FORM 10-QSB.--QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period.........to......... Commission file number 0-11767 ANGELES INCOME PROPERTIES, LTD. II (Exact name of small business issuer as specified in its charter) California 95-3793526 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Insignia Financial Plaza Greenville, South Carolina 29602 (Address of principal executive offices) (Zip Code) Issuer's telephone number (864) 239-1000 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) ANGELES INCOME PROPERTIES, LTD. II CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except unit data) June 30, 1997 Assets Cash and cash equivalents: Unrestricted $ 2,282 Restricted--tenant security deposits 273 Accounts receivable, net of allowance for doubtful accounts of $59 170 Escrows for taxes 167 Restricted escrows 1,716 Other assets 742 Investment in, and advances of $46 to, Joint Venture 58 Investment properties: Land $ 2,197 Buildings and related personal property 33,097 35,294 Less accumulated depreciation (23,691) 11,603 $ 17,011 Liabilities and Partners' Deficit Liabilities Accounts payable $ 225 Tenant security deposits 273 Accrued taxes 218 Other liabilities 189 Mortgage notes payable 18,290 Partners' Deficit General partners $ (461) Limited partners (99,784 units outstanding) (1,723) (2,184) $ 17,011 See Accompanying Notes to Consolidated Financial Statements b) ANGELES INCOME PROPERTIES, LTD. II CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except unit data) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 Revenues: Rental income $ 1,789 $ 1,598 $ 3,382 $ 3,207 Other income 116 77 222 146 Total revenues 1,905 1,675 3,604 3,353 Expenses: Operating 461 470 908 922 General and administrative 50 77 119 165 Maintenance 225 221 408 393 Depreciation 445 438 888 871 Interest 369 393 734 789 Property taxes 137 147 277 280 Bad debt (recovery) expense, net (30) (19) (20) 19 Total expenses 1,657 1,727 3,314 3,439 Income (loss) before equity in income (loss) of Joint Venture and loss on disposal of property 248 (52) 290 (86) Equity in income (loss) of Joint Venture 26 11 11 (19) Loss on disposal of property (74) -- (111) -- Net income (loss) $ 200 $ (41) $ 190 $ (105) Net income (loss) allocated to general partners (1%) $ 2 $ -- $ 2 $ (1) Net income (loss) allocated to limited partners (99%) 198 (41) 188 (104) Net income (loss) $ 200 $ (41) $ 190 $ (105) Net income (loss) per limited partnership unit $ 1.98 $ (.41) $ 1.88 $ (1.04) <FN> See Accompanying Notes to Consolidated Financial Statements c) ANGELES INCOME PROPERTIES, LTD, II CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT (Unaudited) (in thousands, except unit data) Limited Partnership General Limited Units Partners Partners Total Original capital contributions 100,000 $ 1 $ 50,000 $ 50,001 Partners' deficit at December 31, 1996 99,784 $ (453) $ (921) $ (1,374) Partners' distributions -- (10) (990) (1,000) Net income for the six months ended June 30, 1997 -- 2 188 190 Partners' deficit at June 30, 1997 99,784 $ (461) $ (1,723) $ (2,184) <FN> See Accompanying Notes to Consolidated Financial Statements d) ANGELES INCOME PROPERTIES, LTD. II CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended June 30, 1997 1996 Cash flows from operating activities: Net income (loss) $ 190 $ (105) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Bad debt (recovery) expense, net (20) 19 Depreciation 888 871 Amortization of discounts, loan costs and lease commissions 49 58 Equity in (income) loss of Joint Venture (11) 19 Loss on disposal of property 111 -- Change in accounts: Restricted cash (14) (10) Accounts receivable 49 (30) Escrows for taxes (72) (147) Other assets (40) (19) Accounts payable (27) (53) Tenant security deposit liabilities 17 17 Accrued taxes 40 101 Other liabilities 18 39 Net cash provided by operating activities 1,178 760 Cash flows from investing activities: Property improvements and replacements (538) (204) Deposits to restricted escrows (346) (31) Withdrawals from restricted escrows 236 -- Advances to Joint Venture (3) (29) Net cash used in investing activities (651) (264) Cash flows from financing activities: Loan costs paid (10) (47) Payments on mortgage notes payable (90) (141) Distributions to partners (1,000) -- Net cash used in financing activities (1,100) (188) Net (decrease) increase in unrestricted cash and cash equivalents (573) 308 Unrestricted cash and cash equivalents at beginning of period 2,855 1,708 Unrestricted cash and cash equivalents at end of period $ 2,282 $ 2,016 Supplemental disclosure of cash flow information: Cash paid for interest $ 694 $ 739 <FN> See Accompanying Notes to Consolidated Financial Statements e) ANGELES INCOME PROPERTIES, LTD. II NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Angeles Realty Corporation II (the "Managing General Partner"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1997, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1997. For further information, refer to the financial statements and footnotes thereto included in Angeles Income Properties, Ltd. II's (the "Partnership" or the "Registrant") annual report on Form 10-KSB for the fiscal year ended December 31, 1996. Certain reclassifications have been made to the 1996 information to conform to the 1997 presentation. 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 payments to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following payments were made to the Managing General Partner and affiliates during the six month periods ended June 30, 1997 and 1996: 1997 1996 (in thousands) Property management fees (included in operating expenses) $167 $158 Reimbursement for services of affiliates (included in general and administrative expenses) 73 102 The Partnership insures its properties under a master policy through an agency and insurer unaffiliated with the Managing General Partner. An affiliate of the Managing General Partner acquired, in the acquisition of a business, certain financial obligations from an insurance agency which were later acquired by the agent who placed the current year's master policy. The current agent assumed the financial obligations to the affiliate of the Managing General Partner who receives payments on these obligations from the agent. The amount of the Partnership's insurance premiums accruing to the benefit of the affiliate of the Managing General Partner by virtue of the agent's obligations is not significant. Angeles Mortgage Investment Trust ("AMIT") currently holds a note receivable from the Princeton Meadows Golf Course Joint Venture ("Joint Venture") in the amount of $1,567,000, which is secured by the Joint Venture's sole investment property known as the Princeton Meadows Golf Course. Total interest expense on this financing was $98,000 and $101,000 for the six months ended June 30, 1997 and 1996, respectively. MAE GP Corporation ("MAE GP"), an affiliate of the Managing General Partner, owns 1,675,113 Class B Shares of AMIT. The terms of the Class B Shares provide that they are convertable, in whole or in part, into Class A Shares on the basis of 1 Class A Share for every 49 Class B Shares (however, in connection with the settlement agreement described in the following paragraph, MAE GP has agreed not to convert the Class B Shares so long as AMIT's option is outstanding). These Class B Shares entitle MAE GP to receive 1% of the distributions of net cash distributed by AMIT(however, in connection with the settlement agreement described in the following paragraph, MAE GP has agreed to waive it's right to receive dividends and distributions so long as AMIT's option is outstanding). These Class B Shares also entitle MAE GP to vote on the same basis as Class A Shares, providing MAE GP with approximately 39% of the total voting power of AMIT (unless and until converted to Class A Shares, in which case the percentage of the vote controlled represented by the shares held by MAE GP would approximate 1.3% of the vote). Between the date of acquisition of these shares (November 24, 1992) and March 31, 1995, MAE GP declined to vote these shares. Since that date, MAE GP voted its shares at the 1995 and 1996 annual meetings in connection with the election of trustees and other matters. MAE GP has not exerted and continues to decline to exert any management control over or participate in the management of AMIT. MAE GP may choose to vote these shares as it deems appropriate in the future. In addition, Liquidity Assistance L.L.C., an affiliate of the Managing General Partner and an affiliate of Insignia Financial Group, Inc. ("Insignia"), which provides property management and partnership administration services to the Partnership, owns 96,800 Class A Shares of AMIT at June 30, 1997. These Class A Shares represent approximately 2.2% of the total voting power of AMIT. As part of a settlement of certain disputes with AMIT, MAE GP granted to AMIT an option to acquire the Class B shares owned by it. This option can be exercised at the end of 10 years or when all loans made by AMIT to partnerships affiliated with MAE GP as of November 9, 1994 (which is the date of execution of a definitive Settlement Agreement) have been paid in full, but in no event prior to November 9, 1997. In connection with such settlement, AMIT delivered to MAE GP cash in the sum of $250,000 at closing (which occurred April 14, 1995) as payment for the option. If and when the option is exercised, AMIT will be required to remit to MAE GP an additional $94,000. Simultaneously with the execution of the option and as part of the settlement, MAE GP executed an irrevocable proxy in favor of AMIT, the result of which is that MAE GP is permitted to vote the Class B Shares on all matters except those involving transactions between AMIT and MAE GP affiliated borrowers or the election of any MAE GP affiliate as an officer or trustee of AMIT. On those matters, MAE GP is obligated to deliver to the AMIT trustees, in their capacity as trustees of AMIT, proxies with regard to the Class B Shares instructing such trustees to vote said Class B Shares in accordance with the vote of the majority of the Class A Shares voting to be determined without consideration of the votes of "Excess Class A Shares" (as defined in Section 6.13 of the Declaration of Trust of AMIT). On April 3, 1997, Insignia and AMIT entered into a non-binding agreement in principle contemplating, among other things, a business combination of AMIT and Insignia Properties Trust, an entity owned 98% by Insignia and its affiliates ("IPT"). On July 18, 1997, IPT, Insignia and MAE GP entered into a definitive merger agreement pursuant to which (subject to shareholder approval and certain other conditions, including the receipt by AMIT of a fairness opinion from its investment bankers) AMIT would be merged with and into IPT, with each Class A Share and Class B Share being converted into 1.625 and 0.0332 common shares of IPT, respectively. The foregoing exchange ratios are subject to adjustment to account for dividends paid by AMIT from January 1, 1997, through the closing date of the merger. It is anticipated that Insignia (and its affiliates) and MAE GP (and its affiliates) would own approximately 55% and 2.4%, respectively, of post-merger IPT when this transaction is consummated. The Partnership may make advances to the Joint Venture as deemed appropriate by the Managing General Partner. These advances do not bear interest and do not have stated terms of repayment. NOTE C - INVESTMENT IN JOINT VENTURE The Partnership owns a 14.4% interest in the Joint Venture. The Partnership accounts for its interest in the Joint Venture using the equity method of accounting. The balance sheet of the Joint Venture is summarized as follows: June 30, 1997 (in thousands) Assets Cash $ 232 Other assets 208 Investment property, net 1,894 Total $ 2,334 Liabilities and Partners' Capital Note payable to AMIT $ 1,567 Other liabilities 690 Partners' capital 77 Total $ 2,334 The statements of the operations of the Joint Venture are summarized as follows: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (in thousands) (in thousands) Revenues $ 545 $ 494 $ 741 $ 609 Costs and expenses (362) (416) (664) (740) Net income (loss) $ 183 $ 78 $ 77 $ (131) The Partnership realized equity income of $11,000 and equity loss of $19,000 in the Joint Venture for the six months ended June 30, 1997 and 1996, respectively. The Princeton Meadows Golf Course property had an underground fuel storage tank that was removed in 1992. This fuel storage tank caused contamination to the area. Management installed monitoring wells in the area where the tank was formerly buried. Some samples from these wells indicated lead and phosphorus readings that were higher than the range prescribed by the New Jersey Department of Environmental Protection ("DEP"). The Joint Venture notified DEP of the findings when they were first discovered. However, DEP did not give any directives as to corrective action until late 1995. In November 1995, representatives of the Joint Venture and the New Jersey DEP met and developed a plan of action to clean-up the contamination site at Princeton Meadows Golf Course. The Joint Venture has engaged an engineering firm to conduct consulting and compliance work and a second firm to perform the field work necessary for the clean-up. The Joint Venture has recorded a liability of $199,000 for the costs of the clean-up. The contracts have been executed and field work has been partially completed, with the expected completion date of the field work to be sometime in late 1997. The Managing General Partner anticipates that the compliance requirements will be satisfied by June 1998. NOTE D - REFINANCINGS On November 1, 1996, the Partnership refinanced the mortgages encumbering Deer Creek Apartments and Landmark Apartments. As a result of the refinance, the Partnership incurred a $173,000 loss on refinancing due to the write-off of unamortized loan costs and prepayment penalties incurred. The new mortgage indebtedness of $6,300,000 for Deer Creek Apartments and $6,600,000 for Landmark Apartments carries a stated interest rate of 7.33% and a maturity date of November 2003. The previous mortgage indebtedness carried stated interest rates of 9.13% and 9.75%. This refinancing was necessary due to the maturity of the mortgage secured by Deer Creek Apartments in July 1996. Landmark Apartments was refinanced to obtain a lower interest rate and to provide funds needed to help close the Deer Creek Apartments refinancing. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The Partnership's investment properties consist of three apartment complexes and one commercial property. The following table sets forth the average occupancy of the properties for the six months ended June 30, 1997 and June 30, 1996: Average Occupancy Property 1997 1996 Atlanta Crossing Shopping Center Montgomery, Alabama (1) 90% 91% Deer Creek Apartments Plainsboro, New Jersey 96% 95% Georgetown Apartments South Bend, Indiana 98% 97% Landmark Apartments Raleigh, North Carolina (2) 91% 93% (1)The Managing General Partner is in discussions with several prospective tenants and is hopeful that occupancy will improve at this property. (2)Occupancy at Landmark Apartments is down due to college students that have moved out for the summer. Occupancy should improve in the 3rd and 4th quarter of 1997 as students return to college. The Partnership's net income for the six months ended June 30, 1997, was approximately $190,000 versus a net loss of approximately $105,000 for the six months ended June 30, 1996. For the three months ended June 30, 1997, the Partnership reported net income of approximately $200,000, versus a net loss of approximately $41,000 for the corresponding period of 1996. Net income for the three and six month periods ended June 30, 1997, increased compared to the same periods in 1996 as a result of increases in total revenues and decreases in expenses, partially offset by a loss recognized on disposal of property during 1997. Rental revenue increased primarily due to an increase in rental rates at all the investment properties. Other income increased due to increased interest income. During the first quarter of 1997, the Partnership invested in instruments that yield a higher rate of return on the Partnership's cash reserves. Also, as a result of the refinance of the mortgages encumbering Deer Creek Apartments and Landmark Apartments in the second half of 1996, there was an increase in capital reserve balances, leading to increased interest income. General and administrative expenses decreased due to a decrease in reimbursements for services of affiliates. The decrease in interest expense is a result of lower interest rates obtained by the refinancing of the mortgages encumbering Deer Creek Apartments and Landmark Apartments. The Managing General Partner has recovered a net amount of $20,000, during the six months ended June 30, 1997, of past due amounts that had been previously reserved from tenants of Atlanta Crossing Shopping Center. The Partnership has a 14.4% investment in the Princeton Meadows Golf Course Joint Venture. For the six months ended June 30, 1997, the Partnership realized equity in income of the Joint Venture of $11,000 compared to a $19,000 loss for the six months ended June 30, 1996. The improved performance at Princeton Meadows Golf Course in 1997 can be attributed to an increase in revenues. These revenue increases are the result of maintenance upgrades at the golf course that have improved the appearance of the property. The completion of these upgrades in 1996 led to a decrease in expenses for the six months ended June 30, 1997. For the six months ended June 30, 1997, the Partnership recognized a loss on disposal of property of $111,000. This loss resulted from the write-off of roofs at Deer Creek Apartments that were not fully depreciated at the time of replacement. The roof replacement is still in process at June 30, 1997. Included in maintenance expense for the six months ended June 30, 1997, is $80,000 of major repairs and maintenance mainly comprised of exterior building improvements, major landscaping, exterior painting and parking lot repairs. Included in maintenance expense for the six months ended June 30, 1996, is $69,000 of major repairs and maintenance mainly comprised of major landscaping and exterior building improvements. 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. At June 30, 1997, the Partnership had unrestricted cash and cash equivalents of approximately $2,282,000 versus approximately $2,016,000 at June 30, 1996. Net cash provided by operating activities increased primarily due to an increase in net income, as discussed above. Net cash used in investing activities increased due to an increase in property improvements and replacements and deposits to restricted escrows, as required by the new mortgage indebtedness secured by Landmark Apartments and Deer Creek Apartments. Partially offsetting the increase in deposits to restricted escrows was an increase in withdrawals from restricted escrows. Net cash used in financing activities increased due to a $1,000,000 distribution paid in April 1997. Additionally, loan costs paid in 1997 relate to the 1996 refinance of Deer Creek Apartments and Landmark Apartments. As a result of the refinance, the monthly debt service payments were reduced causing a reduction in the payments applied to the mortgage note balances. 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 properties to adequately maintain the physical assets and other operating needs of the Partnership. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. The Partnership has mortgage notes payable totaling approximately $18,290,000. The first mortgages secured by Deer Creek Apartments and Landmark Apartments mature in November 2003. The remaining debt, which is secured by Georgetown Apartments, matures in October 2003. The Partnership's primary source of cash is from the operations of its properties and from financing placed on such properties. Cash from these sources is utilized for property operations, capital improvements, and/or repayment of debt. 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 investment properties to adequately maintain the physical assets and other operating needs of the Partnership. As mentioned previously, cash distributions of $1,000,000 were paid in April 1997. Future cash distributions will depend on the levels of net cash generated from operations, refinancings and property sales. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. b) Reports on Form 8-K: None filed during the three months ended June 30, 1997. 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/ Carroll D. Vinson Carroll D. Vinson President By: /s/ Robert D. Long, Jr. Robert D. Long, Jr. Vice President/CAO Date: August 11, 1997