<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended SEPTEMBER 30, 1998
Commission File Number 0-09782
REAL ESTATE ASSOCIATES LIMITED II
(A California Limited Partnership)
I.R.S. Employer Identification No. 95-3547609
9090 WILSHIRE BLVD., SUITE 201,
BEVERLY HILLS, CALIF. 90211
Registrant's Telephone Number,
Including Area Code (310) 278-2191
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve 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 [ ]
<PAGE> 2
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, September 30, 1998 and December 31, 1997 ...............1
Statements of Operations,
Nine and Three Months Ended, September 30, 1998 and 1997 .........2
Statement of Partners' Equity
Nine Months Ended September 30, 1998 .............................3
Statements of Cash Flows,
Nine Months Ended September 30, 1998 and 1997 ....................4
Notes to Financial Statements ..........................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................10
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 12
Item 6: Exhibits and Reports and Form 8-K.......................................12
Signatures ......................................................................13
</TABLE>
<PAGE> 3
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
1998
(Unaudited) 1997
----------- -----------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2) $ 4,288,992 $ 3,493,251
CASH AND CASH EQUIVALENTS (Note 1) 1,003,585 1,602,717
----------- -----------
TOTAL ASSETS $ 5,292,577 $ 5,095,968
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable $ 95,548 $ 98,954
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
PARTNERS' EQUITY (DEFICIENCY):
General partners (166,125) (168,125)
Limited partners 5,363,154 5,165,139
----------- -----------
5,197,029 4,997,014
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $ 5,292,577 $ 5,095,968
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
1
<PAGE> 4
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine months Three months Nine months Three months
ended ended ended ended
Sept. 30, 1998 Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME $ 53,869 $ 15,607 $ 62,133 $ 21,441
--------- --------- --------- ---------
OPERATING EXPENSES:
Legal and accounting 129,891 6,475 108,211 49,923
Management fees - general partner (Note 3) 298,260 99,420 298,260 99,420
Administrative (Notes 2 and 3) 304,400 158,509 60,968 22,311
--------- --------- --------- ---------
Total operating expenses 732,551 264,404 467,439 171,654
--------- --------- --------- ---------
LOSS FROM OPERATIONS (678,682) (248,797) (405,306) (150,213)
DISTRIBUTIONS FROM LIMITED
PARTNERSHIPS RECOGNIZED AS
INCOME (Note 2) 224,997 67,314 247,126 135,859
EQUITY IN INCOME OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ACQUISITION COSTS (Note 2) 653,700 217,900 804,000 268,000
--------- --------- --------- ---------
NET INCOME $ 200,015 $ 36,417 645,820 $ 253,646
========= ========= ========= =========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST (Note 1) $ 19 $ 3 60 $ 24
========= ========= ========= =========
</TABLE>
The accompanying notes are integral part of these financial statements.
2
<PAGE> 5
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
---------- ---------- ----------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS 10,693
==========
EQUITY (DEFICIENCY),
January 1, 1998 $ (168,125) $5,165,139 $4,997,014
Net income for the nine months
ended September 30, 1998 2,000 198,015 200,015
---------- ---------- ----------
EQUITY (DEFICIENCY),
September 30, 1998 $ (166,125) $5,363,154 $5,197,029
========== ========== ==========
</TABLE>
The accompanying notes are integral part of these financial statements.
3
<PAGE> 6
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 200,015 $ 645,820
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in income of limited partnerships
and amortization of acquisition costs (653,700) (804,000)
Decrease in accounts payable (3,406) (7,575)
----------- -----------
Net cash used in operating activities (457,091) (165,755)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributions (173,900) --
Distributions recognized as a return of capital
recognized as return of capital 31,859 184,990
----------- -----------
Net cash (used in) provided by investing activities (142,041) 184,990
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (599,132) 19,235
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,602,717 1,821,955
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,003,585 $ 1,841,190
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
4
<PAGE> 7
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The information contained in the following notes to the financial
statements is condensed from that which would appear in the annual
audited financial statements; accordingly, the financial statements
included herein should be reviewed in conjunction with the financial
statements and related notes thereto contained in the annual report
for the year ended December 31, 1997 prepared by Real Estate
Associates Limited II (the "Partnership"). Accounting measurements at
interim dates inherently involve greater reliance on estimates than
at year end. The results of operations for the interim period
presented are not necessarily indicative of the results for the
entire year.
In the opinion of the Partnership, the accompanying unaudited
financial statements contain all adjustments (consisting primarily of
normal recurring accruals) necessary to present fairly the financial
position as of September 30, 1998 and the results of operations for
the nine and three months then ended and changes in cash flows for
the nine months then ended.
The general partners have a 1 percent interest in profits and losses
of the Partnership. The limited partners have the remaining 99
percent interest which is allocated in proportion to their respective
individual investments. National Partnership Investments Corp.
(NAPICO) is the corporate general partner of the Partnership. NAPICO
is a wholly owned subsidiary of Casden Investment Corporation, which
is wholly owned by Alan I. Casden.
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 date of the financial statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS
The investment in limited partnerships is accounted for on the equity
method. Acquisition fees, selection fees and other costs related to
the acquisition of the projects were capitalized as part of the
investment account and are being amortized on a straight-line basis
over the estimated lives of the underlying assets, which is generally
30 years.
NET INCOME PER LIMITED PARTNERSHIP INTEREST
Net income per limited partnership interest was computed by dividing
the limited partners' share of net income by the number of limited
partnership interests outstanding during the year. The number of
limited partnership interests was 10,693 for the periods presented.
5
<PAGE> 8
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and bank certificates of
deposit with an original maturity of three months or less. The
Partnership has its cash and cash equivalents are in excess of the FDIC
insurance limit.
INCOME TAXES
No provision has been made for income taxes in the accompanying
financial statements since such taxes, if any, are the liability of the
individual partners.
IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership reviews long-lived assets to determine if there has
been any permanent impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If the sum of the expected future cash flows is less than
the carrying amount of the assets, the Partnership recognizes an
impairment loss.
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS
The Partnership has limited partnership interests in 21 limited
partnerships. The limited partnerships own residential rental projects
consisting of 2,430 apartment units. The mortgage loans of these
projects are insured by the United States Department of Housing and
Urban Development ("HUD") or state governmental agencies.
The Partnership, as a limited partner, is entitled to between 85
percent and 99 percent of the profits and losses of the limited
partnerships.
Equity in losses of limited partnerships is recognized in the financial
statements until the limited partnership investment account is reduced
to a zero balance. Losses incurred after the limited partnership
investment account is reduced to zero are not recognized.
Distributions from the limited partnerships are accounted for as a
return of capital until the investment balance is reduced to zero or to
a negative amount equal to further capital contributions required.
Subsequent distributions received are recognized as income.
6
<PAGE> 9
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
The following is a summary of the investments in limited partnerships
for the nine and three months ended September 30, 1998:
<TABLE>
<S> <C>
Balance, beginning of period $3,493,251
Capital contributions 173,900
Amortization of acquisition costs (6,300)
Cash distribution recognized as return of capital (31,859)
Equity in income of limited partnerships 660,000
----------
Balance, end of period $4,288,992
==========
</TABLE>
The difference between the investment per the accompanying balance
sheets at September 30, 1998 and December 31, 1997, and the deficiency
per the unaudited combined estimated statements of operations is due
primarily to cumulative unrecognized equity in losses of certain
limited partnerships, costs capitalized to the investment account and
cumulative distributions recognized as income.
The following are unaudited combined estimated statements of operations
for the nine months ended September 30, 1998 and 1997 for the limited
partnerships in which the Partnership has investments:
<TABLE>
<CAPTION>
Nine months Three months Nine months Three months
ended ended ended ended
Sept. 30, 1998 Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Rental and other $17,334,000 $5,778,000 $17,235,000 $5,704,000
----------- ---------- ----------- ----------
EXPENSES
Depreciation 2,382,000 794,000 2,403,000 801,000
Interest 4,881,000 1,627,000 5,001,000 1,667,000
Operating 9,708,000 3,236,000 9,168,000 3,056,000
----------- ----------- ------------ -----------
16,971,000 5,657,000 16,461,000 5,524,000
----------- ----------- ----------- -----------
NET INCOME $ 363,000 $ 121,000 $ 774,000 $ 180,000
============ =========== ============ ===========
</TABLE>
NAPICO, or one of its affiliates, is the general partner and property
management agent for certain of the limited partnerships included
above.
Under recently adopted law and policy, HUD has determined not to renew
housing assistance payments contracts ("HAP Contracts") on their
existing terms. In connection with renewals of the HAP Contracts under
such new law and policy, the amount of rental assistance payments under
renewed HAP Contracts will be based on market rentals instead of above
market rentals, which was generally the case under existing HAP
Contracts. As a result, existing HAP Contracts that are renewed in the
7
<PAGE> 10
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
future on projects insured by the Federal Housing Administration of HUD
("FHA") will not provide sufficient cash flow to permit owners of
properties to meet the debt service requirements of these existing
FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family
Assisted Housing Reform and Affordability Act of 1997 ("MAHRAA"), which
was adopted in October 1997, provides for the restructuring of mortgage
loans insured by the FHA with respect to properties subject to HAP
Contracts that have been renewed under the new policy. The restructured
loans will be held by the current lender or another lender. Under
MAHRAA, an FHA-insured mortgage loan can be restructured to reduce the
annual debt service on such loan. There can be no assurance that the
Partnership will be permitted to restructure its mortgage indebtedness
pursuant to the new HUD rules implementing MAHRAA or that the
Partnership would choose to restructure such mortgage indebtedness if
it were eligible to participate in the MAHRAA program. It should be
noted that there are uncertainties as to the economic impact on the
Partnership of the combination of the reduced payments under the HAP
Contracts and the restructuring of the existing FHA-insured mortgage
loans under MAHRAA. Accordingly, the General Partners are unable to
predict with certainty their impact on the Partnership's future cash
flow.
As a result of the foregoing, the Partnership is undergoing an
extensive review of the properties in which the limited partnerships
have invested that are subject to HUD mortgages and which may be sold
to the REIT as set forth below. The Partnership has incurred expenses
in connection with this review by various third party professionals,
including accounting, legal, valuation, structural review and
engineering costs, which amounted to approximately $380,000 through
September 30, 1998 including approximately $242,000 and $24,000 for the
nine months ended September 30, 1998 and 1997, respectively, which are
included in general and administrative expenses.
A real estate investment trust ("REIT") organized by affiliates of
NAPICO has advised the Partnership that it intends to make a proposal
to purchase from the Partnership certain of the limited partnership
interests held for investment by the Partnership.
The REIT proposes to purchase such limited partnership interests for
cash, which it plans to raise in connection with a private placement of
its equity securities. The purchase is subject to, among other things,
(i) consummation of such private placement by the REIT; (ii) the
purchase of the general partnership interests in the local limited
partnerships by the REIT; (iii) the approval of HUD and certain state
housing finance agencies; (iv) the consent of the limited partners to
the sale of the local limited partnership interests held for investment
by REAL II; and (v) the consummation of a minimum number of purchase
transactions with other NAPICO affiliated partnerships.
A consent solicitation statement has been sent to the limited partners
setting forth the terms and conditions of the purchase of the limited
partners' interests held for investment by the Partnership, together
with certain amendments to the Partnership Agreement and other
disclosures of various conflicts of interest in connection with the
proposed transaction. As of November 2, 1998, the consents of the
limited partners to the sale of the partnership interests and
amendments to the
8
<PAGE> 11
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
Partnership Agreement have been obtained. In addition, the REIT has
completed buy-out negotiations with a majority of the general partners
of the local limited partnerships and has obtained approval from HUD.
NOTE 3 - MANAGEMENT FEE AND EXPENSES DUE TO GENERAL PARTNER
Under the terms of the Restated Certificate and Agreement of Limited
Partners, the Partnership is liable to NAPICO for an annual management
fee equal to .4 percent of the original invested assets of the limited
partnerships. Invested assets are defined as the costs of acquiring
project interests, including the proportionate amount of the mortgage
loans related to the Partnership's interests in the capital accounts of
the respective partnerships. For the nine months ended September 30,
1998 and 1997, the fee was $298,260.
The Partnership reimburses NAPICO for certain expenses. The
reimbursement paid to NAPICO was approximately $26,400 and $24,300 for
the nine months ended September 30, 1998 and 1997, respectively, and is
included in administrative expenses.
NOTE 4 - CONTINGENCIES
On August 27, 1998, two investors holding an aggregate of eight units
of limited partnership interests in Real Estate Associates Limited III
(an affiliated partnership in which NAPICO is the managing general
partner) and two investors holding an aggregate of five units of
limited partnership interest in Real Estate Associates Limited VI
(another affiliated partnership in which NAPICO is the managing general
partner) commenced an action in the United States District Court for
the Central District of California against the Partnership, NAPICO and
certain other affiliated entities. The complaint alleges that the
defendants breached their fiduciary duty to the limited partners of
certain NAPICO managed partnerships and made materially false and
misleading statements in the consent solicitation statements sent to
the limited partners of such partnerships relating to approval of the
transfer of partnership interests in limited partnerships, owning
certain of the properties, to the REIT (Note 2). The plaintiffs seek
preliminary and permanent injunctive relief and other equitable relief,
as well as compensatory and punitive damages. The managing general
partner of such NAPICO partnerships and the other defendants believe
that the plaintiffs' claims are without merit and intend to contest the
action vigorously.
The corporate general partner is involved in various lawsuits arising
from transactions in the ordinary course of business. In addition, the
Partnership is involved in a lawsuit. In the opinion of management and
the corporate general partner, the claims will not result in any
material liability to the Partnership.
The Partnership has assessed the potential impact of the Year 2000
computer systems issue on its operations. The Partnership believes that
no significant actions are required to be taken by the Partnership to
address the issue and that the impact of the Year 2000 computer systems
issue will not materially affect the Partnership's future operating
results or financial condition.
9
<PAGE> 12
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure
about Fair Value of Financial Instruments," requires disclosure of
fair value information about financial instruments. The carrying
amount of assets and liabilities reported on the balance sheets that
require such disclosure approximates fair value due to their
short-term maturity.
10
<PAGE> 13
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of funds include interest income
earned from investing available cash and distributions from limited
partnerships in which the Partnership has invested.
RESULTS OF OPERATIONS
Partnership revenues consist primarily of interest income earned on
certificates of deposit and other temporary investment of funds not
required for investment in local partnerships.
Operating expenses consist primarily of recurring general and
administrative expenses and professional fees for services rendered to
the Partnership. In addition, an annual Partnership management fee in
an amount equal to .4 percent of invested assets is payable to the
corporate general partner.
The Partnership accounts for its investments in the local limited
partnerships on the equity method, thereby adjusting its investment
balance by its proportionate share of the income or loss of the local
limited partnerships. Losses incurred after the limited partnership
investment account is reduced to zero are not recognized in accordance
with the equity accounting method.
Distributions received from limited partnerships are recognized as
return of capital until the investment balance has been reduced to zero
or to a negative amount equal to future capital contributions required.
Subsequent distributions received are recognized as income.
Except for certificates of deposit and money market funds the
Partnership's investments are entirely interests in other limited
partnerships owning government assisted projects. Available cash is
invested in these funds earning interest income as reflected in the
statements of operations. These investments can be converted to cash to
meet obligations as they arise.
Under recently adopted law and policy, HUD has determined not to renew
housing assistance payments contracts ("HAP Contracts") on their
existing terms. In connection with renewals of the HAP Contracts under
such new law and policy, the amount of rental assistance payments under
renewed HAP Contracts will be based on market rentals instead of above
market rentals, which was generally the case under existing HAP
Contracts. As a result, existing HAP Contracts that are renewed in the
future on projects insured by the Federal Housing Administration of HUD
("FHA") will not provide sufficient cash flow to permit owners of
properties to meet the debt service requirements of these existing
FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family
Assisted Housing Reform and Affordability Act of 1997 ("MAHRAA"), which
was adopted in October 1997, provides for the restructuring of mortgage
loans insured by the FHA with respect to properties subject to HAP
Contracts that have been renewed under the new policy. The restructured
loans will be held by the current lender or another lender. Under
MAHRAA, an FHA-insured mortgage loan can be restructured to reduce the
annual debt service on such loan. There can be no assurance that the
Partnership will be permitted to restructure its mortgage indebtedness
pursuant
11
<PAGE> 14
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
to the new HUD rules implementing MAHRAA or that the Partnership would
choose to restructure such mortgage indebtedness if it were eligible
to participate in the MAHRAA program. It should be noted that there
are uncertainties as to the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA.
Accordingly, the General Partners are unable to predict with certainty
their impact on the Partnership's future cash flow.
As a result of the foregoing, the Partnership is undergoing an
extensive review of the properties in which the limited partnerships
have invested that are subject to HUD mortgages and which may be sold
to the REIT as set forth below. The Partnership has incurred expenses
in connection with this review by various third party professionals,
including accounting, legal, valuation, structural review and
engineering costs, which amounted to approximately $380,000 through
September 30, 1998 including approximately $242,000 and $24,000 for
the nine months ended September 30, 1998 and 1997, respectively, which
are included in general and administrative expenses.
A real estate investment trust ("REIT") organized by affiliates of
NAPICO has advised the Partnership that it intends to make a proposal
to purchase from the Partnership certain of the limited partnership
interests held for investment by the Partnership.
The REIT proposes to purchase such limited partnership interests for
cash, which it plans to raise in connection with a private placement
of its equity securities. The purchase is subject to, among other
things, (i) consummation of such private placement by the REIT; (ii)
the purchase of the general partnership interests in the local limited
partnerships by the REIT; (iii) the approval of HUD and certain state
housing finance agencies; (iv) the consent of the limited partners to
the sale of the local limited partnership interests held for
investment by REAL II; and (v) the consummation of a minimum number of
purchase transactions with other NAPICO affiliated partnerships.
A consent solicitation statement has been sent to the limited partners
setting forth the terms and conditions of the purchase of the limited
partners' interests held for investment by the Partnership, together
with certain amendments to the Partnership Agreement and other
disclosures of various conflicts of interest in connection with the
proposed transaction. As of November 2, 1998, the consents of the
limited partners to the sale of the partnership interests and
amendments to the Partnership Agreement have been obtained. In
addition, the REIT has completed buy-out negotiations with a majority
of the general partners of the local limited partnerships and has
obtained approval from HUD.
The Partnership has assessed the potential impact of the Year 2000
computer systems issue on its operations. The Partnership believes
that no significant actions are required to be taken by the
Partnership to address the issue and that the impact of the Year 2000
computer systems issue will not materially affect the Partnership's
future operating results or financial condition.
12
<PAGE> 15
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Joseph Alizio v. Peter Perpignano, New Haven Plaza Associates, et. al.,
Index No. 1776/94, Supreme Court, Nassau County. This action was
commenced by Joseph Alizio, a limited partner in New Haven Plaza
Associates ("New Haven Plaza"), alleging seven causes of action.
Plaintiff sought to recover his pro rata share of $280,000,
representing a portion of the purchase price of the partnership
interest purchased by Real Estate Associates Limited II ("REAL II"), as
well as an accounting. By order dated September 24, 1996, the Court
dismissed the first through fourth, sixth and seventh causes of action.
On December 22, 1997, the Appellate Division affirmed the dismissal of
the first through fourth, sixth and seventh causes of action. The fifth
cause of action is still pending in which plaintiff seeks his pro rata
share of a $75,000 consultant's fee paid to defendant Perpignano by
Real II and its general partners.
On August 27, 1998, two investors holding an aggregate of eight units
of limited partnership interests in Real Estate Associates Limited III
(an affiliated partnership in which NAPICO is the managing general
partner) and two investors holding an aggregate of five units of
limited partnership interest in Real Estate Associates Limited VI
(another affiliated partnership in which NAPICO is the managing general
partner) commenced an action in the United States District Court for
the Central District of California against the Partnership, NAPICO and
certain other affiliated entities. The complaint alleges that the
defendants breached their fiduciary duty to the limited partners of
certain NAPICO managed partnerships and made materially false and
misleading statements in the consent solicitation statements sent to
the limited partners of such partnerships relating to approval of the
transfer of partnership interests in limited partnerships, owning
certain of the properties, to the REIT (Note 2). The plaintiffs seek
preliminary and permanent injunctive relief and other equitable relief,
as well as compensatory and punitive damages. The managing general
partner of such NAPICO partnerships and the other defendants believe
that the plaintiffs' claims are without merit and intend to contest the
action vigorously.
The corporate general partner is involved in various lawsuits. None of
these are related to the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A report 8-K relating to an unsolicited offer to buy units of limited
partnership interests (the "Units"), as discussed below, was filed with
the Securities and Exchange Commission during the quarter ended
September 30, 1998.
On February 15, 1998, Bond Purchase, L.L.C. (the "Buyer") made an
unsolicited tender offer to buy a certain number of Units in the
Partnership for a price of $215 per Unit. The Buyer did not contact
the Corporate General Partner prior to commencing its tender offer. By
letter dated March 11, 1998, the Corporate General Partner advised
limited partners that it had determined not to take a position with
respect to the tender offer but cautioned limited partners to consider
certain items before determining whether to tender their Units to the
Buyer. A copy of the letter from the Buyer is attached as an Exhibit
to this form 10-Q.
13
<PAGE> 16
REAL ESTATE ASSOCIATES LIMITED II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REAL ESTATE ASSOCIATES LIMITED II
(a California limited partnership)
By: National Partnership Investments Corp.
General Partner
/s/ PAUL PATIERNO
--------------------------------------
Paul Patierno
Chief Financial Officer
Date:
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/s/ CHARLES BOXENBAUM
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Charles Boxenbaum
Chief Executive Officer
Date:
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14
<PAGE> 17
BOND PURCHASE L.L.C.
P.O. Box 26730
Kansas City, MO 64196
February 15, 1998
To the Holders of Limited Partnership Interests in Real Estate
Associates Limited II.
RE: OFFER TO PURCHASE LIMITED PARTNERSHIP INTERESTS FOR $215.00
Dear Investor:
We are offering you an opportunity to sell your limited partnership
interests (the "Units") in Real Estate Associates Limited II (the
"Partnership") for cash in the amount of $215.00 per Unit (which amount will be
reduced by any cash distributions declared by the Partnership after the date of
this letter). Our offer provides you with an opportunity to sell your Units now
without the costly transfer fees and commission costs (typically up to 10%)
usually paid by the seller in secondary market sales. ALL TRANSFER COSTS AND
FEES WILL BE PAID BY BOND PURCHASE, L.L.C.
We believe that it is appropriate for investors to have financial choices.
Our offer gives you, the investor, the ability to make a decision about your
continued involvement with the Partnership. You may no longer wish to continue
with your investment in the Partnership for a number of reasons, including:
* NO FURTHER IRS FILING
* HIGHEST OFFER -- This offer is higher than the last reported trade of
$210 (August 1, 1997 to September 30, 1997) in the secondary
* If you sell you units, 1998 will be the final year for which you
receive a K-I tax from the partnership.
* You may be able to realize a tax loss that would reduce your taxes
for 1998.
* The Partnership was closed eighteen years ago in 1980. You money has
been tied up for this long period with minimal return.
* More immediate use for the cash tied up in your investment in the
Units.
* The absence of a formal trading market for the Units and their
resulting relative illiquidity.
<PAGE> 18
* The lack of any current cash distributions.
* General disenchantment with real estate investments, particularly
long-term investments in limited partnerships;
Our offer is limited to 512 of the 10,693 outstanding Units. If we were to
acquire more than this amount, the administrative costs of our offer would
become burdensome.
We will accept for purchase properly documented Units on a "first-received,
first-buy" basis. You will be paid promptly following confirmation of a valid,
properly executed Agreement of Transfer and other required transfer documents.
We will pay for all Partnership transfer fees and costs. All tenders of Units
will be irrevocable and may not be rescinded or withdrawn.
We are real estate investors who are not affiliated with the Partnership
or the General Partners. The General Partners of the Partnership have not
analyzed, approved, endorsed or made any recommendation as to acceptance of the
offer. The purchase offer has been determined solely at the discretion of Bond
Purchase, L.L.C. and does not necessarily represent the true market value of
each unit. We are seeking to acquire Units for investment purposes only and not
with a view to their resale.
An Agreement of Transfer is enclosed which you can use to accept our
offer. Please execute page 3 of this document, as well as the Power of
Attorney, obtain all other required signatures and return it in the enclosed
envelope. In addition, please return your Unit Certificate in the enclosed
envelope. We encourage you to act immediately if you are interested in
accepting or offer as only 512 Units will be purchased.
OUR OFFER WILL EXPIRE AT 5:00 PM ON APRIL 15, 1998, UNLESS EXTENDED.
Please call William Teel at (816) 421-4670 if you have any questions.
Sincerely,
Bond Purchase, L.L.C.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PARTNERSHIP'S STATEMENT OF EARNINGS AND BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,003,585
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,003,585
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,292,577
<CURRENT-LIABILITIES> 95,548
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,197,029
<TOTAL-LIABILITY-AND-EQUITY> 5,292,577
<SALES> 0
<TOTAL-REVENUES> 932,566
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 732,551
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 200,015
<INCOME-TAX> 0
<INCOME-CONTINUING> 200,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200,015
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
