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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, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-20056
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
California 33-0433017
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17782 Sky Park Circle Irvine, CA 92614-6404
(Address of principal executive offices)
(714) 662-5565
(Telephone number)
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 CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
INDEX TO FORM 10-Q
For the Quarter Ended September 30, 2004
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
As of September 30, 2004 and March 31, 2004..................2
Statements of Operations
For the Three and Six Months Ended September 30, 2004 and
2003.........................................................3
Statement of Partners' Deficit
For the Six Months Ended September 30, 2004..................4
Statements of Cash Flows
For the Six Months Ended September 30, 2004 and 2003.........5
Notes to Financial Statements.........................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................13
Item 3. Quantitative and Qualitative Disclosures
About Market Risks..........................................14
Item 4. Controls and Procedures......................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................15
Item 6. Exhibits and Reports on Form 8-K.............................15
Signatures ...................................................16
1
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
BALANCE SHEETS
September 30, 2004 March 31, 2004
----------------------- --------------------
(unaudited)
ASSETS
Cash and cash equivalents $ 184,433 $ 206,876
Investments in limited partnerships, net (Note 2) 1,352,327 1,546,722
Accounts receivable - 3,646
----------------------- --------------------
$ 1,536,760 $ 1,757,244
======================= ====================
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accrued fees and expenses due to
General Partner and affiliates (Note 3) $ 2,083,718 $ 1,997,095
----------------------- --------------------
Commitments and contingencies
Partners' deficit:
General partner (170,731) (167,660)
Limited partners (20,000 units authorized;
17,726 units issued and outstanding) (376,227) (72,191)
----------------------- --------------------
Total partners' deficit (546,958) (239,851)
----------------------- --------------------
$ 1,536,760 $ 1,757,244
======================= ====================
See accompanying notes to financial statements
2
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
For the Three and Six Months Ended September 30, 2004 and 2003
(unaudited)
2004 2003
------------------------------------ ------------------------------------
Three Months Six Months Three Months Six Months
----------------- --------------- --------------- -----------------
Interest income $ 124 $ 319 $ 472 $ 1,037
Distribution income - 9,100 1,120 1,120
Reporting fee 1,120 1,120 - -
----------------- --------------- --------------- -----------------
Total operating income 1,244 10,539 1,592 2,157
----------------- --------------- --------------- -----------------
Operating expenses:
Amortization (Note 2) 4,189 8,378 13,294 26,588
Asset management fees (Note 3) 52,521 105,042 52,521 105,042
Legal and accounting 15,475 16,000 13,374 16,944
Other 119 5,309 340 2,049
----------------- --------------- --------------- -----------------
Total operating expenses 72,304 134,729 79,529 150,623
----------------- --------------- --------------- -----------------
Loss from operations (71,060) (124,190) (77,937) (148,466)
Equity in losses of
limited partnerships (Note 2) (94,633) (182,917) (266,996) (416,788)
----------------- --------------- --------------- -----------------
Net loss $ (165,693) $ (307,107) $ (344,933) $ (565,254)
================= =============== =============== =================
Net loss allocated to:
General partner $ (1,657) $ (3,071) $ (3,449) $ (5,653)
================= =============== =============== =================
Limited partners $ (164,036) $ (304,036) $ (341,484) $ (559,601)
================= =============== =============== =================
Net loss per limited partner unit $ (9) $ (17) $ (19) $ (32)
================= =============== =============== =================
Outstanding weighted limited
partner units 17,726 17,726 17,726 17,726
================= =============== =============== =================
See accompanying notes to financial statements
3
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
STATEMENT OF PARTNERS' DEFICIT
For the Six Months Ended September 30,2004
(unaudited)
General Limited
Partner Partners Total
----------------- ------------------ ----------------
Partners' deficit at March 31, 2004 $ (167,660) $ (72,191) $ (239,851)
Net loss (3,071) (304,036) (307,107)
----------------- ------------------ ----------------
Partners' deficit at September 30, 2004 $ (170,731) $ (376,227) $ (546,958)
================= ================== ================
See accompanying notes to financial statements
4
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Three and Six Months Ended September 30, 2004 and 2003
(unaudited)
2004 2003
----------------- ----------------
Cash flows from operating activities:
Net loss $ (307,107) $ (565,254)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization 8,378 26,588
Equity in losses of limited partnerships 182,917 416,788
Change in accounts receivable 3,646 -
Change in accrued fees and expense due to
General Partner and affiliates 86,623 79,687
----------------- ----------------
Net cash used in operating activities (25,543) (42,191)
----------------- ----------------
Cash flows from investing activities:
Distributions received from limited partnerships 3,100 36,303
----------------- ----------------
Net decrease in cash and cash equivalents (22,443) (5,888)
Cash and cash equivalents, beginning of period 206,876 220,039
----------------- ----------------
Cash and cash equivalents, end of period $ 184,433 $ 214,151
================= ================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Taxes paid $ - $ -
================= ================
See accompanying notes to financial statements
5
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(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 six months ended
September 30, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 2005. 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,
2004.
Organization
- ------------
WNC California Housing Tax Credits II, L.P., a California Limited Partnership
(the "Partnership"), was formed on September 13, 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
multi-family 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 of the Partnership is WNC Tax Credit Partners, L.P. (the
"General Partner"). WNC & Associates, Inc. ("Associates") and Wilfred N. Cooper
Sr. are the general partners of the General Partner. 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 General Partner
and the Partnership has no employees of its own.
The Partnership shall continue 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 20,000 units at $1,000
per Unit ("Units"). The offering of Units concluded in January 1993 at which
time 17,726 Units, representing subscriptions in the amount of $17,726,000 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 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 investments (as defined
in the Partnership Agreement) and the General Partner has received proceeds
equal to its capital contribution and a subordinated disposition fee from the
remainder, any additional sales or refinancing proceeds will be distributed 90%
to the limited partners (in proportion to their respective investments) and 10%
to the General Partner.
6
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended September 30, 2004
(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 price which would result in the Partnership realizing cash
distributions or proceeds from the transaction. Accordingly, the Partnership may
be unable to distribute any cash to its Limited Partners. 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
future 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 Limited Partners 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.
Substantially all of the Low Income Housing Credits anticipated to be realized
from the Local Limited Partnerships have been realized. The Partnership does not
anticipate being allocated a significant amount of Low Income Housing Credits
from the Local Limited Partnerships in the future. Until the Local Limited
Partnerships have completed the 15 year Low Income Housing Credit compliance
period risks exist for potential recapture of prior low Income Housing Credits.
7
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
No trading market for the Units exists or is expected to develop. Limited
Partners may be unable to sell their Units except at a discount and should
consider their Units to be a long-term investment. Individual Limited Partners
will have no recourse if they disagree with actions authorized by a vote of the
majority of Limited Partners.
Anticipated future and existing cash resources of the Partnership are not
sufficient to meet existing contractual cash obligations. Substantially all of
the future contractual cash obligations of the Partnership are payable to the
General Partner. Though a substantial portion of the amounts contractually
obligated to the General Partner are contractually currently payable, the
Partnership anticipates that the General Partner will not require the payment of
these contractual obligations until capital reserves are in excess of the future
foreseeable working capital requirements of the Partnership. However, the
Partnership is contractually required to pay these obligations to the General
Partner and/or its affiliates on a current basis. The Partnership would be
adversely affected should the General Partner and/or its affiliates demand
current payment of these contractual obligations and or suspend services for
this or any other reason.
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 including those
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 Limited Partners 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 Limited Partners' return wherever possible and, ultimately, to wind
down those funds that no longer provide tax benefits to Limited Partners. To
date 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 the estimated value derived by
management, generally consisting of the product of the remaining future
Low-Income Housing Credits estimated to be allocable to the Partnership and the
estimated residual value to the Partnership. If an investment is considered to
be impaired, the Partnership reduces the carrying value of its investment in any
such Local Limited Partnership. The accounting policies of the Local Limited
Partnerships, generally, are expected to be 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).
8
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
Equity in losses of limited partnerships for the periods ended September 30,
2004 and 2003 have been recorded by the Partnership based on six months of
reported results estimated by management of the Partnership. Management's
estimate for the six-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 the Local
Limited Partnerships allocated to the Partnership are not 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).
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.
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 limited partners' capital and amounted to $2,389,519 at the end
of all periods presented.
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.
Income Taxes
- ------------
No provision for income taxes has been recorded in the financial statements as
any liability and or benefits for income taxes flows to the partners of the
Partnership and is their obligation and/or benefit. For income tax purposes the
Partnership reports on a calendar year basis.
Cash and Cash Equivalents
- -------------------------
The Partnership considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents. The Partnership
had no cash equivalents for all periods presented.
Concentration of Credit Risk
- ----------------------------
At September 30, 2004, the Partnership maintained cash balances at a certain
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.
9
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- --------------------------------------------------------------
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
during for all periods presented, as defined by SFAS No. 130.
New Accounting Pronouncements
- -----------------------------
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.
In December 2003, the FASB issued a revision of FIN 46 ("FIN 46R") to clarify
some of its provisions. The revision results in multiple effective dates based
on the nature as well as the creation date of the VIE. VIEs created after
January 31, 2003, but prior to January 1, 2004, may be accounted for either
based on the original interpretations or the revised interpretations. However,
all VIEs must be accounted for under the revised interpretations as of March 31,
2004, when FIN 46R is effective for the Partnership.
This Interpretation would require consolidation by the Partnership of certain
Local Limited Partnerships' assets and liabilities and results of operations if
the Partnership determined that the Local Limited Partnership was a VIE and that
the Partnership was the "Primary Beneficiary." Minority interests may be
recorded for the Local Limited Partnerships' ownership share attributable to
other Limited Partners. Where consolidation of Local Limited Partnerships is not
required, additional financial information disclosures of Local Limited
Partnerships may be required. The Partnership has assessed the potential
consolidation effects of the Interpretation and preliminarily concluded that the
adoption of the Interpretation will not have a material impact on the financial
statements of the Partnership.
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS
- --------------------------------------------
As of the periods presented, the Partnership has acquired limited partnership
interests in fifteen Local Limited Partnerships each of which owns one Housing
Complex consisting of an aggregate of 786 apartment units. The respective
general partners of the Local Limited Partnerships manage the day to day
operations of the entities. Significant Local Limited Partnership's business
decisions require approval from 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 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 that has
reached zero is recognized as income.
10
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2004
(unaudited)
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS, continued
- -------------------------------------------------------
The following is a summary of the equity method activity of the investments in
Local Limited Partnerships for the periods presented:
For the Six For the Year
Months Ended Ended
September 30, 2004 March 31, 2004
------------------------ ------------------
Investments per balance sheet,
Beginning of period $ 1,546,722 $ 2,675,025
Distributions received (3,100) (5,303)
Equity in losses of limited partnerships (182,917) (330,980)
Impairment loss - (744,836)
Amortization of capitalized
Acquisition fees and costs (8,378) (47,184)
------------------------ ------------------
Investments per balance sheet,
End of period $ 1,352,327 $ 1,546,722
======================== ==================
Selected financial information for the six months ended September 30, 2004 and
2003 from the unaudited combined condensed financial statements of the limited
partnerships in which the Partnership has invested is as follows:
2004 2003
-------------------- ------------------
Revenues $ 1,977,000 $ 1,724,000
-------------------- ------------------
Expenses:
Operating expenses 1,450,000 1,367,000
Interest expense 441,000 450,000
Depreciation and amortization 647,000 651,000
-------------------- ------------------
Total expenses 2,538,000 2,468,000
-------------------- ------------------
Net loss $ (561,000) $ (744,000)
==================== ==================
Net loss allocable to the Partnership $ (516,000) $ (711,000)
==================== ==================
Net loss recorded by the Partnership $ (183,000) $ (417,000)
==================== ==================
Certain Local Limited Partnerships have incurred significant 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 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.
11
WNC CALIFORNIA HOUSING TAX CREDITS II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For the Quarter Ended September 30, 2004
(unaudited)
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 the Invested Assets of the Partnership, as defined.
"Invested Assets" means the sum of the Partnership's Investments in Local
Limited Partnerships 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 $105,042 were incurred
during each of the six months ended September 30, 2004 and 2003. The
Partnership paid the General Partner or its affiliates $18,750 and $29,500
of those fees during the six months ended September 30, 2004 and 2003,
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 to
the General Partner 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.
(c) The Partnership reimburses the General Partner or its affiliates for
operating expenses incurred in behalf of the Partnership. Operating expense
reimbursements were approximately $17,332 and $14,849 during the six months
ended September 30, 2004 and 2003, respectively.
The accrued fees and expenses due to general partner and affiliates consisted of
the following at:
September 30, 2004 March 31, 2004
--------------------- -----------------------
Reimbursement for expenses paid by the
General Partner of an affiliate $ 2,188 $ 1,857
Asset management fee payable 2,081,530 1,995,238
--------------------- -----------------------
Total $ 2,083,718 $ 1,997,095
===================== =======================
12
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 unaudited 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, 2004 and 2003, 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 September 30, 2004 consisted primarily of $184,000
in cash and aggregate investments in the fifteen Local Limited Partnerships of
$1,352,000. Liabilities at September 30, 2004 consisted primarily of $2,084,000
of accrued asset management fees and expenses due to the General Partner.
Results of Operations
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003. The Partnership's net loss for the three months ended September 30,
2004 was $(166,000), reflecting a decrease of $179,000 from the net loss of
$(345,000) for the three months ended September 30, 2003. The decrease in net
loss is primarily due to a decrease in equity in losses of limited partnerships
of $172,000 to $(95,000) for the three months ended September 30, 2004, from
$(267,000) during the three months ended September 30, 2003. This decrease was a
result of the Partnership not recognizing certain losses of the Local Limited
Partnerships. The investments in such Local Limited Partnerships had reached $0
at September 30, 2004. Since the Partnership's liability with respect to its
investments is limited, losses in excess of investments are not recognized. In
addition to the decrease in equity in losses of limited partnerships there was
also a decrease of $7,000 in loss from operations from $(78,000) for the three
months ended September 30, 2003 to approximately $(71,000) for the three months
ended September 30, 2004. The $7,000 decrease in loss from operations was due to
a decrease of $9,000 in amortization offset by a $(2,000) increase in legal and
accounting expense.
Six Months Ended September 30, 2004 Compared to Six Months Ended September 30,
2003. The Partnership's net loss for the six months ended September 30, 2004 was
$(307,000), reflecting a decrease of $258,000 from the net loss of $(565,000)
for the six months ended September 30, 2003. The decrease in net loss is
primarily due to a decrease in equity in losses of limited partnerships of
$234,000 to $(183,000) for the six months ended September 30, 2004, from
$(417,000) during the six months ended September 30, 2003. This decrease was a
result of the Partnership not recognizing certain losses of the Local Limited
Partnerships. The investments in such Local Limited Partnerships had reached $0
at September 30, 2004. Since the Partnership's liability with respect to its
investments is limited, losses in excess of investments are not recognized. In
addition to the decrease in equity in losses of limited partnerships there was
also a decrease in loss from operations of $24,000 from $(148,000) for the
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations-Continued
six months ended September 30, 2003 to approximately $(124,000) for the six
months ended September 30, 2004. The decrease in loss from operations is due to
the $8,000 increase in operating income, $18,000 decrease in amortization,
$1,000 decrease in legal and accounting fee, offset by a $(3,000) increase in
other operating expenses.
Cash Flows
Six Months Ended September 30, 2004 Compared to Six Months Ended September 30,
2003. Net cash used during the six months ended September 30, 2004 was $(22,000)
compared to net cash used for the six months ended September 30, 2003 of
$(5,000). The change is primarily due to a decrease of $(33,000) in cash
provided by investing activities offset by a decrease of $16,000 in net cash
used by operating activities.
During the six months ended September 30, 2004, accrued payables, which
consisted primarily of asset management fees due to the General Partner,
increased by $87,000. 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.
Anticipated future and existing cash resources of the Partnership are not
sufficient to meet existing contractual cash obligations. Substantially all of
the future contractual cash obligations of the Partnership are payable to the
General Partner. Though a substantial portion of the amounts contractually
obligated to the General Partner are contractually currently payable, the
Partnership anticipates that the General Partner will not require the payment of
these contractual obligations until capital reserves are in excess of the future
foreseeable working capital requirements of the Partnership. However, the
Partnership is contractually required to pay these obligations to the General
Partner and/or its affiliates on a current basis. The Partnership would be
adversely affected should the General Partner and/or its affiliates demand
current payment of these contractual obligations and or suspend services for
this or any other reason.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
NOT APPLICABLE
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Partnership's
General Partner, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer of Associates carried
out an evaluation of the effectiveness of the Fund's "disclosure controls
and procedures" as defined in Securities Exchange Act of 1934 Rule 13a-15
and 15d-15. Based on that evaluation, the Chief Executive Officer and
Principal Financial Officer have concluded that as of the end of the period
covered by this report, the Partnership's disclosure controls and
procedures were adequate and effective in timely alerting them to material
information relating to the Partnership required to be included in the
Partnership's periodic SEC filings.
Changes in internal controls. There were no changes in the Partnership's
internal control over financial reporting that occurred during the quarter
ended September 30, 2004 that materially affected, or are reasonably likely
to materially affect, the Partnership's internal control over financial
reporting.
14
Part II. Other Information
Item 1. Legal Proceedings
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K.
--------------------
NONE
(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 Section 1350 Certification of the Chief Executive Officer. (filed
herewith)
32.2 Section 1350 Certification of the Chief Financial Officer. (filed
herewith)
15
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 CALIFORNIA HOUSING TAX CREDITS II, L.P.
By: WNC Tax Credit Partners, L.P. General Partner
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: November 10, 2004
By: /s/ Thomas J. Riha
------------------
Thomas J. Riha
Senior Vice-President - Chief Financial Officer of WNC & Associates, Inc.
Date: November 10, 2004
16