-----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, Ef4VOpp5miaafC8pnDqogbFylZP9RkLUUMLltbPipwFUIGmkfpRs4HN03gMVW5W+ 89r/TTiIDg0uwwguS0yUUQ== 0000711642-05-000098.txt : 20050418 0000711642-05-000098.hdr.sgml : 20050418 20050418140240 ACCESSION NUMBER: 0000711642-05-000098 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050418 DATE AS OF CHANGE: 20050418 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: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20610 FILM NUMBER: 05756187 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 10KSB 1 ntci2.txt NTCI2 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission File Number 0-20610 NATIONAL TAX CREDIT INVESTORS II (Name of small business issuer in its charter) California 93-1017959 (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 Securities registered under Section 12(b) or 12(g) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: Local Partnership Units (Title of class) 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___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the Partnership's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $199,000 State the aggregate market value of the voting partnership interests held by non-affiliates computed by reference to the price at which the partnership interests were sold, or the average bid and asked prices of such partnership interests as of December 31, 2004. No market exists for the limited partnership interests of the Registrant, and, therefore, no aggregate market value can be determined. DOCUMENTS INCORPORATED BY REFERENCE NONE 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. PART I ITEM 1. DESCRIPTION OF BUSINESS National Tax Credit Investors II ("NTCI-II" or the "Partnership") 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. On April 23, 1990, the Partnership offered 100,000 Units of Limited Partnership Interests ("Units") at $1,000 per Unit through a public offering managed by Paine Webber Incorporated (the "A Selling Agent"). The Partnership shall continue in full force and effect until December 31, 2030 unless terminated earlier pursuant to the Partnership Agreement or law. On December 3, 2001, Casden Properties Inc., entered into a merger agreement and certain other transaction documents with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust, and certain of its subsidiaries, pursuant to which, on March 11, 2002, AIMCO acquired Casden Properties, Inc. and its subsidiaries, including 100% of the outstanding capital stock of NAPICO. Prior to March 11, 2002, Casden Properties, Inc. owned a 95.25% economic interest in NAPICO, with the balance owned by Casden Investment Corporation ("CIC"). CIC, which is wholly owned by Alan I. Casden, owned 95% of the voting common stock of NAPICO prior to March 11, 2002. The special limited partner of the Partnership ("Special Limited Partner") was PaineWebber TC Partners, L.P., a Virginia limited partnership. During the year ended December 31, 2004, the General Partner discovered that the Special Limited Partner was dissolved prior to 2003. The Partnership offered for sale up to 100,000 units of limited partnership interests ("Units") at $1,000 per unit (including 50,000 units subject to the selling agent's option). The term of the offering expired 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 $9,413,000 were incurred in connection with the sale of such limited partner interests. In general, an owner of a low-income housing project is entitled to receive the Housing Tax Credit in each year of a ten-year period (the "Credit Period"). The projects are subject to a minimum compliance period of not less than fifteen years (the "Compliance Period"). Tax Credits are available to the limited partners to reduce their federal income taxes. The ability of a limited partner to utilize such credits may be restricted by the passive activity loss limitation and the general business tax credit limitation rules. NTCI-II has made capital contributions to 37 Local Partnerships. The investment in one of the Local Partnerships was sold and one was foreclosed in 2001, one was sold and one was foreclosed in 2002 and one was foreclosed and one was sold in 2003. As of December 31, 2004, the Partnership holds limited partner interests in 31 Local Partnerships located in 19 states. Each of these Local Partnerships owns a project that is eligible for the Housing Tax Credit. Several of the Local Partnerships also benefit from government programs promoting low or moderate income housing. The Partnership's investments in Local Partnerships are subject to the risks incident to the management and ownership of multifamily residential real estate. Neither the Partnership's investments nor the projects owned by the Local Partnerships will be readily marketable, and there can be no assurance that the Partnership will be able to dispose of its Limited Partnership Interests or projects at the end of the Compliance Period. The value of the Partnership's investments will be subject to changes in national and local economic conditions, including substantial unemployment, which could adversely impact vacancy levels, rental payment defaults and operating expenses. This, in turn, could substantially increase the risk of operating losses for the projects and the Partnership. The projects are subject to the risk of loss through foreclosure. In addition, each Local Partnership is subject to risks relating to environmental hazards which might be uninsurable. Because the Partnership's ability to control its operations will depend on these and other factors beyond the control of the General Partner and the local general partners, there can be no assurance that Partnership operations will be profitable or that the anticipated Housing Tax Credits will be available to the limited partners. The projects owned by the Local Partnerships in which NTCI-II has invested were developed by the local operating general partners (the "Local Operating General Partners") who acquired the sites and applied for applicable mortgages and subsidies, if any. NTCI-II became the principal limited partner in these Local Partnerships pursuant to arm's-length negotiations with the Local Operating General Partners. As a limited partner, NTCI-II's liability for obligations of the Local Partnership is limited to its investment. The Local Operating General Partner of the Local Partnership retains responsibility for developing, constructing, maintaining, operating and managing the Project. Under certain circumstances, an affiliate of NAPICO or NTCI-II may act as the Local Operating General Partner. An affiliate, National Tax Credit Inc. II ("NTC-II") is acting either as a special limited partner or non-managing administrative general partner (the "Administrative General Partner") of each Local Partnership. In general, in order to avoid recapture of Housing Tax Credits, the Partnership does not expect that it will dispose of its Limited Partnership Interests or approve the sale by a Limited 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 Limited 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 Limited 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. The registrant has no employees. Management and administrative services are provided by the General Partner. These services were provided by affiliates of the General Partner for the year ended December 31, 2004. During 2004, the projects in which NTCI-II had invested were substantially rented. The following is a schedule of the status as of December 31, 2004, of the projects owned by Local Partnerships in which NTCI-II is a limited partner. SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS IN WHICH NTCI-II HAS AN INVESTMENT DECEMBER 31, 2004
Units Financed, Authorized Occupancy Insured for Rental Percentage and Assistance for the Year Ended No. of Subsidized Under December 31 Name and Location Units Under Section 8 2004 2003 Ashville Equity (Westview) Ashville, OH 41 -- -- 96% 90% Columbus Junction Park Columbus Junction, IA 24 (A) 24 78% 72% Countryside Howell Township, NJ 180 -- -- 99% 99% Edgewood Apartments Rogers, AR 108 -- -- 100% 100% Fourth Street Los Angeles, CA 44 -- -- 97% 97% Germantown Apartments Conway, AR 132 -- -- 98% 96% Great Basin Associates Reno, NV 28 -- -- 99% 99% Grimes Park Apartments Grimes, IA 16 (A) 7 97% 98% Jamestown Terrace Jamestown, CA 56 (A) 43 94% 94% Jefferson Meadows Apartments Detroit, MI 83 -- -- 95% 91% Kentucky River Apartments Winchester, KY 42 -- -- 93% 93% Lincoln Grove Apartments Greensboro, NC 116 -- -- 88% 94% Meadowlakes Apartments Searcy, AR 108 -- -- 95% 98% Michigan Beach Apartments Chicago, IL 239 -- -- 73% 99% Nickel River (Wedgewood) Apartments LaCrosse, WI 105 -- -- 96% 95% Norwalk Park Apartments Norwalk, IA 16 (A) 4 93% 95% Oakview Apartments Spartanburg, SC 106 (B) 106 96% 98% Palm Springs View Palm Springs, CA 120 -- -- 98% 98% Pam Apartments Pampa, TX 96 (B) 96 95% 96% Parkwood Landing Huntsville, AL 204 -- -- 80% 88% Pensacola Affordable Pensacola, FL 56 -- -- 88% 96% Pineview Terrace Katy, TX 120 -- -- 87% 83% Quivera Lenexa, KS 289 -- -- 80% 80% Rancho Del Mar Tucson, AZ 312 -- -- 80% 80% Salem Park Apartments Conway, AR 144 -- -- 96% 96% Sheboygan Apartments Sheboygan, WI (C) 59 -- -- 94% 93% Sitka III Sitka, AK 16 (A) 16 86% 93% Soldotna (Northwood Senior) Apartments Soldotna, AK 23 (A) 23 97% 95% Torres de Plata II Toa Alto, PR 78 (A) 78 100% 100% Virginia Park Meadows Detroit, MI 83 -- -- 93% 93% Westbridge Apartments W.Columbia, SC 112 (B) 94 85% 94% 3,156 491
(A) The mortgage is insured by the Federal Housing Administration under the provisions of Section 515 of the National Housing Act. (B) Section 8 of Title II of the Housing and Community Development Act of 1974. (C) Subsequent to December 31, 2004, the general partner exercised its option to buy the Partnership's remaining interest in Sheboygen Regency House Limited Partnership for $5,000. The Partnership had no remaining investment balance in this Local Partnership and proceeds were recorded as gain on sale of investment during the first quarter of 2005. The following table details the Partnership's ownership percentages of the Local Partnerships and the cost of acquisition of such ownership. All interests are limited partner interests. Also included is the total mortgage and other encumbrances on each property for each of the Local Partnerships as of December 31, 2004.
NTCI II Original Cost Percentage of Ownership Mortgage Name and Location Interest Interest Notes Notes Payable (in thousands) (in thousands) (in thousands) Ashville Equity (Westview) Ashville, OH 99.00% $ 956 $ 920 $ -- Columbus Junction Park Columbus Junction, IA 99.00% 218 642 -- Countryside Howell Township, NJ 99.00% 95 4,147 143 Edgewood Apartments Rogers, AR 99.00% 288 1,541 -- Fourth Street Los Angeles, CA 99.00% 1,575 920 -- Germantown Apartments Conway, AR 99.00% 740 2,210 -- Great Basin Associates Reno, NV 5.00% 460 572 -- Grimes Park Apartments Grimes, IA 99.00% 1,858 453 -- Jamestown Terrace Jamestown, CA 99.00% 183 2,832 -- Jefferson Meadows Apartments Detroit, MI 98.90% 68 3,248 367 Kentucky River Apartments Winchester, KY 99.00% 1,200 895 -- Lincoln Grove Apartments Greensboro, NC 99.00% 840 462 2,052 Meadowlakes Apartments Searcy, AR 99.00% 370 1,152 -- Michigan Beach Apartments Chicago, IL 98.90% 1,575 6,098 3,460 Nickel River (Wedgewood) Apartments (A) LaCrosse, WI 18.99% 1,400 1,522 -- Norwalk Park Apartments Norwalk, IA 99.00% 465 422 -- Oakview Apartments Spartanburg, SC 99.00% 288 1,010 -- Palm Springs View Palm Springs, CA 50.49% 57 5,040 -- Pam Apartments Pampa, TX 99.00% 336 1,075 -- Parkwood Landing Huntsville, AL 99.00% 50 4,076 -- Pensacola Affordable Pensacola, FL 99.00% 300 962 -- Pineview Terrace Katy, TX 98.99% 132 2,683 -- Quivera Lenexa, KS 99.00% 43 6,415 -- Rancho Del Mar (B) Tucson, AZ 66.40% 216 3,043 -- Salem Park Apartments Conway, AR 99.00% 1,854 2,389 -- Sheboygan Apartments Sheboygan, WI 9.91% 867 1,364 -- Sitka III Sitka, AK 99.00% 1,277 1,150 -- Soldotna (Northwood Senior) Apartments Soldotna, AK 99.00% 1,391 1,457 -- Torres de Plata II Toa Alto, PR 99.00% 100 3,027 -- Virginia Park Meadows Detroit, MI 98.90% 248 3,212 411 Westbridge Apartments W. Columbia, SC 99.00% 840 2,435 -- $20,290 $67,374 $ 6,433
(A) During the year ended December 31, 2003, the Partnership diluted its investment in Wedgewood Commons Limited Partnership from 99% to 18.99%. The proceeds of approximately $83,000 for this dilution reduced the Partnership's investment balance in this Local Partnership. (B) During the year ended December 31, 2003, the Partnership diluted its investment in the Rancho del Mar Apartments Limited Partnership from 99% to 66.4%. The proceeds received for this sale of approximately $1,019,000 were offset against the Partnership's investment balance in the Local Partnership. (C) Subsequent to December 31, 2004, the general partner exercised its option to buy the Partnership's remaining interest in Sheboygen Regency House Limited Partnership for $5,000. The Partnership had no remaining investment balance in this Local Partnership and proceeds were recorded as gain on sale of investment during the first quarter of 2005. Although each Local Partnership in which the Partnership has invested owns a project which must compete with other projects for tenants, government mortgage interest and rent subsidies make it possible for some of the Local Partnerships to rent units to eligible tenants at below market rates. In general, this insulates these properties from market competition. ITEM 2. DESCRIPTION OF PROPERTIES See "Item 1. Description of Business" for the real estate owned by the Partnership through the ownership of limited partnership interests in Local Partnerships. ITEM 3. LEGAL PROCEEDINGS The General Partner is involved in various 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the limited partners through the solicitation of proxies or otherwise during the year ended December 31, 2004. PART II ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND RELATED PARTNERSHIP MATTERS The Limited Partnership Interests (the "Units") are not traded on a public exchange but were sold through a public offering managed by PaineWebber Incorporated. It is not anticipated that any active public market will develop for the purchase and sale of any Limited Partnership Interests, therefore an investor may be unable to sell or otherwise dispose of his or her interest in the Partnership. Limited Partnership Interests may not be transferred but can be assigned only if certain requirements in the Partnership Agreement are satisfied. At December 31, 2004, there were 3,609 registered holders of 72,404 Units in NTCI-II. The Partnership has invested in certain government assisted projects under programs which in many instances restrict the cash return available to project owners. The Partnership was not designed to provide cash distributions to Limited Partners in circumstances other than refinancing or disposition of its investments in Local Partnerships. Distributions have not been made from inception of the Partnership to December 31, 2004. AIMCO and its affiliates owned 397.0 Units in the Partnership representing 0.55% of the outstanding Units at December 31, 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 as its sole stockholder. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This item should be read in conjunction with the financial statements and other items contained elsewhere in this report. 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. Liquidity Some of the Properties in which the Partnership has invested, through its investment in other limited partnerships ("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. Each Partnership acquisition is analyzed by the General Partner with respect to its probable impact upon the Partnership's liquidity position. In this regard, the General Partner takes into account projected cash flow generated from the Local Partnerships, the anticipated debt service requirements of the existing financing and any restructuring or refinancing of the projects, and the division of cash flow in excess of debt service between the Partnership and the local general partner. 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. Subsequent to December 31, 2004, an affiliate of the General Partner advanced approximately $250,000 to the Partnership for payment of the 2002, 2003 and 2004 New Jersey Partnership tax. (see "Note 8 - Fourth Quarter Adjustment"). As of December 31, 2004, the fees and advances due the General Partner exceeded the Partnership's cash. The General Partner, during the forthcoming year, will not demand payment of amounts due in excess of such cash or such that the Partnership would not have sufficient operating cash; however, the Partnership still remains liable for all such amounts. Capital Resources The Partnership raised $72,404,000 from investors by a public offering, the term of which expired on April 22, 1992, that was used for the acquisition of investments in Local Partnerships which own the projects. NTCI-II made capital contributions to 37 Local Partnerships. The investment in one of the Local Partnerships was sold and one was foreclosed upon in each of the years ending December 31, 2003, 2002 and 2001. As of December 31, 2004, the Partnership holds limited partner interests in 31 Local Partnerships. 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 projects, 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 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 limited 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 limited 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 December 31, 2004, the Partnership has cash and cash equivalents of approximately $134,000. Substantially all of this cash is on deposit primarily with high credit quality financial institutions, earning interest. This resulted in the Partnership earning approximately $6,000 and $11,000 in interest income for the years ended December 31, 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 as discussed in "Item 1. Description of Business". 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 December 31, 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 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. Except for interim investments in highly liquid debt investments, 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 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 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 years ended December 31, 2004 and 2003, the Partnership recognized equity in loss of approximately $712,000 and $791,000, respectively, from Local Partnerships. The decrease in equity in losses was primarily due to decreased losses at the Local Partnerships. During the years ended December 31, 2004 and 2003, the Partnership received approximately $69,000 and $75,000, 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 years ended December 31, 2004 and 2003 the Partnership advanced to several Local Partnerships approximately $1,077,000 and $116,000, 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% 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 $552,000 and $620,000 for the years ended December 31, 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 $134,000 and $226,000 for the years ended December 31, 2004 and 2003, respectively. The decrease in 2004 is primarily due to a reduction in legal services due to the settlement of the legal action related to Quivira Place. General and administrative expenses were approximately $362,000 and $117,000 for the years ended December 31, 2004 and 2003, respectively. The increase in general and administrative expenses is primarily due to the implementation of a new Partnership tax related to the investment properties located in New Jersey. Included in general and administrative expenses for the year ended December 31, 2004 are costs associated with the New Jersey tax of approximately $250,000 for the years 2002, 2003, and 2004. 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. As the Partnership had no investment balance related to this Local Partnership, the distribution proceeds from the sale of approximately $793,000 were reported as distributions from local partnerships recognized as income. A final distribution of cash from the property was received during the year ended December 31, 2004 totaling approximately $33,000 and is included in distributions 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 year ended December 31, 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. 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 year ended December 31, 2004, an additional impairment loss of approximately $189,000 was recognized for a revision of the estimate of the total costs of the repairs. As of December 31, 2004, the Partnership had advanced Michigan Beach approximately $1,347,000 to complete these repairs. These advances bear interest at prime plus 2%. Total interest income on the advances was approximately $122,000 for the year ended December 31, 2004 but the receivable has been fully reserved due to uncertainty of recovery from Michigan Beach. No interest was charged during the year ended December 31, 2003. During the year ended December 31, 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 $1,017,000 reduced the Partnership's investment balance in this Local Partnership. During the year ended December 31, 2003, the Partnership diluted its investment in Wedgewood Commons Limited Partnership from 99% to 18.99%. The proceeds of approximately $83,000 for this dilution reduced the Partnership's investment balance in this Local Partnership. Other AIMCO and its affiliates owned 397.0 limited partnership interests (the "Units") in the Partnership representing 0.55% of the outstanding Units at December 31, 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 as its sole stockholder. Recent Accounting Pronouncements As of December 31, 2004, the Partnership adopted FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" (or "FIN 46") and applied its requirements to all Local Partnerships in which the Partnership held a variable interest. FIN 46 addresses the consolidation by business enterprises of variable interest entities. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. FIN 46 requires a VIE to be consolidated in the financial statements of the entity that is determined to be the primary beneficiary of the VIE. The primary beneficiary generally is the entity that will receive a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. Upon adoption of FIN 46, the Partnership determined it held variable interests in 17 VIE's for which the Partnership was not the primary beneficiary. Those 17 VIE's consist of Local Partnerships in which the Partnership acquired an interest prior to the adoption of FIN 46 that are directly engaged in the ownership or management of seventeen apartment properties with a total of 2,071 units. The Partnership is involved with those VIEs as a non-controlling limited partner equity holder. The Partnership's maximum exposure to loss as a result of its involvement with unconsolidated VIE's is limited to the Partnership's recorded investments in and receivables from those VIEs, which was approximately $5,164,000 at December 31, 2004. The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future. Critical Accounting Policies and Estimates A summary of the Partnership's significant accounting policies is included in "Note 1 - Organization and Summary of Significant Accounting Policies" which is included in the financial statements in "Item 7. Financial Statements". The General Partner believes that the consistent application of these policies enables the Partnership to provide readers of the financial statements with useful and reliable information about the Partnership's operating results and financial condition. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Partnership to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Judgments and assessments of uncertainties are required in applying the Partnership's accounting policies in many areas. 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 Partnership is 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. See "Item 1. Financial Statements - Note 1 - Organization and Summary of Significant Accounting Policies" for a description of the impairment policy. 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 7. FINANCIAL STATEMENTS National Tax Credit Investors II (a California limited partnership) LIST OF FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Balance Sheet - December 31, 2004 Statements of Operations - Years ended December 31, 2004 and 2003 Statements of Changes in Partners' (Deficiency) Capital - Years ended December 31, 2004 and 2003 Statements of Cash Flows - Years ended December 31, 2004 and 2003 Notes to Financial Statements Report of Independent Registered Public Accounting Firm The Partners National Tax Credit Investors II We have audited the accompanying balance sheet of National Tax Credit Investors II as of December 31, 2004, and the related statements of operations, partners' (deficiency) capital and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain limited partnerships, the investments in which are reflected in the accompanying financial statements using the equity method of accounting. The investments in these limited partnerships represent 10.1 percent of the total assets of the Partnership as of December 31, 2004 and the equity in the loss of these limited partnerships represent 2 percent and 8.6 percent of the total net (loss) income of the Partnership for the years ended December 31, 2004 and 2003. The investee information for these limited partnerships is included in Notes 2 and 6. The financial statements of these limited partnerships were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for these limited partnerships, is based solely on the reports of the other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of National Tax Credit Investors II at December 31, 2004, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States. /s/Ernst & Young LLP Greenville, South Carolina April 15, 2005 NATIONAL TAX CREDIT INVESTORS II BALANCE SHEET (in thousands) DECEMBER 31, 2004
ASSETS Investments in limited partnerships (Note 2) $ 6,350 Cash and cash equivalents 134 Total Assets $ 6,484 LIABILITIES AND PARTNERS' (DEFICIENCY) CAPITAL Liabilities: Accounts payable and accrued expenses $ 290 Due to affiliates (Note 3) 907 Contingencies (Note 7) Partners' (deficiency) capital: General partners $ (577) Limited partners 5,864 5,287 Total liabilities and partners' (deficiency) capital $ 6,484 See Accompanying Notes to Financial Statements
NATIONAL TAX CREDIT INVESTORS II STATEMENTS OF OPERATIONS (in thousands, except per interest data)
Years Ended December 31, 2004 2003 Operating income: Interest and other income $ 6 $ 22 Gain on legal settlement (Note 5) 193 1,682 Total operating income 199 1,704 Operating expenses: Management fees - partners (Note 3) 552 620 General and administrative (Notes 3 and 8) 362 117 Legal and accounting 134 226 Total operating expenses 1,048 963 (Loss) income from partnership operations (849) 741 Impairment loss (Note 2) (189) (368) Gain on sale of local partnership interest (Note 2) -- 5 Distributions from local partnerships recognized as income (Note 2) 69 868 Advances made to local partnerships recognized as expense (Note 2) (1,077) (116) Equity in loss of local partnerships and amortization of acquisition costs (Note 2) (712) (791) Net (loss) income (Note 4) $(2,758) $ 339 Net (loss) income allocated to general partners (1%) $ (28) $ 3 Net (loss) income allocated to limited partners (99%) (2,730) 336 $(2,758) $ 339 Net (loss) income per limited partnership interest (Note 1) $(37.71) $ 4.64 See Accompanying Notes to Financial Statements
NATIONAL TAX CREDIT INVESTORS II STATEMENTS OF CHANGES IN PARTNERS'(DEFICIENCY) CAPITAL (in thousands, except interests)
General Limited Partner Partners Total Limited Partnership Interests 72,404 Partners' (deficiency) capital at December 31, 2002 $ (552) $ 8,258 $ 7,706 Net income for the year ended December 31, 2003 3 336 339 Partners' (deficiency) capital at December 31, 2003 (549) 8,594 8,045 Net loss for the year ended December 31, 2004 (28) (2,730) (2,758) Partners' (deficiency) capital at December 31, 2004 $ (577) $ 5,864 $ 5,287 See Accompanying Notes to Financial Statements
NATIONAL TAX CREDIT INVESTORS II STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, 2004 2003 Cash flows from operating activities: Net (loss) income $(2,758) $ 339 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Advances made to local partnerships recognized as expense 1,077 116 Gain on sale of local partnership interests -- (5) Equity in loss of limited partnerships and amortization of acquisition costs 712 791 Impairment loss 189 368 Change in accounts: Accounts payable and accrued expenses 290 (152) Accrued fees due to partners 108 (1,127) Net cash (used in) provided by operating activities (382) 330 Cash flows from investing activities: Proceeds from sale of local partnership interests -- 5 Proceeds from dilution of interest in local partnership -- 1,099 Distributions from local partnerships recognized as a return of investment balance 96 60 Decrease in restricted cash -- 267 Advances to local partnerships (1,920) (622) Repayment of advances by local partnerships -- 3 Net cash (used in) provided by investing activities (1,824) 812 Cash flows from financing activities: Advances from affiliate 799 1,278 Repayment of advance from affiliate -- (1,278) Net cash provided by financing activities 799 -- Net decrease in cash and cash equivalents (1,407) 1,142 Cash and cash equivalents, beginning of year 1,541 399 Cash and cash equivalents, end of year $ 134 $ 1,541 Supplemental disclosure of non-cash activity: Advances included in accrued liability to a Local Partnership $ -- $ 654 See Accompanying Notes to Financial Statements
NATIONAL TAX CREDIT INVESTORS II NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 Note 1 - Organization and Summary of Significant Accounting Policies Organization National Tax Credit Investors II ("NTCI II" or the "Partnership") 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. On April 23, 1990, the Partnership offered 100,000 Units of Limited Partnership Interests ("Units") at $1,000 per Unit through a public offering managed by Paine Webber Incorporated (the "A Selling Agent"). The Partnership shall continue in full force and effect until December, 31, 2030 unless terminated earlier pursuant to the Partnership Agreement or law. On December 3, 2001, Casden Properties Inc., entered into a merger agreement and certain other transaction documents with Apartment Investment and Management Company, ("AIMCO"), a publicly traded real estate investment trust, and certain of its subsidiaries, pursuant to which, on March 11, 2002, AIMCO acquired Casden Properties, Inc. and its subsidiaries, including 100% of the outstanding capital stock of NAPICO. Prior to March 11, 2002, Casden Properties, Inc. owned a 95.25% economic interest in NAPICO, with the balance owned by Casden Investment Corporation ("CIC"). CIC, which is wholly owned by Alan I. Casden, owned 95% of the voting common stock of NAPICO prior to March 11, 2002. The special limited partner of the Partnership ("Special Limited Partner") was PaineWebber TC Partners, L.P., a Virginia limited partnership. During the year ended December 31, 2003, the General Partner discovered that the Special Limited Partner was dissolved prior to 2003. It had no capital balance but it's ownership and allocation percentages were allocated to the limited partners. 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. 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. Certain reclassifications have been made to the 2003 information to conform to the 2004 presentation. Cash and Cash Equivalents Cash and cash equivalents include cash and money market mutual funds. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Cash balances include approximately $134,000 at December 31, 2004 that are maintained by an affiliate management company on behalf of affiliated entities in a cash concentration account. Method of Accounting for Investment in Local Limited Partnerships The investment in limited 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. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Net (Loss) Income Per Limited Partnership Interest Net (loss) income per limited partnership interest was computed by dividing the limited partners' share of net (loss) income by the number of limited partnership interests outstanding at the beginning of the year. The number of limited partnership interests was 72,404 for both the years ended December 31, 2004 and 2003. Impairment of Long-Lived Assets The Partnership reviews long-lived assets to determine if there has been any 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. For the years ended December 31, 2004 and 2003, impairment losses of approximately $189,000 and $368,000, respectively, were recognized with respect to the investment balance in one Local Partnership. See "Note 2 - Investments in Local Partnerships" for further information. Fair Value of Financial Instruments Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments", as amended by SFAS No. 110, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Partnership believes that the carrying amounts of its financial instruments approximate their fair value. Segment Reporting SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. As defined in SFAS 131, the Partnership has only one reportable segment. Recent Accounting Pronouncements As of December 31, 2004, the Partnership adopted FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" (or "FIN 46") and applied its requirements to all Local Partnerships in which the Partnership held a variable interest. FIN 46 addresses the consolidation by business enterprises of variable interest entities. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity's activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. FIN 46 requires a VIE to be consolidated in the financial statements of the entity that is determined to be the primary beneficiary of the VIE. The primary beneficiary generally is the entity that will receive a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. Upon adoption of FIN 46, the Partnership determined it held variable interests in 17 VIE's for which the Partnership was not the primary beneficiary. Those 17 VIE's consist of Local Partnerships in which the Partnership acquired an interest prior to the adoption of FIN 46 that are directly engaged in the ownership or management of seventeen apartment properties with a total of 2,071 units. The Partnership is involved with those VIEs as a non-controlling limited partner equity holder. The Partnership's maximum exposure to loss as a result of its involvement with unconsolidated VIE's is limited to the Partnership's recorded investments in and receivables from those VIEs, which was approximately $5,164,000 at December 31, 2004. The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future. Note 2 - Investments in Local Partnerships As of December 31, 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 December 31, 2004, the Local Partnerships own residential projects consisting of 3,156 apartment units. The projects owned by the Local Partnerships in which NTCI-II has invested were developed by the Local Operating General Partners who acquired the sites and applied for applicable mortgages and subsidies, if any. NTCI-II became the principal limited partner in these Local Partnerships pursuant to arm's-length negotiations with the Local Operating General Partners. As a limited partner, NTCI-II's liability for obligations of the Local Partnerships is limited to its investment. The Local Operating General Partner of the Local Partnerships retains responsibility for developing, constructing, maintaining, operating and managing the Projects. Under certain circumstances, an affiliate of NAPICO or NTCI-II may act as the Local Operating General Partner. An affiliate, National Tax Credit Inc. II ("NTC-II") is acting either as a special limited partner or non-managing administrative general partner (the "Administrative General Partner") of each Local Partnership. 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. See "Note 1 - Organization and Summary of Significant Accounting Policies" for a description of the impairment policy. 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 December 31, 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 year ended December 31, 2004(in thousands): Balance, beginning of year $ 7,158 Equity in losses of local partnerships (645) Distributions recognized as a return of investment balance (96) Advances to local partnerships 1,077 Advances made to local partnerships recognized as expense (1,077) Amortization of capitalized acquisition costs and fees (67) Investments balance, end of year $ 6,350 The difference between the investment per the accompanying balance sheet at December 31, 2004 and the equity per the Local Partnerships' combined financial statements is due primarily to cumulative unrecognized equity in losses of certain Local Partnerships, costs capitalized to the investment account, cumulative distributions recognized as income, the Partnership's recording of capital contributions payable to the Local Partnerships in its investment balance and recognition of impairment losses. The Partnership's value of its investments and its equity in the income/loss and/or distributions from the Local Limited Partnerships are, for certain Local Limited Partnerships, individually, not material to the overall financial position of the Partnership. The financial information from the unaudited condensed combined financial statements of such Local Limited Partnerships at December 31, 2004 and for each of the two years in the periods then ended is presented below. The Partnership's value of its investments in Countryside North American Partner, L.P., Edgewood, a Limited Partnership, Fourth Street Apartment Investors, A California Limited Partnership, Germantown, A Limited Partnership, Meadow Lake I, A Limited Partnership, Oak View Spartanburg Associates, L.P., Rancho Del Mar Apartments (An Arizona Limited Partnership), and Kentucky River Apartments, Ltd. (collectively the "Material Investees") are material to the Partnership's financial position and amounts included below for the Material Investees are included on an audited basis.
Condensed Combined Balance Sheet of the Local Limited Partnerships (in thousands) December 31, 2004 Assets Unaudited Audited Total Land $ 4,783 $ 1,520 $ 6,303 Building and improvements, net of accumulated depreciation 46,706 20,449 67,155 Other assets 5,969 2,501 8,470 Total assets $ 57,458 $ 24,470 $ 81,928 Liabilities and Partners Deficit: Liabilities: Mortgage notes payable $ 52,455 $ 14,919 $ 67,374 Other liabilities 19,200 2,083 21,283 71,655 17,002 88,657 Partners' deficit (14,197) 7,468 (6,729) Total liabilities and partners' deficit $ 57,458 $ 24,470 $ 81,928
Condensed Combined Results of Operations of the Local Limited Partnerships (in thousands) 2004 2004 2004 2003 2003 2003 (Unaudited) Audited Total (Unaudited) Audited Total Total revenues $12,004 $ 5,527 $17,531 $ 11,850 $ 5,244 $17,094 Expenses: Operating expenses 8,086 3,432 11,518 7,945 3,152 11,097 Interest 3,601 1,294 4,895 3,604 1,367 4,971 Depreciation and 3,052 1,420 4,472 2,881 1,413 4,294 amortization Total expenses 14,739 6,146 20,885 14,430 5,932 20,362 Net loss $(2,735) $ (619) $(3,354) $ (2,580) $ (688) $(3,268)
An affiliate of the General Partner is currently the Local Operating General Partner in ten of the Local Partnerships included above, and another affiliate receives property management fees of approximately 5 percent of gross revenues from three of the Local Partnerships (See "Note 4 - Transactions with Affiliated Parties"). 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. At December 31, 2004, one of the Local Partnerships, Westbridge Apartments, is under contract for sale. The Partnership's investment balance in this Local Partnership had previously been reduced to zero so this action will have no effect on the Partnership's investment balance. During the year ended December 31, 2003, a Local Partnership, Villa Real, sold its investment property. As the Partnership had no investment balance related to this Local Partnership, the distribution proceeds from the sale of approximately $793,000 were reported in distributions from local partnerships recognized as income. A final distribution of cash from the property was received during the year ended December 31, 2004 totaling approximately $33,000 and is included in distributions 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 year ended December 31, 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. 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 year ended December 31, 2004, the estimate was further revised and an additional impairment loss of approximately $189,000 was recognized. As of December 31, 2004, the Partnership had advanced Michigan Beach approximately $1,347,000 to complete these repairs and an additional approximately $543,000 for other operational items. These advances bear interest at prime plus 2%. Total interest income on the advances was approximately $122,000 for the year ended December 31, 2004 but the receivable has been fully reserved due to uncertainty of recovery from Michigan Beach. No interest was charged during the year ended December 31, 2003. During the year ended December 31, 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 $1,017,000 reduced the Partnership's investment balance in this Local Partnership. During the year ended December 31, 2003, the Partnership diluted its investment in Wedgewood Commons Limited Partnership from 99% to 18.99%. The proceeds of approximately $83,000 for this dilution reduced the Partnership's investment balance in this Local Partnership. Subsequent to December 31, 2004, the general partner exercised its option to buy the Partnership's remaining interest in Sheboygen Regency House Limited Partnership for $5,000. The Partnership had no remaining investment balance in this Local Partnership and the proceeds were recorded as gain on sale of investment during the first quarter of 2005. Note 3 - Transactions with Affiliated Parties 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 years ended December 31, 2004 and 2003, partnership management fees in the amount of approximately $552,000 and $620,000, respectively, were recorded as an expense. At December 31, 2004, approximately $94,000 of these fees remain unpaid and are included in due to affiliates. (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 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 $60,000 for both years ended December 31, 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 years ended December 31, 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 $153,000 and $231,000 for the years ended December 31, 2004 and 2003, respectively. During the year ended December 31, 2004, an affiliate of the General Partner advanced approximately $1,084,000 to the Partnership for operating expenses and advances to Michigan Beach and Quivira Place Local Partnerships. These advances bore interest at prime plus 2.0%. Approximately $285,000 of these advances were repaid during the year ended December 31, 2004. Interest expense during the year ended December 31, 2004 was approximately $16,000. At December 31, 2004 approximately $813,000 of advances and accrued interest remain payable and are included in due to affiliates. Subsequent to December 31, 2004, an affiliate of the General Partner advanced approximately $250,000 to the Partnership for payment of the 2002, 2003 and 2004 New Jersey Partnership tax. (see "Note 8 - Fourth Quarter Adjustment"). As of December 31, 2004, the fees and advances due the General Partner exceeded the Partnership's cash. The General Partner, during the forthcoming year, will not demand payment of amounts due in excess of such cash or such that the Partnership would not have sufficient operating cash; however, the Partnership still remains liable for all such amounts. During the year ended December 31, 2003, an affiliate of the General Partner advanced approximately $1,278,000 to the Partnership for operating expenses and to fund the capital spending required at Michigan Beach. This advance bore interest at prime plus 2% and was repaid prior to December 31, 2003. Total interest expense incurred during the year ended December 31, 2003 was approximately $7,000. AIMCO and its affiliates owned 397.0 limited partnership interests (the "Units") in the Partnership representing 0.55% of the outstanding Units at December 31, 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 as its sole stockholder. Note 4 - Income Taxes The Partnership is not taxed on its income. The partners are taxed in their individual capacities based upon their distributive share of the Partnership's taxable income or loss and are allowed the benefits to be derived from off-setting their distributive share of the tax losses against taxable income from other sources subject to passive loss limitations. The taxable income or loss differs from amounts included in the statements of operations because different methods are used in determining the losses of the Local Partnerships as discussed below. The tax loss is allocated to the partner groups in accordance with Section 704(b) of the Internal Revenue Code and therefore is not necessarily proportionate to the interest percentage owned. A reconciliation follows: Years Ended December 31, 2004 2003 (in thousands) Net (loss) income per financial statements $(2,758) $ 339 Other 191 (2,714) Gain on foreclosure of Partnership interest (573) 190 Loss per tax return (3,140) (2,185) Loss per limited partnership interest $(42.93) $(29.90) The following is a reconciliation between the Partnership's reported amounts and the federal tax basis of net assets: December 31, 2004 (in thousands) Net assets as reported $ 5,287 Add (deduct): Deferred offering costs 9,367 Investment in Partnerships (17,256) Other 8,540 Net assets - federal tax basis $ 5,938 Note 5 - 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 year ended December 31, 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. Subsequent to December 31, 2004, the Partnership received approximately $80,000 in additional settlement payments. Note 6 - Real Estate and Accumulated Depreciation of Local Limited Partnerships in which NTCI-II has Invested (in thousands) (1) Schedule of Encumbrances and Investment Properties (all amounts unaudited except for those amounts relative to the Material Investees - see Note 2) (in thousands):
Buildings And Related Personal Accumulated Description Encumbrances Land Property Total Depreciation Ashville Equity (Westview) $ 920 $ 171 $ 659 $ 830 $ 177 Columbus Junction Park 642 40 803 843 324 Countryside Place 4,147 470 8,346 8,816 4,027 Edgewood Apts. 1,541 158 3,895 4,053 1,994 Fourth Street 920 242 4,219 4,461 1,980 Germantown Apts. 2,210 210 4,613 4,823 2,419 Great Basin Assoc. 572 143 1,406 1,549 749 Grimes Park Apts. 453 50 537 587 222 Jamestown Terrace 2,832 298 3,501 3,799 1,222 Jefferson Meadows 3,248 85 5,348 5,433 2,718 Kentucky River 895 149 2,026 2,175 734 Lincoln Grove 462 118 3,977 4,095 1,444 Meadowlakes 1,152 136 3,964 4,100 2,042 Michigan Beach 6,098 792 6,022 6,814 936 Nickel River (Wedgewood) 1,522 140 3,049 3,189 1,198 Norwalk Park Apts. 422 51 491 542 211 Oakview Apts. 1,010 81 3,616 3,697 1,640 Palm Springs View Apts. 5,040 901 6,772 7,673 2,848 Pam Apts. 1,075 50 2,652 2,702 1,994 Parkwood Landing 4,076 720 9,227 9,947 4,667 Pensacola Affordable 962 252 1,848 2,100 925 Pineview Terrace 2,683 82 3,241 3,323 1,156 Quivira Place 6,415 100 13,506 13,606 7,021 Rancho del Mar 3,043 75 8,770 8,845 4,164 Salem Park Apts. 2,389 204 4,294 4,498 2,428 Sheboygan 1,364 47 2,575 2,622 1,397 Sitka III (Spruce Grove) 1,150 42 1,481 1,523 758 Soldotna (Northwood Senior) 1,457 59 1,925 1,984 678 Torres de Plata II 3,027 158 3,846 4,004 2,027 Virginia Park Meadows 3,212 78 5,367 5,445 2,710 Westbridge Apts. 2,435 201 3,064 3,265 1,075 Total $67,374 $6,303 $125,040 $131,343 $57,885
(2) Reconciliation of real estate (all amounts unaudited except for those amounts relative to the Material Investees - see Note 2) (in thousands):
Years Ended December 31, 2004 2004 2004 2003 2003 2003 (Unaudited) Audited Total (Unaudited)Audited Total Real estate: Balance at beginning of $88,725 $40,889 $129,614 $95,584 $40,838 $136,422 year Improvements during the 1,650 79 1,729 1,121 51 1,172 year Disposal of property -- -- -- (7,980) -- (7,980) Balance at end of year $90,375 $40,968 $131,343 $88,725 $40,889 $129,614
(3) Reconciliation of accumulated depreciation (all amounts unaudited except for those amounts relative to the Material Investees - see Note 2) (in thousands):
Years Ended December 31, 2004 2004 2004 2003 2003 2003 Unaudited Audited Total Unaudited Audited Total Accumulated depreciation: Balance at beginning of year $35,909 $17,619 $53,528 $35,343 $16,230 $51,573 Depreciation expense for the year 3,052 1,420 4,472 2,881 1,413 4,294 Disposal of property (75) (40) (115) (2,315) (24) (2,339) Balance at end of year $38,886 $18,999 $57,885 $35,909 $17,619 $53,528
Note 7 - Contingencies The General Partner is involved in various 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 (the "SEC") is conducting a formal investigation relating to certain matters. Although the staff of the SEC is not limited in the areas that it may investigate, 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, capitalization of payroll and certain other costs, and tax credit transactions. AIMCO is cooperating fully. AIMCO is not able to predict when the matter will be resolved. AIMCO does not believe that the ultimate outcome will have a material adverse effect on its consolidated financial condition or results of operations. Similarly, the Managing 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. Note 8 - Fourth Quarter Adjustment The Partnership's policy is to record equity in loss from Local Partnerships on a quarterly basis, using interim financial information provided by the operating general partners of the Local Partnerships. For the first three quarters of 2003, the equity in loss from Local Partnerships was based on these estimated amounts. During the fourth quarter of 2003, the Partnership recorded an adjustment to the equity in loss from Local Partnerships of approximately $623,000 due to a difference in the estimated losses and the actual losses incurred by the Local Partnerships for the year. The actual equity in loss from Local Partnerships for the year ended December 31, 2003 was approximately $791,000, as compared to the estimated equity in loss from Local Partnerships for the nine months ended September 30, 2003 of approximately $148,000. In 2002 a new Partnership tax related to the investment properties located in New Jersey was implemented. Included in general and administrative expenses for the year ended December 31, 2004 are costs associated with the New Jersey tax of approximately $250,000 for the years 2002, 2003, and 2004. Subsequent to December 31, 2004, an affiliate of the General Partner advanced approximately $250,000 to the Partnership for payment of the 2002, 2003 and 2004 New Jersey Partnership tax. As of December 31, 2004, the fees and advances due the General Partner exceeded the Partnership's cash. The General Partner, during the forthcoming year, will not demand payment of amounts due in excess of such cash or such that the Partnership would not have sufficient operating cash; however, the Partnership still remains liable for all such amounts. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. ITEM 8b. 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 fourth quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. Item 8b. Other Information None. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT National Tax Credit Investors II (the "Partnership" or the "Registrant") has no directors. The general partner responsible for conducting the business of the Partnership is National Partnership Investments Corp a California Corporation ("NAPICO" or the "General Partner"). The names and ages of, as well as the positions and offices held by, the present directors and officers of NAPICO are set forth below: The General Partner manages and controls substantially all of the Partnership's affairs and has general responsibility and ultimate authority in all matters affecting its business. There are no family relationships between or among any directors or officers. Harry G. Alcock 42 Executive Vice President and Director David R. Robertson 39 President, Chief Executive Officer and Director Charles McKinney 53 Senior Vice President and Director of Asset Management Jeffrey H. Sussman 39 Senior Vice President, General Counsel and Secretary Brian H. Shuman 42 Senior Vice President and Chief Financial Officer Harry G. Alcock was appointed as a Director of the Corporate General Partner in October 2004 and was appointed Executive Vice President of the Corporate General Partner in February 2004 and has been Executive Vice President and Chief Investment Officer of AIMCO since October 1999. Prior to October 1999 Mr. Alcock served as a Vice President of AIMCO from July 1996 to October 1997, when he was promoted to Senior Vice President Acquisitions where he served until October 1999. Mr. Alcock has had responsibility for acquisition and financing activities of AIMCO since July 1994. David R. Robertson has been President, Chief Executive Officer and a Director of the Corporate General Partner since October 2002. Mr. Robertson has been an Executive Vice President of AIMCO since February 2002, and was appointed President and Chief Executive Officer of AIMCO Capital in October 2002. Mr. Robertson is responsible for property operations, asset management and transaction activities within AIMCO Capital's portfolio of affordable properties, and for redevelopment and construction activities for both the conventional and affordable property portfolios. Since February 1996, Mr. Robertson has been Chairman and Chief Executive Officer of Robeks Corporation, a privately held chain of specialty food stores. Charles McKinney has been Senior Vice President and Director of Asset Management of the Corporate General Partner and AIMCO Capital since January 2003 and has overall responsibility for monitoring the construction, lease-up, operations and compliance issues for all assets constituting a part of AIMCO's affordable portfolio. Mr. McKinney joined AIMCO as Vice President of Transactions in the Affordable Group in June 2002 and had responsibility for value added dispositions of affordable properties in the Western portion of the United States. From September 2000 through May 2002, Mr. McKinney was Managing Underwriter for Real Estate Recovery, Inc. where he was responsible for the real estate loan underwriting and loan review for the company's clients. From March 1998 through August 2000, Mr. McKinney was the Executive Managing Director of American Capital Advisors, Inc. an investment banking company. Jeffrey H. Sussman has been Senior Vice President, General Counsel and Secretary of the Corporate General Partner since joining NAPICO in 1998. Mr. Sussman is responsible for the legal affairs of NAPICO and its affiliates. Prior to joining NAPICO in 1998, Mr. Sussman was an associate with the law firm of Rus, Miliband, Williams & Smith in Irvine, California. His practice emphasized real estate finance and insolvency law and included the representation of borrowers, lenders, and court-appointed trustees in matters involving apartment complexes, retail centers and hotels. Brian H. Shuman has been Senior Vice President and Chief Financial Officer of the Corporate General Partner since joining NAPICO in 2000. Mr. Shuman is responsible for the financial affairs of NAPICO as well as the limited partnership sponsored by it. From 1996 until joining NAPICO in August 2000, Mr. Shuman was Vice President - Finance for Preferred Health Management Inc., the largest provider of worker compensation diagnostic imaging services in California formed in 1996, and was responsible for establishing and managing the accounting, billing, collection, treasury and financial reporting departments. The board of directors of the Corporate General Partner does not have a separate audit committee. As such, the board of directors of the Corporate General Partner fulfills the functions of an audit committee. The board of directors has determined that Brian H. Shuman meets the requirement of an "audit committee financial expert". The directors and officers of the Corporate General Partner with authority over the Partnership are all employees of subsidiaries of AIMCO. AIMCO has adopted a code of ethics that applies to such directors and officers that is posted on AIMCO's website (www.AIMCO.com). AIMCO's website is not incorporated by reference to this filing. ITEM 10. EXECUTIVE COMPENSATION Neither the director nor the officers received any remuneration from the Registrant for the year ended December 31, 2004. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners The General Partners own all of the outstanding general partnership interests of NTCI II. No person or entity is known to own beneficially in excess of 5 percent of the outstanding limited partnership interests. Entity Number of Units Percentage AIMCO Properties, L.P. (an affiliate of AIMCO) 397.0 0.55% AIMCO Properties, L.P. is indirectly, ultimately controlled by AIMCO. Its business address is 4582 Ulster St. Parkway, Suite 1100, Denver, CO 80237. (b) None of the officers or directors of the General Partner own directly or beneficially any limited partnership interests in NTCI II. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 years ended December 31, 2004 and 2003, partnership management fees in the amount of approximately $552,000 and $620,000, respectively, were recorded as an expense. At December 31, 2004, approximately $94,000 of these remain unpaid and are included in due to affiliates. (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 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 $60,000 for both years ended December 31, 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 years ended December 31, 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 $153,000 and $231,000 for the years ended December 31, 2004 and 2003, respectively. During the year ended December 31, 2004, an affiliate of the General Partner advanced approximately $1,084,000 to the Partnership for operating expenses and advances to Michigan Beach and Quivera Place Local Partnerships. These advances bore interest at prime plus 2.0%. Approximately $285,000 of these advances were repaid during the year ended December 31, 2004. Interest expense during the year ended December 31, 2004 was approximately $16,000. At December 31, 2004 approximately $813,000 of advances and accrued interest remain payable and are included in due to affiliates. Subsequent to December 31, 2004, an affiliate of the General Partner advanced approximately $250,000 to the Partnership for payment of the 2002, 2003 and 2004 New Jersey Partnership tax. (see "Note 8 - Fourth Quarter Adjustment"). As of December 31, 2004, the fees and advances due the General Partner exceeded the Partnership's cash. The General Partner, during the forthcoming year, will not demand payment of amounts due in excess of such cash or such that the Partnership would not have sufficient operating cash; however, the Partnership still remains liable for all such amounts. During the year ended December 31, 2003, an affiliate of the General Partner advanced approximately $1,278,000 to the Partnership for operating expenses and to fund the capital spending required at Michigan Beach. This advance bore interest at prime plus 2% and was repaid prior to December 31, 2003. Total interest expense incurred during the year ended December 31, 2003 was approximately $7,000. AIMCO and its affiliates owned 397.0 limited partnership interests (the "Units") in the Partnership representing 0.55% of the outstanding Units at December 31, 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 as its sole stockholder. ITEM 13. EXHIBITS See Exhibit Index Attached. Item 14. Principal Accountant Fees and Services The General Partner has reappointed Ernst & Young LLP as independent auditors to audit the financial statements of the Partnership for 2005. The aggregate fees billed for services rendered by Ernst & Young LLP for 2004 and 2003 are described below. Audit Fees. Fees for audit services totaled approximately $49,000 and $44,000 for 2004 and 2003, respectively. Fees for audit services also include fees for the reviews of the Partnership's Quarterly Reports on Form 10-QSB. Tax Fees. Fees for tax services totaled approximately $19,000 and $26,000 for 2004 and 2003, respectively. 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: April 18, 2005 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. /s/Harry G. Alcock Director and Executive Date: April 18, 2005 Harry G. Alcock Vice President /s/David R. Robertson President, Chief Executive Date: April 18, 2005 David R. Robertson Officer and Director /s/Brian H. Shuman Senior Vice President and Date: April 18, 2005 Brian H. Shuman Chief Financial Officer 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. 99.1 Independent Auditors' Report for Kentucky River Apartments, Ltd. Exhibit 31.1 CERTIFICATION I, David R. Robertson, certify that: 1. I have reviewed this annual report on Form 10-KSB 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 annual 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: April 18, 2005 /s/David R. Robertson David R. Robertson President and Chief Executive Officer of National Partnership Investments Corp., equivalent of the chief executive officer of the Partnership Exhibit 31.2 CERTIFICATION I, Brian H. Shuman, certify that: 1. I have reviewed this annual report on Form 10-KSB 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 annual 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: April 18, 2005 /s/Brian H. Shuman Brian H. Shuman Senior Vice President and Chief Financial Officer of National Partnership Investments Corp., 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 Annual Report on Form 10-KSB of National Tax Credit Investors II (the "Partnership"), for the year ended December 31, 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: April 18, 2005 /s/Brian H. Shuman Name: Brian H. Shuman Date: April 18, 2005 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. Exhibit 99.1 Independent Auditor's Report To the Partners Kentucky River Apartments, Ltd. A Kentucky Limited Partnership Winchester, Kentucky I have audited the accompanying balance sheets of Kentucky River Apartments, Ltd., a limited partnership, as of December 31, 2004 and 2003, and the related statements of operations, changes in partners' capital, and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Partnership's management. My responsibility is to express an opinion on those financial statements based on my audits. I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. I was not engaged to perform an audit of the Partnership's internal control over financial reporting. My audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly, I express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the management, and evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kentucky River Apartments, Ltd. at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States. /s/Donald W. Causey, CPA, P.C. Gadsden, Alabama March 5, 2005 -----END PRIVACY-ENHANCED MESSAGE-----