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 March 31, 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 March 31, At December 31,
1997 1996
Assets
Investment in mortgage revenue bond, working
capital loan, and capital improvements loan $ 12,907,574 $ 12,983,476
Cash and cash equivalents 414,757 410,449
Mortgage acquisition fees, net of accumulated
amortization of $339,309 and $328,609 in
1997 and 1996, respectively 88,691 99,391
------------ ------------
Total Assets $ 13,411,022 $ 13,493,316
============ ============
Liabilities and Partners' Capital Liabilities:
Accounts payable and accrued expenses $ 41,719 $ 48,523
Due to affiliates 9,987 0
Distributions payable 159,900 162,105
------------ ------------
Total Liabilities 211,606 210,628
------------ ------------
Partners' Capital (Deficit):
General Partner (63,993) (63,160)
BAC Holders (2,140,000 BACS outstanding) 13,263,409 13,345,848
------------ -------------
Total Partners' Capital 13,199,416 13,282,688
------------ ------------
Total Liabilities and Partners' Capital $ 13,411,022 $ 13,493,316
============ ============
Statement of Partners' Capital (Deficit)
For the three months ended March 31, 1997
General BAC
Partner Holders Total
Balance at December 31, 1996 $ (63,160) $ 13,345,848 $ 13,282,688
Net income 766 75,862 76,628
Cash distributions (1,599) (158,301) (159,900)
--------- ------------ ------------
Balance at March 31, 1997 $ (63,993) $ 13,263,409 $ 13,199,416
========= ============ ============
Statements of Operations
For the three months ended March 31, 1997 1996
Revenue
Share of earnings from investment
in mortgage revenue bond $ 130,209 $ 131,614
Other interest 3,389 5,267
---------- ----------
Total 133,598 136,881
========== ==========
Expenses
General and administrative 46,270 19,881
Amortization of mortgage costs 10,700 10,700
---------- ----------
Total 56,970 30,581
---------- ----------
Net Income $ 76,628 $ 106,300
========== ==========
Net Income Allocated:
To the General Partner $ 766 $ 1,063
To the BAC Holders 75,862 105,237
---------- ----------
$ 76,628 $ 106,300
========== ==========
Per BAC unit(2,140,000 outstanding) $ .04 $ .05
---------- ----------
Statements of Cash Flows
For the three months ended March 31, 1997 1996
Cash Flows From Operating Activities:
Net income $ 76,628 $ 106,300
Adjustments to reconcile net income to net
cash provided by operating activities:
Share of earnings from investment
in mortgage revenue bond (130,209) (131,614)
Interest received on mortgage revenue bond 206,111 239,190
Amortization 10,700 10,700
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Accounts payable and accrued expenses (6,804) (5,333)
Due to affiliates 9,987 7
---------- ----------
Net cash provided by operating activities 166,413 219,250
---------- ----------
Cash Flows From Financing Activities:
Cash distributions (162,105) (272,423)
---------- ----------
Net cash used for financing activities (162,105) (272,423)
---------- ----------
Net decrease in cash and cash equivalents 4,308 (53,173)
Cash and cash equivalents, beginning of period 410,449 679,620
---------- ----------
Cash and cash equivalents, end of period $ 414,757 $ 626,447
========== ==========
Notes to the Financial Statements
The unaudited financial statements should be read in conjunction with the
Partnership's annual 1996 audited financial statements within Form 10-K.
The unaudited 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 March 31, 1997 and the results of
operations and cash flows for the three months ended March 31, 1997 and 1996
and the statement of partners' capital (deficit) for the three months ended
March 31, 1997. Results of operations for the period are not necessarily
indicative of the results to be expected for the full year.
The following significant event has occurred subsequent to fiscal year 1996,
and no material contingencies exist which 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 ("Camelot Lakes" or 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. Although the
ConCam Owner paid debt service at the 7.0% minimum pay rate (partially from its
cash reserves) on February 1, 1996, it made its March 1 and April 1, 1996
payments at an annualized rate lower than the minimum pay rate. In view of
these circumstances, the General Partner engaged in discussions with the ConCam
Owner to negotiate an agreement to continue operations under the Forbearance
Agreement. 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, which could be
terminated by either party upon 30 days written notice, was in effect through
December 31, 1996, the expiration of the Forbearance Agreement.
The Internal Revenue Service released final regulations (the "Regulations")
concerning modifications to terms of debt instruments, which generally apply to
debt modifications that occur on or after September 24, 1996. The Regulations
provide that the agreement of a debt holder to defer interest due (i.e., a
forbearance), is a reissuance of the debt for tax purposes, unless the
forbearance is for a period not exceeding two years plus an additional period
of time during which the parties conduct good faith negotiations to restructure
the debt. As a result of the Regulations and the fact that the Bonds were
already the subject of the Forbearance Agreement, the Partnership is unable to
extend the expiration of the Forbearance Agreement beyond the period during
which good faith negotiations between the parties are being conducted. A
longer- term extension could constitute a reissuance of the Bonds, resulting in
the issuance of a new debt obligation and a redemption of the existing debt. As
so reissued, the Bonds may no longer constitute debt, and the tax-exempt
feature of the Bond would be preserved only in the event that the new debt
obligation is determined to be debt and not equity for federal income tax
purposes. A formal restructuring may be required in order to preserve the
tax-exempt status of the Bond. The Partnership and the ConCam Owner are
currently discussing the parameters of a possible restructuring. The General
Partner has been advised by the Partnership's bond counsel that since such
discussions are ongoing, a one-year extension of the existing Agreement is
permissible in accordance with the Regulations. Consequently, the Partnership
has 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 "cash-flow" debt service payments
in accordance with the Agreement. Payments made during the first quarter of
1997 approximated a 5.3% pay rate. However, the April 1997 payment reflected a
4.6% pay rate, and therefore, the General Partner is closely evaluating with
ConCam the prospect of further deteriorating cash flow.
During 1995 the ConCam Owner supplemented Property cash flow with cash reserves
in order to make debt service payments to the Partnership. In early 1996, such
Property reserves were substantially depleted. The ConCam Owner has indicated
that capital requirements at the Property will increase in the foreseeable
future in order to fund certain capital expenses necessary to maintain the
Property's market position. A capital improvements program was completed at
the Property during 1994, and therefore, capital expenditures have been minimal
subsequent to the first quarter of 1995 and did not have a material impact on
cash flow available for debt service payments in 1995. Given the depletion of
Property cash reserves, it is anticipated that budgeted capital requirements
for 1997 will further reduce the cash flow available to the ConCam Owner for
future debt service payments to the Partnership.
The General Partner's objective is to maximize the Partnership's investment.
Options currently being evaluated by the General Partner include, 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. A write-down
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 March 31, 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 is considering
such factors as the potential for further change in the southeast Fresno rental
market and in the performance of the Property.
At March 31, 1997, the Partnership had cash and cash equivalents, which are
invested in tax-exempt money market accounts, of $414,757, largely unchanged
from $410,449 at December 31, 1996.
Accounts payable and accrued expenses decreased to $41,719 at March 31, 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 $9,987 at
March 31, 1997, compared to $0 at December 31, 1996, primarily due to
administrative reimbursement accruals due through the 1997 period. No accruals
were made 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% and will
be funded solely from cash flow generated from Partnership operations.
Historically the Partnership had funded a portion of its cash distributions
from Partnership reserves. Given the uncertainty surrounding the level of debt
service to be paid by ConCam in the future, the General Partner determined it
would be prudent to preserve the Partnership's cash reserves as a precautionary
measure. Additionally, operating cash flow above the 3% distribution level, if
any, will be set aside in order to fund Partnership expenses. Future
distributions to limited partners are dependent on the level of debt service
payments to be made by ConCam in the future and the outcome of the
Partnership's discussions with the ConCam Owner. Should "cash flow" debt
service payments made by ConCam decline further, it may be necessary to reduce
future cash distributions. Total cash distributions declared year-to-date for
1997 were $159,900, which included $158,301, or $.074 per Beneficial Assignee
Certificate, declared payable to the Limited Partners. As of March 31, 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 months ended March 31, 1997, the Partnership generated net income
of $76,628, compared with net income of $106,300 for the three months ended
March 31, 1996. The decrease primarily is due to an increase in general and
administrative expenses and a slight decrease in other interest and the
Partnership's share of earnings from its investment in the Bond.
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 three months
ended March 31, 1997 relative to the same period in 1996. The Partnership's
equity interest in the Property's earnings for the three months ended March 31,
1997 was $130,209, largely unchanged from $131,614 for the three months ended
March 31, 1996.
Total income at the Property was $499,477 for the three months ended March 31,
1997, compared to $520,350 for the three months ended March 31, 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 the Property,
excluding debt service, were $249,624 for the three months ended March 31,
1997, compared to $256,389 for the three months ended March 31, 1996. The
decrease primarily is due to a decrease in other expenses, largely relating to
eviction proceedings. Additionally, other expenses for 1996 include Bond audit
expenses. The decrease in other expenses was partially offset by an increase
in advertising and promotion expenses.
For the three months ended March 31, 1997, other interest was $3,389, compared
to $5,267, for the three months ended March 31, 1996. The decrease primarily
is due to lower cash balances maintained by the Partnership during the 1997
period.
Total Partnership expenses for the three months ended March 31, 1997 were
$56,970, compared to $30,581 for the three months ended March 31, 1996. The
increase is attributable to higher general and administrative expenses for the
1997 period. General and administrative expenses for the three months ended
March 31, 1997 were $46,270, compared to $19,881 for the same period in 1996.
During the 1997 period, 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 reimbursed to the General Partner and its
affiliates. The higher general and administrative expenses is also due to
increased legal expenses associated with the potential debt modification. Prior
to the fourth quarter of 1996, general and administrative expense were paid out
of the Partnership's cash reserves.
Interest received on the mortgage revenue bond was $206,111 for the three
months ended March 31, 1997, compared with $239,190 for the three months ended
March 31, 1996. The decrease is largely due to the ConCam Owner providing for
debt service at a lower rate averaging 5.3%, due to the current operating and
market constraints mentioned above.
Average occupancy at the Property for the three months ended March 31, 1997
was 82.4%, compared with 86.7% for the three months ended March 31, 1996.
As of March 31, 1997, the Property was 82.4% occupied, compared with 86.8% as
of March 31, 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 March 31, 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: May 15, 1997
BY: /s/ Paul L. Abbott
------------------
President
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Mar-31-1997
<CASH> 414,757
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,996,265
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,411,022
<CURRENT-LIABILITIES> 211,606
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,411,022
<SALES> 0
<TOTAL-REVENUES> 133,598
<CGS> 0
<TOTAL-COSTS>
<OTHER-EXPENSES> 56,970
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 76,628
<INCOME-TAX> 0
<INCOME-CONTINUING> 76,628
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<EXTRAORDINARY> 0
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<NET-INCOME> 76,628
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
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