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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, 2000
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 jurisdiction 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: None
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, 2000, the following classes of beneficial
assignee interests of Oxford Tax Exempt Fund II Limited
Partnership were outstanding: (i) 7,344,425 beneficial assignee
interests ("BACs") with an aggregate market value ($26.5625 per
share) of $195,086,289, and (ii) 97 Status Quo BACs ("SQBs").
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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 12 through 15 of OTEF
II's Quarterly Report (Unaudited).
Item 2. Management's Discussion and Analysis of Financial Condit
ion 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, 2000 and 1999 is incorporated herein by reference to
sequentially numbered pages 6 through 11 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.
A report on Form 8-K was filed with the Securities &
Exchange Commission on July 13, 2000 regarding certain
contractual arrangements that could result in a change in
control of the Registrant.
A report on Form 8-K was filed with the Securities and
Exchange Commission on September 20, 2000 regarding the
sale of the Registrant's San Bruno investments.
A report on Form 8-K was filed with the Securities and
Exchange Commission on October 5, 2000 regarding the
consummation of the contractual arrangements discussed in
the Form 8-K filed on July 13, 2000.
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, 2000, follows on pages
5 through 21 of this report.
(27) Financial Data Schedule.
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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: 11/13/00 By: /s/ Martha Long
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Martha Long,
Chief Accounting Officer
Date: 11/13/00 By: /s/ Peter Kompaniez
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Peter Kompaniez,
Director and President
Date: 11/13/00 By: /s/ Patrick J. Foye
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Patrick J. Foye,
Director and Executive Vice President
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OXFORD TAX EXEMPT FUND II LIMITED PARTNERSHIP
Quarterly Report
(Unaudited)
September 30, 2000
CONTENTS
Report of Management
Balance Sheets
Statements of Income and Comprehensive Income
Statement of Partners' Capital
Statements of Cash Flows
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, 2000, 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 appearing elsewhere in this
Quarterly Report.
Recent Developments
Change in Control of Managing General Partner. On
September 20, 2000, Apartment Investment and Management Company
("AIMCO") (NYSE: AIV) acquired all of the stock of Oxford Realty
Financial Group, Inc. ("ORFG"), that it did not already own, as
well as other interests in various Oxford entities. ORFG is the
parent company of OTEF II's Managing General Partner, Oxford Tax
Exempt Fund II Corporation (the "Managing General Partner").
Merrill Lynch & Co. served as financial advisor to ORFG and its
affiliates with respect to this transaction.
AIMCO, a publicly-traded real estate investment trust
headquartered in Denver, Colorado, owns and manages a
geographically diversified portfolio of approximately 365,000
apartments and is one of the largest owners and managers of
apartment communities in the nation. AIMCO has substantial
experience with properties financed with tax-exempt bonds, and
continues to serve as the property manager for 19 of the 21
apartment communities that collateralize the tax-exempt and
taxable debt held by OTEF II.
With the completion of this transaction, AIMCO now owns the
Managing General Partner of OTEF II, Oxford Tax Exempt Fund II
Corporation, and thereby controls the management of OTEF II.
Effective as of the closing of the acquisition agreement, the
board of directors and executive officers of Oxford Tax Exempt
Fund II Corporation are those set forth on Annex I to AIMCO's
Schedule 13D regarding the ORFG transaction, dated September 20,
2000. AIMCO also owns the managing general partner interests in
20 of the 21 partnerships whose apartment properties are
collateral for OTEF II's tax-exempt and taxable debt.
As part of such acquisition, AIMCO acquired: (1) the entity
(ORFG) which owns the managing general partner of OTEF II, and
approximately 40% of the non-managing general partner of OTEF II;
and (2) options to purchase, from the principals of ORFG, 32,580
units of beneficial assignee interest in OTEF II ("BACs") owned
by them and (3) existing employee stock options that had been
held by the principals of ORFG to purchase from OTEF II 652,125
BACs.
The options for 32,580 BACs were granted by the principals
of ORFG who were the sellers of the assets in the Oxford
acquisition and, in general, are exercisable at the price offered
in any acquisition transaction (as discussed below) or at a price
equal to 90% of the fully diluted book value per BAC as reported
by OTEF II for the last calendar quarter prior to the exercise of
the option, subject in both cases to possible upward adjustments
if certain events occur after the exercise of the option, but in
no case will the exercise price be less than the price the seller
paid for the BACs. The 652,125 options granted by OTEF II under
its option plan are exercisable at $23.88 per BAC and were
acquired by AIMCO for $8.00 per option, subject to possible
upward adjustment if certain events occur in the future.
AIMCO has agreed with the sellers of the assets in the
Oxford acquisition that if AIMCO enters into an acquisition
transaction involving OTEF II before September 20, 2003, AIMCO
will pay consideration in such acquisition transaction of no less
than 90% of the fully diluted book value per BAC as reported by
OTEF II for the calendar quarter immediately preceding the date
of the acquisition transaction. An acquisition transaction
includes, but is not limited to, a merger, reorganization or
other business combinations, tenders and exchange offers,
purchases and the liquidation of OTEF II.
AIMCO has informed OTEF II that it does not intend to
change OTEF II's current distribution policy. OTEF II's Managing
General Partner expects to consider on behalf of OTEF II (1)
refinancing, reducing or increasing existing indebtedness of OTEF
II; (2) sales of assets, individually or as part of a complete
liquidation; and (3) mergers or other consolidation transactions
involving OTEF II. There is no assurance, however, when or
whether any of these transactions might occur.
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The partnerships which own four senior living properties are
marketing for sale the assets of such operating partnerships on
which OTEF II hold tax-exempt bonds in the amount of
approximately $63.1 million at September 30, 2000. Affiliates of
AIMCO serve as the general partners of such operating
partnerships. Such operating partnerships have not entered into
contracts of sale as of the date of this report, and no assurance
can be given that any of the operating partnerships will enter
into contracts of sale, or as to the terms thereof or that any or
all of such sales will be consummated. In connection with any
such sale, OTEF II expects to sell the tax-exempt bonds secured
by these properties.
Distribution for the Quarter ended September 30, 2000. The
Managing General Partner declared, on September 13, 2000, a
distribution for the quarter ended September 30, 2000 in the
amount of $0.565 per BAC which will be paid on or before November
14, 2000. This distribution is $0.025 or 4.6% greater than the
distribution for the second quarter of 2000, which was paid on
August 11, 2000.
Sale of San Bruno Securities. On September 13, 2000, OTEF
II received approximately $35.6 million from the sale of: (1) tax-
exempt bonds secured by the San Bruno property with a par value
of $26.06 million; (2) a demand note in the amount of $8.27
million received from the San Bruno Operating Partnership in
connection with the San Bruno tax-exempt bond remarketing
transaction that closed on November 1, 1999; and (3) $1.27
million of accrued interest on the San Bruno Securities. As a
result of this sale, OTEF II has now received amounts with
respect to its San Bruno investment equal to all principal and
interest owed under the original 1986 bonds and the 1999 demand
note. This sale concludes OTEF II's investment in San Bruno.
For financial statement purposes, OTEF II realized a gain of
approximately $23.5 million with respect to the sale of the San
Bruno Securities. As of June 30, 2000, the San Bruno Securities
had a cost basis of approximately $10.8 million and a carrying
value of approximately $26.06 million, being the estimated fair
value of the investments at that time. Therefore, OTEF II's book
value increased by approximately $8.27 million as a result of
this transaction. On October 27, 2000, the Managing General
Partner used approximately $9.1 million of the San Bruno proceeds
to reduce a portion of OTEF II's financing debt associated with
one of the senior living properties. The Managing General Partner
intends to use substantially all of the remaining San Bruno
proceeds to further reduce OTEF II's financing debt.
Investment Transactions. On November 24, 1999, OTEF II
closed a development venture transaction for The Peaks at Conyers
Apartments, a 260-unit apartment community being developed in
Conyers, Georgia, an Atlanta suburb, for a total development cost
of approximately $18.2 million. As of the date of this report,
construction continues on The Peaks at Conyers. Based on the
draw requests received to date, work completed and materials
supplied represent approximately 65% of the amount of the
construction contract. OTEF II will continue to monitor the
progress of construction relating to this property.
Financing Transactions. On May 11, 2000, the letter of
credit issued by Banco Santander Central Hispano, S.A. ("Banco
Santander") with respect to the Naples investment, and the
standby reimbursement agreement with a Merrill Lynch affiliate
which effectively guarantees the obligations of the Naples
Borrower to Banco Santander Central Hispano, S.A. were extended
to December 11, 2000. It is the intent of the Managing General
Partner to extend these agreements.
OTEF II is continuing to work on bond refunding and
refinancing transactions with respect to the Summerwalk property.
The senior tax-exempt bonds secured by this property are
currently held by third parties. Based on its preliminary
discussions, the Managing General Partner may consummate
refunding or refinancing transactions for this property. The
credit enhancement associated with the bonds secured by the
property owned by the Summerwalk borrower, scheduled to terminate
on December 15, 2000, was extended to December 15, 2001.
Amortization of Series A Bonds. Effective April 15, 2000,
mandatory quarterly sinking fund redemptions began on the twelve
Original Refunding Bonds (as defined below). These Original
Refunding Bonds provide for payments of interest only for the
first three years and then amortize over a 27-year period
beginning in the fourth bond year. While the total payments on
these bonds increase each year, the portion of the payments
allocable to interest will decrease in the fourth year and
increase each year thereafter. Accordingly, it is anticipated
that OTEF II will receive aggregate principal payments of
approximately $1.4 million in 2000. Of this amount,
approximately 41% will be applied to reduce the financing debt
reported by OTEF II on its balance sheet. Substantially all of
the balance of the principal payments will reduce OTEF II's
remaining investment in the related bonds. While the interest
received on these bonds will decrease in 2000 from the amount
received for 1999 by approximately $0.19 per share, the total
principal and interest that is projected to be received by OTEF
II with respect to these bonds for 2000 will be higher than the
amount of interest received on these bonds for 1999. The
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scheduled interest rates on these bonds will increase in 2001 and
each year thereafter through the remaining term of the Original
Refunding Bonds. On April 15, 2000, approximately $0.47 million
in sinking fund redemptions was received on the Original
Refunding Bonds and approximately $0.19 million was paid on the
financing debt. On July 31, 2000, approximately $0.47 million in
sinking fund redemptions was received on the Original Refunding
Bonds and approximately $0.195 million was paid on the financial
debt. The outstanding balance of the financing debt at September
30, 2000 was $52.2 million. In October 2000, approximately $0.48
million in sinking fund redemptions was received on the Original
Refunding Bonds and approximately $0.196 million was paid on the
financing debt.
Book Value. For the quarter ended September 30, 2000, the
book value of the BACs was approximately $37.54 on a fully
diluted basis, taking into account the 1997 Incentive Options.
Book value is calculated as the sum of the BAC capital account
plus the BACs' allocable share of accumulated comprehensive
income, divided by the fully diluted shares outstanding at
September 30, 2000.
BAC Repurchase Program. On October 30, 1998, the Managing
General Partner authorized the repurchase, from time to time, of
up to 250,000 BACs. OTEF II may purchase BACs in the open market
or through privately negotiated transactions. The timing and
amount of BACs purchased will be dependent on the availability of
BACs and other market factors. OTEF II will purchase BACs only
to the extent that they may be purchased at favorable prices.
Under this program, OTEF II acquired 2,000 BACs in December 1998
for approximately $0.05 million. On January 18, 2000, OTEF II
acquired an additional 10,000 BACs for approximately $0.24
million. These securities are reflected in partners' capital on
the balance sheet as Treasury Shares. No further purchases have
been made through the date of this report.
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 (defined
below) and the Original Remarketed Bonds (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 Status Quo BACs ("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) from
the issuance of additional equity securities in exchange for New
Assets; or (v) from funds borrowed from lenders or by issuing
evidences of indebtedness.
Current Position. OTEF II uses its cash receipts primarily
for distributions to BAC Holders, and its General Partners, to
pay administrative expenses, to acquire New Assets, and pay the
costs and expenses relating to such transactions. As of
September 30, 2000, OTEF II held approximately $41.4 million in
cash and cash equivalents, compared to $5.5 million in cash and
cash equivalents held as of December 31, 1999. This increase
primarily reflects the net proceeds from the San Bruno
transaction described above. The Managing General Partner
intends, to use the majority of the San Bruno proceeds to reduce
OTEF II's 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 $77.0 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 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 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 a low-
cost financing option 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.
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In connection with these transactions, OTEF II converted the
interest rate mode on the Series A Bonds involved in these
transactions from an annual to weekly reset. 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. Additionally, on August 4, 2000, OTEF II
purchased a two-year interest rate cap on the notional amount of
approximately $55 million. Under these arrangements, if the
average short-term, tax-exempt interest rates during the term of
the cap increase above a specified level (6%, 4.5%, and 5.5%
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. For the nine months
ended September 30, 2000, $0.03 million was required to be paid
by the counter-party pursuant to these interest cap agreements.
For financial statement purposes, these transactions are
accounted for as financing transactions. The amount of bonds
financed, as of September 30, 2000 of approximately $76.0
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, 2000 and December 31, 1999 was approximately $52.2
and $52.6 million, respectively. OTEF II's financing debt
represents approximately 15.6 % of OTEF II's total assets (or
29.3 % 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
Bond Marketing Association (BMA) weekly floating bond index plus
approximately 80 to 85 basis points (including credit
enhancement, trustee and related fees). This rate averaged 4.96%
for the 9 months ended September 30, 2000, 4.03% for the 9 months
ended September 30, 1999 and 4.18% for the twelve months of 1999.
The credit enhancement associated with substantially all of the
financing debt was extended to February 15, 2001. 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.
Costs associated with these financing transactions are
amortized over ten years for financial statement purposes, and
costs associated with the interest rate caps are being amortized
over the lives of the interest rate cap agreements, which are two
to 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
mortgage revenue bonds acquired by OTEF upon its formation (the
"Original 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
allocable to BAC Holders ("Liquidity Assets"). OTEF II retained
the related Series B Bonds for the benefit of the BAC Holders,
and retained 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 underlying an Original
Refunding Bond, 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. See "Recent
Developments" for a discussion of the amortization.
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. See Note 3 to the Financial Statements for a
schedule of the current reset rates for the Series A Bonds
retained by OTEF II. 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 are then applicable.
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Series B Bonds. The term of each Series B Bond and,
accordingly, each mortgage loan underlying a Series B Bond, 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
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.
Other Sources. In connection with the closing of the
Original Refunding Bonds, the applicable Operating Partnerships
entered into certain pooling agreements which may 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, 2000, the aggregate amount of net excess cash flow held in
the Operating Partnership escrows was approximately $5.4 million,
including deposits from September's cash flow compared to $3.8
million at the end of 1999.
Original Remarketed Bonds. As required under the trust
indentures for the Original MRBs, on November 1, 1999, the
Original MRBs for the Apollo and San Bruno Operating Partnerships
were remarketed, which means that OTEF II exchanged those for new
bonds ("Original Remarketed 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.
In addition, in connection with the remarketing, the Apollo
Operating Partnership delivered to OTEF II an interest-bearing,
demand promissory note dated November 1, 1999, in the original
principal amount of $5.2 million. 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 note bears floating rate interest at the short-term
federal funds rate. Due to uncertainty of collection, the Apollo
demand note has not been recognized for either tax or financial
statement purposes.
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.
Results of Operations
OTEF II Distributions. Distributions to Partners will
amount to approximately $4.2 million, or $0.565 per BAC, to
holders of record as of September 30, 2000.
OTEF II's Three-Month Operations. For financial statement
purposes, Net Income allocated to BAC holders and Net Income per
BAC was approximately $27.7 million and $3.774, respectively, for
the three month period ended September 30, 2000, as compared to
$5.1 million and $0.689, respectively, for the three month period
ended September 30, 1999. For the three months ended September
30, 2000, Net Income allocated to BAC holders and Net Income per
BAC of $23.0 million and $3.135, respectively, is associated with
the realized gain on the sale of the San Bruno Bond and Demand
Note. Net Income allocated to BAC holders and Net Income per BAC
net of the San Bruno transaction were $4.7 million and $0.639,
respectively for the three months ended September 30, 2000. This
decrease of 7.3% net of the San Bruno transaction is due
primarily to additional interest earned on New Assets and taxable
loans reduced by the principal amortization payments on the
Series A Bonds. While the total cash receipts on the Series A
Bonds, including interest and principal, are approximately the
same as the prior comparative periods, due to the principal
amortization, the current period interest earned on these bonds
is lower than the prior comparative period.
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OTEF II's Nine-Month Operations. For financial statement
purposes, Net Income allocated to BAC holders and Net Income per
BAC was $37.4 million and $5.098, respectively for the nine month
period ended September 30, 2000, as compared to $14.5 million and
$1.983, respectively, for the nine month period ended September
30, 1999. For the nine months ended September 30, 2000, Net
Income allocated to BAC holders and Net Income per BAC of $23.0
million and $3.135, respectively, is associated with the realized
gain on the sale of the San Bruno Bond and Demand Note. Net
Income allocated to BAC holders and Net Income per BAC net of the
San Bruno transaction were $14.4 million and $1.963, respectively
for the nine months ended September 30, 2000. This 1.0% decrease
net of the San Bruno transaction is due primarily to additional
interest earned on New Assets and taxable loans reduced by (i)
the principal amortization payments on the Series A Bonds and
(ii) increases in financial interest expense for the second
quarter due to increases in the floating rate interest payable on
OTEF II's financing debt. While the total cash receipts on the
Series A Bonds, including interest and principal, are
approximately the same as the prior comparative periods, due to
the principal amortization, the current period interest earned on
these bonds is lower than the prior comparative period. The
increase in expenses is primarily attributable to the level of
advisory fees in the current period versus the prior comparative
period.
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 AND MAY BE INDENTIFIED BY
WORDS INCLUDING "EXPECTS," "BELIEVES," "ESTIMATES," "INTENDS" AND
SIMILAR LANGUAGE. 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 CIRCUMSTANCES OCCURRING SUBSEQUENT TO
THE FILING OF THE FORM 10 Q 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> 12
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
----------------------------------------------------------------------------
Balance Sheets (in thousands, except per BAC and SQB amounts)
(Unaudited)
============================================================================
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
----------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments:
Tax-exempt securities $184,406 $208,216
Tax-exempt securities held in trust 76,245 76,765
Taxable securities 27,711 27,190
----------------------------------------------------------------------------
Total Investments $288,362 $312,171
----------------------------------------------------------------------------
Cash and cash equivalents 41,358 5,500
Other Assets 4,452 3,980
============================================================================
Total Assets $334,172 $321,651
============================================================================
Liabilities and Partners' Capital
Liabilities
Financing debt $ 52,229 $ 52,614
Distributions payable 4,234 4,049
Accounts payable and accrued expenses 254 571
----------------------------------------------------------------------------
Total Liabilities 56,717 57,234
----------------------------------------------------------------------------
Partners' Capital
General Partners' Interests (1,670) (2,189)
Limited Partners' Interests:
Beneficial Assignee Interests (7,499,875
interests issued and 7,344,425 and
7,338,425 interests outstanding as of
September 30, 2000 and December 31,
1999, respectively) 193,967 168,308
SQB Interests (12,587 interests issued
and 97 and 737 interests outstanding
as of September 30, 2000 and December
31, 1999, respectively) 35 379
Accumulated other comprehensive income 85,411 97,966
Treasury shares (288) (47)
----------------------------------------------------------------------------
Total Partners' Capital 277,455 264,417
----------------------------------------------------------------------------
Total Liabilities and Partners' Capital $334,172 $321,651
============================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 13
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
-------------------------------------------------------------------------------
Statements of Income and Comprehensive Income (in thousands,
except per BAC amounts) (Unaudited)
===============================================================================
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
--------------- ---------------
2000 1999 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Interest on tax-exempt securities $ 4,312 $ 4,597 $ 13,375 $14,189
Interest on tax-exempt securities
held in trust 1,042 901 3,094 2,229
Interest on taxable securities 618 718 1,846 1,390
Other, primarily tax-exempt income 89 92 224 370
-------------------------------------------------------------------------------
Total Interest Earned 6,061 6,308 18,539 18,178
-------------------------------------------------------------------------------
Finance interest expense (654) (536) (1,943) (1,510)
-------------------------------------------------------------------------------
Net Interest Margin 5,407 5,772 16,596 16,668
-------------------------------------------------------------------------------
Realized gain on sale of security $ 23,499 $ 0 $ 23,499 $ 0
-------------------------------------------------------------------------------
Expenses
Third party expenses 272 251 839 821
Related party expenses 350 363 1,100 1,006
-------------------------------------------------------------------------------
Total Expenses 622 614 1,939 1,827
-------------------------------------------------------------------------------
Net income $ 28,284 $ 5,158 $ 38,156 $14,841
===============================================================================
Other comprehensive income:
Unrealized gains (losses) on
investments $(14,712) $(2,280) $(12,555) $ 1,002
===============================================================================
Comprehensive income $ 13,572 $ 2,878 $ 25,601 $15,843
===============================================================================
Net income allocated to BAC holders $ 27,720 $ 5,058 $ 37,412 $14,534
===============================================================================
Net income per BAC $ 3.774 $ 0.689 $ 5.098 $ 1.983
===============================================================================
Net income per BAC-assuming dilution $ 3.750 $ 0.688 $ 5.086 $ 1.978
===============================================================================
Weighted Average BACs outstanding 7,344 7,337 7,339 7,329
===============================================================================
Weighted Average BACs outstanding -
assuming dilution 7,391 7,352 7,356 7,347
===============================================================================
Distribution per BAC $ 0.565 $ 0.520 $ 1.645 $ 1.550
===============================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 14
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
------------------------------------------------------------------------------
Statement of Partners' Capital (in thousands, except per BAC and SQB amounts)
(Unaudited)
------------------------------------------------------------------------------
<CAPTION>
Partners'
Limited Inerest
------------------ Accumulated
Beneficial Status Other
General Assignee Quo BAC Treasury Comprehensive
Partners Interests Interests Shares Income Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1999 $(2,189) $168,308 $379 $(47) $97,966 $264,417
================================================================================
Comprehensive Income:
Net Income, including
$0.668 per BAC and
$(5.88) per SQB 100 4,896 (4) 0 0 4,992
Unrealized gains on
investments 0 0 0 0 1,225 1,225
----------------------------------------------------------
Total comprehensive
income 100 4,896 (4) 0 1,225 6,217
Allocation of SQB
Capital 0 13 (13) 0 0 0
Purchase of Treasury
Shares 0 0 0 (241) 0 (241)
Distributions payable to
BAC Partners
of $0.54 (81) (3,957) 0 0 0 (4,038)
================================================================================
Balance,
March 31, 2000 $(2,170) $169,260 $362 $(288) $99,191 $266,355
================================================================================
Comprehensive Income:
Net Income (loss),
including $0.649 per
BAC and $(112.14)
per SQB 97 4,796 (13) 0 0 4,880
Unrealized gains on
investments 0 0 0 0 932 932
----------------------------------------------------------
Total comprehensive
income 97 4,796 (13) 0 932 5,812
Allocation of SQB
Capital 0 301 (301) 0 0 0
Distributions payable to
BAC Partners
of $0.54 (78) (3,972) 0 0 0 (4,050)
================================================================================
Balance,
June 30, 2000 $(2,151) $170,385 $48 $(288) $100,123 $268,117
================================================================================
Comprehensive Income:
Net Income (loss),
including $3.774 per
BAC and $(21.73)
per SQB 566 27,720 (2) 0 0 28,284
Unrealized gains
(losses) on
investments 0 0 0 0 (14,712) (14,712)
-----------------------------------------------------------
Total comprehensive
income 566 27,720 (2) 0 (14,712) 13,572
Allocation of SQB
Capital 0 11 (11) 0 0 0
Distributions payable to
BAC Partners
of $0.565 (85) (4,149) 0 0 0 (4,234)
================================================================================
Balance,
September 30, 2000 $(1,670) $193,967 $35 $(288) $85,411 $277,455
================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 15
<TABLE>
Oxford Tax Exempt Fund II Limited Partnership
-----------------------------------------------------------------------------
Statements of Cash Flows (in thousands) (Unaudited)
-----------------------------------------------------------------------------
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $38,156 $14,841
Adjustments to reconcile net income
to net cash provided by operating activities:
Realized gain on security sale (23,499) 0
Change to accounts payable and
accrued expenses (317) (21)
-----------------------------------------------------------------------------
Net cash provided by operating activites 14,340 14,820
-----------------------------------------------------------------------------
Investing Activities:
Investment in new assets (521) (14,689)
Principal proceeds from security sale 34,332 0
Receipt of bond principal payments 943 0
Increase in other assets, net (472) (1,295)
-----------------------------------------------------------------------------
Net cash provided by (used) in investing activities 34,282 (15,984)
-----------------------------------------------------------------------------
Financing activities:
Increase in financing debt 0 5,000
Purchase of treasury shares (241) 0
Financing debt principal payments (385) 0
Distributions paid (12,138) (11,557)
-----------------------------------------------------------------------------
Net cash used in financing activities (12,764) (6,557)
-----------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 35,858 (7,721)
Cash and cash equivalents, beginning of period 5,500 18,011
-----------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 41,358 $ 10,290
=============================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 16
-----------------------------------------------------------------
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, 2000 and
December 31, 1999, the Statements of Income and Comprehensive
Income for the three month and nine month periods ended September
30, 2000 and 1999, the Statement of Partners' Capital as of
September 30, 2000, and the Statements of Cash Flows for the nine
month periods ended September 30, 2000 and 1999, 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, 1999.
Note 2. Change in Control of Managing General Partner
On September 20, 2000, Apartment Investment and Management
Company ("AIMCO") (NYSE: AIV) acquired all of the stock of Oxford
Realty Financial Group, Inc. ("ORFG"), that it did not already
own, as well as other interests in various Oxford entities. ORFG
is the parent company of the Managing General Partner. As part
of such acquisition, AIMCO acquired: (1) ORFG and approximately
40% of the non-managing general partner of OTEF II; and (2)
options to purchase from the principals of ORFG 32,580 units of
beneficial assignee interest in OTEF II ("BACs") owned by them
and (3) existing employee stock options that had been held by the
principals of ORFG to purchase from OTEF II 652,125 BACs.
AIMCO has agreed with the sellers of the assets in the
Oxford acquisition that if AIMCO enters into an acquisition
transaction involving OTEF II before September 20, 2003, AIMCO
will pay consideration to all BAC holders in such acquisition
transaction of no less than 90% of the fully diluted book value
per BAC as reported by OTEF II for the calendar quarter
immediately preceding the date of the acquisition transaction.
An acquisition transaction includes, but is not limited to, a
merger, reorganization or other business combinations, tenders
and exchange offers, purchases and the liquidation of OTEF II.
AIMCO has informed OTEF II that it does not intend to
change OTEF II's current distribution policy. OTEF II's Managing
General Partner expects to consider on behalf of OTEF II in the
future (1) refinancing, reducing or increasing existing
indebtedness of OTEF II; (2) sales of assets, individually or as
part of a complete liquidation; and (3) mergers or other
consolidation transactions involving OTEF II. There is no
assurance, however, when or whether any of these transactions
might occur.
Note 3. General Business
The Partnership was formed under the laws of the State of
Maryland, commenced operations on March 1, 1995. 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.
Original Refunding Bonds (Series A Bonds). The term of
each Original Refunding Bond and, accordingly, each mortgage loan
underlying an Original Refunding Bond 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 quarterly sinking fund redemptions that will result in
full amortization of the Series A Bonds during the 27-year
remaining term beginning in the fourth bond year, calculated
using an assumed interest rate of 5.6% per year. While the total
payments on the Original Refunding Bonds increase each year, the
portion of the payments allocable to interest will decrease in
the fourth year and increase each year thereafter. Accordingly,
it is anticipated that OTEF II will receive aggregate principal
payments of approximately $1.4 million in 2000. Of this amount,
approximately 41% will be applied to reduce the financing debt
reported by OTEF II on its balance sheet, which was approximately
$52.2 million at September 30, 2000. Substantially all of the
balance of the principal payments will reduce OTEF II's remaining
investment in the related bonds. While the interest received on
these bonds will decrease in 2000 by approximately $0.19 per
<PAGE> 17
-----------------------------------------------------------------
Notes to Financial Statements
-----------------------------------------------------------------
share, the total principal and interest that is projected to be
received by OTEF II with respect to these bonds for 2000 will be
higher than the amount of interest received on these bonds for
1999. The interest rates on these bonds will increase in 2001
and each year thereafter through the remaining term of the
Original Refunding Bonds.
Series A Bond Interest. 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 on the dates indicated, with a maximum rate of 5.6% per
annum. The $54.153 million of Series A Bonds retained by OTEF
II, before any principal reduction in 2000, were reset to the
following annual interest rates:
<TABLE>
--------------------------------------------------
<CAPTION>
Bond Amount Interest
Reset Dates (in thousand) Rate
==================================================
<S> <C> <C>
November 1, 1999 $ 7,010 4.88%
December 1, 1999 $ 27,344 5.12%
January 1, 2000 $ 11,126 5.37%
March 1, 2000 $ 8,673 5.54%
---------
Total $ 54,153
</TABLE>
The interest rates on the remaining $62.565 million of
Series A Bonds involved in the financing transactions described
under "Financing Transactions" in Note 4 below were converted
from annual reset to a weekly floating rate based on a spread
over the BMA index at the time such transactions were closed.
The BMA rate plus approximately 80 to 85 basis points (including
credit enhancement, trustee and related fees) averaged 4.96% for
the nine months ended September 30, 2000, 4.03% for the nine
months ended September 30, 1999, and 4.18% for the twelve months
of 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. These Bonds will begin
resetting again in November 2000.
Taxable Investments. In the first quarter of 2000, OTEF II
made additional taxable advances of $0.25 million, $0.14 million
and $0.05 million to the River Reach, Summerwalk and Jacaranda
borrower entities, respectively. In the second quarter of 2000,
OTEF II made additional taxable advances of $0.08 million to
Jacaranda. No additional advances were made in the third
quarter.
Note 4. 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.
Income Taxes. No provision has been made for federal,
state, or local income taxes in the financial statements of
OTEF II since the Partners, SQB holders and 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 II's only
source of "Other Comprehensive Income" is related to the
valuation of its investments to fair value, which results in
unrealized gains or losses previously charged to an equity
account under Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115").
<PAGE> 18
-----------------------------------------------------------------
Notes to Financial Statements
-----------------------------------------------------------------
Investments. As previously reported, on June 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, 2000 that the fair
value of the Original Refunding Bonds and the one remaining
Remarketed Bond, Apollo, was approximately $227 million and,
accordingly, unrealized appreciation on these investments of $85
million is recorded as a credit to partners' capital. The Series
A Bonds, the Remarketed Bonds and the Other Refunding Bonds are
valued based on comparable municipal bond securities, and the
Series B Bonds and the taxable loans 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.
Investments are accounted for using the provisions of 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 to Other Comprehensive
Income in partners' capital. In the event of a sale of a bond,
these unrealized gains or losses are realized and would impact
the Statement of Income in the period the sale occurred.
Accounting for earnings per share. Basic earnings per
share, a measure required by Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," does not include
incentive BAC options as common share equivalents. Diluted
earnings per share reflects the potential dilution that could
occur if such options 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 reporting period, which were
$25.75 and $24.42 for the three months and $24.52 and $24.58 for
the nine months ended September 30, 2000 and 1999, respectively.
To the extent that the average share price exceeds the strike
price of $23.88, the options are dilutive.
Net Income and Distributions per BAC and SQB. Net income
and distributions per BAC and net income and distributions per
Status Quo BAC ("SQB") are based upon the weighted average number
of BACs and SQBs outstanding during the applicable period. As of
September 30, 1999, there were 7,337,425 BAC's and 777 SQB's
outstanding, respectively. As of December 31, 1999, there were
7,338,425 BACs and 737 SQBs outstanding. In January 2000, an
additional 25 SQBs were exchanged for 625 BACs and 10,000 BACs
were repurchased by OTEF II for approximately $0.24 million. In
April 2000, an additional 590 SQBs were exchanged for 14,750
BACs. In July 2000, an additional 25 SQBs were exchange for 625
BACs. BACs and SQBs outstanding at September 30, 2000 were
7,344,425 and 97, respectively.
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 and do not result in
cash receipts or cash payments. This non-cash activity consists
of distributions payable to Partners, SQB holders and OTEF II BAC
Holders of $4.2 million and $4.0 million, at September 30, 2000
and December 31, 1999, respectively. Non-cash investing activity
includes a change in unrealized gain (loss) on investments of
approximately $(12.5) million for the nine months ended September
30, 2000 and $3.1 million, for the year ended December 31, 1999,
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.
Financing Transactions. For financial statement purposes,
the securitizations of approximately $76.0 million of bonds are
accounted for as financing transactions. The amount of the bonds
financed are reflected as Securities Held in Trust, the net cash
proceeds 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 the accompanying
balance sheet.
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.
These deferred costs are included in other assets on the balance
sheet. For federal income tax purposes, these transactions are
treated as sales by OTEF II of the applicable Series A Bonds and
a purchase of subordinated interests in the trusts.
<PAGE> 19
-----------------------------------------------------------------
Notes to Financial Statements
-----------------------------------------------------------------
Accounting for SQBs. On February 8, 1999, OTEF II
distributed to SQB holders an offering circular describing a
voluntary offer to exchange 25 BACs, which are publicly traded
(AMEX: OTF), for each SQB (SQBs are not publicly traded). This
offer terminated on July 31, 1999. As of September 30, 2000,
holders of 6,849 SQBs, or 99% of the amount of SQBs originally
issued, had converted their SQBs to BACs, leaving 97 SQBs
outstanding. These remaining SQBs represent less than one-tenth
of one percent of the total outstanding equity interests of OTEF
II.
As previously reported, since substantially all of the SQBs
have been exchanged for BACs, the remaining SQBs have been
allocated increased shares of administrative costs, which are
relatively fixed costs and not dependent on the number of SQBs
outstanding. Since the second quarter of 1999 such costs have
exceeded allocable income reducing existing SQB cash reserves.
Accordingly, all subsequent distributions have been paid
exclusively from existing cash reserves allocable to remaining
SQB holders. As of March 31, 2000, costs exceeded income
allocable to SQBs resulting in a net loss of $5.88 per SQB for
the first quarter of 2000 and remaining SQB cash reserves were
fully exhausted to pay SQB holder distributions. Accordingly, on
March 16, 2000 the Board of Directors declared that no
distribution would be paid to SQB holders for the quarter ended
March 31, 2000. For the quarter ended September 30, 2000, costs
exceeded income allocable to SQBs resulting in a net loss of
$21.73 per SQB, and no distribution was paid to SQB holders.
This loss of $21.73 is a combination of a $78.36 per SQB gain on
the sale of the San Bruno Bond and Demand Note offset by a
$100.09 per SQB loss from operations for the three months ended
September 30, 2000. 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 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.
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 distribution 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 OTEF II 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. Assets
associated with those SQB holders exchanging their shares for
BACs have been reclassified as BAC assets.
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 are not allocated any capital losses
for federal income tax purposes that may result from the
disposition of the Refunding Bonds or interests therein or new
assets in connection with a financing undertaken pursuant to the
Liquidity and Growth Plan.
Note 5. Related Party Transactions
The AIMCO Affiliates. The Managing General Partner and
each of the affiliates discussed below are collectively referred
to as the AIMCO Affiliates in the accompanying financial
statements. See Note 2 for a discussion of the acquisition by
AIMCO of various interests relating to OTEF II. The General
Partners own interests in OTEF II that entitle them to receive a
share of OTEF II's cash flow and possibly of sale, refinancing
and liquidation proceeds. Distributions to the General Partners
totaled approximately $0.085 million for the quarter ended
September 30, 2000.
Interests in the Operating Partnerships. 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 issuance of the Original Refunding Bonds all cash flow
from the applicable 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.
<PAGE> 20
-----------------------------------------------------------------
Notes to Financial Statements
-----------------------------------------------------------------
Compensation and Fees. Affiliates of the Managing General
Partner provide various management services relating to the
Existing Mortgaged Properties and OTEF II's investment therein.
They also provide additional services in connection with
OTEF II's investment in New Assets, as described below. These
services fees (the "Existing Fees") are operating expenses of the
Operating Partnerships that are payable prior to the payment of
interest on the Remarketed Bonds.
Affiliates of the Managing General Partner generally
receive a 1% acquisition fee from OTEF II for services rendered
in connection with investment transactions. No acquisition fees
were paid in the first nine months of 2000.
OTEF II also generally pays affiliates of the Managing
General Partner an annual 0.5% advisory fee for managing
OTEF II's new investments. The advisory fees associated with the
acquisition of the Dallas, Carpenter, Jacaranda and Summerwalk
investments commenced in 1998. The advisory fees associated with
the acquisition of the Lakeside, River Reach and Conyers
investments commenced in 1999. Total advisory fees incurred by
OTEF II for the nine month periods ended September 30, 2000 and
1999 were approximately $0.46 and $0.30 million, respectively.
For the nine-month periods ended September 30, 2000 and
1999, the Operating Partnerships, including the Carpenter
Borrower and the Dallas Borrower, paid affiliates of the Managing
General Partner total asset management fees of approximately
$0.56 million for both periods, respectively. The original
Operating Partnerships also paid affiliates of the Managing
General Partner, in the aggregate, approximately $0.52 million of
fees in September 30, 2000 and 1999 pursuant to the OTEF II
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"). Affiliates of the Managing General Partner 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 affiliates of the Managing General
Partner for certain expenses they incur 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 periods ended
September 30, 2000 and 1999 were approximately $0.63 million and
$0.62 million, respectively, representing primarily staff
rebillable time. 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.
OTEF II's Incentive Option Plans. On May 21, 1997, OTEF II
adopted an incentive option plan (the "1997 Incentive Option
Plan") in order for the Managing General Partner to attract and
retain key employees of the affiliates of the Managing General
Partner and advisers. The 1997 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 8.3% of the then 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 1997 Incentive
Option Plan. As of September 30, 2000 all of the 652,125 options
were fully vested. The exercise price for all options is $23.88
per BAC, which approximated the fair market value at the date of
grant. Since the exercise price of the options approximated the
BAC market price at the date of grant, no compensation expense
was recognized. For the first nine months ended September 30,
2000, the average market price was $24.52. Since the date of
grant, no options have been exercised or forfeited. On September
20, 2000, in addition to acquiring the Managing General Partner
of OTEF II, AIMCO also acquired from the officers of the Managing
General Partner of OTEF II all of the outstanding options under
the 1997 Incentive Option Plan.
On December 15, 1999, OTEF II adopted a second incentive
option plan (the "1999 Incentive Option Plan"). As of September
30, 2000 none of the 350,000 shares authorized under the 1999
Incentive Option Plan had been awarded. Additionally, on
September 13, 2000 the Board of Directors amended the Plan to
eliminate the dividend equivalent rights associated with the 1999
OTEF II Stock Options. Effective November 7, 2000, OTEF II
Corporation, the Managing General Partner of OTEF, granted to
Scot B. Barker and Stephen P. Gavula, both whom are outside
directors of OTEF II Corporation, 25,000 options to purchase OTEF
BACs at a price of $26.00 per BAC. The options are immediately
exercisable and have a term of 10 years. This grant of options is
in consideration of past, present and anticipated future service
as outside directors of OTEF II Corporation.
<PAGE> 21
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Notes to Financial Statements
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Guarantees and Pledges. In connection with the Lakeside
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 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 approximately $24 million obligations of
the Naples Borrower to Banco Santander Central Hispano, S.A. On
May 11, 2000, this reimbursement agreement was extended to
December 11, 2000. It is the Managing General Partners' intent to
extend these agreements.
<PAGE> 22
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Instructions for Investors who wish to reregister or transfer
OTEF II BACs or SQBs
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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 re-registration 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, 2000, 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
