-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KkdkY4zL+OOdic4nXkYbCXIMbeULDZIsoqmT5J4PVtMfJx6SrKUrw4Ii1QuFo+kN PwYuSQDPKRXxoq+DwbqNPg== 0000711642-04-000258.txt : 20040816 0000711642-04-000258.hdr.sgml : 20040816 20040816171351 ACCESSION NUMBER: 0000711642-04-000258 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL TAX CREDIT INVESTORS II CENTRAL INDEX KEY: 0000859921 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS [6510] IRS NUMBER: 931017959 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20610 FILM NUMBER: 04979798 BUSINESS ADDRESS: STREET 1: 9090 WILSHIRE BLVD 2ND FLR STREET 2: STE 201 CITY: BEVERLY HILLS STATE: CA ZIP: 90211 BUSINESS PHONE: 3102782191 MAIL ADDRESS: STREET 1: 9090 WILSHIRE BLVD SUITE 201 CITY: BEVERLY HILLS STATE: CA ZIP: 90211 10QSB 1 ntci2.txt NTCI2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to __________ Commission file number 0-20610 NATIONAL TAX CREDIT INVESTORS II (Exact name of small business issuer as specified in its charter) California 95-1017959 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 55 Beattie Place, PO Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 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 ___ PART I - FINANCIAL INFORMATION Item 1. Financial Statements NATIONAL TAX CREDIT INVESTORS II BALANCE SHEET JUNE 30, 2004 (in thousands) (Unaudited)
ASSETS Investments in local partnerships (Note 2) $ 6,935 Cash and cash equivalents 381 Total Assets $ 7,316 LIABILITIES AND PARTNERS' (DEFICIENCY) CAPITAL Liabilities: Accounts payable and accrued expenses $ 33 Contingencies (Note 5) Partners' (deficiency) capital: General partner $ (557) Limited partners 7,840 7,283 Total liabilities and partners' (deficiency) capital $ 7,316 The accompanying notes are an integral part of these financial statements.
NATIONAL TAX CREDIT INVESTORS II STATEMENTS OF OPERATIONS (in thousands, except per interest data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 Operating income: Interest and other income $ 1 $ 14 $ 4 $ 14 Gain on legal settlement (Note 4) 193 -- 193 -- Total operating income 194 14 197 14 Operating expenses: Management fees - partners (Note 3) 168 156 306 310 General and administrative (Note 3) 26 36 60 39 Legal and accounting 42 149 89 213 Total operating expenses 236 341 455 562 Loss from partnership operations (42) (327) (258) (548) Impairment loss (Note 2) (174) -- (189) -- Gain on sale of local partnership interest (Note 2) -- -- -- 5 Distributions from local partnerships recognized as income (Note 2) 46 8 62 36 Advances made to local partnerships recognized as expense (218) (66) (218) (66) Equity in (loss) income of local partnerships and amortization of acquisition costs (Note 2) 86 93 (159) (177) Net loss $ (302) $ (292) $ (762) $ (750) Net loss allocated to general partners (1%) $ (3) $ (3) $ (8) $ (8) Net loss allocated to limited partners (99%) (299) (289) (754) (742) $ (302) $ (292) $ (762) $ (750) Net loss per limited partnership interest (Note 1) $ (4.13) $ (3.99) $(10.41) $(10.25) The accompanying notes are an integral part of these financial statements.
NATIONAL TAX CREDIT INVESTORS II STATEMENT OF CHANGES IN PARTNERS' (DEFICIENCY) CAPITAL (Unaudited) (in thousands, except interest data)
General Limited Partner Partners Total Partnership interests 72,404 Partners' (deficiency) capital, $ (549) $ 8,594 $ 8,045 December 31, 2003 Net loss for the six months ended June 30, 2004 (8) (754) (762) Partners' (deficiency) capital, June 30, 2004 $ (557) $ 7,840 $ 7,283 The accompanying notes are an integral part of these financial statements.
NATIONAL TAX CREDIT INVESTORS II STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six Months Ended June 30, 2004 2003 Cash flows from operating activities: Net loss $ (762) $ (750) Adjustments to reconcile net loss to net cash used in operating activities: Advances made to local partnerships recognized as expense 280 66 Equity in loss of local partnerships and amortization of acquisition costs 159 177 Gain on sale of local partnership interests -- (5) Impairment loss 189 -- Change in accounts: Accounts payable and accrued expenses 33 6 Accrued fees due to partners -- (1,035) Net cash used in operating activities (101) (1,541) Cash flows from investing activities: Distributions from local partnerships recognized as a return of investment balance 64 34 Proceeds from sale of local partnership interests -- 5 Advances to local partnerships (1,123) (65) Proceeds from dilution of interest in local partnership -- 1,019 Increase in restricted cash -- 267 Net cash (used in) provided by investing activities (1,059) 1,260 Cash flows from financing activities: Advances from affiliate 285 790 Repayment of advance from affiliate (285) (790) Net cash provided by financing activities -- -- Net decrease in cash and cash equivalents (1,160) (281) Cash and cash equivalents, beginning of period 1,541 399 Cash and cash equivalents, end of period $ 381 $ 118 Supplemental disclosure of non-cash activity: Dilution proceeds included in other assets $ -- $ 81 The accompanying notes are an integral part of these financial statements.
NATIONAL TAX CREDIT INVESTORS II NOTES TO FINANCIAL STATEMENTS (Unaudited) JUNE 30, 2004 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, 2003 filed by National Tax Credit Investors II (the "Partnership" or "NTCI II"). Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year. In the opinion of the Partnership, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the financial position as of June 30, 2004 and the results of operations and changes in cash flows for the three and six months ended June 30, 2004 and 2003. Organization NTCI II is a limited partnership formed under the California Revised Local Partnership Act as of 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 federal income tax credits (the "Housing Tax Credit"). The general partner of the Partnership is National Partnership Investments Corp. (the "General Partner" or "NAPICO"), a California corporation. The Partnership shall continue in full force and effect until December, 31, 2030 unless terminated earlier pursuant to the Partnership Agreement or law. The General Partner has a one percent interest in the 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 General Partner is an affiliate of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. Upon total or partial liquidation of the Partnership or the disposition or partial disposition of a project or project interest and distribution of the proceeds, the General Partner will be entitled to a property disposition fee as mentioned in the partnership agreement. The limited partners will have a priority item equal to their invested capital plus 6 percent priority return as defined in the partnership agreement. This property disposition fee may accrue but shall not be paid until the limited partners have received distributions equal to 100 percent of their capital contributions plus the 6 percent priority return. Basis of Presentation The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Method of Accounting for Investment in Local Partnerships The investment in Local Partnerships is accounted for on the equity method. Acquisition fees, selection fees and other costs related to the acquisition of the projects have been capitalized as part of the investment account and are being amortized by the straight line method 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 number of limited partnership interests outstanding during the period. The number of limited partner interests was 72,404 for the six months ended June 30, 2004 and 2003. Recent Accounting Pronouncements In January 2003 and revised in December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to the issuance of FIN 46, entities were generally consolidated by an enterprise when it had a controlling financial interest through ownership of a majority voting interest in the entity. FIN 46 applied immediately to variable interest entities created after January 31, 2003, and with respect to variable interests held before February 1, 2003, FIN 46 will apply to financial statements filed after December 15, 2004. The Partnership has not entered into any partnership investments subsequent to January 31, 2003. The Partnership is in the process of evaluating its investments in unconsolidated partnerships that may be deemed variable interest entities under the provisions of FIN 46. The Partnership has not yet determined the anticipated impact of adopting FIN 46 for its partnership agreements that existed as of December 31, 2003. However, FIN 46 may require the consolidation of the assets, liabilities and operations of certain of the Partnership's unconsolidated partnership investments. Although the Partnership does not believe the full adoption of FIN 46 will have an impact on cash flow, the Partnership cannot make any definitive conclusion on the impact on net earnings until it completes its evaluation, including an evaluation of the Partnership's maximum exposure to loss. Note 2 - Investments In Local Partnerships As of June 30, 2004 the Partnership holds limited partnership interests in 31 Local Partnerships, located in 19 different states. 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 June 30, 2004, the Local Partnerships own residential projects consisting of 3,157 apartment units. The Partnership, as a limited partner, does not exercise control over the activities and operations, including refinancing or selling decisions, of the Local Partnerships. Accordingly, the Partnership accounts for its investments in the Local Partnerships using the equity method. The Partnership is allocated profits and losses of the Local Partnerships based upon its respective ownership percentage (between 5% and 99%). The Partnership is allocated profits and losses and receives distributions from refinancings and sales in accordance with the Local Partnerships' partnership agreements. These agreements usually limit the Partnership's distributions to an amount substantially less than its ownership percentage in the Local Partnership. The individual investments are carried at cost plus the Partnership's share of the Local Partnership's profits less the Partnership's share of the Local Partnership's losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local Partnerships and is not otherwise committed to provide additional support to them. Therefore, it does not recognize losses once its investment in each of the Local Partnerships reaches zero. Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the accompanying statements of operations. For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership's policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Partnerships. Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize. As of June 30, 2004, the investment balance in 21 of the 31 Local Partnerships had been reduced to zero. The following is a summary of the investments in and advances to Local Partnerships for the six months ended June 30, 2004 (in thousands): Balance, beginning of year $ 7,158 Equity in losses of Local Partnerships (125) Distributions recognized as a reduction of investment balance (64) Advances to local partnerships 280 Advances made to local partnerships recognized as expense (280) Amortization of capitalized acquisition costs and fees (34) Investments balance at June 30, 2004 $ 6,935 The following are unaudited combined estimated statements of operations for the three and six months ended June 30, 2004 and 2003 for the Local Partnerships in which the Partnership has investments (in thousands).
Three Months Ended Six Months Ended June 30, June 30 2004 2003 2004 2003 (Restated) (Restated) Revenues Rental and other $ 4,668 $ 4,292 $ 8,942 $ 8,481 Expenses Depreciation 1,073 1,024 2,147 2,085 Interest 1,243 1,175 2,486 2,427 Operating 2,704 2,651 5,478 5,316 5,020 4,850 10,111 9,828 Net loss from continuing operations (352) (558) (1,169) (1,347) Net income (loss) from discontinued operations -- 19 -- (17) Net loss $ (352) $ (539) $(1,169) $(1,364)
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, the combined statement of operations for the three and six months ended June 30, 2003 have been restated to reflect the operations of Villa Real and East Ridge Local Partnerships as loss from discontinued operations due to their sale and foreclosure during December 2003 and June 2003, respectively. One of the Local Partnerships, East Ridge Apartments, filed for bankruptcy in December 2002 in an effort to restructure its debt. The property was lost to foreclosure in June 2003. The Partnership's investment balance in this Local Partnership had previously been reduced to zero so this action had no effect on the Partnership's investment balance. During the year ended December 31, 2003, a Local Partnership, Villa Real, sold its investment property. The Partnership had no investment balance related to this Local Partnership. Proceeds of approximately $793,000 were received in the fourth quarter of 2003. A final distribution of cash from the property was received during the six months ended June 30, 2004 totaling approximately $33,000 and is included in distribution from local partnerships recognized as income. During the year ended December 31, 2002, the Partnership sold its investment in the Cottages of North St. Paul. As the Partnership had no investment balance related to this Local Partnership, the proceeds of approximately $5,000 received during the six months ended June 30, 2003 were reported as gain on sale of Local Partnership interest. During the year ended December 31, 2002, an impairment loss of $790,000 was recognized with respect to the Partnership's investment in a Local Partnership, Michigan Beach. The Local Partnership reached a settlement with the City of Chicago during 2002 to complete necessary repairs to the exterior facade of the building. The total estimated cost to complete this project will be advanced to Michigan Beach by the Partnership. Since the Partnership has no remaining investment balance in Michigan Beach, and recovery of the advance is uncertain, the entire amount of the estimated cost was recognized as an impairment loss during the year ended December 31, 2002. During the year ended December 31, 2003, an additional impairment loss of approximately $368,000 was recognized with respect to the Partnership's investment in Michigan Beach due to revised estimates of the cost to complete the repairs required by the City of Chicago. During the six months ended June 30, 2004, an additional impairment loss of approximately $189,000 was recognized. As of June 30, 2004, the Partnership has advanced Michigan Beach approximately $1,351,000 to complete these repairs. These advances bear interest at prime plus 2% (6.0% at June 30, 2004). Total interest income on the advances was approximately $62,000 for the six months ended June 30, 2004 but the receivable has been fully reserved due to uncertainty of recovery from Michigan Beach. No interest was charged during the six months ended June 30, 2003. During the six months ended June 30, 2003, the Partnership diluted its investment in Rancho Del Mar Limited Partnership from 99% to 66.4%. The proceeds received for this dilution of approximately $1,019,000 reduced the Partnership's investment balance in this Local Partnership. During the six months ended June 30, 2003, the Partnership diluted its investment in Wedgewood Commons Limited Partnership from 99% to 18.99%. The proceeds for this dilution of approximately $81,000 were received subsequent to June 30, 2003 and reduced the Partnership's investment balance in this Local Partnership. An affiliate of the General Partner is currently the Local Operating General Partner in certain of the Local Partnerships included above, and another affiliate receives property management fees of approximately 5 percent of gross revenues from certain of the Local Partnerships (See "Note 3 - Related Party Transactions "). Note 3 - Related Party Transactions Under the terms of its Partnership Agreement, the Partnership is obligated to the General 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. For the six months ended June 30, 2004 and 2003, partnership management fees in the amount of approximately $306,000 and $310,000, respectively, were recorded as an expense. (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 an unaffiliated 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 received distributions of sale or refinancing 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 or accrued. (c) The Partnership reimburses NAPICO for certain expenses. The reimbursement to NAPICO was approximately $30,000 for both the six month periods ended June 30, 2004 and 2003, and is included in general and administrative expenses. NTC-II or another affiliate of the General Partner is the Local Operating General Partner in ten of the Partnership's 31 Local Partnerships. In addition, NTC-II is typically either a special limited partner or an administrative general partner in each Local Partnership. An affiliate of the General Partner managed three and four properties owned by Local Partnerships during the six months ended June 30, 2004 and 2003, respectively. The Local Partnerships pay the affiliate property management fees in the amount of five percent of their gross rental revenues and data processing fees. The amounts paid were approximately $75,000 and $121,000 for the six months ended June 30, 2004 and 2003, respectively. During the six months ended June 30, 2004, an affiliate of the General Partner advanced approximately $285,000 to the Partnership for operating expenses and advances to Michigan Beach. This advance bore interest at prime plus 2.0% (6.0% at June 30, 2004) and was repaid during the six months ended June 30, 2004. Interest expense during the six months ended June 30, 2004 was approximately $1,000. There were no advances during the six months ended June 30, 2003. Note 4 - Gain on Legal Settlement During 2001, the Partnership and an affiliated partnership filed a suit against several parties for breach of fiduciary duties and breach of the partnership agreements of Quivira Limited Partnership, in which the Partnership has invested, and another Limited Partnership in which the affiliated partnership is invested. The property in each respective Limited Partnership had been refinanced during 2001; however, the proceeds from the refinancing were being held within the Quivira Limited Partnership instead of being distributed. During the year ended December 31, 2002, the Partnership received approximately $108,000 from one of the parties involved in this legal action as part of a settlement agreement. Approximately $1,492,000 of its share of the refinancing proceeds of Quivira Limited Partnership were received during August 2002. The Partnership obtained judgments totaling approximately $4,800,000 against certain defendants in 2002. During the year ended December 31, 2003, the Partnership received approximately $1,682,000 from the parties involved in this legal action as part of a global settlement agreement with the local general partner. During the six months ended June 30, 2004, the Partnership received approximately $193,000 in additional settlement payments. As part of the settlement agreement, the Partnership expects to receive additional payments from the defendants over the next five years. Note 5 - Contingencies During the year ended December 31, 2002, an impairment loss of $790,000 was recognized with respect to the Partnership's investment in a Local Partnership, Michigan Beach. The Local Partnership reached a settlement with the City of Chicago during 2002 to complete necessary repairs to the exterior facade of the building. The total estimated cost to complete this project will be advanced to Michigan Beach by the Partnership. Since the Partnership has no remaining investment balance in Michigan Beach, and recovery of the advance is uncertain, the entire amount of the estimated cost was recognized as an impairment loss during the year ended December 31, 2002. During the year ended December 31, 2003, an additional impairment loss of approximately $368,000 was recognized with respect to the Partnership's investment in Michigan Beach due to revised estimates of the cost to complete the repairs required by the City of Chicago. During the six months ended June 30, 2004, an additional impairment loss of approximately $189,000 was recognized. As of June 30, 2004, the Partnership has advanced Michigan Beach approximately $1,347,000 to complete these repairs. These advances bear interest at prime plus 2% (6.0% at June 30, 2004). Total interest income on the advances was approximately $62,000 for the six months ended June 30, 2004 but the receivable has been fully reserved due to uncertainty of recovery from Michigan Beach. No interest was charged during the six months ended June 30, 2003. In addition to the litigation discussed above, the General Partner is involved in various other lawsuits arising from transactions in the ordinary course of business. In the opinion of management and the General Partner, the claims will not result in any material liability to the Partnership. As previously disclosed, the Central Regional Office of the United States Securities and Exchange Commission is conducting an investigation relating to certain matters. AIMCO believes the areas of investigation include AIMCO's miscalculated monthly net rental income figures in third quarter 2003, forecasted guidance, accounts payable, rent concessions, vendor rebates, and capitalization of expenses and payroll. AIMCO is cooperating fully. AIMCO does not believe that the ultimate outcome will have a material adverse effect on its consolidated financial condition or results of operations taken as a whole. Similarly, the General Partner does not believe that the ultimate outcome will have a material adverse effect on the Partnership's financial condition or results of operations taken as a whole. Item 2. Management's Discussion And Analysis Or Plan Of Operation The matters discussed in this report contain certain forward-looking statements, including, without limitation, statements regarding future financial performance and the effect of government regulations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation: national and local economic conditions; the terms of governmental regulations that affect the Registrant and interpretations of those regulations; the competitive environment in which the Registrant operates; financing risks, including the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; litigation, including costs associated with prosecuting and defending claims and any adverse outcomes, and possible environmental liabilities. Readers should carefully review the Registrant's financial statements and the notes thereto, as well as the risk factors described in the documents the Registrant files from time to time with the Securities and Exchange Commission. The General Partner monitors developments in the area of legal and regulatory compliance. For example the Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures with regard to governance, disclosure, audit and other areas. In light of these changes, the Partnership expects that it will incur higher expenses related to compliance, including increased legal and audit fees. Liquidity Some of the properties in which the Partnership has invested, through its investment in other Local Partnerships, receive one or more forms of assistance from the Federal Government. As a result, the Local Partnership's ability to transfer funds either to the Partnership or among themselves in the form of cash distributions, loans or advances may be restricted by these government assistance programs. These restrictions, however, are not expected to impact the Partnership's ability to meet its cash obligations. Following an acquisition, adverse business or financial developments could negatively impact cash flow and the Partnership's liquidity position. The General Partner may attempt to obtain operating deficit guarantees from certain local general partners to fund operating deficits for limited periods of time. See "Investment Objectives and Policies - Operating Deficit Guarantees" in the Prospectus. In addition, the Local Partnerships are expected to maintain working capital reserves independent of those maintained by the Partnership to the extent that (i) the terms of mortgage debt encumbering the projects or the terms of any government assistance program so require, or (ii) the Local General Partner determines that such reserves are necessary or advisable. Although reserves are to be maintained at both the Partnership and Local Partnership levels, if such reserves and other available income, if any, are insufficient to cover the Partnership's or any Local Partnership's operating expenses and liabilities, it may be necessary to accumulate additional funds from distributions received from Local Partnerships which would otherwise be available for distribution to the Limited Partners, or to liquidate the Partnership's investment in one or more Local Partnerships. 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 distribution and/or sale or refinancing proceeds, if any, which is available for distribution to the Limited Partners may be affected accordingly. 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 cash reserves as of June 30, 2004 were approximately $381,000. The General Partner has the right to cause distributions received by the Partnership from the Local Partnerships (that would otherwise be available for distributions as cash flow) to be dedicated to the increase or replenishment of reserves at the Partnership level. The reserves will generally be available to satisfy working capital or operating expense needs of the Partnership (including payment of partnership management fees) and will also be available to pay any excess third-party costs or expenses incurred by the Partnership in connection with the administration of the Partnership, the preparation of reports to the Limited Partners and other investor servicing obligations of the Partnership. At the discretion of the General Partner, reserves may be available for contributions to the Local Partnerships. 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 reserves available at the Partnership level) will be (i) third-party debt financing (which may not be available if, as expected, the projects owned by the Local Partnerships are already substantially leveraged), (ii) other equity sources (which could adversely affect the Partnership's interest in operating cash flow and/or proceeds of sale or refinancing of the projects which would result in adverse tax consequences to the Limited Partners), or (iii) the sale or disposition of projects. 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 projects if they were unable to renegotiate the terms of their first mortgages and any other debt secured by the projects, which would have significant adverse tax consequences to the Limited Partners. Distributions received from Local Partnerships are recognized as a reduction of the investment balance 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. As of June 30, 2004 and 2003, the Partnership has cash and cash equivalents of approximately $381,000 and $118,000, respectively. Substantially all of this cash is on deposit primarily with high credit quality financial institutions, earning interest. This resulted in the Partnership earning approximately $4,000 and $3,000 in interest income for the six months ended June 30, 2004 and 2003, respectively. The amount of interest income varies with the market rates available on deposits and with the amount of funds available for investment. Cash equivalents can be converted to cash to meet obligations of the Partnership as they arise. The Partnership intends to continue investing available funds in this manner. 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. The investments in 21 of the 31 Local Partnerships have been reduced to zero as of June 30, 2004. 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 project prior to the end of the applicable 15-year Compliance Period. Because of (i) the nature of the projects, (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 projects 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 projects, 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 a project, it is anticipated that the local general partner will either continue to operate such projects 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 a project prior to the end of the Compliance Period. The Partnership's investments are entirely interests in other Local Partnerships owning projects. Funds temporarily not required for such investments in projects are invested in interest bearing accounts. The Partnership, as a Limited Partner in the Local Partnerships in which it has invested, is subject to the risks incident to the 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 projects. The Partnership, as a limited partner, does not exercise control over the activities and operations, including refinancing or selling decisions of the Local Partnerships. Accordingly, the Partnership accounts for its investment in the Local Partnerships using the equity method. Thus the individual investments are carried at cost plus the Partnership's share of the Local Partnership's profits less the Partnership's share of the Local Partnership's losses, distributions and impairment charges. However, since the Partnership is not legally liable for the obligations of the Local Partnerships, or is not otherwise committed to provide additional support to them, it does not recognize losses once its investment in each of the Local Partnerships reaches zero. Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. Subsequent distributions received are recognized as income in the accompanying statements of operations. For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership's policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received, and amortization of acquisition costs from those Local Partnerships. During the six months ended June 30, 2004, the Partnership recognized equity in loss of approximately $159,000 compared to equity in loss of approximately $177,000 for the six months ended June 30, 2003 from Local Partnerships. The decrease in equity in losses was primarily due to reduced losses at the Local Partnerships. During the six months ended June 30, 2004 and 2003, the Partnership received approximately $62,000 and $36,000, respectively, in distributions from Local Partnerships that were recognized as income in the statements of operations since the Partnership's investment in the Local Partnerships has been reduced to zero. During the six months ended June 30, 2004 and 2003, the Partnership advanced to several Local Partnerships approximately $218,000 and $66,000, respectively. These advances were fully reserved since the Partnership has no remaining investment balance in these Local Partnerships. A recurring partnership expense is the annual partnership management fee. The fee, as defined in the Partnership Agreement, is payable to the General Partner and is calculated at 0.5 percent of the Partnership's invested assets. The management fee represents the annual recurring fee which will be paid to the General Partner for its continuing management of Partnership affairs. Management fees were approximately $306,000 and $310,000 for the six months ended June 30, 2004 and 2003, respectively. Operating expenses, exclusive of the management fee, consist of legal and accounting fees for services rendered to the Partnership and general and administrative expenses. Legal and accounting fees were approximately $89,000 and $213,000 for the six months ended June 30, 2004 and 2003, respectively. The decrease in the six months ended June 30, 2004 is primarily due to reduced legal fees incurred related to legal cases as discussed in "Item 1. Financial Statements - Note 4". General and administrative expenses were approximately $60,000 and $39,000 for the six months ended June 30, 2004 and 2003, respectively. The increase in general and administrative expenses is primarily due to an increase in costs to communicate with investors. One of the Local Limited Partnerships, East Ridge Apartments, filed for bankruptcy in December 2002 in an effort to restructure its debt. The property was lost to foreclosure in June 2003. The Partnership's investment balance in this Local Limited Partnership had previously been reduced to zero so this action has no effect on the Partnership's investment balance. During the year ended December 31, 2003, a Local Partnership, Villa Real, sold its investment property. The Partnership had no investment balance related to this Local Partnership. Proceeds of approximately $793,000 were received in the fourth quarter of 2003. A final distribution of cash from the property was received during the six months ended June 30, 2004 totaling approximately $33,000 and is included in distribution from local partnerships recognized as income. During the year ended December 31, 2002, the Partnership sold its investment in the Cottages of North St. Paul. As the Partnership had no investment balance related to this Local Partnership, the proceeds of approximately $5,000 received during the six months ended June 30, 2003 were reported as gain on sale of local partnership interest. During the six months ended June 30, 2003, the Partnership diluted its investment in Rancho Del Mar Limited Partnership from 99% to 66.4%. The proceeds received for this dilution of approximately $1,019,000 reduced the Partnership's investment balance in this Local Partnership. During the six months ended June 30, 2003, the Partnership diluted its investment in Wedgewood Commons Limited Partnership from 99% to 18.99%. The proceeds for this dilution of approximately $81,000 were received subsequent to June 30, 2003 and reduced the Partnership's investment balance in this Local Partnership. During the year ended December 31, 2002, an impairment loss of $790,000 was recognized with respect to the Partnership's investment in a Local Partnership, Michigan Beach. The Local Partnership reached a settlement with the City of Chicago during 2002 to complete necessary repairs to the exterior facade of the building. The total estimated cost to complete this project will be advanced to Michigan Beach by the Partnership. Since the Partnership has no remaining investment balance in Michigan Beach, and recovery of the advance is uncertain, the entire amount of the estimated cost was recognized as an impairment loss during the year ended December 31, 2002. During the year ended December 31, 2003, an additional impairment loss of approximately $368,000 was recognized with respect to the Partnership's investment in Michigan Beach due to revised estimates of the cost to complete the repairs required by the City of Chicago. During the six months ended June 30, 2004, an additional impairment loss of approximately $189,000 was recognized. As of June 30, 2004, the Partnership has advanced Michigan Beach approximately $1,347,000 to complete these repairs. These advances bear interest at prime plus 2% (6.0% at June 30, 2004). Total interest income on the advances was approximately $62,000 for the six months ended June 30, 2004 but the receivable has been fully reserved due to uncertainty of recovery from Michigan Beach. No interest was charged during the six months ended June 30, 2003. Other AIMCO and its affiliates owned 397.0 limited partnership units (the "Units") in the Partnership representing 0.55% of the outstanding Units at June 30, 2004. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the General Partner, as General Partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to AIMCO, its sole stockholder. Recent Accounting Pronouncements In January 2003 and revised in December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to the issuance of FIN 46, entities were generally consolidated by an enterprise when it had a controlling financial interest through ownership of a majority voting interest in the entity. FIN 46 applied immediately to variable interest entities created after January 31, 2003, and with respect to variable interests held before February 1, 2003, FIN 46 will apply to financial statements filed after December 15, 2004. The Partnership has not entered into any partnership investments subsequent to January 31, 2003. The Partnership is in the process of evaluating its investments in unconsolidated partnerships that may be deemed variable interest entities under the provisions of FIN 46. The Partnership has not yet determined the anticipated impact of adopting FIN 46 for its partnership agreements that existed as of December 31, 2003. However, FIN 46 may require the consolidation of the assets, liabilities and operations of certain of the Partnership's unconsolidated partnership investments. Although the Partnership does not believe the full adoption of FIN 46 will have an impact on cash flow, the Partnership cannot make any definitive conclusion on the impact on net earnings until it completes its evaluation, including an evaluation of the Partnership's maximum exposure to loss. Critical Accounting Policies and Estimates The financial statements are prepared in accordance with accounting principles generally accepted in the United States which require the Partnership to make estimates and assumptions. The Partnership believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity. Method of Accounting for Investments in Limited Partnerships The Partnership, as a limited partner, does not exercise control over the activities and operations, including refinancing or selling decisions, of the Local Partnerships. Accordingly, the Partnership accounts for its investments in the Local Partnerships using the equity method. The Partnership is allocated profits and losses of the Local Partnerships based upon its respective ownership percentage of 5% to 99%. Distributions of surplus cash from operations from twelve of the Local Partnerships are restricted by the Local Partnerships' Regulatory Agreements with the United States Department of Housing and Urban Development ("HUD"). These restrictions limit the distribution to a percentage, generally less than 10%, of the initial invested capital. The excess surplus cash is deposited into a residual receipts reserve, of which the ultimate realization by the Partnership is uncertain as HUD frequently retains it upon sale or dissolution of the Local Partnership. For the other nineteen Local Partnerships distributions of surplus cash are not restricted. The Partnerships are allocated profits and losses and receive distributions from refinancings and sales in accordance with the Local Partnerships' partnership agreements. These agreements usually limit the Partnerships' distributions to an amount substantially less than its ownership percentage in the Local Partnership. The individual investments are carried at cost plus the Partnership's share of the Local Partnership's profits less the Partnership's share of the Local Partnership's losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local Partnerships and is not otherwise committed to provide additional support to them. Therefore, it does not recognize losses once its investment in each of the Local Partnerships reaches zero. Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the accompanying statements of operations. For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership's policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Partnerships. Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize. Item 3. Controls And Procedures (a) Disclosure Controls and Procedures. The Partnership's management, with the participation of the principal executive officer and principal financial officer of the General Partner, who are the equivalent of the Partnership's principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Partnership's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer of the General Partner, who are the equivalent of the Partnership's principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Partnership's disclosure controls and procedures are effective. (b) Internal Control Over Financial Reporting. There have not been any changes in the Partnership's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. PART II - OTHER INFORMATION Item 6. Exhibits And Reports On Form 8-K a) Exhibits: See Exhibit Index attached. b) Reports on Form 8-K filed during the quarter ended June 30, 2004: None. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant 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 By: /s/David R. Robertson David R. Robertson President, Chief Executive Officer and Director By: /s/Brian H. Shuman Brian H. Shuman Senior Vice President and Chief Financial Officer Date: August 16, 2004 NATIONAL TAX CREDIT INVESTORS II EXHIBIT INDEX Exhibit Description of Exhibit 3 Partnership Agreement (herein incorporated by reference to the Partnership's Form S-11 Registration No. 33-27658) 31.1 Certification of equivalent of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of equivalent of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 31.1 CERTIFICATION I, David R. Robertson, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of National Tax Credit Investors II; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 16, 2004 /s/David R. Robertson David R. Robertson President and Chief Executive Officer of National Partnership Investments Corporation, equivalent of the chief executive officer of the Partnership Exhibit 31.2 CERTIFICATION I, Brian H. Shuman, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of National Tax Credit Investors II; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 16, 2004 /s/Brian H. Shuman Brian H. Shuman Senior Vice President and Chief Financial Officer of National Partnership Investments Corporation, equivalent of the chief financial officer of the Partnership Exhibit 32.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-QSB of National Tax Credit Investors II (the "Partnership"), for the quarterly period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David R. Robertson, as the equivalent of the chief executive officer of the Partnership, and Brian H. Shuman, as the equivalent of the chief financial officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/David R. Robertson Name: David R. Robertson Date: August 16, 2004 /s/Brian H. Shuman Name: Brian H. Shuman Date: August 16, 2004 This certification is furnished with this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----