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 June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from________to________
Commission file number 0-19243
UNITED INVESTORS INCOME PROPERTIES II
(Exact name of small business issuer as specified in its charter)
Missouri 43-1542903
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza, P.O. 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)
UNITED INVESTORS INCOME PROPERTIES II
BALANCE SHEET
(Unaudited)
June 30, 1998
(in thousands, except unit data)
Assets
Cash and cash equivalents $ 807
Other assets 13
Investment in joint ventures (Notes B, D and E) 2,129
Investment properties:
Land $ 432
Buildings and related personal property 3,685
4,117
Less accumulated depreciation (696) 3,421
$6,370
Liabilities and Partners' Capital (Deficit)
Liabilities
Accrued liabilities $ 12
Partners' Capital (Deficit)
General partner's $ (5)
Limited partners' (32,601 units
issued and outstanding) 6,363 6,358
$6,370
See Accompanying Notes to Financial Statements
b)
UNITED INVESTORS INCOME PROPERTIES II
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues:
Rental income $ 128 $ 115 $ 255 $ 231
Other income 7 8 16 15
Total revenues 135 123 271 246
Expenses:
Operating 16 3 22 6
General and administrative 19 18 35 34
Depreciation 28 26 56 52
Total expenses 63 47 113 92
Equity in net income
of joint ventures 37 38 68 75
Net income $ 109 $ 114 $ 226 $ 229
Net income allocated to
general partner (1%) $ 1 $ 1 $ 2 $ 2
Net income allocated to
limited partners (99%) 108 113 224 227
$ 109 $ 114 $ 226 $ 229
Net income per limited
partnership unit $3.31 $3.47 $6.87 $6.96
Distributions per limited
partnership unit $4.27 $4.42 $8.56 $8.71
See Accompanying Notes to Financial Statements
c)
UNITED INVESTORS INCOME PROPERTIES II
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner's Partners' Total
Original capital contributions 32,601 $ -- $8,150 $8,150
Partners' (deficit) capital
at December 31, 1997 32,601 $ (4) $6,418 $6,414
Partners' distributions -- (3) (279) (282)
Net income for the six months
ended June 30, 1998 -- 2 224 226
Partners' (deficit) capital
at June 30, 1998 32,601 $ (5) $6,363 $6,358
See Accompanying Notes to Financial Statements
d)
UNITED INVESTORS INCOME PROPERTIES II
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
Net income $ 226 $ 229
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in net income of joint ventures (68) (75)
Depreciation 56 52
Change in accounts:
Receivables and deposits -- 2
Other assets (10) 5
Accounts payable -- 1
Accrued liabilities (11) 6
Net cash provided by operating activities 193 220
Cash flows from investing activities:
Distributions from joint ventures 62 170
Net cash provided by investing activities 62 170
Cash flows from financing activities:
Partners' distributions (282) (287)
Net cash used in financing activities (282) (287)
Net (decrease) increase in cash and cash equivalents (27) 103
Cash and cash equivalents at beginning of period 834 699
Cash and cash equivalents at end of period $ 807 $ 802
See Accompanying Notes to Financial Statements
e)
UNITED INVESTORS INCOME PROPERTIES II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of United Investors Income
Properties II (the "Partnership"), 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 United Investor Real Estate, Inc. (the "General Partner"), a
Delaware corporation, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 1998, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Partnership's annual report on
Form 10-KSB for the fiscal year ended December 31, 1997.
Certain reclassifications have been made to the 1997 information to conform to
the 1998 presentation. (see "Note B").
NOTE B - CHANGE IN METHOD OF REPORTING THE OWNERSHIP OF JOINT VENTURES
The Partnership owns a 65% interest in Corinth Square Professional Building
("Corinth") (see "Note D") and a 55% interest in Covington Pike ("Covington")
(see "Note E") (collectively, the "Joint Ventures"). Through the third quarter
of 1997, the Partnership reflected its interests in the Joint Ventures utilizing
full consolidation whereby all the accounts of the Joint Ventures were included
in the Partnership's financial statements, with intercompany accounts being
eliminated. The minority partners' share of the Joint Ventures' assets and
liabilities was reflected as a liability in the balance sheet of the
Partnership. During the fourth quarter of 1997, management determined that the
Partnership shares its authority over operating and financial decisions of the
Joint Ventures with its venture partners and, accordingly, due to the absence of
control, the Partnership began reflecting its interest in Corinth and Covington
utilizing the equity method. Under the equity method, the original investment
is increased by advances to the Joint Ventures and by the Partnership's share of
the earnings of the Joint Ventures. The investment is decreased by
distributions from the Joint Ventures and by the Partnership's share of losses
of the Joint Ventures.
The statements of operations and cash flows for the six months ended June 30,
1997 have been restated to reflect this change. Additionally, certain
reclassifications were made in the 1997 statement of operations to conform to
the current year presentation. These changes had no effect on the net income of
the Partnership, the net income per limited partnership unit, or on partners'
capital (deficit).
NOTE C - TRANSACTIONS WITH AFFILIATED PARTNERS
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all partnership activities.
Prior to February 25, 1998, the General Partner was a wholly-owned subsidiary of
MAE GP Corporation, ("MAE GP"), an affiliate of Insignia Financial Group, Inc.
("Insignia"). Effective February 25, 1998, MAE GP was merged into Insignia
Properties Trust ("IPT"), which is an affiliate of Insignia. Thus, the General
Partner is now a wholly-owned subsidiary of IPT. The partnership agreement
provides for payments to affiliates for services based on a percentage of
revenue and for reimbursement of certain expenses incurred by affiliates on
behalf of the Partnership. The following payments were made to affiliates of
the General Partner for the six month periods ended June 30, 1998 and 1997 (in
thousands):
1998 1997
Property management fees
(included in operating expenses) $ 5 $ 5
Reimbursement for services of affiliates
(included in general and administrative expenses) 14 16
On March 17, 1998, Insignia entered into an agreement to merge its national
residential property management operations, and its controlling interest in IPT,
with Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust. The closing, which is anticipated to happen in
September or October of 1998, is subject to customary conditions, including
government approvals and the approval of Insignia's shareholders. If the
closing occurs, AIMCO will then control the General Partner of the Partnership.
NOTE D - INVESTMENT IN CORINTH SQUARE JOINT VENTURE
The Partnership owns a 65% interest in Corinth, a joint venture with United
Investors Income Properties, an affiliated partnership, in which the General
Partner is also the sole general partner. Corinth is accounted for using the
equity method of accounting (see "Note B").
The condensed balance sheet of Corinth at June 30, 1998, is summarized as
follows (in thousands):
Assets
Commercial property, net $1,736
Other assets 117
Total $1,853
Liabilities and Partners' Capital
Liabilities $ 62
Partners' capital 1,791
Total $1,853
Condensed statements of operations of Corinth for the six months ended June 30,
1998 and 1997, are as follows (in thousands):
1998 1997
Revenue $ 188 $ 166
Costs and expenses 166 129
Net income $ 22 $ 37
NOTE E - INVESTMENT IN COVINGTON PIKE JOINT VENTURE
As of December 31, 1992, the Partnership had advanced $1,057,698 to the General
Partner for the benefit of Covington, which was a joint venture between the
General Partner and an unaffiliated party. On January 1, 1993, the General
Partner assigned its interest in the joint venture to the Partnership with no
additional consideration beyond the funds advanced as of December 31, 1992. The
$1,057,698 consisted of land and building costs of approximately $1,031,000 and
cash of $26,155. Capital contributed by the unaffiliated partner was $82.
Covington is accounted for using the equity method of accounting (see "Note B").
The condensed balance sheet of Covington at June 30, 1998, is summarized as
follows (in thousands):
Assets
Commercial property, net $ 847
Other assets 82
Total $ 929
Liabilities and Partners' Capital
Liabilities $ 79
Partners' capital 850
Total $ 929
Condensed statements of operations of Covington for the six months ended June
30, 1998 and 1997, are as follows (in thousands):
1998 1997
Revenue $ 162 $ 159
Costs and expenses 63 64
Net income $ 99 $ 95
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Partnership's investment properties consist of two distribution centers.
The Partnership's joint venture properties consist of an office building and a
mini-storage facility. The following table sets forth the average physical
occupancy of the properties for each of the six month periods ended June 30,
1998 and 1997:
Average Occupancy
Investment Properties 1998 1997
Keebler Distribution Center
Chesapeake, Virginia 100% 0%
Keebler Distribution Center
Columbia, South Carolina 100% 100%
Joint Venture Properties
Corinth Square Professional Building
Prairie Village, Kansas 84% 80%
Covington Pike
Memphis, Tennessee 99% 99%
The Keebler Company vacated the Columbia, South Carolina facility in January of
1996 and the Chesapeake, Virginia facility in August of 1996. The Keebler
Company has indicated its intentions to honor its financial obligations to the
Partnership. Keebler is obligated to continue paying rent on the vacated space
through the years 2000 (Columbia, South Carolina) and 2002 (Chesapeake,
Virginia). Should the tenant fail to honor its lease obligations, operating
results would be adversely affected. The tenant has thus far paid the scheduled
rental payments on the vacated facilities. In addition, Keebler, with approval
from the Partnership, entered into sub-lease agreements effective July 1, 1996
for the Columbia, South Carolina facility and January 1, 1998 for the
Chesapeake, Virginia facility. The tenants are obligated to pay rent to Keebler
through December 31, 2000 and October 31, 2002, respectively.
The Partnership realized net income of $226,000 for the six month period ended
June 30, 1998, compared to net income of $229,000 for the six month period ended
June 30, 1997. The Partnership realized net income of $109,000 for the three
month period ended June 30, 1998, compared to net income of $114,000 for the
three month period ended June 30, 1997. The decrease in net income is primarily
due to increased operating expenses. Operating expenses increased primarily due
to roof repairs at the Keebler, Virginia facility during 1998. The
Partnership's financial statements for the three and six months ended June 30,
1997 have been restated to change the method of accounting for its joint venture
investments from consolidation to the equity method. This change affects only
the presentation and does not affect net income nor distributions received from
those joint ventures.
As part of the ongoing business plan of the Partnership, the General Partner
monitors the rental market environment of its investment properties to assess
the feasibility of increasing rents, maintaining or increasing occupancy levels
and protecting the Partnership from increases in expenses. As part of this
plan, the 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 to offset
softening market conditions, there is no guarantee that the General Partner will
be able to sustain such a plan.
Exclusive of cash held by the Joint Ventures, at June 30, 1998, the Partnership
had cash and cash equivalents of approximately $807,000 compared to
approximately $802,000 at June 30, 1997. The net decrease in cash and cash
equivalents for the six month period ended June 30, 1998 was approximately
$27,000 compared to a net increase of approximately $103,000 for the six month
period ended June 30, 1997. Net cash provided by operating activities decreased
due to the increased use of cash for other assets and other liabilities due to
the timing of payments. Net cash provided by investing activities decreased
primarily due to decreased distributions from the joint venture properties in
1998. Net cash used in financing activities was nearly constant.
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. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
Cash distributions of $282,000 and $287,000 were made during the six month
periods ended June 30, 1998 and 1997, respectively. Future cash distributions
will depend on the levels of net cash generated from operations, property sales,
and the availability of cash reserves. The General Partner anticipates that the
Partnership will continue to make cash distributions as property operations
permit throughout 1998.
Year 2000
The Partnership is dependent upon the General Partner and Insignia for
management and administrative services. Insignia has completed an assessment
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter (the "Year 2000 Issue"). The project is estimated to be completed
not later than December 31, 1998, which is prior to any anticipated impact on
its operating systems. The General Partner believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the
Partnership.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performance or achievements, expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date
of this quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates of revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners are affiliates of
Insignia filed a complaint in the Superior Court of the State of California,
County of Los Angeles. The action involves forty-four real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia affiliates allegedly manage or control (the
"Subject Partnerships"). The complaint names as defendants Insignia, several
Insignia affiliates alleged to be managing partners of the defendant limited
partnerships, the Partnership and the General Partner. Plaintiffs allege that
they have requested from, but have been denied by each of the Subject
Partnerships, lists of their respective limited partners for the purpose of
making tender offers to purchase up to 4.9% of the limited partner units of each
of the Subject Partnerships. The complaint also alleges that certain of the
defendants made tender offers to purchase limited partner units in many of the
Subject Partnerships, with the alleged result that plaintiffs have been deprived
of the benefits they would have realized from ownership of the additional units.
The plaintiffs assert eleven causes of action, including breach of contract,
unfair business practices, and violations of the partnership statutes of the
states in which the Subject Partnerships are organized. Plaintiffs seek
compensatory, punitive and treble damages. The Partnership was only recently
served with the complaint and has not yet responded to it. The Partnership
believes the claims to be without merit and intends to defend the action
vigorously.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature. The General Partner believes that all such pending
or outstanding litigation will be resolved without a material adverse effect
upon the business, financial condition or operations of the Partnership.
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 filed during the quarter ended June 30, 1998.
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.
UNITED INVESTORS INCOME PROPERTIES II
By: United Investors Real Estate, Inc.
Its General Partner
By: /s/ Carroll D. Vinson
Carroll D. Vinson
President and Director
By: /s/ Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President and Chief Accounting Officer
Date: August 13, 1998