FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Quarterly or Transitional Report
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from________to________
Commission file number 0-19243
UNITED INVESTORS INCOME PROPERTIES II
(Exact name of small business issuer as specified in its charter)
Missouri 43-1542903
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
UNITED INVESTORS INCOME PROPERTIES II
BALANCE SHEET
(Unaudited)
September 30, 1998
(in thousands, except unit data)
Assets
Cash and cash equivalents $ 813
Other assets 17
Investment in joint ventures (Notes B, D and E) 2,139
Investment properties:
Land $ 432
Buildings and related personal property 3,685
4,117
Less accumulated depreciation (723) 3,394
$6,363
Liabilities and Partners' Capital (Deficit)
Liabilities
Accrued liabilities $ 19
Partners' Capital (Deficit)
General partner's $ (4)
Limited partners' (32,601 units
issued and outstanding) 6,348 6,344
$6,363
See Accompanying Notes to Financial Statements
b)
UNITED INVESTORS INCOME PROPERTIES II
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
evenues:
Rental income $ 127 $ 116 $ 382 $ 347
Other income 8 8 24 23
Total revenues 135 124 406 370
Expenses:
Operating 5 2 27 8
General and administrative 16 21 51 55
Depreciation 27 27 83 79
Total expenses 48 50 161 142
Equity in net income
of joint ventures 41 35 109 110
Net income $ 128 $ 109 $ 354 $ 338
Net income allocated to
general partner (1%) $ 1 $ 1 $ 4 $ 3
Net income allocated to
limited partners (99%) 127 108 350 335
$ 128 $ 109 $ 354 $ 338
Net income per limited
partnership unit $ 3.90 $ 3.31 $10.74 $10.28
Distributions per limited
partnership unit $ 4.32 $ 4.28 $12.88 $13.00
See Accompanying Notes to Financial Statements
c)
UNITED INVESTORS INCOME PROPERTIES II
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner's Partners' Total
Original capital contributions 32,601 $ -- $8,150 $8,150
Partners' (deficit) capital
at December 31, 1997 32,601 $ (4) $6,418 $6,414
Partners' distributions -- (4) (420) (424)
Net income for the nine months
ended September 30, 1998 -- 4 350 354
Partners' (deficit) capital
at September 30, 1998 32,601 $ (4) $6,348 $6,344
See Accompanying Notes to Financial Statements
d)
UNITED INVESTORS INCOME PROPERTIES II
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net income $ 354 $ 338
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in net income of joint ventures (109) (110)
Depreciation 83 79
Change in accounts:
Receivables and deposits -- 2
Other assets (14) 7
Accrued liabilities (4) 12
Net cash provided by operating activities 310 328
Cash flows from investing activities:
Distributions from joint ventures 93 212
Net cash provided by investing activities 93 212
Cash flows from financing activities:
Partners' distributions (424) (428)
Net cash used in financing activities (424) (428)
Net (decrease) increase in cash and cash equivalents (21) 112
Cash and cash equivalents at beginning of period 834 699
Cash and cash equivalents at end of period $ 813 $ 811
See Accompanying Notes to Financial Statements
e)
UNITED INVESTORS INCOME PROPERTIES II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited financial statements of United Investors Income
Properties II (the "Partnership"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of United Investors Real Estate, Inc. (the "General Partner"), a
Delaware corporation, a wholly-owned subsidiary of Insignia Properties Trust
("IPT") (see "Note F"), 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, 1998,
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998. For further information, refer to the
financial statements and footnotes thereto included in the Partnership's annual
report on Form 10-KSB for the fiscal year ended December 31, 1997.
Certain reclassifications have been made to the 1997 information to conform to
the 1998 presentation. (see "Note B").
Note B - Change in Method of Reporting the Ownership of Joint Ventures
The Partnership owns a 65% interest in Corinth Square Professional Building
("Corinth") (see "Note D") and a 55% interest in Covington Pike ("Covington")
(see "Note E") (collectively, the "Joint Ventures"). Through the third quarter
of 1997, the Partnership reflected its interests in the Joint Ventures utilizing
full consolidation whereby all the accounts of the Joint Ventures were included
in the Partnership's financial statements, with intercompany accounts being
eliminated. The minority partners' share of the Joint Ventures' assets and
liabilities was reflected as a liability in the balance sheet of the
Partnership. During the fourth quarter of 1997, management determined that the
Partnership shares its authority over operating and financial decisions of the
Joint Ventures with its venture partners and, accordingly, due to the absence of
control, the Partnership began reflecting its interest in Corinth and Covington
utilizing the equity method. Under the equity method, the original investment
is increased by advances to the Joint Ventures and by the Partnership's share of
the earnings of the Joint Ventures. The investment is decreased by
distributions from the Joint Ventures and by the Partnership's share of losses
of the Joint Ventures.
The statements of operations and cash flows for the nine months ended September
30, 1997 have been restated to reflect this change. Additionally, certain
reclassifications were made in the 1997 statements of operations to conform to
the current year presentation. These changes had no effect on the net income of
the Partnership, the net income per limited partnership unit, or on partners'
capital (deficit).
Note C - Transactions with Affiliated Partners
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all partnership activities.
Affiliates of the General Partner provide property management and asset
management services to the Partnership. The partnership agreement provides for
payments to affiliates for services based on a percentage of revenue and for
reimbursement of certain expenses incurred by affiliates on behalf of the
Partnership. The following payments were made to affiliates of the General
Partner for the nine month periods ended September 30, 1998 and 1997:
1998 1997
(in thousands)
Property management fees
(included in operating expenses) $ 10 $ 7
Reimbursement for services of affiliates
(included in general and administrative expenses) 22 29
Note D - Investment in Corinth Square Joint Venture
The Partnership owns a 65% interest in Corinth, a joint venture with United
Investors Income Properties, an affiliated partnership, in which the General
Partner is the sole general partner. Corinth is accounted for using the equity
method of accounting (see "Note B").
The condensed balance sheet of Corinth at September 30, 1998, is summarized as
follows (in thousands):
Assets
Commercial property, net $1,722
Other assets 142
Total $1,864
Liabilities and Partners' Capital
Liabilities $ 53
Partners' capital 1,811
Total $1,864
Condensed statements of operations of Corinth for the nine months ended
September 30, 1998 and 1997, are as follows (in thousands):
1998 1997
Revenue $ 283 $ 256
Costs and expenses 241 207
Net income $ 42 $ 49
The Partnership's equity in the net income of Corinth for the nine months ended
September 30, 1998 and 1997 was approximately $27,000 and $32,000, respectively.
Note E - Investment in Covington Pike Joint Venture
The Partnership owns a 55% interest in Covington Pike, a joint venture with an
unaffiliated party. Covington Pike is accounted for using the equity method of
accounting (see "Note B").
The condensed balance sheet of Covington Pike at September 30, 1998, is
summarized as follows (in thousands):
Assets
Commercial property, net $ 839
Other assets 71
Total $ 910
Liabilities and Partners' Capital
Liabilities $ 66
Partners' capital 844
Total $ 910
Condensed statements of operations of Covington Pike for the nine months ended
September 30, 1998 and 1997, are as follows (in thousands):
1998 1997
Revenue $238 $241
Costs and expenses 89 99
Net income $149 $142
The Partnerhip's equity in the net income of Covington Pike for the nine months
ended September 30, 1998 and 1997 was approximately $82,000 and $78,000,
respectively.
Note F - Transfer of Control; Subsequent Event
On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and
into Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust, with AIMCO being the surviving corporation (the
"Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control
of the General Partner. In addition, AIMCO also acquired approximately 51% of
the outstanding common shares of beneficial interest of IPT. Also, effective
October 1, 1998, IPT and AIMCO entered into an Agreement and plan of Merger
pursuant to which IPT is to be merged with and into AIMCO or a subsidiary of
AIMCO (the "IPT Merger"). The IPT Merger requires the approval of the holders
of a majority of the outstanding IPT Shares. AIMCO has agreed to vote all of
the IPT Shares owned by it in favor of the IPT Merger and has granted an
irrevocable limited proxy to unaffiliated representatives of IPT to vote the IPT
Shares acquired by AIMCO and its subsidiaries in favor of the IPT Merger. As a
result of AIMCO's ownership and its agreement, the vote of no other holder of
IPT is required to approve the merger. The General Partner does not believe
that this transaction will have a material effect on the affairs and operations
of the Partnership.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Partnership's investment properties consist of two distribution centers.
The Partnership's joint venture properties consist of an office building and a
mini-storage facility. The following table sets forth the average physical
occupancy of the properties for each of the nine month periods ended September
30, 1998 and 1997:
Average Occupancy
Investment Properties 1998 1997
Keebler Distribution Center
Chesapeake, Virginia 100% 0%
Keebler Distribution Center
Columbia, South Carolina 100% 100%
Joint Venture Properties
Corinth Square Professional Building
Prairie Village, Kansas 85% 80%
Covington Pike
Memphis, Tennessee 99% 99%
The Keebler Company vacated the Columbia, South Carolina facility in January of
1996 and the Chesapeake, Virginia facility in August of 1996. The Keebler
Company has indicated its intentions to honor its financial obligations to the
Partnership. Keebler is obligated to continue paying rent on the vacated space
through the years 2000 (Columbia, South Carolina) and 2002 (Chesapeake,
Virginia). Should the tenant fail to honor its lease obligations, operating
results would be adversely affected. The former tenant has thus far paid the
scheduled rental payments on the vacated facilities. In addition, Keebler, with
approval from the Partnership, entered into sub-lease agreements effective July
1, 1996 for the Columbia, South Carolina facility and January 1, 1998 for the
Chesapeake, Virginia facility. The new tenants are obligated to pay rent to
Keebler through December 31, 2000 and October 31, 2002, respectively.
The Partnership realized net income of $354,000 for the nine month period ended
September 30, 1998, compared to net income of $338,000 for the nine month period
ended September 30, 1997. The Partnership realized net income of $128,000 for
the three month period ended September 30, 1998, compared to net income of
$109,000 for the three month period ended September 30, 1997. The increase in
net income is primarily due to increased rental income. Partially offsetting
this increase is an increase in operating expenses. Operating expenses increased
primarily due to roof repairs at the Keebler, Virginia facility during 1998.
The Partnership's financial statements for the three and nine months ended
September 30, 1997 have been restated to change the method of accounting for its
joint venture investments from consolidation to the equity method. This change
affects only the presentation and does not affect net income nor distributions
received from those joint ventures.
As part of the ongoing business plan of the Partnership, the General Partner
monitors the rental market environment of its investment properties to assess
the feasibility of increasing rents, maintaining or increasing occupancy levels
and protecting the Partnership from increases in expenses. As part of this
plan, the General Partner attempts to protect the Partnership from the burden of
inflation-related increases in expenses by increasing rents and maintaining a
high overall occupancy level. However, due to changing market conditions, which
can result in the use of rental concessions and rental reductions to offset
softening market conditions, there is no guarantee that the General Partner will
be able to sustain such a plan.
At September 30, 1998, the Partnership had cash and cash equivalents of
approximately $813,000 compared to approximately $811,000 at September 30, 1997.
The net decrease in cash and cash equivalents for the nine month period ended
September 30, 1998 was approximately $21,000 compared to a net increase of
approximately $112,000 for the nine month period ended September 30, 1997. Net
cash provided by operating activities decreased due to the increased use of cash
for other assets and accrued liabilities due to the timing of payments. Net cash
provided by investing activities decreased due to decreased distributions from
the joint venture properties in 1998. Net cash used in financing activities was
relatively constant.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the various properties to adequately maintain the
physical assets and other operating needs of the Partnership and to comply with
federal, state and local legal and regulatory requirements. Such assets are
currently thought to be sufficient for any near-term needs of the Partnership.
The General Partner is currently assessing the need for capital improvements at
each of the Partnership's properties. To the extent that additional capital
improvements are required, the Partnership's distributable cash flow, if any,
may be adversely affected, at least in the short term. Cash distributions of
$424,000 and $428,000 were made during the nine month periods ended September
30, 1998 and 1997, respectively. Future cash distributions will depend on the
levels of net cash generated from operations, property sales, and the
availability of cash reserves. The Partnership's distribution policy will be
reviewed on a quarterly basis. There can be no assurance, however, that the
Partnership will generate sufficient funds from operations to permit further
distributions to its partners in 1998 or subsequent periods.
Transfer of Control; Subsequent Event
On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and
into Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust, with AIMCO being the surviving corporation (the
"Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control
of the General Partner. In addition, AIMCO also acquired approximately 51% of
the outstanding common shares of beneficial interest of Insignia Properties
Trust ("IPT"), the sole shareholder of the General Partner. Also, effective
October 1, 1998 IPT and AIMCO entered into an Agreement and plan of Merger
pursuant to which IPT is to be merged with and into AIMCO or a subsidiary of
AIMCO (the "IPT Merger"). The IPT Merger requires the approval of the holders
of a majority of the outstanding IPT Shares. agreed to vote all of the IPT
Shares owned by it in favor of the IPT Merger and has granted an irrevocable
limited proxy to unaffiliated representatives of IPT to vote the IPT Shares
acquired by AIMCO and its subsidiaries in favor of the IPT Merger. As a result
of AIMCO's ownership and its agreement, the vote of no other holder of IPT is
required to approve the merger. The General Partner does not believe that this
transaction will have a material effect on the affairs and operations of the
Partnership. The General Partner does not believe that this transaction will
have a material effect on the affairs and operations of the Partnership.
Year 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Partnership is
dependent upon the General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any computer programs or hardware
that have date-sensitive software or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Managing Agent has determined that it will be required to modify or replace
significant portions of its software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. The Managing Agent
presently believes that with modifications or replacements of existing software
and certain hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Managing
Agent and the Partnership.
Status of Progress in Becoming Year 2000 Compliant
The Managing Agent's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Managing Agent has fully completed its assessment of all information systems
that could be significantly affected by the Year 2000, and has begun the
remediation, testing and implementation phase on both hardware and software
systems. Assessments are continuing in regards to embedded systems in operating
equipment. The Managing Agent anticipates having all phases complete by June 1,
1999.
In addition to the areas the Partnership is relying on the Managing Agent to
verify compliance with, the Partnership has certain operating equipment,
primarily at the property sites, which needed to be evaluated for Year 2000
compliance. The focus of the General Partner was to the security systems,
elevators, heating-ventilation-air-conditioning systems, telephone systems and
switches, and sprinkler systems. The General Partner is currently engaged in the
identification of all non-compliant operational systems, and is in the process
of estimating the costs associated with any potential modifications or
replacements needed to such systems in order for them to be Year 2000 compliant.
It is not expected that such costs would have a material adverse effect upon
the operations of the Partnership.
Risk Associated with the Year 2000
The General Partner believes that the Managing Agent has an effective program in
place to resolve the Year 2000 issue in a timely manner and has appropriate
contingency plans in place for critical applications that could affect the
Partnership's operations. To date, the General Partner is not aware of any
external agent with a Year 2000 issue that would materially impact the
Partnership's results of operations, liquidity or capital resources. However,
the General Partner has no means of ensuring that external agents will be Year
2000 compliant. The General Partner does not believe that the inability of
external agents to complete their Year 2000 resolution process in a timely
manner will have a material impact on the financial position or results of
operations of the Partnership. However, the effect of non-compliance by
external agents is not readily determinable.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date
of this quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates of revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia ("Insignia Affiliates") filed a complaint entitled
Everest Properties LLC. v. Insignia Group, Inc. in the Superior Court of the
State of California, County of Los Angeles. The action involves 44 real estate
limited partnerships (including the Partnership) in which the plaintiffs
allegedly own interests and which Insignia Affiliates allegedly manage or
control (the "Subject Partnerships"). The complaint names as defendants
Insignia, several Insignia Affiliates alleged to be managing partners of the
defendant limited partnerships, the Partnership and the Partner. Plaintiffs
allege that they have requested from, but have been denied by each of the
Subject Partnerships, lists of their respective limited partners for the purpose
of making tender offers to purchase up to 4.9% of the limited partner units of
each of the Subject Partnerships. The complaint also alleges that certain of
the defendants made tender offers to purchase limited partner units in many of
the Subject Partnerships, with the alleged result that plaintiffs have been
deprived of the benefits they would have realized from ownership of the
additional units. The plaintiffs assert eleven causes of action, including
breach of contract, unfair business practices, and violations of the partnership
statutes of the states in which the Subject Partnerships are organized.
Plaintiffs seek compensatory, punitive and treble damages. The General Partner
filed an answer to the complaint on September 15, 1998. The General Partner
believes the claims to be without merit and intends to defend the action
vigorously.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature. The General Partner believes that all such pending
or outstanding litigation will be resolved without a material adverse effect
upon the business, financial condition or operations of the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27 - Financial Data Schedule, is filed as an exhibit to this
report.
b) Reports on Form 8-K:
A Form 8-K dated September 23, 1998 (amended October 27, 1998) was
filed reporting the dismissal of Deloitte & Touche, LLP as independent
accountant.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED INVESTORS INCOME PROPERTIES II
By: United Investors Real Estate, Inc.
Its General Partner
By: /s/Patrick Foye
Patrick Foye
Executive Vice President
By: /s/Timothy R. Garrick
Timothy R. Garrick
Vice President - Accounting
(Duly Authorized Officer)
Date: November 13, 1998