1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
-----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-18333
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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 I.R.S. Employer
incorporation or organization Identification No.
Attn.: Andre Anderson
3 World Financial Center, 29th Floor, New York, New York 10285
- ------------------------------------------------------- -----
Address of principal executive offices Zip code
Registrant's telephone number, including area code: (212) 526-3183
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Beneficial Assignee Certificates (BACs)
---------------------------------------
Title of Class
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 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 is not contained herein, and will not be contained, to the
best of the 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
-----
As of December 31, 1998, 2,140,000 beneficial assignee certificates (BACs) had
been issued at a subscription price of $10 per BAC. The BACs are not currently
being traded in any market and as such, the BACs have neither a market selling
price nor an average bid or asked price.
Documents Incorporated by Reference:
Portions of Parts I, II, III and IV are incorporated by reference to the
Partnership's Annual Report to BAC Holders for the year ended December 31, 1998,
filed as an exhibit under Item 14.
<PAGE>
2
PART I
Item 1. Business
(a) General Development of Business
-------------------------------
Victory Tax Exempt Realty Income Fund Limited Partnership (the "Partnership" or
"Registrant") was organized January 15, 1988 under the Delaware Revised Uniform
Limited Partnership Act and will continue until December 31, 2018, unless
dissolved earlier in accordance with the Agreement of Limited Partnership (the
"Partnership Agreement"). The Partnership was formed for the purpose of
acquiring tax-exempt mortgage revenue bonds issued by one or more state or local
governments or their agencies or authorities, the proceeds of which are used to
make participating first mortgage loans on multifamily residential rental
developments and to make, in limited circumstances, taxable working capital
loans to owners of such developments.
The general partner of the Partnership is CA Victory Inc. (the "General
Partner"), formerly Shearson/Victory Inc., a Delaware corporation and an
affiliate of Lehman Brothers Inc. ("Lehman"), formerly Shearson Lehman Brothers
Inc. (see section entitled "Certain Matters Involving Affiliates" contained in
Item 10. "Directors and Executive Officers of the Registrant"). The assignor
limited partner is CA Victory Assignor Corp. (the "Assignor Limited Partner"),
formerly Shearson/Victory Assignor Corp. (see section entitled "Certain Matters
Involving Affiliates" contained in Item 10. "Directors and Executive Officers of
the Registrant"), which is an affiliate of Lehman.
The Assignor Limited Partner has assigned certain of the ownership attributes of
its limited partnership interests, including rights to a percentage of the
income, gains, losses, deductions and distributions of the Partnership to the
BAC Holders on the basis of one unit of limited partnership for one BAC.
The business objectives of the Partnership were:
(1) to preserve and protect the Partnership's capital;
(2) to provide to BAC Holders quarterly cash distributions from payments of
base interest on the mortgage revenue bond which has been acquired by
the Partnership, that are excludable from gross income for federal
income tax purposes, and in certain instances, nontaxable distributions
from the Partnership's Interest Reserve Account;
(3) to provide to BAC Holders additional cash distributions from payments
of contingent interest on the mortgage revenue bond that are excludable
from gross income for Federal income tax purposes which are derived to
the extent allocable from participation in project cash flow and sale
or repayment proceeds; and
(4) to provide additional cash distributions from payments of taxable
interest pursuant to working capital loans, which will constitute no
more than 10% of the Partnership's invested assets.
On April 28, 1989, the Partnership acquired a mortgage revenue bond (the "Bond")
issued by the city of Fresno, California in the original principal amount of
$15,515,000. The Bond is secured by a first mortgage loan (the "Loan") on
Camelot Lakes Apartments (the "Property") located in Fresno. In conjunction with
the investment in the Bond, the Partnership also made a working capital loan on
the Property in the amount of $420,000 (the "Working Capital Loan") which was
secured by a second deed of trust encumbering the Property. The owner of the
Property at the time the Partnership purchased the Bond was Camelot Lakes
Associates ("Camelot Lakes"), an unaffiliated California limited partnership. On
February 1, 1994, the General Partner finalized a restructuring with Camelot
Lakes, which included transferring the Property to a new owner, entering into a
Forbearance Agreement with the new owner, amending the second deed of trust, and
replacing the original property management company. Pursuant to the
restructuring, the current owner and borrower is ConCam Associates, LP ("ConCam"
or the "New Borrower"), an unaffiliated California limited partnership, and the
current property manager is ConAm Management Corporation ("ConAm"), an affiliate
of ConCam. In conjunction with this restructuring, the Partnership also made a
capital improvements loan (the "Capital Improvements Loan") of $500,000 during
1994, which was also secured by the second deed of trust encumbering the
Property. Additional information regarding the Bond, the Working Capital Loan
and the Capital Improvements Loan is incorporated by reference to Note 4
"Mortgage Revenue Bond, Working Capital Loan, and Capital Improvements Loan" of
the Notes to the Financial Statements contained in the Partnership's Annual
Report to BAC Holders for the year ended December 31, 1998, filed as an exhibit
under Item 14.
<PAGE>
3
During 1997, the General Partner and ConCam agreed to pursue a sale of the
Property and/or Bond prior to the Loan's scheduled maturity date on April 28,
1999. In February 1999, the Partnership entered into a binding agreement to sell
the Bond. A detailed discussion of the proposed sale (the "Sale") is
incorporated by reference to Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained herein.
(b) Employees
---------
The Partnership does not have any employees. Services are performed for the
Partnership by affiliates of the General Partner and agents retained by them.
(c) Competition
-----------
The Property is subject to competition in its renting and leasing activity from
several similar properties also located within the southeast submarket of Fresno
County. Many one and two family houses in the area are also available for rent
or purchase and compete with the Property for prospective tenants.
Because the Property offers amenities such as a swimming pool and tennis courts,
it demands rents that are at the upper end of the Fresno market. The General
Partner believes that the sluggish economy in Fresno and a demographic shift in
the region have somewhat shifted demand for housing in Southeastern Fresno to
the lower end of the rate structure. This shift, combined with competitive
forces and modest growth in demand, has caused limited or virtually no rental
rate growth at many area properties, including the Property.
Item 2. Properties
The Partnership does not own any property. The Partnership has, however,
invested in the Bond for which an underlying first mortgage on the Property has
been assigned to the Partnership as collateral and the Partnership has made the
initial Working Capital Loan and the Capital Improvements Loan to the owner.
Additional information regarding the Bond, Working Capital Loan, the Capital
Improvements Loan and the Property is incorporated by reference to Note 4
"Mortgage Revenue Bond, Working Capital Loan, and Capital Improvements Loan" of
the Notes to the Financial Statements contained in the Partnership's Annual
Report to BAC Holders for the year ended December 31, 1998, filed as an exhibit
under Item 14.
Item 3. Legal Proceedings
The Partnership is not the subject of any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the BAC Holders to be voted on during the fourth
quarter of the year for which this report was filed.
In February 1999, the Partnership entered into a binding agreement to sell the
Bond (see Item 7). The proposed Sale will require the consent of a
majority-in-interest of the BAC Holders to direct the consent of the Assignor
Limited Partner to the Sale. Consent of the BAC Holders will be solicited only
by means of a consent solicitation, which will be mailed to BAC Holders upon the
completion of a customary Securities and Exchange Commission review process.
There can be no assurance that the sale will be consummated on the announced
terms, if at all.
<PAGE>
4
Part II
Item 5. Market for Registrant's Limited Partnership
Units and Related Unitholder Matters
(a) Market Information.
------------------
There is no established public market in which the BACs are currently traded.
(b) Approximate Number of Security Holders.
--------------------------------------
As of December 31, 1998, there were 1,032 BAC Holders.
(c) Dividend History and Restrictions.
---------------------------------
Information on the Partnership's cash distributions is incorporated by reference
to Item 7., "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained herein, and Note 6 "Distributions Payable" of
the Notes to the Financial Statements in the Partnership's Annual Report to BAC
Holders for the year ended December 31, 1998, filed as an exhibit under Item 14.
Quarterly cash distributions per $10 BAC are shown below for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
(Based on 2,140,000 BACs outstanding)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 $0.0740 $0.0370 $0.0000 $0.0000 $0.1110
1998 0.0000 0.0000 0.0000 0.0000 0.0000
-----------------------------------------------------------
</TABLE>
Cash distributions were suspended beginning with the 1997 third quarter
distribution, which would have been paid in November 1997. In light of the
decision to sell the Property and/or the Bond, quarterly distributions will not
be reinstated. Following the Sale, the General Partner will distribute to the
BAC Holders the net proceeds received on the Bond together with the
Partnership's remaining cash reserves (after payment of, or provision for, the
Partnership's liabilities and expenses), and dissolve the Partnership.
Item 6. Selected Financial Data
Selected Partnership financial data as of and for each of the years ended
December 31, 1998, 1997, 1996, 1995 and 1994 are shown below. This data should
be read in conjunction with the Partnership's financial statements and the
related notes included herein, filed as an exhibit under Item 14.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $ 713,166 $ 440,246 $ 646,191 $ 71,044 $ 406,502
Net Income (Loss) 482,048 (2,692,230) 514,121 (30,145) 211,582
Net Income (Loss) per BAC(1) .23 (1.25) .24 (.01) .10
Total Assets as of December 31 10,918,467 10,422,735 13,493,316 14,044,167 15,168,426
Total Cash Distributions
declared per BAC(1) 0.00 0.111 0.449 0.500 0.500
<FN>
(1) 2,140,000 BACs outstanding.
</FN>
</TABLE>
<PAGE>
5
Item 7. 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 mortgage loan (the "Loan") 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 ConCam Associates, LP
("ConCam"), and property management was transferred to ConAm Management
Corporation ("ConAm"), a major property management company and an affiliate of
ConCam. In addition to ownership, ConCam 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 ConCam pursuant to which the Partnership, for a limited period, agreed to
forbear from exercising certain remedies against ConCam 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, ConCam 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 ConCam, 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, ConCam pays
as debt service all available cash flow generated by the Property. The Agreement
remained in effect until the Forbearance Agreement expired on December 31, 1996.
At such time, the parties were engaged in good faith negotiations and therefore,
the Partnership extended the Agreement with ConCam through December 31, 1997.
Effective January 1, 1998, the Partnership executed an extension of the
Agreement with ConCam until the earlier to occur of December 31, 1998 or the
closing of a sale of the Property. The Agreement was subsequently extended to
the earlier to occur of June 30, 1999, or the closing of a sale of the Bond and
the Property.
The General Partner's objective is to maximize the recovery of the Partnership's
investment. After careful consideration, the General Partner has determined that
a sale of the Property and an accelerated repayment of the Bond, or a sale of
the Bond in conjunction with a sale of the Property, are the most viable means
to achieve this objective. Therefore, the Partnership and ConCam agreed to
pursue a sale of the Property and/or the Bond prior to the Loan's scheduled
maturity date on April 28, 1999. In February 1999, the Partnership entered into
a binding agreement to sell the Bond to Wasatch Acquisitions LLC, a Utah limited
liability company, or its designated affiliate, for a gross sale price of $11.6
million (the "Sale"). The proposed Sale is subject to the consent of the City of
Fresno, California and of a majority-in-interest of the outstanding BAC Holders
evidencing economic and certain other rights attributable to the limited
partnership interests in the Partnership and to the satisfaction or waiver of
the other customary closing conditions. Approval by the BAC Holders will be
solicited only by means of a consent solicitation, which will be mailed to BAC
Holders upon the completion of a customary Securities and Exchange Commission
review process. There can be no assurance that the Sale will be consummated on
the announced terms, if at all. Subject to closing of the Sale, the Partnership
has agreed to allow ConCam to cease making "cash-flow" debt payments from
January 1, 1999, and instead use the cash flow generated by the Property to pay
ConCam's expenses in connection with the operation and sale of the Property to
the buyer, which is intended to occur simultaneously with the sale of the Bond.
During 1997, the Partnership wrote down the carrying value of its investment in
the mortgage revenue bond, working capital loan, and capital improvements loan
to its estimated fair value as determined by management at that time. At
December 31, 1998, the carrying value totaled $9,826,236. If the proposed Sale
is consummated on the announced terms, it is expected to result in a gain in the
amount of approximately $1.2 million.
<PAGE>
6
In anticipation of a potential sale, 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 in 1997 to utilize a
portion of operating cash flow to make certain Property improvements deemed
necessary to increase occupancy and ensure that the Property is well-positioned
for sale. The level of debt service payments made by ConCam to the Partnership
decreased to an average annual pay rate of 3.3% during 1997 as a result of these
additional capital expenses at the Property level. However, debt service
payments during 1998 were made at an average annual rate of 5.1%. This
improvement primarily was due to efforts to stabilize Property operations, as
discussed above.
Effective as of December 31, 1998, the Agreement was extended through the
earlier of (i) June 30, 1999, (ii) the closing of the sale of the Bond and the
Property or (iii) the termination of the Agreement upon default by the borrower.
At December 31, 1998, the Partnership had cash and cash equivalents, which are
invested in tax-exempt money market accounts, of $1,078,440, compared with
$366,144 at December 31, 1997. The increase primarily is due to an increase in
net cash flow from operations due to ConCam making higher minimum interest
payments to the Partnership and the discontinuation of quarterly cash
distributions.
Due to the Property's operating difficulties, the General Partner reduced the
cash distribution paid to the partners commencing in 1993, and subsequently
suspended cash distributions beginning with the 1997 third quarter distribution,
which would have been paid in November 1997. In light of the decision to sell
the Property and/or the Bond, quarterly distributions will not be reinstated.
Following a sale of the Bond, the General Partner will distribute to the BAC
Holders the net proceeds received on the Bond together with the Partnership's
remaining cash reserves (after payment of, or provision for, the Partnership's
liabilities and expenses), and dissolve the Partnership. As of December 31,
1998, 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. Other than from a sale of the Bond, the sources of the Partnership's
future cash flows absent a sale of the Property or the Bond, are expected to be
interest earned on cash and cash equivalents.
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.
The Partnership has entered into a binding agreement to sell the Bond, and it is
anticipated that the Sale will be completed and the Partnership dissolved prior
to December 31, 1999. In the event that the Partnership is not dissolved prior
to December 31, 1999, potential Year 2000 issues relate to the outside vendors
which provide the Partnership's administrative services, including accounting,
tax preparation and transfer agent services. Such services are reliant on
computer systems, software products and equipment which are expected to be Year
2000 compliant prior to December 31, 1999. The General Partner continues to
discuss Year 2000 compliance with these outside vendors. It is anticipated that
the cost of vendor compliance with Year 2000 issues will be borne primarily by
these vendors. Although it is not possible at present to estimate the cost of
this remediation work based on available information, the General Partner does
not expect such costs to have a material adverse impact on the Partnership's
business, results of operations or financial condition.
The Partnership may have potential Year 2000 issues related to ConCam's own
vendors which provide accounting and property management services to them as
well as Year 2000 issues related to property operating systems. Such problems
may impair the ability of ConCam to make its debt service payments. Due to the
General Partner's intent to dissolve the Partnership before December 31, 1999,
no assessment has been made by the General Partner as to potential adverse
impact of ConCam's failure to prepare for the Year 2000.
Due to the General Partner's intent to dissolve the Partnership before December
31, 1999, the General Partner currently does not have Year 2000 contingency
plans. In the event the Sale is not completed, the General Partner intends to
develop and implement contingency plans in 1999. However, there is no certainty
such plans would fully mitigate any Year 2000 problems.
<PAGE>
7
Market Risk
- -----------
The Partnership's principal market risk exposure is interest rate risk. Interest
income from the Partnership's cash and cash equivalents is subject to interest
rate risk in that such funds consist of short-term, highly liquid investments
invested at short-term rates. Since the General Partner expects the Partnership
to dissolve in 1999, such risk is not considered to be material to the
Partnership's operations.
Results of Operations
- ---------------------
1998 versus 1997
- ----------------
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 year ended December 31, 1998, the Partnership generated net income of
$482,048, compared with a net loss of $2,692,230 for the year ended December 31,
1997. The change from net loss to net income is primarily due to the write-down
in the amount of $2,892,415 during 1997 of the carrying value of the investment
in the mortgage revenue bond, working capital loan, and capital improvements
loan to its estimated fair value at December 31, 1997. The improvement is also
due to an increase in 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 increased for the year ended
December 31, 1998 relative to 1997. The Partnership's equity interest in the
Property's earnings in 1998 was $688,788 compared to $426,352 in 1997. The
increase is primarily due to higher rental income and the containment of
expenses incurred at the Property. Total income at Camelot Lakes Apartments was
$2,134,358 for the year ended December 31, 1998, compared to $1,993,837 for the
year ended December 31, 1997. The increase primarily is due to an increase in
rental income as a result of higher average occupancy at the Property. Total
expenses at Camelot Lakes Apartments, net of debt service, depreciation and
amortization and impairment loss were $1,200,732 for the year ended December 31,
1998 compared with $1,223,351 for the year ended December 31, 1997.
Other interest totaled $24,378 for the year ended December 31, 1998, compared to
$13,894 for the year ended December 31, 1997. The increase primarily is due to
higher average cash balances maintained by the Partnership during the 1998
period.
Total expenses for the year ended December 31, 1998 were $231,118 compared to
$240,061 in 1997, excluding the $2,892,415 loss on write-down of investment in
revenue bond, working capital loan and capital improvements loan, discussed
above. The slight decrease primarily reflects lower general and administrative
expenses. General and administrative expenses totaled $188,318 in 1998 compared
to $197,261 in 1997. The decrease is primarily due to lower management and legal
fees, partially offset by higher audit and administrative servicing fees.
Interest received on the mortgage revenue bond was $862,552 for the year ended
December 31, 1998, compared with $517,413 for the year ended December 31, 1997.
The increase is largely due to higher property cash flow, averaging 5.1% for the
1998 period.
Average occupancy at the Property for the year ended December 31, 1998 was
93.6%, compared with 86.1% for the year ended December 31, 1997. As of December
31, 1998, the Property was 91.7% occupied, compared with 90.9% as of December
31, 1997.
1997 versus 1996
- ----------------
For the year ended December 31, 1997, the Partnership had a net loss of
$2,692,230, compared with net income of $514,121 for the year ended December 31,
1996. The change is primarily due to the loss on the Partnership's write-down in
1997 of the investment in mortgage revenue bond, working capital loan, and
capital improvements loan of $2,892,415. Excluding the loss on the write-down,
the Partnership generated net income of $200,185 for the year ended December 31,
1997, compared with net income of $514,121 for the year ended December 31, 1996.
The decrease primarily is due to a decrease in the Partnership's share of
earnings from its investment in the Bond, an increase in general and
administrative expenses and a slight decrease in other interest.
<PAGE>
8
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 year ended
December 31, 1997 relative to 1996. The Partnership's equity interest in the
Property's earnings for the year ended December 31, 1997 was $426,352, compared
to $627,378 for the year ended December 31, 1996. The Partnership's equity
interest in the Property's earnings decreased for the 1997 period, primarily due
to lower rental income and higher expenses incurred at the Property. Total
income at Camelot Lakes Apartments was $1,993,837 for the year ended December
31, 1997, compared to $2,056,281 for the year ended December 31, 1996. The
decrease primarily is due to a decrease in rental income as a result of lower
average rental rates and increased concessions, as well as a slight decrease in
average occupancy at the Property. Total expenses at Camelot Lakes Apartments,
net of debt service, were $1,223,351 for the year ended December 31, 1997,
compared to $1,111,401 for the year ended December 31, 1996. The increase
primarily is due to higher security, advertising and promotion and utilities
expenses, higher property taxes, and higher administrative and repairs and
maintenance expenses, which were partially offset by lower management fees,
insurance and other property expenses.
For the year ended December 31, 1997, other interest was $13,894, compared to
$18,813 for the year ended December 31, 1996. The decrease primarily is due to
lower cash balances maintained by the Partnership during 1997.
Total Partnership expenses for the year ended December 31, 1997, excluding the
loss on write-down of investment in mortgage revenue bond, working capital loan,
and capital improvements loan of $2,892,415, were $240,061, compared to $132,070
for the year ended December 31, 1996. The increase is attributable to higher
general and administrative expenses for the 1997 period. General and
administrative expenses for the year ended December 31, 1997 were $197,261,
compared to $89,270 for the year ended December 31, 1996. Effective January 1,
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. The change is also
due to an increase in other professional fees during 1997.
Interest received on the mortgage revenue bond was $517,413 for the year ended
December 31, 1997, compared with $866,258 for the year ended December 31, 1996.
The decrease is largely due to ConCam providing for debt service at a lower rate
averaging 3.3% for 1997, due to the current operating and market constraints
mentioned above.
Average occupancy at the Property for the year ended December 31, 1997 was
86.1%, compared with 86.6% for the year ended December 31, 1996. As of December
31, 1997, the Property was 90.9% occupied, compared with 83.5% as of December
31, 1996.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Partnership's Annual Report to BAC Holders for
the year ended December 31, 1998, filed as an exhibit under Item 14.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no directors, executive officers or employees of its own.
The names, ages and business experience for the directors and executive officers
of the General Partner as of the filing date are as follows:
<PAGE>
9
Name Office
---- ------
Daphne H. Aronson Director, President & Chief Financial Officer
Rocco F. Andriola Director
Jaime Fuertes Vice President
Daphne H. Aronson, 35, Vice President, joined Lehman Brothers in February 1996,
and has worked with the firm's Expense Management, Legal Department, Purchasing
Unit, Diversified Asset Group and Real Estate Department on a variety of
matters, including acquisition and disposition of various real estate interests.
Ms. Aronson graduated Phi Beta Kappa and received a B.A. in Music magna cum
laude from New York University in 1986. She received a J.D. and an LL.M. in
Taxation from New York University School of Law in 1989 and 1992, respectively.
Prior to joining Lehman Brothers, Ms. Aronson practiced real estate law from
1994 to 1996 at Thatcher Proffitt & Wood in New York, working on originations of
securitized loans.
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.
Jaime Fuertes, 32, is a Senior Associate at Lehman Brothers Inc. He joined
Lehman in 1997 as the Controller of the Diversified Asset Group and since then
has also been engaged in the analysis and negotiations of Lehman's worldwide
current and future lease commitments. Prior to joining Lehman, Mr. Fuertes held
various positions in Finance and Treasury at Chase Manhattan Bank between 1990
and 1996 and at GE Capital Services between 1996 and 1997. Mr. Fuertes received
Bachelor of Science and Master of Science degrees in Finance from Fairfield
University.
Certain officers and directors of CA Victory Inc., formerly Shearson/Victory,
Inc. (see below) are now serving as officers or directors of entities which act
as general partners of a number of real estate limited partnerships which have
sought protection under the provisions of the Federal Bankruptcy Code. The
partnerships which have filed bankruptcy petitions own real estate which has
been adversely affected by the economic conditions in the markets in which that
real estate is located and, consequently, the partnerships sought the protection
of the bankruptcy laws to protect the partnerships' assets from loss through
foreclosure.
Item 11. Executive Compensation
Neither the General Partner nor any of its directors and officers received any
compensation from the Registrant. See Item 13 below with respect to a
description of certain transactions of the General Partner and its affiliates
with the Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners
-----------------------------------------------
To the knowledge of the General Partner, no person or group owned more than 5%
of the outstanding BACs as of December 31, 1998.
<PAGE>
10
(b) Security ownership of management
--------------------------------
As of December 31, 1998, none of the officers and directors of the General
Partner owned any BACs.
(c) Changes in control
------------------
None.
Item 13. Certain Relationships and Related Transactions
Commencing 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.
Additional information is incorporated by reference to Note 5 "Transactions with
Related Parties" of Notes to the Financial Statements contained in the
Partnership's Annual Report to BAC Holders for the year ended December 31, 1998,
filed as an exhibit under Item 14.
<PAGE>
11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
Page
Number
------
Report of Independent Auditors................................... (1)
Balance Sheets - As of December 31, 1998 and 1997................ (1)
Statements of Operations -
For the years ended December 31, 1998, 1997 and 1996............. (1)
Statements of Partners' Capital (Deficit) -
For the years ended December 31, 1998, 1997 and 1996............. (1)
Statements of Cash Flows -
For the years ended December 31, 1998, 1997 and 1996............. (1)
Notes to the Financial Statements................................ (1)
(1) Incorporated by reference to the Partnership's Annual Report to BAC
Holders for the year ended December 31, 1998, which is filed as an
exhibit under Item 14.
(a) (2) Financial Statement Schedules:
ConCam Associates, LP, a California Limited Partnership
Independent Auditors' Report..................................... A-1
Financial Statements:
Balance Sheets at December 31, 1998 and 1997................. A-2
Statements of Operations and Partners' Deficit for
the years ended December 31, 1998, 1997 and 1996............. A-3
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................. A-4
Notes to the Financial Statements............................ A-5
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a) (3) Exhibits:
3.1 Certificate of Limited Partnership of Victory Tax Exempt Realty Income
Fund Limited Partnership. (Incorporated by reference from Exhibit 3 to
the Registrant's Post-Effective Amendment No. 2, dated February 14,
1989, to the Registration Statement on Form S-11.)
3.2 Agreement of Limited Partnership of Victory Tax Exempt Realty Income
Fund Limited Partnership. (Incorporated by reference from Exhibit 3 to
the Registrant's Post-Effective Amendment No. 2, dated February 14,
1989, to the Registration Statement on Form S-11.)
3.3 Beneficial Assignee Certificate. (Incorporated by reference from
Exhibit 3 to the Registrant's Registration Statement on Form S-11.)
<PAGE>
12
10.1 Forbearance Agreement between Victory Tax Exempt Realty Income Fund
Limited Partnership and ConCam Associates, LP dated January 31, 1994.
(Incorporated by reference from Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993.)
10.2 First Amendment to Working Capital Loan Agreement between Victory Tax
Exempt Realty Income Fund Limited Partnership and ConCam Associates, LP
dated February 1, 1994. (Incorporated by reference from Exhibit 10.2 to
the Registrant's Annual Report on Form 10-K for the year ended December
31, 1993.)
10.3 Property Management Agreement between ConCam Associates, LP and ConAm
Management Corporation dated January 31, 1994. (Incorporated by
reference from Exhibit 10.3 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993.)
10.4 Termination and Release Agreement between Victory Tax Exempt Realty
Income Fund Limited Partnership, Camelot Lakes Associates and James
Hendricks and Associates, Inc. dated February 1, 1994. (Incorporated by
reference from Exhibit 10.4 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1993.)
10.5 Standstill Agreement between Victory Tax Exempt Realty Income Fund
Limited Partnership and ConCam Associates, LP dated May 8, 1996.
(Incorporated by reference from Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended March 1,
1996.)
10.6 Extension Letter between Victory Tax Exempt Realty Income Fund Limited
Partnership and ConCam Associates, LP dated January 1, 1997.
(Incorporated by reference to Exhibit 10.6 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).
10.7 Amendment to Standstill Agreement Between Victory Tax Exempt Realty
Income Fund Limited Partnership and ConCam Associates, LP.
13.1 Annual Report to BAC Holders for the year ended December 31, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal
1998.
On February 23, 1999, the Partnership filed a report on Form 8-K
reporting that the Partnership had entered into a binding agreement to
sell the Bond.
<PAGE>
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 31, 1999 BY: /s/Daphne H. Aronson
--------------------
Name: Daphne H. Aronson
Title: President, Director and
Chief Financial Officer
<PAGE>
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
CA VICTORY INC.
General Partner
Date: March 31, 1999 BY: /s/Daphne H. Aronson
--------------------
Name: Daphne H. Aronson
Title: President, Director and
Chief Financial Officer
Date: March 31, 1999 BY: /s/Rocco F. Andriola
--------------------
Name: Rocco F. Andriola
Title: Director
Date: March 31, 1999 BY: /s/Jaime Fuertes
----------------
Name: Jaime Fuertes
Title: Vice President
EXHIBIT 13.1
VICTORY TAX EXEMPT REALTY INCOME FUND
LIMITED PARTNERSHIP
1998 ANNUAL REPORT TO BAC HOLDERS
<PAGE>
- --------------------------------------------------------------------------------
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
Victory Tax Exempt Realty Income Fund Limited Partnership was
formed in 1989 to acquire a $15,515,000 Mortgage Revenue Bond
(the "Bond") issued by the city of Fresno, California. Securing
the Bond is a first mortgage loan (the "Loan") on Camelot Lakes
Apartments (the "Property"), a 476-unit complex owned by an
unaffiliated company. The complex consists of 64 buildings
situated on 30 acres and includes a swimming pool, tennis court
and covered parking.
Contents
1 Message to Investors
3 Financial Statements
5 Notes to the Financial Statements
13 Report of Independent Auditors
<PAGE>
1
- --------------------------------------------------------------------------------
MESSAGE TO INVESTORS
- --------------------------------------------------------------------------------
Presented for your review is the 1998 Annual Report for Victory Tax Exempt
Realty Income Fund Limited Partnership (the "Partnership"). This report includes
a discussion of the Partnership's operations and audited financial statements
for the year ended December 31, 1998.
Current Status
As discussed in prior reports, the General Partner and the Property's owner,
ConCam Associates, LP ("ConCam"), have agreed to pursue a sale of the Property
or the Bond prior to the Loan's scheduled maturity date on April 28, 1999. We
are pleased to report the Partnership has entered into a binding agreement to
sell the Bond to Wasatch Acquisitions LLC, a Utah limited liability company, for
a gross sales price of $11.6 million (the "Sale"). The proposed Sale is subject
to the consent of the City of Fresno, California and a majority-in-interest of
the outstanding limited partners (the "Limited Partners"), and to the
satisfaction or waiver of other customary closing conditions. Approval by the
Limited Partners will be solicited by a consent solicitation, which will be
mailed in the near future to investors upon the completion of a Securities and
Exchange Commission review process. If the Sale is ultimately consummated, we
intend to distribute the net proceeds received for the Bond, together with the
Partnership's remaining cash reserves (after payment of, or provision for, the
Partnership's liabilities and expenses), and subsequently dissolve the
Partnership. There can be no assurance that the sale will be completed in
accordance with the announced terms, if at all.
Property operations improved during 1998, with the Property maintaining an
average occupancy rate of 94% in 1998 compared to 86% in 1997.
Financial Highlights
The following chart highlights the performance of the Partnership for the year
ended December 31st of the indicated years:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------
<S> <C> <C>
Interest received on the Bond $862,552 $517,413
Other interest 24,378 13,894
Cash provided by operating activities 712,296 358,539
-------------------------------------------------------------
</TABLE>
o Interest received on the Bond increased primarily due to
the payment of debt service by ConCam at a higher average
rate of 5.1% during 1998, compared with an average rate
of 3.4% during 1997.
o Other interest increased slightly due to higher average
cash balances maintained by the Partnership.
o Cash provided by operating activities increased largely
due to the increase in interest received on the Bond.
General Information
As you are probably aware, several unaffiliated third parties have commenced
tender offers to purchase limited partnership units at prices that are below the
Partnership's estimate of the fair market value per unit. In response, we have
recommended that Limited Partners reject such offers since we believe that they
do not reflect the underlying value of the Partnership's assets.
<PAGE>
2
Summary
We believe that a sale of the Bond is the most effective means for maximizing
the recovery of your investment in the Partnership. If the proposed Sale is
completed, Limited Partners will receive a final liquidating distribution, and
the Partnership will be dissolved during 1999. We will inform you of any
material developments in future investor correspondence. In the interim,
questions regarding the Partnership's performance should be directed to your
Financial Consultant or Partnership Investor Services. All requests for a change
of address or transfer should be submitted in writing to the Partnership's
administrative agent at P.O. Box 7090, Troy, MI 48007-7090. Partnership Investor
Services can be reached at (617) 342-4225, and the Partnership's administrative
agent can be reached at (248) 637-7900.
Very truly yours,
CA Victory Inc.
General Partner
Daphne H. Aronson
President
March 31, 1999
<PAGE>
3
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
BALANCE SHEETS
At December 31, At December 31,
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investment in mortgage revenue bond, working
capital loan, and capital improvements loan $ 9,826,236 $10,000,000
Cash and cash equivalents 1,078,440 366,144
Mortgage acquisition fees, net of accumulated
amortization of $414,209 and $371,409 in
1998 and 1997, respectively 13,791 56,591
- -------------------------------------------------------------------------------------
Total Assets $10,918,467 $10,422,735
=====================================================================================
Liabilities and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 68,700 $ 51,016
Due to affiliates 18,000 22,000
-----------------------------
Total Liabilities 86,700 73,016
-----------------------------
Partners' Capital (Deficit):
General Partner (87,669) (92,489)
BAC Holders (2,140,000 BACS outstanding) 10,919,436 10,442,208
-----------------------------
Total Partners' Capital 10,831,767 10,349,719
- -------------------------------------------------------------------------------------
Total Liabilities and Partners' Capital $10,918,467 $10,422,735
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1998, 1997 and 1996
General BAC
Partner Holders Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 $(58,613) $13,797,670 $13,739,057
Net income 5,141 508,980 514,121
Cash distributions (9,688) (960,802) (970,490)
- -------------------------------------------------------------------------------------
Balance at December 31, 1996 $(63,160) $13,345,848 $13,282,688
Net loss (26,922) (2,665,308) (2,692,230)
Cash distributions (2,407) (238,332) (240,739)
- -------------------------------------------------------------------------------------
Balance at December 31, 1997 $(92,489) $10,442,208 $10,349,719
Net income 4,820 477,228 482,048
- -------------------------------------------------------------------------------------
Balance at December 31, 1998 $(87,669) $10,919,436 $10,831,767
=====================================================================================
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
4
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
Share of earnings from investment
in mortgage revenue bond $ 688,788 $ 426,352 $ 627,378
Other interest 24,378 13,894 18,813
------------------------------------------
Total Revenue 713,166 440,246 646,191
- -------------------------------------------------------------------------------------
Expenses
Loss on write-down of investment in mortgage
revenue bond, working capital loan, and
capital improvements loan -- 2,892,415 --
General and administrative 188,318 197,261 89,270
Amortization of mortgage costs 42,800 42,800 42,800
------------------------------------------
Total Expenses 231,118 3,132,476 132,070
- -------------------------------------------------------------------------------------
Net Income (Loss) $ 482,048 $(2,692,230) $ 514,121
=====================================================================================
Net Income (Loss) Allocated:
To the General Partner $ 4,820 $ (26,922) $ 5,141
To the BAC Holders 477,228 (2,665,308) 508,980
- -------------------------------------------------------------------------------------
Net Income (Loss) $ 482,048 $(2,692,230) $ 514,121
=====================================================================================
Per BAC
(2,140,000 outstanding) $ .23 $ (1.25) $ .24
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
For the years ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 482,048 $(2,692,230) $ 514,121
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Loss on write-down of investment in
mortgage revenue bond, working
capital loan, and capital
improvements loan -- 2,892,415 --
Share of earnings from investment
in mortgage revenue bond (688,788) (426,352) (627,378)
Interest received on mortgage
revenue bond 862,552 517,413 866,258
Amortization of mortgage costs 42,800 42,800 42,800
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Accounts payable and accrued expenses 17,684 2,493 15,836
Due to affiliates (4,000) 22,000 --
------------------------------------------
Net cash provided by operating activities 712,296 358,539 811,637
- -------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Cash distributions -- (402,844) (1,080,808)
------------------------------------------
Net cash used for financing activities -- (402,844) (1,080,808)
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 712,296 (44,305) (269,171)
Cash and cash equivalents,
beginning of year 366,144 410,449 679,620
------------------------------------------
Cash and cash equivalents, end of year $1,078,440 $ 366,144 $ 410,449
=====================================================================================
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
5
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1. Organization and the Public Offering
Victory Tax Exempt Realty Income Fund L. P. (the "Partnership") was formed under
the Delaware Revised Uniform Limited Partnership Act on January 15, 1988 and
will continue until December 31, 2018, unless dissolved earlier under the
provisions of the Agreement of Limited Partnership. The Partnership was formed
for the purpose of acquiring a pool of tax-exempt Mortgage Revenue Bonds issued
by various state or local governments or their agencies or authorities, and
secured by participating first mortgage loans on multifamily residential rental
developments and/or retirement complexes. The Partnership is also authorized to
have up to ten percent of its invested assets consist of taxable working capital
loans from the Partnership to borrowers of the mortgage loans to cover certain
expenses that are not financed from Mortgage Revenue Bond proceeds.
A Registration Statement on Form S-11 was filed with the Securities and Exchange
Commission and became effective on May 26, 1988 for a maximum offering of
20,000,000 Beneficial Assignee Certificates (the "BACs") at $10 per BAC (the
"Public Offering"). The Public Offering commenced on November 1, 1988 and
terminated on April 28, 1989. Gross proceeds of $21,400,000 were received
representing 2,140,000 BACs. On April 28, 1989, the subscribers of the BACs were
admitted to the Partnership as BAC Holders. The related limited partnership
interests are held by the Assignor Limited Partner, which has assigned certain
ownership attributes of the limited partnership interests to the BAC Holders on
the basis of one unit of limited partnership interest for one BAC.
The General Partner is CA Victory Inc., formerly Shearson/Victory Inc. (see
below), which is a Delaware corporation and an affiliate of Lehman Brothers Inc.
(the "Selling Agent"), formerly Shearson Lehman Brothers Inc., (see below). The
Assignor Limited Partner is CA Victory Assignor Corp., formerly Shearson/Victory
Assignor Corp. (see below), which is wholly-owned by Lehman Brothers.
On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic
retail brokerage and asset management business to Smith Barney, Harris Upham &
Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman
Brothers Inc. changed its name to Lehman Brothers Inc. ("Lehman Brothers"). The
transaction did not affect the ownership of the General Partner. However the
assets acquired by Smith Barney included the name "Shearson". Consequently,
effective October 29, 1993, the Shearson/Victory Inc. General Partner and the
Shearson/Victory Assignor Corp. Assignor Limited Partner changed their names to
CA Victory Inc. and CA Victory Assignor Corp., respectively.
On April 28, 1989, the Partnership acquired an investment in a mortgage revenue
bond (the "Bond") from the City of Fresno, California in the principal amount of
$15,515,000 secured by a mortgage loan (the "Loan") on Camelot Lakes Apartments,
a 476 unit apartment complex (the "Property"). Until February 1, 1994, the
original owner of the Property was Camelot Lakes Associates ("Camelot Lakes"),
an unaffiliated California Limited Partnership. The current owner of the
Property is ConCam Associates, LP ("ConCam" or the "Borrower"), an unaffiliated
California Limited Partnership.
<PAGE>
6
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
2. Significant Accounting Policies
Investment in Mortgage Revenue Bond, Working Capital Loan and Capital
Improvements Loan The Partnership accounts for its investment in the Mortgage
Revenue Bond, the Working Capital Loan and the Capital Improvements Loan (the
"Investment") using the equity method in accordance with AICPA Statement of
Position 78-9. The Partnership is not obligated to fund net operating losses of
the property underlying the Investment. Under this method, the carrying value of
the Bond is (i) reduced for the interest received from Camelot Lakes and (ii)
increased or decreased by the Partnership's share of earnings or losses of
Camelot Lakes. The Partnership generally receives a special allocation of income
equal to the mortgage loan interest due under the bond and loan agreements,
which payments are funded by property operations. Prior to October 1, 1998,
depreciation on the building and personal property funded by the bond and loans
was provided using the straight-line method over 40 years and 5-7 years, for the
amounts allocable to buildings and personal property, respectively. On October
1, 1998, the Partnership committed to sell the investment and, as a result,
ceased depreciation of building and personal property funded by the Bond.
At December 31, 1997, the Partnership completed a review of the recoverability
of the carrying amount of its investment in the Mortgage Revenue Bond, Working
Capital Loan, and Capital Improvements Loan based upon an estimate of
undiscounted cash flows expected to result from the property underlying the
investment's use and eventual disposition. Based upon the review completed at
December 31, 1997 and a change in management's estimated holding period, the
Partnership wrote down the carrying value of its investment in accordance with
Statement of Financial Accounting Standards No. 121 (See Note 4).
Syndication Costs During 1989, selling commissions paid in connection with the
Public Offering, totaling $1,070,000, and sales and registration costs, totaling
$719,754, were charged against BAC Holders' capital.
Mortgage Acquisition Fees Mortgage acquisition fees are recorded at cost less
accumulated amortization, and are being amortized using the straight-line method
over the term of the Bond.
Income Taxes No provision for income taxes has been made in the financial
statements since such taxes are the responsibility of the individual partners
rather than that of the Partnership.
Cash and Cash Equivalents Cash and cash equivalents consist of short-term
highly liquid investments which have maturities of three months or less from the
date of purchase. The carrying value approximates fair value because of the
short maturity of these instruments.
Fair Value of Financial Instruments Statement of Financial Accounting Standards
No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"),
requires that the Partnership disclose the estimated fair values of its
financial instruments. Fair values generally represent estimates of amounts at
which a financial instrument could be exchanged between willing parties in a
current transaction other than in forced liquidation.
The carrying amount of cash and cash equivalents, due to affiliates, and
accounts payable and accrued expenses are estimates of their fair value due to
the short-term nature of those instruments.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk Financial instruments which potentially subject
the Partnership to a concentration of credit risk principally consist of cash
and cash equivalents in excess of the financial institution's insurance limits.
<PAGE>
7
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
3. Partnership Agreement
Pursuant to the terms of the Partnership Agreement, cash available for
distribution from operations will be distributed 99% to the BAC Holders and 1%
to the General Partner for each year until the BAC Holders receive an amount
equal to the Preferred Cash Flow Return, as defined, and, thereafter, 90% to the
BAC Holders and 10% to the General Partner.
Proceeds arising from a sale or other disposition of the mortgaged property or
the repayment of the Bond will be distributed as follows:
(1) to repay all debts and obligations of the Partnership and to increase the
working capital reserve as the General Partner deems necessary;
(2) to each BAC Holder equal to the unpaid portion of any Preferred Cash Flow
Return up to the amount of income allocated to each BAC holder;
(3) to the General Partner and to each BAC Holder up to the amount of their
Adjusted Capital Contributions, as defined; and
(4) to the General Partner and to each BAC Holder, in accordance with their
respective capital accounts.
All profits and losses not arising from a sale of a mortgaged property or
repayment of a mortgage loan shall be allocated 99% to the BAC Holders and 1% to
the General Partner until the BAC Holders realize an amount equal to the
Preferred Cash Flow Return. Thereafter, such profits and losses shall be
allocated 90% to the BAC Holders and 10% to the General Partner.
Profits arising from a sale of a mortgaged property or repayment of a mortgage
loan will be allocated to the General Partner and BAC Holders as follows: first,
in proportion to the negative balances in their capital accounts, up to the
amount of the negative balance; second, in proportion to any unpaid portion of
Preferred Cash Flow Return to realize an amount equal to the Preferred Cash Flow
Return; third, in proportion to their Adjusted Capital Contributions up to their
Adjusted Capital Contributions; and fourth, 90% to the BAC Holders and 10% to
the General Partner.
Losses from such sale or repayment will be allocated to the General Partner and
BAC Holders as follows: first, an amount of loss to the General Partner or BAC
Holders to adjust their capital accounts to 1% and 99%, respectively, of total
Partners' Capital; second, 1% to the General Partner and 99% to the BAC Holders
until the BAC Holders capital account is zero; third, to the General Partner.
4. Mortgage Revenue Bond, Working Capital Loan, and Capital Improvements Loan
Mortgage Revenue Bond The following schedule represents the changes made to the
carrying value of the mortgage revenue bond since its acquisition:
<PAGE>
8
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C>
Original issue value $15,515,000
Working Capital Loan 420,000
1989 share of Camelot Lakes earnings 488,679
1989 interest received on mortgage revenue bond (615,040)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1989 15,808,639
1990 share of Camelot Lakes earnings 772,557
1990 interest received on mortgage revenue bond (1,039,505)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1990 15,541,691
1991 share of Camelot Lakes earnings 805,999
1991 interest received on mortgage revenue bond (1,039,505)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1991 15,308,185
1992 share of Camelot Lakes earnings 677,121
1992 interest received on mortgage revenue bond (1,202,412)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1992 14,782,894
1993 share of Camelot Lakes earnings 527,857
1993 interest received on mortgage revenue bond (1,172,899)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1993 14,137,852
Capital Improvements Loan 500,000
1994 share of Camelot Lakes earnings 377,211
1994 interest received on mortgage revenue bond (833,850)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1994 14,181,213
1995 share of Camelot Lakes earnings 43,158
1995 interest received on mortgage revenue bond (1,002,015)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1995 13,222,356
1996 share of Camelot Lakes earnings 627,378
1996 interest received on mortgage revenue bond (866,258)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1996 12,983,476
1997 share of Camelot Lakes earnings 426,352
1997 interest received on mortgage revenue bond (517,413)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1997, before write down 12,892,415
Loss on write-down of investment in mortgage revenue
bond, working capital loan, and capital improvements loan (2,892,415)
- -------------------------------------------------------------------------------
Carrying value, December 31, 1997 10,000,000
1998 share of Camelot Lakes earnings 688,788
1998 interest received on mortgage revenue bond (862,552)
- -------------------------------------------------------------------------------
Net carrying value, December 31, 1998 $ 9,826,236
===========
</TABLE>
Under the original loan documents, the interest rates during the term of the
mortgage loan are as follows:
<TABLE>
<CAPTION>
Base Primary Supplemental
Interest Deferred Base Contingent Contingent
Rate Interest Rate Interest Rate Interest Rate
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
April 28, 1989 to April 30, 1992 6.70% 5.30% 4.00% --
May 1, 1992 to April 30, 1994 8.50% -- 4.25% 3.25%
May 1, 1994 to April 28, 1999 8.75% -- 4.00% 3.25%
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
9
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
The Loan matures April 28, 1999. Base interest accrued monthly and was payable
in arrears. Deferred base interest and primary contingent interest, which
totaled $2,473,737 and $6,081,880 at December 31, 1998, will be payable monthly
in arrears from excess Net Cash Flow, as defined, from the Property.
Supplemental contingent interest, which totaled $3,361,583 and $2,857,346 at
December 31, 1998 and 1997, respectively, will be payable monthly in arrears to
the extent of 65% of Net Cash Flow remaining after the payment of deferred base
interest and primary contingent interest. Should the Net Cash Flow of the
Property in any year be insufficient to pay any primary or supplemental
contingent interest, the unpaid amounts will be deferred and payable from future
cash flows or upon maturity of the mortgage loan. Based on the current
performance of the Property, it is unlikely that any deferred base interest,
primary contingent interest or supplemental contingent interest payments will be
collected by the Partnership.
To address the possibility of available cash from Property operations being
insufficient to provide the necessary funds for payments of base interest, the
Partnership required at closing that the Borrower establish a Borrower Operating
Reserve in the original amount of $337,326, consisting of cash of $112,326 and
an irrevocable letter of credit of $225,000. In addition, net interim income,
equal to Net Cash Flow from the Property less one month's anticipated operating
expenses, was deposited into the reserve account on a monthly basis, provided
the Property generated sufficient cash flow. In November 1992, the cash balance
in the account reached approximately $187,000, through the addition of net
interim income and the accrued interest income. In November 1992, the
Partnership began withdrawing funds from the Borrower Operating Reserve in order
that Camelot Lakes meet its interest payments. In 1993, funds in the amount of
$232,780 were withdrawn and applied to the payment of base interest. As of
December 31, 1993, a balance of $50,000 remained on the letter of credit; the
Partnership agreed to waive its right to draw on the remaining balance.
Operating difficulties at the Property resulted in Camelot Lakes defaulting on
the November 1993 through January 1994 Bond payments. On February 1, 1994, the
Partnership executed a Termination and Release Agreement with the original owner
of the Property, Camelot Lakes, to relinquish the ownership of the Property and
its cash reserves of approximately $400,000 in return for the Partnership's
agreement to waive its right to draw on the remaining $50,000 of the Borrower's
undrawn letter of credit with the Partnership. Camelot Lakes agreed to transfer
its ownership and management of the Property to ConCam, an affiliate of ConAm
Management Corporation ("ConAm"), a major property management company, whereby
ConCam executed a Forbearance Agreement with the Partnership to assume the
obligations under the Bond and loan documents. ConAm manages the Property and
receives fees for such services. The Forbearance Agreement temporarily modified
the interest payment terms under the Bond to include minimum interest pay rates
as follows:
<TABLE>
<CAPTION>
Minimum Interest
Pay Rate
------------------------------------------
<S> <C>
Per annum rate - 1995 6.50%
Per annum rate - 1996 7.00%
Per annum rate - 1997 7.50%
Per annum rate - 1998 8.00%
------------------------------------------
</TABLE>
<PAGE>
10
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
The unpaid interest from the difference between the original base interest rate
(8.5% through April 30, 1994 and 8.75% thereafter) and the minimum interest pay
rate are being added to the unpaid interest as of February 1, 1994, and are
accrued and compounded monthly at the base interest rate. As of December 31,
1998 and December 31, 1997, the accrued interest differential totaled $3,550,839
and $2,779,324, respectively. Any excess cash flow from the Property after
payment of the minimum interest payment will be allocated to reducing such
accrued interest. During the forbearance period, an annual deposit into the
reserve fund for replacements is required in the amount of $130,900, increasing
3% per annum beginning in January 1995. On April 22, 1994, the General Partner
and ConCam modified the Forbearance Agreement to redirect the monthly deposits
for 1994 to the Partnership as payment of Base Interest, beginning with the
April 1994 payment. Monthly deposits into the replacement reserve were scheduled
to resume effective January 1, 1995, subject to the original terms of the
Forbearance Agreement. However, on October 24, 1994, the Partnership agreed to
allow ConCam to discontinue monthly payments into the reserve fund, including
the remaining 1994 payments that, pursuant to the agreement dated April 22,
1994, were to be redirected as payment of Base Interest. Such payments have
remained discontinued throughout 1998 and reinstatement is at the sole
discretion of the General Partner.
On May 8, 1996, as a result of negotiations with ConCam, the Partnership
executed a Letter Agreement as further amended (the "Agreement") to generally
allow a continuance of the terms of the Forbearance Agreement which originally
became effective January 31, 1994. The Agreement provided that in lieu of the
minimum pay rate, ConCam pay as debt service all available cash flow. 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 extended the Agreement with ConCam
through December 31, 1997, which was further extended through December 31, 1998.
Payments made by ConCam during 1998 approximated an average pay rate of 5.1%.
Effective December 31, 1998, the Agreement was extended through the earlier of
(i) June 30, 1999, (ii) the closing of the sale of the Bond and the Property or
(iii) the termination of the Agreement upon default by the borrower. Subject to
closing on the sale of the Bond, ConCam will cease making debt service payments
beginning January 1, 1999 and instead will use the cash flow generated by the
property to pay operating expenses and closing costs.
Based on its evaluation of conditions in the Fresno market, the General Partner
concluded there is little indication that job growth, or, consequently, demand
for rental units, will improve substantially in the foreseeable future. Given
these factors, the General Partner and ConCam agreed to pursue a sale of the
Property and/or the Bond prior to the Loan's scheduled maturity date on April
28, 1999. In February 1999, the Partnership entered into a binding agreement to
sell the Bond to Wasatch Acquisitions LLC, a Utah limited liability company, or
its designated affiliate, for a gross sale price of $11.6 million (the "Sale").
The proposed Sale will require the consent of a majority-in-interest of the
outstanding BAC Holders and the City of Fresno, California. Approval by the BAC
Holders will be solicited only by means of a consent solicitation, which will be
mailed to BAC Holders upon the completion of a customary Securities and Exchange
Commission review process. There can be no assurance that the Sale will be
consummated on the announced terms, if at all.
Based upon the decision to pursue a sale of the investment and the resulting
change in the estimated holding period, the Partnership wrote down the carrying
value of its investment in Mortgage Revenue Bond, Working Capital Loan, and
Capital Improvements Loan at December 31, 1997 to $10,000,000, the estimated
fair value of the collateral as determined by management as of that date. At
December 31, 1998, the carrying value totaled $9,826,236.
Working Capital and Capital Improvements Loans In conjunction with the
investment in the mortgage revenue bond, the Partnership made a working capital
loan to Camelot Lakes in the amount of $420,000, maturing on April 28, 1999 and
bearing interest at the rate of 12.625% per annum. The loan is secured by a
Second Deed of Trust on the Property, which is subordinate to the first mortgage
loan on the Bond.
<PAGE>
11
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
On February 1, 1994, the Partnership executed a First Amendment to the Working
Capital Loan Agreement (the "Amendment") with the current owner of the Property.
Under the Amendment, the Partnership agreed to lend the Property up to the
aggregate amount of $500,000 (the "Capital Improvements Loan") for capital
improvements to be made to the Property in 1994. The Capital Improvements Loan
bears simple interest, non-compounding, at the per annum rate of 6.0% and all
interest shall be due and payable, together with the principal balance of the
Capital Improvements Loan, upon the earlier of the end of the forbearance period
or the Maturity Payment Date. As of December 31, 1998 and December 31, 1997, the
interest receivable on the Capital Improvements Loan totaled $132,725 and
$102,724, respectively. The Amendment also provides that the principal balance
and accrued interest balance of the Working Capital Loan, $420,000 and $13,256,
respectively as of February 1, 1994, plus all future accrued working capital
loan base interest is due and payable on the Maturity Payment Date. All working
capital loan base interest shall continue to accrue at the per annum rate of
6.0%, a reduction in the previous rate of 12.625%. The Borrower shall not be
obligated to pay working capital loan base interest or any other interest
payments that may be required under the Working Capital Loan Agreement until the
Maturity Payment Date. As of December 31, 1998 and December 31, 1997, the
interest receivable on the Working Capital Loan totaled $137,157 and $111,957,
respectively. Based on the Property's performance, it is unlikely that any
interest on Capital Improvements Loan and the Working Capital Loan will be
received by the Partnership. Consequently, the interest receivable amounts are
not recorded on the accompanying financial statements. The obligation to repay
all loans, including the Bond, and interest thereon, is a nonrecourse obligation
of the Borrower and will be repaid only to the extent excess cash flow from
Property operations or proceeds from the sale of the Property are available. If
the sale of the Bond is consummated, upon closing of such sale and compliance by
ConCam of the terms and conditions of the Agreement, ConCam will be released
from all monetary obligations under the Working Capital Loan and Capital
Improvement Loan.
5. Transactions with Related Parties
The Partnership reimbursed Lehman Brothers in the amount of $557,353 for
organizational and offering expenses incurred in connection with the Public
Offering.
The Selling Agent received selling commissions equal to 5% of the gross proceeds
from the Public Offering. The Selling Agent received $1,070,000 for selling
commissions and $321,000 for additional sales and registration costs.
The General Partner was paid a nonrecurring bond acquisition fee equal to 2% of
gross proceeds of the Public Offering in the amount of $428,000 in consideration
for its services in connection with selecting, evaluating and negotiating the
terms of the investment in the Bond.
Commencing 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. These expenses totaled
approximately $25,400 and $43,000 in 1998 and 1997, of which $18,000 and $22,000
is due to affiliates at December 31, 1998 and 1997, respectively. In prior
years, affiliates of the General Partner had voluntarily absorbed these
expenses.
6. Distributions Payable
Cash distributions, per the Statements of Partners' Capital (Deficit), are
recorded on the accrual basis, which recognizes specific record dates for
payments within each fiscal year; the Statements of Cash Flows recognize actual
cash paid during the period. The following table discloses the annual
differences as presented on the accompanying financial statements:
<TABLE>
<CAPTION>
Distributions
Payable at Statements of Distributions
Beginning Partners' Capital Statements of Payable at
of Period (Deficit) Cash Flows End of Period
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ -- $ -- $ -- $ --
1997 162,105 240,739 402,844 --
1996 272,423 970,490 1,080,808 162,105
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
12
VICTORY TAX EXEMPT REALTY INCOME FUND LIMITED PARTNERSHIP
Cash distributions were suspended beginning with the 1997 third quarter
distribution, which would have been paid in November 1997.
7. Reconciliation of Financial Statement Net Income
(Loss) to Federal Income Tax Net Income
As discussed in Note 4, the investment in the Bond is accounted for using the
equity method for financial reporting purposes. However, for tax purposes, the
investment in the Bond is treated as a mortgage loan receivable. Primarily as a
result of this difference in accounting and the 1997 impairment loss adjustment,
income for tax purposes, including tax exempt income reported to the BAC Holders
for each of the years ended December 31, 1998 and December 31, 1997 was greater
than net income (loss) per the Statements of Operations by approximately
$115,000 and $2,973,000, respectively. Tax exempt income reported to the BAC
Holders amounted to approximately $887,000 and $531,000 for 1998 and 1997,
respectively.
<PAGE>
13
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Partners
Victory Tax Exempt Realty Income Fund Limited Partnership:
We have audited the accompanying balance sheets of Victory Tax Exempt Realty
Income Fund Limited Partnership (a Delaware limited partnership) as of December
31, 1998 and 1997, and the related statements of operations, partners' capital
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1998. 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 Victory Tax Exempt Realty
Income Fund Limited Partnership as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
March 15, 1999
<PAGE>
CONCAM ASSOCIATES, LP,
A CALIFORNIA LIMITED PARTNERSHIP
Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The General Partner
ConCam Associates, LP,
A California Limited Partnership:
We have audited the accompanying balance sheets of ConCam Associates, LP, A
California Limited Partnership (the Partnership), as of December 31, 1998 and
1997 and the related statements of operations and partners' deficit, and cash
flows for each of the years in the three-year period ended December 31, 1998. In
connection with our audits of the financial statements, we also have audited the
related financial statement schedule III. These financial statements and the
related financial statement schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and the related financial statement schedule 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 ConCam Associates, LP, A
California Limited Partnership, as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, based on our audits, the related
financial statement schedule III, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying financial statements and the related financial statement
schedule III have been prepared assuming that the Partnership will continue as a
going concern. As discussed in Note 9 to the financial statements, the ability
of the Partnership to meet its obligations as they become due has been adversely
affected by cash flow deficits from operations. This condition raises
substantial doubt about the Partnership's ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
9 to the financial statements. The financial statements and financial statement
schedule do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
San Diego, California
February 11, 1999, except for Note 11
to the financial statements, as to which
the date is March 15, 1999
<PAGE>
2
CONCAM ASSOCIATES, LP,
A California Limited Partnership
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
---------------- ----------------
<S> <C> <C>
Cash held in trust by ConAm Management
Corporation including $56,180 and $54,762
in 1998 and 1997, respectively, in
interest-bearing accounts $ 113,142 170,236
Impound deposits and other assets 58,056 41,752
Prepaid expenses 5,093 8,012
Property and equipment, at cost,
encumbered (notes 3 and 4):
Land 2,380,000 2,380,000
Land improvements 917,187 913,097
Buildings 6,980,559 6,980,559
Furnishings and equipment 1,004,558 889,164
---------------- ----------------
11,282,304 11,162,820
Less accumulated depreciation (1,451,071) (1,162,820)
---------------- ----------------
Net property and equipment 9,831,233 10,000,000
Organization costs, less amortization of
$11,851 and $9,399 in 1998 and 1997,
respectively 407 2,859
---------------- ----------------
$ 10,007,931 10,222,859
================ ================
Liabilities and Partners' Deficit
Accounts payable and other liabilities $ 50,526 50,224
Due to affiliate (note 5) 27,602 27,602
Rental security deposits 143,421 139,022
First trust deed note payable, net of
discount (Note 4) 14,524,270 12,128,111
Working capital loan payable, net of
discount (Note 4) 392,764 328,069
Capital improvement loan payable (Note 4) 500,000 500,000
Deferred and accrued interest payable, net of 15,448,327 12,455,378
discount (Note 4)
---------------- ----------------
Total liabilities 31,086,910 25,628,406
---------------- ----------------
Partners' deficit (Notes 7 and 8):
General partner (210,789) (154,055)
Limited partner (20,868,190) (15,251,492)
---------------- ----------------
Total partners' deficit (21,078,979) (15,405,547)
---------------- ----------------
$ 10,007,931 10,222,859
================ ================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
3
CONCAM ASSOCIATES, LP,
A California Limited Partnership
Statements of Operations and Partners' Deficit
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenue:
Rent (Note 4) $ 1,965,461 1,822,507 1,883,836
Laundry 9,031 14,787 12,995
Forfeited deposits 67,637 62,057 76,049
Late charges and other 55,051 59,361 47,979
Carport and garage 35,760 33,523 33,772
Interest 1,418 1,602 1,650
---------------- ---------------- ----------------
2,134,358 1,993,837 2,056,281
---------------- ---------------- ----------------
Expenses:
Salaries 244,637 234,062 229,114
Payroll taxes 58,482 50,841 53,345
Office supplies 29,181 36,822 20,108
Utilities 188,641 188,544 182,973
Repairs and maintenance 257,395 306,431 266,556
Advertising 36,968 44,567 25,885
Management fees (Note 5) 86,209 79,919 82,251
Real estate taxes 132,877 145,136 131,108
Insurance 24,103 30,963 34,467
Professional fees 38,948 35,972 39,996
Security services 74,562 58,843 39,121
Miscellaneous 28,729 11,251 36,558
Interest, including $3,497,022,
$2,406,902 and $1,609,522 for the
years ended December 31, 1998, 1997
and 1996, respectively, of
amortization of discount 6,316,355 5,145,445 4,277,558
Depreciation 288,251 305,768 295,962
Amortization of organization costs 2,452 2,452 2,452
Provision for impairment loss (Note 3) -- 1,196,951 --
---------------- ---------------- ----------------
7,807,790 7,873,967 5,717,454
---------------- ---------------- ----------------
Net loss (5,673,432) (5,880,130) (3,661,173)
Partners' deficit at beginning of year (15,405,547) (9,525,417) (5,864,244)
---------------- ---------------- ----------------
Partners' deficit at end of year
(Notes 7 and 8) $ (21,078,979) (15,405,547) (9,525,417)
================ ================ ================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
4
CONCAM ASSOCIATES, LP,
A California Limited Partnership
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,673,432) (5,880,130) (3,661,173)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 288,251 305,768 295,962
Amortization of discount on long-term debt 3,497,022 2,406,902 1,609,522
Amortization of organization costs 2,452 2,452 2,452
Provision for impairment loss -- 1,196,951 --
Change in assets and liabilities:
Impound deposits and other assets (16,304) (5,637) 11,959
Prepaid expenses 2,919 5,453 1,150
Accounts payable and other liabilities 302 (6,363) 14
Due to affiliate -- (1,114) (1,413)
Rental security deposits 4,399 17,908 (12,580)
Deferred and accrued interest 1,956,781 2,221,130 1,801,778
---------------- ---------------- ----------------
Net cash provided by
operating activities 62,390 263,320 47,671
Cash flows from investing activities -
purchase of fixed assets (119,484) (251,233) (39,763)
---------------- ---------------- ----------------
Net increase (decrease) in cash held in
trust by ConAm Management Corporation (57,094) 12,087 7,908
Cash held in trust by ConAm Management
Corporation at beginning of year 170,236 158,149 150,241
---------------- ---------------- ----------------
Cash held in trust by ConAm Management
Corporation at end of year $ 113,142 170,236 158,149
================ ================ ================
Supplemental disclosure of cash flow
information - cash paid during the
year for interest $ 862,552 517,413 866,258
================ ================ ================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
5
CONCAM ASSOCIATES, LP,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(1) Organization and Summary of Significant Accounting Policies and Practices
(a) General
ConCam Associates, LP (the Partnership), a partnership between ConCam,
Inc., as the general partner, and Continental American Properties,
Ltd., as the limited partner, was formed January 28, 1994 for the
purpose of acquiring and operating Camelot Lakes Apartments (the
Property), a 476-unit apartment complex located in Fresno, California.
The Partnership acquired the Property on February 1, 1994. The
Partnership generally leases its apartment units with lease terms of
one year or less. The Property operations is the Partnership's only
business segment.
(b) Basis of Accounting
The accompanying financial statements are prepared on the accrual
basis of accounting. Revenue is recognized when earned and expenses
are recognized when incurred in accordance with generally accepted
accounting principles.
(c) Depreciation
Depreciation has been provided over the estimated useful lives of the
related assets (buildings and improvements - 35 years; furniture - 10
years) using the straight-line method with an estimated residual value
equal to 10% of the original cost.
(d) Organization Costs
Organization costs are amortized using the straight-line method over a
5-year period.
(e) Income Taxes
No provision for income taxes has been made as the liability for such
taxes is that of the partners, rather than the Partnership. At
December 31, 1998 and 1997, the tax basis of the Partnership's assets
was $176,698 and $222,859, respectively, and the tax basis of the
Partnership's liabilities was $221,549 and $216,848, respectively.
(f) Discount on Long-Term Debt
The discount on long-term debt is amortized over the life of the
related liabilities using the interest method.
<PAGE>
6
CONCAM ASSOCIATES, LP,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(g) Impairment of Long-Lived Assets
The Partnership assesses its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows (undiscounted and without interest)
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. At December 31, 1998, the Property was an asset
to be held and used as the Partnership did not have the ability to
sell the Property without the approval of the Lender.
(h) Loss Per Unit
The Partnership did not issue units to the limited partner, therefore,
loss per unit is not applicable.
(i) Use of Estimates
Management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(j) Concentration of Credit Risk
The Partnership's cash held in trust by ConAm Management Corporation
is a financial instrument that is exposed to a concentration of credit
risk. ConAm Management Corporation places the Partnership's cash
balances with high credit quality and federally insured institutions.
Cash balances with any one institution may be in excess of federally
insured limits or may be invested in a non-federally insured money
market account. The Partnership has not experienced any losses in such
accounts and believes it is not exposed to any significant credit
risk.
(2) Acquisition of Property
The Partnership acquired the Property for $1 plus the assumption of
existing debt, and discounted the debt and related deferred and accrued
interest payable in order to value the liabilities at the fair value of the
assets acquired in accordance with APB Opinion No. 21, "Interest on
Receivables and Payables." The Property was valued at $11,900,000 on
February 1, 1994. The $10,449,842 difference between the face amount of the
notes and the value of the property is shown as a discount. As of December
31, 1998, 1997 and 1996, respectively, $3,497,022, $2,406,902 and
$1,609,522 of the discount was amortized as interest expense at an
effective rate of 23.17% for 1998, 23.12% for 1997 and 23.26% for 1996. At
December 31, 1998 and 1997, the tax basis of the Partnership's Property was
zero.
<PAGE>
7
CONCAM ASSOCIATES, LP,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(3) Impairment Loss
In 1997, after the completion of the renovation of a number of the
Property's apartment units and other property improvements, management of
the Partnership reevaluated the recoverability of the carrying value of the
Property. Based on its current and projected performance, management did
not believe the Partnership will be able to recover the carrying value of
its Property. Therefore, the Partnership recorded an impairment loss of
$1,196,951. The loss represented the difference between the carrying value
and the estimated fair value of the Property at that time. The fair value
was estimated based on discounted projected future cash flows and
comparable sales. At December 31, 1998, the Partnership believes that it
will be able to recover the carrying value of its property.
(4) Long-Term Debt
On February 1, 1994, the Partnership executed an assignment and assumption
agreement with the original owner of the Property, Camelot Lakes
Associates, whereby, in conjunction with the acquisition of the Property,
the Partnership assumed the first and second trust deed notes payable.
(a) First Trust Deed Note Payable
The funds for the first trust deed were made available to the lender
through the issuance of revenue bonds (Revenue Bonds), with the
stipulation that 20% of the Property's units must be reserved for low
or very low income tenants, as defined. On December 16, 1997, the
Property's requirement to reserve units for low or very low income
tenants expired. The first trust deed note payable in the amount of
$15,515,000, is secured by property and equipment and an assignment of
rents. The note bears interest at 16% per annum consisting of base
interest, deferral period deferred base interest, primary contingent
interest and supplemental contingent interest. Unamortized discount on
the first trust deed note payable at December 31, 1998 and 1997 was
$990,730 and $3,386,889, respectively.
Under the original loan agreement, interest rates during the term of
the note are as follows:
<TABLE>
<CAPTION>
Deferral
period
deferred Primary Supplemental
Base base contingent contingent
interest interest interest interest
---------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
April 28, 1989 through April 30, 1992 6.70% 5.30% 4.00% --
May 1, 1992 through April 30, 1994 8.50% -- 4.25% 3.25%
May 1, 1994 through April 28, 1999 8.75% -- 4.00% 3.25%
</TABLE>
In conjunction with the acquisition of the Property, the Partnership
executed a forbearance agreement with Victory Tax Exempt Realty Income
Fund Limited Partnership (the Lender). The forbearance agreement was
effective from February 1, 1995 through December 31, 1996, at which
time the Lender had the option to extend the forbearance period or
reinstate the original terms of the first trust deed note agreement
(Note 11).
<PAGE>
8
CONCAM ASSOCIATES, LP,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998, 1997 and 1996
In accordance with the forbearance agreement, the minimum base
interest pay rate in 1998, 1997 and 1996 was 8.0%, 7.5% and 7.0%,
respectively. The unpaid interest from the difference between the
original base interest rate and the minimum base interest pay rate is
to be added to the unpaid interest as of February 1, 1994, and
compounds monthly at the base interest rate. Deferral period deferred
base interest is payable on April 28, 1999. Primary contingent
interest is payable in arrears from excess Net Cash Flow, as defined.
Supplemental contingent interest is payable from 65% of Net Cash Flow
remaining after the payment of deferred base interest and primary
contingent interest. Interest only payments are scheduled until April
28, 1999, at which time all outstanding principal and interest are
payable. Beginning in February 1996, payments of the minimum base
interest were less than the amounts required by the forbearance
agreement. As such, on May 8, 1996, the Lender issued a standstill
letter effective through December 31, 1996. The standstill letter
allowed for the continuance of the forbearance agreement however, the
Partnership was required to pay debt service based on all available
cash flow, in lieu of the minimum base interest pay rate, as required
in the forbearance agreement. On February 26, 1997, the standstill
letter was extended through December 31, 1997. On May 11, 1998, the
standstill letter was extended through December 31, 1998 (Note 11).
Accrued base interest, deferral period deferred base interest, primary
contingent interest and supplemental contingent interest at December
31, 1998 were $3,689,256, $2,473,737, $6,081,880 and $3,362,095,
respectively. Accrued base interest, deferral period deferred base
interest, primary contingent interest and supplemental contingent
interest at December 31, 1997 were $2,913,025, $2,473,737, $5,416,280
and $2,857,346, respectively. Unamortized discount on accrued base
interest, deferral period deferred base interest, primary contingent
interest and supplemental contingent interest at December 31, 1998 and
1997 was $428,523 and $1,464,691, respectively.
In accordance with the forbearance agreement, monthly deposits were
required to be made to a replacement reserve. In April 1994, the
Lender agreed to allow the Partnership to redirect the funds to
payment of base interest. The reinstatement of monthly replacement
reserve deposits is at the sole discretion of the Lender (Note 11).
(b) Working Capital Loan Payable
The working capital loan payable has an outstanding principal amount
of $420,000 at December 31, 1998 and 1997. The loan is secured by a
second trust deed on the Partnership's property and equipment and an
assignment of rents. Based on the original terms of the note, interest
only payments are due until April 28, 1999, at which time all
outstanding principal and interest are payable. The note was amended
on February 1, 1994, resulting in a reduction of the interest rate
from 12.625% to 6.00%, simple interest. In addition, no interest
payments are due until April 28, 1999 (Note 11). At December 31, 1998
and 1997, accrued interest on the note was $137,157 and $111,957,
respectively. Unamortized discount on the working capital loan payable
at December 31, 1998 and 1997 was $27,236 and $91,931, respectively.
<PAGE>
9
CONCAM ASSOCIATES, LP,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(c) Capital Improvement Loan Payable
In conjunction with the amendment to the second trust deed note
payable, the Lender agreed to lend the Partnership an additional
$500,000 for capital improvements to be made to the Property in 1994.
The loan is secured by a second trust deed on the Partnership's
property and equipment and an assignment of rents. The capital
improvement loan bears simple interest at 6.0% per annum. Principal
and interest are due and payable at the earlier of the end of the
forbearance period as extended or April 28, 1999 (Note 11). At
December 31, 1998 and 1997, accrued interest on the note was $132,725
and $102,724, respectively.
(d) Summary of Long-Term Debt
A summary of long-term debt at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
First Working Capital Deferred
trust deed capital improvement and accrued
note loan loan interest
payable payable payable payable Total
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, net of discount at
December 31, 1995 $ 9,376,058 253,766 500,000 7,242,402 17,372,226
Deferred and accrued
interest during the year
ended December 31, 1996 -- -- -- 1,801,778 1,801,778
Discount amortization
during the year ended
December 31, 1996 1,102,844 29,776 -- 476,902 1,609,522
-------------- -------------- -------------- -------------- --------------
Balance, net of discount at
December 31, 1996 10,478,902 283,542 500,000 9,521,082 20,783,526
Deferred and accrued
interest during the year
ended December 31, 1997 -- -- -- 2,221,130 2,221,130
Discount amortization
during the year ended
December 31, 1997 1,649,209 44,527 -- 713,166 2,406,902
-------------- -------------- -------------- -------------- --------------
Balance, net of discount at 12,128,111 328,069 500,000 12,455,378 25,411,558
December 31, 1997
Deferred and accrued
interest during the year -- -- -- 1,956,781 1,956,781
ended December 31, 1998
Discount amortization
during the year
ended December 31, 1998 2,396,159 64,695 -- 1,036,168 3,497,022
-------------- -------------- -------------- -------------- --------------
Balance, net of discount at
December 31, 1998 $ 14,524,270 392,764 500,000 15,448,327 30,865,361
============== ============== ============== ============== ==============
</TABLE>
<PAGE>
10
CONCAM ASSOCIATES, LP,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(5) General Partner and Management Services
(a) Management Agreement
A management agreement between the Partnership and ConAm Management
Corporation (CAMC), an affiliate of ConCam, Inc., the general partner,
provides for base management fees of 4% of gross revenue and an
incentive management fee, which ranges from 0.5% to 1.5% of gross
rental revenue, based on annual cash flow, as defined. If however,
annual cash flow, as defined, does not exceed $1,200,000, the
incentive fee will not be earned. No incentive management fee was
earned for the years ended December 31, 1998, 1997 or 1996 (Note 11).
The agreement has an initial term of 35 months, terminating on
December 31, 1996, and is automatically renewable for successive
1-year terms unless either party elects to terminate upon written
notice given at least 90 days prior to the end of the current contract
year. The Property is operating under the automatic renewal feature of
the agreement in 1999 as neither party elected to terminate the
contract within the last 90 days of the year ended December 31, 1998.
Accrued management fees at December 31, 1998 and 1997 were $7,131.
(b) Reimbursements to Affiliate
As of December 31, 1998 and 1997, the Partnership had accrued a total
of $20,471 of reimbursable expenses payable to an affiliate of the
general partner for costs incurred on behalf of the Partnership.
(6) Fair Value of Financial Instruments
The carrying amount of funds held in trust, impound deposits and other
assets, accounts payable and other liabilities, due to affiliate, and
rental security deposits are reasonable estimates of their fair values due
to the short-term nature of those instruments. Management estimates that
the fair value of the Partnership's first trust deed note payable is
$11,600,000. This estimate is based on the fair value offered to the Lender
by an unrelated party in conjunction with the proposed sale of the related
Revenue Bonds. Management estimates that the fair value of the working
capital loan payable, capital improvement loan payable, and deferred and
accrued interest payable to be zero based on the Partnership's expectation
that such debts will not be repaid.
(7) Allocations of Earnings and Losses
(1) Net loss of the Partnership is to be allocated 99% to the limited
partner and 1% to the general partner.
(2) Net income of the Partnership is to be allocated as follows:
(i) First, to each partner, an amount equal to (or in proportion to
if less than) the excess, if any, of the aggregate amount of net
loss allocated to such partner over the aggregate amount of net
income allocated to such partner; and
(ii) Second, the balance, 99% to the limited partner and 1% to the
general partner.
<PAGE>
11
CONCAM ASSOCIATES, LP,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1998, 1997 and 1996
Notwithstanding anything to the contrary, the partnership agreement
requires that the general partner's interest in each material item of
partnership income, gain, loss, deduction or credit shall be equal to at
least 1% of each item at all times during the existence of the Partnership.
(8) Distributions
Cash Available for Distribution, as defined, is to be distributed 99% to
the limited partner and 1% to the general partner. Cash Available for
Distribution in Liquidation, as defined, is to be distributed to the
partners, pro rata, in accordance with each partner's capital account
balance, to the extent thereof, after allocation of income, loss and other
appropriate capital account adjustments.
(9) Ability to Meet Current Obligations and Management's Plan
The liquidity of the Partnership has been adversely affected by cash flow
deficits from operations. The operating deficits have prevented the
Partnership from meeting its current obligations under the forbearance
agreement and the standstill letters (Notes 4 and 11).
Management is currently under contract (Note 10) to sell the Property. The
sale is contingent upon the buyer assuming the Partnership's first trust
deed note payable and purchasing the Revenue Bonds from the Lender and the
Lender forgiving all other outstanding debts due from the Partnership.
There is no assurance that the sale will be completed. If the sale isn't
completed, the Partnership's ability to continue its operations is
dependent upon the restructuring of the long-term debt.
(10) Potential Sale of Property
On February 5, 1999, the Partnership entered into a purchase and sale
agreement with an unrelated party to sell the Property for $1 plus the
assumption of the principal balance of the Partnership's first trust deed
note payable.
The sale is contingent on the buyer's ability to simultaneously acquire the
Revenue Bonds at a discount for $11,600,000 from the Lender.
(11) Subsequent Event
On March 15, 1999, the standstill letter discussed in Notes 4 and 9 was
extended through the earlier of: (i) June 30, 1999; (ii) the closing of the
sale or other disposition of all or substantially all of the Property and
the Revenue Bonds; or (iii) the termination of the standstill letter by the
Lender upon a default by the Partnership of the terms and conditions of
this agreement.
In connection with this extension, which is effective as of January 1,
1999, the Partnership ceased making payments to the Lender and the
Partnership is to use any excess cash flow generated by the Property to pay
the Property's operating expenses and the Partnership's expenses including
those related to the sale of the Property. In the event that the cash flow
generated by the Property for the period of this extension together with
any Property-level cash balances are insufficient to cover such expenses,
the Lender is to reimburse the Partnership for such difference. In
addition, a $232,000 incentive management fee is to be paid to CAMC from
the proceeds from the sale of the Revenue Bonds.
Upon the closing of the sale of the Property and the Revenue Bonds, the
Lender is to forgive all of the Partnership's obligations to repay any
principal or interest due to the Lender.
<PAGE>
12
CONCAM ASSOCIATES, LP,
A CALIFORNIA LIMITED PARTNERSHIP
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1998
<TABLE>
<CAPTION>
Camelot Lakes
Residential property: Apartments
<S> <C>
Location Fresno, Ca
Construction date 1985
Acquisition date 04/01/94
Life on which depreciation in latest income statements is computed (3)
Encumbrances $ 32,311,850
Initial cost to the Partnership:
Land $ 2,380,000
Land improvements 952,000
Buildings 7,934,395
Furnishings and equipment 633,605
Costs capitalized subsequent to acquisition:
Land, land improvements, buildings, furnishings and equipment 579,255
Write-down of land improvements and buildings (1,196,951)
Gross amount at which carried at close of period(1):
Land $ 2,380,000
Land improvements 917,187
Buildings 6,980,559
Furnishings and equipment 1,004,558
---------------
$ 11,282,304
===============
Accumulated depreciation(2) $ 1,451,071
===============
<FN>
(1) Aggregate cost for federal income tax purposes is $0.
(2) The amount of accumulated depreciation for federal income tax purposes is $0.
(3) Land improvements and buildings - 35 years; furnishings and equipment - 10 years.
</FN>
</TABLE>
A reconciliation of the carrying amount of property and equipment and
accumulated depreciation for the years ended December 31, 1998, 1997 and 1996
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Property and equipment:
Beginning of period $ 11,162,820 12,108,538 12,068,775
Additions 119,484 251,233 39,763
Write-down of assets -- (1,196,951) --
---------------- ---------------- ----------------
End of period $ 11,282,304 11,162,820 12,108,538
================ ================ ================
Accumulated depreciation:
Beginning of period $ 1,162,820 857,052 561,090
Depreciation expense 288,251 305,768 295,962
---------------- ---------------- ----------------
End of period $ 1,451,071 1,162,820 857,052
================ ================ ================
</TABLE>
EXHIBIT 10.7
VICTORY TAX EXEMPT REALTY INCOME FUND
LIMITED PARTNERSHIP
Amendment To Standstill Agreement
Between
Victory Tax Exempt Realty Income Fund
Limited Partnership
And
Concam Associates, LP
<PAGE>
2
AMENDMENT TO STANDSTILL AGREEMENT
---------------------------------
This AMENDMENT TO STANDSTILL AGREEMENT (this "Agreement") is made
effective as of December 31, 1998, by and between VICTORY TAX EXEMPT REALTY
INCOME FUND LIMITED PARTNERSHIP, a Delaware limited partnership ("Lender"), and
CONCAM ASSOCIATES, L.P., a California limited partnership ("Borrower").
R E C I T A L S :
-----------------
1. Lender is the sole holder and owner of a $15,515,000 Mortgage
Revenue Bond (the "Bond"), issued by the City of Fresno, California ("Issuer"),
pursuant to the terms of that certain Indenture of Trust and Lender Loan
Agreement, dated as of April 15, 1989, and that certain Regulatory Agreement,
dated as of April 15, 1989 (collectively, the "Bond Documents"), with respect to
that certain property commonly known as the "Camelot Lake Apartment Project"
located in Fresno, California and more particularly described on Exhibit A
attached hereto, which, with all Improvements, Fixtures and Personalty thereon,
shall hereafter be referred to as the "Property."
2. In connection with the issuance of the Bond, Issuer, Lender and
Camelot Lake Associates, a California limited partnership ("Camelot"), entered
into that certain Loan Agreement, dated as of April 15, 1989 (the "Loan
Agreement"), as well as certain other documents in connection therewith,
including the Bond Documents, as described on Exhibit B attached hereto
(collectively, the "Loan Documents"), including, without limitation, that
certain Deed of Trust with Assignment of Rents and Fixture Filing, dated as of
April 15, 1989 (the "Deed of Trust"), made by Camelot for the benefit of Lender.
Pursuant to the Loan Documents, Lender made a loan to Camelot in the original
principal amount of $15,515,000 (the "Loan") from the proceeds of the Bond.
3. Borrower has heretofore acquired title to the Property and
accordingly replaced Camelot as the owner of the Property and as borrower and
obligor under the Loan Documents.
4. Certain Events of Default under the Loan Documents existed at
the time Borrower acquired title to the Property because income from the
Property was not sufficient to pay operating expenses and amounts payable under
the Loan. Rather than exercise its remedies based on any such Events of Default,
Lender agreed to forbear exercising such remedies, on the terms and conditions
of that certain Forebearance [sic] Agreement, dated as of January 31, 1994, by
and between Lender and Borrower (the "Forbearance Agreement"). All capitalized
terms used and not otherwise defined herein shall have the respective meanings
ascribed thereto in the Forbearance Agreement.
5. The Forbearance Agreement was amended by that certain Standstill
Letter, dated as of May 8, 1996 (as the same may have been amended, the
"Standstill Agreement").
6. Lender and Borrower now desire to sell the Bond and the Property
and, as a result, (i) Borrower expects to sell the Property to Wasatch
Acquisitions, LLC, a Utah limited liability company ("Buyer"), or its affiliate,
for a purchase price of One Dollar ($1.00) and the assumption by Buyer of
Borrower's obligations under the Loan Documents and (ii) concurrently with the
sale of the Property, Lender expects to sell the Bond to Buyer or its affiliate
for a purchase price of Eleven Million Six Hundred Thousand Dollars
($11,600,000) (the "Sale Proceeds").
<PAGE>
3
7. Lender and Borrower desire to enter into this Agreement in order
to facilitate and agree to such sale of the Bond and the Property to Buyer or
its affiliate in accordance with, and subject to, the terms and conditions set
forth in this Agreement.
A G R E E M E N T :
-------------------
NOW, THEREFORE, in consideration of the covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby covenant and agree as follows:
1. TERM. The term of the Standstill Agreement and this Agreement
shall be extended and shall continue until the earlier to occur of (a) June 30,
1999, (b) the closing (the "Closing") of the sale or other disposition of all or
substantially all of the Property to Buyer or its affiliate and the sale of the
Bond (collectively, the "Sale") or (c) the termination of this Agreement by
Lender upon a default by Borrower of the terms and conditions of the Standstill
Agreement or this Agreement which continues for a period of thirty (30) days
after written notice thereof from Lender to Borrower. Except with respect to
Paragraph 3 herein which will survive the termination or expiration of this
Agreement, upon the termination or expiration of the Standstill Agreement, the
rights and obligations of the parties under the Standstill Agreement shall cease
and the Standstill Agreement (including, without limitation, this Agreement)
shall be of no further force or effect, and the rights, liabilities and
obligations of the parties shall be as they existed immediately prior to the
execution of this Agreement.
2. FEES, COSTS AND EXPENSES.
1. Deposits to Operating Account and Savings Account.
Notwithstanding anything to the contrary contained in the Loan Documents, the
Forbearance Agreement or the Standstill Agreement, during the period that this
Agreement is in effect, Borrower shall deposit all rental and other income or
receipts attributable to or with respect to the Property (the "Gross Receipts")
for such period in the "Operating Account" (as hereinafter defined). In
addition, concurrently with the execution hereof, Borrower shall deposit in the
Operating Account all Net Cash Flow (if any) in Borrower's possession or control
and attributable to the period prior to January 1, 1999. From time to time in
Borrower's reasonable discretion, Borrower may (i) transfer funds in the
Operating Account in excess of the "Permitted Expenses" (as hereinafter defined)
to the "Savings Account" (as hereinafter defined) and (ii) to the extent
required, transfer funds from the Savings Account to the Operating Account to
fund the Permitted Expenses. Borrower shall maintain with Bank of America, N.T.
& S.A. (a) corporate checking account no. 1450-1-04695 (the "Operating Account")
and (b) corporate account no. 1450-4-04702 (the "Savings Account"). Borrower
shall and does hereby grant to Lender a first priority security interest in the
Operating Account and the Savings Account in the manner provided in Article 2 of
the Deed of Trust and shall execute such further instruments, notices and
agreements as may be reasonably required by Lender in order to perfect or
effectuate the security interest granted hereby.
<PAGE>
4
2. Permitted Expenses. Borrower may make disbursements from
the Operating Account only for (i) the reasonable, actual costs, fees and
expenses of operation, maintenance and management of the Property, (ii) the
reasonable, actual costs, fees and expenses of administration of Borrower's
partnership and (iii) the "Closing Costs" (as hereinafter defined), all of the
foregoing disbursements as paid and incurred by Borrower in accordance with
Schedule 1 attached hereto (collectively, the "Permitted Expenses") during the
applicable period, including, without limitation, the reasonable, actual amounts
paid and incurred for leasing, marketing, taxes, assessments, capital
improvements, refund of security deposits, insurance, salaries, repairs and
utilities, accounting, tax preparation and auditing fees of the Property or
Borrower, the Bond Trustee Fee, the property management fee paid to the
Management Agent (to the extent approved by Lender pursuant to Section 11.1 of
the Loan Agreement), and the reasonable out-of-pocket fees and expenses incurred
by Borrower in connection with this Agreement or the Sale, but excluding (i) any
payments of interest on, or the repayment of principal of, the Loan and the
Working Capital Loan, (ii) amounts paid in payment of the Mortgage
Administration and Servicing Fee, (iii) any property management fee paid to the
Management Agent if the Management Agent is the Fund or an affiliate of the
Fund, and (iv) payments on account of any Operating Working Capital Loan(s)
and/or interest thereon. All disbursements from the Operating Account shall be
made in accordance with Schedule 1 attached hereto, provided, however, that
Borrower may, without Lender's consent, allocate amounts from the contingency
line-item in such schedule to any other line item.
3. Suspension of Debt Service. During the period that this
Agreement remains in effect, and provided that Borrower complies with the terms
and conditions hereof and no Event of Default hereafter occurs, Borrower shall
not be required to make any payments of Base Interest nor deposits into the
Reserve Fund for Replacements or Property tax payments to Lender that would
otherwise be scheduled to be made during the term of this Agreement.
4. Closing Costs. At the Closing of the Sale, Borrower shall
use (i) the amounts remaining in the Operating Account, (ii) the amounts
remaining in the Savings Account, (iii) any amounts held in the Reserve Account
or by Lender on account of real property taxes, insurance, replacements,
security deposits or bond fees (collectively, the "Reserve Funds"), and (iv) any
other income attributable to the Property and retained by Borrower, to pay the
reasonable, actual expenses of the Sale (including, without limitation, payment
by Borrower of any amounts due from Borrower under the "Purchase Agreement" (as
hereinafter defined) and any Permitted Expenses paid or prorated at the Closing)
incurred by Borrower and approved by Lender in its reasonable discretion prior
to or at the Closing (collectively, the "Closing Costs"). If at the Closing or
any time prior thereto that this Agreement is in effect (A) the amount of the
Closing Costs exceeds the amounts then held in the Operating Account, the
Savings Account and any Reserve Funds or (B) the total amount of the Permitted
Expenses paid or incurred during the term of this Agreement exceeds the amounts
available in the Operating Account and the Savings Account (such events
collectively being referred to herein as a "Shortage"), then (1) Borrower shall
fund any Shortage and (2) upon an "Accounting" (as hereinafter defined) pursuant
to Paragraph 3 below, Lender shall reimburse Borrower for such expenses.
<PAGE>
5
5. Incentive Management Fee. At the Closing of the Sale of
the Bond, Lender shall cause the escrow agent to pay, from the net proceeds of
such Sale, an amount equal to two percent (2%) of the gross Sale price (which
equals Two Hundred Thirty Two Thousand Dollars ($232,000)) based upon a Sale
price of Eleven Million Six Hundred Thousand Dollars ($11,600,000)) which shall
be paid to ConAm Management Corporation, a California corporation ("Management
Company"), as an incentive management fee.
6. Mortgage Administration and Servicing Fee. Borrower shall
suspend payment of the Mortgage Administration and Servicing Fee as of the date
hereof.
7. Purchase Agreement. Lender has read and approved that
certain Agreement of Purchase and Sale and Joint Escrow Instructions, dated as
of February 5, 1999 (the "Purchase Agreement"), by and between Borrower and
Buyer. Upon the Closing of the Sale pursuant to the Purchase Agreement and
provided that Borrower complies with the terms and provisions hereof, Lender
acknowledges that, except as provided herein, Borrower shall have no further
obligation to Lender to repay any principal or interest to Lender under any of
the Loan Documents, the Working Capital Loan, the Capital Improvements Loan or
any other loan (including accrued interest) outstanding from Borrower to Lender.
During the term of this Agreement and the Standstill Agreement, Borrower shall
not amend or modify the Purchase Agreement without the prior written consent of
Lender.
3. FINAL ACCOUNTING. On or before seventy-five (75) days after the
Closing, Borrower shall deliver to Lender a final accounting (the "Accounting")
reconciling (a) the Gross Receipts delivered into the Operating Account, the
Savings Account and any other amounts held in any Reserve Funds and any other
income attributable to the Property and retained by Borrower prior to the
Closing, (b) the actual expenses of the Sale incurred by Borrower and reasonably
approved by Lender and (c) the actual Permitted Expenses incurred by Borrower
and reasonably approved by Lender. Upon Lender's reasonable approval of the
Accounting, any and all remaining funds held by or on behalf of Borrower per the
Accounting shall be remitted to Lender as final payment of the Base Interest, or
in the event that the Accounting establishes that a Shortage occurred, Lender
shall reimburse Borrower for the amount of such Shortage.
4. MISCELLANEOUS.
1. In the event the Sale of the Property or the Bond to Buyer
does not occur, nothing contained herein shall be construed as a commitment by
Lender to (i) make any new loan or loans or to grant or extend any other
financial accommodations to Borrower, (ii) restructure the Loan or to modify any
Loan Document or (iii) except as expressly provided for herein, waive, modify or
forbear from exercising any rights, powers, remedies or privileges, whether
under the Loan Documents, the Forbearance Agreement or the Standstill Agreement,
at law or in equity.
2. No purported alteration, amendment, change, waiver,
termination or other modification of this Agreement, the Loan Documents, the
Forbearance Agreement or the Standstill Agreement shall be binding upon any
party hereto, or have any other force or effect in any respect unless the same
shall be in writing and signed by, or on behalf of, the party to be charged
therewith.
<PAGE>
6
3. Each of the parties hereto understands that this Agreement
is a legally binding agreement that may affect such party's rights. Each party
hereto represents to the other that it has been represented by independent legal
counsel of its choice regarding the meaning and legal significance of this
Agreement and that it is satisfied with its legal counsel and the advice
received from it.
4. Should any provision of this Agreement require judicial
interpretation, it is agreed that a court interpreting or construing the same
shall not apply a presumption that the terms hereof shall be more strictly
construed against any party by reason of the rule of construction that a
document is to be construed more strictly against the party who itself or
through its agent prepared the same.
5. This Agreement shall be interpreted and enforced in
accordance with the internal laws of the State of California as the same may
from time to time exist, without giving effect to the principles of conflicts of
laws.
6. This Agreement constitutes the entire agreement of the
parties concerning the subject matter hereof, and supersedes any prior or
contemporaneous representations or agreements, either oral or written, not
contained herein.
7. Each party executing this Agreement represents that such
party has the full authority and legal power to do so.
8. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument, with the same effect as
if each party had executed all counterparts.
Remainder of this page left intentionally blank.
<PAGE>
7
IN WITNESS WHEREOF, Lender and Borrower have caused this Agreement
to be duly executed as of the date first written above.
LENDER:
VICTORY TAX EXEMPT REALTY INCOME
FUND LIMITED PARTNERSHIP, a
Delaware limited partnership
By: CA VICTORY, INC., a Delaware cor-
poration, Its General Partner
By: /s/Daphne Aronson
-----------------
Name: Daphne Aronson
Its: President
BORROWER:
CONCAM ASSOCIATES, L.P., a California
limited partnership
By: CONCAM, INC., a California corpo-
ration, Its General Partner
By: /s/Ralph W. Tilley
------------------
Name: Ralph W. Tilley
Its: Vice President
<PAGE>
A-1
EXHIBIT A
---------
LEGAL DESCRIPTION
-----------------
All that certain real property located in the County of Fresno, State
of California, described as follows: Lot 16 of Tract No. 3155, Peach Tree
Village, in the City of Fresno, County of Fresno, State of California, according
to the Map thereof Recorded in Book 37, Pages 99 and 100 of Plats, in the Office
of the County Recorder of said county.
<PAGE>
B-1
EXHIBIT B
---------
BOND DOCUMENTS
--------------
1. Deed of Trust with Assignment of Rents and Fixture Filing, dated as of
April 15, 1989, from Borrower to Ticor Title Insurance Company ("TICOR"), as
trustee, for the benefit of Lender.
2. Assignment of Lessor's Interest in Leases, dated as of April 15, 1989,
from Borrower to Lender.
3. Working Capital Loan Agreement, dated as of April 15, 1989, by and
between Borrower and Lender.
4. Second Deed of Trust with Assignment of Rents and Fixture Filing, dated as
of April 15, 1989, from Borrower to TICOR for the benefit of Lender.
5. Second Assignment of Lessor's Interest in Leases, dated as of April 15,
1989, from Borrower to Lender.
6. Regulatory Agreement, dated as of April 15, 1989, by and among Issuer,
Lender, Borrower and First Interstate Bank of California ("Trustee").
7. Indenture of Trust and Lender Loan Agreement, dated as of April 15, 1989,
by and among Issuer, Lender and Trustee.
<PAGE>
S 1-1
SCHEDULE 1
----------
ADJUSTED CASH FLOW PROJECTIONS
------------------------------
See attached.
<PAGE>
Schedule 1
Camelot Lakes
<TABLE>
<CAPTION>
Projected Ending Cash Balance at May 31, 1999
<S> <C> <C>
Cash Balance at 2/28/99 $ 209,648
Estimated Net Cash Flow(1)
March $ 62,000
April 20,000
May 68,000
---------
150,000 150,000
=========
Property Insurance
Insurance Effective Date 5/16/98
Projected Selling Date 5/31/99
Estimated Annual cost 23,803
Payments Made Through Sale 24,000
Less: Earned Premium Through Sale (24,846) 381 Days
---------
Refund/(Payment) Due (846) (846)
=========
Property Taxes
Property Tax Paid Through Date 6/30/99
Projected Selling Date 5/31/99
Actual Taxes Due (7/1/98 - 6/30/99) 120,942
Less: Seller Portion Due Through Closing 0 0 Days 0
Less: Buyer Portion Due Through Closing 9,940 30 Days 9,940
Miscellaneous
Last Month's Expenses (85,000)
Prepaid Rents (3,500)
Security Deposits 2/28/99 (143,177)
Tax Impound Account Balance 12/31/98 66,000
---------
(165,677) (165,677)
========= ---------
Projected Ending Cash Balance at 5/31/99 203,065
Other Final Costs
Final Audit/Tax Return (20,000)
Legal Fees (20,000)
Title Costs (per LandAmerica estimate) (31,000)
Fire Damage deductible (5,000)
Contingency (25,000) (101,000)
========= ---------
Projected Ending Cash Surplus (Deficit) 102,065
=========
</TABLE>
<TABLE>
<CAPTION>
Mar Apr May
<S> <C> <C> <C>
(1)Income $175,000 $175,000 $175,000
Oper Expense (94,000) (80,000) (94,000)
Other Inc/Exp (1,000) (1,000) (1,000)
Taxes (61,000) 0
Insurance (2,000) (2,000) (2,000)
Debt Service
Impounds 0 0 0
Capital Items (16,000) (11,000) (10,000)
-------- -------- --------
Net Cash Flow $ 62,000 $ 20,000 $ 68,000
======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 1,078,440
<SECURITIES> 000
<RECEIVABLES> 000
<ALLOWANCES> 000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 000
<DEPRECIATION> 000
<TOTAL-ASSETS> 10,918,467
<CURRENT-LIABILITIES> 86,700
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 10,831,767
<TOTAL-LIABILITY-AND-EQUITY> 10,918,467
<SALES> 000
<TOTAL-REVENUES> 713,166
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 231,118
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 482,048
<INCOME-TAX> 000
<INCOME-CONTINUING> 482,048
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 482,048
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
