United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1997
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition period from ______ to ______
Commission File Number: 0-18333
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
Exact Name of Registrant as Specified in its Charter
Delaware 13-3516912
State or Other Jurisdiction of
Incorporation or Organization I.R.S. Employer Identification No.
3 World Financial Center, 29th Floor,
New York, NY Attn: Andre Anderson 10285
Address of Principal Executive Offices Zip Code
(212) 526-3237
Registrant's Telephone Number, Including Area Code
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 ____
Balance Sheets At September 30, At December 31,
1997 1996
Assets
Investment in mortgage revenue bond,
working capital loan, and capital
improvements loan $ 12,880,412 $ 12,983,476
Cash and cash equivalents 368,311 410,449
Mortgage acquisition fees, net of accumulated
amortization of $360,709 and $328,609 in
1997 and 1996, respectively 67,291 99,391
Total Assets $ 13,316,014 $ 13,493,316
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 41,725 $ 48,523
Due to affiliates 11,000 0
Distributions payable 0 162,105
Total Liabilities 52,725 210,628
Partners' Capital (Deficit):
General Partner (63,354) (63,160)
BAC Holders (2,140,000 BACS outstanding) 13,326,643 13,345,848
Total Partners' Capital 13,263,289 13,282,688
Total Liabilities and Partners' Capital $ 13,316,014 $ 13,493,316
Statement of Partners' Capital (Deficit)
For the nine months ended September 30, 1997
General BAC
Partner Holders Total
Balance at December 31, 1996 $ (63,160) $ 13,345,848 $ 13,282,688
Net income 2,213 219,127 221,340
Cash distributions (2,407) (238,332) (240,739)
Balance at September 30, 1997 $ (63,354) $ 13,326,643 $ 13,263,289
Statements of Operations
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
Revenue
Share of earnings from investment
in mortgage revenue bond $ 129,333 $ 162,844 $ 366,697 $ 464,526
Other Interest 3,335 4,321 10,565 14,520
Total Revenue 132,668 167,165 377,262 479,046
Expenses
General and administrative 38,585 24,347 123,822 64,933
Amortization of mortgage costs 10,700 10,700 32,100 32,100
Total Expenses 49,285 35,047 155,922 97,033
Net Income $ 83,383 $ 132,118 $ 221,340 $ 382,013
Net Income Allocated:
To the General Partner $ 833 $ 1,321 $ 2,213 $ 3,820
To the BAC Holders 82,550 130,797 219,127 378,193
$ 83,383 $ 132,118 $ 221,340 $ 382,013
Per BAC unit
(2,140,000 outstanding) $.04 $.06 $.10 $.18
Statements of Cash Flows
For the nine months ended September 30, 1997 1996
Cash Flows From Operating Activities:
Net income $ 221,340 $ 382,013
Adjustments to reconcile net income to net cash
provided by operating activities:
Share of earnings from investment in mortgage
revenue bond (366,697) (464,526)
Interest received on mortgage revenue bond 469,761 652,925
Amortization 32,100 32,100
Increase in cash arising from changes in
operating assets and liabilities:
Accounts payable and accrued expenses (6,798) 4,805
Due to affiliates 11,000 0
Net cash provided by operating activities 360,706 607,317
Cash Flows From Financing Activities:
Cash distributions (402,844) (808,386)
Net cash used for financing activities (402,844) (808,386)
Net decrease in cash and cash equivalents (42,138) (201,069)
Cash and cash equivalents, beginning of period 410,449 679,620
Cash and cash equivalents, end of period $ 368,311 $ 478,551
Notes to the Financial Statements
The unaudited interim financial statements should be read in conjunction with
the Partnership's annual 1996 audited financial statements within Form 10-K.
The unaudited interim financial statements include all normal and reoccurring
adjustments which are, in the opinion of management, necessary to present a
fair statement of financial position as of September 30, 1997 and the results
of operations for the three and nine months ended September 30, 1997 and 1996,
and cash flows for the nine months ended September 30, 1997 and 1996, and the
statement of partner's capital (deficit) for the nine months ended
September 30, 1997. Results of operations for the period are not necessarily
indicative of the results to be expected for the full year.
Certain prior year amounts have been reclassified in order to conform to the
current year's presentation.
The following significant events have occurred subsequent to fiscal year 1996,
or the following material contingencies exist and require disclosure in this
interim report per Regulation S- X, Rule 10-01, Paragraph (a) (5).
Effective as of January 1, 1997, the Partnership began reimbursing certain
expenses incurred by the General Partner and its affiliates in servicing the
partnership to the extent permitted by the partnership agreement. In prior
years, affiliates of the General Partner had voluntarily absorbed these
expenses.
Part I, Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The Partnership's operating income is derived from its investment in a mortgage
revenue bond (the "Bond") in the original principal amount of $15,515,000
secured by a first deed of trust on Camelot Lakes Apartments (the "Property").
Operating difficulties at the Property resulted in Camelot Lakes Associates,
an unaffiliated limited partnership (the "Original Borrower"), defaulting on
the November 1993 through January 1994 Bond payments. On February 1, 1994,
the General Partner reached a restructuring agreement with the Original
Borrower, whereby the ownership of the Property was transferred to the ConCam
Owner, and property management was transferred to ConAm, a major property
management company and an affiliate of the ConCam Owner. In addition to
ownership, the ConCam Owner assumed the obligations under the Bond and loan
documents on a nonrecourse basis. Pursuant to the restructuring, the
Partnership entered into a Forbearance Agreement (the "Forbearance Agreement")
with the ConCam Owner pursuant to which the Partnership, for a limited period,
agreed to forbear from exercising certain remedies against the ConCam Owner
and the Property provided certain conditions were met.
Pursuant to the Forbearance Agreement, the minimum interest payment on the
Bond increased to 7.0% on February 1, 1996 from the previous rate of 6.5%. In
February 1996, the ConCam Owner indicated that the Property's operations could
not support debt service payments at the increased rate in 1996. On May 8,
1996, as a result of negotiations with the ConCam Owner, the Partnership
executed a standstill agreement (the "Agreement") to generally allow a
continuance of the terms of the Forbearance Agreement provided that in lieu of
the minimum pay rate, the ConCam Owner pay as debt service all available cash
flow generated by the Property. The Agreement was in effect through
December 31, 1996, the expiration of the Forbearance Agreement. At such time,
the parties were engaged in good faith negotiations and therefore, the
Partnership further extended the Agreement with ConCam through December 31,
1997 to enable the General Partner to explore various alternatives and seek a
suitable resolution. Until such time, ConCam will continue to make "cashflow"
debt service payments in accordance with the Agreement. Payments made during
the first quarter and second quarters of 1997 approximated a 5.3% pay rate and
a 3.5% pay rate, respectively. Payments made during the third quarter of 1997
approximated a 2.85% pay rate.
The General Partner's objective is to maximize the recovery of the
Partnership's investment. Options evaluated by the General Partner have
included, among other things, a discounted pay-off of the Bond, which would
involve a sale of the Property prior to the scheduled maturity date of the Bond
on April 28, 1999, or a formal restructuring of the payment terms
under the Bond, which would likely involve a write-down of the principal
balance of the Bond based on the current market value of the Property. A
writedown or discounted pay-off of the principal balance of the Bond would not
be based on the carrying value reflected on the Partnership's balance sheets
(the Partnership accounts for its investment in the Bond using the equity
method of accounting), but rather, on the contractual obligations under the
Bond, the working capital loan and the capital improvements loan. Collectively,
these obligations, inclusive of deferred and accrued interest, totaled
approximately $20,000,000 as of September 30, 1997. A detailed description of
the Bond, the working capital loan and the capital improvements loan is
contained in the Partnership's 1996 Annual Report on Form 10-K.
Given that the Bond is collateralized by the Property, the principal repaid on
the Bond is dependent on the value of the Property. Therefore, in determining
the viability of the possible alternatives, the General Partner has considered
such factors as the potential for further change in the southeast Fresno rental
market and in the performance of the Property.
Based on its evaluation of conditions in the Fresno market, the General Partner
has concluded there is little indication that job growth, or, consequently,
demand for rental units, will improve substantially in the foreseeable future.
Given these factors, and taking into consideration the significant costs that
would be associated with a potential restructuring of the Bond, the General
Partner and ConCam have agreed to pursue a sale of the Property in order to
accelerate repayment of the Bond at a discount. To assist with sales efforts,
ConCam and the Partnership have retained Marcus & Millichap Real Estate
Investment Brokerage Company ("Marcus & Millichap"), a nationally-recognized
real estate firm. Marcus & Millichap is in the process of preparing marketing
brochures, and it is expected that the active marketing of the Property will
commence in the fourth quarter. In anticipation of initiating the marketing
process, ConCam has been concentrating its efforts on stabilizing Property
operations and positioning the Property in the Fresno market. To this end, the
Partnership authorized ConCam to utilize a portion of operating cash flow to
make certain Property improvements deemed necessary to ensure that the Property
is well-positioned for sale. ConCam will continue to make "cash-flow" debt
service payments to the Partnership until the Property is sold. However, as a
result of this increase in capital expenses at the Property level, the level of
debt service payments made by ConCam to the Partnership further decreased
during the third quarter, and additional decreases are expected in future
payments.
At September 30, 1997, the Partnership had cash and cash equivalents, which are
invested in tax-exempt money market accounts, of $368,311, compared with
$410,449 at December 31, 1996. The decrease is due to a decrease in net cash
flow from operations due to ConCam making lower minimum interest payments to
the Partnership.
Accounts payable and accrued expenses decreased to $41,725 at September 30,
1997, compared to $48,523 at December 31, 1996. The change is primarily due to
differences in the timing of payments. Due to affiliates increased to $11,000
at September 30, 1997, compared to $0 at December 31, 1996, primarily due to
administrative reimbursement accruals due through the 1997 period. Such
expenses were not reimbursable in prior periods.
Due to the Property's operating difficulties, the General Partner reduced the
cash distribution paid to the partners from an annual return of 7.5% to 5.0%,
effective with the second quarter of 1993. Beginning with the fourth quarter
of 1996, cash distributions were reduced to an annual return of 3.0%. The level
of debt service paid by ConCam declined further during the second quarter of
1997, and consequently, the 1997 second quarter distribution was reduced to an
annual return of 1.5%. In view of the decline in cash flow available to fund
distributions, cash distributions have been suspended beginning with the 1997
third quarter distribution, which would have been paid in November. In light
of the decision to begin marketing the Property, it is currently anticipated
that quarterly distributions will not be reinstated, and future distributions
to the Limited Partners likely will be in the form of liquidating
distributions. Total cash distributions declared year-to-date for 1997 were
$240,739, which included $238,332, or $.111 per Beneficial Assignee
Certificate, declared payable to the Limited Partners. As of September 30,
1997, total cash distributions paid to the Limited Partners since inception
have been funded 77% from operating cash flow and 23% from the Partnership's
cash reserves. The sources of the Partnership's future cash flows are expected
to be from payments of interest on the Bond, and interest earned on cash and
cash equivalents.
Results of Operations
The Partnership accounts for its investment in the Bond using the equity method
of accounting. Accordingly, the Partnership reports as income its share of the
Property's results of operations.
For the three and nine months ended September 30, 1997, the Partnership
generated net income of $83,383 and $221,340, respectively, compared with net
income of $132,118 and $382,013, respectively, for the three and nine months
ended September 30, 1996. The decreases primarily are due to decreases in the
Partnership's share of earnings from its investment in the Bond, increases in
general and administrative expenses and slight decreases in other interest.
The Partnership's share of earnings from investment in the Bond is based on the
Property's earnings before debt service, which decreased for the nine months
ended September 30, 1997 relative to the same period in 1996. The
Partnership's equity interest in the Property's earnings for the three and nine
months ended September 30, 1997 was $129,333 and $366,697, respectively,
compared to $162,844 and $464,526, respectively, for the three and nine months
ended September 30, 1996. The Partnership's equity interest in the Property's
earnings decreased for the 1997 periods, primarily due to lower rental income
and higher expenses incurred at the Property. Total income at Camelot Lakes
Apartments was $1,482,529 for the nine months ended September 30, 1997,
compared to $1,561,760 for the nine months ended September 30, 1996. The
decrease primarily is due to a decrease in rental income as a result of
decreased average occupancy at the Property. Total expenses at Camelot Lakes
Apartments, net of debt service, were $829,629 for the nine months ended
September 30, 1997, compared to $772,895 for the nine months ended
September 30, 1996. The increase primarily is due to higher administrative and
management fees, higher property taxes, and higher security, advertising and
promotion, utilities and repairs and maintenance expenses, which were partially
offset by a decrease in other Property expenses.
For the three and nine months ended September 30, 1997, other interest was
$3,335 and $10,565, respectively, compared to $4,321 and $14,520, respectively,
for the three and nine months ended September 30, 1996. The decreases
primarily are due to lower cash balances maintained by the Partnership during
1997.
Total Partnership expenses for the three and nine months ended September30,
1997 were $49,285 and $155,922, respectively, compared to $35,047 and
$97,033, respectively, for the three and nine months ended September 30, 1996.
The increases are attributable to higher general and administrative expenses
for the 1997 periods. General and administrative expenses for the three and
nine months ended September 30, 1997 were $38,585 and $123,822, respectively,
compared to $24,347 and $64,933 for the same periods in 1996. During the 1997
periods, 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.
Interest received on the mortgage revenue bond was $469,761 for the nine months
ended September 30, 1997, compared with $652,925 for the nine months ended
September 30, 1996. The decrease is largely due to the ConCam Owner providing
for debt service at a lower rate averaging 3.7% for the nine-month period in
1997, due to the current operating and market constraints mentioned above.
Average occupancy at the Property for the nine months ended September 30, 1997
was 84.3%, compared with 87.1% for the nine months ended September 30, 1996.
As of September 30, 1997, the Property was 88.9% occupied, compared with 87.6%
as of September 30, 1996.
Part II Other Information
Items 1-5 Not applicable.
Item 6 Exhibits and reports on Form 8-K.
(a) Exhibits -
(27) Financial Data Schedule
(b) Reports on Form 8-K - No reports on Form 8- K were filed
during the quarter ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VICTORY TAX EXEMPT REALTY INCOME FUND
LIMITED PARTNERSHIP
BY: CA Victory Inc.
General Partner
Date: November 14, 1997
BY: /s/ Doreen D. Odell
Name: Doreen D. Odell
Title: Director, President and
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Sept-30-1997
<CASH> 368,311
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,316,014
<CURRENT-LIABILITIES> 52,725
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,316,014
<SALES> 0
<TOTAL-REVENUES> 377,262
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 155,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 221,340
<INCOME-TAX> 0
<INCOME-CONTINUING> 221,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 221,340
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
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