<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 MARCH 31, 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 MARCH 31, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, March 31, 1997 and December 31, 1996 1
Statements of Operations
Three Months Ended March 31, 1997 and 1996 2
Statement of Partners' Equity (Deficiency),
Three Months Ended March 31, 1997 ......... 3
Statements of Cash Flows
Three Months Ended March 31, 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
<PAGE> 3
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS
(Notes 1 and 2) $29,243,348 $30,331,138
CASH AND CASH EQUIVALENTS (Note 1) 237,766 147,870
RESTRICTED CASH (Note 3) 213,972 212,129
----------- -----------
TOTAL ASSETS $29,695,086 $30,691,137
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accrued fees due to partners (Notes 5 and 7) $ 1,493,527 $ 1,302,375
Capital contributions payable (Note 4) 356,985 356,985
Accounts payable and accrued expenses 118,313 68,155
----------- -----------
1,968,825 1,727,515
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
PARTNERS' EQUITY 27,726,261 28,963,622
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $29,695,086 $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
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
INTEREST INCOME $ 4,276 $ 7,491
----------- -----------
OPERATING EXPENSES:
Management fees - partners (Note 5) 191,152 191,153
General and administrative (Note 5) 42,064 43,023
Legal and accounting 59,421 37,082
----------- -----------
Total operating expenses 292,637 271,258
----------- -----------
LOSS FROM PARTNERSHIP OPERATIONS (288,361) (263,767)
EQUITY IN LOSS OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ACQUISITION COSTS (Note 2) (949,000) (1,177,000)
----------- -----------
NET LOSS $(1,237,361) $(1,440,767)
=========== ===========
NET LOSS PER LIMITED
PARTNERSHIP INTEREST (Note 1) $ (17) $ (20)
=========== ===========
</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)
THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------- ------------ ------------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS
March 31, 1997 72,404
============
PARTNERS' EQUITY (DEFICIENCY),
January 1, 1997 $(339,288) $ 29,302,910 $ 28,963,622
Net loss for the three months
ended March 31, 1997 (12,374) (1,224,987) (1,237,361)
--------- ------------ ------------
PARTNERS' EQUITY (DEFICIENCY),
March 31, 1997 $(351,662) $ 28,077,923 $ 27,726,261
========= ============ ============
</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
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,237,361) $(1,440,767)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of limited partnerships
and amortization of acquisition costs 949,000 1,177,000
Increase in restricted cash (1,843) -
Increase (decrease) in:
Accounts payable and accrued expenses 50,158 (93,625)
Accrued fees due to partners 191,152 123,504
----------- -----------
Net cash used in operating activities (48,894) (233,888)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in limited partnerships:
Capital contributions - (143,687)
Distributions recognized as a return of capital 138,790 45,726
----------- -----------
Net cash provided by (used in) investing activities 138,790 (97,961)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 89,896 (331,849)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 147,870 731,131
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 237,766 $ 399,282
=========== ===========
</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
MARCH 31, 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 March 31, 1997 and the results of operations and changes in cash
flows for the three 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)
MARCH 31, 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.
At March 31, 1997, the Local Partnerships own residential projects
consisting of 3,716 apartment units.
6
<PAGE> 9
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (Continued)
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 as
of March 31, 1997:
<TABLE>
<S> <C>
Balance, beginning of period $ 30,331,138
Equity in losses of limited partnerships (897,000)
Distributions recognized as a return of capital (138,790)
Amortization of capitalized acquisition costs and fees (52,000)
-----------
Balance, end of period $ 29,243,348
===========
</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.
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.
7
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NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
NOTE 5 - RELATED-PARTY TRANSACTIONS
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 three months ended
March 31, 1997 and 1996, approximately $191,000 has been
expensed. The unpaid balance at March 31, 1997 is
approximately $1,494,000.
(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 $10,137 and
$9,678, respectively, for the three months ended March 31,
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 $32,744 and
$32,818 for the three months ended March 31, 1997 and 1996,
respectively.
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
8
<PAGE> 11
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
NOTE 6 - CONTINGENCIES (Continued)
("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
the 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. The parties
are in the initial states of discovery. 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 March 31, 1997 is zero.
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.
9
<PAGE> 12
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 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.
10
<PAGE> 13
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 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% 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% of the existing
limited partner's 99% 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% per annum, and the interest is due and payable upon the
attainment of Rental Achievement. In consideration of the
Partnership's advance of the
11
<PAGE> 14
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
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% 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% 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 March 31, 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.
12
<PAGE> 15
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 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. The parties are in the initial states
of discovery. 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 March 31, 19976 is zero.
13
<PAGE> 16
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 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.
14
<PAGE> 17
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 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
Date:_______________________________________
By:_________________________________________
Bruce Nelson
President
Date:_______________________________________
Date:_______________________________________
Shawn Horwitz
Executive Vice President and
Chief Financial Officer
Date:_______________________________________
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS, THE STATEMENTS OF OPERATIONS, AND STATEMENTS OF CASH FLOW, QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 237,766
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 29,695,086
<TOTAL-ASSETS> 118,313
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 27,726,261
<OTHER-SE> 29,695,086
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 4,276
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,241,637
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,237,311
<INCOME-PRETAX> 0
<INCOME-TAX> 1,237,311
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,237,311
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
