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 December 30, 2003
-----------------
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.
----------------------------------------------------
(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
Greenwich, Connecticut 06830
- --------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
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 .
----- -----
AMERICAN TAX CREDIT PROPERTIES II L.P.
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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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)
December 30, March 30,
Notes 2003 2003
----- ----------- ------------
ASSETS
Cash and cash equivalents $ 142,064 $ 775,452
Investments in bonds 2 2,524,998 2,513,779
Investment in local partnerships 3 6,668,291 7,532,015
Interest receivable 27,297 31,514
------------ ------------
$ 9,362,650 $ 10,852,760
============ ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses $ 656,812 $ 726,724
Payable to general partner and affiliates 1,105,638 996,159
Other liabilities 13,600 20,600
------------ ------------
1,776,050 1,743,483
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Commitments and contingencies 3
Partners' equity (deficit)
General partner (418,557) (403,451)
Limited partners (55,746 units of
limited partnership interest outstanding) 7,840,021 9,335,491
Accumulated other comprehensive income, net 2 165,136 177,237
------------ ------------
7,586,600 9,109,277
------------ ------------
$ 9,362,650 $ 10,852,760
============ ============
See Notes to Financial Statements.
3
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
December 30, December 30, December 30, December 30,
Notes 2003 2003 2002 2002
----- ------------ ------------ ------------ -----------
REVENUE
Interest $ 38,712 $ 116,606 $ 47,036 $ 137,549
Other income from local partnerships 3 9,160 15,675 2,520 34,792
----------- ----------- ----------- -----------
TOTAL REVENUE 47,872 132,281 49,556 172,341
----------- ----------- ----------- -----------
EXPENSES
Administration fees 73,608 220,816 74,827 224,480
Management fees 73,608 220,816 74,827 224,480
Professional fees 23,811 84,811 19,047 37,138
State of New Jersey filing fee 20,609 61,827
Printing, postage and other 17,035 31,658 13,022 24,201
----------- ----------- ----------- -----------
TOTAL EXPENSES 208,671 619,928 181,723 510,299
----------- ----------- ----------- -----------
Loss from operations (160,799) (487,647) (132,167) (337,958)
Equity in loss of investment
in local partnerships 3 (188,780) (1,022,929) (236,303) (554,614)
----------- ----------- ----------- -----------
Loss prior to gain on disposal
of local partnership interest (349,579) (1,510,576) (368,470) (892,572)
Gain on disposal of local
partnership interest 3 114,531 846,531
----------- ----------- ----------- -----------
NET LOSS (349,579) (1,510,576) (253,939) (46,041)
Other comprehensive income (loss) 2 (30,206) (12,101) 12,246 140,870
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ (379,785) $(1,522,677) $ (241,693) $ 94,829
=========== =========== =========== ===========
NET LOSS ATTRIBUTABLE TO
General partner $ (3,496) $ (15,106) $ (2,539) $ (460)
Limited partners (346,083) (1,495,470) (251,400) (45,581)
----------- ----------- ----------- -----------
$ (349,579) $(1,510,576) $ (253,939) $ (46,041)
=========== =========== =========== ===========
NET LOSS per unit of limited
partnership interest (55,746
units of limited partnership
interest) $ (6.21) $ (26.83) $ (4.51) $ (.82)
=========== =========== =========== ===========
See Notes to Financial Statements.
4
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 94,277 $ 123,655
Cash used for local partnerships for deferred
expenses (7,000) (7,000)
Cash paid for
administration fees (175,000) (215,068)
management fees (157,137) (157,137)
professional fees (92,912) (66,070)
State of New Jersey filing fee (123,654)
printing, postage and other expenses (31,658) (27,732)
----------- -----------
Net cash used in operating activities (493,084) (349,352)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in local partnerships (170,785) (143,834)
Cash distributions from local partnerships 27,255 1,007,468
Maturities/redemptions and sales of bonds 3,226 205,267
----------- -----------
Net cash provided by (used in) investing
activities (140,304) 1,068,901
----------- -----------
Net increase (decrease) in cash and cash equivalents (633,388) 719,549
Cash and cash equivalents at beginning of period 775,452 10,520
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 142,064 $ 730,069
=========== ===========
SIGNIFICANT NON-CASH INVESTING ACTIVITIES
Unrealized gain (loss) on investments in bonds, net $ (12,101) $ 140,870
=========== ===========
- -------------------------------------------------------------------------------
See reconciliation of net 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)
NINE MONTHS ENDED DECEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES
Net loss $(1,510,576) $ (46,041)
Adjustments to reconcile net loss to net cash used
in operating activities
Equity in loss of investment in local partnerships 1,022,929 554,614
Distributions from local partnerships
classified as other income (15,675) (34,792)
Gain on disposal of local partnership interest (846,531)
Amortization of net premium on investments in bonds 2,792 3,352
Accretion of zero coupon bonds (29,338) (29,446)
Decrease in interest receivable 4,217 12,200
Increase in payable to general partner and affiliates 109,487 76,755
Decrease in accounts payable and accrued expenses (69,920) (32,463)
Decrease in other liabilities (7,000) (7,000)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES $ (493,084) $ (349,352)
=========== ===========
See Notes to Financial Statements.
6
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information. They do not include all
information and footnotes required by accounting principles generally
accepted in the United States of America 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 December 30, 2003 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 and nine month periods ended December
30, 2003 are not necessarily indicative of the results that may be expected
for the entire year.
2. Investments in Bonds
As of December 30, 2003 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 $ 400,055 $ 15,887 $ -- $ 415,942
After one year through five years 1,250,287 89,216 -- 1,339,503
---------- ---------- ---------- ----------
1,650,342 105,103 -- 1,755,445
---------- ---------- ---------- ----------
U.S. Treasury debt securities
After one year through five years 707,894 59,824 -- 767,718
---------- ---------- ---------- ----------
U.S. government and agency securities
After one year through five years 1,626 209 -- 1,835
---------- ---------- ---------- ----------
$2,359,862 $ 165,136 $ -- $2,524,998
========== ========== ========== ==========
7
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 30, 2003
(UNAUDITED)
3. Investment in Local Partnerships
The Partnership originally acquired limited partnership interests in Local
Partnerships representing capital contributions in the aggregate amount of
$46,621,932, which amount includes advances made to certain Local
Partnerships. As of September 30, 2003, the Local Partnerships have
outstanding mortgage loans payable totaling approximately $85,016,000 and
accrued interest payable on such loans totaling approximately $8,047,000,
which are secured by security interests and liens common to mortgage loans on
the Local Partnerships' real property and other assets.
For the nine months ended December 30, 2003, the investment in local
partnerships activity consists of the following:
Investment in local partnerships as of March 30, 2003 $7,532,015
Advances to Local Partnerships 170,785
Equity in loss of investment in local partnerships (1,022,929)*
Cash distributions received from Local Partnerships (27,255)
Cash distributions classified as other income from
local partnerships 15,675
----------
Investment in local partnerships as of December 30, 2003 $6,668,291
==========
*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 $1,914,616 for
the nine months ended September 30, 2003 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
September 30, 2003 and December 31, 2002 and the combined unaudited
statements of operations of the Local Partnerships for the three and nine
month periods ended September 30, 2003 and 2002 are reflected on pages 9 and
10, respectively.
8
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 30, 2003
(UNAUDITED)
3. Investment in Local Partnerships (continued)
The combined balance sheets of the Local Partnerships as of September 30,
2003 and December 31, 2002 are as follows:
September 30, December 31,
2003 2002
-------------- -------------
ASSETS
Cash and cash equivalents $ 1,533,164 $ 1,820,263
Rents receivable 601,719 426,140
Escrow deposits and reserves 6,740,012 6,047,039
Land 3,930,673 3,930,673
Buildings and improvements (net of
accumulated depreciation of $68,423,910
and $64,933,253) 75,564,501 78,780,411
Intangible assets (net of accumulated
amortization of $1,320,204 and $1,382,176) 1,316,514 1,327,698
Other assets 1,359,828 1,425,671
------------- -------------
$ 91,046,411 $ 93,757,895
============= =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses $ 2,159,736 $ 2,014,029
Due to related parties 4,225,277 3,805,439
Mortgage loans 85,016,059 85,746,594
Notes payable 1,182,955 1,259,422
Accrued interest 8,047,284 7,515,988
Other liabilities 820,850 700,106
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101,452,161 101,041,578
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Partners' equity (deficit)
American Tax Credit Properties II L.P.
Capital contributions, net of distributions 44,939,700 44,786,623
Cumulative loss (37,134,353) (36,111,424)
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7,805,347 8,675,199
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General partners and other limited partners
Capital contributions, net of distributions 3,043,894 3,072,216
Cumulative loss (21,254,991) (19,031,098)
------------- -------------
(18,211,097) (15,958,882)
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(10,405,750) (7,283,683)
------------- -------------
$ 91,046,411 $ 93,757,895
============= =============
9
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
DECEMBER 30, 2003
(UNAUDITED)
3. Investment in Local Partnerships (continued)
The combined statements of operations of the Local Partnerships for the three
and nine month periods ended September 30, 2003 and 2002 are as follows:
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2003 2002 2002
------------- ------------ ------------- -------------
REVENUE
Rental $ 5,400,052 $ 16,256,610 $ 5,208,516 $ 15,966,598
Interest and other 135,443 405,436 158,099 486,457
------------ ------------ ------------ ------------
Total Revenue 5,535,495 16,662,046 5,366,615 16,453,055
------------ ------------ ------------ ------------
EXPENSES
Administrative 882,686 2,740,440 920,766 2,729,038
Utilities 666,663 2,613,502 633,209 2,349,047
Operating and maintenance 1,401,818 4,099,036 1,219,122 3,606,329
Taxes and insurance 835,531 2,494,956 1,043,009 2,459,656
Financial 1,410,173 4,354,997 1,440,142 4,578,861
Depreciation and amortization 1,202,221 3,605,937 1,187,226 3,601,144
------------ ------------ ------------ ------------
Total Expenses 6,399,092 19,908,868 6,443,474 19,324,075
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS BEFORE
GAIN ON SALE OF PROPERTY (863,597) (3,246,822) (1,076,859) (2,871,020)
Gain on sale of property 964,614
------------ ------------ ------------ ------------
NET LOSS $ (863,597) $ (3,246,822) $ (1,076,859) $ (1,906,406)
============ ============ ============ ============
NET LOSS ATTRIBUTABLE TO
American Tax Credit $ (188,780) $ (1,022,929) $ (236,303) $ (554,614)
Properties II L.P.
General partners and other limited
partners, which includes $964,414
of specially allocated revenue to
a certain general partner for the
nine months ended September 30, 2002,
and $573,724, $1,914,616, $726,958 and
$2,028,573 of Partnership loss in
excess of investment (674,817) (2,223,893) (840,556) (1,351,792)
------------ ------------ ------------ ------------
$ (863,597) $ (3,246,822) $ (1,076,859) $ (1,906,406)
============ ============ ============ ============
The combined results of operations of the Local Partnerships for the three and
nine month periods ended September 30, 2003 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)
DECEMBER 30, 2003
(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 December 31, 2004. Under the terms of the Funding
Agreements, the Partnership has advanced $387,667 as of December 30, 2003, of
which $96,517 was advanced during the nine 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.
The Partnership advanced $44,268 during the nine months ended December 30,
2003 to College Avenue Apartments Limited Partnership to fund operating
deficits. Cumulative advances as of December 30, 2003 are $72,058. 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 $30,000 during the nine months ended December 30,
2003 to Ann Ell Apartments Associates Limited to fund operating deficits.
Cumulative advances as of December 30, 2003 are $469,545. Such advances have
been recorded as investment in local partnerships and have been offset by
additional equity in loss of investment in local partnerships.
4. Additional Information
Additional information, including the audited March 30, 2003 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, 2003 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 December 30, 2003, American Tax Credit Properties II L.P. (the
"Registrant") has experienced a significant change in financial condition as
compared to March 30, 2003. Principal changes in assets are comprised of a
reduction in cash and cash equivalents utilized to pay for Registrant's
operating expenses and to make advance to certain Local Partnerships and
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 nine months ended
December 30, 2003, Registrant received cash from interest revenue,
maturities/redemptions and sales of bonds and distributions from Local
Partnerships and utilized cash for operating expenses and advances to certain
Local Partnerships (see Local Partnership Matters below). Cash and cash
equivalents and investments in bonds decreased, in the aggregate, by
approximately $622,000 during the nine months ended December 30, 2003 (which
includes a net unrealized loss on investments in bonds of approximately $12,000,
amortization of net premium on investments in bonds of approximately $3,000 and
accretion of zero coupon bonds of approximately $29,000). 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 nine months ended December 30, 2003, the investment in local
partnerships decreased as a result of Registrant's equity in the Local
Partnerships' net loss for the nine months ended December 30, 2003 of $1,022,929
and cash distributions received from Local Partnerships of $11,580 (exclusive of
distributions from Local Partnerships of $15,675 classified as other income),
partially offset by advances to Local Partnerships of $170,785 (see discussion
below under Local Partnership Matters). Accounts payable and accrued expenses
includes deferred administration fees of $568,740, and payable to general
partner represents deferred administration and management fees in the
accompanying balance sheet as of December 30, 2003.
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. 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 December 30, 2003 and 2002
resulted in a net loss of $349,579 and $253,939, respectively. The increase in
net loss is primarily attributable to (i) the filing fee charged to partnerships
in the State of New Jersey in fiscal 2004 of approximately $21,000 and (ii) gain
on disposal of a local partnership interest of approximately $115,000 recognized
in 2002, partially offset by a decrease in equity in loss of investment in local
partnerships of approximately $48,000, which decrease is primarily the result of
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 December 30, 2003 and 2002 resulted from a net
unrealized gain (loss) on investments in bonds of $(30,206) and $12,246,
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' loss from operations of approximately $864,000 for the
three months ended September 30, 2003 was attributable to rental and other
revenue of approximately $5,535,000, exceeded by operating and interest expense
(including interest on non-mandatory debt) of approximately $5,197,000 and
approximately $1,202,000 of depreciation and amortization expense. The Local
Partnerships' loss from operations of approximately $1,077,000 for the three
months ended September 30, 2002 was attributable to rental and other revenue of
approximately $5,366,000, exceeded by operating and interest expense (including
interest on non-mandatory debt) of approximately $5,256,000 and approximately
$1,187,000 of depreciation and amortization expense. The results of operations
of the Local Partnerships for the three months ended September 30, 2003 are not
necessarily indicative of the results that may be expected in future periods.
Registrant's operations for the nine months ended December 30, 2003 and 2002
resulted in a net loss of $1,510,576 and $46,041, respectively. The increase in
net loss is primarily attributable to (i) gain on disposal of a local
partnership interest of approximately $847,000 recognized in 2002, (ii) an
increase in equity in loss of investment in local partnerships of approximately
$468,000, which increase is primarily the result of an increase in the net
operating losses of certain Local Partnerships in which Registrant continues to
have an investment balance, (iii) the filing fee charged to partnerships in the
State of New Jersey in fiscal 2004 of approximately $62,000 and (iv) an increase
in professional fees of approximately $48,000. Other comprehensive income (loss)
for the nine months ended December 30, 2003 and 2002 resulted from a net
unrealized gain (loss) on investments in bonds of $(12,101) and $140,870,
respectively.
The Local Partnerships' loss from operations of approximately $3,247,000 for the
nine months ended September 30, 2003 was attributable to rental and other
revenue of approximately $16,662,000, exceeded by operating and interest expense
(including interest on non-mandatory debt) of approximately $16,303,000 and
approximately $3,606,000 of depreciation and amortization expense. The Local
Partnerships' loss from operations of approximately $2,871,000 for the nine
months ended September 30, 2002 was attributable to rental and other revenue of
approximately $16,453,000 exceeded by operating and interest expense (including
interest on non-mandatory debt) of approximately $15,723,000 and approximately
$3,601,000 of depreciation and amortization expense. The results of operations
of the Local Partnerships for the nine months ended September 30, 2003 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 Year Credit Period"). The Ten Year
Credit Period was 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.
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
13
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
------------------------------------------------------------------
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 in 2001, resulting in both a lower rent subsidy
(resulting in lower NOI) and lower mandatory debt service.
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 nine months ended September 30, 2003, revenue
from operations of the Local Partnerships has generally been sufficient to cover
operating expenses and Mandatory Debt Service. Most 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.
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 would likely have been 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 December 31,
2004. 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 $182,000, excluding accrued management fees
of approximately $30,000, for the nine months ended September 30, 2003. Under
the terms of the Funding Agreements, Registrant has advanced $387,667 as of
December 30, 2003, of which $96,517 was advanced during the nine months then
ended. The Local general Partners represent that 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.
The Local General Partner of Hill Com I Associates Limited Partnership ("Hill
Com I"), has reported that, on April 30, 2003, Hill Com I sold 13 of its 67
dwelling units under the threat of eminent domain by the Urban Renewal
Development Agency of Philadelphia, Pennsylvania. The sale occurred without
Registrant's knowledge and will result in the recapture of Low-income Tax
Credits and interest under Section 42 of the Internal Revenue Code in the amount
of approximately $1 per Unit for those holding Units as of such date. Registrant
is exploring the feasibility of obtaining monetary compensation from the Local
General Partner in an attempt to minimize any adverse tax consequences resulting
from the sale. Registrant's investment balance in Hill Com I, after cumulative
equity losses, became zero during the year ended March 30, 2002. Hill Com I
generated approximately $2.9 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 nine months ended September 30, 2003, Ann Ell Apartments Associates,
Ltd. ("Ann Ell") reported an operating deficit of approximately $47,000.
Registrant has made cumulative advances to Ann Ell of $469,545 as of December
30, 2003, of which $30,000 was advanced during the nine months then ended. The
Local General Partner represents that 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.
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 $35,000 for the nine months ended
September 30, 2003, which includes property management fees of approximately
$10,000. Registrant has made cumulative advances to College Avenue of $72,058 as
of December 30, 2003, of which $44,268 was advanced during the nine months then
ended. The Local General Partner represents that 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.
The terms of the partnership agreement of Harborside Housing Limited Partnership
("Harborside") require the management agent to defer property management fees in
order to avoid a default under the mortgage. During the nine months ended
September 30, 2003, Harborside incurred an operating deficit of approximately
$100,000, which includes property management fees of approximately $91,000. The
Local General Partner represents that payments on the mortgage and real estate
taxes are current. Harborside generated approximately $6.1 per Unit per year to
the limited partners upon the expiration of its Low-income Tax Credit allocation
in 2000.
The terms of the partnership agreement of Queen Lane Investors ("Queen Lane")
require the management agent to defer property management fees in order to avoid
a default under the mortgage. During the nine months ended September 30, 2003,
Queen Lane incurred an operating deficit of approximately $44,000, which
includes property management fees of approximately $8,000. The Local General
Partner represents that payments on the mortgage and real estate taxes are
current. Registrant's investment balance in Queen Lane, after cumulative equity
losses, became zero during the year ended March 30, 2001. Queen Lane generated
approximately $1.9 per Unit per year to the limited partners upon the expiration
of its Low-income Tax Credit allocation in 2001.
The terms of the partnership agreement of Powelton Gardens Associates
("Powelton") require the local general partners to fund all operating deficits
through the Compliance Period. During the nine months ended September 30, 2003,
Powelton incurred an operating deficit of approximately $28,000, which includes
property management fees of approximately $9,000. Powelton remains approximately
two months in arrears on its Mandatory Debt Service, including escrow and
replacement reserve deposits. The local general partner has reported that the
lender has not declared a default as a result of the arrearage and that payments
on the real estate taxes are current. Registrant's investment balance in
Powelton, after cumulative equity losses, became zero during the year ended
March 30, 2002. Powelton generated approximately $2.6 per Unit per year to the
limited partners upon the expiration of its Low-income Tax Credit allocation in
2001.
On November 3, 2003, the Local General Partners of Elm Hill Housing Limited
Partnership ("Elm Hill") entered into a Purchase and Sale agreement whereby the
Property was expected to be sold on March 1, 2004. The proposed purchaser has
since informed the Local General Partners that it is not feasible for the
closing to take place in 2004. The Compliance Period for Elm Hill expires
December 31, 2004. The Local General Partners are attempting to negotiate a one
year extension to the original agreement. The estimated proceeds to be received
by Registrant in connection with the sale is approximately $568,000 based on the
Purchase and Sale agreement executed in November 2003. The agreement is subject
to various terms and conditions and is subject to termination; accordingly,
there is no assurance that such sale will ultimately take place or that the
estatimated proceeds will be realized.
15
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
-----------------------------------------------------------------
Recent Accounting Pronouncements
- --------------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 requires disclosure of off-balance sheet transactions, arrangements,
obligations, guarantees or other relationships with unconsolidated entities or
other persons that have, or are reasonably likely to have, a material effect on
its financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources. The adoption of the accounting
provisions of FIN 45 did not have a material effect on the Registrant's
financial statements or disclosures.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. FIN 46 requires
disclosures about variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest. The
consolidation requirements apply to existing entities in the first fiscal year
or interim period ending after December 15, 2003. The adoption of FIN 46 did not
have a material effect on the Registrant's financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," ("SFAS No. 150"). The statement establishes standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within the scope of SFAS No. 150 as a
liability (or an asset in some circumstances). Certain provisions of this
statement are effective for financial instruments entered into or modified after
May 31, 2003. In October 2003, FASB deferred indefinitely certain provisions of
this Statement pertaining to non-controlling interests in limited life entities.
The adoption of SFAS No. 150 will have no material impact on the Registrant's
financial reporting and disclosures.
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. 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 does
not 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 and
the associated bond rating. 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.
16
AMERICAN TAX CREDIT PROPERTIES II L.P.
--------------------------------------
Item 4. Controls and Procedures
-----------------------
As of September 30, 2003, under the direction of the Chief Executive Officer and
Chief Financial Officer, Registrant evaluated the effectiveness of its
disclosure controls and procedures and internal controls over financial
reporting and concluded that (i) Registrant's disclosure controls and procedures
were effective as of September 30, 2003, and (ii) no changes occurred during the
quarter ended December 30, 2003, that materially affected, or are reasonably
likely to materially affect, such internal controls.
17
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 31.1 Rule 13a-14/15d-14(a) Certification of Chief
Executive Officer
Exhibit 31.2 Rule 13a-14/15d-14(a) Certification of Chief
Financial Officer
Exhibit 32.1 Section 1350 Certification of Chief Executive
Officer
Exhibit 32.2 Section 1350 Certification of Chief Financial
Officer
b. Reports on Form 8-K
None
18
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: February 13, 2004 /s/ David Salzman
-----------------------------------------
by: David Salzman
Chief Executive Officer
Dated: February 13, 2004 /s/ Neal Ludeke
----------------------------------------
by: Neal Ludeke
Chief Financial Officer
18