<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended SEPTEMBER 30, 1998
Commission File Number 0-20610
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 SEPTEMBER 30, 1998
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, September 30, 1998 and December 31, 1997........................... 1
Statements of Operations
Nine and Three Months Ended September 30, 1998 and 1997 ................... 2
Statement of Partners' Equity (Deficiency),
Nine Months Ended September 30, 1998....................................... 3
Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997.............................. 4
Notes to Financial Statements ..................................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 13
Item 6. Exhibits and Reports on Form 8-K ................................................ 13
Signatures ............................................................................... 14
</TABLE>
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NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS
(Notes 1 and 2) $22,734,677 $25,724,722
CASH AND CASH EQUIVALENTS (Note 1) 528,091 216,939
OTHER ASSETS 72,769 30,269
RESTRICTED CASH (Note 3) 230,284 222,007
----------- -----------
TOTAL ASSETS $23,565,821 $26,193,937
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accrued fees due to partners (Notes 5 and 7) $ 2,640,444 $ 2,066,985
Capital contributions payable (Note 4) 356,985 356,985
Accounts payable and accrued expenses 79,780 67,548
----------- -----------
3,077,209 2,491,518
----------- -----------
CONTINGENCIES (Note 6)
PARTNERS' EQUITY 20,488,612 23,702,419
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $23,565,821 $26,193,937
=========== ===========
</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
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine months Three months Nine months Three months
ended ended ended ended
Sept. 30, 1998 Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME $ 24,950 $ 10,291 $ 15,817 $ 5,996
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Management fees - partners (Note 5) 573,459 191,153 573,457 191,153
General and administrative (Note 5) 72,094 16,697 111,519 37,838
Legal and accounting 136,204 40,953 109,889 17,569
----------- ----------- ----------- -----------
Total operating expenses 781,757 248,803 794,865 246,560
----------- ----------- ----------- -----------
LOSS FROM PARTNERSHIP OPERATIONS (756,807) (238,512) (779,048) (240,564)
EQUITY IN LOSS OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ACQUISITION COSTS (Note 2) (2,457,000) (819,000) (2,847,000) (949,000)
----------- ----------- ----------- -----------
NET LOSS $(3,213,807) $(1,057,512) $(3,626,048) $(1,189,564)
=========== =========== =========== ===========
NET LOSS PER LIMITED
PARTNERSHIP INTEREST (Note 1) $ (44) $ (14) $ (50) $ (16)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(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 nine months
ended September 30, 1998 (32,138) (3,181,669) (3,213,807)
------------ ------------ ------------
PARTNERS' EQUITY (DEFICIENCY),
September 30, 1998 $ (424,038) $ 20,912,650 $ 20,488,612
============ ============ ============
</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
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,213,807) $(3,626,048)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of limited partnerships
and amortization of acquisition costs 2,457,000 2,847,000
Increase in other assets (42,500) --
Increase in restricted cash (8,277) (7,108)
Increase (decrease) in:
Accounts payable and accrued expenses 12,232 (30,532)
Accrued fees due to partners 573,459 573,457
----------- -----------
Net cash used in operating activities (221,893) (243,231)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in limited partnerships:
Capital contributions -- (14,732)
Distributions from limited partnerships recognized
as a return of capital 533,045 338,506
----------- -----------
Net cash provided by investing activities 533,045 323,774
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 311,152 80,543
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 216,939 147,870
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 528,091 $ 228,413
=========== ===========
</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
SEPTEMBER 30, 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 September
30, 1998 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)
SEPTEMBER 30, 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 September 30, 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)
SEPTEMBER 30, 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
nine months ended September 30, 1998:
<TABLE>
<S> <C>
Balance, beginning of period $ 25,724,722
Equity in losses of limited partnerships (2,313,000)
Distributions recognized as a return of capital (533,045)
Amortization of capitalized acquisition costs and fees (144,000)
------------
Balance, end of period $ 22,734,677
============
</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)
SEPTEMBER 30, 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 six months
ended September 30, 1998 and 1997, approximately $573,000 has been
expensed. The unpaid balance at September 30, 1998 is approximately
$2,640,000.
(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 $31,000, respectively,
for the nine months ended September 30, 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
$120,600 and $90,700 for the nine months ended September 30, 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: As previously reported, 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 ("Michigan Beach"),
8
<PAGE> 11
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 6 - CONTINGENCIES (CONTINUED)
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. In October 1998, Chicago and Michigan Beach entered into a
settlement whereby the City agreed to the modification of Michigan Beach's
senior mortgage and the parties released each other from the claims asserted
or which could have been asserted in the action. The case was dismissed on
November 4, 1998.
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.
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)
SEPTEMBER 30, 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.
The Partnership does not have the ability to assess Limited Partners for
additional capital contributions to provide capital if needed by the
Partnership or Local Partnerships. Accordingly, if circumstances arise that
cause the Local Partnerships to require capital in addition to that
contributed by the Partnership and any equity of the local general partners,
the only sources from which such capital needs will be able to be satisfied
(other than the limited reserves available at the Partnership level) will be
(i) third-party debt financing (which may not be available if, as expected,
the Apartment Complexes owned by the Local Partnerships are already
substantially leveraged), (ii) other equity sources (which could reduce the
amount of Tax Credits being allocated to the Partnership, adversely affect
the Partnership's interest in operating cash flow and/or proceeds of sale or
refinancing of the Apartment Complexes and possibly even result in adverse
tax consequences to the Limited Partners), or (iii) the sale or disposition
of Apartment Complexes. There can be no assurance that any of such sources
would be readily available in sufficient proportions to fund the capital
requirements of the Local Partnerships. If such sources are not available,
the Local Partnerships would risk foreclosure on their Apartment Complexes
if they were unable to renegotiate the terms of their first mortgages and
any other debt secured by the Apartment Complexes, which would have
significant adverse tax consequences to the Limited Partners.
Reserves of the Partnership and reserves of the Local Partnerships may be
increased or decreased from time to time by the General Partner or the local
general partner, as the case may be, in order to meet anticipated costs and
expenses. The amount of cash flow available for distributions and/or sale as
refinancing proceeds, if any, which is available for distribution to the
Limited Partners may be affected accordingly.
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.
10
<PAGE> 13
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
The Villa Real Local Partnership admitted an additional limited partner and
conveyed to it substantially all of NTCI-II's interest in order to provide
additional capital necessary to restructure, among others, the Michigan
Beach Local Partner and to pay outstanding capital contributions.
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.
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.
11
<PAGE> 14
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
On May 28, 1998, the Partnership and National Tax Credit, Inc., II were
served with a Complaint filed on April 27, 1998 by Parkwood Landing Local
Partnership in the Superior Court of Fulton County, State of Georgia.
Parkwood Landing Local Partnership alleges in the Complaint that Rental
Achievement has been obtained and that the third and fourth capital
contributions are due and payable. The Complaint further alleges interest
due on the third capital contribution is waived retroactively to the date of
the advance. The Complaint alleges that since the Partnership failed to make
the third and fourth capital contribution, National Tax Credit, Inc., II
should be removed as Administrative General Partner. Parkwood Landing Local
Partnership has asked the court to declare that National Tax Credit, Inc.,
II is no longer the Administrative General Partner. The Complaint further
requests the court to declare that Parkwood Landing Local Partnership has
attained Rental Achievement and the third and fourth capital contributions
are due. Parkwood Landing Local Partnership further asks the court to
declare that interest on the third capital contribution is waived. As of
June 30, 1998, interest on the third capital contribution has not been
received or accrued by the Partnership. On July 31, 1998, the Partnership
and National Tax Credit, Inc., II answered the Complaint denying that Rental
Achievement has been attained, that interest on the third capital
contribution should not be waived and that National Tax Credit, Inc., II
should continue as Administrative General Partner.
The Partnership has assessed the potential impact of the Year 2000 computer
systems issue on its operations. The Partnership believes that no
significant actions are required to be taken by the Partnership to address
the issue and that the impact of the Year 2000 computer systems issue will
not materially affect the Partnership's future operating results or
financial condition.
12
<PAGE> 15
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 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: As previously reported, 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 ("Michigan Beach"), 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. In October 1998, Chicago and
Michigan Beach entered into a settlement whereby the City agreed to the
modification of Michigan Beach's senior mortgage and the parties released each
other from the claims asserted or which could have been asserted in the action.
The case was dismissed on November 4, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A report 8-K relating to an unsolicited offer was filed with the Securities and
Exchange Commission during the quarter ended September 30, 1998.
On March 15, 1998 Bond Purchase, L.L.C. (the "Buyer") made an unsolicited
tender offer to buy units of limited partnership interests (the "Units") in the
Partnership for a price of $105 per Unit. The Buyer did not contact the General
Partner prior to commencing its tender offer. By letter dated April 18, 1998,
the General Partner advised limited partners that it had determined not to take
a position with respect to the tender offer but cautioned limited partners to
consider certain items before determining whether to tender their Units to the
Buyer. A copy of the letter from the Buyer is attached as an Exhibit to this
form 10-Q.
13
<PAGE> 16
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
By: National Partnership Investments Corp.
General Partner
/s/ PAUL PATIERNO
--------------------------------------
Paul Patierno
Chief Financial Officer
Date:
--------------------------------------
/s/ CHARLES BOXENBAUM
--------------------------------------
Charles Boxenbaum
Chief Executive Officer
Date:
--------------------------------------
14
<PAGE> 17
BOND PURCHASE L.L.C.
P.O..Box 26730
Kansas City, MO 64196
March 15, 1998
To the Holders of Limited Partnership Interests in National Tax Credit Investors
II.
RE: OFFER TO PURCHASE LIMITED PARTNERSHIP INTERESTS FOR $105.00
Dear Investor:
We are offering you an opportunity to sell your limited partnership
interests (the "Units") in National Tax Credit Investors II (the "Partnership")
for cash in the amount of $105.00 per Unit (which amount will be reduced by any
cash distributions declared by the Partnership after the date of this letter).
Our offer provides you with an opportunity to sell your Units now without the
costly transfer fees and commission costs (typically up to 10%) usually paid by
the seller in secondary market sales. ALL TRANSFER COSTS AND FEES WILL BE PAID
BY BOND PURCHASE, L.L.C.
We believe that it is appropriate for investors to have financial choices.
Our offer gives you, the investor, the ability to make a decision about your
continued involvement with the Partnership. You may no longer wish to continue
with your investment in the Partnership for a number of reasons, including:
* Inability to utilize tax credits, which have been the only benefit to date.
Tax credits you have previously used should not have to be recaptured due
to the large partnership exemption.
* If you sell your units, 1998 will be the final year for which you receive a
K-1 tax form from the partnership.
* You may be able to realize a tax loss from writing off your initial
investment ($1,000 per unit) that would reduce your taxes for 1998.
* The Partnership was closed six years ago in 1992. Your money has been tied
up for this long period with no cash return.
* More immediate use for the cash tied up in your investment in the Units.
* The absence of a formal trading market for the Units and their resulting
relative illiquidity.
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 528,091
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 528,091
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,565,821
<CURRENT-LIABILITIES> 79,780
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 20,565,821
<TOTAL-LIABILITY-AND-EQUITY> 23,565,821
<SALES> 0
<TOTAL-REVENUES> 24,950
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,188,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,213,807
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,213,807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,213,807
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>