<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, 1998
Commission File Number 0-20610
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, 1998
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Balance Sheets, March 31, 1998 and December 31, 1997 ...... 1
Statements of Operations
Three Months Ended March 31, 1998 and 1997 ......... 2
Statement of Partners' Equity (Deficiency),
Three Months Ended March 31, 1998 ................... 3
Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 .......... 4
Notes to Financial Statements ............................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................... 14
Item 6. Exhibits and Reports on Form 8-K ........................ 15
Signatures ....................................................... 16
</TABLE>
<PAGE> 3
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS
(Notes 1 and 2) $24,778,878 $25,724,722
CASH AND CASH EQUIVALENTS (Note 1) 278,373 216,939
OTHER ASSETS 30,269 30,269
RESTRICTED CASH (Note 3) 224,710 222,007
----------- -----------
TOTAL ASSETS $25,312,230 $26,193,937
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accrued fees due to partners (Notes 5 and 7) $ 2,258,138 $ 2,066,985
Capital contributions payable (Note 4) 356,985 356,985
Accounts payable and accrued expenses 57,627 67,548
----------- -----------
2,672,750 2,491,518
----------- -----------
CONTINGENCIES (Note 6)
PARTNERS' EQUITY 22,639,480 23,702,419
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $25,312,230 $26,193,937
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME $ 6,351 $ 4,276
----------- -----------
OPERATING EXPENSES:
Management fees - partners (Note 5) 191,153 191,152
General and administrative (Note 5) 20,807 42,064
Legal and accounting 38,330 59,421
----------- -----------
Total operating expenses 250,290 292,637
----------- -----------
LOSS FROM PARTNERSHIP OPERATIONS (243,939) (288,361)
EQUITY IN LOSS OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ACQUISITION COSTS (Note 2) (819,000) (949,000)
----------- -----------
NET LOSS $(1,062,939) $(1,237,361)
=========== ===========
NET LOSS PER LIMITED
PARTNERSHIP INTEREST (Note 1) $ (15) $ (17)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
------------ ------------ ------------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS 72,404
============
PARTNERS' EQUITY (DEFICIENCY),
January 1, 1998 $ (391,900) $ 24,094,319 $ 23,702,419
Net loss for the three months
ended March 31, 1998 (10,629) (1,052,310) (1,062,939)
------------ ------------ ------------
PARTNERS' EQUITY (DEFICIENCY),
March 31, 1998 $ (402,529) $ 23,042,009 $ 22,639,480
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,062,939) $(1,237,361)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of limited partnerships
and amortization of acquisition costs 819,000 949,000
Increase (decrease) in:
Accounts payable and accrued expenses (9,921) 50,158
Accrued fees due to partners 191,153 191,152
----------- -----------
Net cash used in operating activities (62,707) (47,051)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from limited partnerships recognized as a 126,844 138,790
return of capital
Increase in restricted cash (2,703) (1,843)
----------- -----------
Net cash provided by investing activities 124,141 136,947
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 61,434 89,896
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 216,939 147,870
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 278,373 $ 237,766
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
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, 1997 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, 1998 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, 1998
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.
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 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, 1998, 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
6
<PAGE> 9
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
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 three months ended March 31, 1998:
<TABLE>
<S> <C>
Balance, beginning of period $25,724,722
Equity in losses of limited partnerships (771,000)
Distributions recognized as a return of capital (126,844)
Amortization of capitalized acquisition costs and fees (48,000)
-----------
Balance, end of period $24,778,878
===========
</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
<PAGE> 10
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
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, 1998 and 1997,
approximately $191,000 has been expensed. The unpaid balance at
March 31, 1998 is approximately $2,258,000.
(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 $0 and $10,100,
respectively, for the three months ended March 31, 1998 and 1997,
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 and data processing fees. The amounts paid were
approximately $39,000 and $32,700 for the three months ended March 31,
1998 and 1997, 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
8
<PAGE> 11
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
NOTE 6 - CONTINGENCIES (CONTINUED)
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 its
counterclaim against the City. The parties have completed discovery
and Chicago has filed a motion for summary judgment with respect to
those claims. 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 is
zero.
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
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
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)
MARCH 31, 1998
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.
Currently Partnership reserves total $228,000 which amount will need
to be supplemented in 1998 in order to provide capital necessary to
restructure, among others, the Michigan Beach Local Partner and to pay
outstanding capital contributions. While your General Partner is
evaluating selling certain local partnership interests, no assurances
can be given that such sales will be consummated.
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.
11
<PAGE> 14
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
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.
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
decrease in legal and accounting fees is due to legal fees related to
the Michigan Beach litigation and various securities matters.
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
12
<PAGE> 15
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
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 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 March 31, 1998, 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 in 1996.
13
<PAGE> 16
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1998
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 its
counterclaim against the City. The parties have completed discovery and Chicago
has filed a motion for summary judgment with respect to those claims. 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 was written off in 1996.
14
<PAGE> 17
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1998
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)
MARCH 31, 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.
NATIONAL TAX CREDIT INVESTORS II
(a California limited partnership)
By: National Partnership Investments Corp.
General Partner
/s/ BRUCE NELSON
--------------------------------------
Bruce Nelson
President
Date: May 18, 1998
--------------------------------------
/s/ CHARLES H. BOXENBAUM
--------------------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date: May 18, 1998
--------------------------------------
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 278,373
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 308,642
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,312,230
<CURRENT-LIABILITIES> 57,627
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 22,639,480
<TOTAL-LIABILITY-AND-EQUITY> 25,312,230
<SALES> 0
<TOTAL-REVENUES> 6,351
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,069,290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,062,939
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,062,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,062,939
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
