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 September 29, 1999
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: 0-18405
American Tax Credit Properties II L.P.
(Exact name of Registrant as specified in its charter)
Delaware 13-3495678
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Richman Tax Credit Properties II L.P.
599 West Putnam Avenue, 3rd Floor
Greenwich, Connecticut 06830
(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 X No .
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
Notes to Financial Statements.............................................7
AMERICAN TAX CREDIT PROPERTIES II L.P.
BALANCE SHEETS
(UNAUDITED)
September 29, March 30,
Notes 1999 1999
----- ------------- -------------
ASSETS
Cash and cash equivalents $ 1,231,195 $ 739,118
Investments in bonds available-for-sale 2 3,040,897 3,699,324
Investment in local partnerships 3 12,048,582 12,905,421
Interest receivable 45,655 65,900
------------- -------------
$ 16,366,329 $ 17,409,763
============= =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses 4 $ 671,026 $ 645,210
Payable to general partner 630,701 585,806
Other 41,600 48,600
------------- -------------
1,343,327 1,279,616
============= =============
Commitments and contingencies 3, 4
Partners' equity (deficit)
General partner (341,950) (331,942)
Limited partners (55,746 units of limited partnership
interest outstanding) 15,424,099 16,414,878
Accumulated other comprehensive income (loss), net 2 (59,147) 47,211
------------- -------------
15,023,002 16,130,147
------------- -------------
$ 16,366,329 $ 17,409,763
============= =============
See Notes to Financial Statements.
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
September 29, September 29, September 29, September 29,
Notes 1999 1999 1998 1998
------- -------------- -------------- -------------- --------------
REVENUE
Interest $ 67,489 $ 128,431 $ 99,040 $ 182,424
Other income from local partnerships 3 2,537 8,669 388
-------------- -------------- -------------- --------------
TOTAL REVENUE 70,026 137,100 99,040 182,812
-------------- -------------- -------------- --------------
EXPENSES
Administration fees 4 74,827 149,653 74,827 149,653
Management fees 74,827 149,653 74,827 149,653
Professional fees 21,063 44,060 17,967 42,565
Printing, postage and other 11,106 20,430 7,002 19,480
-------------- -------------- -------------- --------------
TOTAL EXPENSES 181,823 363,796 174,623 361,351
Loss from operations (111,797) (226,696) (75,583) (178,539)
Equity in loss of investment in local
partnerships 3 (321,977) (774,091) (438,011) (1,057,244)
-------------- -------------- -------------- --------------
NET LOSS (433,774) (1,000,787) (513,594) (1,235,783)
Other comprehensive income (loss) 2 (33,367) (106,358) 111,728 129,784
-------------- -------------- -------------- --------------
COMPREHENSIVE LOSS $ (467,141) $ (1,107,145) $ (401,866) $ (1,105,999)
============== ============== ============== ==============
NET LOSS ATTRIBUTABLE TO
General partner $ (4,338) $ (10,008) $ (5,136) $ (12,358)
Limited partners (429,436) (990,779) (508,458) (1,223,425)
-------------- --------------- -------------- --------------
$ (433,774) $ (1,000,787) $ (513,594) $ (1,235,783)
============== =============== ============== ==============
NET LOSS per unit of limited partnership
interest (55,746 units of limited
partnership interest) $ (7.70) $ (17.77) $ (9.12) $ (21.95)
-------------- --------------- -------------- --------------
See Notes to Financial Statements.
AMERICAN TAX CREDIT PROPERTIES II L.P.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 29, 1999 AND 1998
(UNAUDITED)
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 200,745 $ 174,984
Cash used for local partnerships for deferred expenses (7,000) (7,000)
Cash paid for
administration fees (104,758) (104,758)
management fees (104,758) (52,379)
professional fees (77,261) (66,565)
printing, postage and other expenses (6,308) (22,790)
------------ -----------
Net cash used in operating activities (99,340) (78,508)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in local partnerships (84,893)
Cash distributions and other income from local partnerships 176,310 127,415
Redemption of bonds 500,000 300,000
------------ -----------
Net cash provided by investing activities 591,417 427,415
------------ -----------
Net increase in cash and cash equivalents 492,077 348,907
Cash and cash equivalents at beginning of period 739,118 513,536
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,231,195 $ 862,443
============ ===========
SIGNIFICANT NON-CASH INVESTING ACTIVITIES
Unrealized gain (loss) on investments in bonds available-for-sale, net $ (106,358) $ 129,784
============ ===========
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)
SIX MONTHS ENDED SEPTEMBER 29, 1999 AND 1998
(UNAUDITED)
1999 1998
------------ ------------
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES
Net loss $ (1,000,787) $ (1,235,783)
Adjustments to reconcile net loss to net cash used in operating
activities
Equity in loss of investment in local partnerships 774,091 1,057,244
Distributions from local partnerships classified as other income (8,669) (388)
Loss (gain) on redemption of bonds 9,992 (11,403)
Amortization of net premium on investments in bonds 61,671 17,392
Accretion of zero coupon bonds (19,594) (19,594)
Decrease in interest receivable 20,245 6,165
Increase in payable to general partner 44,895 97,274
Increase in accounts payable and accrued expenses 25,816 17,585
Decrease in other liabilities (7,000) (7,000)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES $ (99,340) $ (78,508)
============ ============
See Notes to Financial Statements.
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 29, 1999
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. They do not include all information and footnotes
required by generally accepted accounting principles 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 September 29, 1999 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 and six month periods ended September 29, 1999 are not
necessarily indicative of the results that may be expected for the entire
year.
2. Investments in Bonds Available-For-Sale
As of September 29, 1999, certain information concerning investments in
bonds available-for-sale is as follows:
Gross Gross
Amortized unrealized unrealized Estimated
Description and maturity cost gains losses fair value
------------------------ ----------- ------------ ------------ -------------
Corporate debt securities
Within one year $ 111,367 $ 1,215 $ - $ 112,582
After one year through five years 859,919 11,046 (2,583) 868,382
After five years through ten years 1,447,363 16,250 (56,551) 1,407,062
After ten years 102,808 - (2,520) 100,288
----------- ------------ ------------ ------------
2,521,457 28,511 (61,654) 2,488,314
----------- ------------ ------------ ------------
U.S. Treasury debt securities
After five years through ten years 541,713 - (27,463) 514,250
----------- ------------ ------------ ------------
U.S. government and agency securities
After five years through ten years 36,874 1,459 - 38,333
----------- ------------ ------------ ------------
$ 3,100,044 $ 29,970 $ (89,117) $ 3,040,897
=========== ============ ============ ============
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 29, 1999
(UNAUDITED)
3. Investment in Local Partnerships
The Partnership owns limited partnership interests in fifty Local
Partnerships representing capital contributions in the aggregate amount of
$45,972,983. As of June 30, 1999, the Local Partnerships have outstanding
mortgage loans payable totaling approximately $90,204,000 and accrued
interest payable on such loans totaling approximately $5,504,000, which are
secured by security interests and liens common to mortgage loans on the
Local Partnerships' real property and other assets.
For the six months ended September 29, 1999, the investment in local
partnerships activity consists of the following:
Investment in local partnerships as of March 30, 1999 $ 12,905,421
Investment in local partnerships 84,893
Equity in loss of investment in local partnerships (774,091)*
Cash distributions received from Local Partnerships (176,310)
Cash distributions from local partnerships classified as other income 8,669
---------------
Investment in local partnerships as of September 29, 1999 $ 12,048,582
===============
* 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
$781,835 for the six months ended June 30, 1999 as reflected in the
combined statement of operations of the Local Partnerships reflected
herein Note 3.
Effective October 1, 1998, in an attempt to avoid potential adverse tax
consequences, the Partnership and the local general partners of 2000-2100
Christian Street Associates ("2000 Christian Street") and Christian Street
Associates Limited Partnership ("Christian Street") agreed to equally share
the funding of operating deficits through June 30, 2000 in the case of
Christian Street and through September 30, 2000 in the case of 2000
Christian Street (the respective "Funding Agreements"), whereby either
party's obligation may be cancelled in the event the anticipated annualized
operating deficit exceeds $168,000 in the case of Christian Street and
$132,000 in the case of 2000 Christian Street. The Partnership has made
advances of $16,370 and $10,867 under the Funding Agreements to 2000
Christian Street and Christian Street, respectively, during the six months
ended September 29, 1999 and recorded such advances as investment in local
partnerships. The Local General Partners have made advances of $16,500 and
$25,000 to 2000 Christian Street and Christian Street, respectively, during
the six months ended June 30, 1999.
As a result of increasing deficits and declining occupancy, Forest Village
Housing Partnership ("Forest Village") filed for protection under Chapter
11 of the federal Bankruptcy Code in the United States Bankruptcy Court,
Western District of Washington (the "Court") on March 25, 1999. As of
September 1999, the first and second mortgages are twelve and ten months in
arrears, respectively. In addition, the Partnership has made advances of
$57,656 during the six months ended September 29, 1999 primarily to pay for
needed maintenance of vacant dwelling units, and recorded such advances as
investment in local partnerships. The Property is currently less than 50%
occupied with the remaining units not in rentable condition. Forest Village
has filed a plan of reorganization (the "Plan") and a hearing on
confirmation of the Plan is scheduled for December 14, 1999. In the event
that the Plan is confirmed, it is anticipated that the Partnership will
make additional advances to make needed capital improvements to the
Property. There can be no assurance that the Court will confirm the Plan.
The combined unaudited balance sheets of the Local Partnerships as of June
30, 1999 and December 31, 1998 and the combined unaudited statements of
operations of the Local Partnerships for the three and six month periods
ended June 30, 1999 and 1998 are reflected on pages 9 and 10, respectively.
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 29, 1999
(UNAUDITED)
3. Investment in Local Partnerships (continued)
The combined balance sheets of the Local Partnerships as of June 30, 1999
and December 31, 1998 are as follows:
June 30, December 31,
1999 1998
-------------- ---------------
ASSETS
Cash and cash equivalents $ 3,379,588 $ 3,806,606
Rents receivable 493,197 585,071
Escrow deposits and reserves 5,807,916 5,572,647
Land 4,180,673 4,180,673
Buildings and improvements (net of
accumulated depreciation of $49,366,760 91,692,251 93,551,328
and $46,950,143)
Intangible assets (net of accumulated
amortization of $1,103,645 and 1,569,727 1,623,218
$1,050,154)
Other 1,135,400 1,125,436
-------------- ---------------
$ 108,258,752 $ 110,444,979
============== ===============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Accounts payable and accrued expenses $ 1,406,072 $ 1,368,829
Due to related parties 4,173,366 4,488,367
Mortgage loans 90,203,760 90,801,660
Notes payable 2,473,537 2,382,595
Accrued interest 5,503,749 5,065,190
Other 663,308 649,750
-------------- ---------------
104,423,792 104,756,391
-------------- ---------------
Partners' equity (deficit)
American Tax Credit Properties II L.P.
Capital contributions, net of 44,909,854 44,985,009
distributions
Cumulative loss (32,226,168) (31,452,077)
-------------- ---------------
12,683,686 13,532,932
-------------- ---------------
General partners and other limited
partners, including
ATCP & ATCP III
Capital contributions, net of 3,243,967 3,283,927
distributions
Cumulative loss (12,092,693) (11,128,271)
-------------- ---------------
(8,848,726) (7,844,344)
-------------- ---------------
3,834,960 5,688,588
-------------- ---------------
$ 108,258,752 $ 110,444,979
============== ===============
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 29, 1999
(UNAUDITED)
3. Investment in Local Partnerships (continued)
The combined statements of operations of the Local Partnerships for the
three and six month periods ended June 30, 1999 and 1998 are as follows:
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1999 1998 1998
-------------- -------------- -------------- -------------
REVENUE
Rental $ 5,090,950 $ 10,134,632 $ 5,205,437 $ 10,295,150
Interest and other 88,870 256,649 113,467 240,467
-------------- -------------- -------------- -------------
TOTAL REVENUE 5,179,820 10,391,281 5,318,904 10,535,617
EXPENSES
Administrative 846,439 1,707,470 906,854 1,772,390
Utilities 603,084 1,378,190 575,151 1,370,140
Operating, maintenance and other 1,136,159 2,182,509 1,033,776 1,957,070
Taxes and insurance 630,984 1,197,486 591,523 1,187,268
Financial (including amortization of
$23,954, $53,491, $25,911 and 1,595,094 3,244,571 1,632,522 3,267,277
$46,776)
Depreciation 1,211,054 2,419,568 1,258,992 2,555,854
-------------- ------------- ------------- ------------
TOTAL EXPENSES 6,022,814 12,129,794 5,998,818 12,109,999
-------------- ------------- ------------- ------------
NET LOSS $ (842,994) $ (1,738,513) $ (679,914) $ (1,574,382)
============== ============= ============= ============
NET LOSS ATTRIBUTABLE TO
American Tax Credit Properties II L.P. $ (321,978) $ (774,091) $ (438,011) $ (1,057,244)
General partners and other limited
partners, including ATCP & ATCP III,
which includes $410,533, $781,835,
$149,881 and $354,726 of Partnership (521,016) (964,422) (241,903) (517,138)
loss in excess of investment -------------- ------------- ------------ ------------
$ (842,994) $ (1,738,513) $ (679,914) $ (1,574,382)
============== ============= ============ ============
The combined results of operations of the Local Partnerships for the three
and six month periods ended June 30, 1999 are not necessarily indicative of
the results that may be expected for an entire operating period.
AMERICAN TAX CREDIT PROPERTIES II L.P.
NOTES TO FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 29, 1999
(UNAUDITED)
4. Administration Fees
Pursuant to the Partnership Agreement, the Partnership is authorized to pay
ML Fund Administrators Inc. ("MLFA"), an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, an annual administration fee (the "Administration
Fee") and an annual additional administration fee (the "Additional
Administration Fee") for its administrative services provided to the Partnership
pursuant to an Administrative Services Agreement. The annual Administration Fee
is equal to .14% of all proceeds as of December 31 of any year, invested or
committed for investment in Local Partnerships plus all debts of the Local
Partnership related to the Properties ("Invested Assets"), and the annual
Additional Administration Fee, which is subject to certain provisions of the
Partnership Agreement, is equal to .06% of Invested Assets. MLFA has notified
the Partnership that effective November 23, 1999 it will discontinue the
performance of its services under the Administrative Services Agreement. The
General Partner is considering the transition of such services to an affiliate
of the General Partner without any changes to the terms of the Administrative
Services Agreement. Under the terms of the Partnership Agreement, the
Partnership currently incurs an annual Administration Fee and an annual
Additional Administration Fee of $209,514 and $89,793, respectively. Unpaid
cumulative Administration Fees and Additional Administration Fees in the amount
of $630,701 and $585,806 are included in accounts payable and accrued expenses
in the accompanying balance sheets as of September 29, 1999 and March 30, 1999,
respectively.
5. Additional Information
Additional information, including the audited March 30, 1999 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, 1999 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 September 29, 1999, American Tax Credit Properties II L.P. (the
"Registrant") has not experienced a significant change in financial condition as
compared to March 30, 1999. Principal changes in assets are comprised of
periodic transactions and adjustments and anticipated equity in loss from
operations of the local partnerships (the "Local Partnerships") which own
low-income multifamily residential complexes (the "Properties") which qualify
for the low-income tax credit in accordance with Section 42 of the Internal
Revenue Code (the "Low-income Tax Credit"). During the six months ended
September 29, 1999, Registrant received cash from interest revenue, redemption
of bonds and distributions from Local Partnerships and utilized cash for
operating expenses and investments in 2000-2100 Christian Street Associates
("2000 Christian Street"), Christian Street Associates Limited Partnership
("Christian Street") and Forest Village Housing Partnership ("Forest Village")
(see Local Partnership Matters below). Cash and cash equivalents and investments
in bonds available-for-sale decreased, in the aggregate, by approximately
$166,000 during the six months ended September 29, 1999 (which includes a net
unrealized loss on investments in bonds of approximately $106,000, amortization
of net premium on investments in bonds of approximately $62,000 and accretion of
zero coupon bonds of approximately $20,000). 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 six months ended September 29, 1999, the investment in local partnerships
decreased as a result of Registrant's equity in the Local Partnerships' net loss
for the six months ended June 30, 1999 of $774,091 and cash distributions
received from Local Partnerships of $167,641 (exclusive of distributions from
Local Partnerships of $8,669 classified as other income from local
partnerships), partially offset by investments in Local Partnerships of
$84,893). Accounts payable and accrued expenses includes deferred administration
fees of $630,701 and payable to general partner represents deferred management
fees in the accompanying balance sheet as of September 29, 1999.
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. 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. Accordingly, cumulative losses and cash
distributions in excess of the investment 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 September 29, 1999 and 1998
resulted in net losses of $433,774 and $513,594, respectively. The decrease in
net loss is primarily attributable to a decrease in equity in loss of investment
in local partnerships of approximately $116,000, which is primarily the result
of an increase in the nonrecognition of losses in excess of Registrant's
investment in local partnerships in accordance with the equity method of
accounting, partially offset by a decrease in interest revenue of approximately
$32,000. Other comprehensive income (loss) for the three months ended September
29, 1999 and 1998 resulted from a net unrealized gain (loss) on investments in
bonds available-for-sale of $(33,367) and $111,728, respectively.
The Local Partnerships' net loss of approximately $843,000 for the three months
ended June 30, 1999 was attributable to rental and other revenue of
approximately $5,180,000, exceeded by operating and interest expense (including
interest on non-mandatory debt) of approximately $4,788,000 and approximately
$1,235,000 of depreciation and amortization expense. The Local Partnerships' net
loss of approximately $680,000 for the three months ended June 30, 1998 was
attributable to rental and other revenue of approximately $5,319,000, exceeded
by operating and interest expense (including interest on non-mandatory debt) of
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
approximately $4,714,000 and approximately $1,285,000 of depreciation and
amortization expense. The results of operations of the Local Partnerships for
the three months ended June 30, 1999 are not necessarily indicative of the
results that may be expected in future periods.
Registrant's operations for the six months ended September 29, 1999 and 1998
resulted in net losses of $1,000,787 and $1,235,783, respectively. The decrease
in net loss is primarily attributable to a decrease in equity in loss of
investment in local partnerships of approximately $283,000, which is primarily
the result of an increase in the nonrecognition of losses in excess of
Registrant's investment in local partnerships in accordance with the equity
method of accounting, partially offset by a decrease in interest revenue of
approximately $54,000. Other comprehensive income (loss) for the six months
ended September 29, 1999 and 1998 resulted from a net unrealized gain (loss) on
investments in bonds available-for-sale of $(106,358) and $129,784,
respectively.
The Local Partnerships' net loss of approximately $1,739,000 for the six months
ended June 30, 1999 was attributable to rental and other revenue of
approximately $10,391,000, exceeded by operating and interest expense (including
interest on non-mandatory debt) of approximately $9,657,000 and approximately
$2,473,000 of depreciation and amortization expense. The Local Partnerships' net
loss of approximately $1,574,000 for the six months ended June 30, 1998 was
attributable to rental and other revenue of approximately $10,536,000, exceeded
by operating and interest expense (including interest on non-mandatory debt) of
approximately $9,507,000 and approximately $2,603,000 of depreciation and
amortization expense. The results of operations of the Local Partnerships for
the six months ended June 30, 1999 are not necessarily indicative of the results
that may be expected in future periods.
Local Partnership Matters
Registrant's primary objective is to provide Low-income Tax Credits to limited
partners generally over a ten year period. 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. Through December 31,
1998, none of the Local Partnerships have suffered an event of recapture of
Low-income Tax Credits. The Local Partnerships will have generated substantially
all of the Low-income Tax Credits allocated to limited partners by December 31,
2000.
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. In
October 1997, Congress passed the Multifamily Assisted Housing and Reform and
Affordability Act, whereby the United States Department of Housing and Urban
Development ("HUD") was given the authority to renew certain project based
Section 8 contracts expiring during HUD's fiscal year 1998, where requested by
an owner, for an additional one year term generally at or below existing rent
levels, subject to certain guidelines. In October 1998, HUD issued a directive
related to project based Section 8 contracts expiring during HUD's fiscal year
1999 which defines owners' notification responsibilities, advises owners of
project based Section 8 properties of what their options are regarding the
renewal of Section 8 contracts, provides guidance and procedures to owners,
management agents, contract administrators and HUD staff on renewing Section 8
contracts, provides guidance on setting renewal rents and handling renewal rent
increases and provides 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 and debt
structure of any or all Local Partnerships currently receiving such subsidy or
similar subsidies. Seven Local Partnerships' Section 8 contracts, certain of
which cover only certain rental units, are currently subject to annual
year-to-year renewals.
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 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 six months ended June 30, 1999, revenue from
operations of the Local Partnerships have generally been sufficient to cover
operating expenses and Mandatory Debt Service. Substantially all of the Local
Partnerships are effectively operating at or near 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.
Christian Street and 2000 Christian Street, which Local Partnerships have
certain common general partner interests and a common first mortgage lender,
have experienced ongoing operating deficits. Under terms of the partnership
agreements, the Local General Partners have exceeded their respective operating
deficit guarantees and, as of September 30, 1998, had advanced in excess of
$1,000,000 in the aggregate, to Christian Street and 2000 Christian Street. The
Local General Partners approached the lender and are attempting to restructure
the loans; however the lender indicated that in connection with any such
restructuring, the respective Local Partnerships would be responsible for
certain costs, which may be significant. There can be no assurance that any such
restructuring will be achieved. Christian Street and 2000 Christian Street have
allocated approximately 8.5 years of Low-income Tax Credits to Registrant
through December 31, 1998. Accordingly, if the Local General Partners cease to
fund the operating deficits, Registrant would likely incur substantial recapture
of Low-income Tax Credits. Effective October 1, 1998, in an attempt to avoid
potential adverse tax consequences, Registrant and the Local General Partners of
Christian Street and 2000 Christian Street agreed to equally share the funding
of operating deficits through June 30, 2000 in the case of Christian Street and
through September 30, 2000 in the case of 2000 Christian Street (the respective
"Funding Agreements"), whereby either party's obligation may be cancelled in the
event the anticipated annualized operating deficit exceeds $168,000 in the case
of Christian Street and $132,000 in the case of 2000 Christian Street. The Local
General Partners of Christian Street and 2000 Christian Street have agreed to
cause the management agent to accrue and defer its management fees during the
period of the Funding Agreements. The accrued management fees are excluded when
determining the operating deficits. Christian Street and 2000 Christian Street
reported a combined operating deficit of approximately $56,000, excluding
accrued management fees of approximately $19,000, for the six months ended June
30, 1999. Under the terms of the Funding Agreements, Registrant has funded
$32,870 and $31,867 to 2000 Christian Street and Christian Street, respectively,
as of September 29, 1999 while the Local General Partners have funded $16,500
and $25,000, respectively, as of June 30, 1999. Payments on the mortgage and
real estate taxes are current. Registrant's investment balances in Christian
Street and 2000 Christian Street, after cumulative equity losses, became zero
during the year ended March 30, 1997. Christian Street and 2000 Christian Street
will have generated approximately $8 and approximately $4 per Unit per year to
the limited partners upon the expiration of their Low-income Tax Credit
allocations in 2000 and 2001, respectively.
As a result of increasing deficits and declining occupancy, Forest Village filed
for protection under Chapter 11 of the federal Bankruptcy Code in the United
States Bankruptcy Court, Western District of Washington (the "Court") on March
25, 1999. As of September 1999, the first and second mortgages are twelve and
ten months in arrears, respectively. In addition, Registrant has made advances
of approximately $58,000 during the six months ended September 29, 1999
primarily to pay for needed maintenance of vacant dwelling units. The Property
is currently less than 50% occupied with the remaining units not in rentable
condition. Forest Village has filed a plan of reorganization (the "Plan") and a
hearing on confirmation of the Plan is scheduled for December 14, 1999. In the
event that the Plan is confirmed, it is anticipated that Registrant will make
additional advances to make needed capital improvements to the Property. There
can be no assurance that the Court will confirm the Plan. Registrant's
investment balance in Forest Village, after cumulative equity losses, became
zero during the year ended March 30, 1995. Of Registrant's total annual
Low-income Tax Credits, approximately 1% is allocated from Forest Village.
The terms of the partnership agreement of Batesville Family, L.P. ("Batesville")
require the management agent to defer property management fees in order to avoid
a default under the mortgage. Batesville reported an operating deficit of
approximately $6,000 for the six months ended June 30, 1999, which includes
property management fees of approximately $1,000. Payments on the mortgage and
real estate taxes are current. Registrant's investment balance in Batesville,
after cumulative equity losses, became zero during the year ended March 30,
1998. Of Registrant's total annual income Low-income Tax Credits, less than 1%
is allocated from Batesville.
AMERICAN TAX CREDIT PROPERTIES II L.P.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit year is commonly referred to as the year 2000 compliance ("Y2K") issue. As
the year 2000 approaches, such systems may be unable to accurately process
certain data-based information. Many businesses may need to upgrade existing
systems or purchase new ones to correct the Y2K issue. Registrant has performed
an assessment of its computer software and hardware and believes it has made the
necessary upgrades in an effort to ensure compliance. However, there can be no
assurance that the systems of other entities on which Registrant relies,
including the Local Partnerships which report to Registrant on a periodic basis
for the purpose of Registrant's reporting to its investors, will be timely
converted. Registrant has corresponded with the Local Partnerships to ensure
their awareness of the Y2K issue and has requested details regarding their
efforts to ensure compliance. The total cost associated with Y2K implementation
is not expected to materially impact Registrant's financial position or results
of operations in any given year. However, there can be no assurance that a
failure to convert by Registrant or another entity would not have a material
adverse impact on Registrant.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Registrant has invested a significant portion of its working capital reserves in
corporate bonds, U.S. Treasury instruments and U.S. government and agency
securities. The market value of such investments is subject to fluctuation based
upon changes in interest rates relative to each investment's maturity date.
Since Registrant's investments in bonds have various maturity dates through
2023, the value of such investments may be adversely impacted in an environment
of rising interest rates in the event Registrant decides to liquidate any such
investment prior to its maturity. Although Registrant may utilize reserves to
assist an underperforming Property, it otherwise intends to hold such
investments to their respective maturities. Therefore, Registrant does not
anticipate any material adverse impact in connection with such investments.
The Properties are generally located where there is a demand for low-income
housing. Accordingly, there is a significant likelihood that new low-income
housing properties could be built in the general vicinity of the respective
Properties. As a result, the respective Properties' ability to operate at high
occupancy levels is subject to competition from newly built low-income housing.
AMERICAN TAX CREDIT PROPERTIES II L.P.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As a result of increasing deficits and declining occupancy, Forest
Village Housing Partnership ("Forest Village") filed for protection
under Chapter 11 of the federal Bankruptcy Code in the United States
Bankruptcy Court, Western District of Washington on March 25, 1999.
Forest Village has filed a plan of reorganization and a hearing on
confirmation of the plan is scheduled for December 14, 1999.
Registrant is not aware of any other material legal proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
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.
AMERICAN TAX CREDIT PROPERTIES II L.P.
(a Delaware limited partnership)
By Richman Tax Credit Properties II L.P.,
General Partner
by: Richman Tax Credits Inc.,
general partner
Dated: November 15, 1999 /s/ Richard Paul Richman
---------------------------------------------
by: Richard Paul Richman
President, Chief Executive Officer and
Director of the general partner of the
General Partner
Dated: November 15, 1999 /s/ Neal Ludeke
----------------------------------------------
by: Neal Ludeke
Vice President and Treasurer of the
general partner
Of the General Partner
(Principal Financial and Accounting
Officer of Registrant)