Item 1. Business
(a) General Development of Business -------------------------------
Senior Income Fund L.P. (the "Partnership", formerly Shearson Lehman Senior Income Fund Limited Partnership), a Delaware limited partnership, was formed on October 14, 1986 pursuant to a Limited Partnership Agreement, as amended and restated on March 17, 1987 pursuant to an Amended and Restated Limited Partnership Agreement (the "Partnership Agreement"). The Partnership was formed for the purpose of acquiring a general partnership interest in Shearson August Property Partnership, a California general partnership (the "Property Partnership"), with August Financial Partners II ("AFP-II") an affiliate of August Financial Corporation ("August").
The general partner of the Partnership is Senior Income Fund Inc. (the "General Partner", formerly Shearson Lehman Senior Income Fund, Inc.), a Delaware corporation, and wholly owned subsidiary of Lehman Brothers Inc. (formerly Shearson Lehman Brothers Inc.).
On November 21, 1996, the Partnership purchased the general partnership interest of the successor to AFP-II for a purchase price of $850,000. As a result of such purchase, all of the Property Partnership's assets were distributed to the Partnership and the Property Partnership was dissolved. Accordingly, all sale proceeds received upon a sale of any property belong to the Partnership and no amount is owed to AFP-II. The Partnership will continue until December 31, 2036 unless terminated earlier pursuant to the provisions of the Partnership Agreement.
The Property Partnership was formed to acquire, operate and ultimately sell four specified residential properties for senior citizens (the "Properties") as follows: (i) Pacific Inn, a 134-unit apartment complex located in Torrance, California; (ii) Nohl Ranch Inn, a 133-unit apartment complex located in Anaheim, California; (iii) Ocean House, a 121-unit apartment complex located in Santa Monica, California, and; (iv) Prell Gardens, a 102-unit apartment complex located in Van Nuys, California.
On August 1, 1997, the Partnership closed the sale of three of its four Properties -- Prell Gardens, Nohl Ranch and Pacific Inn, for net proceeds of $30,148,357. On October 13, 1998, the Partnership closed on the sale of the remaining property, Ocean House, for a net selling price of $998,579. The General Partner is in the process of winding up the Partnership's affairs and expects to dissolve the Partnership during 1999. Reference is made to Item 7 for a discussion of the sales.
(b) Financial Information about Industry Segments ---------------------------------------------
Substantially all of the Partnership's revenues, operating profit or loss and assets relate solely to its interest as general partner of the Property Partnership whose operating profit or loss and assets relate to its ownership and operation of the Properties, until November 21, 1996, at which time the Partnership purchased AFP-II's general partner interest in the Property Partnership, as noted in Item 1(a).
(c) Narrative Description of Business ---------------------------------
The Partnership's principal objectives at inception were:
(1) to provide quarterly cash distributions a portion of which will be "tax sheltered;" (2) to preserve and protect capital; (3) to achieve long-term appreciation in the value of the Properties for distributions upon sale of the Properties.
Presently, the General Partner is in the process of winding up the Partnership's affairs and expects to dissolve the Partnership in accordance with the Partnership Agreement during 1999.
(d) Employees ---------
The Partnership has no employees.
Item 2.
Item 2. Properties
As of December 31, 1998, all four of the Partnership's properties had been sold.
Item 3.
Item 3. Legal Proceedings
The Registrant is not subject to any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the holders of Units ("Limited Partners") during the fourth quarter of the year for which this report is filed.
PART II
Item 5.
Item 5. Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters
(a) Market Price Information
There is no established trading market for the units nor is there anticipated to be.
(b) Holders
As of December 31, 1998, there were 3,298 Limited Partners of record.
(c) Cash Distributions per Unit
As a result of the sale of Ocean House, the Partnership made a special distribution of $1.11 per Unit on November 17, 1998, representing net sales proceeds and a portion of the Partnership's cash reserves. The remaining reserves will be used to pay the Partnership's liabilities and expenses through liquidation. If any proceeds remain, the Partnership intends to make another distribution upon liquidation.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
(a) Liquidity and Capital Resources -------------------------------
On June 9, 1997, the Partnership executed an agreement with an unaffiliated third party, MBK Senior Properties, Ltd. (the "Buyer") to sell the Partnership's four Properties (the "Sale") for $36,300,000, subject to adjustments and prorations for closing costs, and a credit for the cost to repair earthquake damage at the Ocean House property. On August 1, 1997, the Partnership closed the Sale for three of the four Properties - Prell Gardens, Nohl Ranch and Pacific Inn, for net proceeds of $30,148,357. On October 13, 1998 the Partnership closed on the sale of the fourth property, Ocean House. The gross selling price of the property was $5,172,750, less a credit for cost of repairs due to earthquake damages of $4,174,171, resulting in a net selling price of $998,579.
As a result of the Sales, the Partnership suspended the payment of quarterly cash distributions beginning with the second quarter 1997 distribution which would have been paid on or about August 15, 1997. On August 25, 1997, the Partnership paid a cash distribution in the amount of $5.75 per Unit, representing proceeds from the sale of Prell Gardens, Nohl Ranch, and Pacific Inn and cash flow from operations for the second quarter of 1997. On November 17, 1998, the Partnership made a special distribution of $1.11 per Unit, representing net sales proceeds from the sale of Ocean House, and a portion of the Partnership's cash reserves. The remaining reserves will be used to pay the Partnership's liabilities and expenses through liquidation. If any proceeds remain, the Partnership intends to make another distribution upon liquidation. The General Partner is in the process of winding up the Partnership's affairs and expects to dissolve the Partnership during 1999.
At December 31, 1998, the Partnership had cash and cash equivalents of $1,060,585 compared to $5,320,317 at December 31, 1997. The decrease is primarily due to the payment of a special cash distribution on November 17, 1998, representing net sales proceeds from the sale of Ocean House, and a portion of the Partnership's cash reserves.
Primarily as a result of the sale of Ocean House, the following balance sheet categories decreased from December 31, 1997 to December 31, 1998: prepaid expenses, accounts payable and accrued expenses, deferred rent payable and security deposits payable. Due to affiliates decreased from $61,973 at December 31, 1997 to $22,000 at December 31, 1998. The decrease reflects lower Partnership management fees as a result of the sale of the Properties.
Market Risk - ----------- The Partnership's principal market risk exposure is interest rate risk. As a result of the sale of Ocean House, the Partnership no longer has any properties or debt, and its assets consist primarily of cash and cash equivalents. Accordingly, the Partnership's interest risk exposure is primarily limited to interest earned on the Partnership's cash and cash equivalents, which are invested at short-term rates. Such risk is not considered material to the Partnership's operations.
Year 2000 Initiatives - --------------------- The Year 2000 compliance issue concerns the ability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in computer system failures or miscalculations causing disruptions of operations. The Year 2000 issue affects almost all companies and organizations.
As noted above, all of the Partnership's properties have been sold and it is anticipated that the Partnership will dissolve prior to December 31, 1999. In the event that the Partnership is not liquidated prior to December 31, 1999, potential Year 2000 issues relate primarily to outside vendors which provide the Partnership's administrative services including accounting, tax preparation and transfer agent services. Such services are heavily reliant on computer systems, software products and equipment which may or may not be Year 2000 compliant. It is anticipated that the cost of vendor compliance with Year 2000 problems will be borne primarily by vendors. Although it is not possible at present to give an estimate of the cost of this work to the Partnership, the General Partner does not expect such costs to have a material adverse impact on the Partnership's long term results of operations.
(b) Results of Operations ---------------------
1998 versus 1997 - ----------------
Partnership operations resulted in net income of $2,349,347 for the year ended December 31, 1998, compared to $12,770,868 for the year ended December 31, 1997. Net income in 1997 included a $11,839,814 gain on sale of Prell Gardens, Nohl Ranch and Pacific Inn, while net income in 1998 included a $2,072,451 gain on the sale of Ocean House. Excluding these gains, net income from operations totaled $276,896 in 1998 compared with $931,054 in 1997. The decrease is primarily due to a decrease in rental income, as a result of the sale of three of the Properties in 1997, which exceeded the decrease in all expense categories. The decrease also reflects the sale of Ocean House in October 1998.
Primarily as a result of the sale of three of the Partnership's Properties on August 1, 1997, rental income and all expense categories decreased from 1997 to 1998. Loss on real estate held for disposition was $-0- in 1998 compared to $48,000 in 1997. The 1997 amount represents costs associated with balcony restoration at Ocean House which were expensed through the loss provision in compliance with Statement of Financial Accounting Standards No. 121.
1997 versus 1996 - ----------------
Partnership operations for the year ended December 31, 1997 resulted in net income of $12,770,868 compared to $3,154,499 for 1996. The increase is primarily due to the gain on sale of properties in the amount of $11,839,814. Excluding this gain, the Partnership incurred net income from operations of $931,054 for the year ended December 31, 1997. The decrease in net income from operations was primarily the result of lower rental income due to the sale of properties, partially offset by the elimination of depreciation expense in 1997 as a result of the reclassification of the Properties as "real estate assets held for disposition". The 1996 amount also includes the receipt of insurance settlement proceeds.
Rental income was $8,232,614 for the year ended December 31, 1997, compared to $10,782,123 for 1996. The decrease is due to the sale of three of the Properties on August 1, 1997, which was partially offset by an increase in rental income from Ocean House.
As a result of the sale of three of the Partnership's Properties on August 1, 1997, the following expense categories decreased from 1996 to 1997: payroll, rent and utilities, supplies, repairs and maintenance and real estate taxes.
General and administrative expenses were $1,527,054 in 1997 as compared with $1,774,183 in 1996. The decrease is the result of the sale of the three properties partially offset by an increase in management fees at Ocean House and an increase in Partnership servicing expense. During 1997, certain expenses incurred by the General Partner, its affiliates, and an unaffiliated third party service provider in servicing the Partnership, which were voluntarily absorbed by affiliates of the General Partner in prior periods, were reimbursable to the General Partner and its affiliates.
Loss on real estate held for disposition totaled $48,000 for the year ended December 31, 1997. This represents costs associated with balcony restoration at Ocean House which were expensed through the loss provision in compliance with Statement of Financial Accounting Standards No. 121.
For the years ended December 31, 1997 and 1996, Ocean House reported average occupancy of 95% and 91%, respectively.
Item 8.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1998, which is filed as an exhibit under Item 14.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Partnership
The Partnership has no directors or officers. The General Partner has general responsibility for all aspects of the Partnership's operation. Certain of the officers and directors of the General Partner are also officers and employees of Lehman Brothers Inc.
Certain officers and directors of the General Partner are now serving (or in the past have served) as officers or directors of entities which act as general partners of a number of limited partnerships which have sought protection under the provisions of the Federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own assets which have been adversely affected by the economic conditions in the markets in which that asset is located and, consequently, the partnerships sought protection of the bankruptcy laws to protect the partnerships' assets from loss through foreclosure.
The directors and principal officers of the General Partner are listed below.
Name Office ---- ------ Rocco F. Andriola Director Michael T. Marron Director, President and Chief Financial Officer Lawrence M. Ostow Vice President
Rocco F. Andriola, 40, is a Managing Director of Lehman Brothers Inc. in its Diversified Asset Group and has held such position since October 1996. Since joining Lehman in 1986, Mr. Andriola has been involved in a wide range of restructuring and asset management activities involving real estate and other direct investment transactions. From June 1991 through September 1996, Mr. Andriola held the position of Senior Vice President in Lehman's Diversified Asset Group. From June 1989 through May 1991, Mr. Andriola held the position of First Vice President in Lehman's Capital Preservation and Restructuring Group. From 1986-89, Mr. Andriola served as a Vice President in the Corporate Transactions Group of Shearson Lehman Brothers' office of the general counsel. Prior to joining Lehman, Mr. Andriola practiced corporate and securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola received a B.A. from Fordham University, a J.D. from New York University School of Law, and an LL.M in Corporate Law from New York University's Graduate School of Law.
Michael T. Marron, 35, is a Vice President of Lehman Brothers and has been a member of the Diversified Asset Group since 1990 where he has actively managed and restructured a diverse portfolio of syndicated limited partnerships. Prior to joining Lehman Brothers, Mr. Marron was associated with Peat Marwick Mitchell & Co. serving in both its audit and tax divisions from 1985 to 1989. Mr. Marron received his B.S. degree from the State University of New York at Albany and an M.B.A. from Columbia University.
Lawrence M. Ostow, 31, is a Vice President of Lehman Brothers and is responsible for the management of commercial real estate in the Diversified Asset Group. Mr. Ostow joined Lehman Brothers in September 1992. Prior to that, Mr. Ostow was a Senior Consultant with Arthur Andersen & Co. in the Real Estate Services Group, beginning in July 1990. Mr. Ostow earned an M.B.A. from the Stern School of Business in 1997 and a B.A. degree in Economics from the University of Michigan in 1990.
Item 11.
Item 11. Executive Compensation
The Directors and Officers of the General Partner do not receive any salaries or other compensation from the Partnership. See Item 13, "Certain Relationships and Related Transactions," for a description of certain transactions of the General Partner and its affiliates with the Partnership.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners.
As of December 31, 1998, one party was known by the Partnership to be the beneficial owner of more than five percent of the Units of the Partnership. The owner, LAVRA, Inc., owns a total of 585,482.75 Units or 12.1% of the Units in one account. LAVRA's address is 245 Fischer Avenue, Suite D-1, Costa Mesa, California, 92626.
(b) Security ownership of management.
Officers and Directors of the General Partner owned no units of the Partnership as of December 31, 1998.
(c) Changes in control.
None.
Item 13.
Item 13. Certain Relationships and Related Transactions
For fees paid and reimbursed to the General Partner or its affiliates during 1998, 1997 and 1996, see Note 5, "Transactions with Related Parties," to the Consolidated Financial Statements which is incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1998, which is filed as an exhibit under Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements:
Consolidated Balance Sheets - At December 31, 1998 and 1997 .....(1)
Consolidated Statements of Partners' Capital (Deficit) - For the years ended December 31, 1998, 1997 and 1996 ....................(1)
Consolidated Statements of Operations - For the years ended December 31, 1998, 1997 and 1996 ................................(1)
Consolidated Statements of Cash Flows - For the years ended December 31, 1998, 1997 and 1996 ................................(1)
Notes to the Consolidated Financial Statements ..................(1)
Report of Independent Accountants ...............................(1)
(a) (2) Financial Statement Schedules:
No schedules are presented because the information is not applicable or is included in the Financial Statements or the notes thereto.
(1) Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1998, filed as an exhibit under Item 14.
(a) (3)Exhibits
3.1 The Partnership's Amended and Restated Agreement of Limited Partnership, Dated March 17, 1987, is hereby incorporated by reference to Exhibit A to the Prospectus contained in Registration Statement No. 33-9921, which registration Statement (the "Registration Statement") was declared effective by the Securities and Exchange Commission on January 30, 1987.
3.2 The Capital Contribution Agreement by and among the General Partner and Shearson Group is hereby incorporated by reference to Exhibit 3.2 to the Registration Statement.
10.1 Form of the Management Agreement dated as of April 5, 1988 between the Partnership and the Operator is incorporated by reference to Exhibit 10.2 to the Registration Statement.
10.2 The form of Property Partnership Agreement between the Partnership and the Property Partner is hereby incorporated by reference to Exhibit 10.6 to the Registration Statement.
10.3 The form of Purchase Agreement concerning the acquisition of the Properties is hereby incorporated by reference to Exhibit No. 10.4 to the Registration Statement.
13.1 Annual Report to Unitholders for the year ended December 31, 1998.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
On October 27, 1998 the Partnership filed a report on Form 8-K reporting the close of the sale of Ocean House.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SENIOR INCOME FUND L.P.
BY: SENIOR INCOME FUND INC. General Partner
Date: March 31, 1999 BY: /s/Michael T. Marron -------------------- Name: Michael T. Marron Title: Director, President and Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SENIOR INCOME FUND L.P.
BY: SENIOR INCOME FUND INC. General Partner
Date: March 31, 1999 BY: /s/Rocco F. Andriola -------------------- Name: Rocco F. Andriola Title: Director
Date: March 31, 1999 BY: /s/Michael T. Marron -------------------- Name: Michael T. Marron Title: Director, President and Chief Financial Officer
Date: March 31, 1999 BY: /s/Lawrence M. Ostow -------------------- Name: Lawrence M. Ostow Title: Vice President