UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2004
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
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) (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 2004 2004
----- ----------- -----------
ASSETS
Cash and cash equivalents $ 158,096 $ 100,169
Investments in bonds 2 2,252,351 2,545,112
Investment in local partnerships 3 5,010,271 5,210,954
Prepaid expenses 8,946
Interest receivable 26,726 31,169
----------- -----------
$ 7,456,390 $ 7,887,404
=========== ===========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses $ 568,196 $ 656,773
Payable to general partner and affiliates 1,386,184 1,247,302
Other liabilities 6,600 13,600
----------- -----------
1,960,980 1,917,675
----------- -----------
Commitments and contingencies 3
Partners' equity (deficit)
General partner (438,866) (434,848)
Limited partners (55,746 units of
limited partnership interest outstanding) 5,829,417 6,227,206
Accumulated other comprehensive income, net 2 104,859 177,371
----------- -----------
5,495,410 5,969,729
----------- -----------
$ 7,456,390 $ 7,887,404
=========== ===========
See Notes to Financial Statements.
3
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 2004 AND 2003
(UNAUDITED)
Notes 2004 2003
----- --------- ---------
REVENUE
Interest $ 38,829 $ 38,484
Other income from local partnerships 31,254 388
--------- ---------
TOTAL REVENUE 70,083 38,872
--------- ---------
EXPENSES
Administration fees 73,605 73,605
Management fees 73,605 73,605
Professional fees 21,340 29,535
State of New Jersey filing fee 17,359 20,609
Printing, postage and other 10,782 14,259
--------- ---------
TOTAL EXPENSES 196,691 211,613
--------- ---------
Loss from operations (126,608) (172,741)
Equity in loss of investment in local
partnerships 3 (275,199) (409,958)
--------- ---------
NET LOSS (401,807) (582,699)
Other comprehensive income (loss), net 2 (72,512) 37,522
--------- ---------
COMPREHENSIVE LOSS $(474,319) $(545,177)
========= =========
NET LOSS ATTRIBUTABLE TO
General partner $ (4,018) $ (5,827)
Limited partners (397,789) (576,872)
--------- ---------
$(401,807) $(582,699)
========= =========
NET LOSS per unit of limited partnership
interest (55,746 units of limited
partnership interest) $ (7.14) $ (10.35)
========= =========
See Notes to Financial Statements.
4
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 29, 2004 AND 2003
(UNAUDITED)
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 33,015 $ 34,215
Cash used for local partnerships for deferred
expenses (7,000)
Cash paid for
administration fees (8,328) (8,192)
management fees (52,379)
professional fees (68,699) (413)
State of New Jersey filing fee (67,523) (123,654)
printing, postage and other expenses (10,782) (14,259)
--------- ---------
Net cash used in operating activities
(129,317) (164,682)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to local partnerships (84,516) (66,889)
Cash distributions from local partnerships 41,254 10,388
Proceeds from maturities/redemptions and
sales of bonds 230,506 1,100
--------- ---------
Net cash provided by (used in) investing
activities 187,244 (55,401)
--------- ---------
Net increase (decrease) in cash and cash
equivalents 57,927 (220,083)
Cash and cash equivalents at beginning of period 100,169 775,452
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 158,096 $ 555,369
========= =========
SIGNIFICANT NON-CASH INVESTING ACTIVITIES
Unrealized gain (loss) on investments in bonds, net $ (72,512) $ 37,522
========= =========
- --------------------------------------------------------------------------------
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)
THREE MONTHS ENDED JUNE 29, 2004 AND 2003
(UNAUDITED)
2004 2003
--------- ---------
RECONCILIATION OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES
Net loss $(401,807) $(582,699)
Adjustments to reconcile net loss to net cash used in
operating activities
Equity in loss of investment in local partnerships 275,199 409,958
Distributions from local partnerships classified as
other income (31,254) (388)
Gain on redemption and sale of bonds (1,188)
Amortization of net premium on investments in bonds 599 890
Accretion of zero coupon bonds (9,668) (9,637)
Increase in prepaid expenses (8,946) (8,045)
Decrease in interest receivable 4,443 4,478
Increase in payable to general partner and affiliates 138,882 86,639
Decrease in accounts payable and accrued expenses (88,577) (65,878)
Decrease in other liabilities (7,000)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES $(129,317) $(164,682)
========= =========
See Notes to Financial Statements.
6
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 29, 2004
(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 June 29, 2004 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, 2004 are not
necessarily indicative of the results that may be expected for the entire
year.
2. Investments in Bonds
As of June 29, 2004, 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 $ 199,949 $ 4,593 $ -- $ 204,542
After one year through five years 1,248,862 63,811 -- 1,312,673
---------- ---------- ---------- ----------
1,448,811 68,404 -- 1,517,215
---------- ---------- ---------- ----------
U.S. Treasury debt securities
After one year through five years 698,521 36,290 -- 734,811
---------- ---------- ---------- ----------
U.S. government and agency securities
After one year through five years 160 165 -- 325
---------- ---------- ---------- ----------
$2,147,492 $ 104,859 $ -- $2,252,351
========== ========== ========== ==========
7
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2004
(UNAUDITED)
3. Investment in Local Partnerships
The Partnership originally acquired limited partnership interests in Local
Partnerships representing capital contributions in the aggregate amount of
$46,742,743 which amount includes advances made to certain Local
Partnerships. As of June 29, 2004, The Partnership holds an interest in
forty-nine Local Partnerships that have, as of March 31, 2004, outstanding
mortgage loans payable totaling approximately $84,462,000 and accrued
interest payable on such loans totaling approximately $8,394,000, 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, 2004, the investment in local
partnerships activity consists of the following:
Investment in local partnerships as of March
30, 2004 $ 5,210,954
Advances to Local Partnerships 84,516
Equity in loss of investment in local
partnerships (275,199)*
Cash distributions received from Local
Partnerships (41,254)
Cash distributions classified as other income
from local partnerships 31,254
-----------
Investment in local partnerships as of
June 29, 2004 $ 5,010,271
===========
*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 $720,719 for the
three months ended March 31, 2004 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, 2004 and December 31, 2003 and the combined unaudited statements of
operations of the Local Partnerships for the three months ended March 31,
2004 and 2003 are reflected on pages 9 and 10, respectively.
8
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2004
(UNAUDITED)
3. Investment in Local Partnerships (continued)
The combined balance sheets of the Local Partnerships as of March 31, 2004
and December 31, 2003 are as follows:
2004 2003
------------- -------------
ASSETS
Cash and cash equivalents $ 1,541,638 $ 1,751,943
Rents receivable 465,455 418,925
Escrow deposits and reserves 6,668,062 6,325,707
Land 3,906,771 3,906,771
Buildings and improvements (net of
accumulated depreciation of $70,515,804 and
$69,357,958) 73,507,741 74,558,167
Intangible assets (net of accumulated amortization 1,276,087 1,296,361
of $1,095,255 and $1,074,981)
Other assets 1,434,271 1,448,467
------------- -------------
$ 88,800,025 $ 89,706,341
============= =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses $ 2,871,205 $ 2,465,127
Due to related parties 4,265,025 4,246,512
Mortgage loans 84,462,410 84,857,612
Notes payable 961,716 988,436
Accrued interest 8,393,674 8,229,819
Other liabilities 710,369 697,550
------------- -------------
101,664,399 101,485,056
------------- -------------
Partners' equity (deficit)
American Tax Credit Properties II L.P.
Capital contributions, net of distributions 45,044,272 45,008,247
Cumulative loss (37,702,939) (37,427,740)
------------- -------------
7,341,333 7,580,507
------------- -------------
General partners and other limited partners
Capital contributions, net of distributions 3,042,796 3,045,596
Cumulative loss (23,248,503) (22,404,818)
------------- -------------
(20,205,707) (19,359,222)
------------- -------------
(12,864,374) (11,778,715)
------------- -------------
$ 88,800,025 $ 89,706,341
============= =============
9
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2004
(UNAUDITED)
3. Investment in Local Partnerships (continued)
The combined statements of operations of the Local Partnerships for the three
months ended March 31, 2004 and 2003 are as follows:
2004 2003
REVENUE
Rental $ 5,552,850 $ 5,432,237
Interest and other 148,185 137,985
----------- -----------
Total Revenue 5,701,035 5,570,222
----------- -----------
EXPENSES
Administrative 991,304 947,971
Utilities 1,129,747 1,134,117
Operating and maintenance 1,133,920 1,220,123
Taxes and insurance 950,608 842,606
Financial 1,433,315 1,451,105
Depreciation and amortization 1,181,025 1,221,815
----------- -----------
Total Expenses 6,819,919 6,817,737
----------- -----------
NET LOSS $(1,118,884) $(1,247,515)
=========== ===========
NET LOSS ATTRIBUTABLE TO
American Tax Credit Properties II L.P. $ (275,199) $ (409,958)
General partners and other limited
partners, which includes $720,719 and
$745,163 of Partnership loss in excess of
investment (843,685) (837,557)
----------- -----------
$(1,118,884) $(1,247,515)
=========== ===========
The combined results of operations of the Local Partnerships for the three
months ended March 31, 2004 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, 2004
(UNAUDITED)
3. Investment in Local Partnerships (continued)
Effective October 1, 1998, 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 $480,229 as of June 29, 2004, of
which $56,537 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 of March 31, 2004, Queen Lane Investors ("Queen Lane") was in default
under the terms of its first mortgage; payments of principal, interest and
replacement reserve deposits are eight months in arrears, representing an
arrearage of approximately $40,000. Although Queen Lane has been involved in
negotiating a restructuring of its mortgage debt, a final resolution has not
been reached and documented. There can be no assurance that the issues will
be resolved and the mortgage remains in default without a formal forbearance.
Effective February 1, 2004, Queen Lane received an increase in its housing
assistance payment contract rents, representing an annual rent increase of
approximately $81,000 through January 2006. In addition, effective May 1,
2004, the interest rate on the first mortgage was reduced, resulting in an
annual savings of approximately $8,000.
The Partnership advanced $27,979 during the three months ended June 29, 2004
to College Avenue Apartments Limited Partnership to fund operating deficits.
Cumulative advances as of June 29, 2004 are $100,037. 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, 2004 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, 2004 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, 2004, American Tax Credit Properties II L.P. (the "Registrant")
has not experienced a significant change in financial condition as compared to
March 30, 2004. Principal changes in assets are comprised of periodic
transactions and adjustments and 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, 2004,
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 $235,000 during the three months
ended June 29, 2004 (which includes a net unrealized loss on investments in
bonds of approximately $73,000, 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, 2004, 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, 2004 of $275,199 and cash distributions received
from Local Partnerships of $10,000 (exclusive of distributions from Local
Partnerships of $31,254 classified as other income), partially offset by
advances to Local Partnerships of $84,516 (see discussion below under Local
Partnership Matters). Accounts payable and accrued expenses includes deferred
administration fees of $543,740, and payable to general partner represents
deferred administration and management fees in the accompanying balance sheet as
of June 29, 2004.
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 book value of
Registrant's investment in each Local Partnership (the "Local Partnership
Carrying Value") may be reduced if 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 June 29, 2004 and 2003
resulted in a net loss of $401,807 and $582,699 respectively. The decrease in
net loss from fiscal 2003 to fiscal 2004 is primarily attributable to (i) a
decrease in equity in loss of investment in local partnerships of approximately
$135,000, 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 and (ii) an increase in other income from local
partnerships of approximately $31,000. Other comprehensive income (loss) for the
three months ended June 29, 2004 and 2003 resulted from a net unrealized gain
(loss) on investments in bonds of ($72,512) and $37,522, 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 $1,119,000 for the three
months ended March 31, 2004 was attributable to rental and other revenue of
approximately $5,701,000, exceeded by operating and interest expenses (including
interest on non-mandatory debt) of approximately $5,639,000 and approximately
$1,181,000 of depreciation and amortization expense. The Local Partnerships' net
loss of approximately $1,248,000 for the three months ended March 31, 2003 was
attributable to rental and other revenue of approximately $5,570,000, exceeded
by operating and interest expenses (including interest on non-mandatory debt) of
approximately $5,596,000 and approximately $1,222,000 of depreciation and
amortization expense. The results of operations of the Local Partnerships for
the three months ended March 31, 2004 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. A Local Partnership 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. 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 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 three months ended March 31, 2004, 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.
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 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 $109,000, excluding accrued management fees
of approximately $10,000, for the three months ended March 31, 2004. Under the
terms of the Funding Agreements, Registrant has advanced $480,229 as of June 29,
2004, of which $56,537 was advanced during the three 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 $82.0 and approximately $44.3
per Unit to the limited partners upon the expiration of their Low-income Tax
Credit allocations in 2000 and 2001, respectively.
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 $8,000 for the three months ended
March 31, 2004, which includes property management fees of approximately $4,000.
Registrant has made cumulative advances to College Avenue of $100,037 as of June
29, 2004, of which $27,979 was advanced during the three months then ended. The
Local General Partner represents that payments on the real estate taxes are
current. College Avenue has a Section 8 contract that expired in January 2004
and HUD declined the renewal of the contract. As a result of recent
unsatisfactory inspection results, the Fort Worth, Texas office of HUD (the
"Fort Worth Office") notified the Shreveport, Louisiana office of HUD (the
"Shreveport Office") that the Fort Worth Office intended to accelerate College
Avenue's mortgage. Registrant has advanced additional funds to ensure that
payments on the mortgage are current and that the repairs required as a result
of the latest inspection could be completed. The Shreveport Office requested
that the Fort Worth Office conduct a follow-up inspection; such inspection was
recently conducted and the Local General Partner is waiting to hear the results
thereof. 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 $12.5 per Unit to
the limited partners upon the expiration of its Low-income Tax Credit allocation
in 2000.
During the three months ended March 31, 2004, Ann Ell Apartments Associates,
Ltd. ("Ann Ell") reported an operating deficit of approximately $19,000.
Registrant has made cumulative advances to Ann Ell of $469,545 as of June 29,
2004. 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 $16.9 per Unit
to the limited partners upon the expiration of its Low-income Tax Credit
allocation in 2001.
The terms of the partnership agreement of Hill Com II Associates Limited
Partnership ("Hill Com II") require the management agent to defer property
management fees in order to avoid a default under the mortgage. During the three
months ended March 31, 2004, Hill Com II reported an operating deficit of
approximately $29,000, which includes property management fees of approximately
$5,000. The Local General Partner represents that payments on the mortgage and
real estate taxes are current. Registrant's investment balance in Hill Com II,
after cumulative equity losses, became zero during the year ended March 30,
2001. Hill com II generated approximately $22.6 per Unit to the limited partners
upon the expiration of its Low-income Tax Credit allocation in 2001.
14
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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. Queen Lane reported an operating deficit of
approximately $46,000 for the three months ended March 31, 2004, which includes
property management fees of approximately $3,000. As of March 31, 2004, Queen
Lane was in default under the terms of its first mortgage; payments of
principal, interest and replacement reserve deposits are eight months in
arrears, representing an arrearage of approximately $40,000. Although Queen Lane
has been involved in negotiating a restructuring of its mortgage debt, a final
resolution has not been reached and documented. There can be no assurance that
the issues will be resolved and the mortgage remains in default without a formal
forbearance as of August 2004. Effective February 1, 2004, Queen Lane received
an increase in its housing assistance payment contract rents, representing an
annual rent increase of approximately $81,000 through January 2006. In addition,
effective May 1, 2004, the interest rate on the first mortgage was reduced,
resulting in an annual savings of approximately $8,000. The Local General
Partner represents that payments on the 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 $18.8 per Unit 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 and to cause the management agent to defer
property management fees in order to avoid a default under the mortgage.
Powelton reported an operating deficit of approximately $6,000 for the three
months ended March 31, 2004, which includes property management fees of
approximately $3,000. In addition, 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 $26.2 per Unit to the limited partners upon the
expiration of its Low-income Tax Credit allocation in 2001.
Effective June 3, 2004, the Local General Partners of Elm Hill Housing Limited
Partnership ("Elm Hill") entered into an Amended and Restated Purchase and Sale
agreement whereby the Property is expected to be sold in January 2005. The
estimated proceeds to be received by Registrant in connection with the sale is
approximately $800,000. 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 estimated proceeds will be realized.
The Compliance Period for Elm Hill expires December 31, 2004.
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.
15
AMERICAN TAX CREDIT PROPERTIES II L.P.
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 pay for its operating expenses and/or 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.
Item 4. Controls and Procedures
As of June 29, 2004, 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 June 29, 2004, and (ii) no changes occurred during the
quarter ended June 29, 2004, that materially affected, or are reasonably likely
to materially affect, such internal controls.
16
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; see Item 5 regarding the mortgage default of a Local
Partnership.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
As discussed in Part I, Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, the local
general partner of Queen Lane Investors ("Queen Lane") reports that
Queen Lane is twelve months in arrears on its first mortgage
obligation as of August 2004. Although the local general partner has
been involved in negotiating a restructuring of Queen Lane's debt, a
final resolution has not been reached and the mortgage is in
default.
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
17
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 16, 2004 /s/ David Salzman
---------------------------------------
by: David Salzman
Chief Executive Officer
Dated: August 16, 2004 /s/ Neal Ludeke
---------------------------------------
by: Neal Ludeke
Chief Financial Officer
18