<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 JUNE 30, 1997
Commission File Number 33-33216
NATIONAL TAX CREDIT INVESTORS II
(A California Limited Partnership)
I.R.S. Employer Identification No. 93-1017959
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
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<S> <C>
Balance Sheets, June 30, 1997 and December 31, 1996............. 1
Statements of Operations
Six and Three Months Ended June 30, 1997 and 1996............ 2
Statement of Partners' Equity (Deficiency),
Six Months Ended June 30, 1997............................... 3
Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996...................... 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........................................... 13
Item 6. Exhibits and Reports on Form 8-K ........................... 14
Signatures . . . . . . . . . . . . . ................................ 15
</TABLE>
<PAGE> 3
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS
(Notes 1 and 2) $28,240,528 $30,331,138
CASH AND CASH EQUIVALENTS (Note 1) 151,402 147,870
RESTRICTED CASH (Note 3) 216,552 212,129
----------- -----------
TOTAL ASSETS $28,608,482 $30,691,137
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accrued fees due to partners (Notes 5 and 7) $ 1,684,679 $ 1,302,375
Capital contributions payable (Note 4) 356,985 356,985
Accounts payable and accrued expenses 39,679 68,155
----------- -----------
2,081,343 1,727,515
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
PARTNERS' EQUITY 26,527,139 28,963,622
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $28,608,482 $30,691,137
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Six months Three months Six months Three months
ended ended ended ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME $ 9,821 $ 5,545 $ 12,424 $ 4,934
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Management fees - partners (Note 5) 382,304 191,153 382,303 191,151
General and administrative (Note 5) 73,680 31,616 65,514 22,490
Legal and accounting 92,320 32,899 73,527 36,445
----------- ----------- ----------- -----------
Total operating expenses 548,304 255,668 521,344 250,086
----------- ----------- ----------- -----------
LOSS FROM PARTNERSHIP OPERATIONS (538,483) (250,123) (508,920) (245,152)
EQUITY IN LOSS OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ACQUISITION COSTS (Note 2) (1,898,000) (949,000) (2,354,000) (1,177,000)
----------- ----------- ----------- -----------
NET LOSS $(2,436,483) $(1,199,123) $(2,862,920) $(1,422,152)
=========== =========== =========== ===========
NET LOSS PER LIMITED
PARTNERSHIP INTEREST (Note 1) $ (33) $ (16) $ (39) $ (19)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENT OF PARTNERS' EQUITY (DEFICIENCY)
SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
------------ -------- ------------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS
June 30, 1997 72,404
============
PARTNERS' EQUITY (DEFICIENCY),
January 1, 1997 $ (339,288) $ 29,302,910 $ 28,963,622
Net loss for the six months
ended June 30, 1997 (24,365) (2,412,118) (2,436,483)
------------ ------------ ------------
PARTNERS' EQUITY (DEFICIENCY),
June 30, 1997 $ (363,653) $ 26,890,792 $ 26,527,139
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,436,483) $(2,862,920)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of limited partnerships
and amortization of acquisition costs 1,898,000 2,354,000
Increase in restricted cash (4,423) -
Increase in other assets - (136,395)
Increase (decrease) in:
Accounts payable and accrued expenses (28,476) (122,389)
Accrued fees due to partners 382,304 291,126
----------- -----------
Net cash used in operating activities (189,078) (476,578)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in limited partnerships:
Capital contributions (6,063) -
Distributions recognized as a return of capital 198,673 96,891
----------- -----------
Net cash provided by investing activities 192,610 96,891
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,532 (379,687)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 147,870 731,131
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 151,402 $ 351,444
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - ORGANIZATION AND 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, 1996
prepared by National Tax Credit Investors 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
periods 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 June 30,
1997 and the results of operations for the six and three months then ended
and changes in cash flows for the six months then ended.
ORGANIZATION
The Partnership was formed under the California Revised Limited Partnership
Act on January 12, 1990. The Partnership was formed to invest primarily in
other limited partnerships ("Local Partnerships") which own and operate
multifamily housing complexes that are eligible for low income housing tax
credits. ("Tax Credits"). The general partner of the Partnership (the
"General Partner") is National Partnership Investments Corp. ("NAPICO"), a
California corporation. The special limited partner of the Partnership (the
"Special Limited Partner") is PaineWebber TC Partners, L.P., a Virginia
limited partnership.
The Partnership offered up to 100,000 units of limited partnership interests
("Units") at $1,000 per Unit. The offering terminated on April 22, 1992, at
which date a total of 72,404 Units had been sold amounting to $72,404,000 in
capital contributions. Offering expenses of $9,412,521 were incurred in
connection with the sale of such limited partner interests.
The General Partner has a one percent interest in operating profits and
losses of the Partnership. The limited partners will be allocated the
remaining 99 percent interest in proportion to their respective investments.
The Partnership shall continue in full force and in effect until December
31, 2030 unless terminated earlier pursuant to the terms of its Amended and
Restated Agreement of Limited Partnership (a "Partnership Agreement") or
operation of law.
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.
5
<PAGE> 8
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS
The Partnership's investment in Local Partnerships are accounted for on the
equity method. Acquisition, selection and other costs related to the
Partnership's investments are capitalized and are being amortized on a
straight line basis over the estimated lives of the underlying assets, which
is generally 30 years.
NET LOSS PER LIMITED PARTNERSHIP INTEREST
Net loss per limited partnership interest was computed by dividing the
limited partners' share of net loss by the weighted average number of
limited partnership interests outstanding during the year. The weighted
average number of limited partner interests was 72,404 for the periods
presented.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. The Partnership
has its cash and cash equivalents on deposit primarily with one high credit
quality financial institution. Such 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 responsibility of the
individual partners.
IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Improvement of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of as of January 1, 1996 without a significant effect
on its financial statements. 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 holds limited partnership interests in 37 local partnerships
(the "Local Partnerships"). As a limited partner of the Local Partnerships,
the Partnership does not have authority over day-to-day management of the
Local Partnerships or their properties (the "Apartment Complexes"). The
general partners responsible for management of the Local Partnerships (the
"Local Operating General Partners") are not affiliated with the General
Partner of the Partnership, except as discussed below.
6
<PAGE> 9
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
At June 30, 1997, the Local Partnerships own residential projects consisting
of 3,716 apartment units.
The Partnership, as a limited partner, is generally entitled to 99 percent
of the operating profits and losses of the Local Partnerships. National Tax
Credit, Inc. II ("NTC-II") an affiliate of the General Partner, serves
either as a special limited partner or non-managing administrative general
partner in which case it receives .01 percent of operating profits and
losses of the Local Partnership, or as the Local Operating General Partner
of the Local Partnership in which case it is entitled to .09 percent of the
operating profits and losses of the Local Partnership. The Partnership is
generally entitled to receive 50 percent of the net cash flow generated by
the Apartment Complexes, subject to repayment of any loans made to the Local
Partnerships (including loans made by NTC-II or an affiliate), repayment for
funding of development deficit and operating deficit guarantees by the Local
Operating General Partners or their affiliates (excluding NTC-II and its
affiliates), and certain priority payments to the Local Operating General
Partners other than NTC-II or its affiliates.
The Partnership's allocable share of losses from Local Partnerships are
recognized in the financial statements until the related investment account
is reduced to a zero balance. Losses incurred after the investment account
is reduced to zero will not be recognized.
Distributions received by the Partnership from the Local 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 will be recognized as income.
The following is a summary of the investments in Local Partnerships for the
six months ended June 30, 1997:
<TABLE>
<S> <C>
Balance, beginning of period $30,331,138
Capital contribution 6,063
Equity in losses of limited partnerships (1,794,000)
Distributions recognized as a return of capital (198,673)
Amortization of capitalized acquisition costs and fees (104,000)
-----------
Balance, end of period $28,240,528
===========
</TABLE>
NOTE 3 - RESTRICTED CASH
Restricted cash represents funds in escrow to be used, to fund operating
deficits, if any, of one of the Local Partnership, as defined in the Local
Partnership Agreement.
7
<PAGE> 10
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 4 - CAPITAL CONTRIBUTIONS PAYABLE
Capital contributions payable represent amounts which are due at various
times based on conditions specified in the respective Local Partnership
agreements. The capital contributions payable unsecured and non-interest
bearing. These amounts are generally due upon the Local Partnership
achieving certain operating or financing benchmarks and are expected to be
paid generally within three years of the Partnership's original investment
date.
Under the terms of its Partnership Agreement, the Partnership is obligated
to the General Partner and the Special Limited Partner for the following
fees:
(a) An annual Partnership management fee in an amount equal to 0.5
percent of invested assets (as defined in the Partnership
Agreement) is payable to the General Partner and Special Limited
Partner. For the six months ended June 30, 1997 and 1996,
approximately $382,000 has been expensed. The unpaid balance at
June 30, 1997 is approximately $1,685,000.
(b) A property disposition fee is payable to the General Partner in an
amount equal to the lesser of (i) one-half of the competitive real
estate commission that would have been charged by unaffiliated
third parties providing comparable services in the area where the
apartment complex is located, or (ii) 3 percent of the sale price
received in connection with the sale or disposition of the
apartment complex or local partnership interest, but in no event
will the property disposition fee and all amounts payable to
affiliated real estate brokers in connection with any such sale
exceed in the aggregate, the lesser of the competitive rate (as
described above) or 6 percent of such sale price. Receipt of the
property disposition fee will be subordinated to the distribution
of sale or refinancing proceeds by the Partnership until the
limited partners have proceeds in an aggregate amount equal to (i)
their 6 percent priority return for any year not theretofore
satisfied (as defined in the Partnership Agreement) and (ii) an
amount equal to the aggregate adjusted investment (as defined in
the Partnership Agreement) of the limited partners. No disposition
fees have been paid.
(c) The Partnership reimburses NAPICO for certain expenses. The
reimbursement to NAPICO was approximately $21,000 and $19,000,
respectively, for the six months ended June 30, 1997 and 1996, and
is included in general and administrative expenses.
NTC II is the Local Operating General Partner in four of the Partnership's
37 Local Partnerships. In addition, NTC II is either a special limited
partner or an administrative general partner in each Local Partnership.
An affiliate of the General Partner is currently managing four properties
owned by Local Partnerships. The Local Partnerships pay the affiliate
property management fees in the amount of 5 percent of their gross rental
revenues. The amounts paid were $60,200 and $58,600 for the six months ended
June 30, 1997 and 1996, respectively.
8
<PAGE> 11
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 6 - CONTINGENCIES
The General Partner of the Partnership is involved in various lawsuits
arising from transactions in the ordinary course of business. In addition,
the Partnership was involved in the following lawsuit. In the opinion of
management and the General Partner, the claims will not result in any
material liability to the Partnership.
Michigan Beach/City of Chicago Litigation: On June 19, 1991, the City of
Chicago ("Chicago") commenced an action in the Circuit Court of Cook County,
Illinois (the "Chicago Litigation") against the unaffiliated local operating
general partner, certain of its affiliates, the Michigan Beach Limited
Partnership, National Tax Credit Investors II ("NTCI-II"), National Tax
Credit Inc. II ("NTC-II"), as the limited and administrative general
partner, respectively, of the Michigan Beach Limited Partnership, and
certain other defendants, including the Government National Mortgage
Association ("GNMA"). On May 8, 1992, the Circuit Court of Cook County
entered an order dismissing Counts I-V as against all defendants. On January
26, 1993, the Illinois Appellate Court affirmed the order dismissing all the
claims asserted against NTCI-II and NTC-II. Chicago did not appeal that
judgment.
In August, 1994, Chicago brought Michigan Beach Limited Partnership, which
is the local partnership, back into the Chicago Litigation by filing a
second amended complaint which named the local partnership and others as
defendants. (Counts I-IV were not directed to the local partnership. As was
previously reported, the allegations directed against the local partnership
are in Counts V, VI, VII and VIII). Chicago alleged, among other things,
that Michigan Beach Cooperative, which was the previous owner of the
Michigan Beach Apartments, fraudulently induced Chicago to loan to it
$3,295,230, and breached its alleged agreement to use the loan proceeds
solely for rehabilitating the building. In Counts V and VI, Chicago alleged
that the local partnership's purchase of the Michigan Beach Apartments from
the Michigan Beach Cooperative was a fraudulent conveyance intended to
render the Michigan Beach Cooperative judgment proof and thereby deprive
Chicago of its only source of recovery on its claims against the Michigan
Beach Cooperative; thus, Chicago alleged in these counts that a judgment
entered in favor of Chicago on its claim against the Michigan Beach
Cooperative could be satisfied by Michigan Beach Apartments. Counts VII and
VIII further alleged breaches of Chicago's junior note and mortgage.
The local partnership moved to dismiss all of these allegations. Dismissal
of Counts VI, VII and VIII, was granted and the Michigan Beach local
partnership filed an answer to Count V which denies all of the material
allegations of wrongdoing. Additionally, the local partnership filed a
counterclaim against Chicago requesting $1,000,000 in compensatory damages
arising out of Chicago's conduct in preventing a modification of the senior
debt on the property. On January 26, 1996, the Circuit Court of Cook County
entered an order granting summary judgment in favor of certain defendants
and against Chicago, thereby disposing of all counts of Chicago's Third
Amended Complaint against all defendants. The court also found in favor of
the local partnership on its motion for summary judgment on Count II of its
counterclaim against the City. The City has appealed these rulings and that
appeal is currently pending.
The Michigan Beach Limited Partnership is vigorously prosecuting Counts I
and III of its counterclaim against the City. Discovery has been completed
and Chicago filed a Motion for Summary Judgment which is pending before the
Court. The local partnership is also defending the appeal. At the present
time, legal counsel for the local partnership is unable to predict the
outcome of this litigation. The Partnership's investment in Michigan Beach
Limited Partnership at June 30, 1997 is zero.
9
<PAGE> 12
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
NOTE 7 - 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, when it is practicable to estimate
that value. The operations generated by the investee limited partnerships,
which accounts for the Partnership's primary source of revenues, are subject
to various government rules, regulations and restrictions which make it
impracticable to estimate the fair value of the accrued fees due to
partners. The carrying amount of other assets and liabilities reported on
the balance sheets that require such disclosure approximates fair value due
to their short-term maturity.
10
<PAGE> 13
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Partnership raised $72,404,000 from investors by a public offering. The
Partnership's public offering ended April 22, 1992. The proceeds have been
used to invest in Local Partnerships which own and operate Apartment
Complexes that are eligible for Tax Credits.
It is not expected that any of the Local Partnerships in which the
Partnership invests will generate cash from operations sufficient to provide
distributions to the Limited Partners in any material amount. Such cash from
operations, if any, would first be used to meet operating expenses of the
Partnership. The Partnership's investments will not be readily marketable
and may be affected by adverse general economic conditions which, in turn,
could substantially increase the risk of operating losses for the Apartment
Complexes, the Local Partnerships and the Partnership. These problems may
result from a number of factors, many of which cannot be controlled by the
General Partner.
RESULTS OF OPERATIONS
The Partnership was formed to provide various benefits to its Limited
Partners. It is not expected that any of the Local Partnerships in which the
Partnership has invested will generate cash flow sufficient to provide for
distributions to Limited Partners in any material amount. The Partnership
accounts for its investments in the Local Partnerships on the equity method,
thereby adjusting its investment balance by its proportionate share of the
income or loss of the Local Partnerships.
In general, in order to avoid recapture of Housing Tax Credits, the
Partnership does not expect that it will dispose of its Local Partnership
Interests or approve the sale by a Local Partnership of any Apartment
Complex prior to the end of the applicable 15-year Compliance Period.
Because of (i) the nature of the Apartment Complexes, (ii) the difficulty of
predicting the resale market for low-income housing 15 or more years in the
future, and (iii) the inability of the Partnership to directly cause the
sale of Apartment Complexes by local general partners, but generally only to
require such local general partners to use their respective best efforts to
find a purchaser for the Apartment Complexes, it is not possible at this
time to predict whether the liquidation of substantially all of the
Partnership's assets and the disposition of the proceeds, if any, in
accordance with the partnership agreement will be able to be accomplished
promptly at the end of the 15-year period. If a Local Partnership is unable
to sell an Apartment Complex, it is anticipated that the local general
partner will either continue to operate such Apartment Complex or take such
other actions as the local general partner believes to be in the best
interest of the Local Partnership. In addition, circumstances beyond the
control of the General Partner may occur during the Compliance Period which
would require the Partnership to approve the disposition of an Apartment
Complex prior to the end of the Compliance Period.
Except for interim investments in highly liquid debt investments, the
Partnership's investments are entirely interests in other Local Partnerships
owning Apartment Complexes. Funds temporarily not required for such
investments in projects are invested in these highly liquid debt investments
earning interest income as reflected in the statements of operations. These
interim investments can be easily converted to cash to meet obligations as
they arise.
11
<PAGE> 14
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
The Partnership, as a Limited Partner in the Local Partnerships in which it
has invested, is subject to the risks incident to the construction,
management, and ownership of improved real estate. The Partnership
investments are also subject to adverse general economic conditions, and
accordingly, the status of the national economy, including substantial
unemployment and concurrent inflation, could increase vacancy levels, rental
payment defaults, and operating expenses, which in turn, could substantially
increase the risk of operating losses for the Apartment Complexes.
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 Partnerships.
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.
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 0.5
percent of invested assets is payable to the General Partner and Special
Limited Partner. The management fee represents the annual recurring fee
which will be paid to the General Partner for its continuing management of
Partnership affairs.
The Palm Springs View property, a 120-unit apartment complex located in Palm
Springs, California, was in default on the mortgage note in 1995. The
mortgage note is insured by the United States Department of Housing and
Urban Development ("HUD"). In January 1996, HUD paid to the lender a
"partial payment of insurance claim", which modified the mortgage note,
including a reduction of the interest rate and the creation of a second deed
of trust to HUD with required payments restricted to a proportion of
available property cash flow. The completion of the partial payment of
insurance claim, in addition to the application of reserve funds already
held by the lender, served to cure the default. In December 1993, Local
Partnership, PSVA Joint Venture, was admitted as an additional limited
partner of the Palm Springs Local Partnership by its acquisition of 49
percent of the existing limited partner's 99 percent ownership interest. In
exchange for the ownership interest, the additional limited partner
originally agreed to invest $577,200, which was to be paid in seventy-eight
installments of $7,400 per month. In January 1996, in conjunction with the
partial payment of insurance claim, the additional limited partner made a
lump-sum contribution of $150,000 in lieu of the payment of the twenty-four
installments payable during 1996 and 1997.
The Parkwood Landing Local Partnership obtained permanent financing of
$4,700,000 in October 1994, the proceeds of which were used to repay the
then-outstanding construction loan in the amount of $6,386,000. The
remaining outstanding loan balance was paid primarily with the Partnership's
investment of the second and third capital contributions (approximately
$1,200,000 and $400,000, respectively), with the remainder being funded by
the Local Operating General Partner. Pursuant to a letter agreement dated
October 13, 1994 between the Partnership and the Local Operating General
Partner, the third capital contribution was advanced in order to facilitate
the funding of the permanent loan. This advance capital contribution bears
interest at the prime rate plus 2 percent per annum, and the interest is due
and payable upon the attainment of Rental Achievement. In consideration of
the Partnership's advance
12
<PAGE> 15
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
of the third capital contribution, the local general partner agreed to
redefine the benchmarks of the fourth and final capital contribution of
$355,909 so as to be payable in two separate installments. The final capital
contribution shall now be payable in two installments: (a) $100,000 upon the
attainment of breakeven operations and 95 percent occupancy for six
consecutive months, as defined in the letter agreement, and (b) $255,909
upon an additional three months of breakeven operations and 95 percent
occupancy. In addition, the management agent, which is an affiliate of the
Local Operating General Partner, shall subordinate its property management
fees in the event the project operates at a deficit during the guaranty
period. As of June 30, 1997, Rental Achievement has not been attained and
the interest on the capital contributions has not yet been received or
accrued by the Partnership.
The Michigan Beach property, a 240-unit apartment complex located in
Chicago, Illinois, is operating at a substantial deficit. The deficit is
attributable to a soft local rental market, high leverage and deferred
maintenance. In November 1996, the local partnership ceased making payments
on its first mortgage, and has commenced negotiations with the lender and
the U.S. Department of Housing and Urban Development, who insures the loan,
in order to cure the default. The loan is in default and negotiation of the
loan workout is still in progress. As a result of the above and the legal
proceedings discussed in Part II, the carrying value of the investment of
$1,117,893 was written off as of December 31, 1996.
13
<PAGE> 16
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1997
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NTCI-II's General Partner is involved in various lawsuits. In addition, the
Partnership is involved in the following lawsuits arising from transactions in
the ordinary course of business. In the opinion of management and the General
Partner, these claims will not result in any material liability to the
Partnership.
Michigan Beach/City of Chicago Litigation: On June 19, 1991, the City of Chicago
("Chicago") commenced an action in the Circuit Court of Cook County, Illinois
(the "Chicago Litigation") against the unaffiliated local operating general
partner, certain of its affiliates, the Michigan Beach Limited Partnership,
National Tax Credit Investors II ("NTCI-II"), National Tax Credit Inc. II
("NTC-II"), as the limited and administrative general partner, respectively, of
the Michigan Beach Limited Partnership, and certain other defendants, including
the Government National Mortgage Association ("GNMA"). On May 8, 1992, the
Circuit Court of Cook County entered an order dismissing Counts I-V as against
all defendants. On January 26, 1993, the Illinois Appellate Court affirmed the
order dismissing all the claims asserted against NTCI-II and NTC-II. Chicago did
not appeal that judgment.
In August, 1994, Chicago brought Michigan Beach Limited Partnership, which is
the local partnership, back into the Chicago Litigation by filing a second
amended complaint which named the local partnership and others as defendants.
(Counts I-IV were not directed to the local partnership. As was previously
reported, the allegations directed against the local partnership are in Counts
V, VI, VII and VIII). Chicago alleged, among other things, that Michigan Beach
Cooperative, which was the previous owner of the Michigan Beach Apartments,
fraudulently induced Chicago to loan to it $3,295,230, and breached its alleged
agreement to use the loan proceeds solely for rehabilitating the building. In
Counts V and VI, Chicago alleged that the local partnership's purchase of the
Michigan Beach Apartments from the Michigan Beach Cooperative was a fraudulent
conveyance intended to render the Michigan Beach Cooperative judgment proof and
thereby deprive Chicago of its only source of recovery on its claims against the
Michigan Beach Cooperative; thus, Chicago alleged in these counts that a
judgment entered in favor of Chicago on its claim against the Michigan Beach
Cooperative could be satisfied by Michigan Beach Apartments. Counts VII and VIII
further alleged breaches of Chicago's junior note and mortgage.
The local partnership moved to dismiss all of these allegations. Dismissal of
Counts VI, VII and VIII, was granted and the Michigan Beach local partnership
filed an answer to Count V which denies all of the material allegations of
wrongdoing. Additionally, the local partnership filed a counterclaim against
Chicago requesting $1,000,000 in compensatory damages arising out of Chicago's
conduct in preventing a modification of the senior debt on the property. On
January 26, 1996, the Circuit Court of Cook County entered an order granting
summary judgment in favor of certain defendants and against Chicago, thereby
disposing of all counts of Chicago's Third Amended Complaint against all
defendants. The court also found in favor of the local partnership on its motion
for summary judgment on Count II of its counterclaim against the City. The City
has appealed these rulings and that appeal is currently pending.
The Michigan Beach Limited Partnership is vigorously prosecuting Counts I and
III of its counterclaim against the City. Discovery has been completed and
Chicago filed a Motion for Summary Judgment which is pending before the Court.
The local partnership is also defending the appeal. At the present time, legal
counsel for the local partnership is unable to predict the outcome of this
litigation. Finally, NTC-II is preparing a partial payment claim ("PPC") to file
with the Department of Housing and Urban Development ("HUD") in an effort to
reduce the debt service of the Michigan Beach Local Partnership since the loan
is currently in default. The Partnership's investment in Michigan Beach Limited
Partnership at June 30, 1997 is zero.
14
<PAGE> 17
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1997
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are required per the provision of Item 1 of regulation S-K.
15
<PAGE> 18
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
JUNE 30, 1997
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.
NATIONAL TAX CREDIT INVESTORS II
(a California limited partnership)
By: National Partnership Investments Corp.
General Partner
--------------------------------------
Bruce Nelson
President
Date:
-------------------------------------
-------------------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date:
-------------------------------------
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PARTNERSHIP'S STATEMENTS OF EARNINGS AND BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 367,954
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 367,954
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,608,482
<CURRENT-LIABILITIES> 39,679
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 26,527,139
<TOTAL-LIABILITY-AND-EQUITY> 28,608,482
<SALES> 0
<TOTAL-REVENUES> 9,821
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,446,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,436,483
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,436,483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,436,483
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
