United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________to _________
Commission file number 0-11767
ANGELES INCOME PROPERTIES, LTD. II
(Exact name of small business issuer as specified in its charter)
California 95-3793526
(State or other jurisdiction of (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)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANGELES INCOME PROPERTIES, LTD. II
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 2002
Assets
Cash and cash equivalents $ 442
Receivables and deposits 374
Restricted escrows 108
Other assets 635
Investment properties:
Land $ 1,984
Buildings and related personal property 33,214
35,198
Less accumulated depreciation (27,086) 8,112
$ 9,671
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 50
Tenant security deposit liabilities 254
Accrued property taxes 202
Other liabilities 263
Due to affiliates 48
Mortgage notes payable 24,733
Partners' Deficit
General partners $ (598)
Limited partners (99,784 units issued and
outstanding) (15,281) (15,879)
$ 9,671
See Accompanying Notes to Consolidated Financial Statements
ANGELES INCOME PROPERTIES, LTD. II
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Revenues: (Restated) (Restated)
Rental income $ 1,737 $ 1,705 $ 3,429 $ 3,382
Other income 117 115 271 204
Casualty gain (Note D) -- 25 -- 25
Total revenues 1,854 1,845 3,700 3,611
Expenses:
Operating 549 531 1,089 1,073
General and administrative 74 76 187 172
Depreciation 485 464 969 912
Interest 493 358 980 707
Property taxes 170 187 337 365
Loss on early extinguishment of debt
(Note C) -- 57 -- 57
Total expenses 1,771 1,673 3,562 3,286
Net income $ 83 $ 172 $ 138 $ 325
Net income allocated to general partners $ 1 $ 2 $ 1 $ 3
Net income allocated to limited partners 82 170 137 322
$ 83 $ 172 $ 138 $ 325
Net income per limited partnership unit $ 0.82 $ 1.70 $ 1.37 $ 3.23
Distributions per limited partnership unit $ 1.90 $ 3.19 $ 1.90 $ 8.50
See Accompanying Notes to Consolidated Financial Statements
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, 2001 99,784 $ (597) $(15,228) $(15,825)
Distributions to partners -- (2) (190) (192)
Net income for the six months
ended June 30, 2002 -- 1 137 138
Partners' deficit at
June 30, 2002 99,784 $ (598) $(15,281) $(15,879)
See Accompanying Notes to Consolidated Financial Statements
ANGELES INCOME PROPERTIES, LTD. II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net income $ 138 $ 325
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 969 912
Amortization of mortgage discounts and loan costs 46 40
Loss on early extinguishment of debt -- 57
Casualty gain -- (25)
Change in accounts:
Receivables and deposits 19 (583)
Other assets (88) (52)
Accounts payable (42) 42
Tenant security deposit liabilities (4) (14)
Accrued property taxes 69 148
Due to affiliates 46 (81)
Other liabilities 39 (75)
Net cash provided by operating activities 1,192 694
Cash flows from investing activities:
Property improvements and replacements (388) (698)
Net withdrawals from (deposits to) restricted escrows 14 (12)
Insurance proceeds received -- 28
Net cash used in investing activities (374) (682)
Cash flows from financing activities:
Payments on mortgage notes payable (253) (128)
Distributions to partners (192) (857)
Proceeds from mortgage note payable -- 13,750
Repayment of mortgage note payable -- (5,985)
Repayment of advances from affiliates (47) --
Loan costs paid (34) (249)
Net cash (used in) provided by financing activities (526) 6,531
Net increase in cash and cash equivalents 292 6,543
Cash and cash equivalents at beginning of period 150 975
Cash and cash equivalents at end of period $ 442 $ 7,518
Supplemental disclosure of cash flow information:
Cash paid for interest $ 933 $ 704
Supplemental disclosure of non-cash activity:
Loan costs in due to affiliates $ -- $ 138
At December 31, 2001 and 2000, approximately $59,000 and $150,000, respectively,
of property improvements and replacements were included in accounts payable,
which are included in property improvements and replacements during the six
months ended June 30, 2002 and 2001, respectively.
See Accompanying Notes to Consolidated Financial Statements
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"), which is wholly-owned by Apartment Investment and
Management Company ("AIMCO"), a publicly traded real estate investment trust,
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, 2002, are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2002. 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 year ended December 31, 2001.
Effective April 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64". SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt,"
required that all gains and losses from extinguishment of debt be aggregated
and, if material, classified as an extraordinary item. SFAS No. 145 rescinds
SFAS No. 4, and accordingly, gains and losses from extinguishment of debt should
only be classified as extraordinary if they are unusual in nature and occur
infrequently. Neither of these criteria applies to the Partnership. As a result,
the accompanying consolidated statements of operations have been restated to
reflect the loss on early extinguishment of debt at Deer Creek Apartments (see
"Note C") in operations rather than as an extraordinary item.
Note B - 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 reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership.
During the six months ended June 30, 2002 and 2001, 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 $185,000 and $179,000 for
the six months ended June 30, 2002 and 2001, respectively, which is included in
operating expenses.
Affiliates of the Managing General Partner received reimbursement of accountable
administrative expenses amounting to approximately $118,000 and $124,000 for the
six months ended June 30, 2002 and 2001, respectively, which is included in
general and administrative expenses and investment properties. Included in these
amounts are fees related to construction management services provided by an
affiliate of the Managing General Partner of approximately $16,000 and $32,000
for the six months ended June 30, 2002 and 2001, respectively. The construction
management service fees are calculated based on a percentage of current year
additions to investment properties.
The Partnership Agreement provides for a fee equal to 10% of "Net cash flow from
operations," as defined in the Partnership Agreement to be paid to the Managing
General Partner for executive and administrative management services. During the
six months ended June 30, 2002, a fee of approximately $48,000 was earned by the
Managing General Partner and is included in "Due to affiliates" on the
accompanying consolidated balance sheet. During the year ended December 31,
2000, the Managing General Partner earned fees of approximately $100,000 of
which approximately $81,000 was accrued at December 31, 2000. The additional
fees due for the year ended December 31, 2000 of approximately $19,000 were
accrued during the six months ended June 30, 2001 and included in general and
administrative expense. No fees were earned by the Managing General Partner for
the six months ended June 30, 2001.
In accordance with the Partnership Agreement, the Managing General Partner has
loaned the Partnership funds for operating expenses at Landmark Apartments. At
December 31, 2001 the amount of the outstanding loan and accrued interest was
approximately $47,000 and was included in "Due to Affiliates" on the
consolidated balance sheet. During the six months ended June 30, 2002, this loan
was repaid in full by the Partnership. Interest was charged at the prime rate
plus 2%. Interest expense was approximately $1,000 for the six months ended June
30, 2002. There were no loans from the Managing General Partner or associated
interest expenses during the six months ended June 30, 2001.
Pursuant to the Partnership Agreement, the Managing General Partner is entitled
to receive a distribution equal to 3% of the aggregate disposition price of sold
properties. The Partnership paid a distribution of approximately $86,000 to the
Managing General Partner related to the sale of Atlanta Crossing Shopping Center
in March 2000. This amount is subordinate to the limited partners receiving
their original capital contributions plus a cumulative preferred return of 6%
per annum of their adjusted capital investment, as defined in the Partnership
Agreement. If the limited partners have not received these returns when the
Partnership terminates, the Managing General Partner will return this amount to
the Partnership.
In addition to reimbursement for services of affiliates, the Partnership accrued
approximately $138,000 for loan costs related to the refinance of Deer Creek
Apartments during the six months ended June 30, 2001 which was paid to an
affiliate of the Managing General Partner during the year ended December 31,
2001.
Beginning in 2001, the Partnership began insuring its properties up to certain
limits through coverage provided by AIMCO which is generally self-insured for a
portion of losses and liabilities related to workers compensation, property
casualty and vehicle liability. The Partnership insures its properties above the
AIMCO limits through insurance policies obtained by AIMCO from insurers
unaffiliated with the Managing General Partner. During the six months ended June
30, 2002 and 2001, the Partnership was charged by AIMCO and its affiliates
approximately $76,000 and $69,000, respectively, for insurance coverage and fees
associated with policy claims administration.
Note C - Refinancing of Mortgage Note Payable
On June 27, 2001, the Partnership refinanced the mortgage encumbering Deer Creek
Apartments. The refinancing replaced indebtedness of approximately $5,985,000
with a new mortgage of $13,750,000. The new mortgage carries a stated interest
rate of 7.43% as compared to the 7.33% interest rate on the old mortgage.
Payments on the mortgage loan are due monthly until the loan matures on July 1,
2021. Total capitalized loan costs were approximately $387,000 at June 30, 2001.
These costs included $138,000 in fees payable to the Managing General Partner at
June 30, 2001 which was paid during the year ended December 31, 2001. The
Partnership recognized a loss on the early extinguishment of debt of
approximately $57,000 due to the write-off of unamortized loan costs.
Note D - Casualties
During the six months ended June 30, 2001, a net casualty gain was recorded at
Georgetown Apartments. The casualty gain related to ice damage in January 2001.
The gain was the result of insurance proceeds of approximately $28,000 less the
net book value of the damaged property of approximately $3,000.
Note E - 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. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its Managing General Partner and
several of their affiliated partnerships and corporate entities. The action
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, among other
things, the acquisition of interests in certain Managing General Partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; management of the partnerships
by the Insignia affiliates; and the series of transactions which closed on
October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties
Trust, respectively, were merged into AIMCO. The plaintiffs seek 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 filed demurrers to the amended
complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Managing General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On
October 5, 2001, the Managing General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Managing General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court held a hearing on
plaintiffs' motion for class certification and took the matter under submission
after further briefing, as ordered by the court, was submitted by the parties.
On July 10, 2002, the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an opportunity to discuss settlement.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.
The Managing General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases will be material to 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
discussion 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.
The following table sets forth the average occupancy of the properties for both
of the six months ended June 30, 2002 and 2001:
Average Occupancy
Property 2002 2001
Deer Creek Apartments 95% 96%
Plainsboro, New Jersey
Georgetown Apartments 96% 96%
South Bend, Indiana
Landmark Apartments 92% 92%
Raleigh, North Carolina
Results of Operations
The Partnership's net income for the six months ended June 30, 2002 was
approximately $138,000 compared to approximately $325,000 for the six months
ended June 30, 2001. The Partnership's net income for the three month period
ended June 30, 2002 was approximately $83,000 compared to approximately $172,000
for the three month period ended June 30, 2001. The decrease in net income for
the three and six month periods ended June 30, 2002 is primarily attributable to
an increase in total expenses which was partially offset by an increase in total
revenues.
The increase in total expenses for the three and six months ended June 30, 2002
is the result of increases in interest, depreciation and operating expenses
partially offset by a decrease in property tax expense and loss on early
extinguishment of debt. The increase in total expenses during the six months
ended June 30, 2002 was also due to an increase in general and administrative
expenses. Interest expense increased for the three and six month periods ended
June 30, 2002 due to the refinancing of Deer Creek Apartments in June 2001,
which increased the debt balance at the property, as discussed in "Liquidity and
Capital Resources". Depreciation expense increased for the three and six month
periods ended June 30, 2002 due to capital improvements completed during the
past twelve months which are now being depreciated. Operating expense increased
for the three and six month periods ended June 30, 2002 primarily due to
increases in insurance and maintenance expenses partially offset by a decrease
in property expenses. Insurance expenses increased primarily due to an increase
in insurance premiums at all of the Partnership's properties. Maintenance
expenses increased primarily due to an increase in contract services at Landmark
Apartments. Property expense decreased primarily due to decreases in utility
expenses at all of the Partnership's properties. Property tax expense decreased
due to the reappraisal of Deer Creek Apartments. The loss on early
extinguishment of debt relates to the refinancing of the mortgage encumbering
Deer Creek in June 2001 as discussed in "Liquidity and Capital Resources".
General and administrative expenses increased for the six month period ended
June 30, 2002 due to an increase in the cost of services included in the
management reimbursements paid to the Managing General Partner as allowed under
the Partnership Agreement and an increase in the management fee due to the
Managing General Partner based on cash flow as allowed in the Partnership
Agreement partially offset by reduced professional fees associated with the
management of the Partnership. Also included in general and administrative
expenses at both June 30, 2002 and 2001 are costs associated with the quarterly
and annual communications with investors and regulatory agencies and the annual
audit required by the Partnership Agreement.
The increase in total revenues for the three and six months ended June 30, 2002
is due to an increase in rental income partially offset by the casualty gain
recorded during the six months ended June 30, 2001 at Georgetown Apartments due
to an ice storm in January 2001. The gain was the result of insurance proceeds
of approximately $28,000 less the net book value of the damaged property of
approximately $3,000. The increase in total revenues during the six months ended
June 30, 2002 is also due to an increase in other income. The increase in rental
income for the three and six month periods ended June 30, 2002 is primarily due
to an increase in average rental rates at Deer Creek Apartments, increased month
to month rental fees at all the Partnership's properties and a decrease in
rental concessions at Landmark Apartments partially offset by a decrease in
average rental rates at Landmark Apartments and a decrease in occupancy at Deer
Creek Apartments. The increase in other income during the six months ended June
30, 2002 is primarily due to an increase in utility reimbursements and lease
cancellation fees at Deer Creek Apartments and increased non-refundable
administrative fees at Deer Creek and Landmark Apartments partially offset by
reduced clubhouse rental fees at Deer Creek Apartments and reduced interest
income due to lower average cash balances in interest bearing accounts.
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 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
At June 30, 2002, the Partnership had cash and cash equivalents of approximately
$442,000 compared to approximately $7,518,000 at June 30, 2001. The increase in
cash and cash equivalents of approximately $292,000 since December 31, 2001 is
due to approximately $1,192,000 of cash provided by operating activities
partially offset by approximately $526,000 and $374,000 of cash used in
financing and investing activities, respectively. Cash used in financing
activities consisted of loan costs paid, distributions to the partners, payments
of principal made on the mortgages encumbering the Partnership's properties and
repayment of advances from affiliates. Cash used in investing activities
consisted of property improvements and replacements slightly offset by
withdrawals from restricted escrow accounts maintained by the mortgage lenders.
The Partnership invests its working capital reserves in interest bearing
accounts.
On June 27, 2001, the Partnership refinanced the mortgage encumbering Deer Creek
Apartments. The refinancing replaced indebtedness of approximately $5,985,000
with a new mortgage of $13,750,000. The new mortgage carries a stated interest
rate of 7.43% as compared to the 7.33% interest rate on the old mortgage.
Payments on the mortgage loan are due monthly until the loan matures on July 1,
2021. Total capitalized loan costs were approximately $387,000 at June 30, 2001.
These costs included $138,000 in fees payable to the Managing General Partner at
June 30, 2001, which was paid during the year ended December 31, 2001. The
Partnership recognized a loss on the early extinguishment of debt of
approximately $57,000 during the six months ended June 30, 2001 due to the
write-off of unamortized loan costs.
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.
Deer Creek
During the six months ended June 30, 2002, the Partnership completed
approximately $192,000 of budgeted and non-budgeted improvements at Deer Creek
Apartments consisting primarily of clubhouse renovations. These improvements
were funded from operating cash flow. The Partnership has budgeted, but is not
limited to, capital improvements of approximately $121,000, consisting primarily
of floor covering replacements, structural improvements, parking lot upgrades
and appliances. Additional improvements may be considered and will depend on the
physical condition of the property as well as anticipated cash flow generated by
the property.
Georgetown
During the six months ended June 30, 2002, the Partnership completed
approximately $20,000 of improvements at Georgetown Apartments consisting
primarily of office equipment, appliance and floor covering replacements and
major landscaping. These improvements were funded from operating cash flow. The
Partnership has budgeted, but is not limited to, capital improvements of
approximately $60,000, consisting primarily of appliance and floor covering
replacements. Additional improvements may be considered and will depend on the
physical condition of the property as well as anticipated cash flow generated by
the property.
Landmark
During the six months ended June 30, 2002, the Partnership completed
approximately $117,000 of budgeted and non-budgeted improvements at Landmark
Apartments consisting primarily of swimming pool improvements, plumbing upgrades
and floor covering replacements. These improvements were funded from operating
cash flow and Partnership reserves. The Partnership has budgeted, but is not
limited to, capital improvements of approximately $96,000, consisting primarily
of air conditioning unit and water heater replacements, appliances and floor
covering replacements. Additional improvements may be considered and will depend
on the physical condition of the property as well as replacement reserves and
anticipated cash flow generated by the property.
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 Registrant'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 $24,733,000, net of discounts, has maturity dates
ranging from October 2003 to July 2021. The mortgage indebtedness encumbering
Deer Creek Apartments, which was refinanced on June 27, 2001, of approximately
$13,466,000 is amortized over 20 years and matures on July 1, 2021 at which time
it is scheduled to be fully amortized. The mortgage indebtedness encumbering
Georgetown Apartments and Landmark Apartments of approximately $11,267,000, net
of discount, is amortized over periods ranging from 29 to 30 years with balloon
payments of approximately $11,033,000 due in 2003. The Managing General Partner
will attempt to refinance the mortgages encumbering Georgetown Apartments and
Landmark Apartments 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.
The Partnership distributed the following amounts during the six months ended
June 30, 2002 and 2001 (in thousands, except per unit data):
Six Months Per Limited Six Months Per Limited
Ended Partnership Ended Partnership
June 30, 2002 Unit June 30, 2001 Unit
Operations $ 192 $ 1.90 $ 857 $ 8.50
Future cash distributions will depend on the levels of cash generated from
operations, the availability of cash reserves and the timing of debt maturities,
refinancings and/or property sales. The Partnership's cash available for
distribution is reviewed on a monthly basis. There can be no assurance, however,
that the Partnership will generate sufficient funds from operations after
required capital expenditures to permit additional distributions to its partners
during the remainder of 2002 or subsequent periods.
Other
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 61,594 limited partnership units in
the Partnership representing 61.73% of the outstanding units at June 30, 2002. A
number of these units were acquired pursuant to tender offers made by AIMCO or
its affiliates. It is possible that AIMCO or its affiliates will acquire
additional units of limited partnership interest in the Partnership in exchange
for cash or a combination of cash and units in the operating partnership of
AIMCO either through private purchases or tender offers. In this regard, on June
25, 2002, a tender offer by AIMCO Properties, L.P., to acquire all of the units
not owned by affiliates of AIMCO for a purchase price of $94.00 per unit
expired. Pursuant to this offer, AIMCO acquired 2,358 units during the quarter
ended June 30, 2002. Under the Partnership Agreement, unitholders holding a
majority of the units are entitled to take action with respect to a variety of
matters which would include voting on certain amendments to the Partnership
Agreement and voting to remove the Managing General Partner. As a result of its
ownership of 61.73% of the outstanding units, AIMCO is in a position to control
all voting decisions with respect to the Registrant. Although the Managing
General Partner owes fiduciary duties to the limited partners of the
Partnership, the Managing General Partner also owed fiduciary duties to AIMCO as
its sole stockholder. As a result, the duties of the Managing General Partner,
as managing general partner, to the Partnerships and its limited partners may
come into conflict with the duties of the Managing General Partner to AIMCO, as
its sole stockholder.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the Partnership
to make estimates and assumptions. The Partnership believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity.
Impairment of Long-Lived Assets
Investment properties are recorded at cost, less accumulated depreciation,
unless considered impaired. If events or circumstances indicate that the
carrying amount of a property may be impaired, the Partnership will make an
assessment of its recoverability by estimating the undiscounted future cash
flows, excluding interest charges, of the property. If the carrying amount
exceeds the aggregate future cash flows, the Partnership would recognize an
impairment loss to the extent the carrying amount exceeds the fair value of the
property.
Real property investments are subject to varying degrees of risk. Several
factors may adversely affect the economic performance and value of the
Partnership's investment properties. These factors include changes in the
national, regional and local economic climate; local conditions, such as an
oversupply of multifamily properties; competition from other available
multifamily property owners and changes in market rental rates. Any adverse
changes in these factors could cause an impairment in the Partnership's assets.
Revenue Recognition
The Partnership generally leases apartment units for twelve-month terms or less.
Rental income attributable to leases is recognized monthly as it is earned. The
Partnership will offer rental concessions during particularly slow months or in
response to heavy competition from other similar complexes in the area.
Concessions are charged to income as incurred.
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. (the "Nuanes action") in the Superior Court of the
State of California for the County of San Mateo. The plaintiffs named as
defendants, among others, the Partnership, its Managing General Partner and
several of their affiliated partnerships and corporate entities. The action
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, among other
things, the acquisition of interests in certain Managing General Partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one time, affiliates of Insignia; past tender offers by the Insignia
affiliates to acquire limited partnership units; management of the partnerships
by the Insignia affiliates; and the series of transactions which closed on
October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties
Trust, respectively, were merged into AIMCO. The plaintiffs seek 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 filed demurrers to the amended
complaint which were heard February 1999.
Pending the ruling on such demurrers, settlement negotiations commenced. On
November 2, 1999, the parties executed and filed a Stipulation of Settlement,
settling claims, subject to court approval, on behalf of the Partnership and all
limited partners who owned units as of November 3, 1999. Preliminary approval of
the settlement was obtained on November 3, 1999 from the Court, at which time
the Court set a final approval hearing for December 10, 1999. Prior to the
December 10, 1999 hearing, the Court received various objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement. On
December 14, 1999, the Managing General Partner and its affiliates terminated
the proposed settlement. In February 2000, counsel for some of the named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated the settlement. On June 27, 2000, the Court entered an order
disqualifying them from the case and an appeal was taken from the order on
October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff
Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the
putative class. Plaintiffs filed a third amended complaint on January 19, 2001.
On March 2, 2001, the Managing General Partner and its affiliates filed a
demurrer to the third amended complaint. On May 14, 2001, the Court heard the
demurrer to the third amended complaint. On July 10, 2001, the Court issued an
order sustaining defendants' demurrer on certain grounds. On July 20, 2001,
Plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order
granting in part and denying in part defendants' demurrer. On September 7, 2001,
Plaintiffs filed a fourth amended class and derivative action complaint. On
September 12, 2001, the Court denied Plaintiffs' motion for reconsideration. On
October 5, 2001, the Managing General Partner and affiliated defendants filed a
demurrer to the fourth amended complaint, which was heard on December 11, 2001.
On February 2, 2002, the Court served its order granting in part the demurrer.
The Court has dismissed without leave to amend certain of the plaintiffs'
claims. On February 11, 2002, plaintiffs filed a motion seeking to certify a
putative class comprised of all non-affiliated persons who own or have owned
units in the partnerships. The Managing General Partner and affiliated
defendants oppose the motion. On April 29, 2002, the Court held a hearing on
plaintiffs' motion for class certification and took the matter under submission
after further briefing, as ordered by the court, was submitted by the parties.
On July 10, 2002, the Court entered an order vacating the current trial date of
January 13, 2003 (as well as the pre-trial and discovery cut-off dates) and
stayed the case in its entirety through November 7, 2002 so that the parties can
have an opportunity to discuss settlement.
During the third quarter of 2001, a complaint (the "Heller action") was filed
against the same defendants that are named in the Nuanes action, captioned
Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed
a first amended complaint. The first amended complaint in the Heller action is
brought as a purported derivative action, and asserts claims for among other
things breach of fiduciary duty; unfair competition; conversion, unjust
enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a
motion to consolidate the Heller action with the Nuanes action and stated that
the Heller action was filed in order to preserve the derivative claims that were
dismissed without leave to amend in the Nuanes action by the Court order dated
July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated
defendants moved to strike the first amended complaint in its entirety for
violating the Court's July 10, 2001 order granting in part and denying in part
defendants' demurrer in the Nuanes action, or alternatively, to strike certain
portions of the complaint based on the statute of limitations. Other defendants
in the action demurred to the fourth amended complaint, and, alternatively,
moved to strike the complaint. On December 11, 2001, the court heard argument on
the motions and took the matters under submission. On February 4, 2002, the
Court served notice of its order granting defendants' motion to strike the
Heller complaint as a violation of its July 10, 2001 order in the Nuanes action.
On March 27, 2002, the plaintiffs filed a notice appealing the order striking
the complaint. The parties are currently in the midst of briefing that appeal.
The Managing General Partner does not anticipate that any costs, whether legal
or settlement costs, associated with these cases will be material to the
Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 3.1, Amendment Agreement of Limited Partnership of the
Partnership dated October 12, 1982 filed on Form 10K dated
November 30, 1983, incorporated herein by reference.
Exhibit 99, Certification of Chief Executive Officer and
Chief Financial Officer.
b) Reports on Form 8-K filed during the quarter ended June 30, 2002:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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/Thomas C. Novosel
Thomas C. Novosel
Senior Vice President
and Chief Accounting Officer
Date: August 14, 2002
Exhibit 99
Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-QSB of Angeles Income
Properties, Ltd. II (the "Partnership"), for the quarterly period ended June 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), Patrick J. Foye, as the equivalent of the Chief Executive
Officer of the Partnership, and Paul J. McAuliffe, 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/ Patrick J. Foye
Name: Patrick J. Foye
Date: August 14, 2002
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: August 14, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Partnership for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.