UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
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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: 0-18405
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American Tax Credit Properties II L.P.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3495678
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
Richman Tax Credit Properties II L.P.
- ---------------------------------------
599 West Putnam Avenue, 3rd Floor 06830
Greenwich, Connecticut --------
(Address of principal executive offices) (ZipCode)
Registrant's telephone number, including area code: (203) 869-0900
--------------
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 filing requirements
for the past 90 days.
Yes X No .
----- --
1
AMERICAN TAX CREDIT PROPERTIES II L.P.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Table of Contents Page
----
Balance Sheets...............................................................3
Statements of Operations.....................................................4
Statements of Cash Flows.....................................................5
Notes to Financial Statements................................................7
2
AMERICAN TAX CREDIT PROPERTIES II L.P.
BALANCE SHEETS
(UNAUDITED)
June 29, March 30,
Notes 2002 2002
----- ------------ ------------
ASSETS
Cash and cash equivalents $ 754,533 $ 10,520
Investments in bonds 2 2,869,842 2,792,845
Investment in local partnerships 3 7,868,119 8,101,733
Interest receivable 38,006 47,552
------------ ------------
$ 11,530,500 $ 10,952,650
============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses $ 634,734 $ 698,440
Payable to general partner and affiliates 1,058,587 929,773
Other liabilities 20,600 27,600
------------ ------------
1,713,921 1,655,813
------------ ------------
Commitments and contingencies 3
Partners' equity (deficit)
General partner (395,661) (400,150)
Limited partners (55,746 units of limited
partnership interest outstanding) 10,106,712 9,662,307
Accumulated other comprehensive income, net 2 105,528 34,680
------------ ------------
9,816,579 9,296,837
------------ ------------
$ 11,530,500 $ 10,952,650
============ ============
See Notes to Financial Statements.
3
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 2002 AND 2001
(UNAUDITED)
Notes 2002 2001
----- ----------- ----------
REVENUE
Interest $ 41,318 $ 53,717
Other income from local partnerships 32,272 22,984
--------- ---------
TOTAL REVENUE 73,590 76,701
--------- ---------
EXPENSES
Administration fees 74,823 74,823
Management fees 74,823 74,823
Professional fees 2,595 15,975
Printing, postage and other 7,748 9,212
--------- ---------
TOTAL EXPENSES 159,989 174,833
--------- ---------
Loss from operations (86,399) (98,132)
Equity in loss of investment in local partnerships 3 (196,707) (642,513)
--------- ---------
Loss prior to gain on disposal of local
partnership interest (283,106) (740,645)
Gain on disposal of local partnership interest 3 732,000
--------- ---------
NET INCOME (LOSS) 448,894 (740,645)
Other comprehensive income (loss) 2 70,848 (48,718)
--------- ---------
COMPREHENSIVE INCOME (LOSS) $ 519,742 $(789,363)
========= =========
NET INCOME (LOSS) ATTRIBUTABLE TO
General partner $ 4,489 $ (7,406)
Limited partners 444,405 (733,239)
--------- ---------
$ 448,894 $(740,645)
========= =========
NET INCOME (LOSS) per unit of limited partnership
interest (55,746 units of limited partnership
interest) $ 7.97 $ (13.15)
========= =========
See Notes to Financial Statements.
4
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 29, 2002 AND 2001
(UNAUDITED)
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 42,252 $ 42,034
Cash used for local partnerships for deferred expenses (7,000)
Cash paid for
Administration fees (20,832) (5,416)
management fees (52,379)
professional fees (63,024) (22,343)
printing, postage and other expenses (11,025) (13,834)
--------- ---------
Net cash used in operating activities (59,629) (51,938)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in local partnerships (78,701) (96,635)
Cash distributions from local partnerships 879,880 213,010
Maturities/redemptions and sales of bonds 2,463 2,417
Net cash provided by investing activities 803,642 118,792
--------- ---------
Net increase in cash and cash equivalents 744,013 66,854
Cash and cash equivalents at beginning of period 10,520 81,216
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 754,533 $ 148,070
========= =========
SIGNIFICANT NON-CASH INVESTING ACTIVITIES
Unrealized gain (loss) on investments in bonds, net $ 70,848 $ (48,718)
========= =========
- --------------------------------------------------------------------------------
See reconciliation of net income (loss) to net cash used in operating activities
on page 6.
See Notes to Financial Statements.
5
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF CASH FLOWS - (Continued)
THREE MONTHS ENDED JUNE 29, 2002 AND 2001
(UNAUDITED)
2002 2001
---------- ---------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED IN OPERATING
ACTIVITIES
Net income (loss) $ 448,894 $(740,645)
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Equity in loss of investment in local partnerships 196,707 642,513
Distributions from local partnerships classified as other income (32,272) (22,984)
Gain on disposal of local partnership interest (732,000)
Amortization of net premium on investments in bonds 1,132 1,531
Accretion of zero coupon bonds (9,744) (9,744)
Decrease (increase) in interest receivable 9,546 (3,470)
Increase in payable to general partner and affiliates 128,814 91,851
Decrease in accounts payable and accrued expenses (63,706) (10,990)
Decrease in other liabilities (7,000)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES $ (59,629) $ (51,938)
========= =========
See Notes to Financial Statements.
6
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 29, 2002
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. They do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The results of operations are impacted significantly by the
combined results of operations of the Local Partnerships, which are provided
by the Local Partnerships on an unaudited basis during interim periods.
Accordingly, the accompanying financial statements are dependent on such
unaudited information. In the opinion of the General Partner, the financial
statements include all adjustments necessary to present fairly the financial
position as of June 29, 2002 and the results of operations and cash flows
for the interim periods presented. All adjustments are of a normal recurring
nature. The results of operations for the three months ended June 29, 2002
are not necessarily indicative of the results that may be expected for the
entire year.
2. Investments in Bonds
As of June 29, 2002 certain information concerning investments in bonds is
as follows:
Gross Gross
Amortized unrealized unrealized Estimated
Description and maturity cost gains losses fair value
------------------------ ----------- ----------- ------------ -----------
Corporate debt securities
Within one year $ 450,600 $ 9,963 $ -- $ 460,563
After one year through five years 1,655,757 79,558 (11,521) 1,723,794
----------- ----------- ----------- -----------
2,106,357 89,521 (11,521) 2,184,357
----------- ----------- ----------- -----------
U.S. Treasury debt securities
After five years through ten years 649,217 27,252 -- 676,469
----------- ----------- ----------- -----------
U.S. government and agency securities
After one year through five years 8,740 276 -- 9,016
----------- ----------- ----------- -----------
$ 2,764,314 $ 117,049 $ (11,521) $ 2,869,842
=========== =========== =========== ===========
7
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2002
(UNAUDITED)
3. Investment in Local Partnerships
The Partnership owns limited partnership interests in fifty Local
Partnerships representing capital contributions in the aggregate amount of
$46,371,149, which amount includes advances made to certain Local
Partnerships. As of March 31, 2002, the Local Partnerships have outstanding
mortgage loans payable totaling approximately $88,273,000 and accrued
interest payable on such loans totaling approximately $7,130,000 which are
secured by security interests and liens common to mortgage loans on the
Local Partnerships' real property and other assets.
For the three months ended June 29, 2002, the investment in local
partnerships activity consists of the following:
Investment in local partnerships as of March 30, 2002 $ 8,101,733
Advances to Local Partnerships 78,701
Equity in loss of investment in local partnerships (196,707)*
Cash distributions received from Local Partnerships (879,880)
Cash distributions classified as gain on disposal of
local partnership 732,000
Cash distributions classified as other income from local
partnerships 32,272
-----------
Investment in local partnerships as of June 29, 2002 $ 7,868,119
===========
*Equity in loss of investment in local partnerships is limited to the
Partnership's investment balance in each Local Partnership; any excess
is applied to other partners' capital in any such Local Partnership.
The amount of such excess losses applied to other partners' capital was
$601,705 for the three months ended March 31, 2002 as reflected in the
combined statement of operations of the Local Partnerships reflected
herein Note 3.
The combined unaudited balance sheets of the Local Partnerships as of March
31, 2002 and December 31, 2001 and the combined unaudited statements of
operations of the Local Partnerships for the three months ended March 31,
2002 and 2001 are reflected on pages 9 and 10, respectively.
8
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2002
(UNAUDITED)
3. Investment in Local Partnerships (continued)
The combined balance sheets of the Local Partnerships as of March 31, 2002
and December 31, 2001 are as follows:
March 31, December 31,
2002 2001
------------- -------------
ASSETS
Cash and cash equivalents $ 1,996,171 $ 2,127,352
Rents receivable 419,218 431,523
Escrow deposits and reserves 6,113,818 5,755,211
Land 4,180,673 4,180,673
Buildings and improvements (net of accumulated
depreciation of $62,414,422 and $61,229,767) 83,018,104 84,160,541
Intangible assets (net of accumulated amortization
of $1,283,613 and $1,258,567) 1,468,589 1,407,245
Other assets 1,602,602 1,387,096
------------- -------------
$ 98,799,175 $ 99,449,641
============= =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses $ 2,143,640 $ 1,812,873
Due to related parties 4,182,982 4,165,047
Mortgage loans 88,272,956 88,453,937
Notes payable 1,340,988 1,418,799
Accrued interest 7,130,310 6,958,723
Other liabilities 689,664 710,234
------------- -------------
Partners' equity (deficit) 103,760,540 103,519,613
------------- -------------
American Tax Credit Properties II L.P.
Capital contributions, net of distributions 45,579,823 45,555,964
Cumulative loss (35,655,716) (35,459,009)
------------- -------------
9,924,107 10,096,955
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General partners and other limited partners
Capital contributions, net of distributions 3,080,029 3,098,307
Cumulative loss (17,965,501) (17,265,234)
------------- -------------
(14,885,472) (14,166,927)
------------- -------------
(4,961,365) (4,069,972)
------------- -------------
$ 98,799,175 $ 99,449,641
============= =============
9
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2002
(UNAUDITED)
3. Investment in Local Partnerships (continued)
The combined statements of operations of the Local Partnerships for the
three months ended March 31, 2002 and 2001 are as follows:
2002 2001
----------- -----------
REVENUE
Rental $ 5,412,543 $ 5,332,874
Interest and other 154,869 129,529
----------- -----------
Total Revenue 5,567,412 5,462,403
----------- -----------
EXPENSES
Administrative 903,600 897,716
Utilities 956,881 1,190,244
Operating and maintenance 1,159,306 1,136,511
Taxes and insurance 695,473 662,877
Financial 1,538,553 1,554,879
Depreciation and amortization 1,210,573 1,189,588
----------- -----------
Total Expenses 6,464,386 6,631,815
----------- -----------
NET LOSS $ (896,974) $(1,169,412)
=========== ===========
NET LOSS ATTRIBUTABLE TO
American Tax Credit Properties II L.P. $ (196,707) $ (642,513)
General partners and other limited partners, which
includes $601,705 and $426,084 of Partnership loss
in excess of investment (700,267) (526,899)
----------- -----------
$ (896,974) $(1,169,412)
=========== ===========
The combined results of operations of the Local Partnerships for the three
months ended March 31, 2002 are not necessarily indicative of the results
that may be expected for an entire operating period.
10
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2002
(UNAUDITED)
3. Investment in Local Partnerships (continued)
Effective October 1, 1998, in an attempt to avoid potential adverse tax
consequences, the Partnership and the local general partners of 2000-2100
Christian Street Associates ("2000 Christian Street") and Christian Street
Associates Limited Partnership ("Christian Street") agreed to equally share
the funding of operating deficits through June 30, 2000 in the case of
Christian Street and through September 30, 2000 in the case of 2000
Christian Street (the respective "Funding Agreements"). The Funding
Agreements have been extended through June 30, 2003. Under the terms of the
Funding Agreements, the Partnership has advanced $222,278 as of June 29,
2002, of which $27,061 was advanced during the three months then ended. Such
advances have been recorded as investment in local partnerships and have
been offset by additional equity in loss of investment in local
partnerships.
As a result of increasing deficits and declining occupancy caused by
deteriorating physical conditions, Forest Village Housing Partnership
("Forest Village") filed for protection under Chapter 11 of the federal
Bankruptcy Code in the United States Bankruptcy Court, Western District of
Washington (the "Court") on March 25, 1999. Forest Village filed a plan of
reorganization (the "Plan") which was confirmed by the Court on December 14,
1999. The terms of the Plan called for the Partnership to provide up to
$500,000 (the "Bankruptcy Advance"), all of which was previously funded,
which Forest Village utilized to pay certain obligations including all first
mortgage arrears and certain secured and unsecured creditors and to make
necessary repairs to the complex. The Plan also resulted in recasting the
second mortgage and cumulative arrears over a new 30 year amortization
period that reduced Forest Village's mandatory debt service by approximately
$77,000 per annum. Subsequent to the Bankruptcy Advance, the Partnership
provided additional advances of $282,874 to Forest Village. Such advances,
including the Bankruptcy Advance, were recorded as investment in local
partnerships and were offset by additional equity in loss of investment in
local partnerships (see Note 1). Of all such amounts advanced by the
Partnership, $534,500 bore interest at 8.5% and was repayable out of net
cash flow from the operations of the Property. No interest was recorded by
the Partnership.
In May 2002, Forest Village sold its underlying Property for $2,600,000. The
sale proceeds were utilized to repay the outstanding mortgages in full, post
a bond for the purpose of avoiding Low-income Tax Credit Recapture and repay
the Partnership for advances discussed above. Under the terms of the sale,
the purchaser is required to continue to operate the Property as low-income
pursuant to Section 42 through the remainder of the Compliance Period. In
connection with the sale, the Partnership has received $732,000; Forest
Village is maintaining a reserve to pay for certain expenses incurred in
connection with the transaction and other expenses to be incurred in
connection with the termination of Forest Village. Any remaining funds after
the payment of all such expenses will be distributed to the Partnership. The
accompanying financial statements as of and for the three months ended June
29, 2002 include gain on disposal of local partnership interest of $732,000
in connection with Forest Village. Additional gain will be recognized to the
extent the Partnership receives a distribution from the Forest Village
reserve noted above.
The Partnership advanced $35,000 during the three months ended June 29, 2002
to Ann Ell Apartments Associates, Ltd. to fund operating deficits.
Cumulative advances as of June 29, 2002 are $377,545. Such advances have
been recorded as investment in local partnerships and have been offset by
additional equity in loss of investment in local partnerships.
The Partnership advanced $16,640 during the three months ended June 29, 2002
to College Avenue Apartments Limited Partnership to fund operating deficits.
Cumulative advances as of June 29, 2002 are $27,790. Such advances have been
recorded as investment in local partnerships and have been offset by
additional equity in loss of investment in local partnerships.
4. Additional Information
Additional information, including the audited March 30, 2002 Financial
Statements and the Organization, Purpose and Summary of Significant
Accounting Policies, is included in the Partnership's Annual Report on Form
10-K for the fiscal year ended March 30, 2002 on file with the Securities
and Exchange Commission.
11
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Material Changes in Financial Condition
As of June 29, 2002, American Tax Credit Properties II L.P. (the "Registrant")
has not experienced a significant change in financial condition as compared to
March 30, 2002, with the exception of the receipt of $732,000 in connection with
Forest Village Housing Partnership ("Forest Village"); see Local Partnership
Matters below. Principal changes in assets are comprised of periodic
transactions and adjustments and anticipated equity in loss from operations of
the local partnerships (the "Local Partnerships") which own low-income
multifamily residential complexes (the "Properties") which qualify for the
low-income tax credit in accordance with Section 42 of the Internal Revenue Code
(the "Low-income Tax Credit"). During the three months ended June 29, 2002,
Registrant received cash from interest revenue, maturities/redemptions and sales
of bonds and distributions from Local Partnerships and utilized cash for
operating expenses and investments in certain Local Partnerships (see Local
Partnership Matters below). Cash and cash equivalents and investments in bonds
increased, in the aggregate, by approximately $821,000 during the three months
ended June 29, 2002 (which includes a net unrealized gain on investments in
bonds of approximately $71,000, amortization of net premium on investments in
bonds of approximately $1,000 and accretion of zero coupon bonds of
approximately $10,000). Notwithstanding circumstances that may arise in
connection with the Properties, Registrant does not expect to realize
significant gains or losses on its investments in bonds, if any. During the
three months ended June 29, 2002, the investment in local partnerships decreased
as a result of Registrant's equity in the Local Partnerships' net loss for the
three months ended March 31, 2002 of $196,707 and cash distributions received
from Local Partnerships of $115,608 (exclusive of distributions from Local
Partnerships of $764,272 classified as other income), partially offset by
investments in Local Partnerships of $78,701 (see discussion below under Local
Partnership Matters). Accounts payable and accrued expenses includes deferred
administration fees of $593,740, and payable to general partner represents
deferred administration and management fees in the accompanying balance sheet as
of June 29, 2002.
Results of Operations
Registrant's operating results are dependent upon the operating results of the
Local Partnerships and are significantly impacted by the Local Partnerships'
policies. In addition, the operating results herein are not necessarily the same
for tax reporting. Registrant accounts for its investment in local partnerships
in accordance with the equity method of accounting. Accordingly, the investment
is carried at cost and is adjusted for Registrant's share of each Local
Partnership's results of operations and by cash distributions received. Equity
in loss of each investment in Local Partnership allocated to Registrant is
recognized to the extent of Registrant's investment balance in each Local
Partnership. Equity in loss in excess of Registrant's investment balance in a
Local Partnership is allocated to other partners' capital in any such Local
Partnership. As a result, the reported equity in loss of investment in local
partnerships is expected to decrease as Registrant's investment balances in the
respective Local Partnerships become zero. However, the combined statements of
operations of the Local Partnerships reflected in Note 3 to Registrant's
financial statements include the operating results of all Local Partnerships,
irrespective of Registrant's investment balances.
Cumulative losses and cash distributions in excess of investment in local
partnerships may result from a variety of circumstances, including a Local
Partnership's accounting policies, subsidy structure, debt structure and
operating deficits, among other things. In addition, the carrying value of
Registrant's investment in local partnerships may be reduced if the book value
(the "Local Partnership Carrying Value") is considered to exceed the estimated
value derived by management. Accordingly, cumulative losses and cash
distributions in excess of the investment or an adjustment to a Local
Partnership's Carrying Value are not necessarily indicative of adverse operating
results of a Local Partnership. Adjustments to a Local Partnership's Carrying
Value are typically determined and recorded in the fourth quarter of
Registrant's fiscal year. See discussion below under Local Partnership Matters
regarding certain Local Partnerships currently operating below economic break
even levels.
Registrant's operations for the three months ended June 29, 2002 and 2001
resulted in net income (loss) of $448,894 and ($740,645) respectively. The
increase in net income is primarily attributable to (i) gain on disposal of
local partnership interest of $732,000 in connection with Forest Village and
(ii) a decrease in equity in loss of investment in local partnerships of
approximately $446,000, which decrease is primarily the result of an increase in
the nonrecognition of losses in accordance with the equity method of accounting
and a decrease in the net operating losses of certain Local Partnerships in
which Registrant continues to have an investment balance. Other comprehensive
income (loss) for the three months ended June 29, 2002 and 2001 resulted from a
net unrealized gain (loss) on investments in bonds of $70,848 and $(48,718),
respectively.
12
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The Local Partnerships' net loss of approximately $897,000 for the three months
ended March 31, 2002 was attributable to rental and other revenue of
approximately $5,567,000, exceeded by operating and interest expenses (including
interest on non-mandatory debt) of approximately $5,253,000 and approximately
$1,211,000 of depreciation and amortization expense. The Local Partnerships' net
loss of approximately $1,169,000 for the three months ended March 31, 2001 was
attributable to rental and other revenue of approximately $5,462,000, exceeded
by operating and interest expenses (including interest on non-mandatory debt) of
approximately $5,441,000 and approximately $1,190,000 of depreciation and
amortization expense. The results of operations of the Local Partnerships for
the three months ended March 31, 2002 are not necessarily indicative of the
results that may be expected in future periods.
Local Partnership Matters
Registrant's primary objective is to provide Low-income Tax Credits to limited
partners generally over a ten year period. The relevant state tax credit agency
has allocated each of Registrant's Local Partnerships an amount of Low-income
Tax Credits, which are generally available for a ten year period from the year
the Property is placed in service (the ("Ten Tear Credit Period"). The Ten Year
Credit Period has been fully exhausted by the Local Partnerships as of December
31, 2001. The required holding period of each Property, in order to avoid
Low-income Tax Credit recapture, is fifteen years from the year in which the
Low-income Tax Credits commence on the last building of the Property (the
"Compliance Period"). In addition, certain of the Local Partnerships have
entered into agreements with the relevant state tax credit agencies whereby the
Local Partnerships must maintain the low-income nature of the Properties for a
period which exceeds the Compliance Period, regardless of any sale of the
Properties by the Local Partnerships after the Compliance Period. The Properties
must satisfy various requirements including rent restrictions and tenant income
limitations (the "Low-income Tax Credit Requirements") in order to maintain
eligibility for the recognition of the Low-income Tax Credit at all times during
the Compliance Period. Once a Local Partnership has become eligible for the
Low-income Tax Credit, it may lose such eligibility and suffer an event of
recapture if its Property fails to remain in compliance with the Low-income Tax
Credit Requirements. Through December 31, 2001, none of the Local Partnerships
have suffered an event of recapture of Low-income Tax Credits.
The Properties are principally comprised of subsidized and leveraged low-income
multifamily residential complexes located throughout the United States and
Puerto Rico. Many of the Local Partnerships receive rental subsidy payments,
including payments under Section 8 of Title II of the Housing and Community
Development Act of 1974 ("Section 8"). The subsidy agreements expire at various
times during and after the Compliance Periods of the Local Partnerships. Since
October 1997, the United States Department of Housing and Urban Development
("HUD") has issued a series of directives related to project based Section 8
contracts that define owners' notification responsibilities, advise owners of
project based Section 8 properties of what their options are regarding the
renewal of Section 8 contracts, provide guidance and procedures to owners,
management agents, contract administrators and HUD staff concerning renewal of
Section 8 contracts, provide policies and procedures on setting renewal rents
and handling renewal rent adjustments and provide the requirements and
procedures for opting-out of a Section 8 project based contract. Registrant
cannot reasonably predict legislative initiatives and governmental budget
negotiations, the outcome of which could result in a reduction in funds
available for the various federal and state administered housing programs
including the Section 8 program. Such changes could adversely affect the future
net operating income before debt service ("NOI") and debt structure of any or
all Local Partnerships currently receiving such subsidy or similar subsidies.
Six Local Partnerships' Section 8 contracts, certain of which cover only certain
rental units, are currently subject to renewal under applicable HUD guidelines.
In addition, two Local Partnerships entered into restructuring agreements,
resulting in both a lower rent subsidy (resulting in lower NOI) and lower
mandatory debt service with no anticipated material adverse impact to the
operating results of the Properties through the respective Compliance Periods.
The Local Partnerships have various financing structures which include (i)
required debt service payments ("Mandatory Debt Service") and (ii) debt service
payments which are payable only from available cash flow subject to the terms
and conditions of the notes, which may be subject to specific laws, regulations
and agreements with appropriate federal and state agencies ("Non-Mandatory Debt
Service or Interest"). During the three months ended March 31, 2002, revenue
from operations of the Local Partnerships has generally been sufficient to cover
operating expenses and Mandatory Debt Service. Substantially all of the Local
Partnerships are effectively operating at or above break even levels, although
certain Local Partnerships' operating information reflects operating deficits
that do not represent cash deficits due to their mortgage and financing
structure and the required deferral of property management fees. However, as
discussed below, certain Local Partnerships' operating information indicates
below break even operations after taking into account their mortgage and
financing structure and any required deferral of property management fees.
13
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Christian Street Associates Limited Partnership ("Christian Street") and
2000-2100 Christian Street Associates ("2000 Christian Street"), which Local
Partnerships have certain common general partner interests and a common first
mortgage lender, have experienced ongoing operating deficits. Under terms of the
partnership agreements, the Local General Partners exceeded their respective
operating deficit guarantees and, as of September 30, 1998, had advanced in
excess of $1,000,000 in the aggregate to Christian Street and 2000 Christian
Street. The Local General Partners approached the lender with the intention to
restructure the loans; however the lender indicated that in connection with any
such restructuring, the respective Local Partnerships would be responsible for
certain costs, which may be significant. If the Local General Partners were to
cease funding the operating deficits, Registrant would likely incur substantial
recapture of Low-income Tax Credits. Effective October 1, 1998, in an attempt to
avoid potential adverse tax consequences, Registrant and the Local General
Partners agreed to equally share the funding of operating deficits through June
30, 2000 in the case of Christian Street and through September 30, 2000 in the
case of 2000 Christian Street (the respective "Funding Agreements"). The Funding
Agreements have been extended through June 30, 2003. The Local General Partners
agreed to cause the management agent to accrue and defer its management fees
during the period of the Funding Agreements and the accrued management fees are
excluded when determining the operating deficits. Christian Street and 2000
Christian Street reported a combined operating deficit of approximately $53,000,
excluding accrued management fees of approximately $11,000, for the three months
ended March 31, 2002. Under the terms of the Funding Agreements, Registrant has
advanced $222,278 as of June 29, 2002, of which $27,061 was advanced during the
three months then ended. Payments on the mortgages and real estate taxes are
current. Registrant's investment balances in Christian Street and 2000 Christian
Street, after cumulative equity losses, became zero during the year ended March
30, 1997 and advances made by Registrant have been offset by additional equity
in loss of investment in local partnerships. Christian Street and 2000 Christian
Street generated approximately $8.2 and approximately $4.4 per Unit per year to
the limited partners upon the expiration of their Low-income Tax Credit
allocations in 2000 and 2001, respectively.
As a result of increasing deficits and declining occupancy caused by
deteriorating physical conditions, Forest Village Housing Partnership ("Forest
Village") filed for protection under Chapter 11 of the federal Bankruptcy Code
in the United States Bankruptcy Court, Western District of Washington (the
"Court") on March 25, 1999. Forest Village filed a plan of reorganization (the
"Plan") that was confirmed by the Court on December 14, 1999. The terms of the
Plan called for Registrant to provide up to $500,000 (the "Bankruptcy Advance"),
all of which was previously funded, which Forest Village utilized to pay certain
obligations including all first mortgage arrears and certain secured and
unsecured creditors and to make necessary repairs to the complex. The Plan also
resulted in recasting the second mortgage and cumulative arrears over a new 30
year amortization period that reduced Forest Village's mandatory debt service by
approximately $77,000 per annum. Subsequent to the Bankruptcy Advance,
Registrant provided additional advances of $282,874 to Forest Village.
Registrant's investment balance in Forest Village, after cumulative equity
losses, became zero during the year ended March 30, 1995 and advances made by
Registrant, including the Bankruptcy Advance, were offset by additional equity
in loss of investment in local partnerships. Forest Village generated
approximately $1.5 per Unit per year to the limited partners upon the expiration
of its Low-income Tax Credit allocation in 2001.
In May 2002, Forest Village sold its underlying Property for $2,600,000. The
sale proceeds were utilized to repay the outstanding mortgages in full, post a
bond for the purpose of avoiding Low-income Tax Credit recapture and repay
Registrant for advances noted above. Under the terms of the sale, the purchaser
is required to continue to operate the Property as low-income pursuant to
Section 42 through the remainder of the Compliance Period. In connection with
the sale, Registrant received $732,000; Forest Village is maintaining a reserve
to pay for certain expenses incurred in connection with the transaction and
other expenses to be incurred in connection with the termination of Forest
Village. Any remaining funds after the payment of all such expenses will be
distributed to Registrant. The financial statements as of and for the three
months ended June 29, 2002 include gain on disposal of local partnership
interest of $732,000 in connection with Forest Village. Additional gain will be
recognized to the extent Registrant receives a distribution from the Forest
Village reserve noted above.
The terms of the partnership agreement of College Avenue Apartments Limited
Partnership ("College Avenue") require the management agent to defer property
management fees in order to avoid a default under the mortgage. College Avenue
reported an operating deficit of approximately $6,000 for the three months ended
March 31, 2002, which includes property management fees of approximately $3,000.
Registrant has made cumulative advances to College Avenue of $27,790 as of June
29, 2002, of which $16,640 was advanced during the three months then ended.
Payments on the mortgage and real estate taxes are current. Registrant's
investment balance in College Avenue, after cumulative equity losses, became
zero during the year ended March 30, 1999 and advances made by Registrant have
been offset by additional equity in loss of investment in local partnerships.
College Avenue generated approximately $1.2 per Unit per year to the limited
partners upon the expiration of its Low-income Tax Credit allocation in 2000.
14
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
During the three months ended March 31, 2002, Ann Ell Apartments Associates,
Ltd. ("Ann Ell") reported an operating deficit of approximately $10,000.
Registrant has made cumulative advances to Ann Ell of $377,545 as of June 29,
2002, of which $35,000 was advanced during the three months then ended. Payments
on the mortgage and real estate taxes are current. Registrant's investment
balance in Ann Ell, after cumulative equity losses, became zero during the year
ended March 30, 1994 and advances made by Registrant have been offset by
additional equity in loss of investment in local partnerships. Ann Ell generated
approximately $1.7 per Unit per year to the limited partners upon the expiration
of its Low-income Tax Credit allocation in 2001.
Critical Accounting Policies and Estimates
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which requires Registrant to
make certain estimates and assumptions. A summary of significant accounting
policies is disclosed in Note 1 to the financial statements which are included
in Registrant's annual report on Form 10-K for the year ended March 30, 2002.
The following section is a summary of certain aspects of those accounting
policies that may require subjective or complex judgments and are most important
to the portrayal of Registrant's financial condition and results of operations.
Registrant believes that there is a low probability that the use of different
estimates or assumptions in making these judgments would result in materially
different amounts being reported in the financial statements.
o Registrant accounts for its investment in local partnerships in
accordance with the equity method of accounting since Registrant
cannot control the operations of a Local Partnership.
o If the book value of Registrant's investment in a Local Partnership
exceeds the estimated value derived by management, Registrant reduces
its investment in any such Local Partnership and includes such
reduction in equity in loss of investment in local partnerships.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Registrant has invested a significant portion of its working capital reserves in
corporate bonds, U.S. Treasury instruments and U.S. government and agency
securities. The market value of such investments is subject to fluctuation based
upon changes in interest rates relative to each investment's maturity date.
Since Registrant's investments in bonds have various maturity dates through
2008, the value of such investments may be adversely impacted in an environment
of rising interest rates in the event Registrant decides to liquidate any such
investment prior to its maturity. Although Registrant may utilize reserves to
assist an under performing Property, it otherwise intends to hold such
investments to their respective maturities. Therefore, Registrant does not
anticipate any material adverse impact in connection with such investments.
15
AMERICAN TAX CREDIT PROPERTIES II L.P.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Registrant is not aware of any material legal proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 99.1 Certification of Chief Executive Officer
Exhibit 99.2 Certification of Chief Financial Officer
b. Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN TAX CREDIT PROPERTIES II L.P.
(a Delaware limited partnership)
By: Richman Tax Credit Properties
II L.P.,
General Partner
by: Richman Tax Credits Inc.,
general partner
Dated: August 13, 2002 /s/ David Salzman
-------------------------------------
by: David Salzman
President of the general partner
of the General Partner
Dated: August 13, 2002 /s/ Neal Ludeke
-------------------------------------
by: Neal Ludeke
Vice President and Treasurer
of the general partner
of the General Partner
(Principal Financial and Accounting
Officer of Registrant)
17