operating income before the costs of financing plus the estimated proceeds at sale or refinancing discounted at 9.5%. This rate was determined to be an appropriate tax- exempt rate commensurate with the tax-exempt financing attached thereto. All operating profits and losses are allocated in accordance with the percentage of partnership interest, as set forth in the Partnership Agreement. Any gains or losses recognized upon the sale, exchange, or other disposition of real property in the project shall also be allocated as set forth in the Partnership Agreement. Note 2. Summary of Significant Accounting Policies A summary of the Partnership's significant accounting policies not disclosed elsewhere in the financial statements is as follows: Credit Risk: The Partnership has deposits in financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. Cash: The cash balance represents cash resources which are available to fund current operations. Restricted cash consists of the following: 1993 Real estate tax and insurance escrow $ 287,102 Security deposits 106,740 Replacement reserve 84,373 Trust fund 149,832 ---------- $ 628,047 Replacement reserve represents amounts available to fund future replacements and repairs as defined in the loan agreement. Trust fund represents amounts which are held in trust by the lender for payment of debt service. Depreciation: Depreciation is provided for by the use of the straight- line method over the estimated useful lives of the assets. Income Taxes: No provision or benefit for income taxes has been included in these financial statements since the tax loss passes through to, and is reported by, the partners individually. Note 3. Debt The project was financed with proceeds from the issuance and sale of tax exempt mortgage revenue bonds by The Health, Educational and Housing Facilities Board of the County of Knox, Tennessee, for a total of $17,950,000 and a $150,000 working capital loan from SCA Tax Exempt Fund Limited Partnership ("SCA"), an affiliate of the managing agent. The provisions of this working capital loan are identical to those of the mortgage revenue bond. Both loans are collateralized by a first mortgage on the real property and an assignment of rents. Principal payments on the loans are due October, 2008. The loans may be prepaid in whole, but not in part, on or after the seventh anniversary of the initial purchase of the bonds. Interest on the original loans is unconditionally payable at a base rate of 7.875%. Commencing on October 17, 1988, the second anniversary date of the mortgage revenue bonds, contingent interest is payable during the year from 100% of the project cash flow after payment of base interest, at a rate of 2.375%. Any remaining cash flow is split equally with the lender until the lender reaches it's 16% per annum limit. To the extent the aggregate of all interest payments, including contingent interest, for any year does not equal 16%, the interest 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 lender to the extent necessary in order to pay the base rate of interest on the original mortgage revenue bonds and working capital loan plus 2.375% per annum. Fifty (50) percent of any excess sale or redemption proceeds, after payment of the base rate plus 2.375%, are paid to the lender to satisfy any previously unpaid amounts from the 16% per annum interest rate previously deferred. The Project has been unable to pay all base interest to date, accordingly, it is uncertain whether project cash flows would ever be sufficient to pay contingent interest. As a result, no contingent interest has been accrued. Aggregate unpaid potential contingent interest from 1988 through December 31, 1993 is $7,659,505. Note 4. Related Party Transactions Additional amounts due to SCA are as follows: Working capital loan $ 150,000 Debt service payable 1,699,358 ------------ $ 1,849,358 The Partnership is due $495 from the Limited Partner and $5 from the General Partner based upon their capital contribution percentages. The project paid property management fees of $52,039 to an affiliate for the period ended December 31, 1993. This amount is included in administrative expenses in the accompanying statement of operations. As required by the Indenture of Trust, the project paid mortgage servicing fees of $67,875 to an affiliate partnership in 1993. Note 5. Retirement Plan Shelter Properties Corporation Limited, the managing agent, has a 401(k) retirement plan covering all eligible employees of the property. Employer contributions are at the discretion of the Company. The Partnership elected not to make a contribution to the plan for the period ended December 31, 1993. HAMILTON GROVE LIMITED PARTNERSHIP FINANCIAL STATEMENTS AND AUDIT REPORT December 31, 1993 HAMILTON GROVE LIMITED PARTNERSHIP CONTENTS REPORT OF INDEPENDENT ACCOUNTANTS 1 BALANCE SHEETS 2 STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT 3 STATEMENTS OF CASH FLOWS 4 NOTES TO FINANCIAL STATEMENTS 5/8 SUPPLEMENTARY INFORMATION Report of Independent Accountants 10 Schedules of Project Cash Flows 11 Member AICPA Division for CPA Firms Private Companies Practice Section SEC Practice Section REPORT OF INDEPENDENT ACCOUNTANTS To the Partners Hamilton Grove Limited Partnership Chattanooga, Tennessee We have audited the accompanying balance sheets of Hamilton Grove Limited Partnership as of December 31, 1993 and 1992, and the related statements of operations and partners' deficit and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hamilton Grove Limited Partnership as of December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. The financial statements have been prepared assuming that the partnership will continue as a going concern. As discussed in the notes to the financial statements, the partnership has had net losses from operations and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in the notes to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Joseph Decosimo and Company Chattanooga, Tennessee March 4, 1994, except for the notes payable footnote, as to which the date is March 15, 1994 HAMILTON GROVE LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1993 and 1992 1993 1992 ASSETS Property and Equipment, net $ 8,670,454 $ 9,061,971 Cash and Cash Equivalents, including restricted cash of $123,489 for 1993 and $71,010 for 1992 127,496 97,172 Tenant Receivables 1,825 1,325 Intangibles, net 330,235 367,756 ------------ ------------ TOTAL ASSETS $ 9,130,010 $ 9,528,224 LIABILITIES AND PARTNERS' DEFICIT LIABILITIES Notes Payable $ 13,975,000 $ 13,975,000 Accounts Payable 26,160 27,858 Accrued Interest 263,196 93,167 Accrued Property Taxes 178,689 181,773 Accrued Management Fees 8,322 7,859 Tenant Security Deposits 58,415 56,310 Rents Received in Advance 23,604 20,536 Advances from Partners and Management Company 499,415 480,341 ------------ ------------ Total Liabilities 15,032,801 14,842,844 PARTNERS' DEFICIT ( 5,902,791) ( 5,314,620) ------------ ------------ TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 9,130,010 $ 9,528,224 The accompanying notes are an integral part of the financial statements. HAMILTON GROVE LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT Years Ended December 31, 1993, 1992 and 1991 1993 1992 1991 REVENUES Gross Rent Potential $ 1,904,258 $ 1,858,651 $ 1,812,723 Less: Vacancies 81,952 66,706 101,881 Concessions 7,627 25,212 38,583 Quarters Allowance 23,743 34,972 26,502 Model 13,148 10,250 8,095 Net Rental Income 1,777,788 1,721,511 1,637,662 Other 185,094 199,646 172,605 ----------- ----------- ----------- 1,962,882 1,921,157 1,810,267 EXPENSES Administrative 263,961 251,364 229,557 Management Fees 98,144 103,889 90,513 Advertising and Promotion 8,185 9,633 13,993 Insurance 24,189 25,025 22,553 Outside Services 39,477 43,882 48,074 Payroll and Related Expenses 168,580 160,349 153,055 Repairs and Maintenance 3,750 9,024 15,845 Supplies 39,660 22,285 24,274 Utilities 153,747 144,022 150,490 ----------- ---------- ----------- 799,693 769,473 748,354 INCOME FROM OPERATIONS 1,163,189 1,151,684 1,061,913 OTHER INCOME (EXPENSE) Interest Income 746 1,648 5,550 Interest Expense (1,118,000) (1,118,000) (1,118,000) Amortization ( 37,521) ( 91,670) ( 109,717) Depreciation ( 418,302) ( 415,454) ( 428,090) Real Estate Taxes ( 178,283) ( 184,239) ( 166,280) ----------- ----------- ----------- (1,751,360) (1,807,715) (1,816,537) ----------- ----------- ----------- NET LOSS ( 588,171) ( 656,031) ( 754,624) PARTNERS' DEFICIT - beginning of year (5,314,620) (4,658,589) (3,903,965) PARTNERS' DEFICIT - ----------- ----------- ----------- end of year $(5,902,791) $(5,314,620) $(4,658,589) The accompanying notes are an integral part of the financial statements. HAMILTON GROVE LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS Years Ended December 31, 1993, 1992 and 1991 1993 1992 1991 CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Tenants $ 1,958,442 $ 1,911,327 $ 1,818,912 Cash Paid to Employees and Suppliers ( 973,182) ( 911,092) ( 896,329) Interest Received 746 1,648 5,550 Interest Paid ( 947,971) (1,118,000) (1,118,000) Net Cash Provided (Used) by ----------- ---------- ---------- Operating Activities 38,035 ( 116,117) ( 189,867) CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures ( 26,785) ( 9,050) ( 14,603) CASH FLOWS FROM FINANCING ACTIVITIES Advances from Partners 19,074 21,530 198,971 Bank Overdraft - - ( 5,400) Net Cash Provided by Financing Activities 19,074 21,530 193,571 NET INCREASE (DECREASE) IN CASH ----------- ---------- ---------- AND CASH EQUIVALENTS 30,324 ( 103,637) ( 10,899) CASH AND CASH EQUIVALENTS - beginning of year 97,172 200,809 211,708 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS - end of year $ 127,496 $ 97,172 $ 200,809 RECONCILIATION OF NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Net Loss $( 588,171) $( 656,031) $( 754,624) Depreciation 418,302 415,454 428,090 Amortization 37,521 91,670 109,717 Bad Debt Expense 9,113 10,139 6,723 Changes in Operating Assets and Liabilities - Decrease (Increase) in - Tenant Receivables ( 9,613) ( 10,871) 218 Increase (Decrease) in - Accounts Payable ( 1,698) 7,867 15,601 Accrued Interest 170,029 - - Accrued Property Taxes ( 3,084) 16,755 ( 4,019) Accrued Management Fees 463 7,859 - Tenant Security Deposits 2,105 1,840 3,715 Rents Received in Advance 3,068 ( 799) 4,712 NET CASH PROVIDED (USED) BY ----------- ----------- ----------- OPERATING ACTIVITIES $ 38,035 $( 116,117)$( 189,867) The accompanying notes are an integral part of the financial statements. HAMILTON GROVE LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies and practices followed by the partnership are as follows: ORGANIZATION - Hamilton Grove Limited Partnership (the "partnership") was organized under the laws of the state of Tennessee on August 14, 1986, for the purpose of acquiring and developing a 300-unit apartment complex in Chattanooga, Tennessee known as Hamilton Chase Apartments. The partnership commenced operations on October 1, 1987. Venture Technology Properties is the general partner and manages the partnership and is allocated 94% of net operating losses and profits and gains. On March 15, 1994, the partnership signed a letter of intent with its bondholder and fiscal agent (see notes payable footnote) which will admit an affiliate of the fiscal agent as sole general partner. The new general partner shall have exclusive authority over all partnership decisions. CASH EQUIVALENTS - The partnership considers all money market accounts and highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is provided on the straight-line method for real property and accelerated methods for personal property over the estimated useful lives of the depreciable assets. INTANGIBLE ASSETS - Intangible assets consist of organization and start-up costs which are amortized using the straight-line method over five years and bond issue and financing costs which are amortized over the term of the bonds. INCOME TAXES - No provision for income taxes is reflected in the financial statements since the tax effects of the partnership's income or loss are passed through to the individual partners. OPERATIONS From inception through December 31, 1993, the partnership has had net losses of $5,902,891 and negative cash flows from operations of $1,980,254. The partnership's ability to continue as a going concern depends on the satisfaction of certain conditions established by the letter of intent signed with the bondholder and fiscal agent (see notes payable footnote) and the willingness of certain partners to fund partnership losses. RESTRICTED CASH Restricted cash consists of the following: 1993 1992 Taxes and Insurance Escrow Accounts $ 63,095 $ 12,843 Tenant Security Deposit Escrow Account 60,394 58,167 --------- --------- $ 123,489 $ 71,010 PROPERTY AND EQUIPMENT Property and equipment consist of the following major classifications: 1993 1992 Land $ 900,000 $ 900,000 Buildings 9,846,708 9,844,945 Furniture and Equipment 656,995 631,972 Vehicles 2,890 2,890 11,406,593 11,379,807 Accumulated Depreciation ( 2,736,139) ( 2,317,836) ------------ ------------ $ 8,670,454 $ 9,061,971 INTANGIBLES Intangibles consist of the following: 1993 1992 Organization and Start-Up Costs $ 360,976 $ 360,976 Bond Issue and Financing Costs 562,819 562,819 --------- --------- 923,795 923,795 Accumulated Amortization (593,560) (556,039) --------- --------- $ 330,235 $ 367,756 NOTES PAYABLE Notes payable consist of the following: 1993 1992 Industrial Revenue Bonds Series 1986A $ 13,875,000 $ 13,875,000 Working Capital Loan 100,000 100,000 ------------ ------------ $ 13,975,000 $ 13,975,000 The Industrial Revenue Bonds were issued by the Industrial Development Board of the County of Hamilton, Tennessee and are assigned to SCA Tax Exempt Fund. Base interest is payable monthly at 8%. Commencing December 1, 1988, contingent interest was payable at a rate of 2.25% from 100% of the project cash flow after the payment of base interest (level 1 contingent interest). Any remaining cash flow is split equally with the bondholder until the bondholder reaches a 16% per annum limit (level 2 contingent interest). To the extent that the aggregate of all interest payments, including contingent interest, for any year does not equal 16% per annum, the difference less priority contingent interest is deferred until the property is sold or the loan is repaid. Priority contingent interest for any given year is the lesser of unpaid level 1 contingent interest or .5%. Priority contingent interest is payable from 100% of cash flow before level 1 or 2 contingent interest as future cash flows permits. Sale or repayment proceeds remaining after the repayment of the principal and other specified payments are paid 100% to the bondholder to the extent necessary to provide the bondholder a return equal to the base interest rate plus 2.25%. Thereafter, such proceeds are split equally with the bondholder in order to provide a return of 16%. The partnership has been unable to pay all base interest to date; accordingly, it is uncertain whether cash flows would be sufficient to pay contingent interest. As a result, no contingent interest has been accrued at December 31, 1993 and 1992. Aggregate unpaid interest at December 31, 1993 and 1992, is $5,683,127 and $4,573,127, respectively. The bonds are redeemable after December 1, 1993, at the option of the partnership and are subject to remarketing on or after December 1, 1998. The bonds currently mature August 15, 2006; however, if previously remarketed, the maturity may be extended to August 15, 2008. The bonds are collateralized by the real property and an assignment of rents. Provisions of the working capital loan are identical to those of the Industrial Revenue Bonds. As of December 31, 1993, the partnership was in default of the terms of the loan agreement with the Industrial Development Board of Hamilton County, Tennessee. On March 15, 1994, the partnership signed a letter of intent with the bondholder and fiscal agent of the bonds whereby an affiliate of the fiscal agent will become the sole general partner and have sole and exclusive authority over all partnership decisions. The letter of intent becomes binding upon the satisfaction of certain conditions by the partnership. If these changes to the partnership structure are accomplished, the fiscal agent has no plans or intentions to exercise its rights to accelerate the maturity of the bonds during the ensuing year provided the terms of the agreement are fully satisfied. RELATED PARTY TRANSACTIONS Transactions and outstanding balances with partners are summarized as follows: 1993 1992 1991 Management Fees $ 98,144 $ 103,889 $ 90,513 Advance from Partners $ 499,415 $ 480,341 $ 458,811 Accrued Management Fees $ 8,322 $ 7,859 $ - The advances from partners shall be repaid from the partnership's share of sale or refinancing proceeds in accordance with the loan agreement related to the Industrial Development Bonds. SUPPLEMENTARY INFORMATION Member AICPA Division for CPA Firms Private Companies Practice Section SEC Practice Section REPORT OF INDEPENDENT ACCOUNTANTS To the Partners Hamilton Grove Limited Partnership Chattanooga, Tennessee Our report on our audits of the basic financial statements of Hamilton Grove Limited Partnership as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, appears on page 1. Those audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Joseph Decosimo and Company Chattanooga, Tennessee March 4, 1994 HAMILTON GROVE LIMITED PARTNERSHIP SCHEDULES OF PROJECT CASH FLOWS Years Ended December 31, 1993, 1992 and 1991 1993 1992 1991 SOURCES OF CASH Cash Received from Tenants $ 1,958,442 $1,911,327 $1,818,912 Interest Received 746 1,648 5,550 Developer Contribution 19,074 21,530 198,971 ----------- ---------- ---------- 1,978,262 1,934,505 2,023,433 USES OF CASH Operating Expenses Paid (973,182) (911,092) (896,329) Debt Service (947,971) (1,118,000) (1,118,000) ----------- ---------- ---------- (1,921,153) (2,029,092) (2,014,329) Project Cash Flow 57,109 (94,587) 9,104 OTHER USES OF CASH Capital Expenditures (26,785) (9,050) (14,603) Bank Overdraft - - (5,400) ----------- ---------- --------- NET INCREASE (DECREASE) IN CASH $ 30,324 $ (103,637) $ (10,899) No contingent interest is payable for 1991 because project cash flow is the result of loans from the developer corporation and draws from reserves. No contingent interest is payable for 1993 because project cash flow is the result of loans from the developer corporation and the timing of interest payments. AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP FINANCIAL STATEMENTS AND AUDIT REPORT December 31, 1994 AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP CONTENTS REPORT OF INDEPENDENT ACCOUNTANTS 1 BALANCE SHEETS 2 STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT 3 STATEMENTS OF CASH FLOWS 4/5 NOTES TO FINANCIAL STATEMENTS 6/11 SUPPLEMENTARY INFORMATION Combining Balance Sheets 13/14 Combining Statements of Operations 15/17 Schedules of Project Cash Flow for Phase I 18 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners Auction Street Associates Limited Partnership Chattanooga, Tennessee We have audited the accompanying balance sheets of Auction Street Associates Limited Partnership as of December 31, 1994 and 1993, and the related statements of operations and partners' deficit and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Auction Street Associates Limited Partnership as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Joseph Decosimo and Company Chattanooga, Tennessee February 22, 1995 AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1994 and 1993 1994 1993 ASSETS Property and Equipment, net $ 17,045,468 $ 17,741,544 Cash and Cash Equivalents, including restricted cash of $1,440,186 for 1994 and $1,336,610 for 1993 1,483,130 1,344,621 Tenant Receivables 7,135 5,929 Partner Receivables 76,640 142,796 Prepaid Insurance 9,232 - Intangibles, net 802,606 962,094 ------------ ------------ TOTAL ASSETS $ 19,424,211 $ 20,196,984 LIABILITIES AND PARTNERS' DEFICIT LIABILITIES Notes Payable $ 28,304,000 $ 28,304,000 Accounts Payable 14,100 18,730 Partner Payables - 90,582 Accrued Interest 1,434,505 1,068,331 Other Accrued Expenses 3,695 180 Tenant Security Deposits 148,348 136,432 Rents Received in Advance 22,723 10,560 ------------ ------------ Total Liabilities 29,927,371 29,628,815 PARTNERS' DEFICIT (10,503,160) ( 9,431,831) ------------ ------------ TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 19,424,211 $ 20,196,984 The accompanying notes are an integral part of the financial statements. AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT Years Ended December 31, 1994, 1993 and 1992 1994 1993 1992 REVENUES Gross Rent Potential $ 3,410,464 $ 3,338,578 $ 3,270,175 Convenience Store Income 6,303 9,100 8,062 Less: Vacancies 85,129 139,522 235,033 Concessions - - 19,053 Quarters Allowance 13,384 13,271 15,379 Model 14,365 13,760 13,560 Net Rental Income 3,303,889 3,181,125 2,995,212 Other 120,232 101,062 107,626 ------------ ------------ ----------- 3,424,121 3,282,187 3,102,838 OPERATING EXPENSES Payroll and Related Expenses 218,110 210,459 229,034 Administrative 106,606 115,005 90,144 Real Estate Taxes and Insurance 34,830 49,486 48,755 Management Fee 169,936 163,523 150,744 Advertising and Promotion 22,732 22,168 24,962 Utilities 110,453 106,264 101,110 Repairs and Maintenance 17,484 40,499 22,190 Supplies 77,109 67,082 53,520 Services 99,175 108,136 118,981 ------------ ------------ ----------- 856,435 882,622 839,440 OPERATING INCOME 2,567,686 2,399,565 2,263,398 OTHER INCOME (EXPENSE) Depreciation ( 782,649) ( 780,405) ( 778,218) Amortization ( 159,488) ( 178,372) ( 197,255) Servicing Fee ( 143,812 ) ( 143,813) ( 155,797) Interest Expense (2,599,154) (2,452,021) (2,434,905) Interest Income 46,088 41,626 54,207 ------------ ------------ ----------- (3,639,015) (3,512,985) (3,511,968) NET LOSS (1,071,329) (1,113,420) (1,248,570) PARTNERS' DEFICIT - beginning of year (9,431,831) (8,318,411) (7,571,971) Capital Contribution - - 502,130 PARTNERS' DEFICIT - ------------ ----------- ----------- end of year $(10,503,160) $(9,431,831)$(8,318,411) The accompanying notes are an integral part of the financial statements. AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS Years Ended December 31, 1994, 1993 and 1992 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Tenants $ 3,446,749 $ 3,275,233 $ 3,119,297 Cash Paid to Employees and Suppliers (866,537) (900,351) (891,680) Interest Received 46,088 41,626 54,207 Interest Paid (2,232,980) (2,258,114) (2,243,968) Servicing Fee (143,812) (143,813) (155,797) Net Cash Provided (Used) by ----------- ----------- ----------- Operating Activities 249,508 14,581 (117,941) CASH FLOWS FROM INVESTING ACTIVITIES Capital Expenditures (86,573) (50,022) (55,611) Net Partner Repayments (Advances) 66,156 (119,203) (23,593) Net Cash Used by Investing ----------- ----------- ----------- Activities (20,417) (169,225) (79,204) CASH FLOWS FROM FINANCING ACTIVITIES Bank Overdraft - - (17,766) Capital Contribution - - 502,130 Repayment of Revenue Bonds - (50,000) (37,000) Repayment of Development Fee (90,582) (199,168) - Net Cash Provided (Used) by ----------- ----------- ----------- Financing Activities (90,582) (249,168) 447,364 NET INCREASE (DECREASE) IN CASH AND ----------- ----------- ----------- CASH EQUIVALENTS 138,509 (403,812) 250,219 CASH AND CASH EQUIVALENTS - beginning of year 1,344,621 1,748,433 1,498,214 CASH AND CASH EQUIVALENTS - ----------- ----------- ----------- end of year $ 1,483,130 $ 1,344,621 $ 1,748,433 The accompanying notes are an integral part of the financial statements. AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS Years Ended December 31, 1994, 1993 and 1992 1994 1993 1992 RECONCILIATION OF NET LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Net Loss $(1,071,329) $(1,113,420)$(1,248,570) Depreciation 782,649 780,405 778,218 Amortization 159,488 178,372 197,255 Bad Debt Expense 245 670 14,786 Changes in Operating Assets and Liabilities - Increase in - Tenant Receivables ( 1,451) ( 4,322) ( 11,426) Prepaid Insurance ( 9,232) - - Increase (Decrease) in - Accounts Payable and Accrued Expenses ( 1,115) ( 18,399) ( 67,026) Accrued Interest 366,174 193,907 190,937 Tenant Security Deposits 11,916 9,478 18,610 Rents Received in Advance 12,163 ( 12,110) 9,275 NET CASH PROVIDED (USED) BY ----------- ----------- ----------- OPERATING ACTIVITIES $ 249,508 $ 14,581 $( 117,941) The accompanying notes are an integral part of the financial statements. AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies and practices followed by the partnership are as follows: ORGANIZATION - Auction Street Associates Limited Partnership was organized under the laws of the state of South Carolina on November 1, 1985, for the purpose of acquiring, developing and operating a 500-unit apartment complex in Memphis, Tennessee known as Riverset Apartments. The partnership commenced operations on July 1, 1988. Phase I, which contains 352 apartment units, was completed prior to December 31, 1988. Phase II, which contains 148 apartment units, was completed prior to December 31, 1990. Venture Technology Properties is the general partner and manages the partnership and is allocated 97% of net operating losses and profits and gains. CASH EQUIVALENTS - The partnership considers all money market accounts and highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The partnership maintains at various financial institutions cash equivalents which may at times exceed federally insured amounts. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations. Depreciation is provided on the straight-line basis for real property and accelerated basis for personal property over the estimated useful lives of the depreciable assets. INTANGIBLE ASSETS - Intangible assets consist of organization and start-up costs which are amortized using the straight-line method over five years and bond issue and financing costs which are amortized over the term of the bonds. INCOME TAXES - No provision for income taxes is reflected in the financial statements since the tax effects of the partnership's income or loss are passed through to the individual partners. PROPERTY AND EQUIPMENT Property and equipment consist of the following: 1994 1993 Land $ 983,986 $ 983,986 Buildings 13,496,795 13,485,166 Furniture and Equipment 984,431 925,340 Land - Phase II 1,497,283 1,497,283 Buildings - Phase II 4,848,690 4,848,690 Furniture and Equipment - Phase II 174,441 158,588 ------------ ------------ 21,985,626 21,899,053 Accumulated Depreciation ( 4,940,158) ( 4,157,509) ------------ ------------ $ 17,045,468 $ 17,741,544 RESTRICTED CASH Restricted cash consists of the following: 1994 1993 Debt Service Reserve $ 391,427 $ 384,814 Replacement Reserve 79,611 54,865 Revenue Fund 8,782 13,046 Tenant Security Deposit Escrow Account 96,538 61,551 Taxes and Insurance Escrow Accounts 2,393 2,184 Project Fund - Phase II 7,601 6,467 Tenant Security Deposit Escrow Account - Phase II 42,454 40,728 Debt Service Reserve - Phase II 619,883 625,439 Replacement Reserve - Phase II 16,533 15,943 Revenue Fund - Phase II - 168 Taxes and Insurance Escrow Accounts - Phase II 461 328 Bond Fund - A - Phase II 159,753 121,124 Bond Fund - B - Phase II 14,750 9,953 ----------- ----------- $ 1,440,186 $ 1,336,610 The debt service reserve was funded from the initial proceeds of permanent financing of the project and is equal to 2% of permanent financing and a working capital loan. The reserve may be increased by unexpended financeable development costs as defined by the Indenture of Trust between the issuer of the permanent financing bonds and the purchaser. At no time will the reserve exceed $1,900,000 nor be less than 2% of the aggregate of the outstanding permanent financing and the working capital loan. The reserve will be used to pay any base interest which operations cannot pay. The Bond Proceeds Fund and Revenue Fund were created by the permanent loan agreement and are restricted by the loan agreement. INTANGIBLES Intangibles consist of the following: 1994 1993 Organization and Start-Up Costs $ 188,838 $ 188,838 Bond Issue and Financing Costs 644,450 644,450 Organization and Start-Up Costs - Phase II 296,238 296,238 Bond Issue and Financing Costs - Phase II 719,807 719,807 ----------- ----------- 1,849,333 1,849,333 Accumulated Amortization (1,046,727) ( 887,239) ----------- ----------- $ 802,606 $ 962,094 NOTES PAYABLE Notes payable consist of the following: 1994 1993 Industrial Revenue Bonds - Phase I $ 19,000,000 $ 19,000,000 Working Capital Loan - Phase I 175,000 175,000 Series 1989 A Industrial Revenue Bonds - Phase II 7,610,000 7,610,000 Series 1989 B Industrial Revenue Bonds - Phase II 1,519,000 1,519,000 ------------ ------------ $ 28,304,000 $ 28,304,000 The Industrial Revenue Bonds on Phase I issued by Memphis City Revenue Finance Corporation and held by The Shelter/CAN-American Group are at a base interest rate of 10.5% with a contingent rate of 5.5% through August 2, 1989, with base interest payable monthly. After that date, base interest at 7.875% is due monthly and contingent interest totaling 8.125% is due quarterly. Contingent interest after August 2, 1989, is payable at the lesser of 2.1% plus the aggregate amount of unpaid priority contingent interest for all previous years to the extent the partnership has positive cash flow and an additional 6.025% limited to one half of positive cash flow after payment of contingent interest payable from 100% of cash flow. Priority interest for any given year is calculated based upon the lesser of unpaid contingent interest of 2.1% for such year or .5%. Upon any sale or any refinancing of the property, the net proceeds from the sale or refinancing are allocated to pay the loan, then to pay the bondholder cumulative deferred interest up to 10.75% from August 3, 1989. Any excess proceeds then repay any operating loans made by the general partner, then fifty percent of such remaining excess is allocated to the bondholder to pay cumulative deferred interest up to 16% from the inception of the loan. Contingent interest is $399,000 for 1994, 1993 and 1992. As of December 31, 1994, contingent interest payable to the extent of positive cash flow was $137,087. Total unpaid priority contingent interest totaled $3,015,114 and an additional $6,200,729 must be paid to the extent of fifty percent of any positive cash flow from operations or future sale of the property. The bonds are redeemable after an initial seven year period at the option of the partnership and are subject to remarketing on or after August 3, 1998. The bonds mature November 1, 1999. The bonds are collateralized by the real property and an assignment of rents. Provisions of the working capital loan are identical to those of the Phase I Industrial Revenue Bonds. The Series 1989 A and Series 1989 B Industrial Revenue Bonds are held by Union Planters National Bank and bear interest at 9.5% and 10%, respectively. Interest on the Series 1989 A Bonds is payable on April 1 and October 1 of each year and the bonds mature on October 1, 2019. Principal and interest on the Series 1989 B Bonds is due on April 1 and October 1 of each year with final payment due on April 1, 2019. Aggregate maturities of the Series B Industrial Revenue Bonds for the five years subsequent to December 31, 1994, are as follows: December 31, December 31, December 31, December 31, December 31, 1995 1996 1997 1998 1999 $ 68,000 $ 78,000 $ 88,000 $ 85,000 $ 101,000 Interest expense for Phase I and Phase II totaled $1,647,118 and $952,036, respectively, for 1994, $1,510,031 and $941,990, respectively, for 1993 and $1,510,031 and $924,874, respectively, for 1992. PROPERTY TAXES The partnership is required to pay only a minimal amount of property taxes because it received a tax abatement on most of its property taxes through 2001. RELATED PARTY TRANSACTIONS Transactions and outstanding balances with partners are summarized as follows: 1994 1993 1992 Accounts Receivable $ 11,676 $ 27,623 $ 2,447 Management Fee Expense $ 117,811 $ 114,522 $ 109,279 Accrued Management Fees $ - $ - $ 9,490 Development Fee Payable $ - $ 90,582 $ 289,750 Accounts Receivable - Phase II $ 64,964 $ 115,173 $ 21,146 Management Fee Expense - Phase II $ 52,125 $ 49,001 $ 41,465 Accrued Management Fees - Phase II $ - $ - $ 3,940 Capital Contribution $ - $ - $ 502,130 Management fees are paid to the managing partner for services rendered based on a percentage of revenue. The development fee payable is to be paid when all aspects of the Phase I Development are formally completed. During 1993, the partnership paid $199,168 of the fee to the developer and the remaining $90,582 was payable at year end. During 1994, the remaining fee of $90,582 was paid. During 1992, an additional capital contribution was made by the general partner from proceeds of a life insurance policy and was paid in accordance with a guarantee agreement for Phase II. CONTINGENCY The partnership is a defendant in a lawsuit filed by the trustee of the 1989 Series A and B Industrial Revenue Bonds. The suit was filed to enforce guaranty agreements signed by the general partner and managing general partner. It is the trustee's position that the guarantors should be required to replenish monies used from the debt service fund. The partnership contends that the guaranty has expired and there is no obligation on the part of the guarantors to replenish the funds paid by the trustee from the debt service reserve fund. If the suit is decided in favor of the plaintiff, management and counsel estimate he judgment against the partnership and general partner would not exceed $525,000. SUPPLEMENTARY INFORMATION AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP COMBINING BALANCE SHEET December 31, 1994 Combined After Phase I Phase II Eliminations ASSETS Property and Equipment, net $ 11,441,633 $ 5,603,835 $ 17,045,468 Cash and Cash Equivalents 595,597 887,533 1,483,130 Due from Phase II 11,059 - - Tenant Receivables 1,779 5,356 7,135 Partner Receivables 11,676 64,964 76,640 Prepaid Insurance 7,386 1,846 9,232 Intangibles, net 304,807 497,799 802,606 ------------ ----------- ------------ TOTAL ASSETS $ 12,373,937 $ 7,061,333 $ 19,424,211 LIABILITIES AND PARTNERS' DEFICIT LIABILITIES Notes Payable $ 19,175,000 $ 9,129,000 $ 28,304,000 Accounts Payable 10,753 3,347 14,100 Accrued Interest 262,923 1,171,582 1,434,505 Other Accrued Expenses 3,695 - 3,695 Due to Phase I - 11,059 - Tenant Security Deposits 103,833 44,515 148,348 Rents Received in Advance 16,748 5,975 22,723 ------------ ----------- ------------ Total Liabilities 19,572,952 10,365,478 29,927,371 PARTNERS' DEFICIT ( 7,199,015)( 3,304,145) (10,503,160) TOTAL LIABILITIES AND ------------ ----------- ------------ PARTNERS' DEFICIT $ 12,373,937 $ 7,061,333 $ 19,424,211 AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP COMBINING BALANCE SHEET December 31, 1993 Combined After Phase I Phase II Eliminations ASSETS Property and Equipment, net $ 11,960,060 $ 5,781,484 $ 17,741,544 Cash and Cash Equivalents 517,519 827,102 1,344,621 Due from Phase II 57,977 - - Tenant Receivables 3,403 2,526 5,929 Partner Receivables 27,623 115,173 142,796 Intangibles, net 357,060 605,034 962,094 ------------ ----------- ------------ TOTAL ASSETS $ 12,923,642 $ 7,331,319 $ 20,196,984 LIABILITIES AND PARTNERS' DEFICIT LIABILITIES Notes Payable $ 19,175,000 $ 9,129,000 $ 28,304,000 Accounts Payable 10,210 8,520 18,730 Partner Payables 90,582 - 90,582 Accrued Interest 125,835 942,496 1,068,331 Other Accrued Expenses 180 - 180 Due to Phase I - 57,977 - Tenant Security Deposits 95,204 41,228 136,432 Rents Received in Advance 8,139 2,421 10,560 ------------ ----------- ------------ Total Liabilities 19,505,150 10,181,642 29,628,815 PARTNERS' DEFICIT ( 6,581,508)( 2,850,323) ( 9,431,831) TOTAL LIABILITIES AND ------------ ----------- ------------ PARTNERS' DEFICIT $ 12,923,642 $ 7,331,319 $ 20,196,984 AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP COMBINING STATEMENT OF OPERATIONS Year Ended December 31, 1994 Phase I Phase II Total REVENUES Gross Rent Potential $ 2,401,569 $ 1,008,895 $ 3,410,464 Convenience Store Income - 6,303 6,303 Less: Vacancies 54,978 30,151 85,129 Quarters Allowance 9,163 4,221 13,384 Model 14,365 - 14,365 Net Rental Income 2,323,063 980,826 3,303,889 Other 78,599 41,633 120,232 ----------- ----------- ----------- 2,401,662 1,022,459 3,424,121 OPERATING EXPENSES Payroll and Related Expenses 153,469 64,641 218,110 Administrative 66,223 40,383 106,606 Real Estate Taxes and Insurance 27,279 7,551 34,830 Management Fee 117,811 52,125 169,936 Advertising and Promotion 16,058 6,674 22,732 Utilities 77,699 32,754 110,453 Repairs and Maintenance 14,818 2,666 17,484 Supplies 56,460 20,649 77,109 Services 71,931 27,244 99,175 ---------- ----------- ----------- 601,748 254,687 856,435 OPERATING INCOME 1,799,914 767,772 2,567,686 OTHER INCOME (EXPENSE) Depreciation ( 589,147) ( 193,502) ( 782,649) Amortization ( 52,253) ( 107,235) ( 159,488) Servicing Fee ( 143,812) - ( 143,812) Interest Expense (1,647,118) ( 952,036) (2,599,154) Interest Income 14,909 31,179 46,088 ----------- ----------- ----------- (2,417,421) (1,221,594) (3,639,015) ----------- ----------- ----------- NET LOSS $( 617,507)$( 453,822) $(1,071,329) AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP COMBINING STATEMENT OF OPERATIONS Year Ended December 31, 1993 Phase I Phase II Total REVENUES Gross Rent Potential $ 2,347,606 $ 990,972 $ 3,338,578 Convenience Store Income - 9,100 9,100 Less: Vacancies 93,159 46,363 139,522 Quarters Allowance 9,778 3,493 13,271 Model 13,760 - 13,760 Net Rental Income 2,230,909 950,216 3,181,125 Other 66,613 34,449 101,062 ----------- ----------- ----------- 2,297,522 984,665 3,282,187 OPERATING EXPENSES Payroll and Related Expenses 149,093 61,366 210,459 Administrative 61,914 53,091 115,005 Real Estate Taxes and Insurance 37,387 12,099 49,486 Management Fee 114,522 49,001 163,523 Advertising and Promotion 15,976 6,192 22,168 Utilities 75,656 30,608 106,264 Repairs and Maintenance 21,622 18,877 40,499 Supplies 45,568 21,514 67,082 Services 78,147 29,989 108,136 ----------- ----------- ----------- 599,885 282,737 882,622 OPERATING INCOME 1,697,637 701,928 2,399,565 OTHER INCOME (EXPENSE) Depreciation ( 584,080) ( 196,325) ( 780,405) Amortization ( 71,137) ( 107,235) ( 178,372) Servicing Fee ( 143,813) - ( 143,813) Interest Expense (1,510,031) ( 941,990) (2,452,021) Interest Income 17,736 23,890 41,626 ----------- ----------- ----------- (2,291,325) (1,221,660) (3,512,985) ----------- ----------- ----------- NET LOSS $( 593,688)$( 519,732) $(1,113,420) AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP COMBINING STATEMENT OF OPERATIONS Year Ended December 31, 1992 Phase I Phase II Total REVENUES Gross Rent Potential $ 2,292,601 $ 977,574 $ 3,270,175 Convenience Store Income - 8,062 8,062 Less: Vacancies 137,182 97,851 235,033 Concessions 17,382 1,671 19,053 Quarters Allowance 7,759 7,620 15,379 Model 13,560 - 13,560 Net Rental Income 2,116,718 878,494 2,995,212 Other 82,202 25,424 107,626 ----------- ----------- ----------- 2,198,920 903,918 3,102,838 OPERATING EXPENSES Payroll and Related Expenses 161,094 67,940 229,034 Administrative 57,075 33,069 90,144 Real Estate Taxes and Insurance 27,700 21,055 48,755 Management Fee 109,279 41,465 150,744 Advertising and Promotion 17,743 7,219 24,962 Utilities 72,652 28,458 101,110 Repairs and Maintenance 12,270 9,920 22,190 Supplies 34,919 18,601 53,520 Services 84,025 34,956 118,981 ----------- ----------- ----------- 576,757 262,683 839,440 OPERATING INCOME 1,622,163 641,235 2,263,398 OTHER INCOME (EXPENSE) Depreciation ( 574,874) ( 203,344) ( 778,218) Amortization ( 90,020) ( 107,235) ( 197,255) Servicing Fee ( 155,797) - ( 155,797) Interest Expense (1,510,031) ( 924,874) (2,434,905) Interest Income 28,590 25,617 54,207 ----------- ----------- ----------- (2,302,132) (1,209,836) (3,511,968) ----------- ----------- ----------- NET LOSS $( 679,969)$( 568,601) $(1,248,570) AUCTION STREET ASSOCIATES LIMITED PARTNERSHIP SCHEDULES OF PROJECT CASH FLOW FOR PHASE I Years Ended December 31, 1994, 1993 and 1992 1994 1993 1992 SOURCES OF CASH Cash Received from Tenants $ 2,420,295 $ 2,297,354 $ 2,209,370 Interest Received 14,909 17,736 28,590 Draws from Reserves - 185,867 137,282 Net Phase II Collections 46,918 - 32,339 Net Partner Collections 15,947 - - ----------- ----------- ----------- 2,498,069 2,500,957 2,407,581 USES OF CASH Operating Expenses Paid 748,657 755,727 776,837 Debt Service 1,510,031 1,510,031 1,510,031 Net Partner Advances - 25,176 2,447 Net Phase II Advances - 27,416 - Additions to Reserves 62,291 - - ----------- ----------- ----------- 2,320,979 2,318,350 2,289,315 Project Cash Flow 177,090 182,607 118,266 OTHER USES (SOURCES) OF CASH Capital Expenditures 70,720 45,035 55,611 Uses of Reserves ( 62,291) 185,867 137,282 Development Fee Payment 90,582 199,168 - 99,011 430,070 192,893 ----------- ----------- ----------- INCREASE (DECREASE) IN CASH $ 78,079 $( 247,463) $( 74,627) -----END PRIVACY-ENHANCED MESSAGE-----