FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
Commission file number 0-11767
ANGELES INCOME PROPERTIES, LTD. II
(Exact name of small business issuer as specified in its charter)
California 95-3793526
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
a)
ANGELES INCOME PROPERTIES, LTD. II
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
March 31, 1999
Assets
Cash and cash equivalents $ 2,610
Receivables and deposits (net of allowance
for doubtful accounts of $308) 670
Restricted escrows 747
Other assets 673
Investment in, and advances of $46 to,
joint venture 458
Investment properties:
Land $ 2,198
Buildings and related personal property 34,608
36,806
Less accumulated depreciation (26,211) 10,595
$ 15,753
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 52
Tenant security deposit liabilities 277
Accrued property taxes 218
Other liabilities 250
Mortgage notes payable 17,947
Partners' Deficit
General partners $ (469)
Limited partners (99,784 units issued and
outstanding) (2,522) (2,991)
$ 15,753
See Accompanying Notes to Consolidated Financial Statements
b)
ANGELES INCOME PROPERTIES, LTD. II
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended
March 31,
1999 1998
Revenues:
Rental income $ 1,814 $ 1,783
Other income 90 104
Total revenues 1,904 1,887
Expenses:
Operating 592 623
General and administrative 71 70
Depreciation 467 458
Interest 357 361
Property taxes 152 149
Total expenses 1,639 1,661
Equity in income (loss) of joint venture 401 (16)
Income before extraordinary item $ 666 $ 210
Equity in extraordinary loss on the extinguishment
of debt of joint venture (Note C) (1) --
Net income $ 665 $ 210
Net income allocated to general partners (1%) $ 7 $ 2
Net income allocated to limited partners (99%) 658 208
$ 665 $ 210
Net income per limited partnership unit $ 6.59 $ 2.08
See Accompanying Notes to Consolidated Financial Statements
c)
ANGELES INCOME PROPERTIES, LTD. II
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners Partners Total
Original capital contributions 100,000 $ 1 $ 50,000 $ 50,001
Partners' deficit
at December 31, 1998 99,784 $ (476) $ (3,180) $ (3,656)
Net income for the three months
ended March 31, 1999 -- 7 658 665
Partners' deficit
at March 31, 1999 99,784 $ (469) $ (2,522) $ (2,991)
See Accompanying Notes to Consolidated Financial Statements
d)
ANGELES INCOME PROPERTIES, LTD. II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net income $ 665 $ 210
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 467 458
Amortization of discounts, loan costs and lease
commissions 24 25
Bad debt recovery, net -- (49)
Equity in (income) loss of joint venture (401) 16
Equity in extraordinary loss on extinguishment
of debt of joint venture 1 --
Loss on disposal of property 35 --
Change in accounts:
Receivables and deposits (16) (15)
Other assets (36) 18
Accounts payable (67) (73)
Tenant security deposit payable 8 5
Accrued property taxes (36) (36)
Other liabilities 18 (7)
Net cash provided by operating activities 662 552
Cash flows from investing activities:
Property improvements and replacements (166) (158)
Net withdrawals from restricted escrows 105 52
Net cash used in investing activities (61) (106)
Cash flows used in financing activities:
Payments on mortgage notes payable (54) (51)
Net increase in cash and cash equivalents 547 395
Cash and cash equivalents at beginning of period 2,063 3,099
Cash and cash equivalents at end of period $ 2,610 $ 3,494
Supplemental disclosure of cash flow information:
Cash paid for interest $ 338 $ 341
See Accompanying Notes to Consolidated Financial Statements
e)
ANGELES INCOME PROPERTIES, LTD. II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Angeles Income
Properties, Ltd. II (the "Partnership" or "Registrant") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Angeles Realty Corporation II (the
"Managing General Partner"), all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Partnership's annual
report on Form 10-KSB for the fiscal year ended December 31, 1998.
Principles of Consolidation
The consolidated financial statements of the Partnership include all accounts of
the Partnership and its 99% limited partnership interest in Georgetown AIP II,
LP and its 100% owned limited liability corporation interest in AIPL II GP, LLC.
Although legal ownership of the respective asset remains with these entities,
the Partnership retains all economic benefits from the properties. As a result,
the Partnership consolidates its interests in these two entities, whereby all
accounts are included in the consolidated financial statements of the
Partnership with all interentity accounts being eliminated.
NOTE B - TRANSFER OF CONTROL
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. ("Insignia") and Insignia
Properties Trust merged into Apartment Investment and Management Company, a
publicly traded real estate investment trust ("AIMCO"), with AIMCO being the
surviving corporation (the "Insignia Merger"). As a result, AIMCO acquired 100%
ownership interest in the Managing General Partner. The Managing General Partner
does not believe that this transaction will have a material effect on the
affairs and operations of the Partnership.
NOTE C - INVESTMENT IN JOINT VENTURE
The Partnership had a 14.4% investment in Princeton Golf Course JV ("Joint
Venture"). On February 26, 1999, the Joint Venture sold its only investment
property, Princeton Meadows Golf Course, to an unaffiliated third party. The
sale resulted in net proceeds of approximately $3,411,000 after payment of
closing costs, resulting in a gain on sale of approximately $2,885,000. The
Partnership's 1999 pro-rata share of this gain is approximately $415,000.
Furthermore, as a result of the sale, unamortized loan costs of approximately
$7,000 were written off. This resulted in an extraordinary loss on early
extinguishment of debt of approximately $7,000. The Partnership's pro-rata
share of this extraordinary loss is approximately $1,000. Condensed balance
sheet information of the Joint Venture at March 31, 1999 is as follows:
March 31, 1999
(in thousands)
Assets
Cash $ 3,454
Other assets 113
Total $ 3,567
Liabilities and Partners' Capital
Other liabilities $ 715
Partners' capital 2,852
Total $ 3,567
The condensed profit and loss statement of the Joint Venture is summarized as
follows:
Three Months Ended
March 31,
1999 1998
(in thousands)
Revenue $ 30 $ 203
Costs and expenses (131) (317)
Loss before gain on sale of investment
property and extraordinary loss on
extinguishment of debt (101) (114)
Gain on sale of property 2,885 --
Extraordinary loss on
extinguishment of debt (7) --
Net income (loss) $2,777 $ (114)
The Partnership's 14.4% equity interest in the income of the Joint Venture for
the three months ended March 31, 1999 was approximately $401,000. The equity
interest in the loss of the Joint Venture for the three months ended March 31,
1998 was approximately $16,000. The Partnership also realized equity in the
extraordinary loss on extinguishment of debt of approximately $1,000 for the
three months ended March 31, 1999.
The Princeton Meadows Golf Course property had an underground fuel storage tank
that was removed in 1992. This fuel storage tank caused contamination to the
area. Management installed monitoring wells in the area where the tank was
formerly buried. Some samples from these wells indicated lead and phosphorous
readings that were slightly higher than the range prescribed by the New Jersey
Department of Environmental Protection ("DEP"). The Joint Venture notified DEP
of the findings when they were first discovered. However, DEP had not given any
directives as to corrective action until late 1995.
In November 1995, representatives of the Joint Venture and the New Jersey DEP
met and developed a plan of action to clean-up the contamination site at
Princeton Meadows Golf Course. The Joint Venture has engaged an engineering
firm to conduct consulting and compliance work and a second firm to perform the
field work necessary for the clean-up. Field work is in process with skimmers
having been at three test wells on the site. These skimmers are in place to
detect any residual fuel that may still be in the ground. The expected
completion date of the compliance work should be sometime in 1999. The Joint
Venture originally recorded a liability of $199,000 for the costs of the clean-
up. At February 26, 1999, the balance in the liability for clean-up costs was
approximately $53,000. Upon the sale of the Golf Course, as noted above, the
joint venture received documents from the Purchaser releasing the Joint Venture
from any further responsibility or liability with respect to the clean-up.
NOTE D - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The Partnership Agreement provides for certain payments
to affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following payments were paid or
accrued to the Managing General Partner and affiliates during the three months
ended March 31, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating
expense) $85 $85
Reimbursements for services of affiliates,
(included in operating expense and general and
administrative expense) (1) 47 51
(1) Included in "Reimbursements for services of affiliates" is approximately
$3,000 and $9,000 in construction oversight costs for the three months
ended March 31, 1999 and 1998, respectively.
During the three months ended March 31, 1999 and 1998, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from all
of the Registrant's residential properties for providing property management
services. The Registrant paid to such affiliates approximately $85,000 and
$80,000 for the three months ended March 31, 1999 and 1998, respectively.
During the three months ended March 31, 1998, affiliates of the Managing General
Partner were entitled to varying percentages of gross receipts from the
Registrant's commercial property for providing property management services.
These services were performed by affiliates of the Managing General Partner for
the three months ended March 31, 1999 and were approximately $5,000. Effective
October 1, 1998 (the effective date of the Insignia Merger), these services for
the commercial property were provided by an unrelated party.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $47,000 and
$51,000 for the three months ended March 31, 1999 and 1998, respectively.
Additionally, the Partnership paid approximately $6,000 during the three months
ended March 31, 1998, to an affiliate of the Managing General Partner for lease
commissions at the Partnership's commercial property. These lease commissions
are included in other assets and are amortized over the terms of the respective
leases.
Angeles Mortgage Investment Trust, ("AMIT"), a real estate investment trust,
provided financing to the Princeton Meadows Golf Course Joint Venture ("Joint
Venture") (see Note "C" above). Pursuant to a series of transactions,
affiliates of the Managing General Partner acquired ownership interests in AMIT.
On September 17, 1998, AMIT was merged with and into IPT, the entity which
controls the Managing General Partner. Effective February 26, 1999, IPT was
merged into AIMCO. As a result, AIMCO was the current holder of the AMIT loan.
On February 26, 1999, Princeton Meadows Golf Course was sold to an unaffiliated
third party. Upon closing, the AMIT principal balance of $1,567,000 plus
accrued interest of approximately $17,000 was paid off.
NOTE E - SEGMENT REPORTING
The Partnership has two reportable segments: residential properties and
commercial properties. The Partnership's residential property segment consists
of three apartment complexes in New Jersey, Indiana and North Carolina. The
Partnership rents apartment units to tenants for terms that are typically twelve
months or less. The commercial property segment consists of a retail shopping
center located in Montgomery, Alabama. This property leases space to a discount
store, various specialty retail outlets, and several restaurants at terms
ranging from 12 months to twenty years.
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segments are the same as those of the Partnership as
described in the Partnership's annual report on Form 10-KSB for the year ended
December 31, 1998.
The Partnership's reportable segments are investment properties that offer
different products and services. The reportable segments are each managed
separately because they provide distinct services with different types of
products and customers.
Segment information for the three months ended March 31, 1999 and 1998 is shown
in the tables below (in thousands). The "Other" column includes Partnership
administration related items and income and expense not allocated to the
reportable segments.
1999
ResidentialCommercial Other Totals
Rental income $ 1,575 $ 239 $ -- $ 1,814
Other income 81 1 8 90
Interest expense 357 -- -- 357
Depreciation 401 66 -- 467
General and administrative expense -- -- 71 71
Equity in income of joint venture -- -- 401 401
Segment profit 230 98 337 665
Equity in extraordinary loss on
extinguishment of debt of
joint venture -- -- (1) (1)
Total assets 12,675 1,055 2,023 15,753
Capital expenditures for investment
properties 166 -- -- 166
1998
Residential Commercial Other Totals
Rental income $ 1,508 $ 275 $ -- $ 1,783
Other income 80 1 23 104
Interest expense 361 -- -- 361
Depreciation 392 66 -- 458
General and administrative expense -- -- 70 70
Equity in loss of joint venture -- -- (16) (16)
Segment profit (loss) 159 114 (63) 210
Total assets 13,163 1,379 2,377 16,919
Capital expenditures for investment
properties 81 77 -- 158
NOTE F - LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia and entities which were, at
the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain
general partner entities, past tender offers by Insignia Affiliates as well as a
recently announced agreement between Insignia and AIMCO. The complaint seeks
monetary damages and equitable relief, including judicial dissolution of the
Partnership. On June 25, 1998, the Managing General Partner filed a motion
seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs filed an amended complaint. The Managing General Partner has filed
demurrers to the amended complaint which were scheduled to be heard during
February 1999. No ruling on such demurrers has been received. The Managing
General Partner does not anticipate that costs associated with this case, if
any, will be material to the Partnership's overall operations.
On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled Everest Properties, LLC. v.
Insignia Financial Group, Inc., et al. in the Superior Court of the State of
California, County of Los Angeles. The action involves 44 real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia Affiliates allegedly manage or control. This case
was settled on March 3, 1999. The Partnership is responsible for a portion of
the settlement costs. The expense is not expected to have a material effect on
the Partnership's overall operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time.
The discussions of the Registrant's business and results of operations,
including forward-looking statements pertaining to such matters, does not take
into account the effects of any changes to the Registrant's business and results
of operations. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
The Partnership's investment properties consist of three apartment complexes and
one commercial property. The following table sets forth the average occupancy
of the properties for the three months ended March 31, 1999 and March 31, 1998:
Average
Occupancy
Property 1999 1998
Atlanta Crossing Shopping Center 57% 70%
Montgomery, Alabama
Deer Creek Apartments 98% 96%
Plainsboro, New Jersey
Georgetown Apartments 95% 96%
South Bend, Indiana
Landmark Apartments 94% 89%
Raleigh, North Carolina
Bruno's, an anchor tenant, declared bankruptcy and vacated Atlanta Crossing in
February of 1998. This tenant was subleasing the space and the previous tenant
is liable for, and the Partnership expects that it will pay, its rental payment
through the year 2007. It is unknown to what extent this vacancy will
negatively impact the performance of the shopping center in the future. Atlanta
Crossing's average occupancy for 1998 shown above represents the center's
physical occupancy. Because the original tenant has continued making the rental
payments, the center's economic average occupancy for the three months ended
March 31, 1999 and 1998 is 89% and 92%, respectively.
The Managing General Partner attributes the increase in occupancy at Landmark
Apartments to the renovation project completed during 1998 which made the
property more attractive to new tenants and concessions offered to attract new
tenants.
Results of Operations
The Partnership's net income for the three months ended March 31, 1999, was
approximately $665,000 compared to approximately $210,000 for the three months
ended March 31, 1998. The increase in net income is primarily due to the equity
in income of the joint venture due to the sale of Princeton Meadows Golf Course
as discussed below. The increase in net income before the equity in income of
joint venture of approximately $39,000 is primarily due to an increase in total
revenues and a decrease in total expenses. Rental income increased due to
increased or stable rental rates at all the Partnership's properties, increased
occupancy at Deer Creek and Landmark Apartments and increased tenant
reimbursements at Atlanta Crossing which more than offset the decrease in
occupancy at Atlanta Crossing Shopping Center and Georgetown Apartments. The
decrease in expenses is primarily due to a decrease in operating expenses offset
by a slight increase in depreciation expense. The decrease in operating expenses
was primarily due to decreased spending on major repairs and maintenance. These
repairs were mostly related to a renovation project at Landmark Apartments which
was completed during 1998. This renovation project included the correction of
drainage problems and related foundation repairs along with exterior building
repairs and painting in order to improve the appearance of the property.
Partially offsetting the decreased maintenance expenses was a loss on disposal
of property of approximately $35,000 for the three months ended March 31, 1999.
The loss resulted from the write-off of siding at Deer Creek Apartments. This
loss was the result of the write-off of assets not fully depreciated at the time
of replacement. Depreciation expense increased due to capital improvements
completed during 1998 that are now being depreciated. General and
administrative expenses remained relatively constant over the comparable
periods. Included in general and administrative expenses at both March 31, 1999
and 1998, are reimbursements to the Managing General Partner allowed under the
Partnership Agreement associated with its management of the partnership. Costs
associated with the quarterly and annual communications with investors and
regulatory agencies and the annual audit required by the Partnership Agreement
are also included.
The Partnership had a 14.4% investment in the Princeton Meadows Golf Course
Joint Venture. For the three months ended March 31, 1999, the Partnership
realized equity in the income of the joint venture of approximately $400,000,
compared to equity in the loss of the joint venture of approximately $16,000 for
the three months ended March 31, 1998, (See "Note C - Investment in Joint
Venture"). The income is primarily attributable to the Joint Venture selling
Princeton Meadows Golf Course to an unaffiliated third party on February 26,
1999.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expense. As part of this plan, the Managing General Partner attempts to protect
the Partnership from the burden of inflation-related increases in expenses by
increasing rents and maintaining a high overall occupancy level. However, due to
changing market conditions, which can result in the use of rental concessions
and rental reductions needed to offset softening market conditions, there is no
guarantee that the Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
The Partnership held cash and cash equivalents of approximately $2,610,000 at
March 31, 1999, compared to approximately $3,494,000 at March 31, 1998. The
increase in cash and cash equivalents of approximately $547,000 since December
31, 1998 is due to approximately $662,000 of cash provided by operating
activities which was partially offset by approximately $61,000 of cash used in
investing activities and approximately $54,000 of cash used in financing
activities. Cash used in investing activities consisted of property
improvements and replacements which was offset by net withdrawals from escrow
accounts maintained by the mortgage lenders. Cash used in financing activities
consisted of payments of principal made on the mortgages encumbering the
Partnership's properties. The Partnership invests its working capital reserves
in money market accounts.
The Princeton Meadows Golf Course property had an underground fuel storage tank
that was removed in 1992. This fuel storage tank caused contamination to the
area. Management installed monitoring wells in the area where the tank was
formerly buried. Some samples from these wells indicated lead and phosphorous
readings that were higher than the range prescribed by the New Jersey Department
of Environmental Protection ("DEP"). The Joint Venture notified DEP of the
findings when they were first discovered. However, DEP had not given any
directives as to corrective action until late 1995.
In November 1995, representatives of the Joint Venture and the New Jersey DEP
met and developed a plan of action to clean-up the contamination site at
Princeton Meadows Golf Course. The Joint Venture has engaged an engineering firm
to conduct consulting and compliance work and a second firm to perform the field
work necessary for the clean-up. Field work is in process with skimmers having
been installed at three test wells on the site. These skimmers are in place to
detect any residual gas that may still be in the ground. The expected
completion date of the compliance work should be sometime in 1999. The Joint
Venture originally recorded a liability of $199,000 for the costs of the clean-
up and an additional $45,000 in 1997. Upon the sale of the Golf Course, as
noted below, the Joint Venture received documents from the Purchaser releasing
the Joint Venture from any further responsibility or liability with respect to
the clean-up.
The Partnership had a 14.4% investment in Princeton Golf Course JV ("Joint
Venture"). On February 26, 1999, the Joint Venture sold its only investment
property, Princeton Meadows Golf Course, to an unaffiliated third party. The
sale resulted in net proceeds of approximately $3,411,000 after payment of
closing costs, resulting in a gain on sale of approximately $2,885,000. The
Partnership's 1999 pro-rata share of this gain is approximately $415,000.
Furthermore, as a result of the sale, unamortized loan costs of approximately
$7,000 were written off. This resulted in an extraordinary loss on early
extinguishment of debt of approximately $7,000. The Partnership's pro-rata
share of this extraordinary loss is approximately $1,000. The Partnership had
equity income from the Joint Venture in 1999 of approximately $401,000.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the various properties to adequately maintain the
physical assets and other operating needs of the Partnership and to comply with
Federal, state, and local legal and regulatory requirements. Capital
improvements planned for each of the Registrant's properties are detailed below.
Atlanta Crossing
During the three months ended March 31, 1999, the Partnership did not complete
any capital improvements. Based on a report received from an independent third
party consultant analyzing necessary exterior improvements and estimates made by
the Managing General Partner on interior improvements, it is estimated that the
property requires approximately $300,000 of capital improvements over the near
term. The Partnership has budgeted, but is not limited to, capital improvements
of approximately $58,000 for 1999 which consist of tenant improvements.
Deer Creek
During the three months ended March 31, 1999, the Partnership spent
approximately $142,000 on capital improvements consisting primarily of building
improvements and carpet and vinyl replacement. These improvements were funded
from operating cash flow. Based on a report received from an independent third
party consultant analyzing necessary exterior improvements and estimates made by
the Managing General Partner on interior improvements, it is estimated that the
property requires approximately $535,000 of capital improvements over the near
term. The Partnership has budgeted, but is not limited to, capital improvements
of approximately $649,000 for 1999 which includes landscaping and irrigation
improvements, parking lot and pool repairs, exterior painting, and other
interior and exterior building improvements.
Georgetown
During the three months ended March 31, 1999, the Partnership spent
approximately $8,000 on capital improvements which consisted primarily of carpet
and vinyl replacement and appliances. These improvements were funded from
operating cash flow. Based on a report received from an independent third party
consultant analyzing necessary exterior improvements and estimates made by the
Managing General Partner on interior improvements, it is estimated that the
property requires approximately $259,000 of capital improvements over the near
term. The Partnership has budgeted, but is not limited to, capital improvements
of approximately $683,000 for 1999 which included roof replacement, parking lot
repairs, exterior painting, and other interior and exterior building
improvements.
Landmark
During the three months ended March 31, 1999, the Partnership spent
approximately $16,000 on capital improvements consisting primarily of carpet and
vinyl replacement and balconies. These improvements were funded from capital
and replacement reserves. Based on a report received from an independent third
party consultant analyzing necessary exterior improvements and estimates made by
the Managing General Partner on interior improvements, it is estimated that the
property requires approximately $378,000 of capital improvements over the near
term. The Partnership has budgeted, but is not limited to, capital improvements
of approximately $458,000 for 1999 which includes landscaping and irrigation
improvements, parking lot repairs, siding replacement, exterior painting and
carpet replacements.
The additional capital expenditures will be incurred only if cash is available
from operations or from Partnership reserves. To the extent that such budgeted
capital improvements are completed, the Partnership's distributable cash flow,
if any, may be adversely affected at least in the short term.
The Partnership's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $17,947,000, net of discount, is amortized over
periods ranging from 29 to 30 years with balloon payments due in 2003. The
Managing General Partner will attempt to refinance such indebtedness and/or sell
the properties prior to such maturity date. If the properties cannot be
refinanced or sold for a sufficient amount, the Partnership may risk losing such
properties through foreclosure.
There were no cash distributions to the partners during the three months ended
March 31, 1999 and 1998. Future cash distributions will depend on the levels of
cash generated from operations, the availability of cash revenues and the timing
of debt maturities, refinancings and/or property sales. The Partnership's
distribution policy will be reviewed on a quarterly basis. There can be no
assurance, however, that the Partnership will generate sufficient funds from
operations after required capital expenditures to permit distributions to its
partners in 1999 or subsequent periods.
Potential Tender Offer
On October 1, 1998, Insignia Financial Group, Inc. merged into AIMCO, a real
estate investment trust, whose Class A Common Shares are listed on the New York
Stock Exchange. As a result of such merger, AIMCO and AIMCO Properties, L.P., a
Delaware limited partnership and the operating partnership of AIMCO ("AIMCO OP")
acquired indirect control of the Managing General Partner. AIMCO and its
affiliates currently own 22.296% of the limited partnership interests in the
Partnership. AIMCO is presently considering whether it will engage in an
exchange offer for additional limited partnership interests in the Partnership.
There is a substantial likelihood that, within a short period of time, AIMCO OP
will offer to acquire limited partnership interests in the Partnership for cash
or preferred units or common units of limited partnerships interests in AIMCO
OP. While such an exchange offer is possible, no definite plans exist as to when
or whether to commence such an exchange offer, or as to the terms of any such
exchange offer, and it is possible that none will occur.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-QSB shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, PC-based network servers, routers and
desktop PCs were analyzed for compliance. The Managing Agent has begun to
replace each of the non-compliant network connections and desktop PCs and, as of
March 31, 1999, had completed approximately 75% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by July
31, 1999.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at all
properties, is $200,000, and the implementation and the testing process is
expected to be completed by July 31, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.
The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before May 1999.
The Managing Agent has updated data transmission standards with two of the three
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by June 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.8 million ($0.6 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia and entities which were, at
the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain
general partner entities, past tender offers by Insignia Affiliates as well as a
recently announced agreement between Insignia and AIMCO. The complaint seeks
monetary damages and equitable relief, including judicial dissolution of the
Partnership. On June 25, 1998, the Managing General Partner filed a motion
seeking dismissal of the action. In lieu of responding to the motion, the
plaintiffs filed an amended complaint. The Managing General Partner has filed
demurrers to the amended complaint which were scheduled to be heard during
February 1999. No ruling on such demurrers has been received. The Managing
General Partner does not anticipate that costs associated with this case, if
any, will be material to the Partnership's overall operations.
On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled Everest Properties, LLC. v.
Insignia Financial Group, Inc., et al. in the Superior Court of the State of
California, County of Los Angeles. The action involves 44 real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia Affiliates allegedly manage or control. This case
was settled on March 3, 1999. The Partnership is responsible for a portion of
the settlement costs. The expense is not expected to have a material effect on
the Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to
this report.
b) Reports on Form 8-K:
None were filed during the three months ended March 31, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ANGELES INCOME PROPERTIES, LTD. II
By: Angeles Realty Corporation II
Managing General Partner
By: /s/ Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/ Carla R. Stoner
Carla R. Stoner
Senior Vice President Finance and
Administration
Date: May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Angeles
Income Properties, Ltd. II 1999 First Quarter 10-QSB and is qualified in its
entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000711642
<NAME> ANGELES INCOME PROPERTIES, LTD. II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,610
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 36,806
<DEPRECIATION> 26,211
<TOTAL-ASSETS> 15,753
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 17,947
0
0
<COMMON> 0
<OTHER-SE> (2,991)
<TOTAL-LIABILITY-AND-EQUITY> 15,753
<SALES> 0
<TOTAL-REVENUES> 1,904
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 357
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 665
<EPS-PRIMARY> 6.59<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
