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 September 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)
September 30, 2002
Assets
Cash and cash equivalents $ 645
Receivables and deposits 353
Restricted escrows 128
Other assets 547
Investment properties:
Land $ 1,984
Buildings and related personal property 33,310
35,294
Less accumulated depreciation (27,553) 7,741
$ 9,414
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 77
Tenant security deposit liabilities 246
Accrued property taxes 268
Other liabilities 551
Due to affiliates 106
Mortgage notes payable 24,603
Partners' Deficit
General partners $ (603)
Limited partners (99,784 units issued and
outstanding) (15,834) (16,437)
$ 9,414
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenues: (Restated)
Rental income $ 1,667 $ 1,702 $ 5,096 $ 5,084
Other income 128 121 399 325
Casualty gain (Note D) -- 40 -- 65
Total revenues 1,795 1,863 5,495 5,474
Expenses:
Operating 578 646 1,667 1,719
General and administrative 309 77 496 249
Depreciation 467 454 1,436 1,366
Interest 509 493 1,489 1,200
Property taxes 165 191 502 556
Loss on early extinguishment of debt (Note C) -- -- -- 57
Total expenses 2,028 1,861 5,590 5,147
Net (loss) income $ (233) $ 2 $ (95) $ 327
Net (loss) income allocated to general
partners (1%) $ (2) $ -- $ (1) $ 3
Net (loss) income allocated to limited
partners (99%) (231) 2 (94) 324
$ (233) $ 2 $ (95) $ 327
Net (loss) income per limited partnership unit $ (2.31) $ 0.02 $ (0.94) $ 3.25
Distributions per limited partnership unit $ 3.23 $ 72.13 $ 5.13 $ 80.63
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 -- (5) (512) (517)
Net loss for the nine months
ended September 30, 2002 -- (1) (94) (95)
Partners' deficit at
September 30, 2002 99,784 $ (603) $(15,834) $(16,437)
See Accompanying Notes to Consolidated Financial Statements
ANGELES INCOME PROPERTIES, LTD. II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net income $ (95) $ 327
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 1,436 1,366
Amortization of mortgage discounts and loan costs 92 62
Loss on early extinguishment of debt -- 57
Casualty gain -- (65)
Change in accounts:
Receivables and deposits 40 (59)
Other assets (46) (31)
Accounts payable (15) 71
Tenant security deposit liabilities (12) (29)
Accrued property taxes 135 179
Due to affiliates 104 (81)
Other liabilities 327 (21)
Net cash provided by operating activities 1,966 1,776
Cash flows from investing activities:
Property improvements and replacements (484) (1,047)
Net (deposits to) withdrawals from restricted escrows (6) 45
Insurance proceeds received -- 72
Net cash used in investing activities (490) (930)
Cash flows from financing activities:
Payments on mortgage notes payable (383) (224)
Proceeds from mortgage note payable -- 13,750
Repayment of mortgage note payable -- (5,985)
Advances from affiliate 65 --
Repayment of advances from affiliate (112) --
Loan costs paid (34) (408)
Distributions to partners (517) (8,127)
Net cash used in financing activities (981) (994)
Net increase (decrease) in cash and cash equivalents 495 (148)
Cash and cash equivalents at beginning of period 150 975
Cash and cash equivalents at end of period $ 645 $ 827
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,395 $ 1,091
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 nine
months ended September 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
nine month periods ended September 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 fiscal 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 nine months ended September 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 $278,000 and
$271,000 for the nine months ended September 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 $164,000 and $310,000 for the
nine months ended September 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 $18,000 and
$174,000 for the nine months ended September 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
nine months ended September 30, 2002 fees of approximately $106,000 were earned
by the Managing General Partner and are included in "Due to affiliates" on the
accompanying consolidated balance sheet. During the nine months ended September
30, 2001 fees of approximately $11,000 were earned by the Managing General
Partner. 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 nine months ended
September 30, 2001 and included in general and administrative expense.
In accordance with the Partnership Agreement, the Managing General Partner
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. During the nine months ended September 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 nine months
ended September 30, 2002. During the nine months ended September 30, 2002, the
Managing General Partner loaned the Partnership approximately $65,000 for
operating expenses at Deer Creek Apartments. This loan was repaid prior to
September 30, 2002. Interest on this loan was charged at the prime rate plus 2%
and amounted to less than $1,000. There were no loans from the Managing General
Partner or associated interest expenses during the nine months ended September
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 nine months ended September 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 nine months ended
September 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 $408,000 at September 30,
2001. These costs included $138,000 in fees paid to the Managing General
Partner. 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 nine months ended September 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.
During the nine months ended September 30, 2001, two net casualty gains were
recorded at Landmark Apartments. One casualty gain related to a fire in January
2001. This gain was the result of insurance proceeds of approximately $22,000
less the net book value of the damaged property of approximately $2,000. The
other casualty gain related to a fire in March 2001. This gain was the result of
insurance proceeds of approximately $22,000 less the net book value of the
damaged property of approximately $2,000.
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. On October 30, 2002, the court
entered an order extending the stay in effect through January 10, 2003.
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 Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. The matters discussed
in this report contain certain forward-looking statements, including, without
limitation, statements regarding future financial performance and the effect of
government regulations. The discussions of the Registrant's business and results
of operations, including forward-looking statements pertaining to such matters,
do not take into account the effects of any changes to the Registrant's business
and results of operations. Actual results may differ materially from those
described in the forward-looking statements and will be affected by a variety of
risks and factors including, without limitation: national and local economic
conditions; the terms of governmental regulations that affect the Registrant and
interpretations of those regulations; the competitive environment in which the
Registrant operates; financing risks, including the risk that cash flows from
operations may be insufficient to meet required payments of principal and
interest; real estate risks, including variations of real estate values and the
general economic climate in local markets and competition for tenants in such
markets; and possible environmental liabilities. Readers should carefully review
the Registrant's financial statements and the notes thereto, as well as the risk
factors described in the documents the Registrant files from time to time with
the Securities and Exchange Commission.
The Partnership's investment properties consist of three apartment complexes.
The following table sets forth the average occupancy of the properties for both
of the nine months ended September 30, 2002 and 2001:
Average Occupancy
Property 2002 2001
Deer Creek Apartments 96% 96%
Plainsboro, New Jersey
Georgetown Apartments 96% 96%
South Bend, Indiana
Landmark Apartments 91% 91%
Raleigh, North Carolina
Results of Operations
The Partnership's net loss for the nine months ended September 30, 2002 was
approximately $95,000 compared to net income of approximately $327,000 for the
nine months ended September 30, 2001. The Partnership had a net loss for the
three month period ended September 30, 2002 of approximately $233,000 compared
to net income of approximately $2,000 for the three month period ended September
30, 2001. The decrease in net income for the nine months ended September 30,
2002 is due to an increase in total expenses partially offset by an increase in
total revenue. The decrease in net income for the three months ended September
30, 2002 is due to a decrease in total revenue and an increase in total
expenses.
The increase in total expenses for the three and nine month periods ended
September 30, 2002 is primarily due to increases in interest, depreciation and
general and administrative expenses partially offset by decreases in operating
and property tax expense and a loss on early extinguishment of debt recorded in
2001. Interest expense increased 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 due to capital
improvements completed during the past twelve months which are now being
depreciated. General and administrative expenses increased primarily due to
increased Partnership management fees earned by the Managing General Partner and
a new partner tax implemented in New Jersey. Included in general and
administrative expenses at both September 30, 2002 and 2001 are reimbursements
to the Managing General Partner allowed under the Partnership Agreement
associated with its management of the Partnership. Also included in general and
administrative expenses are costs associated with the quarterly and annual
communications with investors and regulatory agencies and the annual audit
required by the Partnership Agreement. Operating expense decreased primarily due
to decreases in damage expenses due to casualties at Landmark and Georgetown
Apartments in 2001 and reduced property expenses partially offset by insurance
proceeds received during 2002 for a casualty at Georgetown Apartments during
2001. Property expenses decreased due to decreased payroll and related benefit
expenses at Georgetown and Deer Creek Apartments and decreased utility expenses
at Deer Creek and Landmark Apartments partially offset by increased payroll and
related benefits at Landmark Apartments. Property tax expense decreased during
the three and nine month periods ended September 30, 2002 due to the reappraisal
of Deer Creek Apartments during 2001. The loss on early extinguishment of debt
during the nine months ended September 30, 2001 relates to the refinancing of
the mortgage encumbering Deer Creek in June 2001 as discussed in "Liquidity and
Capital Resources".
The increase in total revenues for the nine months ended September 30, 2002 is
due to an increase in rental and other income partially offset by a decrease in
casualty gain. The decrease in total revenues for the three months ended
September 30, 2002 is due to a decrease in rental income and a decrease in
casualty gain. The increase in rental income for the nine months ended September
30, 2002 is primarily due to an increase in average rental rates at Deer Creek
Apartments and decreased rental concessions and monthly resident discounts at
Landmark Apartments partially offset by a decrease in average rental rates at
Landmark Apartments. The decrease in rental income for the three months ended
September 30, 2002 is primarily due to decreased average rental rates at
Landmark Apartments. The increase in other income during the nine months ended
September 30, 2002 is primarily due to an increase in utility reimbursements at
Deer Creek Apartments and nonrefundable administrative fees at Deer Creek and
Landmark Apartments, partially offset by reduced interest income due to lower
average cash balances maintained in interest bearing accounts. The casualty gain
recognized in 2001 relates to casualties during 2001 at Georgetown and Landmark
Apartments.
During the nine months ended September 30, 2001, a 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.
During the nine months ended September 30, 2001, two casualty gains were
recorded at Landmark Apartments. One casualty gain related to a fire in January
2001. This gain was the result of insurance proceeds of approximately $22,000
less the net book value of the damaged property of approximately $2,000. The
other casualty gain related to a fire in March 2001. This gain was the result of
insurance proceeds of approximately $22,000 less the net book value of the
damaged property of approximately $2,000.
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 September 30, 2002, the Partnership had cash and cash equivalents of
approximately $645,000 compared to approximately $827,000 at September 30, 2001.
The increase in cash and cash equivalents of approximately $495,000 since
December 31, 2001 is due to approximately $1,966,000 of cash provided by
operating activities partially offset by approximately $981,000 of cash used in
financing activities and approximately $490,000 of cash used in investing
activities. 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 partially offset by advances from affiliates. Cash used in investing
activities consisted of property improvements and replacements and deposits to
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 $408,000 at September 30,
2001. These costs included $138,000 in fees paid to the Managing General Partner
during the year ended December 31, 2001. The Partnership recognized a loss on
the early extinguishment of debt of approximately $57,000 during the nine months
ended September 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. The Managing
General Partner monitors developments in the area of legal and regulatory
compliance and is studying new federal laws, including the Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance
measures with regard to governance, disclosure, audit and other areas. In light
of these changes, the Partnership expects that it will incur higher expenses
related to compliance, including increased legal and audit fees. Capital
improvements planned for each of the Partnership's properties are detailed
below.
Deer Creek
During the nine months ended September 30, 2002, the Partnership completed
approximately $213,000 of budgeted and non-budgeted improvements at Deer Creek
Apartments consisting primarily of clubhouse renovations, air conditioning unit
and floor covering replacements. These improvements were funded from operating
cash flow. For 2002, the Partnership has budgeted, but is not limited to,
capital improvements of approximately $131,000, 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 nine months ended September 30, 2002, the Partnership completed
approximately $41,000 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. For
2002, the Partnership has budgeted, but is not limited to, capital improvements
of approximately $67,000, 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 nine months ended September 30, 2002, the Partnership completed
approximately $171,000 of budgeted and non-budgeted improvements at Landmark
Apartments consisting primarily of swimming pool and plumbing upgrades and floor
covering replacements. These improvements were funded from operating cash flow
and replacement reserves. For 2002, the Partnership has budgeted, but is not
limited to, capital improvements of approximately $115,000, consisting primarily
of air conditioning unit, water heater, appliance 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 $24,603,000, net of discounts, has maturity dates
ranging from October 2003 to July 2021. The mortgage indebtedness encumbering
Deer Creek Apartments of approximately $13,385,000 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 $11,218,000, 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 nine months ended
September 30, 2002 and 2001 (in thousands, except per unit data):
Nine Months Per Limited Nine Months Per Limited
Ended Partnership Ended Partnership
September 30, 2002 Unit September 30, 2001 Unit
Operations $ 517 $ 5.13 $ 857 $ 8.50
Refinancing (1) -- -- 7,270 72.13
$ 517 $ 5.13 $8,127 $80.63
(1) Distributions from the refinancing of Deer Creek Apartments during 2001.
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 61,654 limited partnership units in
the Partnership representing 61.79% of the outstanding units at September 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. 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 61.79% 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 owes fiduciary duties to AIMCO as its sole stockholder. As a result, the
duties of the Managing General Partner, as managing general partner, to the
Partnership 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.
ITEM 3. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of the Managing
General Partner, who are the equivalent of the Partnership's principal executive
officer and principal financial officer, respectively, have, within 90 days of
the filing date of this quarterly report, evaluated the effectiveness of the
Partnership's disclosure controls and procedures (as defined in Exchange Act
Rules (13a-14(c) and (15d-14(c)) and have determined that such disclosure
controls and procedures are adequate. There have been no significant changes in
the Partnership's internal controls or in other factors that could significantly
affect the Partnership's internal controls since the date of evaluation. The
Partnership does not believe any significant deficiencies or material weaknesses
exist in the Partnership's internal controls. Accordingly, no corrective actions
have been taken.
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. On October 30, 2002, the court
entered an order extending the stay in effect through January 10, 2003.
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 September 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: November 14, 2002
CERTIFICATION
I, Patrick J. Foye, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Angeles Income
Properties Ltd. II;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/Patrick J. Foye
Patrick J. Foye
Executive Vice President of Angeles Realty
Corporation II, equivalent of the chief
executive officer of the Partnership
CERTIFICATION
I, Paul J. McAuliffe, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Angeles Income
Properties Ltd. II;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/Paul J. McAuliffe
Paul J. McAuliffe
Executive Vice President and Chief Financial
Officer of Angeles Realty Corporation II,
equivalent of the chief financial officer of
the Partnership
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
September 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: November 13, 2002
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: November 13, 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.