FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-28370
WNC Housing Tax Credit Fund IV, L.P. - Series 2
California 33-0596399
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3158 Redhill Avenue, Suite 120, Costa Mesa, CA 92626
(714) 662-5565
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--------- ----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
Yes No X
--------- ----------
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
INDEX TO FORM 10-Q
For the Three and Six Months Ended September 30, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
September 30, 2002 and March 31, 2002......................3
Statements of Operations
For the three and six months ended
September 30, 2002 and 2001................................4
Statement of Partners' Equity (Deficit)
For the six months ended September 30, 2002................5
Statements of Cash Flows
For the six months ended September 30, 2002 and 2001.......6
Notes to Financial Statements................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............15
Item 3. Quantitative and Qualitative Disclosures about Market Risks.18
Item 4. Procedures and Controls.....................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................18
Item 4. Submission of Matters to a Vote of Security Holders.........18
Item 5. Other Information...........................................18
Item 6. Exhibits and Reports on Form 8-K............................18
Signatures...........................................................19
Certifications.......................................................20
2
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
BALANCE SHEETS
September 30, 2002 March 31, 2002
------------------------ --------------------
(unaudited)
ASSETS
Cash and cash equivalents $ 25,565 $ 32,342
Investments in limited partnerships, net (Note 3) 6,378,679 6,677,963
Other assets 998 3,998
------------------------ --------------------
$ 6,405,242 $ 6,714,303
======================== ====================
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Accrued expenses $ - $ 4,000
Accrued fees and expenses due to General Partner
and affiliates (Note 4) 346,177 316,573
------------------------ --------------------
Total liabilities 346,177 320,573
------------------------ --------------------
Commitments and Contingencies (Note 6)
Partners' equity (deficit):
General Partner (91,722) (88,375)
Limited Partners (20,000 units authorized,
15,600 units issued and outstanding) 6,150,787 6,482,105
--------------------
------------------------
Total partners' equity 6,059,065 6,393,730
------------------------ --------------------
$ 6,405,242 $ 6,714,303
======================== ====================
See accompanying notes to financial statements
3
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
For the Three and Six Months Ended September 30, 2002 and 2001
(unaudited)
2002 2001
----------------------------------------- ------------------------------------------
Three Months Six Months Three Months Six Months
----------------- ----------------- ----------------- ------------------
Interest income $ 102 $ 222 $ 646 $ 1,452
----------------- ----------------- ----------------- ------------------
Operating expenses:
Amortization (Note 3) 9,422 18,844 9,483 18,966
Asset management fees (Note 4) 11,000 22,000 11,000 22,000
Legal & accounting 12,632 14,327 5,426 7,130
Other 927 7,216 2,161 6,175
----------------- ----------------- ----------------- ------------------
Total operating expenses 33,981 62,387 28,070 54,271
----------------- ----------------- ----------------- ------------------
Loss from operations (33,879) (62,165) (27,424) (52,819)
Equity in losses of
limited partnerships (Note 3) (134,229) (272,500) (199,723) (368,065)
----------------- ----------------- ----------------- ------------------
Net loss $ (168,108) $ (334,665) $ (227,147) $ (420,884)
================= ================= ================= ==================
Net loss allocated to:
General Partner $ (1,681) $ (3,347) $ (2,272) $ (4,209)
================= ================= ================= ==================
Limited Partners $ (166,427) $ (331,318) $ (224,875) $ (416,675)
================= ================= ================= ==================
Net loss per weighted limited
partner unit $ (11) $ (21) $ (15) $ (27)
================= ================= ================= ==================
Outstanding weighted limited
partner units 15,600 15,600 15,600 15,600
================= ================= ================= ==================
See accompanying notes to financial statements
4
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
STATEMENT OF PARTNERS' EQUITY (DEFICIT)
For the Six Months Ended September 30, 2002
(unaudited)
General Limited
Partner Partners Total
---------------- --------------- ----------------
Partners' equity (deficit) at March 31, 2002 $ (88,375) $ 6,482,105 $ 6,393,730
Net loss (3,347) (331,318) (334,665)
---------------- --------------- ----------------
Partners' equity (deficit) at September 30, 2002 $ (91,722) $ 6,150,787 $ 6,059,065
================ =============== ================
See accompanying notes to financial statements
5
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Six Months Ended September 30, 2002 and 2001
(unaudited)
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net loss $ (334,665) $ (420,884)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization 18,844 18,966
Equity in losses of limited partnerships 272,500 368,065
Change in accrued expenses (4,000) -
Change in other assets 3,000 -
Change in accrued fees and expenses due to
General Partner and affiliates 29,604 21,534
----------------- -----------------
Net cash used in operating activities (14,717) (12,319)
----------------- -----------------
Cash flows from investing activities:
Distributions from limited partnerships 7,940 2,250
----------------- -----------------
Net cash provided by operating activities 7,940 2,250
----------------- -----------------
Net decrease in cash and cash equivalents (6,777) (10,069)
Cash and cash equivalents, beginning of period 32,342 84,147
----------------- -----------------
Cash and cash equivalents, end of period $ 25,565 $ 74,078
================= =================
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Taxes paid $ 800 $ 800
================ =================
See accompanying notes to financial statements
6
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Three and Six Months Ended September 30, 2002
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
General
- -------
The accompanying condensed unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act
of 1934. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six
months ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2003. For further
information, refer to the financial statements and footnotes thereto included in
the Partnership's annual report on Form 10-K for the fiscal year ended March 31,
2002.
Organization
- ------------
WNC Housing Tax Credit Fund IV, L.P., Series 2 (the "Partnership") was formed on
September 27, 1993 under the laws of the state of California and commenced
operations on July 18, 1994. The Partnership was formed to invest primarily in
other limited partnerships (the "Local Limited Partnerships") which own and
operate multi-family housing complexes (the "Housing Complex") that are eligible
for low-income housing credits. The local general partners (the "Local General
Partners") of each Local Limited Partnership retain responsibility for
maintaining, operating and managing the Housing Complex.
The general partner of the Partnership is WNC Tax Credit Partners IV, L.P. (the
"General Partner") a California limited partnership. The general partner of the
General Partner is WNC & Associates, Inc. ("Associates"). The chairman and
president own substantially all of the outstanding stock of Associates. The
business of the Partnership is conducted primarily through the general partner
as the Partnership has no employees of its own
The Partnership shall continue in full force and effect until December 31, 2050
unless terminated prior to that date pursuant to the partnership agreement or
law.
The Partnership Agreement authorized the sale of 20,000 units at $1,000 per unit
("Units"). The offering of Units concluded in July 1995 at which time 15,600
Units representing subscriptions, net of discounts for volume purchases of more
than 100 units, in the amount of $15,241,000 had been accepted. The General
Partner has 1% interest in operating profits and losses, taxable income and
losses, cash available for distribution from the Partnership and tax credits.
The limited partners will be allocated the remaining 99% of these items in
proportion to their respective investments.
After the limited partners have received proceeds from sale or refinancing equal
to their capital contributions and their return on investment (as defined in the
Partnership Agreement) and the General Partner has received proceeds equal to
its capital contributions and a subordinated disposition fee from the remainder,
any additional sale or refinancing proceeds will be distributed 90% to the
limited partners (in proportion to their respective investments) and 10% to the
General Partner.
7
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Three and Six Months Ended September 30, 2002
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Risks and Uncertainties
- -----------------------
The Partnership's investments in Local Limited Partnerships are subject to the
risks incident to the management and ownership of low-income housing and to the
management and ownership of multi-unit residential real estate. Some of these
risks are that the low-income housing credit could be recaptured and that
neither the Partnership's investments nor the Housing Complexes owned by the
Local Limited Partnerships will be readily marketable. To the extent the Housing
Complexes receive government financing or operating subsidies, they may be
subject to one or more of the following risks: difficulties in obtaining tenants
for the Housing Complexes; difficulties in obtaining rent increases; limitations
on cash distributions; limitations on sales or refinancing of Housing Complexes;
limitations on transfers of Local Limited Partnership Interests; limitations on
removal of Local General Partners; limitations on subsidy programs; and possible
changes in applicable regulations. The Housing Complexes are or will be subject
to mortgage indebtedness. If a Local Limited Partnership does not make its
mortgage payments, the lender could foreclose resulting in a loss of the Housing
Complex and low-income housing credits. As a limited partner of the Local
Limited Partnerships, the Partnership will have very limited rights with respect
to management of the Local Limited Partnerships, and will rely totally on the
Local General Partners of the Local Limited Partnerships for management of the
Local Limited Partnerships. The value of the Partnership's investments will be
subject to changes in national and local economic conditions, including
unemployment conditions, which could adversely impact vacancy levels, rental
payment defaults and operating expenses. This, in turn, could substantially
increase the risk of operating losses for the Housing Complexes and the
Partnership. In addition, each Local Limited Partnership is subject to risks
relating to environmental hazards and natural disasters, which might be
uninsurable. Because the Partnership's operations will depend on these and other
factors beyond the control of the General Partner and the Local General
Partners, there can be no assurance that the anticipated low-income housing
credits will be available to Limited Partners.
In addition, Limited Partners are subject to risks in that the rules governing
the low-income housing credit are complicated, and the use of credits can be
limited. The only material benefit from an investment in Units may be the
low-income housing credits. There are limits on the transferability of Units,
and it is unlikely that a market for Units will develop. All management
decisions will be made by the General Partner.
Method of Accounting for Investments in Limited Partnerships
- ------------------------------------------------------------
The Partnership accounts for its investments in limited partnerships using the
equity method of accounting, whereby the Partnership adjusts its investment
balance for its share of the Local Limited Partnership's results of operations
and for any distributions received. The accounting policies of the Local Limited
Partnership are consistent with those of the Partnership. Costs incurred by the
Partnership in acquiring the investments are capitalized as part of the
investment account and are being amortized over 30 years (Note 3).
Offering Expenses
- -----------------
Offering expenses consist of underwriting commissions, legal fees, printing,
filing and recordation fees, and other costs incurred with selling limited
partnership interests in the Partnership. The General Partner is obligated to
pay all offering and organization costs in excess of 15% (including sales
commissions) of the total offering proceeds.
8
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Three and Six Months Ended September 30, 2002
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Offering Expenses (continued)
- -----------------------------
Offering expenses are reflected as a reduction of partners' capital and amounted
to $970,717 as of September 30, 2002 and March 31, 2002.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could materially differ from those
estimates.
Cash and Cash Equivalents
- -------------------------
The Partnership considers highly liquid investments with maturity of three
months or less when purchased to be cash equivalents. As of September 30, 2002
and March 31, 2002, the Partnership had no cash equivalents.
Net Loss Per Limited Partner Unit
- ---------------------------------
Net loss per limited partner unit is calculated pursuant to Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Net loss per unit
includes no dilution and is computed by dividing loss available to limited
partners by the weighted average number of units outstanding during the period.
Calculation of diluted net income per unit is not required.
Reporting Comprehensive Income
- ------------------------------
The Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income established standards for the reporting and display of
comprehensive income (loss) and its components in a full set of general-purpose
financial statements. The Partnership had no items of other comprehensive income
for all periods presented, as defined by SFAS No. 130.
New Accounting Pronouncements
- -----------------------------
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses accounting and financial reporting for the impairment or
disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning
after December 15, 2001, and generally, is to be applied prospectively. SFAS 144
is not expected to have a material impact on the Partnership's financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS 146 is not expected
to have a material impact on the Partnership's financial position or results of
operations.
9
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Three and Six Months Ended September 30, 2002
(unaudited)
NOTE 2 - UNCERTAINTY WITH RESPECT TO INVESTMENTS IN BROKEN BOW AND SIDNEY:
- --------------------------------------------------------------------------------
IMPAIRMENT OF INVESTMENTS
-------------------------
The Partnership has two investments accounted for under the equity method,
consisting of 99% limited partnership interests in each of Broken Bow Apartments
I, Limited Partnership ("Broken Bow") and Sidney Apartments I, Limited
Partnership ("Sidney").
During the year ended March 31, 2000, Broken Bow and Sidney continued to
experience operational difficulties and negative cash flows from operations, and
ceased paying their lender. Foreclosure procedures were commenced by these two
Local Limited Partnerships' lender. Management performed an evaluation of the
Partnership's remaining investment balances in Broken Bow and Sidney, including
any other anticipated costs and determined that an impairment adjustment was
necessary. An impairment loss of $766,559 was recognized for the year ended
March 31, 2000. This impairment loss included $558,688 in remaining net book
value of the Partnership's investments in Broken Bow and Sidney, $120,906 and
$30,753 of cash advances, a $37,670 accrual for anticipated legal costs, and
$18,542 of estimated accounting and other related costs.
As a result of the foregoing, the Partnership, Broken Bow, Sidney, and a WNC
subsidiary executed a work-out agreement with the lender (the "Agreement"),
which was effective December 14, 2001. Broken Bow was required to pay to the
lender $165,000 as a partial settlement of the indebtedness due and owing by
Broken Bow due to the fact that their loan was a construction loan. The
Partnership advanced the aforementioned monies to Broken Bow and fully reserved
the amount as of March 31, 2002. The balance of the indebtedness due and owing
to the lender by Broken Bow was satisfied by the execution of two promissory
notes. The first note totals $85,000, bears interest at 7% per annum, and
requires principal and interest payments totaling $600 per month through April
2014, at which date the unpaid principal balance is due. The second note totals
$500,000, bears interest at 1% per annum, and has payments due monthly out of
available cash flow, as defined, with the unpaid principal balance due April
2014. The balance of the indebtedness due and owing to the lender by Sidney was
satisfied by the execution of two promissory notes. The first note totals
$130,000, bears interest at 7% per annum, and requires principal and interest
payments totaling $900 per month through April 2012, at which date the unpaid
principal is due. The second note totals $300,000, bears interest at 1% per
annum, and has payments due monthly out of available cash flow, as defined, with
the unpaid principal balance due April 2014. The Partnership and a WNC
subsidiary have executed a guarantee for the payment of both notes of Broken Bow
and Sidney. In addition, several other commitments were made. Broken Bow and
Sidney executed a grant deed to the lender in the event that either entity
defaults under the terms and provisions of the notes. The deeds are held in
escrow, and if Broken Bow or Sidney defaults on either note, the lender may, at
its option, record the respective deed. In addition, the Partnership has
assigned the lender as additional collateral all of its residual value
interests, as defined, in all of the Local Limited Partnerships. The Partnership
and the Local Limited Partnerships are prohibited from selling, assigning,
transferring or further encumbering the Housing Complexes retained by each Local
Limited Partnership.
As a result of the operating difficulties mentioned above, there is uncertainty
as to additional costs, if any, that the Partnership may incur in connection
with its investment in Broken Bow and Sidney and as to whether the Partnership
will ultimately retain its interest in these Local Limited Partnerships. In the
event the Partnership does not successfully retain its interest in Broken Bow
and Sidney, the Partnership would be exposed to the cessation and recapture of
the related tax credits. The Partnership's financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
10
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Three and Six Months Ended September 30, 2002
(unaudited)
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS
- --------------------------------------------
As of the periods presented, the Partnership had acquired limited partnership
interests in twenty-two Local Limited Partnerships, each of which owns one
Housing Complex consisting of an aggregate of 892 apartment units. The
respective general partners of the Local Limited Partnerships manage the
day-to-day operations of the entities. Significant Local Limited Partnership
business' decisions require approval from the Partnership. The Partnership, as a
limited partner, is entitled to 96% to 99%, as specified in the partnership
agreements, of the operating profits and losses, taxable income and losses and
tax credits of the Limited Partnerships.
Equity in losses of Local Limited Partnerships is recognized in the financial
statements until the related investment account is reduced to a zero balance.
Losses incurred after the investment account is reduced to zero are not
recognized. If the Local Limited Partnerships report net income in future years,
the Partnership will resume applying the equity method only after its share of
such net income equals the share of net losses not recognized during the
period(s) the equity method was suspended.
Distributions received by limited partners are accounted for as a reduction of
the investment balance. Distributions received after the investment has reached
zero would be recognized as income.
Following is a summary of the equity method activity of the investments in Local
Limited Partnerships for the periods presented:
For the Six Months
Ended For the Year Ended
September 30, 2002 March 31, 2002
------------------------ -------------------
Investments in limited partnerships, beginning of period $ 6,677,963 $ 7,432,933
Distributions received from limited partnerships (7,940) (250)
Equity in losses of limited partnerships (272,500) (716,788)
Amortization of capitalized acquisition fees and costs (18,844) (37,932)
------------------------ -------------------
Investments in limited partnerships, end of period $ 6,378,679 $ 6,677,963
======================== ===================
11
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Three and Six Months Ended September 30, 2002
(unaudited)
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS, continued
- -------------------------------------------------------
Selected financial information for the six months ended September 30, 2002 and
2001 from the unaudited combined condensed financial statements of the limited
partnerships in which the Partnership has invested are as follows: (Combined
condensed financial information for Broken Bow and Sidney were previously
excluded from the 2001 presentation but have now been included in the periods
presented. See Note 2 for further discussion):
COMBINED CONDENSED STATEMENTS OF OPERATIONS
2002 2001
-------------------- ------------------
Revenues $ 2,061,000 $ 1,916,000
-------------------- ------------------
Expenses:
Interest expense 550,000 567,000
Depreciation & amortization 679,000 645,000
Operating expenses 1,274,000 1,134,000
-------------------- ------------------
Total expenses 2,503,000 2,346,000
-------------------- ------------------
Net loss $ (442,000) $ (430,000)
==================== ==================
Net loss allocable to the Partnership $ (437,000) $ (425,000)
==================== ==================
Net loss recorded by the Partnership $ (273,000) $ (368,000)
==================== ==================
Certain Local Limited Partnerships have incurred significant operating losses
and have working capital deficiencies. In the event these Local Limited
Partnerships continue to incur significant operating losses, additional capital
contributions by the Partnership and/or the Local General Partner may be
required to sustain the operations of such Local Limited Partnerships. If
additional capital contributions are not made when they are required, the
Partnership's investment in certain of such Local Limited Partnerships could be
impaired, and the loss and recapture of the related tax credits could occur
(furthermore, see Note 6).
The Partnership currently has insufficient working capital to fund its
operations. WNC and Associates, Inc., the general partner of the Partnership,
has agreed to continue providing advances sufficient to fund the operations and
working capital requirements of the Partnership through November 30, 2003.
12
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Three and Six Months Ended September 30, 2002
(unaudited)
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
The Partnership has no officers, employees, or directors. However, under the
terms of the Partnership Agreement the Partnership is obligated to the General
Partner or its affiliates for the following fees:
(a) Annual Asset Management Fee. An annual asset management fee of the greater
of (i) $2,000 per multi-family housing complex or (ii) 0.275% of Gross
Proceeds. The base fee amount will be adjusted annually based on changes in
the Consumer Price Index. However, in no event will the annual asset
management fee exceed 0.2% of Invested Assets. "Invested Assets" means the
sum of the Partnership's investment in Local Limited Partnerships and the
Partnership's allocable share of the amount of indebtedness related to the
Housing Complexes. Asset Management fees of $22,000 were incurred during
each of the six months ended September 30, 2002 and 2001. The Partnership
paid the General Partner or its affiliates $1,875 and $0 of those fees
during the six months ended September 30, 2002 and 2001, respectively.
(b) Subordinated Disposition Fee. A subordinated disposition fee in an amount
equal to 1% of the sales price of real estate sold. Payment of this fee is
subordinated to the limited partners receiving a preferred return of 16%
through December 31, 2003 and 6% thereafter (as defined in the Partnership
Agreement) and is payable only if the General Partner or its affiliates
render services in the sales effort.
The accrued fees and expenses due to General Partner and affiliates consisted of
the following:
September 30, 2002 March 31, 2002
-------------------- --------------------
Reimbursement for expenses paid by the General
Partner or an affiliate $ 175,893 $ 166,414
Asset management fee payable 170,284 150,159
-------------------- --------------------
Total $ 346,177 $ 316,573
==================== ====================
The General Partner does not anticipate that these accrued fees will be paid
until such time as capital reserves are in excess of future foreseeable working
capital requirements of the Partnership.
NOTE 5 - INCOME TAXES
- ---------------------
The Partnership will not make a provision for income taxes since all items of
taxable income and loss will be allocated to the partners for inclusion in their
respective income tax returns.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
During 2000, WNC identified a potential problem with a developer who, at the
time, was the local general partner in six Local Limited Partnerships. The
Partnership has a 99% limited partnership interest in two of those six Local
Limited Partnerships. Those investments are Broken Bow Apartments I, Limited
Partnership, and Sidney Apartments I, Limited Partnership. All of the properties
continue to experience operating deficits.
13
WNC HOUSING TAX CREDIT FUND IV, L.P., Series 2
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Three and Six Months Ended September 30, 2002
(unaudited)
NOTE 6 - COMMITMENTS AND CONTINGENCIES, continued
- -------------------------------------------------
The local general partner ceased funding the operating deficits, which placed
the Local Limited Partnerships in jeopardy of foreclosure. Consequently, WNC
voted to remove the local general partner and the management company from the
Local Limited Partnerships. After the local general partner contested its
removal, WNC commenced legal action on behalf of the Local Limited Partnerships
and was successful in getting a receiver appointed to manage the Local Limited
Partnerships and an unaffiliated entity appointed as property manager. WNC was
subsequently successful in attaining a summary judgment to confirm the removal
of the local general partner, the receiver was discharged and WNC now controls
all six of the Local Limited Partnerships.
The six Local Limited Partnerships (hereinafter referred to as "Defendants")
were defendants in a separate lawsuit. The lawsuit was filed by eight other
partnerships in which the local general partner of the Local Limited
Partnerships is or was involved (the "Plaintiffs"). The Plaintiffs allege that
the local general partner accepted funds from the Plaintiffs and improperly
loaned these funds to the Defendants. In July 2001, a tentative settlement was
reached with respect to this lawsuit for the aggregate amount of $35,000. The
settlement was executed in November 2001. The Partnership's allocated share of
$11,700 had been paid in full at March 31, 2002.
The Partnership currently has insufficient working capital to fund its
operations. WNC and Associates, Inc., the general partner of the General Partner
of the Partnership, has agreed to provide advances sufficient enough to fund the
operations and working capital requirements of the Partnership through November
30, 2003.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
With the exception of the discussion regarding historical information,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other discussions elsewhere in this Form 10-Q contain
forward-looking statements. Such statements are based on current expectations
subject to uncertainties and other factors, which may involve known and unknown
risks that could cause actual results of operations to differ materially from
those projected or implied. Further, certain forward-looking statements are
based upon assumptions about future events, which may not prove to be accurate.
Risks and uncertainties inherent in forward-looking statements include, but are
not limited to, our future cash flows and ability to obtain sufficient
financing, level of operating expenses, conditions in the low-income housing tax
credit property market and the economy in general, as well as legal proceedings.
Historical results are not necessarily indicative of the operating results for
any future period.
Subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by
cautionary statements in this Form 10-Q and in other reports we filed with the
Securities and Exchange Commission. The following discussion should be read in
conjunction with the condensed Financial Statements and the Notes thereto
included elsewhere in this filing.
The following discussion and analysis compares the results of operations for the
three and six months ended September 30, 2002 and 2001, and should be read in
conjunction with the condensed financial statements and accompanying notes
included within this report.
Uncertainty and Commitments with Respect to Investment in Broken Bow and Sidney
The Partnership has two investments accounted for under the equity method,
consisting of 99% limited partnership interests in each of Broken Bow Apartments
I, Limited Partnership ("Broken Bow") and Sidney Apartments I, Limited
Partnership ("Sidney").
During the year ended March 31, 2000, Broken Bow and Sidney continued to
experience operational difficulties and negative cash flows from operations, and
ceased paying their lender. Foreclosure procedures were commenced by these two
Local Limited Partnerships' lender. Management performed an evaluation of the
Partnership's remaining investment balances in Broken Bow and Sidney, including
any other anticipated costs and determined that an impairment adjustment was
necessary. An impairment loss of $766,559 was recognized for the year ended
March 31, 2000. This impairment loss included $558,688 in remaining net book
value of the Partnership's investments in Broken Bow and Sidney, $120,906 and
$30,753 of cash advances, a $37,670 accrual for anticipated legal costs, and
$18,542 of estimated accounting and other related costs.
As a result of the foregoing, the Partnership, Broken Bow, Sidney, and a WNC
subsidiary executed a work-out agreement with the lender (the "Agreement"),
which was effective December 14, 2001. Broken Bow was required to pay to the
lender $165,000 as a partial settlement of the indebtedness due and owing by
Broken Bow due to the fact that their loan was a construction loan. The
Partnership advanced the aforementioned monies to Broken Bow and fully reserved
the amount as of March 31, 2002. The balance of the indebtedness due and owing
to the lender by Broken Bow was satisfied by the execution of two promissory
notes. The first note totals $85,000, bears interest at 7% per annum, and
requires principal and interest payments totaling $600 per month through April
2014, at which date the unpaid principal balance is due. The second note totals
$500,000, bears interest at 1% per annum, and has payments due monthly out of
available cash flow, as defined, with the unpaid principal balance due April
2014. The balance of the indebtedness due and owing to the lender by Sidney was
satisfied by the execution of two promissory notes. The first note totals
$130,000, bears interest at 7% per annum, and requires principal and interest
payments totaling $900 per month through April 2012, at which date the unpaid
principal is due.
15
Uncertainty and Commitments with Respect to Investment in Broken Bow and Sidney,
continued
The second note totals $300,000, bears interest at 1% per annum, and has
payments due monthly out of available cash flow, as defined, with the unpaid
principal balance due April 2014. The Partnership and a WNC subsidiary have
executed a guarantee for the payment of both notes of Broken Bow and Sidney. In
addition, several other commitments were made. Broken Bow and Sidney executed a
grant deed to the lender in the event that either entity defaults under the
terms and provisions of the notes. The deeds are held in escrow, and if Broken
Bow or Sidney defaults on either note, the lender may, at its option, record the
respective deed. In addition, the Partnership has assigned the lender as
additional collateral all of its residual value interests, as defined, in all of
the Local Limited Partnerships. The Partnership and the Local Limited
Partnerships are prohibited from selling, assigning, transferring or further
encumbering the Housing Complexes retained by each Local Limited Partnership.
As a result of the operating difficulties mentioned above, there is uncertainty
as to additional costs, if any, that the Partnership may incur in connection
with its investment in Broken Bow and Sidney and as to whether the Partnership
will ultimately retain its interest in these Local Limited Partnerships. In the
event the Partnership does not successfully retain its interest in Broken Bow
and Sidney, the Partnership would be exposed to the cessation and recapture of
the related tax credits. The Partnership's financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
Financial Condition
The Partnership's assets at September 30, 2002 consisted primarily of $26,000 in
cash and aggregate investments in the twenty-two Local Limited Partnerships of
$6,379,000. Liabilities at September 30, 2002 primarily consisted of $170,000 in
accrued asset management fees and $176,000 of accrued fees and expenses due to
the General Partner or affiliates.
Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001. The Partnership's net loss for the three months ended September 30,
2002 was $(168,000) reflecting a decrease of $(59,000) from the $(227,000) net
loss experienced for the three months ended September 30, 2001. The decrease in
net loss is primarily due to equity in losses of Local Limited Partnerships,
which decreased by $65,000 to $(134,000) for the three months ended September
30, 2002 from $(199,000) for the three months ended September 30, 2001. The
decrease in equity in losses of Local Limited Partnerships is due to the
Partnership not recognizing certain losses of the Local Limited Partnerships.
The investments in such Local Limited Partnerships had reached $0 at September
30, 2002. Since the Partnership's liability with respect to its investments is
limited, losses in excess of investment are not recognized. The decrease in
equity in losses of Local Limited Partnerships is offset by an increase in loss
from operation of $6,000, to $(34,000) for the three months ended September 30,
2002 from $(28,000) for the three months ended September 30, 2001, due to an
approximate $7,000 increase in legal and accounting expenses, which offset by a
$(1,000) decrease in other operating expenses.
Six Months Ended September 30, 2002 Compared to Six Months Ended September 30,
2001. The Partnership's net loss for the six months ended September 30, 2002 was
$(335,000) reflecting a decrease of $(86,000) from the $(421,000) net loss
experienced for the six months ended September 30, 2001. The decrease in net
loss is primarily due to equity in losses of Local Limited Partnerships, which
decreased by $95,000 to $(273,000) for the six months ended September 30, 2002
from $(368,000) for the six months ended September 30, 2001. The decrease in
equity in losses of Local Limited Partnerships is due to the Partnership not
recognizing certain losses of the Local Limited Partnerships. The investments in
such Local Limited Partnerships had reached $0 at September 30, 2002. Since the
Partnership's liability with respect to its investments is limited, losses in
excess of investment are not recognized. The decrease in equity in losses of
Local Limited Partnerships is offset by an increase in loss from operation of
$9,000, to $(62,000) for the six months ended September 30, 2002 from $(53,000)
for the three months ended September 30, 2001, due to a $1,000 decrease in
interest income and an approximate $8,000 increase in comparable legal,
accounting and other operating expenses.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
Cash Flows
Six Months Ended September 30, 2002 Compared to Six Months Ended September 30,
2001. Net cash used during the six months ended September 30, 2002 was $(7,000)
compared to net cash used during the six months ended September 30, 2001 of
$(10,000). The $3,000 decrease was due primarily to an increase in cash used in
operating activities of $(2,000) offset by a $5,000 increase in distributions
from local limited partnerships.
During the six months ended September 30, 2002, accrued payables, which consist
primarily of asset management fees due to the General Partner and reimbursements
for expenses, paid by the general partner or an affiliate, increased by $15,000.
The General Partner does not anticipate that these accrued fees will be paid in
full until such time as capital reserves are in excess of future foreseeable
working capital requirements of the Partnership.
The Partnership currently has insufficient working capital to fund its
operations. WNC and Associates, Inc., the general partner of the Partnership,
has agreed to continue providing advances sufficient to fund the operations and
working capital requirements of the Partnership through November 30, 2003.
17
Item 3. Quantitative and Qualitative Disclosures above Market Risks
NOT APPLICABLE.
Item 4. Procedures and Controls
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a- 14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the
Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
Part II. Other Information
Item 1. Legal Proceedings
NONE.
Item 4. Submission of Matters to a Vote of Security Holders
The Consent Solicitation Statement dated August 15, 2002 was first
sent to the Limited Partners on or about August 15, 2002.
The General Partner has proposed that the Partnership cease
reproduction and mailing of quarterly and annual financial statements
to the Limited Partners, to reduce the expenses incurred by the
Partnership. The Partnership will continue to prepare quarterly and
annual financial statements so long as it is required to do so under
the Securities and Exchange Commission Act of 1934 and submit them to
the Securities and Exchange Commission. All votes were to be returned
to the General Partner by October 15, 2002 to be counted. The proposal
was approved by the Limited Partners and the results of the vote were
9,005 for the proposal, 1,360 against the proposal, and 144
abstentions.
Item 5. Other Information
Wilfred N. Cooper, Jr. has assumed the role of Chief Executive Officer
of WNC & Associates. Wilfred N. Cooper, Sr. who previously held the
role of Chief Executive Officer remains the Chairman of The Board.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K.
--------------------
1. NONE
(b) Exhibits.
---------
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adapted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WNC Housing Tax Credit Fund IV, L.P. - Series 2
By: WNC Tax Credit Partners IV, L.P., General Partner of the Registrant
By: WNC & ASSOCIATES, INC., General Partner
By: /s/ Wilfred N. Cooper, Jr.
---------------------------
Wilfred N. Cooper, Jr.
President and Chief Executive Officer of WNC & Associates, Inc.
Date: December 4, 2002
By: /s/ Thomas J. Riha
-------------------
Thomas J. Riha
Vice President - Chief Financial Officer of WNC & Associates, Inc.
Date: December 4, 2002
19
CERTIFICATIONS
I, Wilfred N. Cooper, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of WNC Housing Tax
Credit Fund IV, L.P. Series 2;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 4, 2002
/s/ Wilfred N. Cooper, Jr.
- --------------------------
[Signature]
President and Chief Executive Officer of WNC & Associates, Inc.
20
CERTIFICATIONS
I, Thomas J. Riha, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WNC Housing Tax
Credit Fund IV, L.P. Series 2;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 4, 2002
/s/ Thomas J. Riha
- ------------------
[Signature]
Vice-President - Chief Financial Officer of WNC & Associates, Inc.
21