UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 29, 2006
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission file number: 0-18405
American Tax Credit Properties II L.P.
(Exact name of Registrant as specified in its charter)
Delaware | 13-3495678 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No. |
Richman Tax Credit Properties II L.P. 340 Pemberwick Road Greenwich, Connecticut | 06831 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (203) 869-0900
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes o No x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of February 2008, there are 55,746 units of limited partnership interest outstanding.
AMERICAN TAX CREDIT PROPERTIES II L.P.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Table of Contents | | | Page | |
| Balance Sheets | | | 3 | |
| | | | | |
| Statements of Operations | | | 4 | |
| | | | | |
| Statements of Cash Flows | | | 5 | |
| | | | | |
| | | 7 | |
AMERICAN TAX CREDIT PROPERTIES II L.P.
BALANCE SHEETS
(UNAUDITED)
ASSETS | | | Notes | | | | | | | |
| | | | | | | | | | | |
| Cash and cash equivalents | | | | | $ | 1,387,630 | | $ | 1,096,927 | |
| Investments in bonds | | | 2 | | | 767,297 | | | 964,306 | |
| Due from local partnerships | | | 3 | | | 504,221 | | | 604,221 | |
| Investment in local partnerships | | | 3 | | | 1,395,856 | | | 1,400,270 | |
| Prepaid expenses | | | | | | 19,730 | | | | |
| Interest receivable | | | | | | | | | 5,447 | |
| | | | | | $ | 4,074,734 | | $ | 4,071,171 | |
| | | | | | | | | | | |
LIABILITIES AND PARTNERS' EQUITY (DEFICIT) | | | | | | | | | | |
| | | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| | | | | | | | | | | |
| Accounts payable and accrued expenses | | | | | $ | 624,592 | | $ | 645,422 | |
| Payable to general partner and affiliates | | | | | | 1,367,758 | | | 1,312,102 | |
| | | | | | | 1,992,350 | | | 1,957,524 | |
| | | | | | | | | | | |
| Commitments and contingencies | | | 3,4 | | | | | | | |
| | | | | | | | | | | |
| Partners' equity (deficit) | | | | | | | | | | |
| | | | | | | | | | | |
| General partner | | | | | | (471,885 | ) | | (471,636 | ) |
| Limited partners (55,746 units of limited partnership interest outstanding) | | | | | | 2,560,546 | | | 2,585,195 | |
| Accumulated other comprehensive income (loss), net | | | 2 | | | (6,277 | ) | | 88 | |
| | | | | | | 2,082,384 | | | 2,113,647 | |
| | | | | | $ | 4,074,734 | | $ | 4,071,171 | |
See Notes to Financial Statements.
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 2006 AND 2005
(UNAUDITED)
| | | | Notes | | | 2006 | | | 2005 | |
REVENUE | | | | | | | | | | |
| | | | | | | | | | | |
| Interest | | | | | $ | 24,047 | | $ | 27,355 | |
| Other income from local partnerships | | | | | | 147,727 | | | 5,572 | |
| | | | | | | | | | | |
| TOTAL REVENUE | | | | | | 171,774 | | | 32,927 | |
| | | | | | | | | | | |
EXPENSES | | | | | | | | | | |
| | | | | | | | | | | |
| Administration fees | | | | | | 57,860 | | | 64,262 | |
| Management fees | | | | | | 57,860 | | | 64,262 | |
| Professional fees | | | | | | 22,582 | | | 19,169 | |
| State of New Jersey filing fee | | | | | | 19,650 | | | 15,366 | |
| Printing, postage and other | | | | | | 10,306 | | | 10,968 | |
| | | | | | | | | | | |
| TOTAL EXPENSES | | | | | | 168,258 | | | 174,027 | |
| | | | | | | 3,516 | | | (141,100 | ) |
| | | | | | | | | | | |
| Equity in loss of investment in local partnerships | | | 3 | | | (68,414 | ) | | (38,808 | ) |
| | | | | | | | | | | |
| Loss prior to gain on disposal of limited partner interests/local partnership properties | | | | | | (64,848 | ) | | (179,908 | ) |
| | | | | | | | | | | |
| Gain on disposal of limited partner interests/local partnership properties | | | 3 | | | 40,000 | | | | |
| | | | | | | | | | | |
NET LOSS | | | | | | (24,898 | ) | | (179,908 | ) |
| | | | | | | | | | | |
| Other comprehensive loss, net | | | 2 | | | (6,365 | ) | | (92 | ) |
| | | | | | | | | | | |
COMPREHENSIVE LOSS | | | | | $ | (31,263 | ) | $ | (180,000 | ) |
| | | | | | | | | | | |
NET LOSS ATTRIBUTABLE TO | | | | | | | | | | |
| | | | | | | | | | | |
| General partner | | | | | $ | (249 | ) | $ | (1,799 | ) |
| Limited partners | | | | | | (24,649 | ) | | (178,109 | ) |
| | | | | | $ | (24,898 | ) | $ | (179,908 | ) |
| | | | | | | | | | | |
NET LOSS per unit of limited partnership interest (55,746 units of limited partnership interest) | | | | | $ | (0.44 | ) | $ | (3.20 | ) |
See Notes to Financial Statements.
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 29, 2006 AND 2005
(UNAUDITED)
| | | | 2006 | | | 2005 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
| | | | | | | | |
| Interest received | | $ | 20,138 | | $ | 13,985 | |
| Cash paid for | | | | | | | |
| administration fees | | | (7,685 | ) | | (8,330 | ) |
| management fee | | | (52,379 | ) | | | |
| professional fees | | | (2,792 | ) | | (1,921 | ) |
| State of New Jersey filing fee | | | (80,000 | ) | | (52,524 | ) |
| printing, postage and other expenses | | | (10,306 | ) | | (10,968 | ) |
| | | | | | | | |
| Net cash used in operating activities | | | (133,024 | ) | | (59,758 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
| | | | | | | | |
| Advances to local partnerships | | | (64,000 | ) | | (25,721 | ) |
| Cash distributions from local partnerships | | | 147,727 | | | 5,572 | |
| Proceeds from maturities/redemptions and sales of bonds | | | 200,000 | | | | |
| Proceeds in connection with disposal of limited partner interests/local partnership properties | | | 140,000 | | | 891,559 | |
| | | | | | | | |
| Net cash provided by investing activities | | | 423,727 | | | 871,410 | |
| | | | | | | | |
| Net increase in cash and cash equivalents | | | 290,703 | | | 811,652 | |
| | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 1,096,927 | | | 90,086 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 1,387,630 | | $ | 901,738 | |
| | | | | | | | |
SIGNIFICANT NON-CASH INVESTING ACTIVITIES | | | | | | | |
| | | | | | | | |
| Unrealized loss on investments in bonds, net | | $ | (6,365 | ) | $ | (92 | ) |
| See reconciliation of net loss to net cash used in operating activities on page 6. |
See Notes to Financial Statements.
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF CASH FLOWS - (Continued)
THREE MONTHS ENDED JUNE 29, 2006 AND 2005
(UNAUDITED)
| | | 2006 | | 2005 | |
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES | | | | | | | |
| | | | | | | | |
| Net loss | | $ | (24,898 | ) | $ | (179,908 | ) |
| | | | | | | | |
| Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | |
| | | | | | | | |
| Equity in loss of investment in local partnerships | | | 68,414 | | | 38,808 | |
| Distributions from local partnerships classified as other income | | | (147,727 | ) | | (5,572 | ) |
| Gain on disposal of limited partner interests/local partnership properties | | | (40,000 | ) | | | |
| Amortization of net premium on investments in bonds | | | | | | 581 | |
| Accretion of zero coupon bonds | | | (9,356 | ) | | (9,356 | ) |
| Increase in prepaid expenses | | | (19,730 | ) | | (16,166 | ) |
| Decrease (increase) in interest receivable | | | 5,447 | | | (4,595 | ) |
| Increase in payable to general partner and affiliates | | | 55,656 | | | 120,194 | |
| Decrease in accounts payable and accrued expenses | | | (20,830 | ) | | (3,744 | ) |
| | | | | | | | |
NET CASH USED IN OPERATING ACTIVITIES | | $ | (133,024 | ) | $ | (59,758 | ) |
See Notes to Financial Statements.
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 29, 2006
(UNAUDITED)
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. They do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The results of operations are impacted significantly by the combined results of operations of the Local Partnerships, which are provided by the Local Partnerships on an unaudited basis during interim periods. Accordingly, the accompanying financial statements are dependent on such unaudited information. In the opinion of the General Partner, the financial statements include all adjustments necessary to present fairly the financial position as of June 29, 2006 and the results of operations and cash flows for the interim periods presented. All adjustments are of a normal recurring nature. The results of operations for the three months ended June 29, 2006 are not necessarily indicative of the results that may be expected for the entire year.
As of June 29, 2006, certain information concerning investments in bonds is as follows:
Description and maturity | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value | |
| | | | | | | | | | |
| U.S. Treasury debt securities | | | | | | | | | | | | | |
| After one year through five years | | $ | 773,574 | | $ | — | | $ | (6,277 | ) | $ | 767,297 | |
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2006
(UNAUDITED)
| 3. | Investment in Local Partnerships |
The Partnership originally acquired limited partnership interests in fifty Local Partnerships representing capital contributions in the aggregate amount of $48,187,347, which amount includes advances made to certain Local Partnerships. As of June 29, 2006, the Partnership holds an interest in forty-four Local Partnerships that have, as of June 29, 2006, outstanding mortgage loans payable totaling approximately $69,059,000 and accrued interest payable on such loans totaling approximately $7,586,000, which are secured by security interests and liens common to mortgage loans on the Local Partnerships' real property and other assets.
For the three months ended June 29, 2006, the investment in local partnerships activity consists of the following:
| Investment in local partnerships as of March 30, 2006 | | $ | 1,400,270 | |
| | | | | |
| Advances to Local Partnerships | | | 64,000 | |
| | | | | |
| Equity in loss of investment in local partnerships | | | (68,414) | * |
| | | | | |
| Cash distributions received from local partnerships | | | (147,727 | ) |
| | | | | |
| Cash distributions classified as other income | | | 147,727 | |
| | | | | |
| Investment in local partnerships as of June 29, 2006 | | $ | 1,395,856 | |
| * | Equity in loss of investment in local partnerships is limited to the Partnership's investment balance in each Local Partnership; any excess is applied to other partners' capital in any such Local Partnership. The amount of such excess losses applied to other partners' capital was $613,243 for the three months ended March 31, 2006 as reflected in the combined statement of operations of the Local Partnerships reflected herein Note 3. |
The combined unaudited balance sheets of the Local Partnerships as of March 31, 2006 and December 31, 2005 and the combined unaudited statements of operations of the Local Partnerships for the three months ended March 31, 2006 and 2005 are reflected on pages 9 and 10, respectively.
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2006
(UNAUDITED)
| 3. | Investment in Local Partnerships (continued) |
The combined unaudited balance sheets of the Local Partnerships as of March 31, 2006 and December 31, 2005 are as follows:
| | | | 2006 | | | 2005 | |
ASSETS | | | | | | | |
| | | | | | | | |
| Cash and cash equivalents | | $ | 1,992,733 | | $ | 1,876,849 | |
| Rents receivable | | | 392,469 | | | 418,063 | |
| Escrow deposits and reserves | | | 5,585,803 | | | 5,963,334 | |
| Land | | | 3,441,506 | | | 3,762,971 | |
| Buildings and improvements (net of accumulated depreciation of $69,603,966 and $71,922,960) | | | 56,776,100 | | | 60,069,674 | |
| Intangible assets (net of accumulated amortization of $401,364 and $464,456) | | | 675,706 | | | 785,994 | |
| Other assets | | | 1,167,025 | | | 1,248,654 | |
| | | | | | | | |
| | | $ | 70,031,342 | | $ | 74,125,539 | |
| | | | | | | | |
LIABILITIES AND PARTNERS' EQUITY (DEFICIT) | | | | | | | |
| | | | | | | | |
| Liabilities | | | | | | | |
| | | | | | | | |
| Accounts payable and accrued expenses | | $ | 2,470,206 | | $ | 2,733,421 | |
| Due to related parties | | | 3,295,134 | | | 3,366,451 | |
| Mortgage loans | | | 69,058,540 | | | 72,511,042 | |
| Notes payable | | | 967,940 | | | 967,767 | |
| Accrued interest | | | 7,586,043 | | | 9,473,727 | |
| Other liabilities | | | 630,053 | | | 637,950 | |
| | | | | | | | |
| | | | 84,007,916 | | | 89,690,358 | |
| Partners' equity (deficit) | | | | | | | |
| | | | | | | | |
| American Tax Credit Properties II L.P. | | | | | | | |
| Capital contributions, net of distributions | | | 34,211,373 | | | 36,337,522 | |
| Cumulative loss | | | (27,439,677 | ) | | (29,497,412 | ) |
| | | | | | | | |
| | | | 6,771,696 | | | 6,840,110 | |
| | | | | | | | |
| General partners and other limited partners | | | | | | | |
| Capital contributions, net of distributions | | | 3,484,789 | | | 3,485,189 | |
| Cumulative loss | | | (24,233,059 | ) | | (25,890,118 | ) |
| | | | | | | | |
| | | | (20,748,270 | ) | | (22,404,929 | ) |
| | | | | | | | |
| | | | (13,976,574 | ) | | (15,564,819 | ) |
| | | | | | | | |
| | | $ | 70,031,342 | | $ | 74,125,539 | |
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2006
(UNAUDITED)
| 3. | Investment in Local Partnerships (continued) |
The combined unaudited statements of operations of the Local Partnerships for the three months ended March 31, 2006 and 2005 are as follows:
| | | | 2006 | | | 2005 | |
REVENUE | | | | | | | |
| | | | | | | | |
| Rental | | $ | 4,846,906 | | $ | 5,620,532 | |
| Interest and other | | | 249,394 | | | 118,852 | |
| | | | | | | | |
| TOTAL REVENUE | | | 5,096,300 | | | 5,739,384 | |
| | | | | | | | |
EXPENSES | | | | | | | |
| | | | | | | | |
| Administrative | | | 1,018,351 | | | 1,157,918 | |
| Utilities | | | 1,172,934 | | | 1,203,520 | |
| Operating and maintenance | | | 1,006,220 | | | 1,237,774 | |
| Taxes and insurance | | | 615,300 | | | 681,247 | |
| Financial | | | 994,873 | | | 1,325,826 | |
| Depreciation and amortization | | | 1,029,987 | | | 1,141,539 | |
| | | | | | | | |
| TOTAL EXPENSES | | | 5,837,665 | | | 6,747,824 | |
| | | | | | | | |
| Loss from operations before gain on sale of property | | | (741,365 | ) | | (1,008,440 | ) |
| | | | | | | | |
| Gain on sale of property | | | | | | 1,177,998 | |
| | | | | | | | |
NET INCOME (LOSS) | | $ | (741,365 | ) | $ | 169,558 | |
| | | | | | | | |
NET INCOME (LOSS) ATTRIBUTABLE TO | | | | | | | |
| | | | | | | | |
| American Tax Credit Properties II L.P.* | | $ | (68,414 | ) | $ | 1,052,984 | |
| General partners and other limited partners, which includes $613,243 and $841,551 of Partnership loss in excess of investment | | | (672,951 | ) | | (883,426 | ) |
| | | | | | | | |
| | | $ | (741,365 | ) | $ | 169,558 | |
The combined results of operations of the Local Partnerships for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for an entire operating period.
| * | The equity in loss of investment in local partnerships as reflected in the accompanying statement of operations of the Partnership for the three months ended June 29, 2005 is $38,808. The Property owned by Elm Hill Housing Limited Partnership (“Elm Hill”) was sold on March 31, 2005, in connection with which Elm Hill recognized a gain on sale of property of $1,177,998 that is included in the statement of operations of the Local Partnerships for the three months ended March 31, 2005 included herein Note 3.; the Partnership received $891,559 as of March 30, 2006 in connection with the sale and adjusted the carrying value of Elm Hill as of March 30, 2005 based on such anticipated proceeds. Accordingly, although the combined statement of operations of the Local Partnerships for the three months ended March 31, 2005 includes an allocation to the Partnership of gain on sale of the Elm Hill property, no such allocation was recorded by the Partnership. Elm Hill has since been dissolved, but the Partnership received additional proceeds in the amount of $104,221, which amount is reflected as due from local partnerships in the accompanying balance sheet as of June 29, 2006 and was recorded as income by the Partnership for the year ended March 30, 2006. |
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2006
(UNAUDITED)
| 3. | Investment in Local Partnerships (continued) |
Effective June 2006, the Partnership withdrew from 2000-2100 Christian Street Associates for consideration of $40,000; such amount is reflected as gain on disposal of limited partner interests/local partnership properties in the accompanying statement of operations of the Partnership for the three months ended June 29, 2006.
In January 2006, the Partnership sold its limited partner interest in York Park Associates Limited Partnership (“York Park”) to an affiliate of one of York Park’s general partners for $500,000, of which $100,000 was received by the Partnership during the three months ended June 29, 2006 and $400,000 is included in due from local partnerships in the accompanying balance sheet as of June 29, 2006 and was recognized as income by the Partnership for the year ended March 30, 2006.
The Partnership advanced $64,000 during the three months ended June 29, 2006 to Ann Ell Apartments Limited Partnership (“Ann Ell”) to fund operating deficits. Cumulative advances as of June 29, 2006 are $533,545. The Partnership’s investment balance in Ann Ell, after cumulative equity losses, became zero during the year ended March 30, 1994 and advances made by the Partnership were recorded as investment in local partnerships and have been offset by additional equity in loss of investment in local partnerships. In addition, Ann Ell’s non-mandatory second mortgage matured in February 2006 but has not been repaid. Unpaid principal and accrued interest as of December 2007 total approximately $773,000. The Local General Partner represents that the lender has not declared a default and that payments on the first mortgage and real estate taxes are current
The Local General Partner of Queen Lane Investors (“Queen Lane”) represents that, as a result of a dispute between the local housing agency (the “Agency”) and the Local General Partner regarding the adequacy of certain unit repairs mandated by the Agency, the Local General Partner requested that the Agency cancel the Section 8 voucher contract in connection with the Property. As a result, the Property has been vacant since October 2007. Two of Queen Lane’s mortgages matured in 2007 but have not been repaid, representing principal and accrued interest in excess of $1,740,000 as of December 2007. The Local General Partner further represents that the lender has not issued a notice of default. The Local General Partner is examining the potential to sell the Property. Registrant’s investment balance in Queen Lane, after cumulative equity losses, became zero during the year ended March 30, 2001.
The non-mandatory mortgages of Littleton Avenue Community Village, L.P. (“Littleton”) matured in October 2006 but have not been repaid. Unpaid principal and accrued interest as of December 2007 total approximately $7,843,000. The Local General Partner represents that neither lender has declared a default and that negotiations are ongoing in an effort to refinance the mortgages. The Local General Partner further represents that payments on the real estate taxes are current. Registrant’s investment balance in Littleton, after cumulative equity losses, became zero during the year ended March 30, 1999.
One of the mortgages of The Pendleton (A Louisiana Partnership in Commendam) (“Pendleton”), which was scheduled to commence amortization in May 2004, is over three years in arrears (approximately $123,000) as of December 2007. The Local General Partner represents that it is negotiating with the lender, that the lender has not commenced foreclosure proceedings and that payments on the other mortgage and the real estate taxes are current. The Partnership has made cumulative advances to Pendleton of $3,300 as of June 29, 2006, none of which was advanced during the three months then ended; such advances were recorded as investment in local partnerships and have been offset by additional equity in loss of investment in local partnerships. The Partnership’s investment balance in Pendleton, after cumulative equity losses, became zero during the year ended March 30, 2002.
In a series of two separate transactions in September 2006 and October 2006, the Property owned by Powelton Gardens Associates (“Powelton”) was sold, whereby the Partnership received $240,502 and Powelton subsequently dissolved. Such amount received will be recognized as income by the Partnership in the period of the sale.
The Property owned by Dermott Villas Limited Partnership (“Dermott”) was sold in October 2006, whereby the Partnership received $40,000 in May 2007. Such amount received will be recognized as income by the Partnership in the period of the sale. The Partnership withdrew from Dermott effective December 31, 2006.
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
JUNE 29, 2006
(UNAUDITED)
| 3. | Investment in Local Partnerships (continued) |
Effective February 2007, the Partnership assigned its limited partner interest in Carrington Limited Dividend Housing Association Limited Partnership (“Carrington”) to one of Carrington’s general partners, whereby the Partnership received $75,105. Such amount will be recognized as income by the Partnership in the period of the assignment.
Additional information, including the audited March 30, 2006 Financial Statements and the Organization, Purpose and Summary of Significant Accounting Policies, is included in the Partnership's Annual Report on Form 10-K for the fiscal year ended March 30, 2006 on file with the Securities and Exchange Commission.
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Material Changes in Financial Condition
As of June 29, 2006, American Tax Credit Properties II L.P. (the “Registrant”) has not experienced a significant change in financial condition as compared to March 30, 2006. Principal changes in assets are comprised of periodic transactions and adjustments and equity in loss from operations of the local partnerships (the “Local Partnerships”), which own low-income multifamily residential complexes (the “Properties”) that qualified for the low-income tax credit in accordance with Section 42 of the Internal Revenue Code (the “Low-income Tax Credit”). During the three months ended June 29, 2006, Registrant received cash from interest revenue, maturities/redemptions and sales of bonds, proceeds in connection with disposals of limited partner interests/local partnership properties (see Local Partnership Matters below) and distributions from Local Partnerships and utilized cash for operating expenses and making advances to a Local Partnership (see Local Partnership Matters below). Cash and cash equivalents and investments in bonds increased, in the aggregate, by approximately $94,000 during the three months ended June 29, 2006 (which includes a net unrealized loss on investments in bonds of approximately $6,000 and accretion of zero coupon bonds of approximately $9,000). Notwithstanding circumstances that may arise in connection with the Properties, Registrant does not expect to realize significant gains or losses on its investments in bonds, if any. During the three months ended June 29, 2006, the investment in local partnerships decreased as a result of Registrant’s equity in the Local Partnerships’ net loss for the three months ended March 31, 2006 of $68,414, partially offset by advances to a Local Partnership of $64,000 (see discussion below under Local Partnership Matters). Accounts payable and accrued expenses includes deferred administration fees of $518,740, and payable to general partner and affiliates represents deferred administration and management fees in the accompanying balance sheet as of June 29, 2006.
Results of Operations
Registrant’s operating results are dependent upon the operating results of the Local Partnerships and are significantly impacted by the Local Partnerships’ policies. In addition, the operating results herein are not necessarily the same for tax reporting. Registrant accounts for its investment in local partnerships in accordance with the equity method of accounting. Accordingly, the investment is carried at cost and is adjusted for Registrant's share of each Local Partnership's results of operations and by cash distributions received. Equity in loss of each investment in Local Partnership allocated to Registrant is recognized to the extent of Registrant’s investment balance in each Local Partnership. Equity in loss in excess of Registrant’s investment balance in a Local Partnership is allocated to other partners' capital in any such Local Partnership. As a result, the reported equity in loss of investment in local partnerships is expected to decrease as Registrant’s investment balances in the respective Local Partnerships become zero. However, the combined statements of operations of the Local Partnerships reflected in Note 3 to Registrant’s financial statements include the operating results of all Local Partnerships, irrespective of Registrant’s investment balances.
Cumulative losses and cash distributions in excess of investment in local partnerships may result from a variety of circumstances, including a Local Partnership's accounting policies, subsidy structure, debt structure and operating deficits, among other things. In addition, the book value of Registrant’s investment in each Local Partnership (the “Local Partnership Carrying Value”) may be reduced if the Local Partnership Carrying Value is considered to exceed the estimated value derived by management. Accordingly, cumulative losses and cash distributions in excess of the investment or an adjustment to a Local Partnership’s Carrying Value are not necessarily indicative of adverse operating results of a Local Partnership. See discussion below under Local Partnership Matters regarding certain Local Partnerships currently operating below economic break even levels.
Registrant’s operations for the three months ended June 29, 2006 and 2005 resulted in net losses of $24,898 and $179,908, respectively. The decrease in net loss is primarily attributable to an increase in other income from local partnerships of approximately $142,000 in fiscal 2006 as compared to fiscal 2005 and a gain on disposal of limited partner interests/local partnership properties of $40,000 in fiscal 2006, partially offset by an increase in equity in loss of investment in local partnerships of approximately $30,000, which increase is primarily the result of an increase in advances made to certain Local Partnerships in fiscal 2006 that were written off as equity in loss of investment in local partnerships. Other comprehensive loss for the three months ended June 29, 2006 and 2005 resulted from a net unrealized loss on investments in bonds of $6,365 and $92, respectively.
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Local Partnerships’ loss from operations of approximately $741,000 for the three months ended March 31, 2006 was attributable to rental and other revenue of approximately $5,096,000, exceeded by operating and interest expenses (including interest on non-mandatory debt) of approximately $4,807,000 and approximately $1,030,000 of depreciation and amortization expense. The Local Partnerships’ loss from operations of approximately $1,008,000 for the three months ended March 31, 2005 was attributable to rental and other revenue of approximately $5,739,000, exceeded by operating and interest expenses (including interest on non-mandatory debt) of approximately $5,605,000 and approximately $1,142,000 of depreciation and amortization expense. The Local Partnerships’ operating revenues and expenses have decreased in 2006 as compared to 2005 as the result of recent Property sales and Registrant’s withdrawal from certain Local Partnerships. The results of operations of the Local Partnerships for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected in future periods.
Local Partnership Matters
Registrant's primary objective has been to provide Low-income Tax Credits to limited partners generally over a ten year period. The relevant state tax credit agency has allocated each of Registrant’s Local Partnerships an amount of Low-income Tax Credits, which are generally available for a ten year period from the year the Property is placed in service (the “Ten Year Credit Period”). The Ten Year Credit Period was substantially fully exhausted by the Local Partnerships as of December 31, 2001. The required holding period of each Property, in order to avoid Low-income Tax Credit recapture, is fifteen years from the year in which the Low-income Tax Credits commence on the last building of the Property (the "Compliance Period"). In addition, certain of the Local Partnerships have entered into agreements with the relevant state tax credit agencies whereby the Local Partnerships must maintain the low-income nature of the Properties for a period which exceeds the Compliance Period, regardless of any sale of the Properties by the Local Partnerships after the Compliance Period. The Properties must satisfy various requirements including rent restrictions and tenant income limitations (the "Low-income Tax Credit Requirements") in order to maintain eligibility for the recognition of the Low-income Tax Credit at all times during the Compliance Period. Once a Local Partnership has become eligible for the Low-income Tax Credit, it may lose such eligibility and suffer an event of recapture if its Property fails to remain in compliance with the Low-income Tax Credit Requirements. As of December 31, 2006, the Compliance Period of all of the Local Partnerships had expired. It is the General Partner’s intention to sell or assign Registrant’s interests in Local Partnerships subsequent to the expiration of the respective Compliance Periods. It is uncertain as to the amount, if any, that Registrant will receive with respect to each specific Property from such sales and assignments.
The Properties are principally comprised of subsidized and leveraged low-income multifamily residential complexes located throughout the United States and Puerto Rico. Many of the Local Partnerships receive rental subsidy payments, including payments under Section 8 of Title II of the Housing and Community Development Act of 1974 ("Section 8”). The subsidy agreements expire at various times during and after the Compliance Periods of the Local Partnerships. Since October 1997, the United States Department of Housing and Urban Development (“HUD”) has issued a series of directives related to project based Section 8 contracts that define owners’ notification responsibilities, advise owners of project based Section 8 properties of what their options are regarding the renewal of Section 8 contracts, provide guidance and procedures to owners, management agents, contract administrators and HUD staff concerning renewal of Section 8 contracts, provide policies and procedures on setting renewal rents and handling renewal rent adjustments and provide the requirements and procedures for opting-out of a Section 8 project based contract. Registrant cannot reasonably predict legislative initiatives and governmental budget negotiations, the outcome of which could result in a reduction in funds available for the various federal and state administered housing programs including the Section 8 program. Such changes could adversely affect the future net operating income before debt service (“NOI”) and debt structure of any or all Local Partnerships currently receiving such subsidy or similar subsidies. Eleven Local Partnerships’ Section 8 contracts, certain of which cover only certain rental units, are currently subject to renewal under applicable HUD guidelines. In addition, two Local Partnerships have entered into restructuring agreements, resulting in a change to both rent subsidy and mandatory debt service.
The Local Partnerships have various financing structures which include (i) required debt service payments (“Mandatory Debt Service”) and (ii) debt service payments which are payable only from available cash flow subject to the terms and conditions of the notes, which may be subject to specific laws, regulations and agreements with appropriate federal and state agencies (“Non-Mandatory Debt Service or Interest"). During the three months ended March 31, 2006, revenue from operations of the Local Partnerships was generally sufficient to cover operating expenses and Mandatory Debt Service. Most of the Local Partnerships were effectively operating at or above break even levels, although certain Local Partnerships’ operating information reflects operating deficits that do not represent cash deficits due to their mortgage and financing structure and the required deferral of property management fees. However, as discussed below, certain Local Partnerships' operating information indicates below break even operations after taking into account their mortgage and financing structure and any required deferral of property management fees.
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Property owned by Elm Hill Housing Limited Partnership (“Elm Hill”) was sold on March 31, 2005. Registrant received $891,559 as of June 29, 2006 in connection with the sale. Elm Hill has since been dissolved, but Registrant received additional proceeds in the amount of $104,221, which amount is included in due from local partnerships in the accompanying balance sheet as of June 29, 2006. The Compliance Period for Elm Hill expired prior to such sale.
Effective June 2006, Registrant withdrew from 2000-2100 Christian Street Associates (“Christian Street”) and received consideration of $40,000, which is reflected in the accompanying statement of operations of the Partnership as gain on disposal of limited partner interests/local partnership properties for the three months ended June 29, 2006. The Compliance Period for Christian Street expired prior to such withdrawal.
In January 2006, Registrant sold its limited partner interest in York Park Associates Limited Partnership (“York Park”) to an affiliate of one of York Park’s general partners. Registrant received $500,000 in connection with the sale, of which $100,000 was received during the three months ended June 29, 2006 and $400,000 is included in due from local partnerships in Registrant’s accompanying balance sheet as of June 29, 2006. The Compliance Period for York Park expired prior to such sale.
Registrant advanced $64,000 to Ann Ell Apartments Associates, Ltd., (“Ann Ell”) during the three months ended June 29, 2006 to fund operating deficits. Registrant has made cumulative advances to Ann Ell of $533,545 as of June 29, 2006. In addition, Ann Ell’s Non-Mandatory second mortgage matured in February 2006 but has not been repaid. Unpaid principal and accrued interest as of December 2007 total approximately $773,000. The Local General Partner represents that the lender has not declared a default and that payments on the first mortgage and real estate taxes are current Registrant’s investment balance in Ann Ell, after cumulative equity losses, became zero during the year ended March 30, 1994 and advances made by Registrant have been offset by additional equity in loss of investment in local partnerships. The Compliance Period for Ann Ell has expired.
The Local General Partner of Queen Lane Investors (“Queen Lane”) represents that, as a result of a dispute between the local housing agency (the “Agency”) and the Local General Partner regarding the adequacy of certain unit repairs mandated by the Agency, the Local General Partner requested that the Agency cancel the Section 8 voucher contract in connection with the Property. As a result, the Property has been vacant since October 2007. Two of Queen Lane’s mortgages matured in 2007 but have not been repaid, representing principal and accrued interest in excess of $1,740,000 as of December 2007. The Local General Partner further represents that the lender has not issued a notice of default. The Local General Partner is currently examining the potential to sell the Property. Registrant’s investment balance in Queen Lane, after cumulative equity losses, became zero during the year ended March 30, 2001. The Compliance Period for Queen Lane has expired.
The non-mandatory mortgages of Littleton Avenue Community Village, L.P. (“Littleton”) matured in October 2006 but have not been repaid. Unpaid principal and accrued interest as of December 2007 total approximately $7,843,000. The Local General Partner represents that neither lender has declared a default and that negotiations are ongoing in an effort to refinance the mortgages. The Local General Partner further represents that payments on the real estate taxes are current. Registrant’s investment balance in Littleton, after cumulative equity losses, became zero during the year ended March 30, 1999. The Compliance Period for Littleton has expired.
The terms of the partnership agreement of The Pendleton (A Louisiana Partnership in Commendam) (“Pendleton”) require the Local General Partner to cause the management agent to defer property management fees in order to avoid a default under the mortgages. Pendleton reported an operating deficit of approximately $12,000 for the three months ended March 31, 2006, which includes property management fees of approximately $4,000. In addition, one of Pendleton’s mortgages, which was scheduled to commence amortization in May 2004, is over three years in arrears (approximately $123,000) as of December 2007. The Local General Partner represents that it is negotiating with the lender, that the lender has not commenced foreclosure proceedings and that payments on the other mortgage and the real estate taxes are current. Registrant’s investment balance in Pendleton, after cumulative equity losses, became zero during the year ended March 30, 2002. The Compliance Period for Pendleton has expired.
The terms of the partnership agreement of Patton Place Limited Partnership (“Patton Place”) require the Local General Partners to cause the management agent to defer property management fees in order to avoid a default under the mortgage. During the three months ended March 31, 2006, Patton Place reported an operating deficit of approximately $8,000, which includes property management fees of approximately $2,000. The Local General Partners represent that payments on the mortgage and real estate taxes are current. The Compliance Period for Patton Place has expired.
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
In a series of two separate transactions in September 2006 and October 2006, the Property owned by Powelton Gardens Associates (“Powelton”) was sold, whereby Registrant received $240,502. Such amount will be recognized as income by Registrant in the period of the sale. Powelton was subsequently dissolved; the Compliance Period for Powelton expired prior to such sale.
The Property owned by Dermott Villas Limited Partnership (“Dermott”) was sold in October 2006, whereby Registrant received $40,000 in May 2007. Such amount will be recognized as income by Registrant in the period of the sale. Registrant withdrew from Dermott effective December 31, 2006; the Compliance Period for Dermott expired prior to such sale.
Effective February 2007, Registrant assigned its limited partner interest in Carrington Limited Dividend Housing Association Limited Partnership (“Carrington”) to one of Carrington’s general partners, whereby Registrant received $75,105. Such amount will be recognized as income by Registrant in the period of the assignment. The Compliance Period for Carrington has expired prior to such assignment.
Critical Accounting Policies and Estimates
The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which requires Registrant to make certain estimates and assumptions. The following section is a summary of certain aspects of those accounting policies that may require subjective or complex judgments and are most important to the portrayal of Registrant’s financial condition and results of operations. Registrant believes that there is a low probability that the use of different estimates or assumptions in making these judgments would result in materially different amounts being reported in the financial statements.
| | | Registrant accounts for its investment in local partnerships in accordance with the equity method of accounting since Registrant does not control the operations of a Local Partnership. |
| | · | If the book value of Registrant’s investment in a Local Partnership exceeds the estimated value derived by management, Registrant reduces its investment in any such Local Partnership and includes such reduction in equity in loss of investment in local partnerships. Registrant makes such assessment at least annually in the fourth quarter of its fiscal year or whenever there are indications that a permanent impairment may have occurred. A loss in value of an investment in a Local Partnership other than a temporary decline would be recorded as an impairment loss. Impairment is measured by comparing the investment carrying amount to the sum of the total amount of the remaining tax credits to be allocated to Registrant and the estimated residual value of the investment. |
| | · | Registrant does not consolidate the accounts and activities of the Local Partnerships, which are considered Variable Interest Entities under Financial Accounting Standards Board Interpretation No. 46 - Revised, “Consolidation of Variable Interest Entities,” because Registrant is not considered the primary beneficiary. Registrant’s balance in investment in local partnerships represents the maximum exposure to loss in connection with such investments. Registrant’s exposure to loss on the Local Partnerships is mitigated by the condition and financial performance of the underlying Properties as well as the strength of the Local General Partners. |
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Registrant has invested a significant portion of its working capital reserves in U.S. Treasury instruments. The market value of such investment is subject to fluctuation based upon changes in interest rates relative to the investment’s maturity date and the associated bond rating. Since Registrant’s investments in bonds mature in 2008, the value of such investment may be adversely impacted in an environment of rising interest rates in the event Registrant decides to liquidate the investment prior to its maturity. Although Registrant may utilize reserves to pay for its operating expenses and/or to assist an under performing Property, it otherwise intends to hold such investment to its maturity. Therefore, Registrant does not anticipate any material adverse impact in connection with such investment.
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 4. Controls and Procedures
As of June 29, 2006, under the direction of the Chief Executive Officer and Chief Financial Officer, Registrant evaluated the effectiveness of its disclosure controls and procedures and concluded that (i) Registrant’s disclosure controls and procedures were effective as of June 29, 2006, and (ii) there has been no change in Registrant’s internal control over financial reporting during the quarter ended June 29, 2006 that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
AMERICAN TAX CREDIT PROPERTIES II L.P.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Registrant is not aware of any material legal proceedings.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Item 1A of Registrant’s Annual Report on Form 10-K for the year ended March 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None; see Item 2 of Part I regarding the mortgage defaults of certain Local Partnerships.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Exhibit 32.1 Section 1350 Certification of Chief Executive Officer
Exhibit 32.2 Section 1350 Certification of Chief Financial Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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| | AMERICAN TAX CREDIT PROPERTIES II L.P. (a Delaware limited partnership) |
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| By: | Richman Tax Credit Properties II L.P., General Partner |
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| | by: | Richman Tax Credits Inc., |
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| Dated: March 14, 2008 | | /s/ David Salzman |
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by: David Salzman |
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| Dated: March 14, 2008 | | /s/ Neal Ludeke |
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Chief Financial Officer |
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| Dated: March 14, 2008 | | /s/ Richard Paul Richman |
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by: Richard Paul Richman Director |
