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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 30, 2012

 

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 Circle    
Irvine, CA   92614-6404
(Address of principal executive offices)   (Zip Code)

 

(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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes [X] No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [  ]

 

Indicate by check mark whether the registrant is a shell company (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 Quarterly Period Ended September 30, 2012

 

PART I. FINANCIAL INFORMATION    
       
  Item 1. Financial Statements    
       
  Condensed Balance Sheets  As of September 30, 2012 and March 31, 2012   F-1
     
  Condensed Statements of Operations For the Three and Six Months Ended September 30, 2012 and 2011   F-2
     
  Condensed Statement of Partners’ Deficit For the Six Months Ended September 30, 2012   F-3
     
  Condensed Statements of Cash Flows For the Six Months Ended September 30, 2012 and 2011   F-4
     
  Notes to Condensed Financial Statements   F-5
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   3
     
  Item 3. Quantitative and Qualitative Disclosures about Market Risks   5
       
  Item 4. Controls and Procedures   5

 

PART II. OTHER INFORMATION    
       
  Item 1. Legal Proceedings   6
       
  Item 1A. Risk Factors   6
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   6
       
  Item 3. Defaults Upon Senior Securities   6
       
  Item 4. Mine Safety Disclosures   6
       
  Item 5. Other Information   6
       
  Item 6. Exhibits   6
       
  Signatures   7

 

2
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

CONDENSED BALANCE SHEETS

(Unaudited)

 

   September 30, 2012   March 31, 2012 
         
ASSETS          
           
Cash  $15,752   $64,478 
Investments in Local Limited Partnerships, net (Note 2)   -    - 
Other assets   4,167    19,405 
           
Total Assets  $19,919   $83,883 
           
LIABILITIES AND PARTNERS’ DEFICIT          
           
Liabilities:          
 Accrued fees and expenses due to General Partner and affiliates (Note 3)  
 
 
$
 
2,419,691
 
 
 
 
 
$
 
2,528,838
 
 
           
 Total Liabilities   2,419,691    2,528,838 
           
Partners’ Deficit:          
General Partner   (81,158)   (81,610)
Limited Partners (12,000 Partnership Units authorized; 7,000 Partnership Units issued and outstanding)   (2,318,614)   (2,363,345)
           
 Total Partners’ Deficit   (2,399,772)   (2,444,955)
           
 Total Liabilities and Partners’ Deficit  $19,919   $83,883 

 

See accompanying notes to condensed financial statements 

 

F-1
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

CONDENSED STATEMENTS OF OPERATIONS

 

For the Three and Six Months Ended September 30, 2012 and 2011

(Unaudited)

 

   2012   2011 
   Three Months   Six Months   Three Months   Six Months 
                 
 Reporting fees  $-   $-   $6,134   $6,134 
 Distribution income   -    -    -    500 
                     
 Total operating income   -    -    6,134    6,634 
                     
 Operating expenses:                    
 Asset management fees (Note 3)   4,697    14,866    18,234    38,437 
 Legal and accounting fees   7,990    25,490    3,263    31,652 
 Write off of other assets   -    8,950    -    - 
 Other   3,226    4,650    9,549    11,287 
                     
 Total operating expenses   15,913    53,956    31,046    81,376 
                     
 Loss from operations   (15,913)   (53,956)   (24,912)   (74,742)
                     
 Gain on sale of Local Limited Partnerships   43,312    99,132    17,004    55,928 
                     
 Interest income   3    7    2    4 
                     
 Net income (loss)  $27,402   $45,183   $(7,906)  $(18,810)
                     
 Net income(loss) allocated to:                    
 General Partner  $274   $452   $(79)  $(188)
                     
 Limited Partners  $27,128   $44,731   $(7,827)  $(18,622)
                     
Net income (loss) per Partnership Unit  $4   $6   $(1)  $(3)
                     
 Outstanding weighted Partnership Units   7,000    7,000    7,000    7,000 

 

See accompanying notes to condensed financial statements

 

F-2
 

  

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

CONDENSED STATEMENT OF PARTNERS’ DEFICIT

 

For the Six Months Ended September 30, 2012

(Unaudited)

 

   General   Limited     
   Partner   Partners   Total 
             
Partners’ deficit at March 31, 2012  $(81,610)  $(2,363,345)  $(2,444,955)
                
Net income   452    44,731    45,183 
                
Partners’ deficit at September 30, 2012  $(81,158)  $(2,318,614)  $(2,399,772)

 

See accompanying notes to condensed financial statements

 

F-3
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

CONDENSED STATEMENTS OF CASH FLOWS

 

For the Six Months Ended September 30, 2012 and 2011

(Unaudited)

 

   2012   2011 
         
Cash flows from operating activities:          
 Net income (loss)  $45,183   $(18,810)
 Adjustments to reconcile net income(loss) to net  cash used in operating activities:          
 Increase in other assets   (7,099)   (16,546)
 Increase in accrued expenses   -    363 
 Decrease in accrued fees and expenses due to General Partner and affiliates   (33,128)   (31,504)
 Write off of other assets   8,950    - 
 Gain on sale of Local Limited Partnerships   (99,132)   (55,928)
           
 Net cash used in operating activities   (85,226)   (122,425)
           
 Cash flows from investing activities:          
 Proceeds from sale of Local Limited Partnerships   36,500    88,063 
           
 Net cash provided by investing activities   36,500    88,063 
           
Net decrease in cash   (48,726)   (34,362)
           
Cash, beginning of period   64,478    43,639 
           
Cash, end of period  $15,752   $9,277 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
           
 Taxes paid  $-   $- 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES          
Gain on sale of Local Limited Partnerships was increased and accrued fees and expenses due to the General Partner and affiliates was decreased for sales proceeds paid directly to Associates.  $76,019   $- 

 

See accompanying notes to condensed financial statements

 

F-4
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

For the Quarterly Period Ended September 30, 2012

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

General

 

The accompanying condensed unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended September 30, 2012are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2013. 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, 2012.

 

Organization

 

WNC Housing Tax Credit Fund II, L.P. (the “Partnership”) is a California Limited Partnership formed under the laws of the State of California on January 19, 1990. The Partnership was formed to acquire limited partnership interests in other limited partnerships (“Local Limited Partnerships”) which own multi-family housing complexes (“Housing Complexes”) that are eligible for Federal low income housing tax credits (“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 Complexes. Each Local Limited Partnership is governed by its agreement of limited partnership (the “Local Limited Partnership Agreement”).

 

The general partner of the Partnership is WNC Financial Group, L.P., a California partnership (the “General Partner”). The general partners of the General Partner are WNC & Associates, Inc., a California corporation (“Associates”), and Wilfred N. Cooper Sr. The chairman and president of Associates ownall of the outstanding stock of Associates. The business of the Partnership is conducted primarily through Associates, as the Partnership has no employees of its own.

 

The Partnership shall continue in full force and effect until December 31, 2045 unless terminated prior to that date pursuant to the partnership agreement or law.

 

The financial statements include only activity relating to the business of the Partnership, and do not give effect to any assets that the partners may have outside of their interests in the Partnership, or to any obligations, including income taxes, of the partners.

 

The Partnership Agreement authorized the sale of up to 12,000 units of Limited Partnership interests (“Partnership Units”) at $1,000 per Partnership Unit. The offering of Partnership Units concluded on December 31, 1992 at which time 7,000 Partnership Units representing subscriptions in the amount of $7,000,000 had been accepted. The General Partner has a 1% interest in operating profits and losses, taxable income and losses, cash available for distribution from the Partnership and Low Income Housing Tax Credits of the Partnership. The investors (the “Limited Partners”) will be allocated the remaining 99% of these items in proportion to their respective investments.

 

The proceeds from the disposition of any of the Local Limited Partnership Housing Complexes will be used first to pay debts and other obligations per the respective Local Limited Partnership Agreement. Any remaining proceeds will then be paid to the Partnership. The sale of a Housing Complex may be subject to other restrictions and obligations. Accordingly, there can be no assurance that a Local Limited Partnership will be able to sell its Housing Complex. Even if it does so,there can be no assurance that any significant amounts of cash will be distributed to the Partnership. Should such distributions occur, the Limited Partners will be entitled to receive distributions equal to their capital contributions and their return on investment (as defined in the Partnership Agreement) and the General Partner would then be entitled to receive proceeds equal to its capital contributions 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.

 

F-5
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

 

For the Quarterly Period Ended September 30, 2012

(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 Tax Credits rules are extremely complicated. Noncompliance with these rules results in the loss of future Low Income Housing Tax Credits and the fractional recapture of Low Income Housing Tax Credits already taken. In most cases the annual amount of Low Income Housing Tax Credits that an individual can use is limited to the tax liability due on the person’s last $25,000 of taxable income. The Local Limited Partnerships may be unable to sell the Housing Complexes at a price which would result in the Partnership realizing cash distributions or proceeds from the transaction. Accordingly, the Partnership may be unable to distribute any cash to its Limited Partners. Low Income Housing Tax 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 “Compliance Period”), the loss of any remaining future Low Income Housing Tax Credits, a fractional recapture of prior Low Income Housing Tax Credits, and a loss of the Partnership’s investment in the Housing Complex would occur. The Partnership is a limited partner or a 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 Tax Credits and recapture of Low Income Housing Tax 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 Housing Complexes, 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 Tax Credits and tax losses allocable to 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.

 

All of the Low Income Housing Tax Credits anticipated to be realized from the Local Limited Partnerships have been realized. The Partnership does not anticipate being allocated any Low Income Housing Tax Credits from the Local Limited Partnerships in the future.

 

F-6
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

 

For the Quarterly Period Ended September 30, 2012

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

No trading market for the Partnership Units exists or is expected to develop. Limited Partners may be unable to sell their Partnership Units except at a discount and should consider their Partnership 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.

 

The Partnership currently has insufficient working capital to fund its operations. Associates has agreed to continue providing advances sufficient enough to fund the operations and working capital requirements of the Partnership through November 30, 2013.

 

Anticipated future and existing cash resources of the Partnership are not sufficient to pay existing liabilities of the Partnership. However, substantially all of the existing liabilities of the Partnership are payable to the General Partner and/or its affiliates. Though the amounts payable to the General Partner and/or its affiliates are contractually currently payable, the Partnership anticipates that the General Partner and/or its affiliates will not require the payment of these contractual obligations until capital reserves are in excess of the aggregate of then existing contractual obligations and then anticipated future foreseeable obligations of the Partnership. The Partnership would be adversely affected should the General Partner and/or its affiliates demand current payment of the existing contractual obligations and or suspend services for this or any other reason.

 

Exit Strategy

 

The Compliance Period for a Housing Complex is generally 15 years following construction or rehabilitation completion. Associates was one of the first in the industry to offer syndicated investments in Low Income Housing Tax Credits. The initial programs have completed their Compliance Periods.

 

Upon the sale of a Local Limited Partnership or Housing Complex after the end of the Compliance Period, there would be no recapture of Low Income Housing Tax Credits. All Local Limited Partnerships have completed their Compliance Period.

 

With that in mind, the General Partner is continuing its review of the Housing Complexes. The review considers many factors, including extended use requirements (such as those due to mortgage restrictions or state compliance agreements), the condition of the Housing Complexes, and the tax consequences to the Limited Partners from the sale of the Housing Complexes.

 

Upon identifying those Housing Complexes with the highest potential for a successful sale, refinancing or re-syndication, the Partnership expects to proceed with efforts to liquidate them. The objective is to wind down the Partnership as Low Income Housing Tax Credits are no longer available. Local Limited Partnership interests may be disposed of any time by the General Partner in its discretion. While liquidation of the Housing Complexes continues to be evaluated, the dissolution of the Partnership was not imminent as of September 30, 2012.

 

Upon management of the Partnership identifying a Local Limited Partnership for disposition, costs incurred by the Partnership in preparation for the disposition are deferred. Upon the sale of the Local Limited Partnership interest, the Partnership nets the costs that had been deferred against the proceeds from the sale in determining the gain or loss on sale of the Local Limited Partnership. Deferred disposition costs are included in other assets on the condensed balance sheets.

 

The Partnership has received the majority vote in favor of the plan of liquidation of the Partnership. Therefore, the Partnership is engaging third party appraisers to appraise several of the Local Limited Partnerships in this Partnership. The appraisal is one of the preliminary steps that need to be completed in order to move forward with the approved liquidation plan. Expenses incurred for the appraisals, or any other disposition related expenses the Partnership incurs, are being capitalized and will remain on the balance sheet until the respective Local Limited Partnership is sold. At the time of disposition all related the capitalized costs will be netted with any sale proceeds received in order to calculate the net gain or loss on the disposition.

 

F-7
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

 

For the Quarterly Period Ended September 30, 2012

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

  

Prior to the quarter ended September 30, 2012, the Partnership sold its Local Limited Partnership Interest in Lake View, a California limited partnership, Ashland Investment Group, Wilcox Investment Group, Cherokee Square, Ltd., Divall Midland Associates Limited Partnership II, Candleridge Apartments of Perry, L.P., Candleridge Apartments of Runnells, L.P., Whitewater Woods, Brian’s Village Apartments, L.P., Rociada, L.P., Idalou Manor, L.P., Littlefield Manor, L.P., Brantley Housing, Ltd, Eclectic Housing, Ltd., Perry County Housing, Ltd., Pine Hill Housing, Ltd., and Wadley Housing, Ltd. Each of the Local Limited Partnerships had completed its Compliance Period.

 

During the six months ended September 30, 2012, the Local Limited Partnership Interests for the five following Local Limited Partnerships were sold. No distributions will be made to the Limited Partners as a result of these dispositions. Each of the Local Limited Partnerships had completed its Compliance Period so there is no risk of recapture to the investors in the Partnership.

 

Local Limited
Partnership
  Debt at
12/31/11
   Appraisal
Value
   Date of Sale   Sales
Price
   Actual
Appraisal
Expense
   Sales
Related
Expenses
   Gain on
sale
 
Airport Road Associate, LTD  $1,381,000   $950,000    6/01/2012   $22,450   $3,100   $1,471   $17,879 
Am-Kent Associates   1,061,000    940,000    6/01/2012    22,450    3,100    744    18,606 
Elizabeth Square, LP   1,367,000    1,270,000    6/01/2012    22,450    3,100    744    18,606 
Arizona  I   1,412,689    785,000    08/31/2012     25,000    -    481    24,519 
Castroville Village   838,355    710,000    08/31/2012    20,169    -    647    19,522 

 

The following table represents the anticipated use of the cash proceeds from the disposition of the five Local Limited Partnerships.

 

Local Limited
Partnership
  Expected
cash
Proceeds
   Payment of
accrued asset
management fees
   Reimburse
GP or
affiliates for
expenses
   Remaining cash
to  remain in
reserve for future expenses
 
Airport Road Associate, LTD  $22,450   $11,749   $7,701   $3,000 
Am-Kent Associates   22,450    11,749    7,701    3,000 
Elizabeth Square, LP   22,450    11,749    7,701    3,000 
Arizona I   25,000    22,000    -    3,000 
Castroville Village   20,169    17,669    -    2,500 

 

F-8
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

 

For the Quarterly Period Ended September 30, 2012

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Method of Accounting for Investments in Local Limited Partnerships

 

The Partnership accounts for its investments in Local 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 at least annually or whenever events or changes in circumstances indicate that the carrying amount of such investment may not be recoverable. Recoverability of such investment is measured by the estimated value derived by management, generally consisting of the sum of the remaining future Low Income Housing Tax Credits estimated to be allocable to the Partnership and the estimated residual value to the Partnership. If an investment is considered to be impaired, the Partnership reduces the carrying value of its investment in any such Local Limited Partnership. The accounting policies of the Local Limited Partnerships, generally, are expected to be consistent with those of the Partnership. Costs incurred by the Partnership in acquiring the investments are capitalized as part of the investment account and were amortized over 27.5 years (see Note 2).

 

“Equity in losses of Local Limited Partnerships” for the periods ended September 30, 2012 and 2011 has been recorded by the Partnership. Management’s estimate for the three and six-month periods 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 of Local Limited Partnerships allocated to the Partnership are not recognized to the extent that the investment balance would be adjusted below zero. 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 (see Note 2).

 

In accordance with the accounting guidance for the consolidation of variable interest entities, the Partnership determines when it 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. The analysis that must be performed to determine which entity should consolidate a VIE focuses on control and economic factors. 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 has (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. If multiple unrelated parties share such power, as defined, no party will be required to consolidate the VIE. Further, the guidance requires continual reconsideration of the primary beneficiary of a VIE.

 

Based on this guidance, the Local Limited Partnerships in which the Partnership invests meet the definition of a VIE because the owners of the equity at risk in these entities do not have the power to direct their operations. However, management does not consolidate the Partnership’s interests in these VIEs, as it is not considered to be the primary beneficiary since it does not have the power to direct the activities that are considered most significant to the economic performance of these entities. The Partnership currently records the amount of its investment in these Local Limited Partnerships as an asset on its balance sheets, recognize its share of partnership income or losses in the statements of operations, and disclose how it accounts for material types of these investments in its financial statements. The Partnership’s balance in investment in Local Limited Partnerships, plus the risk of recapture of tax credits previously recognized on these investments, represents its maximum exposure to loss. The Partnership’s exposure to loss on these Local Limited Partnerships is mitigated by the condition and financial performance of the underlying Housing Complexes as well as the strength of the Local General Partners and their guarantee against credit recapture to the investors in the Partnership.

 

Distributions received by the Partnership are accounted for as a reduction of the investment balance. Distributions received after the investment has reached zero are recognized as income. As of September 30, 2012, all of the investment balances had reached zero.

 

F-9
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

 

For the Quarterly Period Ended September 30, 2012

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Cash and Cash Equivalents

 

The Partnership considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. As of September 30, 2012 and March 31, 2012, the Partnership had no cash equivalents.

 

Reporting Comprehensive Income

 

The Partnership had no items of other comprehensive income for all periods presented.

 

Income Taxes

 

The Partnership has elected to be treated as a pass-through entity for income tax purposes and, as such, is not subject to income taxes. Rather, all items of taxable income, deductions and tax credits are passed through to and are reported by its owners on their respective income tax returns. The Partnership’s federal tax status as a pass-through entity is based on its legal status as a partnership. Accordingly, the Partnership is not required to take any tax positions in order to qualify as a pass-through entity. The Partnership is required to file and does file tax returns with the Internal Revenue Service and other taxing authorities. Accordingly, these financial statements do not reflect a provision for income taxes and the Partnership has no other tax positions which must be considered for disclosure.

 

Net Loss Per Partnership Unit

 

Net loss per Partnership Unit includes no dilution and is computed by dividing loss allocated to Limited Partners by the weighted average number of Partnership Units outstanding during the period. Calculation of diluted net loss per Partnership Unit is not required.

 

Revenue Recognition

 

The Partnership is entitled to receive reporting fees from the Local Limited Partnerships. The intent of the reporting fees is to offset (in part) administrative costs incurred by the Partnership in corresponding with the Local Limited Partnerships. Due to the uncertainty of the collection of these fees, the Partnership recognizes reporting fees as collections are made.

 

F-10
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

 

For the Quarterly Period Ended September 30, 2012

(Unaudited)

 

NOTE 2 - INVESTMENTS IN LOCAL LIMITED PARTNERSHIPS

 

As of September 30, 2012 and March 31, 2012, the Partnership owns Local Limited Partnership interests in 1 and 6 Local Limited Partnerships, respectively. Each of these Local Limited Partnership’s own one Housing Complex consisting of an aggregate of 42 and 244 apartment units, respectively. The Local General Partners of the Local Limited Partnerships manage the day to day operations of the entities. Significant Local Limited Partnership business decisions require approval from the Partnership. The Partnership, as a Limited Partner, is generally entitled to 99%, as specified in the Local Limited Partnership governing agreements, of the operating profits and losses, taxable income and losses, and tax credits of the Local Limited Partnerships.

 

Selected financial information for the six months ended September 30, 2012 and 2011 from the unaudited combined condensed financial statements of the Local Limited Partnerships in which the Partnership has invested is as follows:

 

COMBINED CONDENSED STATEMENTS OF OPERATIONS

 

   2012   2011 
         
Revenues  $234,000   $1,101,000 
           
Expenses          
Interest expense   21,000    117,000 
Depreciation and amortization   55,000    218,000 
Operating expenses   162,000    875,000 
Total expenses   238,000    1,210,000 
           
Net loss  $(4,000)  $(109,000)
Net loss allocable to the Partnership  $(3,000)  $(108,000)
Net loss recorded by the Partnership  $-   $- 

 

Certain Local Limited Partnerships have incurred significant operating losses and/or have working capital deficiencies. In the event these Local Limited Partnerships continue to incur significant operating losses, additional capital contributions by the Partnership may be required to sustain operations of such Local Limited Partnerships.

  

F-11
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

 

For the Quarterly Period Ended September 30, 2012

(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 the following fees:

 

(a) An annual asset management fee equal to 0.5% of the invested assets of the Partnership, as defined. “Invested Assets” means the sum of the Partnership’s investment in Local Limited Partnership interests and the Partnership’s allocable share of mortgage loans on and other debts related to the Housing Complexes owned by such Local Limited Partnerships. Fees of $14,866 and $38,437 were incurred during the six months ended September 30, 2012 and 2011, respectively. The Partnership paid the General Partner and or its affiliates $114,915 and $33,063 of those fees during the six months ended September 30, 2012 and 2011, respectively.
   
(b) The Partnership reimburses the General Partner or its affiliates for operating expenses incurred by the Partnership and paid for by the General Partner or its affiliates on behalf of the Partnership. Operating expense reimbursements were $46,337 and $86,000 during the six months ended September 30, 2012 and 2011, respectively.
   
(c) A subordinated disposition fee in an amount equal to 1% of the sale price may be received in connection with the sale or disposition of a Housing Complex or Local Limited Partnership interest. Payment of this fee is subordinated to the Limited Partners receiving a preferred return of 6% (as defined in the Partnership Agreement) and is payable only if the General Partner or its affiliates render services in the sales effort. No such fee was incurred for period presented.

 

The accrued fees and expenses due to the General Partner and affiliates consist of the following at:

 

   September 30, 2012   March 31, 2012 
         
Expenses paid by the General Partner or affiliates on behalf of the Partnership  $11,886   $20,985 
Accrued asset management fees   2,407,805    2,507,853 
           
Total  $2,419,691   $2,528,838 

 

The General Partner and/or its affiliates do 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.

 

F-12
 

 

WNC HOUSING TAX CREDIT FUND II, L.P.

(A California Limited Partnership)

 

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

 

For the Quarterly Period Ended September 30, 2012

(Unaudited)

 

NOTE 4 – SUBSEQUENT EVENTS

 

The last Local Limited Partnership, Casa Alegre Apartments (“Casa Alegre”), has been identified for disposition. Casa Alegre was appraised with a value of $925,000 and the outstanding mortgage as of December 31, 2011 was approximately $1,206,354. The Local General Partner has requested to exercise his right to an Option Agreement as outlined in the Limited Partnership Agreement, which was executed by all parties. An offer of $25,000 was accepted for the Local Limited Partnership and the sale of the Local Limited Partnership is scheduled to close on November 16, 2012. The partnership has incurred $12,900 in sales related expenses which will be netted against the proceeds from calculating the gain on sale. The Partnership will use all cash proceeds to pay accrued asset management fees and reimburse the General Partner or affiliates for operating expenses paid on its behalf. The Partnership’s investment balance is zero. No cash distribution will be made to the Limited Partners as a result of this sale. The Compliance Period has been completed therefore there is no risk of recapture and investor approval is not required.

 

F-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, this “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, the Partnership’s 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 the Partnership or persons acting on its behalf are expressly qualified in their entirety by cautionary statements in this Form 10-Q and in other reports filed with the Securities and Exchange Commission.

 

The following discussion and analysis compares the results of operations for the three and six months ended September 30, 2012 and 2011, and should be read in conjunction with the condensed unaudited financial statements and accompanying notes included within this report.

 

Financial Condition

 

The Partnership’s assets at September 30, 2012 consisted of $16,000 in cash and other assets of $4,000. Liabilities at September 30, 2012 consisted of $2,420,000 of accrued fees and expenses due to the General Partner and affiliates.

 

Results of Operations

 

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011. The Partnership’s net income for the three months ended September 30, 2012 was $27,000, reflecting an increase of approximately $35,000 from the $(8,000) net loss experienced during the three months ended September 30, 2011. The change was partially due to a $26,000 increase in gain on sale of Local Limited Partnerships during the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The Partnership is in the disposition phase and the number of dispositions and gains recorded will vary from year to year depending on the economic conditions. Additionally,the asset management fees decreased by $13,000 for the three months ended September 30, 2012. These fees are calculated based on the Invested Assets of the Partnership. As Local Limited Partnerships are sold, the Invested Assets decrease, thereby decreasing the asset management fees incurred by the Partnership. There wasan increase of $5,000 in legal and accounting fees due to the timing of work performed for the Partnership. Reporting fees decreased by $6,000 during the three months ended September 30, 2012. These fees vary depending on when the Local Limited Partnerships’ cash flow will allow for the payment.

 

Six Months Ended September 30, 2012 Compared to the Six Months Ended September 30,2011. The Partnership’s net income for the six months ended September 30, 2012 was $45,000 reflecting an increase of approximately $64,000 from the $(19,000) net loss experienced during the six months ended September 30, 2011. There was a $43,000 increase in gain on sale of Local Limited Partnerships for the six months ended September 30, 2012. The Partnership is in the disposition phase and the number of dispositions and gains recorded will vary from year to year depending on the economic conditions. The decrease was also partially due to a decrease of $23,000 in asset management fees for the six months ended September 31, 2012. These fees are calculated based on the Invested Assets of the Partnership. As Local Limited Partnerships are sold, the Invested Assets decrease, thereby decreasing the asset management fees incurred by the Partnership. Legal and accounting fees decreased by $7,000 for the six months ended September 30, 2012 due to the timing of the work performed. There was a $(9,000) increase in write off of other assets for the six months ended September 30, 2012. Capitalized costs from the potential disposition of Local Limited Partnership were expensed due to the length of time it has taken to dispose of the properties. There was also a decrease of $(6,000) in reporting fees for the six months ended September 30, 2012. These fees vary depending on when the Local Limited Partnerships’ cash flow will allow for the payment.

  

3
 

  

Liquidity and Capital Resources

 

Six Months Ended September 30, 2012 Compared to Six Months Ended September 30, 2011. The net decrease in cash during the six months ended September 30, 2012 was $(49,000) compared to a net decrease in cash during the six months ended September 30, 2011 of $(34,000). The change was primarily due to the fact that during the six months ended September 30, 2012, the Partnership paid $(62,000) of accrued asset management fees to the General Partner or its affiliates along with $(23,000) reimbursed to the General Partner or its affiliates for operating expenses paid on behalf of the Partnership, compared to $(33,000) and $(86,000), respectively, paid during the six months ended September 30, 2011. During the six months ended September 30, 2012, the Partnership received $37,000 in proceeds from the sale of Local Limited Partnerships compared to $88,000 in proceeds received during the six months ended September 30, 2011. Additionally, the Partnership collected $(6,000) less of reporting fees during the six months ended September 30, 2012 compared to the six months ended September 30, 2011 as discussed above.

 

During the six months ended September 30, 2012, accrued payables, which consist primarily of related party asset management fees and advances due to the General Partner, decreased by $109,000. The General Partner does not anticipate that the balance of the accrued fees and advances will be paid until such time as capital reserves are in excess of foreseeable working capital requirements of the Partnership.

 

The Partnership expects its future cash flows, together with its net available assets as of September 30, 2012, to be insufficient to meet all currently foreseeable future cash requirements. Associates have agreed to continue providing advances sufficient enough to fund the operations and working capital requirements of the Partnership through November 30, 2013.

 

Impact of RecentAccounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (VIEs). The amended guidance modified the consolidation model to one based on control and economics, and replaced quantitative primary beneficiary analysis with a qualitative analysis. The primary beneficiary of a VIE will be the entity that has (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. If multiple unrelated parties share such power, as defined, no party will be required to consolidate the VIE. Further, the amended guidance requires continual reconsideration of the primary beneficiary of a VIE and adds an additional reconsideration event for determination of whether an entity is a VIE. Additionally, the amendment requires enhanced and expanded disclosures around VIEs. This amendment was effective for fiscal years beginning after November 15, 2009. The adoption of this guidance on April 1, 2010 did not have a material effect on the Partnership’s financial statements.

 

In May 2011, the FASB issued an update to existing guidance related to fair value measurements on how to measure fair value and what disclosures to provide about fair value measurements. For fair value measurements categorized as level 3, a reporting entity should disclose quantitative information of the unobservable inputs and assumptions, a description of the valuation processes and narrative description of the sensitivity of the fair value to changes in unobservable inputs. This update is effective for interim and annual periods beginning after December 15, 2011. The adoption of this update did not materially affect the Partnership’s condensed financial statements.

 

4
 

  

Item 3. Quantitative and Qualitative Disclosures About Market Risks

 

NOT APPLICABLE

 

Item 4. Controls and Procedures

 

(a) Disclosure controls and procedures
   
  As of the end of the period covered by this report, the Partnership’s General Partner, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of Associates, carried out an evaluation of the effectiveness of the Partnership’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 Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Partnership’s disclosure controls and procedures were not effective to ensure that material information required to be disclosed in the Partnership’s periodic report filings with SEC is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms, consistent with the definition of “disclosure controls and procedures” under the Securities Exchange Act of 1934.
   
  The Partnership must rely on the Local Limited Partnerships to provide the Partnership with certain information necessary to the timely filing of the Partnership’s periodic reports. Factors in the accounting at the Local Limited Partnerships have caused delays in the provision of such information during past reporting periods, and resulted in the Partnership’s inability to file its periodic reports in a timely manner.
   
  Once the Partnership has received the necessary information from the Local Limited Partnerships, the Chief Executive Officer and the Chief Financial Officer of Associates believe that the material information required to be disclosed in the Partnership’s periodic report filings with SEC is effectively recorded, processed, summarized and reported, albeit not in a timely manner. Going forward, the Partnership will use the means reasonably within its power to impose procedures designed to obtain from the Local Limited Partnerships the information necessary to the timely filing of the Partnership’s periodic reports.
   
(b) 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, 2012 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

5
 

   

Part II. Other Information
   
Item 1. Legal Proceedings
   
  NONE
   
Item 1A. Risk Factors
   
  No material changes in risk factors as previously disclosed in the Partnership’s Form 10-K
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
  NONE
   
Item 3 Defaults Upon Senior Securities
   
  NONE
   
Item 4.

Mine Safety Disclosures

 

NOT APPLICABLE

   
Item 5 Other Information
   
  NONE
   
Item 6. Exhibits

 

32.1   Certification of the Principal Executive Officer pursuant to Rule 13a-14 and 15d-14, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
     
32.2   Certification of the Principal Financial Officer pursuant to Rule 13a-14 and 15d-14, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
     
32.3   Section 1350 Certification of the Chief Executive Officer. (filed herewith)
     
32.4   Section 1350 Certification of the Chief Financial Officer. (filed herewith)

 

101   Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Balance Sheets at September 30, 2012 and March 31, 2012, (ii) the Condensed Statements of Operations for the three and six-month periods ended September 30, 2012 and September 30, 2011, (iii) the Condensed Statements of Cash Flows for the six months ended September 30, 2012 and September 30, 2011 and (iv) the Notes to Condensed Financial Statements.
     
    Exhibits 32.1, 32.2 and 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibits shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or Securities Exchange Act of 1934.

 

6
 

  

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: /s/ Wilfred N. Cooper, Jr  
Wilfred N. Cooper, Jr.  
President and Chief Executive Officer of WNC & Associates, Inc.

  

Date: November 13, 2012

  

By:  /s/ Melanie R. Wenk  
Melanie R. Wenk  
Vice-President - Chief Financial Officer of WNC & Associates, Inc.

  

Date: November 13, 2012

 

7