<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, 1999
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, 1999
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, March 31, 1999 and December 31, 1998.............................. 1
Statements of Operations
Three Months Ended March 31, 1999 and 1998................................. 2
Statement of Partners' Equity (Deficiency),
Three Months Ended March 31, 1999........................................... 3
Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998.................................. 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, 1999 AND DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
INVESTMENTS IN LIMITED PARTNERSHIPS
(Notes 1 and 2) $20,464,295 $21,167,503
CASH AND CASH EQUIVALENTS (Note 1) 507,177 515,522
RESTRICTED CASH (Note 3) 233,965 232,822
----------- -----------
TOTAL ASSETS $21,205,437 $21,915,847
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accrued fees due to partners (Notes 5 and 7) $ 3,022,750 $ 2,831,597
Capital contributions payable (Note 4) 356,985 356,985
Accounts payable and accrued expenses 92,668 112,672
----------- -----------
3,472,403 3,301,254
----------- -----------
CONTINGENCIES (Note 6)
PARTNERS' EQUITY 17,733,034 18,614,593
----------- -----------
TOTAL LIABILITIES AND PARTNERS' EQUITY $21,205,437 $21,915,847
=========== ===========
</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, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INTEREST INCOME $ 6,801 $ 6,351
----------- -----------
OPERATING EXPENSES:
Management fees - partners (Note 5) 191,153 191,153
General and administrative (Note 5) 24,224 20,807
Legal and accounting 28,983 38,330
----------- -----------
Total operating expenses 244,360 250,290
----------- -----------
LOSS FROM PARTNERSHIP OPERATIONS (237,559) (243,939)
EQUITY IN LOSS OF LIMITED
PARTNERSHIPS AND AMORTIZATION
OF ACQUISITION COSTS (Note 2) (644,000) (819,000)
----------- -----------
NET LOSS $ (881,559) $(1,062,939)
=========== ===========
NET LOSS PER LIMITED
PARTNERSHIP INTEREST (Note 1) $ (12) $ (15)
=========== ===========
</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, 1999
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
------------ ------------ ------------
<S> <C> <C> <C>
PARTNERSHIP INTERESTS 72,404
============
PARTNERS' EQUITY (DEFICIENCY),
January 1, 1999 $ (442,778) $ 19,057,371 $ 18,614,593
Net loss for the three months
ended March 31, 1999 (8,815) (872,744) (881,559)
------------ ------------ ------------
PARTNERS' EQUITY (DEFICIENCY),
March 31, 1999 $ (451,593) $ 18,184,627 $ 17,733,034
============ ============ ============
</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, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (881,559) $(1,062,939)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of limited partnerships
and amortization of acquisition costs 644,000 819,000
Increase (decrease) in:
Accounts payable and accrued expenses (20,004) (9,921)
Accrued fees due to partners 191,153 191,153
----------- -----------
Net cash used in operating activities (66,410) (62,707)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from limited partnerships recognized as a 76,854 126,844
return of capital
Capital contributions (17,646) --
Increase in restricted cash (1,143) (2,703)
----------- -----------
Net cash provided by investing activities 58,065 124,141
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,345) 61,434
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 515,522 216,939
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 507,177 $ 278,373
=========== ===========
</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, 1999
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, 1998 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, 1999 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.
5
<PAGE> 8
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS
The 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.
During 1998, the Partnership recognized an impairment loss of $499,941
related to certain of the investments in local limited partnerships,
which has been included in equity in loss of limited partnership.
6
<PAGE> 9
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
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, 1999, the Local Partnerships own residential projects
consisting of 3,716 apartment units.
The Partnership, as a limited partner, is generally entitled to 99
percent of the operating profits and losses of the Local Partnerships.
National Tax Credit, Inc. II ("NTC-II") an affiliate of the General
Partner, serves either as a special limited partner or non-managing
administrative general partner in which case it receives .01 percent of
operating profits and losses of the Local Partnership, or as the Local
Operating General Partner of the Local Partnership in which case it is
entitled to .09 percent of the operating profits and losses of the Local
Partnership. The Partnership is generally entitled to receive 50 percent
of the net cash flow generated by the Apartment Complexes, subject to
repayment of any loans made to the Local Partnerships (including loans
made by NTC-II or an affiliate), repayment for funding of development
deficit and operating deficit guarantees by the Local Operating General
Partners or their affiliates (excluding NTC-II and its affiliates), and
certain priority payments to the Local Operating General Partners other
than NTC-II or its affiliates.
The Partnership's allocable share of losses from Local Partnerships are
recognized in the financial statements until the related investment
account is reduced to a zero balance. Losses incurred after the
investment account is reduced to zero will not be recognized.
Distributions received by the Partnership from the Local Partnerships
are accounted for as a return of capital until the investment balance is
reduced to zero or to a negative amount equal to further capital
contributions required. Subsequent distributions received will be
recognized as income.
The following is a summary of the investments in Local Partnerships for
the three months ended March 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Balance, beginning of period $21,167,503
Capital contributions 17,646
Equity in losses of limited partnerships (600,000)
Distributions recognized as a return of capital (76,854)
Amortization of capitalized acquisition costs and fees (44,000)
-----------
Balance, end of period $20,464,295
===========
</TABLE>
NOTE 3 - RESTRICTED CASH
Restricted cash represents funds in escrow to be used, to fund operating
deficits, if any, of one of the Local Partnership, as defined in the
Local Partnership Agreement.
7
<PAGE> 10
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
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.
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, 1999 and 1998,
approximately $191,000 has been expensed. The unpaid balance at
March 31, 1999 is approximately $3,022,750.
(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. For the
three months ended March 31, 1999 and 1998 there were no
reimbursements to NAPICO.
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 $36,000 and $39,000 for the three months ended March 31,
1999 and 1998, respectively.
8
<PAGE> 11
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
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.
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") were engaged in
litigation with the City of Chicago (the "City"). On October 27, 1998,
the City and Michigan Beach entered into a settlement agreement 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)
MARCH 31, 1999
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)
MARCH 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
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.
11
<PAGE> 14
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
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 the settlement of the Michigan Beach
litigation in 1998, discussed below.
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") were engaged in
litigation with the City of Chicago (the "City"). On October 27, 1998,
the City and Michigan Beach entered into a settlement agreement 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 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
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 December 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 Partnership has received notification form the Internal Revenue
Service ("IRS") in April, 1998, that the low income housing tax credits
generated during 1992 and 1993 by the Wedgewood Commons local
partnership were subject to recapture due to the local partnership's
alleged failure to properly comply with federal tax credit guidelines.
The Partnership has filed an administrative appeal of the IRS
notification. In addition, the local general partner and its affiliated
management agent are currently attempting to negotiate a settlement with
the IRS that reportedly includes a proposal to rescind the IRS
notification.
12
<PAGE> 15
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
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.
13
<PAGE> 16
NATIONAL TAX CREDIT INVESTORS II
(A CALIFORNIA LIMITED PARTNERSHIP)
MARCH 31, 1999
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.
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") were engaged in litigation with the City of
Chicago (the "City"). On October 27, 1998, the City and Michigan Beach entered
into a settlement agreement 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) 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, 1999
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 24, 1999
-------------------------------------
/s/ CHARLES H. BOXENBAUM
--------------------------------------
Charles H. Boxenbaum
Chief Executive Officer
Date: May 24, 1999
-------------------------------------
15
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 507,177
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 507,177
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,205,437
<CURRENT-LIABILITIES> 92,668
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,733,034
<TOTAL-LIABILITY-AND-EQUITY> 21,205,437
<SALES> 0
<TOTAL-REVENUES> 6,801
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 888,360
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (881,559)
<INCOME-TAX> 0
<INCOME-CONTINUING> (881,559)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (881,559)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
