UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO 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 Registrant 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, 2003
Assets
Cash and cash equivalents $ 357
Receivables and deposits 425
Restricted escrow 14
Other assets 690
Investment properties:
Land $ 1,984
Buildings and related personal property 33,699
35,683
Less accumulated depreciation (29,187) 6,496
$ 7,982
Liabilities and Partners' Deficit
Liabilities
Tenant security deposit liabilities $ 249
Accrued property taxes 213
Other liabilities 251
Due to affiliates (Note B) 119
Mortgage notes payable 25,246
Partners' Deficit
General partners $ (619)
Limited partners (99,804 units issued and
outstanding) (17,477) (18,096)
$ 7,982
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,
2003 2002 2003 2002
Revenues:
Rental income $ 1,600 $ 1,667 $ 4,659 $ 5,096
Other income 135 128 347 399
Total revenues 1,735 1,795 5,006 5,495
Expenses:
Operating 569 578 1,652 1,667
General and administrative 88 309 267 496
Depreciation 205 467 1,162 1,436
Interest 401 509 1,334 1,489
Property taxes 142 165 516 502
Loss on early extinguishment of debt
(Note C) -- -- 58 --
Total expenses 1,405 2,028 4,989 5,590
Net income (loss) $ 330 $ (233) $ 17 $ (95)
Net income (loss) allocated to general
partners (1%) $ 3 $ (2) $ -- $ (1)
Net income (loss) allocated to limited
partners (99%) 327 (231) 17 (94)
$ 330 $ (233) $ 17 $ (95)
Net income (loss) per limited partnership
unit $ 3.28 $ (2.31) $ 0.17 $ (0.94)
Distributions per limited partnership unit $ 3.85 $ 3.23 $ 18.15 $ 5.13
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, 2002 99,784 $ (601) $(15,683) $(16,284)
Distributions to partners -- (18) (1,811) (1,829)
Units recorded as abandoned
in error (Note D) 20 -- -- --
Net income for the nine months
ended September 30, 2003 -- -- 17 17
Partners' deficit at
September 30, 2003 99,804 $ (619) $(17,477) $(18,096)
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,
2003 2002
Cash flows from operating activities:
Net income (loss) $ 17 $ (95)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 1,162 1,436
Amortization of mortgage discounts and loan costs 56 92
Loss on early extinguishment of debt 58 --
Change in accounts:
Receivables and deposits (116) 40
Other assets (56) (46)
Accounts payable (53) (15)
Tenant security deposit liabilities 13 (12)
Accrued property taxes 70 135
Due to affiliates 14 104
Other liabilities (13) 327
Net cash provided by operating activities 1,152 1,966
Cash flows from investing activities:
Property improvements and replacements (313) (484)
Net withdrawals from (deposits to) restricted escrows 134 (6)
Net cash used in investing activities (179) (490)
Cash flows from financing activities:
Payments on mortgage notes payable (412) (383)
Distributions to partners (1,829) (517)
Proceeds from mortgage note payable 6,175 --
Repayment of mortgage notes payable (5,017) --
Advances from affiliates -- 65
Repayment of advances from affiliates -- (112)
Loan costs paid (174) (34)
Prepayment penalty paid (28) --
Net cash used in financing activities (1,285) (981)
Net (decrease) increase in cash and cash equivalents (312) 495
Cash and cash equivalents at beginning of period 669 150
Cash and cash equivalents at end of period $ 357 $ 645
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,296 $ 1,395
At December 31, 2001, approximately $59,000 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.
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, 2003 are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31, 2003.
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, 2002.
Effective April 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64" which requires that 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 reflect the loss on early
extinguishment of debt at Georgetown 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.
Affiliates of the Managing General Partner are entitled to receive 5% of gross
receipts from all of the Partnership's properties as compensation for providing
property management services. The Partnership paid to such affiliates
approximately $247,000 and $278,000 for the nine months ended September 30, 2003
and 2002, respectively, which is included in operating expenses.
Affiliates of the Managing General Partner received reimbursement of accountable
administrative expenses amounting to approximately $127,000 and $164,000 for the
nine months ended September 30, 2003 and 2002, respectively, which are 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 $13,000 and
$18,000 for the nine months ended September 30, 2003 and 2002, 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. The
Managing General Partner earned fees of approximately $39,000 and $106,000 for
the nine months ended September 30, 2003 and 2002, respectively, which is
included in general and administrative expenses. At September 30, 2003 the
balance due to the Managing General Partner is approximately $119,000, which is
included in Due to affiliates on the accompanying consolidated balance sheet.
In accordance with the Partnership Agreement, during 2001 and 2002 the Managing
General Partner loaned the Partnership funds for operating expenses at Deer
Creek Apartments and Landmark Apartments. During the nine months ended September
30, 2002 these loans were 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. There were no loans from the Managing
General Partner or associated interest expense during the nine months ended
September 30, 2003.
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. The right to receive payment for this amount is subordinate to
the right of the limited partners to receive 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.
The Partnership paid an affiliate of the Managing General Partner approximately
$62,000 for loan costs related to the refinancing of Georgetown Apartments
during the nine months ended September 30, 2003. These costs were capitalized
and are included in other assets on the accompanying consolidated balance sheet.
The Partnership insures 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, 2003 and
2002, the Partnership was charged by AIMCO and its affiliates approximately
$86,000 and $104,000, respectively, for insurance coverage and fees associated
with policy claims administration.
Note C - Refinancing of Mortgage Notes Payable
On May 21, 2003, the Partnership refinanced the mortgages encumbering Georgetown
Apartments. The refinancing replaced the existing mortgages of approximately
$5,017,000 with a new mortgage in the amount of $6,175,000. Total capitalized
loan costs were approximately $174,000 during the nine months ended September
30, 2003. These costs included approximately $62,000 in fees payable to the
Managing General Partner. The Partnership recognized a loss on the early
extinguishment of debt of approximately $58,000 during the nine months ended
September 30, 2003, due to the write off of unamortized loan costs and debt
discounts and the payment of a prepayment penalty.
These loans were initially refinanced under an interim credit facility ("Interim
Credit Facility") that also provided for the refinancing of properties in other
Partnerships that are affiliated with the Partnership. However, the Interim
Credit Facility created separate loans for each property refinanced thereunder,
which loans were not cross-collateralized or cross-defaulted with each other.
During the term of the Interim Credit Facility, Georgetown Apartments was
required to make monthly interest-only payments. The first month's interest rate
for Georgetown Apartments was 2.78%.
As of June 1, 2003, the loan on Georgetown Apartments was assumed by a different
lender. The credit facility ("Permanent Credit Facility") with the new lender
has a maturity of five years with an option for the Partnership to elect one
five-year extension. This Permanent Credit Facility creates separate loans for
each property refinanced thereunder, which loans are not cross-collateralized or
cross-defaulted with each other. Each note under this Permanent Credit Facility
begins as a variable rate loan, and provides the option, after three years, of
converting to a fixed rate loan. The interest rate on the variable rate loans is
the Fannie Mae discounted mortgage-backed security index plus 85 basis points
(1.91% at October 1, 2003), and resets monthly. Each loan automatically renews
at the end of each month. In addition, monthly principal payments are required
based on a 30-year amortization schedule, using the interest rate in effect
during the first month that the property is financed by the Permanent Credit
Facility. The loans are prepayable without penalty.
Note D - Units Abandoned in Error
During the nine months ended September 30, 2003, the Partnership discovered that
twenty limited partnership Units that had previously been reported as abandoned
were actually not abandoned. The Units were reinstated as of January 1, 2003 and
back distributions of approximately $4,000 were paid to the unitholder during
the nine months ended September 30, 2003.
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
purported to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) that 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 that 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 sought monetary
damages and equitable relief, including judicial dissolution of the Partnership.
In addition, 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 Heller action was brought as a
purported derivative action, and asserted claims for, among other things, breach
of fiduciary duty, unfair competition, conversion, unjust enrichment, and
judicial dissolution.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action.
In general terms, the proposed settlement provides for certification for
settlement purposes of a settlement class consisting of all limited partners in
this Partnership and others (the "Partnerships") as of December 20, 2002, the
dismissal with prejudice and release of claims in the Nuanes and Heller
litigation, payment by AIMCO of $9.9 million (which shall be distributed to
settlement class members after deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent appraisals of the Partnerships' properties by a Court appointed
appraiser. An affiliate of the Managing General Partner has also agreed to make
at least one round of tender offers to purchase all of the partnership interests
in the Partnerships within one year of final approval, if it is granted, and to
provide partners with the independent appraisals at the time of these tenders.
The proposed settlement also provided for the limitation of the allowable costs
which the Managing General Partner or its affiliates will charge the
Partnerships in connection with this litigation and imposes limits on the class
counsel fees and costs in this litigation. On April 11, 2003, notice was
distributed to limited partners providing the details of the proposed
settlement.
On June 13, 2003, the Court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions. On August 12, 2003, an objector
filed an appeal seeking to vacate and/or reverse the order approving the
settlement and entering judgment thereto. The Managing General Partner intends
to file a respondent's brief in support of the order approving settlement and
entering judgment thereto.
The Managing General Partner does not anticipate that any costs to the
Partnership, whether legal or settlement costs, associated with these cases will
be material to the Partnership's overall operations.
On August 8, 2003 AIMCO Properties L.P., an affiliate of the Managing General
Partner, was served with a Complaint in the United States District Court,
District of Columbia alleging that AIMCO Properties L.P. willfully violated the
Fair Labor Standards Act (FLSA) by failing to pay maintenance workers overtime
for all hours worked in excess of forty per week. The Complaint is styled as a
Collective Action under the FLSA and seeks to certify state subclasses in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. failed to compensate maintenance workers for
time that they were required to be "on-call". Additionally, the Complaint
alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating
maintenance workers for time that they worked in responding to a call while
"on-call". The Complaint also attempts to certify a subclass for salaried
service directors who are challenging their classification as exempt from the
overtime provisions of the FLSA. AIMCO Properties L.P. has filed an answer to
the Complaint denying the substantive allegations. Although the outcome of any
litigation is uncertain, in the opinion of the Managing General Partner the
claims will not result in any material liability to the Partnership.
The Partnership is unaware of any other pending or outstanding litigation
matters involving it or its investment properties that are not of a routine
nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this report contain certain forward-looking statements,
including, without limitation, statements regarding future financial performance
and the effect of government regulations. Actual results may differ materially
from those described in the forward-looking statements and will be affected by a
variety of risks and factors including, without limitation: national and local
economic conditions; the terms of governmental regulations that affect the
Registrant and interpretations of those regulations; the competitive environment
in which the Registrant operates; financing risks, including the risk that cash
flows from operations may be insufficient to meet required payments of principal
and interest; real estate risks, including variations of real estate values and
the general economic climate in local markets and competition for tenants in
such markets; litigation, including costs associated with prosecuting and
defending claims and any adverse outcomes, and possible environmental
liabilities. Readers should carefully review the Registrant's financial
statements and the notes thereto, as well as the risk factors described in the
documents the Registrant files from time to time with the Securities and
Exchange Commission.
The Partnership's investment properties consist of three apartment complexes.
The following table sets forth the average occupancy of the properties for the
nine months ended September 30, 2003 and 2002:
Average Occupancy
Property 2003 2002
Deer Creek Apartments 95% 96%
Plainsboro, New Jersey
Georgetown Apartments 95% 96%
South Bend, Indiana
Landmark Apartments 86% 91%
Raleigh, North Carolina
The Managing General Partner attributes the decrease in occupancy at Landmark
Apartments to the slowdown in the economy and lower home mortgage interest rates
in the Raleigh area.
Results of Operations
The Partnership's net income for the three and nine months ended September 30,
2003 was approximately $330,000 and $17,000, respectively, compared to net loss
of approximately $233,000 and $95,000, respectively, for the three and nine
months ended September 30, 2002. The increase in net income is due to a decrease
in total expenses, partially offset by a decrease in total revenues. The
decrease in total revenues for the nine months ended September 30, 2003 is due
to a decrease in both rental and other income. The decrease in total revenues
for the three months ended September 30, 2003 is due to a decrease in rental
income. Other income remained relatively constant for the three months ended
September 30, 2003. The decrease in rental income for both periods is due to
decreases in occupancy and average rental rates, and increases in concessions
and bad debt expense at all of the Partnership's properties. Other income
decreased for the nine months ended September 30, 2003 primarily due to
decreases in utility reimbursements and lease cancellation fees at Deer Creek
Apartments.
The decrease in total expenses for both the three and nine months ended
September 30, 2003 is due to decreases in depreciation, interest and general and
administrative expenses. The decrease in total expenses for the nine months
ended September 30, 2003 was partially offset by an increase in loss on early
extinguishment of debt. Depreciation expense decreased for both periods due to
buildings and property improvements and replacements placed into service in
prior years becoming fully depreciated during the nine months ended September
30, 2003. Interest expense decreased due to principal payments made on the
mortgages encumbering the Partnership's properties, which reduced the debt
balance, and the refinancing of the mortgages encumbering Georgetown Apartments
in May 2003 at a lower interest rate. The loss on early extinguishment of debt
recognized during the nine months ended September 30, 2003 is a result of the
refinancing of the mortgages encumbering Georgetown Apartments in May 2003 as
discussed in "Liquidity and Capital Resources".
General and administrative expenses decreased for both the nine months ended
September 30, 2003 primarily due to decreases in management reimbursements paid
to the Managing General Partner as allowed under the Partnership Agreement, the
management fee due to the Managing General partner based on cash flow as allowed
in the Partnership Agreement, and the Partnership tax paid to the state of New
Jersey. Also included in general and administrative expenses for the three and
nine months ended September 30, 2003 and 2002 are cost associated with the
quarterly and annual communications with investors and regulatory agencies and
the annual audit required by the Partnership Agreement.
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, the
Managing General Partner may use rental concessions and rental rate reductions
to offset softening market conditions, accordingly, there is no guarantee that
the Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At September 30, 2003, the Partnership had cash and cash equivalents of
approximately $357,000 compared to approximately $645,000 at September 30, 2002.
The decrease in cash and cash equivalents of approximately $312,000, from
December 31, 2002, is due to approximately $1,285,000 of cash used in financing
activities and approximately $179,000 of cash used in investing activities,
partially offset by approximately $1,152,000 of cash provided by operating
activities. Cash used in financing activities consisted of distributions to the
partners, payments of principal made on the mortgages encumbering the
Partnership's properties, repayment of mortgage notes payable due to the
refinancing of the mortgages encumbering Georgetown Apartments and loan costs
and prepayment penalties paid, partially offset by proceeds received from the
refinancing of the mortgage encumbering Georgetown Apartments. Cash used in
investing activities consisted of property improvements and replacements,
partially offset by net receipts from restricted escrow accounts maintained by
the mortgage lenders. The Partnership invests its working capital reserves in
interest bearing accounts.
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 Apartments
During the nine months ended September 30, 2003, the Partnership completed
approximately $194,000 of capital improvements at Deer Creek Apartments,
consisting primarily of water heater upgrades, structural improvements, and
floor covering replacement. These improvements were funded from the property's
operating cash flow. The Partnership evaluates the capital improvement needs of
the property during the year and currently expects to complete an additional
$9,000 in capital improvements during the remainder of 2003. The additional
capital improvements will consist primarily of floor covering replacement.
Additional capital improvements may be considered and will depend on the
physical condition of the property as well as the anticipated cash flow
generated by the property.
Georgetown Apartments
During the nine months ended September 30, 2003, the Partnership completed
approximately $29,000 of capital improvements at Georgetown Apartments,
consisting primarily of plumbing upgrades, and floor covering and window
replacements. These improvements were funded from replacement reserves and
operating cash flow. The Partnership evaluates the capital improvement needs of
the property during the year and currently expects to complete an additional
$40,000 in capital improvements during the remainder of 2003. The additional
capital improvements will consist primarily of appliance and floor covering
replacements, parking lot upgrades and other building improvements. Additional
capital improvements may be considered and will depend on the physical condition
of the property as well as the anticipated cash flow generated by the property.
Landmark Apartments
During the nine months ended September 30, 2003, the Partnership completed
approximately $90,000 of capital improvements at Landmark Apartments, consisting
primarily of floor covering replacement. These improvements were funded from the
property's operating cash flow and replacement reserves. The Partnership
evaluates the capital improvement needs of the property during the year and
currently expects to complete an additional $13,000 in capital improvements
during the remainder of 2003. The additional capital improvements will consist
primarily of floor covering replacement. Additional capital improvements may be
considered and will depend on the physical condition of the property as well as
the anticipated cash flow generated by the property and replacement reserves.
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.
On May 21, 2003, the Partnership refinanced the mortgages encumbering Georgetown
Apartments. The refinancing replaced the existing mortgages of approximately
$5,017,000 with a new mortgage in the amount of $6,175,000. Total capitalized
loan costs were approximately $174,000 during the nine months ended September
30, 2003. These costs included approximately $62,000 in fees payable to the
Managing General Partner. The Partnership recognized a loss on the early
extinguishment of debt of approximately $58,000 during the nine months ended
September 30, 2003, due to the write off of unamortized loan costs and debt
discounts and the payment of a prepayment penalty.
These loans were initially refinanced under an interim credit facility ("Interim
Credit Facility") that also provided for the refinancing of properties in other
Partnerships that are affiliated with the Partnership. However, the Interim
Credit Facility created separate loans for each property refinanced thereunder,
which loans were not cross-collateralized or cross-defaulted with each other.
During the term of the Interim Credit Facility, Georgetown Apartments was
required to make monthly interest-only payments. The first month's interest rate
for Georgetown Apartments was 2.78%.
As of June 1, 2003, the loan on Georgetown Apartments was assumed by a different
lender. The credit facility ("Permanent Credit Facility") with the new lender
has a maturity of five years with an option for the Partnership to elect one
five-year extension. This Permanent Credit Facility creates separate loans for
each property refinanced thereunder, which loans are not cross-collateralized or
cross-defaulted with each other. Each note under this Permanent Credit Facility
begins as a variable rate loan, and provides the option, after three years, of
converting to a fixed rate loan. The interest rate on the variable rate loans is
the Fannie Mae discounted mortgage-backed security index plus 85 basis points
(1.91% at October 1, 2003), and resets monthly. Each loan automatically renews
at the end of each month. In addition, monthly principal payments are required
based on a 30-year amortization schedule, using the interest rate in effect
during the first month that the property is financed by the Permanent Credit
Facility. The loans are prepayable without penalty.
The Partnership's assets are thought to be sufficient for any near-term needs
(exclusive of capital improvements) of the Partnership. The mortgage
indebtedness encumbering Deer Creek Apartments of approximately $13,046,000 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 Landmark
Apartments of approximately $6,063,000 is amortized over 30 years with a balloon
payment of approximately $6,054,000 due in November 2003. The Partnership is in
the process of refinancing the mortgage encumbering Landmark Apartments. The
mortgage indebtedness encumbering Georgetown Apartments of approximately
$6,137,000 that was refinanced during the nine months ended September 30, 2003,
has a balloon payment due in September 2007. The Managing General Partner has
the option to extend the maturity date for five additional years. The Managing
General Partner intends to refinance the mortgages encumbering Landmark
Apartments and Georgetown Apartments and/or sell the properties prior to their
maturity dates. If the properties cannot be refinanced or sold for a sufficient
amount, the Partnership will risk losing the properties through foreclosure.
The Partnership distributed the following amounts during the nine months ended
September 30, 2003 and 2002 (in thousands, except per unit data):
Nine Months Per Limited Nine Months Per Limited
Ended Partnership Ended Partnership
September 30, 2003 Unit September 30, 2002 Unit
Operations $ 797 $ 7.91 $ 517 $ 5.13
Refinance (1) 1,032 10.24 -- --
Total $1,829 $18.15 $ 517 $ 5.13
(1) From proceeds from the refinancing of the mortgages encumbering Georgetown
Apartments during May 2003.
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 2003 or subsequent periods.
Other
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 61,754 limited partnership units
(the "Units") in the Partnership representing 61.88% of the outstanding Units at
September 30, 2003. 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 in exchange for cash or a combination
of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO,
either through private purchases or tender offers. Pursuant to the Partnership
Agreement, unitholders holding a majority of the Units are entitled to take
action with respect to a variety of matters that include, but are not limited
to, voting on certain amendments to the Partnership Agreement and voting to
remove the Managing General Partner. As a result of its ownership of 61.88% of
the outstanding units, AIMCO and its affiliates are in a position to control all
voting decisions with respect to the Partnership. 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, but are not limited
to, 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 impairment of 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 and
the Partnership fully reserves all balances outstanding over thirty days. The
Partnership will offer rental concessions during particularly slow months or in
response to heavy competition from other similar complexes in the area. Any
concessions given at the inception of the lease are amortized over the life of
the lease.
ITEM 3. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Partnership's management, with the
participation of the principal executive officer and principal financial officer
of the Managing General Partner, who are the equivalent of the Partnership's
principal executive officer and principal financial officer, respectively, has
evaluated the effectiveness of the Partnership's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report. Based on such evaluation, the principal
executive officer and principal financial officer of the Managing General
Partner, who are the equivalent of the Partnership's principal executive officer
and principal financial officer, respectively, have concluded that, as of the
end of such period, the Partnership's disclosure controls and procedures are
effective.
(b) Internal Control Over Financial Reporting. There have not been any changes
in the Partnership's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Partnership's internal control
over financial reporting.
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
purported to assert claims on behalf of a class of limited partners and
derivatively on behalf of a number of limited partnerships (including the
Partnership) that 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 that 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 sought monetary
damages and equitable relief, including judicial dissolution of the Partnership.
In addition, 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 Heller action was brought as a
purported derivative action, and asserted claims for, among other things, breach
of fiduciary duty, unfair competition, conversion, unjust enrichment, and
judicial dissolution.
On January 8, 2003, the parties filed a Stipulation of Settlement in proposed
settlement of the Nuanes action and the Heller action.
In general terms, the proposed settlement provides for certification for
settlement purposes of a settlement class consisting of all limited partners in
this Partnership and others (the "Partnerships") as of December 20, 2002, the
dismissal with prejudice and release of claims in the Nuanes and Heller
litigation, payment by AIMCO of $9.9 million (which shall be distributed to
settlement class members after deduction of attorney fees and costs of class
counsel and certain costs of settlement) and up to $1 million toward the cost of
independent appraisals of the Partnerships' properties by a Court appointed
appraiser. An affiliate of the Managing General Partner has also agreed to make
at least one round of tender offers to purchase all of the partnership interests
in the Partnerships within one year of final approval, if it is granted, and to
provide partners with the independent appraisals at the time of these tenders.
The proposed settlement also provided for the limitation of the allowable costs
which the Managing General Partner or its affiliates will charge the
Partnerships in connection with this litigation and imposes limits on the class
counsel fees and costs in this litigation. On April 11, 2003, notice was
distributed to limited partners providing the details of the proposed
settlement.
On June 13, 2003, the Court granted final approval of the settlement and entered
judgment in both the Nuanes and Heller actions. On August 12, 2003, an objector
filed an appeal seeking to vacate and/or reverse the order approving the
settlement and entering judgment thereto. The Managing General Partner intends
to file a respondent's brief in support of the order approving settlement and
entering judgment thereto.
The Managing General Partner does not anticipate that any costs to the
Partnership, whether legal or settlement costs, associated with these cases will
be material to the Partnership's overall operations.
On August 8, 2003 AIMCO Properties L.P., an affiliate of the Managing General
Partner, was served with a Complaint in the United States District Court,
District of Columbia alleging that AIMCO Properties L.P. willfully violated the
Fair Labor Standards Act (FLSA) by failing to pay maintenance workers overtime
for all hours worked in excess of forty per week. The Complaint is styled as a
Collective Action under the FLSA and seeks to certify state subclasses in
California, Maryland, and the District of Columbia. Specifically, the plaintiffs
contend that AIMCO Properties L.P. failed to compensate maintenance workers for
time that they were required to be "on-call". Additionally, the Complaint
alleges AIMCO Properties L.P. failed to comply with the FLSA in compensating
maintenance workers for time that they worked in responding to a call while
"on-call". The Complaint also attempts to certify a subclass for salaried
service directors who are challenging their classification as exempt from the
overtime provisions of the FLSA. AIMCO Properties L.P. has filed an answer to
the Complaint denying the substantive allegations. Although the outcome of any
litigation is uncertain, in the opinion of the Managing General Partner the
claims will not result in any material liability to the Partnership.
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 10.20(e), Sixth Reaffirmation and Joinder Agreement
dated May 16, 2003 between Georgetown AIP II, L.P., GMAC
Commercial Mortgage Corporate, and Fannie Mae, a federally
chartered and stockholder owned corporation.
Exhibit 31.1, Certification of equivalent of Chief Executive
Officer pursuant to Securities Exchange Act Rules
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2, Certification of equivalent of Chief Financial
Officer pursuant to Securities Exchange Act Rules
13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1, Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b) Reports on Form 8-K:
None filed during the quarter ended September 30, 2003.
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/Paul J. McAuliffe
Paul J. McAuliffe
Executive Vice President
and Chief Financial Officer
Date: November 12, 2003
Exhibit 31.1
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 report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 12, 2003
/s/Patrick J. Foye
Patrick J. Foye
Executive Vice President of Angeles Realty
Corporation II, equivalent of the chief executive
officer of the Partnership
Exhibit 31.2
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 report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 12, 2003
/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 32.1
Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-QSB of Angeles Income
Properties, Ltd. II (the "Partnership"), for the quarterly period ended
September 30, 2003 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 12, 2003
/s/Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: November 12, 2003
This certification is furnished with this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Partnership for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.