ITEM 1. BUSINESS
Century Pacific Tax Credit Housing Fund-II (CPTCHF-II or the Partnership) was formed on September 2, 1988 as a limited partnership under the laws of the State of California to invest in multifamily housing developments (the Properties). The Partnership's business is to invest primarily in other limited partnerships (Operating Partnerships) that are organized for the purposes of either constructing or acquiring and operating existing affordable multifamily rental apartments (the Properties) that are eligible for the Low Income Housing Tax Credit, or to a lesser extent, the Rehabilitation Tax Credit, both enacted by the Tax Reform Act of 1986 (sometimes referred to as Credits or Tax Credits). The Partnership has invested in two Properties, each of which qualifies for the Low Income Housing Tax Credit. Both of these Properties receive one or more forms of assistance from Federal, state or local governments. A summary of the Partnership's objectives and a summary of the Tax Credits are provided in the Prospectus under "Investment Objectives and Policies" and "Federal Income Tax Aspects" on pages 45 and 79, respectively, and are incorporated herein by reference.
The partnership does not employ any persons. Alternatively, the partnership reimburses an affiliate for allocated overhead, consisting primarily of payroll costs.
In order to stimulate private investment in low and moderate income housing of the types in which CPTCHF-II has invested, the federal government, through the Department of Housing and Urban Development (HUD), has provided investors with significant ownership incentives, such as interest subsidies, rent supplements, mortgage insurance and other measures, with the intent of reducing the risks and providing the investors/owners with certain tax benefits, limited cash distributions and the possibility of long-term capital gains. However, there are significant risks inherent in this type of housing. Long-term investments in real estate limit the ability of CPTCHF-II to vary its portfolio in response to changing economic, financial and investment conditions, rising operating costs and vacancies, rent controls and collection difficulties, costs and availability of energy, as well as other factors which normally affect real estate values. In addition, these Properties usually are rent restricted and are subject to Government Agency programs which may or may not require prior consent to transfer ownership.
The Partnership acquired the Properties by investing as the limited partner in Operating Partnerships which own the Properties. As a limited partner, CPTCHF-II's liability for obligations of the Operating Partnerships is limited to its investment. The Partnership made capital contributions to the Operating Partnerships in amounts sufficient to pay the Operating Partnerships' expenses and to reimburse the General Partners for their costs incurred in forming the Operating Partnerships, if any, and acquiring the Properties. For each acquisition, this typically included a cash down payment (in one or more installments), acceptance of the Property's mortgage indebtedness, and execution of a Purchase Money Note in favor of the seller of the Property.
The Partnership's primary objective is to provide Low-Income Housing Tax Credits to its limited partners generally over a 10-year period. Each of the Partnership's Operating Partnerships has been allocated, by the relevant state tax credit agency, an annual amount of the Low-Income Housing Tax Credits for 10 years from the date the Property was placed in service. The required holding period of the Properties is 15 years (the Compliance Period). The Properties must satisfy rent restriction, tenant income limitations and other requirements (the Low-Income Housing Tax Credit Requirements) in order to maintain eligibility for recognition of the Low-Income Housing Tax Credits at all times during the Compliance Period. Once an Operating Partnership has become eligible for the Low-Income Housing Tax Credits, it may lose such eligibility and suffer an event of recapture if its Property fails to remain in compliance with the Low-Income Housing Tax Credit Requirements. To date, neither of the Operating Partnerships have suffered an event of recapture of Low-Income Housing Tax Credit.
ITEM 2.
ITEM 2. PROPERTIES
As of March 31, 2003, CPTCHF-II had acquired equity interests in the Operating Partnerships set forth in the table below. Each of the Properties acquired by the Operating Partnerships receives benefits under government assistance programs provided by HUD. One of the Properties also receives benefits from the Illinois Housing Development Authority (IHDA). The table below summarizes the Operating Partnerships acquired and the government assistance programs benefiting each Property. Further information concerning these Properties may be found in Supplement No. 2 to the Prospectus, pages 4 through 66, which information is incorporated herein by reference and is summarized below.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of July 31, 2003, there were no pending legal proceedings against CPTCHF-II or any Operating Partnership in which it has invested.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As of March 31, 2003, there were no submissions of matters to a vote of security holders.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS
There is at present no public market for the units of limited partnership interests (the Units), and it is unlikely that any public market for the Units will develop. See the Prospectus under "Transferability of Interests" on pages 24 and 52 of the Prospectus, which information is incorporated herein by reference. The number of owners of Units as of June 3, 2003 was approximately 519, holding 5,754 units.
As of July 31, 2003, there were no cash distributions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below, insofar as they relate to each of the three years ended March 31, 2003, and as of March 31, 2003 and 2002, are derived from, and are qualified by reference to, our audited financial statements included herein and should be read in conjunction with those financial statements and the notes thereto. The selected financial data as of March 31, 2001, 2000 and 1999 and for the years ended March 31, 2000 and 1999 are derived from audited financial statements not included herein. Results for past periods are not necessarily indicative of results that may be expected for future periods.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership offered limited partnership interests to the public during calendar year 1989, pursuant to a Registration Statement filed under the Securities Act of 1933. The Partnership raised $5,754,000 in equity capital and, thereafter, invested in Operating Partnerships, which own multifamily Properties located in Illinois and Massachusetts. These properties under Section 42 of the Internal Revenue Code earn low-income housing tax credits which are passed through to the individual partners of the Partnership. Low-Income housing tax credits earned by the Partnership for calendar years 2002, 2001 and 2000 were $23,744 per year. 2002 was the final year of the Partnership receiving low-income housing tax credits.
As of March 31, 2003, the Partnership portfolio consists of two Properties totaling 533 units. For a summary of the combined financial status of the Operating Partnerships and the Properties, see the financial information contained under ITEM 15.
The government restricts rental rate increases. A substantial amount of the revenue generated by these properties comes from rental subsidy payments made by federal or state housing agencies. These features, which are characteristic of all low-income housing properties, limit the pool of potential buyers for these real estate assets. As a limited partner of the Operating Partnerships, the Partnership does not control property disposition decisions, and management is not aware of any plans or intentions of the general partners of these partnerships to sell any of the investment properties in the near future.
The Partnership is currently experiencing a liquidity problem. Under the Partnership Agreement, the Partnership is entitled to receive distributions of surplus cash from the Operating Partnerships which is to provide the funds necessary for the Partnership to meet its administrative expenses and pay the Partnerships management fee. At the present time, the Operating Partnerships have not generated sufficient cash distributions to fund the Partnership's expenses. As a result of the foregoing, the Partnership has been dependent upon its affiliates and the General Partners for continued financial support to meet its expenses. Though there can be no assurance, management believes that affiliates and/or the General Partners, though not required to do so, will continue to fund operations of the Partnership and defer receipt of payment of allocated overhead administrative expenses and partnership management fees. Allocated administrative expenses paid or accrued to affiliates and the General Partners represent reimbursement of the actual cost of goods and materials used for or by the Partnership, salaries, related payroll costs and other administrative items incurred or allocated, and direct expenses incurred in rendering legal, accounting/bookkeeping, computer, printing and public relations services. Items excluded from the overhead allocation include overhead expenses of the General Partners, including rent and salaries of employees not specifically performing the services described above. Unpaid allocated administrative expenses and partnership management fees, an annual amount up to ..5% of invested assets, will accrue for payment in future operating years.
The Partnership is not expected to have access to any significant sources of financing. Accordingly, if unforeseen contingencies arise that cause an Operating Partnership to require additional capital to sustain operations, in addition to that previously contributed by the Partnership, the source of the required capital needs may be from (i) limited reserves from the Partnership (which may include distributions received from Operating Partnerships that would otherwise be available for distribution to partners), (ii) debt financing at the Operating partnership level (which may not be available), or (iii) additional equity contributions from the general partner of the Operating Partnerships (which may not be available). There can be no assurance that any of these sources would be readily available to provide for possible additional capital requirements which may be necessary to sustain the operations of the Operating Partnerships.
Contractual Obligations
The Operating Partnerships' contractual cash obligations and other commercial commitments at March 31, 2003 are summarized in the following table:
Tax Reform Act of 1986, Ominbus Budget Reconciliation Act of 1987, Technical and Miscellaneous Revenue Act of 1988, Ominbus Budget Reconciliation Act of 1989 and Ominbus Budget Reconciliation Act of 1990 and all subsequent tax acts.
The Partnership is organized as a limited partnership and is a "pass through" tax entity which does not, itself, pay federal income tax. However, the partners of the Partnership, who are subject to federal income tax, may be affected by the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, the Ominbus Budget Reconciliation Act of 1989 and the Ominbus Budget Reconciliation Act of 1990 and all subsequent tax acts (collectively the Tax Acts). The Partnership will consider the effect of certain aspects of the Tax Acts on the partners when making investment decisions. The Partnership does not anticipate that the Tax Acts will have a material adverse impact on the Partnership's business operations, capital resources, plans or liquidity.
Results of Operations
The fiscal year of the Partnership ends on March 31 of each year, however, the fiscal year of each Operating Partnership ends on December 31. Therefore, the earnings and losses of the Operating Partnerships reflected on the equity method in the Partnership's financial statements for its current fiscal year are for the calendar year ended December 31, 2002.
2003 Compared to 2002
For the fiscal year ended March 31, 2003, the Partnership recorded a net loss of approximately $208,000, as compared to a net loss of approximately $209,000 for the prior fiscal year. The decrease in net loss is the result of a small decrease in the Partnership's expenses of approximately $1,000.
In accordance with the equity method of accounting for limited partnership interests, the Partnership does not recognize losses from investment properties when losses exceed the Partnership's equity method basis in these properties. One of the two investments has had an equity method basis of zero since March 31, 1993. The recorded share of the Partnership's other investment on an equity method basis was reduced to zero in 2001.
In the aggregate, combined rental revenue of the Operating Partnerships increased during the current calendar year. The average occupancy level for Plumley Village remained constant at 99% in calendar year 2002, but Washington Court increased to 94% occupancy level in the current year. The combined total expenses of the two operating properties decreased by approximately $43,000 in the current year primarily due to decreases in interest, repairs and maintenance and management fees offset with increases in utilities, other operating expenses and depreciation.
2002 Compared to 2001
For the fiscal year ended March 31, 2002, the Partnership recorded a net loss of approximately $209,000, as compared to a net loss of approximately $620,000 for the prior fiscal year. The decrease in net loss is the result of the decrease in the Partnership's equity in net losses of the Operating Partnerships of approximately $430,000, offset by a small increase in the expenses of approximately $19,000 in 2002.
In accordance with the equity method of accounting for limited partnership interests, the Partnership does not recognize losses from investment properties when losses exceed the Partnership's equity method basis in these properties. One of the two investments has had an equity method basis of zero since March 31, 1993. The recorded share of the Partnership's other investment on an equity method basis was reduced to zero in 2001.
In the aggregate, combined rental revenue of the Operating Partnerships increased during 2002. The average occupancy level for Plumley Village remained constant at 99% in calendar year 2001, but Washington Court increased to 91% occupancy level in calendar year 2001. The combined total expenses of the two operating properties increased by approximately $270,000 in 2002 primarily due to an increase in utilities, other operating expenses, interest, and depreciation expense.
Inflation
Inflation is not expected to have a material adverse impact on the Partnership's operations during its period of ownership of the Properties.
Other
The Partnership's operations are not subject to any significant seasonal fluctuations. The Partnership believes it is in compliance with environmental regulations and does not anticipate material effects of continued compliance.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The financial statements together with the report of the independent auditors thereon are set forth on the pages indicated in ITEM 15.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no officers or directors. Management of the Partnership is vested in Irwin Jay Deutch and Century Pacific Capital II Corporation (CPII) (the General Partners). The General Partners will involve themselves in the day-to-day affairs of the Partnership as required to protect the Limited Partners' investment and advance the Partnership's investment objectives. Mr. Deutch, the Managing General Partner, has the overall responsibility for the preparation and transmittal of periodic reports to the Limited Partners, preparation and filing of the Partnership's tax returns with the IRS and the appropriate state tax authorities, and the preparation and filing of reports to HUD and other Government Agencies.
Following is biographical information on Mr. Deutch and the Executive Officers of CPII:
IRWIN JAY DEUTCH
Irwin Jay Deutch, age 62, is Chairman of the Board, President, and Chief Executive Officer of Century Pacific Realty Corporation (CPRC), a General Partner of the Operating Partnerships that own the Properties in which CPTCHF-II has invested, and its Affiliates. Mr. Deutch has been involved with low-income housing investments since 1968. He is the individual general partner in 62 private limited partnerships and two public limited partnerships investing in 209 properties, including 196 multifamily properties with 33,700 apartment units, 10 commercial projects, and 3 hotel properties. Fifty-eight of the 62 private limited partnerships have invested in affordable housing. In his capacity as general partner and officer of CPRC, he oversees the management of these partnerships and assumes overall responsibility for the development, direction, and operation of all affiliated CPRC companies. Mr. Deutch is recognized as an expert in the field of affordable housing and frequently addresses professional groups on topics of real estate investment, syndication, tax law, and the Low-Income Housing Tax Credit program.
Mr. Deutch received a B.B.A. with distinction from the University of Michigan School of Business Administration in 1962 and a Juris Doctor degree with honors from the University of Michigan Law School in 1965. He is a member of the Order of the Coif. Mr. Deutch served in the Honors Program in the Office of the Chief Counsel of the Internal Revenue Service from 1965 to 1967, where he was assigned to the Interpretative Division in Washington, D.C. He attended Georgetown Law Center and received his Master of Laws degree in taxation in 1967. Mr. Deutch is a member of the State Bars of Michigan and California, as well as the American, Federal, Los Angeles, and Beverly Hills Bar Associations.
KEY OFFICERS OF CPII AND AFFILIATES
ESSIE SAFAIE, age 53, is Chief Financial Officer and Chief Operating Officer of CPRC. Prior to joining CPRC in 1988, from 1985-88, he was Vice President and Chief Financial Officer of Sunrise Investments, Inc., a real estate syndication firm with $450 million of real estate under management. During this period, Mr. Safaie was also President of an affiliated property management firm, S&L Property Management, Inc., with over 12,000 residential units and 800,000 square feet of commercial office space under direct management. From 1982 to 1985, Mr. Safaie was assistant controller of Standard Management Company, builders and managers of luxury hotels, commercial offices and residential units. From 1980-1982, he served as financial officer of Diamond "M" Drilling Company. Mr. Safaie received a BA degree in Business Administration from California State University with a major in accounting.
CHARLES L. SCHWENNESEN, age 57, is Vice President of Acquisition Finance for CPRC and is responsible for financial analysis and "due diligence" reviews of all properties acquired by CPRC. Prior to joining CPRC in 1987, he was a consultant to companies which provided investment opportunities through private placements. From 1984 to 1985, Mr. Schwennesen was Vice President of Cranston Securities Company and was responsible for the structuring of more than $30 million of mortgage revenue bond financing for affordable housing projects. From 1977 to 1984, Mr. Schwennesen was a manager with the accounting firm of Price Waterhouse where he specialized in providing auditing and consulting services to publicly held California real estate development companies involved in the affordable housing industry. Mr. Schwennesen is a Certified Public Accountant and holds a Masters degree in Business Administration from the UCLA Graduate School of Management and a B.A. degree in Mathematics from UCLA.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no officers or directors. However, in connection with the operations of the partnership and the Operating Partnerships, the General Partners and their Affiliates will or may receive certain fees, compensation, income and other payments which are described in the Prospectus under "Compensation, Fees and Reimbursements" on page 17, the terms of which are incorporated herein by reference.
During the fiscal years ended March 31, 2003, 2002 and 2001, CPII, a General Partner of the Partnership, earned $162,091, $159,321, and $150,049, respectively, of partnership management fees. During the fiscal years ended March 31, 2003, 2002 and 2001, the Partnership accrued $37,600, $37,600, and $37,600, respectively, for the reimbursement of overhead allocation from Century Pacific Equity Corporation (CPEC). During fiscal year 2003, the General Partners received no payments from the Operating Partnerships.
ITEM 12.
ITEM 12. PARTNERSHIP INTEREST OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No partner in CPTCHF-II owns more than 5% of the total number of partnership interests outstanding. Irwin J. Deutch, the Managing General Partner, holds a one-half percent General Partnership Interest.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Irwin J. Deutch is the Managing General Partner of CPTCHF-II, and CPII is also a General Partner. Irwin J. Deutch is the sole Director and President of CPII, and the stock of CPII is solely owned by the Deutch Family Trust. Mr. Deutch is also the President, sole Director and the Deutch Family Trust is the sole stockholder of Century Pacific Realty Corporation (CPRC), a General Partner of the Operating Partnerships that own the Properties in which CPTCHF-II has invested. CPII received a partnership management fee for its services in managing and advising the Partnership and its business. CPEC, an affiliate, provides all the services and materials necessary for the operation of the Partnership and is reimbursed for actual costs. These transactions are more particularly set forth in the financial statements found under ITEM 15.
As of March 31, 2003, a third-party buyer had entered into a conditional contract to acquire CP Equity, CP Capital, CP Realty, and their affiliated companies and partnerships from Deutch's family trust. As of March 31, 2003, these acquisitions had not yet occurred, but are anticipated to occur in 2003.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Partnership's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Partnership's disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c) as of a date within ninety days before the filing date of this report. Based on that evaluation, they have concluded that the Partnership's current disclosure controls and procedures are effective in timely providing them with material information relating to the Partnership required to be disclosed in the reports the Partnership files or submits under the Exchange Act.
(b) Changes in Internal Controls
There have not been any significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to June 30, 2003, the date of evaluation. There were no significant deficiencies or material weaknesses, and, therefore, no corrective actions were taken.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
INDEPENDENT AUDITORS' REPORT
Partners
Century Pacific Tax Credit Housing Fund - II
We have audited the accompanying balance sheet of Century Pacific Tax Credit Housing Fund - II as of March 31, 2003 and 2002, and the related statements of operations, partners' equity (deficit) and cash flows for each of the three years in the period ended March 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Century Pacific Tax Credit Housing Fund - II as of March 31, 2003 and 2002 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 6 to the financial statements, the Partnership has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans regarding these matters also are described in Note 6. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed under Item 15 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ RUBIN, BROWN, GORNSTEIN & CO., LLP St. Louis, Missouri June 3, 2003
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II BALANCE SHEET
See the accompanying report letter and notes to financial statements.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II STATEMENT OF PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
See the accompanying report letter and notes to financial statements.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II STATEMENT OF OPERATIONS
See the accompanying report letter and notes to financial statements.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II STATEMENT OF CASH FLOWS
See the accompanying report letter and notes to financial statements.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II
NOTES TO FINANCIAL STATEMENTS MARCH 31, 2003, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Partnership maintains its financial records on the tax basis. Memorandum entries, while not recorded in the records of the Partnership, have been made in order to prepare the financial statements in accordance with accounting principles generally accepted in the United States of America.
On August 7, 1991, management of the Partnership changed from a calendar year end to a fiscal year end of March 31 for financial reporting purposes. Accordingly, the Partnership's quarterly periods end June 30, September 30 and December 31. The Operating Partnerships, for financial reporting purposes, have a calendar year. The Partnership, as well as the Operating Partnerships, have a calendar year for income tax purposes.
ESTIMATES AND ASSUMPTIONS
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 reported period. Actual results could differ from those estimates.
INVESTMENTS IN OPERATING PARTNERSHIPS
The Partnership uses the equity method to account for its investments in the Operating Partnerships (Note 4). Under the equity method of accounting, the investments are carried at cost and adjusted for the Partnership's share of the Operating Partnerships' results of operations and by cash distributions received. Equity in the loss of each Operating Partnership allocated to the Partnership is not recognized to the extent that the investment balance would become negative.
SYNDICATION COSTS
Public offering costs have been recorded as a direct reduction to the capital accounts of the Limited Partners.
See the accompanying report letter
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II
Notes To Financial Statements (Continued)
INCOME TAXES
No provision has been made for income taxes in the accompanying financial statements since such taxes and/or the recapture of the Low-Income Housing Tax Credit benefits received, if any, are the liability of the individual partners. The Partnership uses the accrual method of accounting for tax purposes.
NET LOSS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Net loss per unit of limited partnership interest is calculated based upon the weighted average number of units of limited partnership interest (units) outstanding.
2. OPERATIONS
Century Pacific Tax Credit Housing Fund-II, a California limited partnership, (the Partnership or CPTCHF-II), was formed on September 2, 1988 for the purpose of raising capital by offering and selling limited partnership interests and then acquiring limited partnership interests in partnerships (the Operating Partnerships) owning and operating existing residential apartment rental properties (the Properties).
The general partners of the Partnership are Century Pacific Capital II Corporation, a California corporation (CPII), and Irwin Jay Deutch, an individual (collectively, the general partners). The general partners and affiliates of the general partners (the general partners and affiliates) have interests in the Partnership and receive compensation from the Partnership and the Operating Partnerships (Note 3).
The Properties qualify for the Low-Income Housing Tax Credit established by Section 42 of the Tax Reform Act of 1986 (the Low-Income Housing Tax Credit). These properties are leveraged low-income multifamily residential complexes and receive one or more forms of assistance from federal, state or local governments, or agencies (the Government Agencies).
In September 1988, the Partnership began raising capital from sales of limited partnership interests, at $1,000 per unit, to limited partners. The Partnership authorized the issuance of a maximum of 25,000 Partnership Units of which 5,754 were subscribed and issued. The limited partnership interest offering closed as of December 31, 1989.
As of March 31, 2003, the Partnership has acquired limited partnership interests of 90% in Washington Courts Limited Partnership and 60% in Laurel-Clayton Limited Partnership, two existing Operating Partnerships which own apartment rental properties.
See the accompanying report letter.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II
Notes To Financial Statements (Continued)
The Partnership is currently experiencing a liquidity problem as the Partnership's Operating Partnerships have not achieved operating results required to provide the Partnership with sufficient cash distributions to fund the Partnership's administrative costs. As a result of the foregoing, the Partnership has been dependent upon its affiliates and the general partners for continued financial support to meet its expenses. Though there can be no assurance, management believes that affiliates and/or the general partners, though not required to do so, will continue to fund operations of the Partnership and defer receipt of payment on management fees and allocated overhead expenses. Unpaid management fees and allocated overhead expenses will accrue for payment in future operating years.
3. TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES OF THE GENERAL PARTNERS
Century Pacific Placement Corporation (CPPC), an affiliate of the general partners, served as the broker-dealer-manager for sales of the limited partnership interests in the Partnership. Century Pacific Realty Corporation (CPRC), an affiliate of CPII, is a general partner in each of the Operating Partnerships.
The general partners have an aggregate one percent interest in the Partnership. CPRC has a one-half percent interest in each of the Operating Partnerships.
The general partners and affiliates receive compensation and reimbursement of expenses from the Partnership, as set forth in the limited partnership agreement, for their services in managing the Partnership and its business. Pursuant to the partnership agreement, the Partnership is required to pay CPII an annual management fee for its services in connection with the management of the affairs of the Partnership. The annual management fee is equal to .5% of invested assets (as defined by the partnership agreement). The general partners and affiliates also receive compensation and reimbursement of expenses from the Operating Partnerships. This compensation and reimbursement includes services provided to the Partnership during its offering stage, acquisition stage and operational stage.
See the accompanying report letter.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II
Notes To Financial Statements (Continued)
The general partners and affiliates earned the following fees for services provided to the Partnership and were entitled to reimbursement for costs incurred by the general partners and affiliates on behalf of the Partnership and the Operating Partnerships for the years ended March 31, 2003, 2002 and 2001 as follows:
At March 31, 2003 and 2002, non-interest bearing amounts due to affiliates consist of fees and certain general and administrative costs payable by the Partnership to the general partners and affiliates totaling $1,695,781 and $1,533,690, respectively.
At March 31, 2003 and 2002, CPII owed the Partnership for an unsecured, noninterest bearing advance of $871.
At March 31, 2003 and 2002, CPRC was owed $40,594 for a noninterest bearing, demand, cash advance to the Partnership.
As of March 31, 2003 and 2002, CPII was owed $568,254 and $529,399, respectively, for a noninterest bearing, demand cash advance made to the Partnership.
The general partners may advance funds to the Partnership to fund operating deficits, but are not obligated to do so. Such advances shall be evidenced by a promissory note of a term no more than 12 months in length and at a rate of interest no lower than the prime rate. All such loans shall be repaid prior to any distributions of net cash. At March 31, 2003 and 2002, the Partnership had no outstanding advances due to the general partners.
4. INVESTMENTS IN OPERATING PARTNERSHIPS
At March 31, 2003 and 2002, the Partnership owned limited partnership interests in two Operating Partnerships, each of which has invested in a Property.
See the accompanying report letter.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II
Notes To Financial Statements (Continued)
Investments in Operating Partnerships consist of the following:
The names and locations of the Properties in which the Operating Partnerships hold beneficial interests are as follows:
A summarized combined balance sheet as of December 31, 2002 and 2001 and statements of operations of the aforementioned Operating Partnerships for the years then ended follows:
See the accompanying report letter.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II
Notes To Financial Statements (Continued)
5. COMMITMENTS AND CONTINGENCIES
The Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD) exercise control over the projects through provisions of Regulatory Agreements (the Agreements). The Agreements restrict the Projects, without prior written approval from HUD, from encumbering, acquiring, altering or disposing of land, buildings and equipment; using the Properties for any purpose other than the use originally intended; engaging in any other business or activity; and paying distributions to partners, compensation to officers or directors, or for any purpose other than reasonable operating expenses. The Agreements also stipulate that FHA and HUD shall control the rental rates, rate of return on investment and method of operation.
See the accompanying report letter.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II
Notes To Financial Statements (Continued)
In addition, the Agreements require the Properties to make cash deposits on a monthly basis into a reserve fund for replacements. The respective mortgagees are the designated custodians of the reserve funds and withdrawals can only be made with HUD approval.
6. GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Partnership as a going concern. However, the Partnership's Operating Partnerships have not achieved the operating results required to provide the Partnership with sufficient cash distributions to fund the Partnership's administrative costs. Additionally, the Partnership has incurred allocated losses from both of its Operating Partnerships to the extent of the Partnership's cash contributions. As a result of the foregoing, the Partnership is dependent upon the general partners and affiliates for continued financial support.
Management maintains that the general partners and affiliates, though not required to do so, will continue to fund operations by deferring payment to related parties of allocated overhead expenses, and by funding any Partnership operating costs. Unpaid allocated overhead expenses will accrue and become payable when the Operating Partnerships generate sufficient cash distributions to the Partnership to cover such expenses. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
See the accompanying report letter.
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II
Notes To Financial Statements (Continued)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
CASH
The carrying amount approximates fair value because of the short maturity of those instruments.
RELATED PARTY RECEIVABLES
The carrying amount approximates fair value because of the short-term nature of the receivables.
ADVANCE FROM AFFILIATE
The carrying amount approximates fair value because of the short-term nature of the advance.
PAYABLE TO RELATED PARTIES
The carrying amount approximates fair value because the terms of the payable are similar to currently available terms and conditions for similar instruments.
See the accompanying report letter.
Schedule III Page 1 Of 1
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II REAL ESTATE AND ACCUMULATED DEPRECIATION OF OPERATING PARTNERSHIPS IN WHICH CPTCHF-II HAS LIMITED PARTNERSHIP INTERESTS DECEMBER 31, 2002
See notes to schedule
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF OPERATING PARTNERSHIPS IN WHICH CPTCHF-II HAS LIMITED PARTNERSHIP INTERESTS DECEMBER 31, 2002
NOTE 1 - DESCRIPTION OF PROPERTIES
The Properties held by the Operating Partnerships in which CPTCHF-II has invested are housing projects, primarily for families and elderly or handicapped individuals of low and moderate income.
NOTE 2 - SCHEDULE OF ENCUMBRANCES
NOTE 3 - RECONCILIATION OF REAL ESTATE AND ACCUMULATED DEPRECIATION
Schedule IV Page 1 of 1
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II MORTGAGE LOANS ON REAL ESTATE OF OPERATING PARTNERSHIPS IN WHICH CPTCHF-II HAS LIMITED PARTNERSHIP INTERESTS DECEMBER 31, 2002
CENTURY PACIFIC TAX CREDIT HOUSING FUND-II NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE OF OPERATING PARTNERSHIPS IN WHICH CPTCHF-II HAS LIMITED PARTNERSHIP INTERESTS DECEMBER 31, 2002
NOTE 1 - DESCRIPTION
Each Operating Partnership has invested in a Property.
Laurel-Clayton Limited Partnership assumed a mortgage loan obligation from the seller of the Property. The mortgage loan obligation is insured by the United States Department of Housing and Urban Development and is secured by the land and buildings of the Property.
Washington Courts Limited Partnership has obtained permanent financing in the principal amount of $5,165,400 which is insured by the Federal Housing Administration. The loan bears interest at 9.25% per annum. The note will be amortized over a period of 40 years.
NOTE 2 - RECONCILIATION OF MORTGAGES
S2100-020 INDEPENDENT AUDITORS' REPORT
To The Partners Washington Courts Limited Partnership
We have audited the accompanying balance sheet of Washington Courts Limited Partnership, Project No. 071-35593, a limited partnership, as of December 31, 2000 and 1999, and the related statements of profit and loss, partners' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Washington Courts Limited Partnership as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ RUBIN, BROWN, GORNSTEIN & CO., LLP
March 2, 2001
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WASHINGTON COURTS LIMITED PARTNERSHIP 071-35593 - -------------------------------------------------------------------------------- BALANCE SHEET PAGE 1 OF 2
- -------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 2
WASHINGTON COURTS LIMITED PARTNERSHIP 071-35593 - -------------------------------------------------------------------------------- BALANCE SHEET PAGE 2 OF 2
- -------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 3
WASHINGTON COURTS LIMITED PARTNERSHIP 071-35593 - -------------------------------------------------------------------------------- STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED DECEMBER 31, 2000
Page 1 of 2
- -------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 4
Page 2 of 2
------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 5
WASHINGTON COURTS LIMITED PARTNERSHIP 071-35593 - -------------------------------------------------------------------------------- STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED DECEMBER 31, 1999
Page 1 of 2
- -------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 6
Page 2 of 2
- -------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 7
WASHINGTON COURTS LIMITED PARTNERSHIP 071-35593 - -------------------------------------------------------------------------------- SCHEDULE OF SUB-ACCOUNTS
- -------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 8a
WASHINGTON COURTS LIMITED PARTNERSHIP 071-35593 ------------------------------------------------------------------------------ STATEMENT OF PARTNERS' EQUITY
- -------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 9
WASHINGTON COURTS LIMITED PARTNERSHIP 071-35593 - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS PAGE 1 OF 2
- -------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 10
WASHINGTON COURTS LIMITED PARTNERSHIP 071-35593 - -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS PAGE 2 OF 2
- -------------------------------------------------------------------------------- See the accompanying notes to financial statements. Page 11
WASHINGTON COURTS LIMITED PARTNERSHIP 071-35593 ------------------------------------------------------------------------------ NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (S3100-010)
ORGANIZATION (S3100-010)
Washington Courts Limited Partnership (the Partnership) was organized as a limited partnership formed April 6, 1988 to acquire an interest in real property located in Chicago, Illinois and to construct and operate thereon an apartment complex (the Project) of 103 units under Section 221(d)(4) of the National Housing Act. Such projects are regulated by the U.S. Department of Housing and Urban Development (HUD) and the Illinois Housing Development Authority (IHDA) as to rent charges and operating methods. The regulatory agreements limit annual distributions of net operating receipts to surplus cash available at the end of each year. There was no available surplus cash at December 31, 2000 and 1999.
The following significant accounting policies have been followed in the preparation of the financial statements:
Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses.
The Partnership provides an allowance for doubtful accounts equal to the estimated collection losses that will be incurred in collection of all receivables. The estimated losses are based on a review of the current status of the existing receivables. No allowance for doubtful accounts was provided for at December 31, 2000 or 1999 as none was deemed necessary by management.
Depreciation is provided using primarily the straight-line method over the estimated useful lives of the assets ranging from seven to twenty-seven and a half years.
The replacement reserve can only be used for improvements to buildings upon prior approval of HUD.
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WASHINGTON COURTS LIMITED PARTNERSHIP - ------------------------------------------------------------------------------ Notes To Financial Statements (Continued)
Deferred loan costs consist of fees for obtaining the HUD insured mortgage loan and are being amortized using the straight-line method over the life of the mortgage loan.
Low-income housing credit fees are amortized over ten years.
In December 1999, a portion of the general partnership interest was converted to a special limited partner interest. Due to this, at December 31, 1999 income or loss of the Partnership will be allocated 1.005% to the general partners and 98.995% to the limited partners. No income tax provision has been included in the financial statements since income or loss of the Partnership is required to be reported by the partners on their respective income tax returns. No adjustment of financial statement loss to tax loss is required.
2. OTHER ASSETS (S3100-X3X) (S3100-240)
Other assets consist of:
3. MORTGAGE PAYABLE (S3100-050)
The 9.25% mortgage note payable is insured by HUD and is payable in monthly installments of $40,841 (including principal and interest) through February 2031. The note is secured by a first deed of trust on real estate.
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WASHINGTON COURTS LIMITED PARTNERSHIP - ------------------------------------------------------------------------------ Notes To Financial Statements (Continued)
The scheduled maturities of the mortgage payable at December 31, 2000 are as follows: (S3100-x1x)
4. MISCELLANEOUS CURRENT LIABILITIES (S3100-X3X) (S3100-240)
Miscellaneous current liabilities consist of:
5. COMMITMENTS (S3100-X3X) (S3100-240)
The Partnership has entered into regulatory agreements with HUD and IHDA which regulate, among other things, the rents which may be charged for apartment units in the Project, prohibit the sale of the Project without HUD and IHDA consent, limit the annual distribution of cash flow to the partners and otherwise regulate the relationship between the Partnership, HUD and IHDA.
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WASHINGTON COURTS LIMITED PARTNERSHIP - ------------------------------------------------------------------------------ Notes To Financial Statements (Continued)
Pursuant to an agreement with HUD, under Section 8 of the Housing Assistance Payment Program, the Partnership is entitled to receive housing assistance payments on behalf of qualified tenants. The term of the agreement is for a maximum of 15 years. The Partnership cannot sell of otherwise substantially liquidate its assets during such period that the agreement for housing assistance program with HUD is in existence without their approval.
6. RELATED PARTY TRANSACTIONS (S3100-200)
On December 10, 1999, a transaction occurred which converted Century Pacific Realty Corporation (CPRC) to a Special Limited Partner and Shorebank Development assumed CPRC's previous role of Supervising General Partner. Shorebank Development Corporation also remains the Managing General Partner.
INCENTIVE MANAGEMENT FEE
Commencing in 1990, the Managing General Partner will receive from Permissible Sources a non-cumulative incentive management fee equal to the lesser of (i) 10% of the gross income of the Partnership for such fiscal year less the management fee paid or payable in respect of such fiscal year or (ii) seventy percent (70%) of the amount of the Partnership's Available Cash remaining after payment of the Preferred Distribution, the Administration Fee, and repayment of any Operating Deficit Advances made to the Partnership.
For its services in administering the Local Affairs of the Partnership within the state, including, without limitation, coordinating the activities of the Partnership relating to HUD, the lender and the agency, and overseeing local compliance with applicable regulations, the Partnership shall be required to pay the local general partners from Permissible Sources an annual Administrative Fee of $19,772 beginning in 1990. A portion of the Administrative Fee equal to one percent (1%) of the gross income of the Partnership shall be payable each year from the Partnership's Available Cash (to the extent that such Available Cash constitutes Permissible Sources remaining after payment of the Preferred Distribution). The balance of the Administration Fee shall be payable from available cash (to the extent that such Available Cash constitutes a Permissible Source) remaining after full payment of the Preferred Distribution and repayment of any operating deficit advances. Such payment shall be made dollar-for-dollar with payments of the Preferred Distribution (plus unpaid amounts thereof accruing from prior taxable years) until one of such fees is paid in full, with any remainder of such Available Cash applied to any balance of the other such fee. The Partnership owes the Managing General Partner $68,269 at December 31, 2000 and 1999, respectively.
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WASHINGTON COURTS LIMITED PARTNERSHIP - ------------------------------------------------------------------------------ Notes To Financial Statements (Continued)
The Investor Limited Partner will, beginning in 1989, receive from Permissible Sources an annual cumulative cash distribution (the Annual Preferred Distribution) of $39,545. Beginning in 1990, a portion of the Annual Preferred Distribution equal to one percent (1%) of the annual gross income of the Partnership (the Guaranteed Portion) shall be distributed to the Investor Limited Partner from Permissible Sources without regard to Partnership income. An amount of the Annual Preferred Distribution equal to $19,772 (the Priority Portion), reduced by the Guaranteed Portion payable for such year, shall be payable from the Partnership's Available Cash (to the Permissible Source) after payment of the Primary Portion of the Administration Fee and repayment of any outstanding Operating Deficit Advances. Such payment shall be made dollar-for-dollar with repayments of the Administration Fee (other than the Primary Portion thereof) until one of such items is paid in full, with any remainder of such Available Cash applied to any balance of the other such item. Any unpaid amount of the Priority Portion with respect to any year after 1989 shall accrue, without interest, and be distributable to the Investor Limited Partner from Available Cash (to the extent that such Available Cash constitutes a Permissible Source) after payment of the Primary Portion of the Administration Fee and repayment of any outstanding Operating Deficit Advances. Such payment shall be made dollar-for-dollar with payments of the Administration Fee (other than the Primary Portion thereof) until one of such items is paid in full, with any remainder of such Available Cash (to the extent that such Available Cash constitutes a Permissible Source) applied to any balance of the other such item. Any remaining amounts of the Annual Preferred Distribution after 1989, including any unpaid amount of the Priority Portion, shall be distributable to the Investor Limited Partner, without interest, from cash available for distribution from Capital Transactions. The remaining unpaid balance at December 31, 2000 and 1999 amounted to $268,329 and $248,557, respectively, and is not reflected in the accompanying balance sheet.
MANAGEMENT FEE (S3100-230)
The apartment project was managed by Century Pacific Management Corporation, an affiliate of the general partner until November 1999 and received a fee of 5.55% of rents collected. In November 1999, HJ Russell & Company began managing the Project. They have received a management fee of 5.65% of rents collected.
In December 2000, DSSA Management, Inc. took over management of the Project. They are receiving a fee of 5.65% of gross collections. At December 31, 2000 and 1999, the outstanding management fee payable was $14,644.
S3100-210 COMPANY NAME HJ Russell & Company S3100-220 AMOUNT RECEIVED $35,466
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CENTURY PACIFIC TAX CREDIT HOUSING FUND II
Date: 8/15/03 /s/ Irwin Jay Deutch - --------------- --------------------------------------------------------- By: Irwin Jay Deutch, as Managing General Partner
and
Century Pacific Capital II Corporation, as Corporate General Partner and as attorney-in-fact for all Investor Limited Partners
Date: 8/15/03 /s/ Irwin Jay Deutch - --------------- --------------------------------------------------------- By: Irwin Jay Deutch, President
EXHIBIT INDEX
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* Filed herewith