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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: 0-20057
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)
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 September 30, 2004
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
September 30, 2004 and March 31, 2004......................3
Statements of Operations
For the Three and Six Months Ended
September 30, 2004 and 2003................................4
Statement of Partners' Deficit
For the Six Months Ended September 30, 2004................5
Statements of Cash Flows
For the Six Months Ended September 30, 2004 and 2003.......6
Notes to Financial Statements ...............................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk..................................................15
Item 4. Procedures and Controls......................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................16
Item 6. Exhibits and Reports on Form 8-K.............................16
Signatures ..........................................................17
2
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
BALANCE SHEETS
September 30, 2004 March 31, 2004
---------------------- ----------------------
(unaudited)
ASSETS
Cash and cash equivalents $ 93,507 $ 101,711
Investments in limited partnerships, net (Note 2) - -
---------------------- ----------------------
$ 93,507 $ 101,711
====================== ======================
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accrued fees and expenses due to
General Partner and affiliates (Note 3) $ 1,831,305 $ 1,758,534
---------------------- ----------------------
Partners' deficit:
General Partner (76,921) (76,111)
Limited Partners (12,000 units authorized and 7,000
units issued and outstanding) (1,660,877) (1,580,712)
---------------------- ----------------------
Total partners' deficit (1,737,798) (1,656,823)
---------------------- ----------------------
$ 93,507 $ 101,711
====================== ======================
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 Six Months Ended September 30, 2004 and 2003
(unaudited)
2004 2003
----------------------------------------- ----------------------------------------
Three Six Three Six
Months Months Months Months
------------------ ------------------- ------------------ ------------------
Interest income $ 61 $ 126 $ 141 $ 287
Distribution income 8,929 12,759 7,406 10,440
------------------ ------------------- ------------------ ------------------
8,990 12,885 7,547 10,727
------------------ ------------------- ------------------ ------------------
Operating expenses:
Amortization (Note 2) - - 2,896 5,791
Asset management fees (Note 3) 36,226 72,451 36,226 72,452
Legal and accounting 16,300 16,825 14,425 17,995
Other 383 4,584 1,114 4,532
------------------ ------------------- ------------------ ------------------
Total operating expenses 52,909 93,860 54,661 100,770
------------------ ------------------- ------------------ ------------------
Loss from operations (43,919) (80,975) (47,114) (90,043)
Equity in losses of
limited partnerships (Note 2) - - (20,621) (30,843)
------------------ ------------------- ------------------ ------------------
Net loss $ (43,919) $ (80,975) $ (67,735) $ (120,886)
================== =================== ================== ==================
Net loss allocated to:
General Partner $ (439) $ (810) $ (677) $ (1,209)
================== =================== ================== ==================
Limited Partners $ (43,480) $ (80,165) $ (67,058) $ (119,677)
================== =================== ================== ==================
Net loss per weighted limited
partner unit $ (6) $ (11) $ (10) $ (17)
================== =================== ================== ==================
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 Six Months Ended September 30, 2004
(unaudited)
General Limited
Partner Partners Total
------------------- ---------------- --------------
Partners' deficit at March 31, 2004 $ (76,111) $ (1,580,712) $ (1,656,823)
Net loss (810) (80,165) (80,975)
------------------- ---------------- --------------
Partners' deficit at September 30, 2004 $ (76,921) $ (1,660,877) $ (1,737,798)
=================== ================ ==============
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 Six Months Ended September 30, 2004 and 2003
(unaudited)
2004 2003
-------------------- ------------------
Cash flows from operating activities:
Net loss $ (80,975) $ (120,886)
Adjustments to reconcile net loss to net
cash used in operating activities:
Equity in losses of limited partnerships - 30,843
Amortization - 5,791
Change in accrued fees and expenses due to
General Partner and affiliates 72,771 77,551
-------------------- ------------------
Net cash used in operating activities (8,204) (6,701)
-------------------- ------------------
Cash flows from investing activities:
Distributions received from limited partnerships - 1,418
-------------------- ------------------
Net decrease in cash and cash equivalents (8,204) (5,283)
Cash and cash equivalents, beginning of period 101,711 113,943
-------------------- ------------------
Cash and cash equivalents, end of period $ 93,507 $ 108,660
==================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Taxes Paid $ - $ -
==================== ==================
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 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 three and 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 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 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 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
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.
8
WNC HOUSING TAX CREDIT FUND 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
- --------------------------------------------------------------
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 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 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. 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).
9
WNC HOUSING TAX CREDIT FUND 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
- --------------------------------------------------------------
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 partners' capital and amounted to $1,036,840 at the end of all
periods presented.
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.
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 original 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.
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.
10
WNC HOUSING TAX CREDIT FUND 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
- --------------------------------------------------------------
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 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.
11
WNC HOUSING TAX CREDIT FUND II, L.P.
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
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 below:
For the Six Months For the Year
Ended Ended
September 30, 2004 March 31, 2004
---------------------- ------------------
Investments per balance sheet, beginning of period $ - $ 308,868
Equity in losses of limited partnerships - (39,221)
Impairment loss - (256,646)
Distributions received from limited partnerships - (1,418)
Amortization of capitalized acquisition fees and costs - (11,583)
---------------------- ------------------
Investments per balance sheet, end of period $ - $ -
====================== ==================
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 as follows:
2004 2003
------------------- -----------------
Revenues $ 1,666,000 $ 1,594,000
------------------- -----------------
Expenses:
Interest expense 321,000 325,000
Depreciation and amortization 449,000 443,000
Operating expenses 1,218,000 1,144,000
------------------- -----------------
Total expenses 1,988,000 1,912,000
------------------- -----------------
Net loss $ (322,000) $ (318,000)
=================== =================
Net loss allocable to the Partnership $ (319,000) $ (315,000)
=================== =================
Net loss recorded by the Partnership $ - $ (31,000)
=================== =================
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.
12
WNC HOUSING TAX CREDIT FUND 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 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
$72,451 and $72,452 were incurred during the six months ended September 30,
2004 and 2003, respectively. The partnership paid $0 to the General Partner
or its affiliates for those fees during each of the six months ended
September 30, 2004 and 2003.
(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.
(c) The Partnership reimburses the General Partner or its affiliates for
operating expenses incurred in behalf of the Partnership. Operating expense
reimbursements were approximately $22,889 and $17,427 during the six months
ended September 30, 2004 and 2003, respectively.
The accrued fees and expenses due to General Partner and affiliates consist of
the following at:
September 30, 2004 March 31, 2004
----------------------- -----------------------
Advances from WNC $ 2,100 $ 1,780
Asset management fee payable 1,829,205 1,756,754
----------------------- -----------------------
Total accrued fees and expenses due to
General Partner and affiliates $ 1,831,305 $ 1,758,534
======================= =======================
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.
13
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, 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 of $94,000 in cash.
Liabilities at September 30, 2004 consisted of $1,831,000 of accrued fees and
expenses due to the General Partner and affiliates.
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 $(44,000), reflecting a decrease of $24,000 from the net loss for the
three months ended September 30, 2003 of $(68,000). The decrease in net loss is
primarily due to a decrease of $21,000 in equity in losses of limited
partnerships to $0 for the three months ended September 30, 2004 from
approximately $(21,000) for the six months ended September 30, 2003. This
decrease was a result of the Partnership not recognizing any losses of the Local
Limited Partnerships. The investments in all 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 $3,000 in loss from operations to
$(44,000) for the three months ended September 30, 2004 from $(47,000) for the
three months ended September 30, 2003. The decrease in loss from operations was
due to a decrease of $3,000 in amortization, $1,000 decrease in other operating
expense, $1,000 increase in distribution income, offset by an increase of
$(2,000) 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
$(81,000), reflecting a decrease of $40,000 from the net loss for the six months
ended September 30, 2003 of $(121,000). The decrease in net loss is primarily
due to a decrease of $31,000 in equity in losses of limited partnerships $0 for
the six months ended September 30, 2004 from approximately $(31,000) for the six
months ended September 30, 2003. This decrease was a result of the Partnership
not recognizing any losses of the Local Limited Partnerships. The investments in
all 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 from Limited Partnerships there was also a decrease of $9,000 in
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, continued
loss from operations to $(81,000) for the six months ended September 30, 2004
from $(90,000) for the six months ended September 30, 2003. The decrease in
losses from operations was due to a decrease of $6,000 in amortization, a
decrease of $1,000 in legal and accounting expense, and a $2,000 increase in
distribution income.
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 $(8,000),
compared to net cash used in the six months ended September 30, 2003 of
$(5,000). The $(3,000) increase in net cash used is due to a decrease of
$(5,000) in accrued fees and expense due to general partner and affiliates
offset by a decrease of $(2,000) net cash provided by investing activities to $0
for the six months ended September 30, 2004 from $2,000 for the six months ended
September 30, 2003 in distributions received from limited partnerships.
During the six months ended September 30, 2004, accrued payables, which
consisted primarily of asset management fees due to the General Partner,
increased by $73,000. 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.
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 Risks
NOT APPLICABLE
Item 4. Procedures and Controls
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.
15
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)
16
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: 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
17