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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-25600
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Maryland 52-1394232
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(State or other jurisdiciton of (I.R.S. Employer
incorporation or organization) Identification No.)
7200 Wisconsin Avenue, 11th floor, Bethesda, Maryland 20814
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 301-654-3100
Securities registered pursuant to Section 12(b) of the Act:
Beneficial Assignee Interests
Securities registered pursuant to Section 12(g) of the Act:
Beneficial Assignee Interests
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ NO / /.
At September 30, 1999, the following classes of beneficial
assignee interests of Oxford Tax Exempt Fund II Limited
Partnership were outstanding: (i) 7,337,425 beneficial assignee
interests ("BACs") with an aggregate market value ($24 per share)
of $176,098,200, and (ii) 777 Status Quo BACs ("SQBs").
Index to Exhibits is found on page 3.
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<PAGE> 2
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-Q
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements of OTEF II are incorporated herein
by reference to sequentially numbered pages 15 through 18 of OTEF
II's Quarterly Report (Unaudited).
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
A discussion of OTEF II's financial condition and results
of operations for the three and nine-month period ended September
30, 1999 is incorporated herein by reference to sequentially
numbered pages 6 through 14 entitled "Report of Management"
included in OTEF II's Quarterly Report (Unaudited).
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
For a list of Exhibits as required by Item 601 of
Regulation S-K, see Exhibit Index on page 3 of this
report.
(b) Reports on Form 8-K.
None.
No other items were applicable.
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OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-Q
EXHIBIT INDEX
(Listed according to the number assigned in the Exhibit Table in
Item 601 of Regulation S-K).
(20) Report furnished to Security Holders.
Oxford Tax Exempt Fund II Limited Partnership's Quarterly
Report (Unaudited) dated September 30, 1999, follows on
sequentially numbered pages 5 through 29 of this report.
(27) Financial Data Schedule.
<PAGE> 4
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
FORM 10-Q
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.
Oxford Tax Exempt Fund II Limited Partnership
By: Oxford Tax Exempt Fund II Corporation,
Managing General Partner of the registrant
Date: 11/12/99 By: /S/ Richard R. Singleton
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Richard R. Singleton,
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Date: 11/12/99 By: /S/ Francis P. Lavin
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Francis P. Lavin,
Director and President
Date: 11/12/99 By: /S/ Robert B. Downing
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Robert B. Downing,
Director and Executive Vice President
<PAGE> 5
OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
Quarterly Report
(Unaudited)
September 30, 1999
CONTENTS
Report of Management
Balance Sheets
Statements of Income and Comprehensive Income
Statement of Partners' Capital
Notes to Financial Statements
Instructions for Investors who wish to reregister or
transfer OTEF II BACs
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Report of Management
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The following report provides information about the
financial condition of Oxford Tax Exempt Fund II Limited
Partnership, a Maryland limited partnership ("OTEF II" or the
"Partnership"), as of September 30, 1999, and its results of
operations and cash flows for the period then ended. This report
and analysis should be read together with the financial
statements and related notes thereto and the selected financial
data appearing elsewhere in this Quarterly Report.
Recent Developments
Distribution for the Quarter ended September 30, 1999. On
September 15, 1999, the Managing General Partner declared a
distribution for the quarter ended September 30, 1999 in the
amount of $0.52 per BAC and $6.19 per SQB holder. For BAC
holders, this represents an increase of 2% over the distribution
for the prior comparative period, and is the same amount as the
distribution paid for the second quarter of 1999. These
distributions are payable on November 12, 1999 to holders of
record on September 30, 1999.
Investment Transactions. OTEF II is continuing work on a
number of transactions, including at least one transaction
that is expected to close later this year. On November 1, 1999,
the Apollo and San Bruno bonds were remarketed. See Existing
MRBs below. As previously reported, OTEF II is also working on
bond refunding and refinancing transactions with respect to the
Summerwalk property and the River Reach property. The senior tax-
exempt bonds secured by these properties are currently held by
third parties. Based on its preliminary discussions, the Managing
General Partner anticipates consummating refunding or refinancing
transactions for these properties.
Book Value. OTEF II has determined the fully diluted book
value of the BACs to be $35.47 as of September 30, 1999, taking
into account the Incentive Options.
Status Quo BACs. As of October 31, 1999, 6,169 SQBs, or
approximately 89% of the 6,946 SQBs outstanding at December 31,
1998, had been converted to 154,225 BACs in accordance with the
voluntary exchange offer made by OTEF II earlier this year. The
voluntary exchange offer expired on July 31, 1999.
As previously reported, since substantially all of the SQBs
outstanding at December 31, 1998 have been exchanged for BACs,
the remaining SQBs have been allocated increased shares of
administrative costs, which are relatively fixed costs that are
not dependent on the number of SQBs outstanding. For the quarter
ended September 30, 1999, these costs exceeded income resulting
in a net loss of $4.56 per SQB. Accordingly, the September 30,
1999 distribution will be paid exclusively from existing cash
reserves allocable to remaining SQB holders.
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Report of Management
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Based on OTEF II's existing cash reserves allocable to the
remaining SQBs and the Managing General Partner's estimates of
allocable interest payments received by OTEF II from recurring
cash flow and expenses allocable to SQB holders, the current
level of SQB quarterly distributions can only be maintained
through the fourth quarter of 1999 before these cash reserves are
substantially depleted. Thereafter, in the absence of a sale of
any remaining SQB assets, or a redemption by one or more
borrowers of the bonds in which SQB holders have an ownership
interest, or some other transaction of a capital nature, it is
anticipated that SQB holders will continue to realize net losses
and the SQBs will no longer receive quarterly distributions
payable from recurring operations. See Existing MRBs. Continued
losses will cause a reduction in the SQB capital accounts, which
will reduce the amount of net proceeds from any future capital
transaction otherwise payable to SQB holders.
The Information Memorandum states that, subject to receipt
of a fairness opinion from OTEF II's independent real estate
consultant, all outstanding SQBs will be purchased or redeemed by
OTEF II at such time as the Managing General Partner believes
that it would be in the best interests of OTEF II and the holders
of the non-tendered SQBs, but in no event later than December 31,
2006, which date may be extended under certain circumstances.
The Managing General Partner has undertaken an analysis of
whether such a redemption by OTEF II would be in the best
interests of the remaining SQB Holders and OTEF II at the present
time.
Liquidity and Capital Resources
To pursue additional investment opportunities, OTEF II
requires additional capital from time to time. In addition to
proceeds from financings, OTEF II may generally acquire
additional investments ("New Assets"): (i) from the proceeds of
sales or other dispositions of Original Refunding Bonds (as
defined below) and the Existing MRBs (as defined below) and the
proceeds from principal payments with respect to the Original
Refunding Bonds (except for the portion of such proceeds
allocable to SQBs), as well as bonds issued to refund any tax-
exempt bonds acquired by OTEF II pursuant to the Liquidity and
Growth Plan; (ii) from the proceeds of sales or other
dispositions of New Assets and the proceeds from principal
payments with respect to New Assets; (iii) from the proceeds of
issuances of additional equity securities, including additional
BACs or other limited partnership interests in OTEF II; (iv) by
issuing additional equity securities in exchange for New Assets;
or (v) by borrowing funds from lenders or by issuing evidences of
indebtedness.
Current Position. OTEF II uses its cash receipts primarily
for distributions to BAC Holders, SQB Holders and its General
Partners, to pay administrative expenses, and to acquire New
Assets and pay the costs and expenses relating to such
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Report of Management
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transactions. As of September 30, 1999, OTEF II held
approximately $10.3 million in cash and cash equivalents, a
decrease of $7.7 million, or approximately 43%, from the $18
million in cash and cash equivalents held as of December 31,
1998. This decrease in OTEF II's cash and cash equivalents is
primarily attributable to the Lakeside North and River Reach
investment transactions that closed during the second quarter.
Total assets increased approximately $9.3 million over the amount
reported at December 31, 1998. Total liabilities of OTEF II
shown on the balance sheet increased by approximately $5.1
million to approximately $57.1 million as of September 30, 1999
from $52 million at December 31, 1998, due to a net $5 million
increase in financing debt.
Financing Transactions. OTEF II undertakes securitization
transactions with respect to its bond portfolio from time to time
to enhance its overall return on investment and to generate
proceeds, which facilitate the acquisition of New Assets. OTEF
II has securitized approximately $76.8 million of its bond
portfolio by assigning these bonds to a Merrill Lynch affiliate
which, in turn, deposited them into trusts. The trusts, in turn,
sold to institutional investors senior, floating rate securities
credit enhanced by a Merrill Lynch affiliate. These senior
securities have first priority on the debt service payments
related to the bonds held in these trusts. OTEF II has acquired
all the subordinated interests in these trusts, aggregating
approximately $15 million, and received the proceeds, net of
transaction costs from the sale of the senior securities. In
addition, in a recent transaction involving the Carpenter bonds,
OTEF II acquired approximately $9 million of senior trust
interests, which may be sold at any time to provide cash to OTEF
II for new acquisitions or for any other purpose. OTEF II has
certain rights to repurchase and/or refinance the bonds and to
repurchase the senior securities and, therefore, retains a level
of control over the bonds. These securitization transactions
provide low-cost financing for OTEF II's growth. The portion of
the net proceeds from these transactions that is not invested in
New Assets is temporarily invested in liquid tax-exempt money
market securities.
In connection with these transactions, OTEF II converted
the interest rate mode on the Series A Bonds involved in these
transactions from an annual reset to weekly floaters. On August
22, 1997, and September 21, 1998, OTEF II purchased three-year
interest rate caps on a notional amount of approximately $27
million and $30 million, respectively, to minimize the effects of
interest rate volatility. Under these arrangements, if the
average short-term, tax-exempt interest rates during the term of
the cap increase above a specified level (6% and 4.5%,
respectively), the counter-party to the interest rate cap
transaction is required to pay directly to OTEF II the amount by
which such rates exceed the specified level. Through September
30, 1999 no payments were required to be made by the counter-
party pursuant to these interest cap agreements.
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Report of Management
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For financial statement purposes, these transactions are
accounted for as financing transactions. The amount of bonds
financed, approximately $76.8 million, is reflected as Securities
Held in Trust, the net cash proceeds not reinvested are
classified as Cash and Cash Equivalents and the difference
between the principal amount of the bonds financed and the
principal amount of the subordinated interests acquired by OTEF
II is classified as financing debt on OTEF II's balance sheet.
The aggregate financing debt at September 30, 1999 was
approximately $52.6 million, compared to $47.6 million as of
December 31, 1998. OTEF II's financing debt represents
approximately 16% of OTEF II's total assets (or 28% of OTEF
II's total assets if the entities in which OTEF II has made a
subordinated debt investment were consolidated). Due to the
credit enhancement provided by a Merrill Lynch affiliate in
connection with the securitization transactions, and favorable
underwriting characteristics (generally, low loan-to-value and
high debt coverage), this financing debt bears interest at the
BMA weekly floating bond index plus approximately 80 to 150 basis
points (including credit enhancement, trustee and related fees).
This rate averaged 4.63% from the date of closing through
December 31, 1997 and 4.33% for the twelve months of 1998 and
4.03% for the nine months ended September 30, 1999. The credit
enhancement associated with approximately $27.2 million of this
financing debt was extended this summer from August 22, 1999 to
August 15, 2000. The remaining $20.4 million of financing debt
must be renewed or refinanced by February 19, 2000 (approximately
$9.6 million) and April 15, 2000 (approximately $10.8 million).
While OTEF II is not an obligor and, therefore, is not liable for
repayment of this financing debt, the Securitized Bonds (in which
OTEF II owns approximately $15 million of subordinated interests
through the trusts) are in effect collateral for this financing
debt. Based on its preliminary discussions with financing
sources, the Managing General Partner believes that OTEF II will
be able to extend the credit enhancement or refinance this
financing debt, although no assurances can be given.
Costs associated with these financing transactions are
being amortized over ten years for financial statement purposes,
and costs associated with the interest rate cap are being
amortized over the life of each interest rate cap agreement,
which is three years. For federal income tax purposes, these
transactions are treated as sales by OTEF II of the applicable
bonds and a purchase of senior and subordinated interests in the
trusts.
Original Refunding Bonds. OTEF II has acquired refunding
bonds ("Original Refunding Bonds") for twelve of the fifteen
Existing MRBs, representing approximately 88% of the face amount
of the original bond portfolio. The Original Refunding Bonds
currently held by OTEF II consist of senior bonds ("Series A
Bonds") and subordinated bonds ("Series B Bonds"). This
senior/subordinated structure has allowed OTEF II to undertake
several financing transactions involving the Series A Bonds
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Report of Management
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allocable to BAC Holders, as well as other bonds acquired by OTEF
II pursuant to the Liquidity and Growth Plan ("Liquidity
Assets"). OTEF II retained the related Series B Bonds for the
benefit of the BAC Holders, and retained the portion of both the
Series A Bonds and the Series B Bonds that are designated as
Status Quo Assets and held for the benefit of SQB Holders.
Series A Bonds. The term of each Original Refunding Bond
and, accordingly, each Mortgage Loan is 30 years following the
date of refunding. The Series A Bonds require interest only
payments during the first three years and, thereafter, are
subject to annual sinking fund redemptions that will result in
full amortization of the Series A Bonds during the 27-year
remaining term. This annual sinking fund redemption begins April
15, 2000 for all twelve Series A Bonds. The Managing General
Partner is considering whether the elimination of this annual
sinking fund redemption would facilitate financing transactions
involving these assets or would otherwise be advantageous to OTEF
II.
Series A Bond Interest and Principal. The Series A Bonds
require pre-determined annual sinking fund redemptions based on a
27-year amortization schedule beginning in the fourth year,
calculated with an assumed rate of interest of 5.6% per year. In
the annual reset mode, Series A Bond interest was set initially
at closing of the refundings and is reset annually, thereafter,
at a market rate based upon a percentage of the then prevailing
one-year U.S. Treasury Bill rate, with a maximum rate of 5.6% per
annum. The initial interest rate on the Series A Bonds that have
been issued to date was 4.9%. The interest rate on seven of the
Series A Bonds retained by OTEF II was reset on November 1, 1999
to 4.88%; the interest rate on three Series A Bonds retained by
OTEF II was reset on December 1, 1998 to 4.01%. On January 1,
1999, the interest rate on another Series A Bond retained by OTEF
II was reset to 4.03%, and the interest rate on another Series A
Bond was reset on March 1, 1999 to 4.32%. The interest rate on
the Series A Bonds involved in the financing transactions
described above was converted from annual reset to a weekly
floating rate based on a spread over the BMA index. The weighted
averaged rate was 4.63% from the date of closing through December
31, 1997, 4.33% for the twelve months of 1998 and 3.98% for the
nine months ended September 30, 1999. Upon a remarketing, the
Series A Bonds may be converted to a different interest rate mode
(fixed or floating) and the interest rates may be modified at
that time to reflect the prevailing market interest rates for
whatever rate mode and remaining term is then applicable.
Series B Bonds. The term of each Series B Bond and,
accordingly, each Mortgage Loan is 30 years following the date of
refunding.
Series B Bond Interest and Principal. The Series B Bonds
accrue interest equal to the product of the Combined Rate (as
defined below) multiplied by the total combined principal balance
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Report of Management
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of the Series A Bonds and the Series B Bonds for each Operating
Partnership, less the interest payable on the related Series A
Bonds; the resulting amount of interest divided by the principal
balance of the Series B Bonds equals the interest accrual rate on
the Series B Bonds. Interest-only is payable on the Series B
Bonds to the extent of available cash flow of the Operating
Partnership, with the entire principal balance and any unpaid
interest due at maturity.
Combined Rate. The Combined Rate represents that portion
of each Property's projected Cash Flow Before Debt Service
("CFBDS") for each year (projected at the time of the refunding
of each Existing MRB) that may be applied to interest on the
combined Series A Bonds and Series B Bonds. See Note 7 to
Financial Statements included in OTEF II's 1998 Form 10-K for a
schedule of the Combined Rates of the Original Refunding Bonds
over the next 10 years.
Other Sources. In connection with the closing of the
Original Refunding Bonds, the applicable Operating Partnerships
entered into certain pooling agreements that provide under
certain circumstances additional sources of funds to enable them
to pay their respective debt service on the Series A Bonds and
the Series B Bonds and related fees and expenses. As of
September 30, 1999, the aggregate amount of net excess cash flow
held in the Operating Partnership escrows was approximately $3.6
million, including deposits from September's cash flow compared
to $2.2 million at the end of 1998.
Existing MRBs
At September 30, 1999, OTEF II held Existing MRBs for two of
the Operating Partnerships. As of September 30, 1999, the two
Operating Partnerships had cumulative unpaid Base Interest and
interest on interest at 8.25% per annum of approximately $5.5
million with respect to these Existing MRBs. The unpaid Base
Interest is not accrued on OTEF II's financial statements.
As required under the trust indentures for the Existing
MRBs, on November 1, 1999, the Existing MRBs for the Apollo and
San Bruno Operating Partnerships were remarketed, which means
that OTEF II exchanged the Existing MRBs for new bonds that bear
a fixed rate of interest to maturity at a market rate determined
by a remarketing agent. The remarketing agent determined the
fixed rate of interest on the San Bruno bonds to be 9% per annum.
The trust indenture for the Apollo bonds specified that the fixed
rate of interest on the remarketed bonds was the lower of the
rate established by the remarketing agent or 150 basis points in
excess of the Bond Buyer 20-bond index. The new rate was
determined to be 7.49% on the remarketing date. The original
maturity date of November 2009 was not changed for these Existing
MRBs.
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Report of Management
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In addition, in connection with the remarketing, the San
Bruno and Apollo Operating Partnerships delivered to OTEF II
interest-bearing, demand promissory notes, dated November 1,
1999, in the amount of $8,833,577 and $5,181,076.36,
respectively. The principal amount of the San Bruno note
reflects contingent interest in the amount of $8,599,800 due and
payable on the remarketing date together with accrued but unpaid
base interest; the principal amount of the Apollo note reflects
accrued but unpaid interest only since no contingent interest was
due and payable on the remarketing date. The demand notes bear
floating rate interest at the short-term applicable federal rate.
The contingent interest owed by the San Bruno Operating
Partnership has not been accrued on OTEF II's financial
statements through September 30, 1999.
OTEF II is continuing to explore with the Apollo Operating
Partnership a possible bond restructuring or refinancing
transaction. The Managing General Partner currently believes
that the amount of the Apollo bond and cumulative unpaid base
interest exceeds the value of the property owned by the Apollo
Operating Partnership. The San Bruno Operating Partnership is
currently considering a refinancing of its mortgage indebtedness
in addition to a possible bond restructuring or other capital
transaction. The Managing General Partner currently believes
that the value of the property owned by the San Bruno Operating
Partnership exceeds the combined outstanding principal balance of
the San Bruno bond in the amount of $26,060,000 and the new
demand note in the amount of $8,833,577 described above, and
that OTEF will realize the value of the San Bruno bond and the
demand note through a future sale, securitization, refinancing
or other capital transaction involving the bond and/or the note,
or a repayment of the bond and note by the San Bruno Operating
Partnership in accordance with the terms of such instruments.
Results of Operations
OTEF II Distributions. Distributions to Partners will
amount to approximately $3.9 million, or $0.52 per BAC and $6.19
per SQB holder of record as of September 30, 1999. These
distributions are payable on November 12, 1999.
OTEF II's Three-Month Operations. For financial statement
purposes, Net Income allocated to BAC holders and Net Income per
BAC was $5.1 million and $0.689, respectively, for the three-
month period ended September 30, 1999, as compared to $4.6
million and $0.637, respectively, for the three-month period
ended September 30, 1998, representing an increase of
approximately 8.2% over the prior comparative period. OTEF II's
total interest earned and expenses including finance interest
expense for the third quarter increased by approximately 10% and
19%, respectively, over the prior comparative period. The
increase in net income is the result of additional interest on
New Assets and taxable loans exceeding the costs associated with
<PAGE> 13
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Report of Management
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the implementation of the Liquidity & Growth Plan that were not
incurred in the prior comparative period.
OTEF II's Nine-Month Operations. For financial statement
purposes, Net Income allocated to BAC holders and Net Income per
BAC was $14.5 million and $1.983, respectively, for the nine-
month period ended September 30, 1999, as compared to $13.2
million and $1.840, respectively, for the nine-month period ended
September 30, 1998, representing an increase of approximately
7.7% over the prior comparative period. OTEF II's 1999 total
interest earned and expenses including finance interest expense
for the nine-month period increased by approximately 10.9% and
27.4%, respectively, over the prior comparative period. The
increase in net income is the result of additional interest on
New Assets and taxable loans exceeding the costs associated with
the implementation of the Liquidity & Growth Plan that were not
incurred in the prior comparative period. Due to OTEF II's
voluntary exchange program, there were 7,337,425 BACs outstanding
as of September 30, 1999 compared to 7,185,200 as of September
30, 1998.
Year 2000 Compliance
In accordance with the SEC's interpretive release
"Statement of the Commission Regarding Disclosure of Year 2000
Issues and Consequences by Public Companies...," the Managing
General Partner of OTEF II has upgraded and tested the principal
systems on which OTEF II relies and believes that they are Year
2000 compliant as of this date. The Managing General Partner is
currently contacting third parties with whom OTEF II does
business to evaluate their exposure to year 2000 issues. In
addition, the Managing General Partner is in the process of
contacting it's vendors to determine their compliance and is
developing contingency plans. The Managing General Partner
believes that such analysis will be completed in 1999.
THIS REPORT CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, AND SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND IS SUBJECT TO THE SAFE
HARBORS CREATED BY THOSE SECTIONS. THESE FORWARD-LOOKING
STATEMENTS REFLECT MANAGEMENT'S CURRENT VIEWS WITH RESPECT TO
FUTURE EVENTS AND FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING
STATEMENTS, AND WILL BE AFFECTED BY A VARIETY OF RISKS AND
FACTORS. THESE STATEMENTS ARE SUBJECT TO MANY UNCERTAINTIES AND
RISKS, AND SHOULD NOT BE CONSIDERED GUARANTEES OF FINANCIAL
PERFORMANCE. READERS SHOULD REVIEW CAREFULLY OTEF II's FINANCIAL
STATEMENTS AND THE NOTES THERETO, AS WELL AS RISK FACTORS
DESCRIBED IN THE SEC FILINGS. OTEF II DISCLAIMS ANY OBLIGATION
TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-
LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
<PAGE> 14
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Report of Management
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CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE FILING OF THE FORM 10 K
WITH THE SEC OR OTHERWISE TO REVISE OR UPDATE ANY ORAL OR WRITTEN
FORWARD-LOOKING STATEMENT THAT MAY BE MADE FROM TIME TO TIME BY
OR ON BEHALF OF OTEF II.
<PAGE> 15
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
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Balance Sheets (in thousands, except per BAC and SQB amounts)
(Unaudited)
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<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
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<S> <C> <C>
Assets
Investments in tax-exempt securities $200,701 $213,900
Investments in tax-exempt securities held in trust 76,765 62,565
Taxable investments and loans 26,529 11,840
Cash and cash equivalents 10,290 18,011
Other assets 4,065 2,770
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Total Assets $318,350 $309,086
=============================================================================
Liabilities and Partners' Capital
Liabilities
Financing debt 52,614 $ 47,614
Distributions payable 3,899 3,826
Accounts payable and accrued expenses 552 573
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Total Liabilities 57,065 52,013
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Partners' Capital
General Partners' Interests (2,211) (2,275)
Limited Partners' Interests:
Beneficial Assignee Interests (7,499,875 interests
issued and 7,337,425 and 7,183,200 interests
outstanding as of September 30, 1999 and
December 31, 1998,respectively) 167,216 160,632
SQB Interests (12,587 interests issued and 777 and
6,946 interests outstanding as of September 30,
1999 and December 31, 1998, respectively) 411 3,849
Accumulated other comprehensive income 95,869 94,867
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Total Partners' Capital 261,285 257,073
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Total Liabilities and Partners' Capital $318,350 $309,086
=============================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
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Statements of Income and Comprehensive Income (in thousands,
except per BAC amounts) (Unaudited)
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<CAPTION> Three months Nine months
ended ended
September 30, September 30,
--------------- ---------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Interest Earned
Interest on investments in
tax-exempt securities $ 4,597 $4,593 $14,189 $13,655
Interest on investments in
tax-exempt securities held in trust 901 665 2,229 1,808
Interest on taxable investments & loans 718 318 1,390 491
Other, tax-exempt income 92 157 370 440
- -----------------------------------------------------------------------------
Total Interest Earned 6,308 5,733 18,178 16,394
- -----------------------------------------------------------------------------
Finance interest expense (536) (500) (1,510) (1,320)
- -----------------------------------------------------------------------------
Net Interest Margin 5,772 5,233 16,668 15,074
- -----------------------------------------------------------------------------
Expenses
Governance and administrative expenses (251) (215) (821) (663)
Other liquidity and growth expenses (363) (251) (1,006) (636)
- -----------------------------------------------------------------------------
Total Expenses (614) (466) (1,827) (1,299)
=============================================================================
Net income $ 5,158 $4,767 $14,841 $13,775
=============================================================================
Other comprehensive income:
Unrealized (loss) gains on investments $(2,280) $4,913 $ 1,002 $ 6,550
=============================================================================
Comprehensive income $2,878 $9,680 $15,843 $20,325
=============================================================================
Net income allocated to BAC holders $5,058 $4,576 $14,534 $13,222
=============================================================================
Net income per BAC $0.689 $0.637 $1.983 $1.840
=============================================================================
Weighted Average BACs outstanding 7,337 7,185 7,329 7,185
=============================================================================
Net income per BAC-assuming dilution<F1> $0.688 $0.631 $1.978 $1.821
=============================================================================
Weighted Average BACs outstanding -
assuming dilution<F1> 7,352 7,252 7,347 7,262
=============================================================================
Distribution per BAC $0.520 $0.510 $1.550 $1.515
=============================================================================
<PAGE> 16-continued
<FN>
<F1> Reflects the dilutive effect of unexercised stock options.
</FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 17
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
- ------------------------------------------------------------------------------
Statement of Partners' Capital (in thousands, except per BAC and SQB amounts)
(Unaudited)
- ------------------------------------------------------------------------------
<CAPTION>
Limited Partner Accumulated
Interest Other
General ------------------ Comprehensive
Partners BACs SQBs Income Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $(2,275) $160,632 $3,849 $94,867 $257,073
==============================================================================
Comprehensive Income:
Net Income, including
$0.644 per BAC and $7.57
per SQB 97 4,711 13 0 4,821
Unrealized gains on
investments 0 0 0 2,774 2,774
-------------------------------------------------
Total comprehensive income 97 4,711 13 2,774 7,595
Allocation of SQB Capital 0 2,875 (2,875) 0 0
Distributions payable to
Partners including $0.51
per BAC and $12.38
per SQB (77) (3,730) (22) 0 (3,829)
==============================================================================
Balance, March 31, 1999
(Unaudited) $(2,255) $164,488 $ 965 $97,641 $260,839
==============================================================================
Comprehensive Income:
Net Income (loss),
including $0.650 per BAC
and $(0.340) per SQB 97 4,765 0 0 4,862
Unrealized gains on
investments 0 0 0 508 508
-------------------------------------------------
Total comprehensive income 97 4,765 0 508 5,370
Allocation of SQB Capital 0 499 (499) 0 0
Distributions payable to
Partners including $0.52
per BAC and $12.38
per SQB (78) (3,816) (10) 0 (3,904)
==============================================================================
Balance, June 30, 1999
(Unaudited) $(2,236) $165,936 $ 456 $98,149 $262,305
==============================================================================
<PAGE> 17-continued
Comprehensive Income:
Net Income (loss),
including $0.689 per BAC
and $(4.560) per SQB 103 5,058 (3) 0 5,158
Unrealized gains on
investments 0 0 0 (2,280) (2,280)
-------------------------------------------------
Total comprehensive income 103 5,058 (3) (2,280) 2,878
Allocation of SQB Capital 0 37 (37) 0 0
Distributions payable to
Partners including $0.52
per BAC and $6.19
per SQB (78) (3,815) (5) 0 (3,898)
==============================================================================
Balance, September 30, 1999
(Unaudited) $(2,211) $167,216 $ 411 $95,869 $261,285
==============================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 18
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
- -----------------------------------------------------------------------------
Statements of Cash Flows (in thousands) (Unaudited)
- -----------------------------------------------------------------------------
<CAPTION>
Nine months ended
September 30,
------------------------
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $14,841 $13,775
Adjustments to reconcile net income
to net cash provided by operating activities:
Changes in Accounts payable and accrued expenses (21) (882)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 14,820 12,893
- -----------------------------------------------------------------------------
Investing Activities:
Investment in new assets (14,689) (14,944)
Litigation Settlement Payments<F1> 0 (1,538)
Increase in other assets, net<F2> (1,295) (362)
Redemption of SQB interests 0 (80)
- -----------------------------------------------------------------------------
Net cash used in investing activities (15,984) (16,924)
- -----------------------------------------------------------------------------
Financing activities:
Increase in financing debt 5,000 20,440
Distributions paid (11,557) (11,263)
- -----------------------------------------------------------------------------
Net cash (used) provided by financing activities (6,557) 9,177
- -----------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (7,721) 5,146
Cash and cash equivalents, beginning of period 18,011 11,694
- -----------------------------------------------------------------------------
Cash and cash equivalents, end of period $10,290 $16,840
=============================================================================
<FN>
<F1> In connection with the settlement of the OTEF II litigation
discussed in prior reports, OTEF II made a final payment of
plaintiff's counsel fees and expenses in the amount of $1.54
million in the second quarter of 1998 upon the expiration of
all appeal periods and dismissal of the state court action.
<F2> Other assets represent primarily deferred costs incurred in
connection financing transactions, none of which are recurring
operating activities. Such deferred costs are net of
amortization expense which is included in other Liquidity &
Growth expenses as presented in the Statements of Income and
Comprehensive Income.
</FN>
The accompanying notes are an integral part of these
financial statements.
</TABLE>
<PAGE> 19
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
Note 1. Financial Statements
The financial statements reflect all adjustments which, in
the opinion of the Managing General Partner of Oxford Tax Exempt
Fund II Limited Partnership ("Oxford Tax Exempt Fund II," "OTEF
II" or the "Partnership"), are necessary to present fairly
OTEF II's financial position as of September 30, 1999 and
December 31, 1998, the Statements of Income and Comprehensive
Income for the three and nine-month periods ended September 30,
1999 and 1998, the Statement of Partners' Capital as of September
30, 1999, and the Statements of Cash Flows for the nine-month
period ended September 30, 1999 and 1998, and the notes thereto,
in accordance with generally accepted accounting principles.
These statements should be read in conjunction with the audited
financial statements and notes included in the Partnership's
Annual Report for the year ended December 31, 1998.
Note 2. General Business
The Partnership, which was formed under the laws of the
State of Maryland, commenced operations on March 1, 1995, in
connection with a plan (the "1995 OTEF Restructuring Plan") to
restructure Oxford Tax Exempt Fund Limited Partnership, a
Maryland limited partnership ("OTEF," "Predecessor," or
"OTEF II's predecessor"). Oxford Tax Exempt Fund II Corporation,
a Maryland corporation, is the Managing General Partner of
OTEF II (the "Managing General Partner"). OTEF II Associates
Limited Partnership, a Maryland limited partnership, is the
associate general partner of OTEF II (together with the Managing
General Partner, the "General Partners").
OTEF II is a publicly-traded partnership (AMEX: OTF) that
invests in tax-exempt bonds issued to finance high quality
apartment and senior living/health care communities, with the
objective of producing increasing income and quarterly
distributions for its shareholders. These distributions are
primarily exempt from federal income taxation.
Note 3. Significant Accounting Policies
Method of Accounting. OTEF II's financial statements are
prepared in accordance with generally accepted accounting
principles.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
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 dates of the financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates.
<PAGE> 20
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
Income Taxes. No provision has been made for federal,
state, or local income taxes in the financial statements of
OTEF II since the Partners of OTEF II, formerly OTEF, BAC Holders
(collectively, "OTEF II BAC Holders") are required to report on
their individual tax returns their allocable share of taxable
income, gains, losses, deductions, and credits of OTEF II.
Comprehensive Income. Comprehensive income includes both
"Net Income" and "Other Comprehensive Income". OTEF's only
source of "other comprehensive income" is related to the change
in the valuation of its tax-exempt investments to market which
results in unrealized gains or losses previously charged to an
equity account under SFAS 115 "Accounting for Certain Investments
in Debt and Equity Securities". SFAS 130 does not require
presentation of comprehensive earnings per share. For the three
months ended September 30, 1999 OTEF II reported on unrealized
loss on investments in tax exempt securities of approximately
$2.2 million due to upward market fluctuations in interest rates
which resulted in a higher discount of the bonds. For the nine
month period ended September 30, 1999 and 1998, OTEF recorded
"Other Comprehensive Income" from unrealized gains on its
investment in tax-exempt securities of approximately $1 million
and $6.6 million, respectively. Cumulative "Other Comprehensive
Income" from unrealized gains on investments was $95.9 million
and $85.1 million at September 30, 1999 and 1998, respectively.
Investments. As previously reported, on September 1, 1995,
the then Existing MRBs were transferred from OTEF to OTEF II at
their book value of approximately $153 million. The OTEF II
Managing General Partner estimated at September 30, 1999 that the
fair value of the Original Refunding Bonds and the Existing MRBs
was approximately $248.8 million and, accordingly, unrealized
appreciation on these investments of $95.9 million is recorded as
a credit to partners' capital. The current fair value of the
Existing MRBs was determined by the Managing General Partner
using the same cash flow methodology applied by a major
investment banking firm in connection with structuring advice
rendered to OTEF II and its predecessor with respect to the 1995
OTEF Restructuring Plan. The Series A Bonds are valued at par
based on comparable municipal bond securities, and all other
bonds (the Existing MRBs and the Series B Bonds) are valued based
on a discounted cash flow analysis. For this purpose the
applicable cash flows are based on certain assumptions concerning
the Properties and the markets in which they are located,
including the timing and realization of such cash flows. The
Dallas and Jacaranda bonds are recorded at cost, which
approximates their fair market values at September 30, 1999. Due
to the recent securitization transaction with Merrill Lynch the
Carpenter Bonds were adjusted to their face amount of $14.2
million.
<PAGE> 21
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
Investments are accounted for using the provisions of
Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). Under this method the investments are reflected at their
current estimated fair value, with cumulative unrealized gains or
losses being credited or charged as unrealized gains or losses on
investments directly to partners' capital, rather than the
Statement of Income. Interest on all bonds other than the
Existing MRBs are recorded as interest income as earned.
Interest income on the Existing MRBs is recorded based on current
projected cash flows. Accrued interest on the Series A and
Series B and New bonds as of September 30, 1999 and 1998 was $1.6
million, $1.5 million, respectively.
Accounting for earnings per share. Basic earnings per
share, a measure required by the Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), does not include
incentive BAC options as common share equivalents. Diluted
earnings per share reflects the potential dilution that could
occur if such options or other contracts to issue shares were
exercised or resulted in the issuance of an incremental amount of
new shares based on the Treasury Method. The Treasury Method
assumes that the proceeds from exercise of the options are used
to purchase shares at the average market price during the three
month reporting period, which was $24.42 and $26.62 for September
30, 1999 and 1998, respectively. The incremental shares (the
difference between the number of shares assumed issued and the
number of shares assumed purchased) is included in the
denominator of the diluted earnings per share computation.
"Incremental" BAC shares were approximately 7,347,000 and
7,262,000 for September 30, 1999 and 1998, respectively.
Net Income and Distributions per BAC and SQB. Net income
and distributions per BAC and net income and distributions per
SQB are based upon the weighted average number of BACs and SQBs
outstanding during the applicable period. For the first quarter
of 1997 there were 7,499,875 BACs outstanding. On April 1, 1997,
314,675 BACs were converted to 12,587 SQBs, leaving 7,185,200
BACs outstanding at September 30, 1997. In December 1998, OTEF
purchased 2,000 BACs on the open market in accordance with its
BAC repurchase program, leaving 7,183,200 BACs outstanding at
December 31, 1998. During the third quarter of 1997, 5,494 SQBs
were redeemed for a total cost of $3.0 million. An additional
147 SQBs were redeemed during 1998, leaving 6,946 SQBs
outstanding at December 31, 1998. In the first nine months of
1999, 6,169 of the remaining 6,946 SQBs were converted to 154,225
BACs in accordance with OTEF II's voluntary exchange offer, which
expired on July 31, 1999. At March 31, 1999 there were 7,312,950
BACs and 1,756 SQBs outstanding. In the second quarter of 1999
an additional 910 SQBs were converted to 22,750 BACs. In the
third quarter of 1999 and additional 69 SQBs were converted to
1,725 BACs. At September 30, 1999 there were 7,337,425 BACs and
<PAGE> 22
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
777 SQBs outstanding. For the nine-months ended September 30,
1999, approximately $0.05 million of general and administrative
costs were incurred in connection with the exchange program.
Statements of cash flows. The statements of cash flows are
intended to reflect only cash receipts and cash payment activity.
The statements do not reflect investing and financing activity
that affect recognized assets or liabilities that do not result
in cash receipts or cash payments. This non-cash activity
consists of distributions payable to Partners, SQB Holders, and
BAC Holders of approximately $3.9 million and $3.8 million at
September 30, 1999 and 1998, respectively.
Cash and cash equivalents. Cash and cash equivalents
consist of all demand deposits and tax-exempt money market funds
stated at cost, which approximates market value, with original
maturities of three months or less at date of purchase.
Accounting for SQBs. The SQBs are designed to replicate,
to the extent possible, the economic interest that the SQB
Holders would have had in the Existing MRBs, as refunded, if the
partnership agreement for Oxford Tax Exempt Fund Limited
Partnership ("OTEF"), OTEF II's predecessor, had continued to
govern and the Liquidity and Growth Plan was not implemented.
For financial statement purposes, the SQBs are treated as a
separate class of equity and, accordingly, net income allocated
to SQB holders, net income per SQB, and distributions per SQB are
reflected separately from the OTEF II BAC Holders on the
Statement of Partners' Capital. The SQBs were not split as were
the BACs on July 1, 1997. The redeemed SQBs are reflected as a
reduction of Partners' Capital and were offset against the SQB
Holders' interests when redeemed.
The SQB Holders do not share in the growth or other
benefits expected to be achieved under the Liquidity and Growth
Plan. In addition, the SQBs will not be allocated any capital
losses for federal income tax purposes that may result from the
disposition of the Original Refunding Bonds or interests therein
or new assets in connection with a financing undertaken pursuant
to the Liquidity and Growth Plan. A schedule of SQB income
(loss) for the three and nine-months ended September 30, 1999 is
as follows:
<PAGE> 23
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
<TABLE>
- -----------------------------------------------------------------
STATEMENT OF STATUS QUO BAC INCOME (LOSS)
(in thousands, except per SQB interest amounts)
(Unaudited)
- -----------------------------------------------------------------
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
1999 1998 1999 1998
--------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Interest on Bonds $ 12 $ 108 $ 56 $ 320
Other Interest 0 3 1 9
- -----------------------------------------------------------------
12 111 57 329
Expenses
Governance and Administration (15) (16) (47) (50)
Litigation expenses 0 0 0 (2)
- -----------------------------------------------------------------
Net income to SQB holders $ (3) $ 95 $ 10 $ 277
=================================================================
Other comprehensive income:
Unrealized gains on investment 1 114 14 152
=================================================================
Comprehensive income $ (2) $ 209 $ 24 $ 429
=================================================================
Weighted average SQBs outstanding 777 6,946 1,126 6,977
=================================================================
Net income (loss) per SQB interest $(4.56) $13.77 $ 8.40 $39.72
=================================================================
Distribution per SQB interest $ 6.19 $12.38 $30.95 $37.14
=================================================================
</TABLE>
As previously reported, since substantially all of the SQBs
outstanding at December 31, 1998 have been exchanged for BACs,
the remaining SQBs have been allocated increased share of
administrative costs, which are relatively fixed costs that are
not dependent on the number of SQBs outstanding. For the quarter
ended September 30, 1999, these costs exceeded income, resulting
in a net loss of $4.56 per SQB. Accordingly, the
September 30, 1999 distribution will be paid exclusively from
existing cash reserves allocable to remaining SQB holders. In
the absence of a sale of any remaining SQB assets, a redemption
by one or more Operating Partnerships of the bonds in which SQB
holders have an ownership interest, or some other capital
transaction, the Managing General Partner expects that SQB
holders will continue to realize net losses in the future.
<PAGE> 24
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
Based on OTEF II's existing cash reserves allocable to the
remaining SQBs and the Managing General Partner's estimates of
allocable interest payments received by OTEF II from recurring
cash flow and expenses allocable to SQB holders, the current
level of SQB quarterly distributions can only be maintained
through the fourth quarter of 1999 before these cash reserves are
substantially depleted. Thereafter, in the absence of a sale of
any remaining SQB assets, or a redemption by one or more
borrowers of the bonds in which SQB holders have an ownership
interest, or some other transaction of a capital nature, it is
anticipated that SQBs will no longer receive quarterly
distributions payable from recurring operations. Continued
losses will cause a reduction in the SQB capital accounts, which
will reduce the amount of net proceeds from any future capital
transaction otherwise payable to SQB holders. See Note 5.
Note 4. Related Party Transactions
Interests in OTEF II and the Operating Partnerships. The
General Partners own interests in OTEF II that entitle them to
receive a share of OTEF II's cash flow and possibly, sale,
refinancing and liquidation proceeds. Distributions to the
General Partners totaled approximately $0.08 million for three
months ended September 30, 1999 and September 30, 1998,
respectively.
Affiliates of the Managing General Partner that are general
and limited partners of the Operating Partnerships have an
interest in the Operating Partnerships that entitles them to
receive a share of any cash flow and sale, refinancing and
liquidation proceeds of the Operating Partnerships. Since
inception, the original Operating Partnerships have not been able
to make any distributions of cash flow to their respective
partners. In addition, in connection with the 1995 OTEF
Restructuring Plan and after the Existing MRBs are refunded, all
cash flow from the original Operating Partnership that is
attributable to these interests will be pledged for the benefit
of OTEF II. Affiliates of the Managing General Partner receive
fees from these partnerships and serve as their general partners,
which entitles them to a share of any cash flow and refinancing
and liquidation proceeds from these partnerships.
Fees. For the nine months ended September 30, 1999 and
1998 total fees paid to Oxford Realty Financial Group, Inc.
("ORFG") and other Oxford affiliates by OTEF II or the Operating
Partnerships amounted to approximately $1.8 million and $1.6
million, respectively, as discussed below.
ORFG provides various asset management-related services
relating to the Mortgaged Properties and OTEF II's investment
therein. It also provides additional services in connection with
OTEF II's investment in New Assets, as described below. The fees
payable to ORFG for the services it is providing currently (the
<PAGE> 25
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
"Existing Fees") are operating expenses of the Operating
Partnerships that are payable prior to the payment of interest on
the Existing MRBs.
ORFG receives an acquisition fee from OTEF II for finding,
analyzing and acquiring a New Asset. The acquisition fee, which
is payable on the closing of any transaction in which OTEF II
acquires a New Asset, is equal to 1.0% of (i) the purchase price
paid by OTEF II for the New Asset, or (ii) with respect to a New
Asset which is subordinated in payment to senior indebtedness,
the sum of (A) the purchase price paid by OTEF II for its
subordinated interest and (B) the principal amount of the senior
interest, if any; provided, however, that no acquisition fee
shall be paid with respect to the principal amount of any such
senior interest if OTEF II has not purchased the senior interest
and neither the Managing General Partner nor any of its
affiliates had any material involvement in the negotiation,
structuring or closing of the purchase of the senior interest.
In the case of a New Asset which is subordinated in payment to
senior indebtedness as of the closing of the transaction in which
OTEF II acquires its interest, the maximum acquisition fee
payable shall be equal to 2.5% of the purchase price paid by
OTEF II for such interest as of the date of closing. For the
nine months ended September 30, 1999 and 1998 OTEF paid
acquisition fees of $0.42 and $0.35 million, respectively.
OTEF II also pays ORFG an advisory fee for managing
OTEF II's New Assets after their acquisition. The advisory fee,
which is payable monthly, is equal to 0.5% of (i) the purchase
price paid by OTEF II for a New Asset, or (ii) with respect to a
New Asset which is subordinated in payment to senior
indebtedness, the sum of (A) the purchase price paid by OTEF II
for its subordinated interest and (B) the principal amount of the
senior interest; provided, however, that if an affiliate of the
Managing General Partner is receiving fees for property
management services pursuant to a property management agreement
entered into with the owner of an additional mortgaged property
("Additional Mortgaged Property") the advisory fee will be equal
to 0.5% of the purchase price paid by OTEF II for the related New
Asset. In addition, if the Managing General Partner receives in
any year compensation or fees from an unaffiliated person that
serves as the property manager for the Additional Mortgaged
Property, the amount of the advisory fee payable with respect to
the related New Asset shall be reduced by 50% of any such
compensation or fees received by the Managing General Partner.
Total advisory fees paid by OTEF II to ORFG for the nine months
of 1999 and 1998 were approximately $0.30 and $0.16 million,
respectively.
For the nine months ended September 30, 1999 and 1998, the
Operating Partnerships, paid ORFG total asset management fees of
approximately $0.56 million and $0.55 million, respectively. For
the nine months ended September 30, 1999 and 1998, the original
<PAGE> 26
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
Operating Partnerships also paid ORFG, in the aggregate, $0.52
million of fees pursuant to the OTEF Restructuring Plan
Administration/Asset Management Fee Agreement, which amount is
equal to 0.25% per annum of the principal amount of the bonds
collateralized by the properties owned by the original Operating
Partnerships ("Existing Mortgaged Properties"). Oxford
affiliates may also receive other fees and expense reimbursements
from entities other than OTEF II in connection with the
acquisition, financing or refinancing, operation, repair,
replacement and improvement of Mortgaged Properties.
Expense Reimbursements. OTEF II and the Operating
Partnerships also reimburse ORFG for certain expenses it incurs
in providing services with respect to the mortgaged properties
and the administration of OTEF II's affairs. Total
reimbursements to the General Partners and their affiliates for
the nine-month period ended September 30, 1999 and 1998 were
approximately $0.617 million, $0.460 million, respectively. The
Managing General Partner anticipates that the amount of expense
reimbursements payable by OTEF II will increase in accordance
with the terms of OTEF II's partnership agreement due, in part,
to the additional acquisition and financing activities relating
to the Liquidity and Growth Plan. The portion of the expense
reimbursement relating to salaries is determined based on the
actual time the officers and employees devote to OTEF II based
upon their respective wage rate.
Incentive Option Plan. On May 21, 1997, OTEF II adopted an
incentive option plan (the "Incentive Option Plan") for the
Managing General Partner to attract and retain key employees and
advisers. The Incentive Option Plan authorizes the granting to
the directors, officers and employees of the Managing General
Partner and certain affiliates of options to purchase 652,125
OTEF II BACs (on a post-split basis), representing approximately
8.2% of the outstanding OTEF II BACs on a fully diluted basis.
Such options are exercisable for 10 years. The Managing General
Partner has awarded all of the OTEF II BACs authorized under the
terms of the Incentive Option Plan. Of the 652,125 options,
613,000 were fully vested upon issuance and 39,125 are vested
equally over 3 years commencing January 1, 1998. The exercise
price for all options is $23.88 per BAC, which approximated the
fair market value at the date of grant. At September 30, 1999
the BAC market price of $24 was not materially different than the
option exercise price. Since the date of grant, no options have
been exercised.
Guarantees and Pledges. In connection with the Lakeside
North and Summerwalk investments, OTEF II, along with the
operating partnership that owns the applicable property, executed
a guaranty agreement relating to payment of issuer and trustee
fees and expenses (including expenses of their respective
counsel), as well as an indemnity agreement relating to
environmental matters pertaining to the property. OTEF II
<PAGE> 27
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
obtained Phase I environmental site assessment reports for these
investments which, subject to the limitations stated therein,
conclude generally that no adverse environmental conditions
requiring remediation exist at either site. Accordingly, the
Managing General Partner believes that OTEF II does not have
material financial exposure under these agreements. In
connection with the Carpenter bond securitization, OTEF II
pledged the $10.3 million of Dallas bonds as collateral. In
connection with the River Reach investment transaction, OTEF II
executed a standby reimbursement agreement with a Merrill Lynch
affiliate which effectively guarantees the obligations of the
Naples Borrower to Banco Santander Central Hispano, S.A. OTEF II
may execute similar agreements in connection with new investments
made after the date of this report.
Note 5. Subsequent Events.
Remarketing. As required under the trust indentures for
the Existing MRBs, on November 1, 1999, the Existing MRBs for the
Apollo and San Bruno Operating Partnerships were remarketed,
which means that OTEF II exchanged the Existing MRBs for new
bonds that bear a fixed rate of interest to maturity at a market
rate determined by a remarketing agent. The remarketing agent
determined the fixed rate of interest on the San Bruno bonds to
be 9% per annum. The trust indenture for the Apollo bonds
specified that the fixed rate of interest on the remarketed bonds
was the lower of the rate established by the remarketing agent or
150 basis points in excess of the Bond Buyer 20-bond index. The
new rate was determined to be 7.49% on the remarketing date. The
original maturity date of November 2009 was not changed for these
Existing MRBs.
In addition, in connection with the remarketing, the San
Bruno and Apollo Operating Partnerships delivered to OTEF II
interest-bearing, demand promissory notes dated November 1, 1999,
in the amount of $8,833,577 and $5,181,076.36, respectively. The
principal amount of the San Bruno note reflects contingent
interest in the amount of $8,599,800 due and payable on the
remarketing date together with accrued but unpaid base interest;
the principal amount of the Apollo note reflects accrued but
unpaid interest only since no contingent interest was due and
payable on the remarketing date. The demand notes bear floating
rate interest at the short-term applicable federal rate. The
contingent interest owed by the San Bruno Operating Partnership
has not been accrued on OTEF II's financial statements through
September 30, 1999.
OTEF II is continuing to explore with the Apollo Operating
Partnership a possible bond restructuring or refinancing
transaction. The Managing General Partner currently believes
that the amount of the Apollo bond and cumulative unpaid base
interest exceeds the value of the property owned by the Apollo
Operating Partnership. The San Bruno Operating Partnership is
<PAGE> 28
- -----------------------------------------------------------------
Notes to Financial Statements
- -----------------------------------------------------------------
currently considering a refinancing of its mortgage indebtness in
addition to a possible bond restructuring or other capital
transaction. The Managing General Partner currently believes
that the value of the property owned by the San Bruno Operating
Partnership exceeds the combined outstanding principal balance
of the San Bruno bond in the amount of $26,060,000 and the new
demand note in the amount of $8,833,577 described above, and
that OTEF will realize the value of the San Bruno bond and the
demand note through a future sale, securitization, refinancing
or other capital transaction involving the bond and/or the note,
or a repayment of the bond and note by the San Bruno Operating
Partnership in accordance with the terms of such instruments.
Distributions. On November 12, 1999, the Managing General
Partner paid a distribution of $0.52 per BAC and $6.19 per SQB to
holders of record as of September 30, 1999.
<PAGE> 29
- -----------------------------------------------------------------
Instructions for Investors who wish to reregister or transfer
OTEF II BACs or SQBs
- -----------------------------------------------------------------
On July 22, 1997, the American Stock Exchange began trading
OTEF II BACs under the ticker symbol, OTF. Please follow
the instructions below to expedite the reregistration or transfer
of ownership of any OTEF II BACs or Status Quo BACs ("SQB") that
you may own.
IF YOU DO NOT HOLD CERTIFICATES
Your shares are being held by your brokerage firm in "street
name". To register a change of ownership of OTEF II BACs held
in such accounts, please have your account representative or
financial consultant request the necessary transfer documents.
YOU MUST HAVE THE PROPER TRANSFER DOCUMENTS FROM YOUR
BROKERAGE FIRM. Additionally, please contact your account
representative or financial consultant for address changes.
IF YOU HOLD CERTIFICATES
Effective July 1, 1997, OTEF II appointed Registrar and
Transfer Company ("R&T") as the sole registrar and transfer
agent with respect to the OTEF II BACs and SQBs.
All notices, claims, certificates, requests, demands and
other communications relating to transfers of OTEF II BACs and
SQBs should be sent to:
Registrar and Transfer Company
Attn: William Tatler, Vice President
Stock Transfer Department
10 Commerce Drive
Cranford, NJ 07016
All phone calls relating to such transfers should be directed
to: Registrar and Transfer Company
Stock Transfer Department
1-800-368-5948
GENERAL INFORMATION
All general inquiries relating to OTEF II should be directed
to OTEF II Investor Services at 1-888-321-OTEF.
The Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, filed with the Securities and Exchange
Commission, is available to SQB and OTEF II BAC Holders and
may be obtained by writing:
Investor Services
Oxford Tax Exempt Fund II Limited Partnership
7200 Wisconsin Avenue, 11th Floor
Bethesda, Maryland 20814
1-888-321-OTEF
ALSO VISIT OUR WEB SITE AT WWW.OTEF.COM
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at September 30, 1999 (Unaudited) and the Statements of
Income for the nine months ended September 30, 1999 (Unaudited) and is
qualified in its entirety by reference to such finacial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,290
<SECURITIES> 303,995
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,065
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 318,350
<CURRENT-LIABILITIES> 57,065
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 261,285
<TOTAL-LIABILITY-AND-EQUITY> 318,350
<SALES> 0
<TOTAL-REVENUES> 18,178
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,337
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,841
<EPS-BASIC> 1.98
<EPS-DILUTED> 1.98
</TABLE>
