FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission File number: 0-21895
WNC HOUSING TAX CREDIT FUND V, L.P., Series 3
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
California 33-6163848
WNC HOUSING TAX CREDIT FUND V, L.P., Series 3
3158 Redhill Avenue, Suite 120, Costa Mesa, CA 92626
(714) 662-5565
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--------- ----------
WNC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
June 30, 2002 and March 31, 2002 3
Statements of Operations
For the Three Months Ended June 30, 2002 and 2001 4
Statement of Partners' Equity (Deficit)
For the Three Months Ended June 30, 2002 5
Statements of Cash Flows
For the Three Months Ended June 30, 2002 and 2001 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risks 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certification Pursuant To 18 U.S.C. Section 1350 20
2
WNC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
BALANCE SHEETS
June 30, 2002 March 31, 2002
----------------------- ---------------------
(unaudited)
ASSETS
Cash and cash equivalents $ 26,044 $ 78,098
Investments in limited partnerships, net (Notes 3) 8,688,031 8,970,406
Advances to limited partnership (Note 6) 50,000 -
----------------------- ---------------------
$ 8,764,075 $ 9,048,504
======================= =====================
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Accrued expenses 8,133 6,067
Accrued fees and expenses due to
General Partner and affiliates (Note 4) 106,529 87,990
----------------------- ---------------------
Total liabilities 114,662 94,057
----------------------- ---------------------
Commitments and Contingencies (Note 6)
Partners' equity (deficit):
General Partner (88,997) (85,947)
Limited Partners (25,000 units authorized and
18,000 units issued and outstanding) 8,738,410 9,040,394
----------------------- ---------------------
Total partners' equity 8,649,413 8,954,447
----------------------- ---------------------
$ 8,764,075 $ 9,048,504
======================= =====================
See accompanying notes to financial statements
3
WNC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2002 and 2001
(unaudited)
2002 2001
-------------------------- ----------------------------
Interest income $ 249 $ 133
-------------------------- ----------------------------
Operating expenses:
Amortization (Note 3) 9,645 9,645
Asset management fees (Note 4) 12,375 8,896
Legal and accounting fees 8,479 14,416
Other 5,760 8,290
-------------------------- ----------------------------
Total operating expenses 36,259 41,247
-------------------------- ----------------------------
Loss from operations (36,010) (41,114)
Equity in losses of limited
partnerships (Note 3) (269,024) (139,220)
-------------------------- ----------------------------
Net loss (305,034) (180,334)
========================== ============================
Net loss allocated to:
General partner $ (3,050) $ (1,803)
========================== ============================
Limited partners $ (301,984) $ (178,531)
========================== ============================
Net loss per limited partner unit $ (17) $ (10)
========================== ============================
Outstanding weighted limited
partner units 18,000 18,000
========================== ============================
See accompanying notes to financial statements
4
WNC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
STATEMENT OF PARTNERS' EQUITY (DEFICIT)
For the Three Months Ended June 30, 2002
(unaudited)
General Limited
Partner Partners Total
------------------- ------------------- -------------------
Partners' equity (deficit) at March 31, 2002 $ (85,947) $ 9,040,394 $ 8,954,447
Net loss (3,050) (301,984) (305,034)
------------------- ------------------- -------------------
Partners' equity (deficit) at June 30, 2002 $ (88,997) $ 8,738,410 $ 8,649,413
=================== =================== ===================
See accompanying notes to financial statements
5
WNC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 2002 and 2001
(unaudited)
2002 2001
---------------- -----------------
Cash flows from operating activities:
Net loss $ (305,034) $ (180,334)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization 9,645 9,645
Equity in losses of limited partnerships 269,024 139,220
Change in accrued expenses 2,066 (25,122)
Advances to limited partnership (50,000) -
Accrued fees and expenses due to
General Partner and affiliates 18,539 31,892
---------------- -----------------
Net cash used in operating activities (55,760) (24,699)
---------------- -----------------
Cash flows from investing activities:
Distributions from limited partnerships 3,706 10,049
---------------- -----------------
Net cash provided by investing activities 3,706 10,049
---------------- -----------------
Net decrease in cash and cash equivalents (52,054) (14,650)
Cash and cash equivalents, beginning of period 78,098 20,126
---------------- -----------------
Cash and cash equivalents, end of period $ 26,044 $ 5,476
================ =================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Taxes paid $ 800 $ 800
================ =================
See accompanying notes to financial statements
6
WNC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2002
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
General
- -------
The accompanying condensed unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act
of 1934. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended June 30, 2002 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 2003. For further information,
refer to the financial statements and footnotes thereto included in the
Partnership's annual report on Form 10-K for the fiscal year ended March 31,
2002.
Organization
- ------------
WNC Housing Tax Credit Fund V, L.P., Series 3 ("the Partnership") is a
California Limited Partnership formed under the laws of the State of California
on March 28, 1995, and commenced operations on October 24, 1995. The Partnership
was formed to acquire limited partnership interests in other limited
partnerships or limited liability companies ("Local Limited Partnerships") which
own multifamily apartment complexes that are eligible for low-income housing
federal and, in some cases, California income tax credits (the "Low Income
Housing Credit").
WNC & Associates, Inc. ("Associates") is the general partner of the Partnership
(the "General Partner"). The chairman and president own substantially all of the
outstanding stock of Associates. The business of the Partnership is conducted
primarily through the General Partner as the Partnership has no employees of its
own
The Partnership shall continue in full force and effect until December 31, 2050
unless terminated prior to that date pursuant to the partnership agreement or
law.
The financial statements include only activities relating to the business of the
Partnership, and do not give effect to the assets that the partners may have
outside of their interests in the Partnerships, or to any obligations, including
income taxes, of the partners.
The partnership agreement authorized the sale of up to 25,000 units at $1,000
per Unit ("Units"). The offering of Units concluded in January 1996, at which
time 18,000 Units representing subscriptions in the amount of $17,558,985, net
of $441,015 of discounts for volume purchases, had been accepted. The General
Partner has 1% interest in operating profits and losses, taxable income and
losses, cash available for distribution from the Partnership and tax credits.
The limited partners will be allocated the remaining 99% of these items in
proportion to their respective investments.
After the limited partners have received proceeds from a sale or refinancing
equal to their capital contributions and their return on investment (as defined
in the Partnership Agreement) and the General Partner has received proceeds
equal to its capital contribution and a subordinated disposition fee (as
described in Note 3) from the remainder, any additional sale or refinancing
proceeds will be distributed 90% to the limited partners (in proportion to their
respective investments) and 10% to the General Partner.
7
WNC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended June 30, 2002
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Risks and Uncertainties
- -----------------------
The Partnership's investments in Local Limited Partnerships are subject to the
risks incident to the management and ownership of low-income housing and to the
management and ownership of multi-unit residential real estate. Some of these
risks are that the low income housing credit could be recaptured and that
neither the Partnership's investments nor the Housing Complexes owned by the
Local Limited Partnerships will be readily marketable. To the extent the Housing
Complexes receive government financing or operating subsidies, they may be
subject to one or more of the following risks: difficulties in obtaining tenants
for the Housing Complexes; difficulties in obtaining rent increases; limitations
on cash distributions; limitations on sales or refinancing of Housing Complexes
limitations on transfers of Local Limited Partnership Interests; limitations on
removal of Local General Partners limitations on subsidy programs; and possible
changes in applicable regulations. The Housing Complexes are or will be subject
to mortgage indebtedness. If a Local Limited Partnership does not make its
mortgage payments, the lender could foreclose resulting in a loss of the Housing
Complex and low-income housing credits. As a limited partner of the Local
Limited Partnerships, the Partnership will have very limited rights with respect
to management of the Local Limited Partnerships, and will rely totally on the
Local General Partners of the Local Limited Partnerships for management of the
Local Limited Partnerships. The value of the Partnership's investments will be
subject to changes in national and local economic conditions, including
unemployment conditions, which could adversely impact vacancy levels, rental
payment defaults and operating expenses. This, in turn, could substantially
increase the risk of operating losses for the Housing Complexes and the
Partnership. In addition, each Local Limited Partnership is subject to risks
relating to environmental hazards and natural disasters, which might be
uninsurable. Because the Partnership's operations will depend on these and other
factors beyond the control of the General Partner and the Local General
Partners, there can be no assurance that the anticipated low income housing
credits will be available to Limited Partners.
In addition, Limited Partners are subject to risks in that the rules governing
the low income housing credit are complicated, and the use of credits can be
limited. The only material benefit from an investment in Units may be the low
income housing credits. There are limits on the transferability of Units, and it
is unlikely that a market for Units will develop. All management decisions will
be made by the General Partner.
Method of Accounting For Investments in Limited Partnerships
- ------------------------------------------------------------
The Partnership accounts for its investments in limited partnerships using the
equity method of accounting, whereby the Partnership adjusts its investment
balance for its share of the Local Limited Partnership's results of operations
and for any distributions received. The accounting policies of the Local Limited
Partnerships are consistent with those of the Partnership. Costs incurred by the
Partnership in acquiring the investments are capitalized as part of the
investment account and are being amortized over 30 years (Note 3).
Offering Expenses
- -----------------
Offering expenses consist of underwriting commissions, legal fees, printing,
filing and recordation fees, and other costs incurred in connection with selling
limited partnership interests in the Partnership. The General Partner is
obligated to pay all offering and organization costs in excess of 15% (including
sales commissions) of the total offering proceeds. Offering expenses are
reflected as a reduction of limited partners' capital and amounted to $2,132,000
at the end of all periods presented.
8
WNC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended June 30, 2002
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 materially differ from those
estimates.
Cash and Cash Equivalents
- -------------------------
The Partnership considers highly liquid investments with remaining maturity of
three months or less when purchased to be cash equivalents. As of June 30 and
March 31, 2002, the Partnership had no cash equivalents.
Net Loss Per Limited Partner Unit
- ---------------------------------
Net loss per limited partner unit is calculated pursuant to Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Net loss per unit
includes no dilution and is computed by dividing loss available to limited
partners by the weighted average number of units outstanding during the period.
Calculation of diluted net income per unit is not required.
Reporting Comprehensive Income
- ------------------------------
The Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income established standards for the reporting and display of
comprehensive income (loss) and its components in a full set of general-purpose
financial statements. The Partnership had no items of other comprehensive income
for all the periods presented, as defined by SFAS No. 130.
New Accounting Pronouncement
- ----------------------------
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses accounting and financial reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning
after December 15, 2001, and generally, is to be applied prospectively. The
Partnership does not expect SFAS 144 to have a material impact on the
Partnership's financial position or results of operations.
9
NC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2002
NOTE 2 - UNCERTAINTY WITH RESPECT TO INVESTMENTS IN ALLIANCE, EVERGREEN AND
- ---------------------------------------------------------------------------
HASTINGS: IMPAIRMENT OF INVESTMENTS
------------------------------------
The Partnership has three investments accounted for under the equity method,
consisting of 99% limited partnership interests in each of Alliance Apartments
I, Limited Partnership ("Alliance"), Evergreen Apartments I, Limited Partnership
("Evergreen") and Hastings Apartments I, Limited Partnership ("Hastings").
During the year ended March 31, 2000, Alliance, Evergreen and Hastings were
experiencing operational difficulties and negative cash flows from operations,
and ceased paying their lenders. Foreclosure procedures were commenced by these
two Local Limited Partnerships' lenders. Management performed an evaluation of
the Partnership's remaining investment balances in Alliance, Evergreen and
Hastings, including the cash advances noted above and other anticipated costs
and determined that an impairment adjustment was necessary. An impairment loss
of $995,804 was recognized at March 31, 2000. This impairment loss included
$644,589 in remaining book value of the Partnership's investments in Alliance,
Evergreen and Hastings, $205,080 and $74,631 of cash advances, a $50,000 accrual
for anticipated legal costs, and $21,504 of estimated accounting and other
related costs.
As a result of the foregoing, the Partnership, Alliance, Hastings, and a WNC
subsidiary executed a work-out agreement with their lender (the "Agreement"),
which was effective December 14, 2001. The balance of the indebtedness due and
owing to the lender by Alliance was satisfied by the execution of two promissory
notes. The first note totals $116,000, bears interest at 7% per annum, and
requires principal and interest payments totaling $800 per month through
February 2011, at which date the unpaid principal balance is due. The second
note totals $328,000, bears interest at 1% per annum, and has payments due
monthly out of available cash flow, as defined, with the unpaid principal
balance due February 2011. The balance of the indebtedness due and owing to the
lender by Hastings was also satisfied by the execution of two promissory notes.
The first note totals $165,000, bears interest at 7% per annum, and requires
principal and interest payments totaling $1,100 per month through September
2011, at which date the unpaid principal is due. The second note totals
$261,000, bears interest at 1% per annum, and has payments due monthly out of
available cash flow, as defined, with the unpaid principal balance due September
2011. The Partnership and a WNC subsidiary have executed a guarantee for the
payment of both notes of Alliance and Hastings. In addition, several other
commitments were made. Alliance and Hastings executed a grant deed to the lender
in the event that either entity defaults under the terms and provisions of the
notes. The deeds are held in escrow, and if Alliance or Hastings defaults on
either note, the lender may, at its option, record the respective deed. In
addition, the Partnership has assigned the lender as additional collateral its
residual value interests, as defined, in all of the Local Limited Partnerships.
The Partnership and the Local Limited Partnerships are prohibited from selling,
assigning, transferring or further encumbering the Housing Complexes retained by
each Local Limited Partnership.
As a result of the operating difficulties mentioned above, there is uncertainty
as to additional costs, if any, that the Partnership may incur in connection
with its investment in Alliance and Hastings and as to whether the Partnership
will ultimately retain its interest in these Local Limited Partnerships. In the
event the Partnership does not successfully retain its interest in Alliance and
Hastings, the Partnership would be exposed to the cessation and recapture of the
related tax credits. The Partnership's financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
On July 19, 2001, Evergreen's Housing Complex was sold for a gross sales price
of $1,300,000, which after payment of its outstanding loans and closing costs,
yielded net proceeds to the Partnership of approximately $170,000 in the form of
a return of advances. As the investment in Evergreen together with cash advances
had been previously impaired, the entire proceeds were reflected as a gain on
sale of investments in Limited Partnerships of $169,691, for the period ended
March 31, 2002. Due to the sale of the property, approximately $428,000
(unaudited) of tax credits are no longer available to the Partnership's
investors ($23.80 per Limited Partner Unit). In addition, there can be no
assurance that tax credits and loss deductions previously taken will not be
subject to recapture in the future.
10
NC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2002
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS
- --------------------------------------------
As of June 30, 2002, the Partnership has limited partnership interests in 17
Local Limited Partnerships, each of which owns one Housing Complex consisting of
an aggregate of 1,120 apartment units. The respective general partners of the
Local Limited Partnerships manage the day to day operations of the entities.
Significant Local Limited Partnership business decisions require approval from
the Partnership. The Partnership, as a limited partner, is generally entitled to
99%, as specified in the Local Limited Partnership agreements, of the operating
profits and losses, taxable income and losses and tax credits of the Local
Limited Partnerships, except for one of the investments in which it is entitled
to 49.49% of such amounts.
Equity in losses of Local Limited Partnerships is recognized in the financial
statements until the related investment account is reduced to a zero balance.
Losses incurred after the investment account is reduced to zero are not
recognized. If the Local Limited Partnerships report net income in future years,
the Partnership will resume applying the equity method only after its share of
such net income equals the share of net losses not recognized during the
period(s) the equity method was suspended.
Distributions received by limited partners are accounted for as a reduction of
the investment balance. Distributions received after the investment has reached
zero are recognized as income
Following is a summary of the equity method activity of the investments in Local
Limited Partnerships for the periods presented below:
June 30, 2002 March 31, 2002
------------------------- ---------------------
Investments in limited partnerships - beginning of period $ 8,970,406 $ 10,245,015
Equity in losses of limited partnerships (269,024) (1,225,735)
Distributions received from limited partnerships (3,706) (10,294)
Amortization of paid capitalized acquisition fees and costs (9,645) (38,580)
------------------------- ---------------------
Investments in limited partnerships - end of period $ 8,688,031 $ 8,970,406
========================= =====================
11
NC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2002
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS, continued
- -------------------------------------------------------
Selected information for the three months ended June 30, 2002 and 2001 from the
unaudited combined condensed financial statements of the limited partnerships in
which the Partnership has invested are as follows (Combined condensed financial
information for Alliance and Hastings were previously excluded from the 2001
presentation but have now been included in the periods presented below. See Note
2 for further discussion):
COMBINED CONDENSED STATEMENT OF OPERATIONS
2002 2001
---------------- ------------------
(Restated)
Revenue $ 1,501,000 $ 1,464,000
---------------- ------------------
Expenses:
Interest expense 388,000 391,000
Depreciation 392,000 382,000
Operating expenses 1,029,000 874,000
---------------- ------------------
Total expenses 1,810,000 1,647,000
---------------- ------------------
Net loss $ (309,000) $ (183,000)
================ ==================
Net loss allocable to the Partnership $ (292,000) $ (161,000)
================ ==================
Net loss recorded by the Partnership $ (269,000) $ (139,000)
================ ==================
Certain Local Limited Partnerships have incurred significant operating losses
and have working capital deficiencies. In the event these Local Limited
Partnerships continue to incur significant operating losses, additional capital
contributions by the Partnership and/or the Local General Partner may be
required to sustain the operations of such Local Limited Partnerships. If
additional capital contributions are not made when they are required, the
Partnership's investment in certain of such Local Limited Partnerships could be
impaired and the loss and recapture of the related tax credits could occur.
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
The Partnership has no officers, employees, or directors. However, under the
terms of the Partnership Agreement the Partnership is obligated to the General
Partner or Associates for the following fees:
(a) Annual Asset Management Fee. An annual asset management fee of the greater
of (i) $2,000 per multi-family housing complex or (ii) 0.275% of Gross
Proceeds. The base fee amount will be adjusted annually based on changes in
the Consumer Price Index. However, in no event will the annual asset
management fee exceed 0.2% of Invested Assets. "Invested Assets" means the
sum of the Partnership's Investments in Local Limited Partnerships and the
Partnership's allocable share of the amount of mortgages on and other
indebtedness related to the Housing Complexes. Asset management fees of
$12,375 and $8,896 were incurred during the three months ended June 30,
2002 and 2001, respectively. The Partnership paid the General Partner or
its affiliates $0 of these fees during the three months ended June 30, 2002
and 2001.
(b) A subordinated disposition fee in an amount equal to 1% of the sales price
of real estate sold. Payment of this fee is subordinated to the limited
partners receiving a preferred return of 14% through December 31, 2006 and
6% thereafter (as defined in the Partnership Agreement) and is payable only
if the General Partner or its affiliates render services in the sales
effort.
12
NC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2002
NOTE 4 - RELATED PARTY TRANSACTIONS, continued
- ----------------------------------------------
The accrued fees and expenses due to the General Partner and affiliates
consisted of the following as of:
June 30, 2002 March 31, 2002
------------------------- ----------------------
Reimbursements for expenses paid by the
General Partner or an affiliate 7,529 1,365
Asset management fee payable 99,000 86,625
------------------------- ----------------------
Total $ 106,529 $ 87,990
========================= ======================
NOTE 5 - INCOME TAXES
- ---------------------
No provision for income taxes has been recorded in the accompanying financial
statements, as any liability for income taxes is the obligation of the partners
of the Partnership.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
During 2000, WNC identified a potential problem with a developer who, at the
time, was the local general partner in six Local Limited Partnerships. The
Partnership has 99% limited partnership investments in three of those six Local
Limited Partnerships. Those investments are Alliance Apartments I, Evergreen
Apartments I and Hastings Apartments I. All the properties continue to
experience operating deficits. The local general partner ceased funding the
operating deficits, which placed the Local Limited Partnerships in jeopardy of
foreclosure. Consequently, WNC voted to remove the local general partner and the
management company from the Local Limited Partnerships. After the local general
partner contested its removal, WNC commenced legal action on behalf of the Local
Limited Partnerships and was successful in getting a receiver appointed to
manage the Local Limited Partnerships and an unaffiliated entity appointed as
property manager. WNC was subsequently successful in attaining a summary
judgment to confirm the removal of the local general partner, the receiver was
discharged and WNC now controls all six of the Local Limited Partnerships.
The six Local Limited Partnerships (hereinafter referred to as "Defendants")
were defendants in a separate lawsuit. The lawsuit was filed by eight other
partnerships in which the local general partner of the Local Limited
Partnerships is or was involved (the "Plaintiffs"). The Plaintiffs allege that
the local general partner accepted funds from the Plaintiffs and improperly
loaned these funds to the Defendants. In July 2001, this lawsuit was settled for
an aggregate amount of $35,000. The Partnerships allocated share of $17,500 had
been accrued in full at March 31, 2001 and paid in full at March 31, 2002.
The Partnership has a 99% limited partnership investment in Cascade Pines, L.P.
II ("Cascade"). Cascade is a defendant in a wrongful death lawsuit and related
injury lawsuits. Cascade carries general liability and extended liability
insurance. The wrongful death claim has been compromised, released and
dismissed. Liability insurance covered the settlement. In the related injury
lawsuits, the insurers for both the general liability, limited to $2 million,
and extended liability insurance, limited to a further $15 million, have
acknowledged coverage for the potential loss, should the outcome be unfavorable.
Discovery for the related injury lawsuits is ongoing; management of Cascade
13
NC HOUSING CREDIT FUND V, L.P. SERIES 3
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2002
NOTE 6 - COMMITMENTS AND CONTINGENCIES, continued
- -------------------------------------------------
and WNC are unable to determine the outcome of these lawsuits at this time or
their impact, if any, on the Partnership's financial statements. Should Cascade
be unsuccessful in its defense and the insurance coverage proves to be
inadequate, Cascade's assets could be subject to an adverse judgment. This could
result in the loss of the Cascade investment, which could result in the
recapture of tax credits and certain prior tax deductions. As a result, there is
an uncertainty as to the Partnership's ability to ultimately realize the
carrying value of its investment in Cascade, which totaled $465,653 at June 30,
2002. The accompanying financial statements do not reflect any adjustments that
may result from any unfavorable outcome that may occur upon the ultimate
resolution of this uncertainty.
One Local Limited Partnership, Patten Towers L.P. II ("Patten Towers"), in which
the Partnership owns a 99% interest, has a promissory note payable aggregating
approximately $6,453,000 which was funded with proceeds from the issuance of
Multifamily Housing Revenue Bonds as of December 31, 2001. Patten Towers failed
to make timely principal payments of approximately $233,000 for the year ended
December 31, 2001 in accordance with the note payable. Consequently, the Local
Limited Partnership is in default of its bond covenants and the property could
be foreclosed on by the Bond Trustee to satisfy its obligations under the bonds.
These conditions raise substantial doubt as to the Local Limited Partnership's
ability to continue as a going concern. Patten Towers is working to refinance
the property and to payoff the bonds, but as of August 16, 2002 the past due
principal payments owed have not been paid, and the bonds are fully payable
under the event of default. The lender is working with Patten Towers to assist
in improving property operations and has held off pursuing foreclosure action
against the property. There can be no assurances that Patten Towers will be
successful in its refinancing. Accordingly, Patten Towers is subject to the risk
of foreclosure and sale of the property by the lender, which would result in the
loss and potential recapture of certain tax losses and the tax credits. As a
result, there is an uncertainty as to the Partnership's ability to ultimately
realize the carrying value of its investment in Patten Towers, which totaled
$1,621,267 at June 30, 2002. The accompanying financial statements do not
reflect any adjustments that may result from any unfavorable outcome that may
occur upon the ultimate resolution of this uncertainty. At June 30, 2002, the
Partnership had advanced $50,000 to Patten Towers to facilitate a workout plan.
As of August 16, 2002, an additional $82,473 was advanced to Patten Toweres from
the Partnership. A promissory note was executed by the Partnership and Patten
Towers for the aforementioned advances totaling $132,473 plus interest equal to
10% per annum, payable by Patten Towers on demand or by August 9, 2012.
The Partnership has a 99% limited partnership investment in Heritage Apartments,
L.P. ("Heritage"). Heritage is a defendant in several wrongful death lawsuits
and related injury lawsuits. Heritage carries general liability and extended
liability insurance. Discovery for these lawsuits is ongoing, but the management
of Heritage and WNC are unable to determine the outcome of these lawsuits at
this time or their impact, if any, on the Partnership's financial statements.
Should Heritage be unsuccessful in its defense and the insurer denies coverage
or the insurance coverage proves to be inadequate, the Partnership may be
required to sell its investment or may otherwise lose its investment in
Heritage. Loss of the Heritage investment could result in the cessation and
recapture of tax credits and certain prior tax deductions.
The Partnership currently has insufficient working capital to fund its
operations. WNC & Associates, Inc. has agreed to provide advances sufficient
enough to fund the operations and working capital requirements of the
Partnership through August 16, 2003.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
With the exception of the discussion regarding historical information,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other discussions elsewhere in this Form 10-Q contain
forward-looking statements. Such statements are based on current expectations
subject to uncertainties and other factors, which may involve known and unknown
risks that could cause actual results of operations to differ materially from
those projected or implied. Further, certain forward-looking statements are
based upon assumptions about future events, which may not prove to be accurate.
Risks and uncertainties inherent in forward looking statements include, but are
not limited to, our future cash flows and ability to obtain sufficient
financing, level of operating expenses, conditions in the low income housing tax
credit property market and the economy in general, as well as legal proceedings.
Historical results are not necessarily indicative of the operating results for
any future period.
Subsequent written and oral forward looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by
cautionary statements in this Form 10-Q and in other reports we filed with the
Securities and Exchange Commission. The following discussion should be read in
conjunction with the condensed Financial Statements and the Notes thereto
included elsewhere in this filing.
The following discussion and analysis compares the results of operations for the
three months ended June 30, 2002 and 2001, and should be read in conjunction
with the condensed financial statements and accompanying notes included within
this report.
Uncertainty and Commitments with Respect to Investments in Alliance, Evergreen
and Hastings
The Partnership has three investments accounted for under the equity method,
consisting of 99% limited partnership interests in each of Alliance Apartments
I, Limited Partnership ("Alliance"), Evergreen Apartments I, Limited Partnership
("Evergreen") and Hastings Apartments I, Limited Partnership ("Hastings").
During the year ended March 31, 2000, Alliance, Evergreen and Hastings were
experiencing operational difficulties and negative cash flows from operations,
and ceased paying their lenders. Foreclosure procedures were commenced by these
three Local Limited Partnerships' lenders. Management performed an evaluation of
the Partnership's remaining investment balances in Alliance, Evergreen and
Hastings, including any anticipated costs and determined that an impairment
adjustment was necessary. An impairment loss of $995,804 was recognized at March
31, 2000. This impairment loss included $644,589 in remaining book value of the
Partnership's investments in Alliance, Evergreen and Hastings, $205,080 and
$74,631 of cash advances, a $50,000 accrual for anticipated legal costs, and
$21,504 of estimated accounting and other related costs.
As a result of the foregoing, the Partnership, Alliance, Hastings, and a WNC
subsidiary executed a work-out agreement with their lender (the "Agreement"),
which was effective December 14, 2001. The balance of the indebtedness due and
owing to the lender by Alliance was satisfied by the execution of two promissory
notes. The first note totals $116,000, bears interest at 7% per annum, and
requires principal and interest payments totaling $800 per month through
February 2011, at which date the unpaid principal balance is due. The second
note totals $328,000, bears interest at 1% per annum, and has payments due
monthly out of available cash flow, as defined, with the unpaid principal
balance due February 2011. The balance of the indebtedness due and owing to the
lender by Hastings was also satisfied by the execution of two promissory notes.
The first note totals $165,000, bears interest at 7% per annum, and requires
principal and interest payments totaling $1,100 per month through September
2011, at which date the unpaid principal is due. The second note totals
$261,000, bears interest at 1% per annum, and has payments due monthly out of
available cash flow, as defined, with the unpaid principal balance due September
2011. The Partnership and a WNC subsidiary have executed a guarantee for the
payment of both notes of Alliance and Hastings. In addition, several other
commitments were made. Alliance and Hastings executed a grant deed to the lender
in the event that either entity defaults under the terms and provisions of the
notes. The deeds are held in escrow, and if Alliance or Hastings defaults on
either note, the lender may, at its option, record the respective deed. In
addition, the Partnership has given the lender as additional collateral all of
its residual value interests, as defined, in all of the Local Limited
Partnerships. The Partnership and the Local Limited Partnerships are prohibited
from selling, assigning, transferring or further encumbering the Housing
Complexes retained by each Local Limited Partnership.
15
Uncertainty and Commitments with Respect to Investments in Alliance, Evergreen
and Hastings, continued
As a result of the operating difficulties mentioned above, there is uncertainty
as to additional costs, if any, that the Partnership may incur in connection
with its investment in Alliance and Hastings and as to whether the Partnership
will ultimately retain its interest in these Local Limited Partnerships. In the
event the Partnership does not successfully retain its interest in Alliance and
Hastings, the Partnership would be exposed to the cessation and recapture of the
related tax credits. The Partnership's financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
On July 19, 2001, Evergreen's Housing Complex was sold for a gross sales price
of $1,300,000, which after payment of its outstanding loans and closing costs,
yielded net proceeds to the Partnership of approximately $170,000 in the form of
a return of advances. As the investment in Evergreen together with cash advances
had been previously impaired, the entire proceeds were reflected as a gain on
sale of investments in Local Limited Partnerships of $169,691, for the period
ended March 31, 2002. Due to the sale of the property, approximately $428,000
(unaudited) of tax credits are no longer available to the Partnership's
investors ($23.80 per Limited Partner Unit). In addition, there can be no
assurance that tax credits and loss deductions previously taken will not be
subject to recapture in the future.
Uncertainty with Respect to Investments in Cascade, Patten Towers and Heritage
The Partnership has a 99% limited partnership investment in Cascade Pines, L.P.
II ("Cascade"). Cascade is a defendant in a wrongful death lawsuit and related
injury lawsuits. Cascade carries general liability and extended liability
insurance. The wrongful death claim has been compromised, released and
dismissed. Liability insurance covered the settlement. In the related injury
lawsuits, the insurers for both the general liability, limited to $2 million,
and extended liability insurance, limited to a further $15 million, have
acknowledged coverage for the potential loss, should the outcome be unfavorable.
Discovery for the related injury lawsuits is ongoing; management of Cascade and
WNC are unable to determine the outcome of these lawsuits at this time or their
impact, if any, on the Partnership's financial statements. Should Cascade be
unsuccessful in its defense and the insurance coverage proves to be inadequate,
Cascade's assets could be subject to an adverse judgment. This could result in
the loss of the Cascade investment, which could result in the recapture of tax
credits and certain prior tax deductions. As a result, there is an uncertainty
as to the Partnership's ability to ultimately realize the carrying value of its
investment in Cascade, which totaled $465,653 at June 30, 2002. The
Partnership's financial statements, presented elsewhere herein, do not reflect
any adjustments that may result from any unfavorable outcome that may occur upon
the ultimate resolution of this uncertainty.
One Local Limited Partnership, Patten Towers L.P. II ("Patten Towers"), in which
the Partnership owns a 99% interest, has a promissory note payable aggregating
approximately $6,453,000 which was funded with proceeds from the issuance of
Multifamily Housing Revenue Bonds as of December 31, 2001. Patten Towers failed
to make timely principal payments of approximately $233,000 for the year ended
December 31, 2001 in accordance with the note payable. Consequently, the Local
Limited Partnership is in default of its bond covenants and the property could
be foreclosed on by the Bond Trustee to satisfy its obligations under the bonds.
These conditions raise substantial doubt as to the Local Limited Partnership's
ability to continue as a going concern. Patten Towers is working to refinance
the property and to payoff the bonds, but as of August 16, 2002 the past due
principal payments owed have not been paid, and the bonds are fully payable
under the event of default. The lender is working with Patten Towers to assist
in improving property operations and has held off pursuing foreclosure action
against the property. There can be no assurances that Patten Towers will be
successful in its refinancing. Accordingly, Patten Towers is subject to the risk
of foreclosure and sale of the property by the lender, which would result in the
loss and potential recapture of certain tax losses and the tax credits. As a
result, there is an uncertainty as to the Partnership's ability to ultimately
realize the carrying value of its investment in Patten Towers, which totaled
$1,621,267 at June 30, 2002. The Partnership's financial statements, presented
elsewhere herein, do not reflect any adjustments that may result from any
unfavorable outcome that may occur upon the ultimate resolution of this
uncertainty. At June 30, 2002, the Partnership had advanced $50,000 to Patten
Towers to facilitate a workout plan. As of August 16, 2002, an additional
$82,473 was advanced to Patten Toweres from the Partnership. A promissory note
was executed by the Partnership and Patten Towers for the aforementioned
advances totaling $132,473 plus interest equal to 10% per annum, payable by
Patten Towers on demand or by August 9, 2012.
The Partnership has a 99% limited partnership investment in Heritage Apartments,
L.P. ("Heritage"). Heritage is a defendant in several wrongful death lawsuits
and related injury lawsuits. Heritage carries general liability and extended
liability insurance. Discovery for these lawsuits is ongoing, but the management
of Heritage and WNC are unable to determine the outcome of these lawsuits at
this time or their impact, if any, on the Partnership's financial statements.
Should Heritage be unsuccessful in its defense and the insurer denies coverage
or the insurance coverage proves to be inadequate, the Partnership may be
required to sell its investment or may otherwise lose its investment in
Heritage. Loss of the Heritage investment could result in the cessation and
recapture of tax credits and certain prior tax deductions.
16
Financial Condition
The Partnership's assets at June 30, 2002 consisted primarily of $26,000 in
cash, a receivable of $50,000 and aggregate investments in the seventeen Local
Limited Partnerships of $8,688,000. Liabilities at June 30, 2002 primarily
consisted of $8,000 of accrued expenses and $107,000 of accrued fees and
reimbursements due to the General Partner and affiliates.
Results of Operations
Three months ended June 30, 2002 Compared to Three months Ended June 30, 2001.
The Partnership's net loss for the three months ended June 30, 2002 was
$(305,000), reflecting an increase of $125,000 from the net loss experienced for
the three months ended June 30, 2001 of $(180,000). The increase in net loss is
due to an increase of $130,000 in equity in losses of limited partnerships,
which increased to $(269,000) for the three month period ended June 30, 2002
from $(139,000) for the three month period ended June 30, 2001. The increase in
equity in losses of limited partnerships is offset by a decrease in operating
loss of $5,000 to $(36,000), for the three months ended June 30, 2002 from
$(41,000) for the three months ended June 30, 2001.
Cash Flows
Three months ended June 30, 2002 Compared to Three months Ended June 30, 2001.
Net decrease in cash during the three months ended June 30, 2002 was $(52,000)
compared to a net decrease in cash for the three months ended June 30, 2001 of
$(15,000). The $37,000 increase was due to a decrease in distributions from
limited partnerships of $6,000 from $10,000 for the three month period ended
June 30, 2001 compared to $4,000 for the three month period ended June 30, 2002
and an increase in net cash used by operating activities of $31,000 to $(56,000)
for the three month period ended June 30, 2002 from $(25,000) for the three
month period ended June 30, 2001.
During the three months ended June 30, 2002, accrued payables, which consist of
related party management fees and reimbursements due to the General Partner and
accrued expenses, increased by $19,000. The General Partner does not anticipate
that the accrued fees and reimbursements will be paid until such time as capital
reserves are in excess of foreseeable working capital requirements of the
partnership.
The Partnership does not expect its future cash flows, together with its
available net assets at June 30, 2002 to be sufficient to meet all currently
foreseeable future cash requirements. Accordingly the General Partner has agreed
to provide advances sufficient to fund the operations and working capital
requirements of the Partnership through August 16, 2003.
Impact of New Accounting Pronouncement
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses accounting and financial reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning
after December 15, 2001, and generally, is to be applied prospectively. The
Partnership does not expect SFAS 144 to have a material impact on the
Partnership's financial position or results of operations.
17
Item 3. Quantitative and Qualitative Disclosures Above Market Risks
NONE
Part II. Other Information
Item 1. Legal Proceedings
During 2000, Associates identified a potential problem with a developer who, at
the time, was the local general partner in six Local Limited Partnerships. The
Partnership has a 99% limited partnership interest in three of those six Local
Limited Partnerships. Those investments are Alliance Apartments I, Evergreen
Apartments I and Hastings Apartments I. All the properties continue to
experience operating deficits. The local general partner ceased funding the
operating deficits, which placed the Local Limited Partnerships in jeopardy of
foreclosure. Consequently, Associates voted to remove the local general partner
and the management company from the Local Limited Partnerships. After the local
general partner contested its removal, Associates commenced legal action on
behalf of the Local Limited Partnerships and was successful in getting a
receiver appointed to manage the Local Limited Partnerships and an unaffiliated
entity appointed as property manager. Associates was subsequently successful in
attaining a summary judgment to confirm the removal of the local general
partner, the receiver was discharged and Associates now controls all six of the
Local Limited Partnerships.
The six Local Limited Partnerships (hereinafter referred to as "Defendants")
were defendants in a separate lawsuit. The lawsuit was filed by eight other
partnerships in which the local general partner of the Local Limited
Partnerships is or was involved (the "Plaintiffs"). The Plaintiffs allege that
the local general partner accepted funds from the Plaintiffs and improperly
loaned these funds to the Defendants. In July 2001, this lawsuit was settled for
an aggregate amount of $35,000 of which the Partnership's share was
approximately $17,500.
The Partnership has a 99% limited partnership investment in Cascade Pines, L.P.
II ("Cascade"). Cascade is a defendant in a wrongful death lawsuit and related
injury lawsuits. Cascade carries general liability and extended liability
insurance. The wrongful death claim has been compromised, released and
dismissed. Liability insurance covered the settlement. In the related injury
lawsuits, the insurers for both the general liability, limited to $2 million,
and extended liability insurance, limited to a further $15 million, have
acknowledged coverage for the potential loss, should the outcome be unfavorable.
Discovery for the related injury lawsuits is ongoing, but the management of
Cascade and WNC are unable to determine the outcome of these lawsuits at this
time or their impact, if any, on the Partnership's financial statements.
The Partnership has a 99% limited partnership investment in Heritage Apartments,
L.P. ("Heritage"). Heritage is a defendant in several wrongful death lawsuits
and related injury lawsuits. Heritage carries general liability and extended
liability insurance. Discovery for these lawsuits is ongoing, but the management
of Heritage and WNC are unable to determine the outcome of these lawsuits at
this time or their impact, if any, on the Partnership's financial statements.
Should Heritage be unsuccessful in its defense and the insurer denies coverage
or the insurance coverage proves to be inadequate, the Partnership may be
required to sell its investment or may otherwise lose its investment in
Heritage. Loss of the Heritage investment could result in the cessation and
recapture of tax credits and certain prior tax deductions.
Item 6. Exhibits and Reports on Form 8-K
NONE
18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WNC HOUSING TAX CREDIT FUND V, L.P., Series 3
By: WNC & ASSOCIATES, INC. General Partner
By: /s/ Wilfred N Cooper, Jr.
-------------------------
Wilfred N Cooper, Jr.
President and Chief Operating Officer of WNC & Associates, Inc.
Date: August 16, 2002
By: /s/ Thomas J. Riha
--------------------
Thomas J. Riha
Vice President and Chief Financial Officer of WNC & Associates, Inc.
Date: August 16, 2002
19
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of WNC Housing Tax
Credits Fund V, L.P., Series 3 (the "Partnership") for the period ended June 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), and pursuant to 18 U.S.C., section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, I, Wilfred N. Cooper, Sr.,
Chairman and Chief Executive Officer of WNC & Associates, Inc., general partner
[of the general partner] of the Partnership, hereby certify that:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Partnership.
/s/WILFRED N. COOPER, SR.
- -------------------------
Wilfred N. Cooper, Sr.
Chairman and Chief Executive Officer of WNC & Associates, Inc.
August 16, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of WNC Housing Tax
Credits Fund V, L.P., Series 3 (the "Partnership") for the period ended June 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), and pursuant to 18 U.S.C., section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, I, Thomas J. Riha, Chief
Financial Officer of WNC & Associates, Inc., general partner [of the general
partner] of the Partnership, hereby certify that:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Partnership.
/s/THOMAS J. RIHA
- -----------------
Thomas J. Riha
Chief Financial Officer of WNC & Associates, Inc.
August 16, 2002
20