FORM 10-QSB_ QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 1999
[ ] 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 0-14458
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
(Exact name of small business issuer as specified in its charter)
Maryland 52-1365317
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9200 Keystone Crossing, Suite 500
Indianapolis, Indiana 46240-7602
(Address of principal executive offices)
(317) 817-7500
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
SEPTEMBER 30, 1999
ASSETS
Cash and cash equivalents $ 2,647
Investments in and advances to Local Limited
Partnerships (Note 2) 4,445,582
$4,448,229
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities
Other accrued expenses $ 34,612
Administrative and reporting fee payable to
General Partner 1,218,001
Notes payable to General Partner 2,414,468
Accrued interest on notes payable to General Partner 3,482,463
7,149,544
Partners' deficit
General Partner -- The National Housing
Partnership (NHP) (182,103)
Original Limited Partner -- 1133 Fifteenth
Street Two Associates (187,003)
Other Limited Partners -- 18,300 investment
units (2,332,209)
(2,701,315)
$4,448,229
b)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES:
Share of profits from Local
Limited Partnerships $ 60,098 $ 63,840 $184,898 $161,450
Interest income 192 220 508 540
Interest income from Local Limited
Partnership -- -- 123,685 --
60,290 64,060 309,091 161,990
COSTS AND EXPENSES:
Administrative and reporting fees
to General Partner 34,311 34,312 102,936 102,936
Interest on deferred acquisition
to General Partner 60,858 60,362 181,581 181,085
Interest on partner loans -- 771 1,216 771
Other operating expenses 19,746 67,600 51,928 95,945
114,915 163,045 337,661 380,737
LOSS BEFORE EXTRAORDINARY ITEM (54,625) (98,985) (28,570) (218,747)
Extraordinary item-share from local
limited partnership of gain on
extinguishment of debt -- 26,119 -- 26,119
NET LOSS (54,625) (72,866) (28,570) (192,628)
ALLOCATION OF NET LOSS:
General Partner _ NHP $ (547) $ (728) $ (286) $ (1,926)
Original Limited Partner _ 1133
Fifteenth Street Two Associates (547) (728) (286) (1,926)
Other limited partners _ 18,300
Investment units (53,531) (71,410) (27,998) (188,776)
$(54,625) $(72,866) $(28,570) $(192,628)
NET LOSS PER LIMITED
PARTNERSHIP INTEREST:
Loss before extraordinary item $ (3) $ (5) $ (2) $ (11)
Extraordinary item -- 1 -- 1
$ (3) $ (4) $ (2) $ (10)
</TABLE>
c)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENT OF PARTNER'S DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
The National 1133
Housing Fifteenth Other
Partnership Street Two Limited
(NHP) Associates Partners Total
<S> <C> <C> <C> <C>
Deficit at December 31, 1998 $ (181,817) $ (186,717) $(2,304,211) $(2,672,745)
Net loss - nine months ended
September 30, 1999 (286) (286) (27,998) (28,570)
Deficit at September 30, 1999 $ (182,103) $ (187,003) $(2,332,209) $(2,701,315)
Percentage interest at
September 30, 1999 1% 1% 98% 100%
(A) (B) (C)
</TABLE>
(A)General Partner
(B)Original Limited Partner
(C)Consists of 18,300 investment units
d)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 508 $ 540
Operating expenses paid (75,147) (65,777)
Interest income received from Local Limited Partnership 123,685 --
Payment of administrative reporting fees to General
Partner (97,014) --
Payment of interest on partner loans (2,917) --
Net cash used in operating activities (50,885) (65,237)
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayment of) advances from General Partner (33,650) 33,650
CASH FLOWS FROM INVESTING ACTIVITIES
Distributions from Local Limited Partnership 61,593 16,521
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,942) (15,066)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,589 23,409
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,647 $ 8,343
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
Net loss $ (28,570) $(192,628)
Adjustments to reconcile net loss to net
cash used in operating activities:
Share of profits from Local Limited Partnerships (184,898) (161,450)
Share of gain on extinguishment of debt -- (26,119)
Increase in accrued interest on deferred acquisition
notes 181,581 181,085
(Decrease) increase interest on Partners loans (1,701) 771
Increase in administrative and reporting fees payable 5,922 102,936
(Decrease) increase in other accrued expenses (23,219) 30,168
Total adjustments (22,315) 127,391
Net cash used in operating activities $(50,885) $(65,237)
</TABLE>
e)
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(A MARYLAND LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ACCOUNTING POLICIES
ORGANIZATION
National Housing Partnership Realty Fund Two (the "Partnership" or the
"Registrant") is a limited partnership organized under the Maryland Revised
Uniform Limited Partnership Act on January 22, 1985. The Partnership was formed
for the purpose of raising capital by offering and selling limited partnership
interests and then investing in limited partnerships ("Local Limited
Partnerships"), each of which owns and operates an existing rental housing
project which is financed and/or operated with one or more forms of rental
assistance or financial assistance from the U.S. Department of Housing and Urban
Development ("HUD"). On April 30, 1985, the Partnership began raising capital
and acquiring interests in Local Limited Partnerships.
The General Partner was authorized to raise capital for the Partnership by
offering and selling to additional limited partners not more than 18,300
interests at a price of $1,000 per unit. During 1985, the sale of interests was
closed after the sale of 18,300 interests to limited partners.
BASIS OF PRESENTATION
The accompanying unaudited interim financial statements reflect all adjustments
which are, in the opinion of management, necessary for a fair statement of the
financial condition and results of operations for the interim periods presented.
All such adjustments are of a normal and recurring nature.
While the General Partner believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and notes
included in the Partnership's Annual Report filed on Form 10-K for the year
ended December 31, 1998.
Certain reclassifications have been made to the 1998 information to conform with
the 1999 presentation.
(2) INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS
During 1985, the Partnership acquired a 94.5% limited partnership interest (98%
with respect to allocation of losses) in twenty-one Local Limited Partnerships:
Meadows Apartments Limited Partnership, Esbro Limited Partnership, Rodeo Drive
Limited Partnership, Menlo Limited Partnership, Mayfair Manor Limited
Partnership, Hurbell I Limited Partnership, Hurbell II Limited Partnership,
Hurbell III Limited Partnership, Tinker Creek Limited Partnership, Rockwell
Limited Partnership, Meadows East Apartments Limited Partnership, Kimberton
Apartments Limited Partnership, San Juan del Centro Limited Partnership, Gulfway
Limited Partnership, Caroline Arms Limited Partnership, Hilltop Limited
Partnership, Harold House Limited Partnership, Park Avenue West I Limited
Partnership, West Oak Village Limited Partnership, Park Avenue West II Limited
Partnership, and Windsor Apartments Associates Limited Partnership. During
1998, the Partnership's interest in Gulfway Limited Partnership, Menlo Limited
Partnership and Rockwell Limited Partnership were foreclosed upon and Tinker
Creek Limited Partnership sold its property. During August 1999, the
Partnership's interest in Meadows East Apartments Limited Partnership was
foreclosed upon.
The Menlo Limited Partnership had a note payable which was due on October 31,
1997. On November 10, 1997, the note holder notified Menlo Limited Partnership
that the note was in default and demanded immediate payment. The Local Limited
Partnership did not have the resources to pay amounts due on the note payable.
On January 5, 1998, pursuant to the security agreement of the note payable, the
note holder was substituted as sole limited partner of the Local Limited
Partnership in place of the Partnership and the note holder's assignee was
substituted as the general partner. Additionally, the Gulfway and Rockwell
Limited Partnerships had notes payable which were due on November 7, 1997. The
Local Limited Partnerships did not have the resources to pay amounts due on the
notes payable. On June 29, 1998, pursuant to the security agreements of the
notes payable, the note holders were substituted as sole limited partner of the
Local Limited Partnerships in place of the Partnership and the note holders'
assignee was substituted as the general partner. No gain or loss was recorded
as a result of these transfers of partnership interests. With the loss of the
Partnership's interests in Menlo, Gulfway and Rockwell Limited Partnerships to
the note holders, the Partnership will not receive any future benefits from
these Local Limited Partnerships and taxable income will be generated and flow
to the Partnership's investors without any distributable cash. The specific
impact of the tax consequences was dependent upon each specific partner's
individual tax situation.
Tinker Creek Limited Partnership had a note payable due on June 30, 1998.
During February 1998, Tinker Creek Limited Partnership entered into a sales
agreement with Artcraft Investment, L.L.C. for the sale of Tinker Creek
Apartments. The closing occurred on July 2, 1998, with a purchase price of
$1,785,000. Net proceeds of $750,081 were divided between the holders of the
Tinker Creek note payable and Tinker Creek Limited Partnership, with the note
holders receiving 80% of the net proceeds in full satisfaction of amounts due on
their notes. Any unpaid balances were forgiven. Tinker Creek Limited
Partnership received the remaining 20% of the net proceeds. The Partnership's
share of the gain from the sale, in excess of cumulative losses not taken, in
the amount of $33,818 was recorded in the statements of operations for the nine
months ended September 30, 1998, as an extraordinary item _ gain on
extinguishment of debt. The sale may have generated taxable income to the
Partnership's investors. The specific impact of the tax consequences was
dependent upon each specific partner's individual tax situation.
Meadows East Apartments had a note payable which was due on December 12, 1997.
The Local Limited Partnerships did not have the resources to pay amounts due on
the note payable. Effective August 5, 1999 Meadows East Apartments was
foreclosed upon. Pursuant to the security agreement of the note payable, the
note holder was substituted as the sole limited partner of the Local Limited
Partnership in place of the Partnership and the note holder's assignee was
substituted as the general partner. No gain or loss has been recorded as a
result of the transfer of this partnership interest. With the loss of the
Partnership's interest in Meadows East Apartments to the note holder, the
Partnership will not receive any future benefits from this Local Limited
Partnership and taxable income will be generated and flow to the Partnership's
investors without any distributable cash. The specific impact of the tax
consequence is dependent upon each specific partner's individual tax situation.
Since the Partnership, as a limited partner, does not exercise control over the
activities of the Local Limited Partnerships in accordance with the partnership
agreements, these investments are accounted for using the equity method. Thus,
the investments are carried at cost less the Partnership's share of the Local
Limited Partnerships' losses and distributions plus the Partnership's share of
Local Limited Partnerships' profits. However, since the Partnership is not
legally liable for the obligations of the Local Limited Partnerships, and is not
otherwise committed to provide additional support to them, it does not recognize
losses once its investment in each of the individual Local Limited Partnerships
reduced for its share of losses and cash distributions, reaches zero. Once an
investment account has been reduced to zero, profits reported by a Local Limited
Partnership are not recognized by the Partnership until such profits equal
losses not recognized plus distributions received and previously recognized as
revenue. As a result, the Partnership did not recognize $517,273 and $1,298,387
of losses from twelve and seventeen Local Limited Partnerships during the nine
months ended September 30, 1999 and 1998, respectively. During the nine months
ended September 30, 1999, the Partnership's share of profits in two Local
Limited Partnerships in the amount of $98,901 was offset against prior year
losses not taken. As of September 30, 1999, the Partnership has not recognized
$19,176,092 of its allocated cumulative share of losses from fourteen Local
Limited Partnerships in which its investment has been reduced to zero.
No working capital advances or repayments were made between the Partnership and
the Local Limited Partnerships. During 1993, the Partnership re-evaluated the
timing of the collectibility of the advances and determined, based on the Local
Limited Partnerships' operations, that such advances are not likely to be
collected. For accounting purposes, the Partnership treated the advance balance
as additional investments in the Local Limited Partnerships. The balance was
then reduced to zero, with a corresponding charge to operations to reflect a
portion of the previously unrecognized losses on investments.
Advances to the Local Limited Partnership remain due and payable to the
Partnership. Interest is calculated at the Chase Manhattan Bank prime rate plus
2% (10.25% at September 30, 1999). Payment of principal and interest is
contingent upon the Local Limited Partnerships having available surplus cash, as
defined by HUD regulations, from operations or from the sale or refinancing of
the Local Limited Partnership properties. Any future repayment of advances or
interest will be reflected as Partnership income when received. During the nine
months ended September 30, 1999 the Partnership received $123,685 of interest
from Harold House Limited Partnership on its advance from the Partnership.
The following are combined statements of operations for the three and nine
months ended September 30, 1999 and 1998, respectively, of the Local Limited
Partnerships in which the Partnership has invested. The statements are compiled
from financial statements of the Local Limited Partnerships, prepared on the
accrual basis of accounting, as supplied by the managing agents of the projects,
and are unaudited.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Rental income $ 2,812,049 $ 2,953,591 $ 8,714,025 $ 9,877,908
Other income 143,315 105,354 368,255 340,942
Total income 2,955,364 3,058,945 9,082,280 10,218,850
Operating expenses 1,761,197 2,107,752 5,493,242 6,834,820
Interest, taxes, and insurance 769,013 858,873 2,434,964 2,996,334
Depreciation 422,090 479,843 1,381,587 1,598,565
Loss on disposal of rental property -- 341,658 -- 341,658
Total expense 2,952,300 3,788,126 9,309,793 11,771,377
Income (loss) before extraordinary
item 3,064 (729,181) (277,513) (1,552,527)
Extraordinary item-gain on
extinguishment of debt -- 1,623,199 -- 1,623,199
Net income (loss) $ 3,064 $ 894,018 $ (227,513) $ 70,672
National Housing Partnership
Realty Fund Two share of income
(losses) $ 259 $ 831,622 $ (233,474) $ 20,412
</TABLE>
(3) TRANSACTIONS WITH THE GENERAL PARTNER
During the nine month periods ended September 30, 1999 and 1998, the Partnership
accrued administrative and reporting fees payable to the General Partner in the
amount of $102,936 for services provided to the Partnership. The Partnership
paid $97,014 to the General Partner for these fees during the nine months ended
September 30, 1999. The amount of fees due to the General Partner by the
Partnership was $1,218,001 at September 30, 1999.
During the nine months ended September 30, 1999, the Partnership paid the
General Partner $33,650 and $2,917 for repayment of a working capital advance
and accrued interest on the advance, respectively. No working capital advances
were made during the nine months ended September 30, 1999. During the nine
months ended September 30, 1998, a working capital advance of $33,650 was made
from the General Partner to the Partnership to pay legal fees related to the
civil action taken by the deferred acquisition note holders of Rodeo Drive
Limited Partnership. No repayments were made between the General Partner and
the Partnership during the nine months ended September 30, 1998. Interest is
charged on borrowings at the Chase Manhattan Bank rate of prime plus 2% (10.25%
at September 30, 1999). Accrued interest on this loan amounted to $1,701 at
December 31, 1998.
The accrued administrative and reporting fees payable to the General Partner
will be paid as cash flow permits or from the sale or refinancing of one or more
of the underlying properties of the Local Limited Partnerships.
(4) SEGMENT INFORMATION
The Partnership has only one reportable segment. Due to the very nature of the
Partnership's operations, the General Partner believes that segment-based
disclosures will not result in a more meaningful presentation than the financial
statements as currently presented.
(5) DISPOSAL OF RENTAL PROPERTY
Tinker Creek Limited Partnership had a deferred acquisition note payable due on
June 30, 1998. During February 1998, Tinker Creek Limited Partnership entered
into a sales agreement with an unaffiliated third party for the sale of Tinker
Creek Apartments. The property was sold on July 2, 1998 at purchase price of
$1,785,000. Net proceeds from the sale were divided between the holder of the
Tinker Creek deferred acquisition note and Tinker Creek Limited Partnership,
with the note holders receiving 80% of the net proceeds in full satisfaction of
amounts due on their notes. Any unpaid balances were forgiven. Tinker Creek
Limited Partnership received the remaining 20% of the net proceeds. The
Partnership's share of the gain from the sale, in excess of cumulative losses
not taken, in the amount of $26,119 was recorded for the nine months ended
September 30, 1998, as an extraordinary item - gain on extinguishment of debt.
The sale may have generated taxable income to the Partnership's investors. The
specific impact of the tax consequences was dependent upon each specific
partner's individual tax situation.
(6) LEGAL PROCEEDINGS
In July 1999, NHP received a grand jury subpoena requesting documents relating
to NHP's management of HUD-assisted or HUD-insured multi-family projects and
NHP's operation of a group purchasing program created by NHP, known as Buyers
Access. The subpoena relates to the same subject matter as subpoenas NHP
received in October and December 1997 from the HUD Inspector General. To date,
neither the HUD Inspector General nor the grand jury has initiated any action
against NHP or Apartment Investment and Management Company ("AIMCO"), the
ultimate controlling entity of NHP or, to NHP's or AIMCO's knowledge, any owner
of a HUD property managed by NHP. AIMCO believes that NHP's operations and
programs are in compliance, in all material respects, with all laws, rules and
regulations relating to HUD-assisted or HUD-insured properties. NHP does not
believe that the investigations will result in a material adverse impact on
its operations. However, as with any similar investigation, there can be no
assurance that these will not result in material fines, penalties or other
costs.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
ITEM 2 _ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time.
The discussion of the Registrant's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Registrant's business and results of
operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Partnership retained an interest in sixteen of its
original twenty-one Local Limited Partnerships. The properties in which the
Local Limited Partnerships have invested receive one or more forms of assistance
from the Federal Government. As a result, the Local Limited Partnerships'
ability to transfer funds either to the Partnership or among themselves in the
form of cash distributions, loans, or advances is generally restricted by these
government-assistance programs. These restrictions could impact the
Partnership's ability to meet its cash obligations given the low level of
reserves at the Partnership level.
For the past several years, various proposals have been advanced by the United
States Department of Housing and Urban Development ("HUD"), Congress and others
proposing the restructuring of HUD's rental assistance programs under Section 8
of the United States Housing Act of 1937 ("Section 8"), under which 1,739 units,
76 percent of the total units owned by the properties in which the Partnership
has invested, receive rental subsidies. On October 27, 1997, the President
signed into law the Multifamily Assisted Housing Reform and Affordability Act of
1997 (the "1997 Housing Act"). Under the 1997 Housing Act, certain properties
assisted under Section 8, with rents above market levels and financed with HUD-
insured mortgage loans, will be restructured by adjusting subsidized rents to
market levels, thereby potentially reducing rent subsidies, and lowering
required debt service costs as needed to ensure financial viability at the
reduced rents and rent subsidies. The 1997 Housing Act retains project_based
subsidies for most properties (properties in rental markets with limited supply,
properties serving the elderly, and certain other properties). The 1997 Housing
Act phases out project-based subsidies on selected properties servicing families
not located in rental markets with limited supply, converting such subsidies to
a tenant-based system. Under a tenant-based system, rent vouchers would be
issued to qualified tenants who then could elect to reside at properties of
their choice, provided such tenants have the financial ability to pay the
difference between the selected properties' monthly rent and the value of the
vouchers, which would be established based on HUD's regulated fair market rent
for the relevant geographical areas. With respect to Housing Assistance Payments
Contracts ("HAP Contracts") expiring before October 1, 1998, Congress has
elected to renew them for one-year terms, generally at existing rents, so long
as the properties remain in compliance with the HAP Contracts. While the
Partnership does not expect the provisions of the 1997 Housing Act to result in
a significant number of tenants relocating from properties owned by the Local
Limited Partnerships, there can be no assurance that the provisions will not
significantly affect the operations of the properties of the Local Limited
Partnerships. Furthermore, there can be no assurance that other changes in
Federal housing subsidy policy will not occur. Any such changes could have an
adverse effect on the operation of the Partnership.
No working capital advances or repayments were made between the Partnership and
the Local Limited Partnerships during the nine months ended September 30, 1999
and 1998. The combined amount carried as due to the Partnership by the Local
Limited Partnerships was $424,607 as of September 30, 1999.
Distributions received in excess of investment in Local Limited Partnerships
represent the Partnership's proportionate share of the excess cash available for
distribution from the Local Limited Partnerships. As a result of the use of the
equity method of accounting for the Partnership's investments, investments in
fourteen of the remaining sixteen Local Limited Partnerships had been reduced to
zero as of September 30, 1999. For these investments, cash distributions
received are recorded in income as distributions received in excess of
investment in Local Limited Partnerships. For those investments not reduced to
zero, distributions received are recorded as distributions from Local Limited
Partnerships. Cash distributions of $61,593 and $16,521 from Local Limited
Partnerships were received during the nine months ended September 30, 1999 and
1998, respectively. The receipt of distributions in future quarters and years
is dependent upon the operations of the underlying properties of the Local
Limited Partnerships to generate sufficient cash for distribution in accordance
with applicable HUD regulations.
Net cash used in operations for the nine months ended September 30, 1999 was
$50,885 as compared to $65,237 for the nine months ended September 30, 1998.
The increase in cash used in operations is primarily due to increases in payment
of administrative reporting fees to the General Partner and operating expenses
paid, which is partially offset by interest income received from one of the
Local Limited Partnerships. Cash used in financing activities consisted of
repayment of advances from the General Partner. Cash provided by investing
activities consisted of a distribution from one of the Local Limited
Partnerships.
Cash and cash equivalents amounted to $2,647 at September 30, 1999 as compared
to $25,589 at December 31, 1998. The decrease in cash and cash equivalents is
due to cash used in operating activities and cash repayments of advances from
the General Partner more than offsetting distributions from Local Limited
Partnerships. The ability of the Partnership to meet its on-going cash
requirements in excess of cash on hand at September 30, 1999 is dependent upon
the future receipt of distributions from the Local Limited Partnerships or
proceeds from sales or refinancing of one or more of the underlying properties
of the Local Limited Partnerships. Cash on hand at September 30, 1999 plus any
distributions from the underlying operations of the combined Local Limited
Partnerships is expected to adequately fund the operations of the Partnership in
the current year. However, there can be no assurance that future distributions
will be adequate to fund the operations beyond the current year.
The Partnership currently owes the General Partner $1,218,001 for administrative
and reporting services performed. The payment of the unpaid administrative and
reporting fees will most likely result from the sale or refinancing of the
underlying properties of the Local Limited Partnerships, rather than through
recurring operations.
During 1998, the General Partner advanced the Partnership $33,650 to pay legal
expenses of the Partnership. During the nine months ended September 30, 1999
the Partnership paid the General Partner $33,650 and $2,917 for repayment of the
advance and accrued interest on the advance, respectively. Interest is charged
on borrowings at the Chase Manhattan Bank prime interest rate plus 2% (10.25% at
September 30, 1999).
Each Local Limited Partnership in which the Partnership currently holds an
interest has a note payable due to the original owner of each property. With
the exception of West Oak Village Limited Partnership, these notes are either
currently due or become due in 1999. These notes are secured by both the
Partnership's and NHP's interests in the applicable Local Limited Partnerships.
In the event of a default on the notes, the note holders would be able to assume
NHP's and the Partnership's interests in the Local Limited Partnerships.
The West Oak Village Limited Partnership note payable matured on November 30,
1996. During 1997, the note holders entered into an agreement with the West Oak
Village Limited Partnership under which the maturity date of the note was
extended until November 2013. Under the terms of the agreement, the Local
Limited Partnership must pay the note holders annual interest on or before each
December 31, during the term of the note at a variable rate based on the prior
year's interest rate payment multiplied by the most recent Consumer Price Index
rate, with any increase subject to a floor of 2% and a ceiling of 5%. At any
time prior to the note's maturity, the Local Limited Partnership has an option
to pay of the note payable at a discount equal to 70% of the property's annual
scheduled rent but no less than $700,000. At September 30, 1999, the
outstanding principal and related interest, respectively, were $2,046,695 and
$2,574,431. There can be no assurance that the Local Limited Partnership will
have sufficient cash or that the General Partner will loan additional cash to
the Local Limited Partnership, if necessary, to make the annual installment
payments required under the Agreement. The failure to make the required
payments may result in a loss of interest in this Local Limited Partnership,
which may result in the investors incurring adverse tax consequences.
The Menlo Limited Partnership had a note payable which was due on October 31,
1997. On November 10, 1997, the note holder notified Menlo Limited Partnership
that the note was in default and demanded immediate payment. The Local Limited
Partnership did not have the resources to pay amounts due on the note payable.
On January 5, 1998, pursuant to the security agreement of the note payable, the
note holder was substituted as sole limited partner of the Local Limited
Partnership in place of the Partnership and the note holder's assignee was
substituted as the general partner. Additionally, the Gulfway and Rockwell
Limited Partnerships had notes payable which were due on November 7, 1997. The
Local Limited Partnerships did not have the resources to pay amounts due on the
notes payable. On June 29, 1998, pursuant to the security agreements of the
notes payable, the note holders were substituted as sole limited partner of the
Local Limited Partnerships in place of the Partnership and the note holders'
assignee was substituted as the general partner. No gain or loss was recorded
as a result of these transfers of partnership interests. With the loss of the
Partnership's interests in Menlo, Gulfway and Rockwell Limited Partnerships to
the note holders, the Partnership will not receive any future benefits from
these Local Limited Partnerships and taxable income will be generated and flow
to the Partnership's investors without any distributable cash. The specific
impact of the tax consequences was dependent upon each specific partner's
individual tax situation.
Mayfair Manor and Esbro Limited Partnerships had notes payable which originally
matured on October 25, 1997. Effective February 16, 1998, both Mayfair Manor
and Esbro Limited Partnerships executed Amended and Restated Promissory Notes
("ARPN") for each of their notes payable. The general terms of the ARPNs
require payment of the following upon the earlier of the sale, transfer or
refinancing of the underlying property, or October 25, 1999:
a) the original principal sum of the note payable, plus
b) interest which accrued on such principal at the rate of 9% per annum
from the original date to October 25, 1997, plus
c) interest on the foregoing sums of principal and interest from
October 25, 1997 at the rate of 5.54% per annum, compounded
annually.
The ARPNs are collateralized by a security interest in the general and limited
partnership interests of the Local Limited Partnerships. The note holders were
paid an extension fee of $90,000 and $70,000 for Mayfair Manor and Esbro,
respectively, which was paid from proceeds of loans from the General Partner.
Mayfair Manor and Esbro Limited Partnerships are currently in default of these
notes payable due to nonpayment of principal plus accrued interest upon maturity
as of October 25, 1999. The note holder of both Mayfair Manor and Esbro Limited
Partnership have notified the Partnerships that their notes are in default and
have demanded payment. Neither Partnership has the resources to pay their
respective amounts due on the note payable. Accordingly, the note holders have
initiated foreclosure proceedings. Should the Partnership lose its interest in
the Local Limited Partnerships, partners in the Partnership may incur adverse
tax consequences. The impact of the tax consequences is dependant upon each
partner's individual tax situation.
Tinker Creek Limited Partnership had a note payable due on June 30, 1998.
During February 1998, Tinker Creek Limited Partnership entered into a sales
agreement with Artcraft Investment, L.L.C. for the sale of Tinker Creek
Apartments. The closing occurred on July 2, 1998, with a purchase price of
$1,785,000. Net proceeds of $750,081 were divided between the holders of the
Tinker Creek note payable and Tinker Creek Limited Partnership, with the note
holders receiving 80% of the net proceeds in full satisfaction of amounts due on
their notes. Any unpaid balances were forgiven. Tinker Creek Limited
Partnership received the remaining 20% of the net proceeds. The sale may have
generated taxable income to the Partnership's investors. The specific impact of
the tax consequences is dependent upon each specific partner's individual tax
situation.
The note payable with respect to Rodeo Drive Limited Partnership matured on
December 6, 1998. The Local Limited Partnership does not have the resources to
pay amounts due on the note payable. The holders of the note commenced a civil
action seeking to gain control of the general and limited partnership interests
of the Rodeo Drive Limited Partnership. If the Partnership loses its interest
in Rodeo Drive Limited Partnership to the note holder, the Partnership will not
receive any future benefits from this Local Limited Partnership and taxable
income will be generated and flow to the Partnership's investors without any
distributable cash. The specific impact of the tax consequence is dependent upon
each partner's individual tax situation.
Meadows East Apartments had a note payable due on December 12, 1997. The Local
Limited Partnerships did not have the resources to pay amounts due on the note
payable. Effective August 5, 1999 Meadows East Apartments was foreclosed upon.
Pursuant to the security agreement of the note payable, the note holder was
substituted as the sole limited partner of the Local Limited Partnership in
place of the Partnership and the note holder's assignee was substituted as the
general partner. No gain or loss has been recorded as a result of the transfer
of this partnership interest. With the loss of the Partnership's interest in
Meadows East Apartments to the note holder, the Partnership will not receive any
future benefits from this Local Limited Partnership and taxable income will be
generated and flow to the Partnership's investors without any distributable
cash. The specific impact of the tax consequence is dependent upon each
partner's individual tax situation.
Additionally, Meadows Apartments Limited Partnership had a note payable which
was due on December 12, 1997. The Local Limited Partnership does not have the
resources to pay the amount due on its note payable and is currently in default
on the note. The holder of the note has started proceedings to take back the
Partnership's interest in the Local Limited Partnership. Should the Partnership
lose its interest in the Local Limited Partnership, partners in the Partnership
may incur adverse tax consequences. The impact of the tax consequence is
dependent upon each partner's individual tax situation.
In addition to the maturity of the extension notes in Mayfair Manor and Esbro
Limited Partnerships on October 25, 1999, the notes payable in Hurbell II and
Hilltop Limited Partnerships matured on November 2, 1999 while the note payable
in Caroline Arms Limited Partnership matured on November 11, 1999. With the
exception of West Oak Limited Partners, the notes related to the other six
remaining Local Limited Partnerships will reach final maturity during the
balance of the fourth quarter of 1999. The Local Limited Partnerships have not
renegotiated the terms of the notes, including the extension of the due date.
Caroline Arms Limited Partnership and Harold House Limited Partnership whose
notes payable mature November 11 and 15, 1999, respectively, are both marketing
their properties for sale. Both sales would be subject to the prospective
purchaser's due diligence and other customary conditions. There can be no
assurance that either or both of the sales will ultimately be consummated or if
consummated, at a price sufficient to generate net proceeds to the Partnership.
Continuation of the Local Limited Partnerships' operations in the present form
is dependent on their ability to extend the maturity dates of these notes or to
repay or refinance the notes. These notes are secured by both the Partnership's
and the General Partner's interests in the Local Limited Partnerships. In the
event of a default on the notes, the note holders would be able to assume the
General Partner's and the Partnership's interests in the Local Limited
Partnerships. Should the Partnership lose its interest in a Local Limited
Partnership, partners in the Partnership may incur adverse tax consequences.
The impact of the tax consequence is dependent upon each partner's individual
tax situation. There can be no assurance that the General Partner will be
successful in extending or restructuring the notes payable as they mature.
As a result of the above, there is substantial doubt about the Partnership's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible effects on the recoverability and
classification of assets or amounts and classifications of liabilities that may
result from these uncertainties.
RESULTS OF OPERATIONS
At September 30, 1999, the Partnership held an interest in sixteen Local Limited
Partnerships. To the extent the Partnership still has a carrying basis in a
respective Local Limited Partnership, results of operations are significantly
impacted by the Partnership's share of the profits or losses in the Local
Limited Partnership. These profits or losses include depreciation and accrued
note payable interest expense which are non-cash in nature. As of September 30,
1999, the Partnership had no carrying basis in fourteen of the Local Limited
Partnerships and therefore, reflected no results of operations from its share of
losses from these Local Limited Partnerships.
The Partnership had a net loss of $28,570 for the nine months ended September
30, 1999, compared to a net loss of $192,628 for the nine months ended September
30, 1998. Net loss per unit of limited partnership decreased to $(2) from $(10)
for the 18,300 units outstanding at September 30, 1999 and 1998, respectively.
The decrease in net loss was primarily attributable to an increase in the
Partnership's share of profits from Local Limited Partnerships, an increase in
interest income from a Local Limited Partnership and a decrease in other
operating expenses. The Partnership did not recognize $517,273 of its allocated
share of losses from twelve Local Limited Partnerships for the nine months ended
September 30, 1999, as the Partnership's net carrying basis in these Local
Limited Partnerships had been reduced to zero. In addition, the Partnership did
not recognize $98,901 of its allocated share of profits from two of the Local
Limited Partnerships for the nine months ended September 30, 1999, as the
Partnership had cumulative unrecognized losses with respect to these two Local
Limited Partnerships. The Partnership's share of losses from the Local Limited
Partnerships, if not limited to its investment account balance, would have
decreased $781,114 between periods, primarily due to a decrease in total
expenses, which is offset partially by a decrease in rental income. The
decrease in total expenses and rental income are primarily the result of the
loss of the Partnership's interests during 1998 in the Menlo, Gulfway and
Rockwell Limited Partnerships due to foreclosures and the sale of the sole
property in Tinker Creek Limited Partnership.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the main computer system used by the Managing Agent became fully
functional. In addition to the main computer system, PC-based network servers,
routers and desktop PCs were analyzed for compliance. The Managing Agent has
begun to replace each of the non-compliant network connections and desktop PCs
and, as of September 30, 1999, had virtually completed this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
In April 1999 the Managing Agent embarked on a data center consolidation project
that unifies its core financial systems under its Year 2000 compliant system.
The estimated completion date for this project is October 1999.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at
all properties, is $200,000, and the implementation and testing process was
completed in June 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded virtually all of the server operating systems.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally.
A pre-assessment of the properties by the Managing Agent has indicated virtually
no Year 2000 issues. A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 1999. Any operating
equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
September 30, 1999 to replace or repair the operating equipment was
approximately $75,000. The Managing Agent estimates the cost to replace or
repair any remaining operating equipment is approximately $125,000.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent has banking relationships with three major financial
institutions, all of which have designated their compliance. The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date, the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.9 million ($0.7 million expenses
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
In July 1999, NHP received a grand jury subpoena requesting documents relating
to NHP's management of HUD-assisted or HUD-insured multi-family projects and
NHP's operation of a group purchasing program created by NHP, known as Buyers
Access. The subpoena relates to the same subject matter as subpoenas NHP
received in October and December 1997 from the HUD Inspector General. To date,
neither the HUD Inspector General nor the grand jury has initiated any action
against NHP or Apartment Investment and Management Company ("AIMCO"), the
ultimate controlling entity of NHP or, to NHP's or AIMCO's knowledge, any owner
of a HUD property managed by NHP. AIMCO believes that NHP's operations and
programs are in compliance, in all material respects, with all laws, rules and
regulations relating to HUD-assisted or HUD-insured properties. NHP does not
believe that the investigations will result in a material adverse impact on
its operations. However, as with any similar investigation, there can be no
assurance that these will not result in material fines, penalties or other
costs.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27, Financial Data Schedule
b) Reports on Form 8-K:
None filed during the quarter ended September 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
(Registrant)
By: The National Housing Partnership,
Its sole General Partner
By: National Corporation for Housing
Partnerships, its sole General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Martha L. Long
Martha L. Long
Senior Vice President and
Controller
Date:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from National
Housing Partnership Realty Fund Two 1999 Third Quarter 10-QSB and is qualified
in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000762859
<NAME> NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,647
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,448,229
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2,414,468
0
0
<COMMON> 0
<OTHER-SE> (2,701,315)
<TOTAL-LIABILITY-AND-EQUITY> 4,448,229
<SALES> 0
<TOTAL-REVENUES> 309,091
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 337,661
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 182,797
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,570)
<EPS-BASIC> (2)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
