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 December 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-20057
WNC HOUSING TAX CREDIT FUND II, L.P.
California 33-0391979
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17782 Sky Park Cirlce
Irvine, CA 92614-6404
(Address of principal executive offices)
(714) 662-5565
(Telephone number)
3158 Redhill Avenue, Suite 120, Costa Mesa, CA 92626
(Former name, formeraddress and former fiscal year,
if changed since last report)
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 II, L.P.
(A California Limited Partnership)
INDEX TO FORM 10-Q
For the Quarter Ended December 31, 2003
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
December 31, 2003 and March 31, 2003................................3
Statements of Operations
For the Three and Nine Months Ended December 31, 2003 and 2002......4
Statement of Partners' Deficit
For the Nine Months Ended December 31, 2003.........................5
Statements of Cash Flows
For the Nine Months Ended December 31, 2003 and 2002...............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 Risk.......16
Item 4. Procedures and Controls..........................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................17
Item 6. Exhibits and Reports on Form 8-K.................................17
Signatures ..............................................................18
2
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
BALANCE SHEETS
December 31, 2003 March 31, 2003
---------------------- ----------------------
(unaudited)
ASSETS
Cash and cash equivalents $ 101,343 $ 113,943
Investments in limited partnerships, net (Note 2) 257,697 308,868
---------------------- ----------------------
$ 359,040 $ 422,811
====================== ======================
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accrued fees and expenses due to
General Partner and affiliates (Note 3) $ 1,724,429 $ 1,613,741
---------------------- ----------------------
Partners' deficit:
General Partner (73,197) (71,452)
Limited Partners (12,000 units authorized and 7,000
units issued and outstanding) (1,292,192) (1,119,478)
---------------------- ----------------------
Total partners' deficit (1,365,389) (1,190,930)
---------------------- ----------------------
$ 359,040 $ 422,811
====================== ======================
See accompanying notes to financial statements
3
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended December 31, 2003 and 2002
(unaudited)
2003 2003 2002 2002
------------------ ------------------- ------------------ ------------------
Three Nine Three Nine
Months Months Months Months
------------------ ------------------- ------------------ ------------------
Interest income $ 333 $ 620 $ 227 $ 1,253
Distribution income 200 10,640 - 6,547
------------------ ------------------- ------------------ ------------------
533 11,260 227 7,800
------------------ ------------------- ------------------ ------------------
Operating expenses:
Amortization (Note 2) 2,896 8,687 2,896 8,688
Asset management fees (Note 3) 36,225 108,677 36,225 108,677
Legal and accounting 181 18,176 2,320 17,818
Other 4,582 9,114 259 2,036
------------------ ------------------- ------------------ ------------------
Total operating expenses 43,884 144,654 41,700 137,219
------------------ ------------------- ------------------ ------------------
Loss from operations (43,351) (133,394) (41,473) (129,419)
Equity in losses of
limited partnerships (Note 2) (10,222) (41,065) (6,976) (27,402)
------------------ ------------------- ------------------ ------------------
Net loss $ (53,573) $ (174,459) $ (48,449) $ (156,821)
================== =================== ================== ==================
Net loss allocated to:
General Partner $ (536) $ (1,745) $ (484) $ (1,568)
================== =================== ================== ==================
Limited Partners $ (53,037) $ (172,714) $ (47,965) $ (155,253)
================== =================== ================== ==================
Net loss per weighted limited
partner unit $ (8) $ (25) $ (7) $ (22)
================== =================== ================== ==================
Outstanding weighted limited
partner units 7,000 7,000 7,000 7,000
================== =================== ================== ==================
See accompanying notes to financial statements
4
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
STATEMENT OF PARTNERS' DEFICIT
For the Nine Months Ended December 31, 2003
(unaudited)
General Limited
Partner Partners Total
------------------- ---------------- --------------
Partners' deficit at March 31, 2003 $ (71,452) $ (1,119,478) $ (1,190,930)
Net loss (1,745) (172,714) (174,459)
------------------- ---------------- --------------
Partners' deficit at December 31, 2003 $ (73,197) $ (1,292,192) $ (1,365,389)
=================== ================ ==============
See accompanying notes to financial statements
5
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31, 2003 and 2002
(unaudited)
2003 2002
-------------------- ------------------
Cash flows from operating activities:
Net loss $ (174,459) $ (156,821)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in losses of limited partnerships 41,065 27,402
Amortization 8,688 8,688
Change in accrued fees and expenses due to
General Partner and affiliates 110,688 103,423
-------------------- ------------------
Net cash used in operating activities (14,018) (17,308)
-------------------- ------------------
Cash flows from investing activities:
Distributions from limited partnerships 1,418 1,736
-------------------- ------------------
Net decrease in cash and cash equivalents (12,600) (15,572)
Cash and cash equivalents, beginning of period 113,943 127,554
-------------------- ------------------
Cash and cash equivalents, end of period $ 101,343 $ 111,982
==================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Taxes Paid $ - $ 800
==================== ==================
See accompanying notes to financial statements
6
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended December 31, 2003
(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 nine
months ended December 31, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2004. 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,
2003.
Organization
- ------------
WNC Housing Tax Credit Fund II, L.P., a California Limited Partnership (the
"Partnership"), was formed on January 19, 1990 under the laws of the State of
California. The Partnership was formed to invest primarily in other limited
partnerships (the "Local Limited Partnerships") which own and operate
multifamily housing complexes (the "Housing Complex") that are eligible for low
income housing tax 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 is WNC Financial Group, L.P., a California partnership (the
"General Partner") of the 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 Associates, as the Partnership and
General Partners have no employees of their own.
The Partnership shall continue to be in full force and effect until December 31,
2045 unless terminated prior to that date pursuant to the partnership agreement
or law.
The Partnership Agreement authorized the sale of up to 12,000 units at $1,000
per Unit ("Units"). The offering of Units concluded on December 31, 1992, at
which time 7,000 Units representing subscriptions in the amount of $7,000,000
had been accepted. The General Partner has 1% interest in operating profits and
losses, taxable income and losses, in cash available for distribution from the
Partnership and tax credits of the Partnership. The limited partners will be
allocated the remaining 99% of these items in proportion to their respective
investments.
After the limited partners have received proceeds from a sale or refinancing
equal to their capital contributions and their return on investment (as defined
in the Partnership Agreement) and the General Partner has received proceeds
equal to its capital contribution and a subordinated disposition fee (as
described in Note 3) from the remainder, any additional sale or refinancing
proceeds will be distributed 95% to the limited partners (in proportion to their
respective investments) and 5% to the General Partner.
7
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended December 31, 2003
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Risks and Uncertainties
- -----------------------
An investment in the Partnership and the Partnership's investments in Local
Limited Partnerships and their Housing Complexes are subject to risks. These
risks may impact the tax benefits of an investment in the Partnership, and the
amount of proceeds available for distribution to the Limited Partners, if any,
on liquidation of the Partnership's investments. Some of those risks include the
following:
The Low Income Housing Credit rules are extremely complicated. Noncompliance
with these rules results in the loss of future Low Income Housing Credit s and
the fractional recapture of Low Income Housing Credits already taken. In most
cases the annual amount of Low Income Housing Credits that an individual can use
is limited to the tax liability due on the person's last $25,000 of taxable
income. The Local Limited Partnerships may be unable to sell the Housing
Complexes at a profit. Accordingly, the Partnership may be unable to distribute
any cash to its investors. Low Income Housing Credits may be the only benefit
from an investment in the Partnership.
The Partnership has invested in a limited number of Local Limited Partnerships.
Such limited diversity means that the results of operation of each single
Housing Complex will have a greater impact on the Partnership. With limited
diversity, poor performance of one Housing Complex could impair the
Partnership's ability to satisfy its investment objectives. Each Housing Complex
is subject to mortgage indebtedness. If a Local Limited Partnership failed to
pay its mortgage, it could lose its Housing Complex in foreclosure. If
foreclosure were to occur during the first 15 years, the loss of any remaining
Low Income Housing Credits, a fractional recapture of prior Low Income Housing
Credits, and a loss of the Partnership's investment in the Housing Complex would
occur. The Partnership is a limited partner or non-managing member of each Local
Limited Partnership. Accordingly, the Partnership will have very limited rights
with respect to management of the Local Limited Partnerships. The Partnership
will rely totally on the Local General Partners. Neither the Partnership's
investments in Local Limited Partnerships, nor the Local Limited Partnerships'
investments in Housing Complexes, are 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 interests in Local Limited
Partnerships; limitations on removal of Local General Partners; limitations on
subsidy programs; and possible changes in applicable regulations. Uninsured
casualties could result in loss of property and Low Income Housing Credits and
recapture of Low Income Housing Credits previously taken. The value of real
estate is subject to risks from fluctuating economic conditions, including
employment rates, inflation, tax, environmental, land use and zoning policies,
supply and demand of similar properties, and neighborhood conditions, among
others.
The ability of Limited Partners to claim tax losses from the Partnership is
limited. The IRS may audit the Partnership or a Local Limited Partnership and
challenge the tax treatment of tax items. The amount of Low Income Housing
Credits and tax losses allocable to the investors could be reduced if the IRS
were successful in such a challenge. The alternative minimum tax could reduce
tax benefits from an investment in the Partnership. Changes in tax laws could
also impact the tax benefits from an investment in the Partnership and/or the
value of the Housing Complexes.
No trading market for the Units exists or is expected to develop. Investors may
be unable to sell their Units except at a discount and should consider their
Units to be a long-term investment. Individual investors will have no recourse
if they disagree with actions authorized by a vote of the majority of Limited
Partners.
8
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended December 31, 2003
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Exit Strategy
- -------------
The IRS compliance period for low-income housing tax credit properties is
generally 15 years from occupancy following construction or rehabilitation
completion. WNC was one of the first in the industry to offer investments using
the tax credit. Now these very first programs are completing their compliance
period.
With that in mind, the Partnership is continuing to review the Partnership's
holdings, with special emphasis on the more mature properties such as any that
have satisfied the IRS compliance requirements. The Partnership's review will
consider many factors including extended use requirements on the property (such
as those due to mortgage restrictions or state compliance agreements), the
condition of the property, and the tax consequences to the investors from the
sale of the property.
Upon identifying those properties with the highest potential for a successful
sale, refinancing or syndication, the Partnership expects to proceed with
efforts to liquidate those properties. The Partnership's objective is to
maximize the investors' return wherever possible and, ultimately, to wind down
those funds that no longer provide tax benefits to investors. No properties in
the Partnership have been selected.
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 Partnerships' results of operations
and for any contributions made and distributions received. The Partnership
reviews the carrying amount of an individual investment in a Local Limited
Partnership for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such investment may not be recoverable.
Recoverability of such investment is measured by a comparison of the carrying
amount to future undiscounted net cash flows expected to be generated. If an
investment is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the investment exceeds
fair value. The accounting policies of the Local Limited Partnerships are
generally 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 (see Note 2).
Equity in losses from Local Limited Partnerships for the periods ended December
31, 2003 and 2002 have been recorded by the Partnership based on nine months of
results estimated by management of the Partnership. Management's estimate for
the nine month period is based on either actual unaudited results reported by
the Local Limited Partnerships or historical trends in the operations of the
Local Limited Partnerships. Equity in losses from Local Limited Partnerships
allocated to the Partnership will not be recognized to the extent that the
investment balance would be adjusted below zero. As soon as the investment
balance reaches zero, amortization of the related costs of acquiring the
investment are accelerated to the extent of losses available (see Note 2).
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. Offering expenses are reflected as
a reduction of partners' capital and amounted to $1,036,840 at the end of all
periods presented.
9
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended December 31, 2003
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could materially differ from those
estimates.
Cash and Cash Equivalents
- -------------------------
The Partnership considers all highly liquid investments with remaining
maturities of three months or less when purchased to be cash equivalents. The
Partnership had no cash equivalents at the end of all periods presented.
Concentration of Credit Risk
- ----------------------------
At December 31, 2003, the Partnership maintained a cash balance at a financial
institution in excess of the federally insured maximum.
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 loss 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 June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations", which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred with the associated asset retirement costs being capitalized as a part
of the carrying amount of the long-lived asset. SFAS No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and reconciliation of changes in the components of those
obligations. The statement is effective for fiscal years beginning after June
15, 2002. The adoption of SFAS No. 143 did not have a material effect on the
Partnership's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which addresses accounting and financial reporting for the
impairment or disposal of long-lived assets. This standard was effective for the
Partnership's financial statements beginning January 1, 2002. The implementation
of SFAS No. 144 did not have a material impact on the Partnership's financial
position or results of operations.
10
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended December 31, 2003
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
New Accounting Pronouncement, continued
- ---------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinded three previously issued statements and amended SFAS No.
13, "Accounting for Leases." The statement provides reporting standards for debt
extinguishments and provides accounting standards for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The statement is effective for certain lease transactions occurring after May
15, 2002 and all other provisions of the statement shall be effective for
financial statements issued on or after May 15, 2002. The implementation of SFAS
No. 145 did not 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," which updates accounting and reporting
standards for personnel and operational restructurings. The Partnership adopted
SFAS No. 146 for exit, disposal or other restructuring activities initiated
after December 31, 2002. The adoption of SFAS No. 146 did not have a material
effect on the Partnership's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The adoption of FIN 45 did not have a
material impact on the Partnership's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method on accounting for stock-based employee compensation. The
implementation of SFAS No. 148 is not expected to have a material effect on the
Partnership's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN46"), "Consolidation
of Variable Interest Entities," FIN 46 provides guidance on when a company
should include the assets, liabilities, and activities of a variable interest
entity ("VIE") in its financial statements and when it should disclose
information about its relationship with a VIE. A VIE is a legal structure used
to conduct activities or hold assets, which must be consolidated by a company if
it is the primary beneficiary because it absorbs the majority of the entity's
expected losses, the majority of the expected returns, or both. The provisions
of FIN 46 were effective February 1, 2003 for all arrangements entered into
after January 31, 2003. FIN 46 is effective in the second quarter of 2004 for
those arrangements entered into prior to January 31, 2003. We are currently
reviewing whether we have relationships with VIEs and, if so, whether we should
consolidate them and disclose information about them as the primary beneficiary
or disclose information about them as an interest holder. We may have to
consolidate some of our equity investments in partnerships based on recent
interpretations from accounting professionals. We currently record the amount of
our investment in these partnerships as an asset on our balance sheet, recognize
our share of partnership income or losses in our income statement, and disclose
how we account for material types of these investments in our 2003 financial
statements. However, we do not yet know the extent of the impact of
consolidating the assets and liabilities of these partnerships on our balance
sheet because of the complexities of applying FIN 46, the evolving
interpretations from accounting professionals, and the nuances of each
individual partnership.
11
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended December 31, 2003
(unaudited)
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS
- --------------------------------------------
As of the periods presented, the Partnership had acquired limited partnership
interests in twenty-seven Local Limited Partnerships, each of which owns one
Housing Complex consisting of an aggregate of 784 apartment units. The
respective Local General Partners of the Local Limited Partnerships manage the
day-to-day operations of the entities. Significant Local Limited Partnership's
business decisions, as defined, require the approval of the Partnership. The
Partnership, as a limited partner, is generally entitled to 99%, as specified in
the Local Limited Partnership agreements, of the operating profits and losses,
taxable income and losses and tax credits of the Local Limited Partnerships.
Equity in losses of the 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.
The following is a summary of the equity method activity of the investments in
Local Limited Partnerships for the periods presented below:
For the Nine Months For the Year
Ended Ended
December 31, 2003 March 31, 2003
---------------------- ------------------
Investments per balance sheet, beginning of period $ 308,868 $ 418,246
Equity in losses of limited partnerships (41,065) (95,444)
Distributions received (1,418) (2,350)
Amortization of capitalized acquisition fees and costs (8,688) (11,584)
---------------------- ------------------
Investments per balance sheet, end of period $ 257,697 $ 308,868
====================== ==================
12
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended December 31, 2003
(unaudited)
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS, continued
- -------------------------------------------------------
Selected financial information for the nine months ended December 31, 2003 and
2002, from the unaudited combined condensed financial statements of the limited
partnerships in which the Partnership has invested as follows:
2003 2002
------------------ ----------------
Revenues $ 2,391,000 $ 2,335,000
------------------- -----------------
Expenses:
Interest expense 488,000 508,000
Depreciation & amortization 665,000 626,000
Operating expenses 1,715,000 1,667,000
------------------- -----------------
Total expenses 2,868,000 2,801,000
------------------- -----------------
Net loss $ (477,000) $ (466,000)
=================== =================
Net loss allocable to the Partnership $ (472,000) $ (461000)
=================== =================
Net loss recorded by the Partnership $ (41,000) $ (27,000)
=================== =================
Certain Local Limited Partnerships incurred operating losses and/or have working
capital deficiencies. In the event these Local Limited Partnerships continue to
incur significant operating losses, additional capital contributions by the
Partnership and/or the Local General Partner may be required to sustain the
operations of such Local Limited Partnerships. If additional capital
contributions are not made when they are required, the Partnership's investment
in certain of such Local Limited Partnerships could be impaired, and the loss
and recapture of the related tax credits could occur.
NOTE 3- RELATED PARTY TRANSACTIONS
- ----------------------------------
Under the terms of the Partnership Agreement, the Partnership has paid or is
obligated to the General Partner or its affiliates for the following items:
(a) Annual Asset Management Fee. An annual asset management fee in an amount
equal to 0.5% of invested assets (the sum of the Partnership's Investment
in Local Limited Partnership Interests and the Partnership's allocable
share of the amount of the mortgage loans on and other debts related to,
the Housing Complexes owned by such Local Limited Partnerships). Fees of
$108,677 were incurred during each of the nine months ended December 31,
2003 and 2002. The partnership paid $0 and $5,250 to the General Partner or
its affiliates for those fees during the nine months ended December 31,
2003 and 2002, respectively.
(b) Subordinated Disposition Fee. A subordinated disposition fee in an amount
equal to 1% the sales price of any real estate sold. Payment of this fee is
subordinated to the limited partners who receive a 6% preferred return (as
defined in the Partnership Agreement) and is payable only if the General
Partner or its affiliates render services in the sales effort.
13
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended December 31, 2003
(unaudited)
NOTE 3- RELATED PARTY TRANSACTIONS, continued
- ---------------------------------------------
The accrued fees and expenses due to General Partner and affiliates consists of
the following at:
December 31, 2003 March 31, 2003
----------------------- -----------------------
Advances from WNC $ 3,900 $ 1,890
Asset management fee payable 1,720,529 1,611,851
----------------------- -----------------------
Total accrued fees and expenses due to
General Partner and affiliates $ 1,724,429 $ 1,613,741
======================= =======================
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.
NOTE 4 - INCOME TAXES
- ---------------------
No provision for income taxes has been recorded in the financial statements, as
any liability for income taxes is the obligation of the partners of the
Partnership.
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 nine months ended December 31,2003 and 2002, and should be read in
conjunction with the condensed financial statements and accompanying notes
included within this report.
Financial Condition
The Partnership's assets at December 31, 2003 consisted of $101,000 in cash and
aggregate investments in the twenty-seven Local Limited Partnerships of
$258,000. Liabilities at December 31, 2003 consisted of $1,724,000 of accrued
fees and expenses due to the General Partner and affiliates.
Results of Operations
Three Months Ended December 31, 2003 Compared to Three Months Ended December 31,
2002. The Partnership's net loss for the three months ended December 31, 2003
was $(54,000), reflecting an increase of $(5,000) from the net loss for the
three months ended December 31, 2002 of $(49,000). The increase in net loss is
due to an increase in equity in losses of limited partnerships of $(3,000) to
$(10,000) for the three months ended December 31, 2003 from approximately
$(7,000) for the three months ended December 31, 2002. Along with an increase in
loss from operations of $(2,000) for the three months ended December 31, 2003 to
$(43,000) from $(41,000) for the three months ended December 31, 2002. This
change was due to a combined increase in accounting, legal and other expenses of
approximately $(2,000).
Nine Months Ended December 31, 2003 Compared to Nine Months Ended December 31,
2002. The Partnership's net loss for the nine months ended December 31, 2003 was
$(174,000), reflecting an increase of $(17,000) from the net loss for the nine
months ended December 31, 2002 of $(157,000). The increase in net loss is due to
an increase in equity in losses of limited partnerships of $(14,000) to
$(41,000) for the nine months ended December 31, 2003 from approximately
$(27,000) for the nine months ended December 31, 2002. Along with distribution
income increasing by $4,000 to $11,000 for the nine months ended December 31,
2003 from $7,000 for the nine months ended December 31, 2002 offset with an
increase in other expenses of $(7,000).
15
Cash Flows
Nine Months Ended December 31, 2003 Compared to Nine Months Ended December 31,
2002. Net cash used during the nine months ended December 31, 2003 was
($13,000), reflecting a decrease of approximately $3,000, compared to net cash
used for the nine months ended December 31, 2002 of $(16,000). The change is
primarily due to an increase in the accrued fees due to the General Partner of
approximately $7,000, offset by an increase of approximately $(4,000) in the
loss from operations.
During the nine months ended December 31, 2003, accrued payables, which
consisted primarily of asset management fees due to the General Partner,
increased by $111,000. 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.
The Partnership expects its future cash flows, together with its net available
assets at December 31, 2003, to be sufficient to meet all currently foreseeable
future cash requirements.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
NOT APPLICABLE
Item 4. Procedures and Controls
Within the 90 days prior to the date of this report, the General
Partners of the Partnership carried out an evaluation, under the
supervision and with the participation of Associates' management,
including Associates' Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the
Partnership'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 Partnership's
disclosure controls and procedures are effective. There were no
significant changes in the Partnership's internal controls or in other
factors that could significantly affect these controls subsequent to
the date of their evaluation.
16
Part II. Other Information
Item 1. Legal Proceedings
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K.
--------------------
1. A current report on Form 8-K was filed on behalf of the registrant on
November 4, 2003 reporting the resignation of the registrant's former
principal independent accountants, and the engagement of new principal
independent accountants under Item 4 of the Form 8-K. An amendment
thereto on Form 8-K/A was filed on November 10, 2003 and November 25,
2003 (under Item 7 and under Items 4 and 7, respectively) to file as
an exhibit the required letter from the former principal independent
accountants. Neither the initial report nor the amendments included
any financial statements.
(b) Exhibits.
---------
31.1 Certification of the Principal Executive Officer pursuant to Rule
13a-15(e) and 15d-15(e), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith)
31.2 Certification of the Principal Financial Officer pursuant to Rule
13a-15(e) and 15d-15(e), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith)
32.1 Certification of the Principal Executive Officer pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002. (filed herewith)
32.2 Certification of the Principal Financial Officer pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002. (filed herewith)
17
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 II, L.P.
By: WNC Financial Group, L.P. General Partner of the Registrant
By: WNC & Associates, Inc. General Partner of WNC Financial Group, L.P.
By: /s/ Wilfred N. Cooper, Jr.
--------------------------
Wilfred N. Cooper, Jr.
President and Chief Executive Officer of WNC & Associates, Inc.
Date: February 9, 2004
By: /s/ Thomas J. Riha
------------------
Thomas J. Riha
Vice-President - Chief Financial Officer of WNC & Associates, Inc.
Date: February 9, 2004
18