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 March 31, 1999 [ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-11766 ANGELES PARTNERS XI (Exact name of small business issuer as specified in its charter) California 95-3788040 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 55 Beattie Place, Post Office 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) ANGELES PARTNERS XI CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except unit data) March 31, 1999 Assets Cash and cash equivalents $ 1,423 Receivables and deposits 1,440 Other assets 372 Investment in, and advances of $164 to, joint venture 1,337 Investment property: Land $ 3,998 Buildings and related personal property 25,917 29,915 Less accumulated depreciation (19,040) 10,875 $ 15,447 Liabilities and Partners' Deficit Liabilities Accounts payable $ 43 Due to affiliates 33 Tenant security deposit liabilities 576 Other liabilities 848 Notes payable 31,200 Partners' Deficit General partners $ (488) Limited partners (39,627 units issued and outstanding) (16,765) (17,253) $ 15,447 See Accompanying Notes to Financial Statements b) ANGELES PARTNERS XI CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except unit data) Three Months Ended March 31, 1999 1998 Revenues: Rental income $ 1,886 $ 1,761 Other income 87 90 Total revenues 1,973 1,851 Expenses: Operating 493 467 General and administrative 55 44 Depreciation 378 374 Interest 727 727 Property taxes 175 201 Total expenses 1,828 1,813 Income before equity in income (loss) and extraordinary loss on debt extinguishment of joint venture 145 38 Equity in income (loss) of joint venture (Note D) 1,144 (47) Income (loss) before equity in extraordinary loss on debt extinguishment of joint venture 1,289 (9) Equity in extraordinary loss on debt extinguishment (Note D) (3) -- Net income (loss) $ 1,286 $ (9) Net income allocated to general partners (1%) $ 13 $ -- Net income (loss) allocated to limited partners (99%) 1,273 (9) $ 1,286 $ (9) Net income (loss) per limited partnership unit $ 32.12 $ (.23) See Accompanying Notes to Financial Statements c) ANGELES PARTNERS XI CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (Unaudited) (in thousands, except unit data) Limited Partnership General Limited Units Partners Partners Total Original capital contributions 40,000 $ 30 $ 40,000 $ 40,030 Partners' deficit at December 31, 1998 39,627 $ (501) $(18,038) $(18,539) Net income for the three months ended March 31, 1999 -- 13 1,273 1,286 Partners' deficit at March 31, 1999 39,627 $ (488) $(16,765) $(17,253) See Accompanying Notes to Financial Statements d) ANGELES PARTNERS XI CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 1999 1998 Cash flows from operating activities: Net income (loss) $1,286 $ (9) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in (income) loss of joint venture (1,144) 47 Equity in extraordinary loss on debt extinguishment of joint venture 3 -- Depreciation 378 374 Amortization of loan costs 28 28 Casualty gain -- (28) Change in accounts: Receivables and deposits (231) 1 Other assets (54) 19 Accounts payable (15) (52) Tenant security deposit liabilities 14 (13) Other liabilities 191 (12) Net cash provided by operating activities 456 355 Cash flows from investing activities: Property improvements and replacements (172) (91) Insurance proceeds received related to casualty -- 58 Net cash used in investing activities (172) (33) Cash flows used in financing activities: Payment on mortgage notes payable (68) (1) Net increase in cash and cash equivalents 216 321 Cash and cash equivalents at beginning of period 1,207 746 Cash and cash equivalents at end of period $1,423 $1,067 Supplemental disclosure of cash flow information: Cash paid for interest $ 699 $ 699 See Accompanying Notes to Financial Statements e) ANGELES PARTNERS XI NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Angeles Partners XI (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"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1999. 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, 1998. Principles of Consolidation The Registrant's financial statements include the accounts of Fox Run AP XI, L.P., of which the Partnership owns a 99% limited partnership interest. The general partner of Fox Run AP XI, L.P. is AP XI Fox Run GP, LLC, a single member limited liability corporation wholly-owned by the Registrant. Thus, these entities are deemed controlled and, therefore, consolidated by the Partnership. All interpartnership balances have been eliminated. NOTE B - TRANSFER OF CONTROL Pursuant to a series of transactions which closed on October 1, 1998 and February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust ("IPT") merged 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, AIMCO acquired a 100% ownership interest in the Managing General Partner. The Managing General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Partnership. NOTE C - 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's partnership agreement provides for (i) certain payments to affiliates for services and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following expenses owed to the Managing General Partner and its affiliates during the three months ended March 31, 1999 and 1998 were paid or accrued: Three Months Ended March 31, 1999 1998 (in thousands) Property management fees (included in operating expenses) $ 98 $ 91 Reimbursement for services of affiliates (included in investment properties, general and administrative and operating expenses) 33 39 Due to affiliates 33 470 Included in "Reimbursement for services of affiliates" at March 31, 1998 is approximately $7,000 in reimbursements for construction oversight costs. No such costs were paid for the three months ended March 31, 1999. During the three months ended March 31, 1999 and 1998, affiliates of the Managing General Partner were entitled to receive 5% of the gross receipts from the Registrant's property for providing property management services. The Registrant paid to such affiliates approximately $98,000 and $91,000 for the three months ended March 31, 1999 and 1998, respectively. An affiliate of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $33,000 and $39,000 for the three months ended March 31, 1999 and 1998, respectively. The decrease in "Due to affiliates" relates to the payment of amounts owed to affiliates of the Managing General Partner for reimbursement of expenses in prior years. The amounts had been previously accrued by the Partnership due to the Partnership's liquidity problems in previous years. The Managing General Partner postponed payment of the amounts until the Partnership's cash flow position improved. In the third quarter of 1998, the Managing General Partner determined that the Partnership had sufficient liquid assets to meet its current operational needs and to provide the necessary maintenance and improvements to its investment property in the near term. As a result, approximately $460,000 was repaid to an affiliate of the Managing General Partner, thereby reducing the balance outstanding as of September 30, 1998 to approximately $10,000. Since September 30, 1998, an additional $23,000 relating to reimbursement for services of affiliates have been accrued bringing the balance due to affiliates to approximately $33,000 as of March 31, 1999. Angeles Mortgage Investment Trust ("AMIT"), a real estate investment trust, provided financing (the "AMIT Loan") to the Princeton Meadows Golf Course Joint Venture ("Joint Venture"), (see "Note D"). Pursuant to a series of transactions, affiliates of the Managing General Partner acquired ownership interests in AMIT. On September 17, 1998, AMIT was merged with and into IPT, the entity which controlled the Managing General Partner. Effective February 26, 1999, IPT was merged into AIMCO. As a result, AIMCO became the holder of the AMIT loan. Also on February 26, 1999, Princeton Meadows Golf Course was sold to an unaffiliated third party. Upon closing, the AMIT principal balance of $1,567,000 plus accrued interest of approximately $17,000 was paid off. 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. At March 31, 1999, the amount of advances receivable from the Joint Venture was approximately $164,000. It is anticipated that this amount will be repaid by the Joint Venture upon the finalization of its operations during the next several months. NOTE D - INVESTMENT IN JOINT VENTURE The Partnership had a 41.1% investment in Princeton Meadows Golf Course Joint Venture. On February 26, 1999, the Joint Venture sold its only investment property, Princeton Meadows Golf Course, to an unaffiliated third party. The sale resulted in net proceeds of approximately $3,411,000 after payment of closing costs, resulting in a gain on sale of approximately $2,885,000. The Partnership's 1999 pro-rata share of this gain is approximately $1,186,000. Furthermore, as a result of the sale, unamortized loan costs of approximately $7,000 were written off. This resulted in an extraordinary loss on early extinguishment of debt of approximately $7,000. The Partnership's pro-rata share of this extraordinary loss is approximately $3,000. Condensed balance sheet information of the Joint Venture at March 31, 1999, is as follows (in thousands): Assets Cash $ 3,454 Other assets 113 Total $ 3,567 Liabilities and Partners' Capital Other liabilities $ 715 Partners' capital 2,852 Total $ 3,567 NOTE D - INVESTMENT IN JOINT VENTURE The condensed statements of operations of the Joint Venture for the three months ended March 31, 1999 and 1998 are summarized as follows: Three Months Ended March 31, 1999 1998 (in thousands) Revenues $ 30 $ 203 Costs and expenses (131) (317) Loss before gain on sale of investment property and extraordinary loss on Extinguishment of debt (101) (114) Gain on sale of investment property 2,885 -- Extraordinary loss on extinguishment of debt (7) -- Net income $ 2,777 $ (114) The Partnership realized equity income (loss) of approximately $1,144,000 and $47,000 in the Joint Venture for the three months ended March 31, 1999, and 1998, respectively. The Partnership also realized an extraordinary loss on extinguishment of debt of $3,000 for the three months ended March 31, 1999. 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 phosphorous readings that were higher than the range prescribed by the New Jersey Department of Environmental Protection ("DEP"). The Joint Venture notified the DEP of the findings when they were first discovered. However, the 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 engaged an engineering firm to conduct consulting and compliance work and a second firm to perform the field work necessary for the clean-up. Field work was in process, with skimmers having been installed at three test wells on the site. These skimmers were in place to detect any residual fuel that may have still been in the ground. The completion date of field work was expected to be in 1999. The Joint Venture originally recorded a liability of $199,000 for the costs of the clean-up. At February 26, 1999, the balance in the liability for clean-up costs was approximately $53,000. Upon the sale of the Golf Course, as noted above, the Joint Venture received documents from the Purchaser releasing the joint Venture from any further responsibility or liability with respect to the clean-up. NOTE E - SEGMENT REPORTING Description of the types of products from which the reportable segment derives its revenues: The Partnership has one reportable segment: residential properties. The Partnership's residential property segment consists of one apartment complex located in Plainsboro, New Jersey. The Partnership rents apartment units to tenants for terms that are typically twelve months or less. Measurement of segment profit or loss: The Partnership evaluates performance based on net income. The accounting policies of the reportable segment are the same as those of the Partnership as described in the Partnership's annual report on Form 10-KSB for the year ended December 31, 1998. Segment information for the three months ended March 31, 1999 and 1998 is shown in the tables below (in thousands). The "Other" column includes partnership administration related items and income and expense not allocated to reportable segments. 1999 Residential Other Totals Rental income $ 1,886 $ -- $ 1,886 Other income 80 7 87 Interest expense 727 -- 727 Depreciation 378 -- 378 General and administrative expense -- 55 55 Equity in income of joint venture -- 1,144 1,144 Equity in extraordinary loss or debt extinguishment of joint venture -- (3) (3) Segment profit (loss) 193 1,093 1,286 Total assets 12,860 2,587 15,447 Capital expenditures for investment property 172 -- 172 1998 Residential Other Totals Rental income $ 1,761 $ -- $ 1,761 Other income 85 5 90 Interest expense 727 -- 727 Depreciation 374 -- 374 General and administrative expense -- 44 44 Equity in loss of JV -- (47) (47) Segment profit (loss) 77 (86) (9) Total assets 13,342 816 14,158 Capital expenditures for investment property 91 -- 91 NOTE F - 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. in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, the Managing General Partner and several of their affiliated partnerships and corporate entities. The complaint purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging the acquisition by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia ("Insignia Affiliates") of interests in certain general partner entities, past tender offers by Insignia Affiliates to acquire limited partnership units, the management of partnerships by Insignia Affiliates as well as a recently announced agreement between Insignia and AIMCO. The complaint seeks monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Managing General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The Managing General Partner has filed demurrers to the amended complaint which were heard during February 1999. No ruling on such demurrers has been received. The Managing General Partner does not anticipate that costs associated with this case, if any, will be material to the Partnership's overall operations. 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 filed a complaint entitled EVEREST PROPERTIES, LLC. V. INSIGNIA FINANCIAL GROUP, INC., ET AL. 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"). This case was settled on March 3, 1999. The Partnership is responsible for a portion of the settlement costs. The expense will not have a material effect on the Partnership's overall operations. The Partnership is unaware of any other pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The matters discussed in this Form 10-QSB contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosures contained in this Form 10-QSB and the other filings with the Securities and Exchange Commission made by the Registrant from time to time. The discussion of the Registrant's business and results of operations, including forward-looking statements pertaining to such matters, does not take into account the effects of any changes to the Registrant's business and results of operation. Accordingly, actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. The Partnership's investment property consists of one apartment complex. The following table sets forth the average occupancy of the property for the three months ended March 31, 1999 and 1998: Average Occupancy 1999 1998 Fox Run Apartments Plainsboro, New Jersey 98% 97% Results of Operations The Partnership incurred net income of approximately $1,286,000 for the three months ended March 31, 1999, as compared to a net loss of approximately $9,000 for the three months ended March 31, 1998. The increase in net income is primarily due to the recognition of the gain on disposal of the Princeton Meadows Joint Venture and, to a lesser extent, an increase in total revenues, which is offset by a slight increase in total expenses. Total revenues increased primarily due to an increase in rental income resulting from an increase in occupancy as well as an increase in the average annual rental rate at Fox Run Apartments. Total expenses for the three months ended March 31, 1999 increased slightly, primarily due to an increase in operating expenses, which was partially offset by a decrease in property taxes. The increase in operating expense is primarily attributable to increases in corporate unit expenses, snow removal and utilities, which is partially offset by a decrease in insurance expense. All of the Registrant's corporate units were vacant for the three months ended March 31, 1999, resulting in the Registrant absorbing the full costs of operating these units. During the three months ended March 31, 1998, the Partnership received insurance proceeds relating to a 1997 fire at Fox Run Apartments, which reduced operating expenses during the three months ended March 31, 1998. No such proceeds were received during the three months ended March 31, 1999. The decrease in insurance expense is the result of a change in insurance carriers. Property taxes decreased due to the timing of the receipt of tax bills for 1999 and 1998 which affected the accruals recorded at March 31 1999 and 1998. General and administrative expense increased slightly during the three months ended March 31, 1999. Included in general and administrative expense at both March 31, 1999 and 1998 are management reimbursements to the Managing General Partner allowed under the Partnership Agreement. In addition costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement are also included. The Partnership had a 41.1% investment in Princeton Meadows Golf Course Joint Venture. On February 26, 1999, the Joint Venture sold the Princeton meadows Golf Course to an unaffiliated third party for gross sale proceeds of $5,100,000. The Joint Venture received net proceeds of $3,411,000 after payment of closing costs, resulting in a gain on sale of approximately $2,885,000. For the three months ended March 31, 1999 the Partnership realized equity in income of the Joint Venture of approximately $1,144,000, which included its equity in the gain on disposal of Princeton Meadows Golf Course of $1,186,000 and the equity in loss on operations of $42,000, as compared to equity in loss of the Joint Venture of approximately $47,000 for the three months ended March 31, 1998. As part of the ongoing business plan of the Partnership, the Managing General Partner monitors the rental market environment at its investment property to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expense. As part of this plan, the Managing General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the Managing General Partner will be able to sustain such a plan. Liquidity and Capital Resources At March 31, 1999, the Partnership had cash and cash equivalents of approximately $1,423,000 as compared to approximately $1,067,000 at March 31, 1998. Cash and cash equivalents increased approximately $216,000 for the period March 31, 1999, from the Registrant's fiscal year-end and is primarily due to approximately $456,000 of cash provided by operating activities, which is partially offset by approximately $172,000 of cash used in investing activities and approximately $68,000 of cash used in financing activities. Cash used in investing activities consisted of property improvements and replacements. Cash used in financing activities consisted of payments of principal made on the mortgages encumbering Fox Run Apartments. The Registrant invests its working capital reserves in a money market cash account. 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 property 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. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that Fox Run Apartments requires approximately $2,192,000 of capital improvements over the near-term. The Partnership has budgeted, but is not limited to, capital improvements of approximately $2,021,000 for 1999 at this property, which includes roof repairs, landscaping and irrigation improvements, and parking lot repairs. As of March 31, 1999, the Partnership spent approximately $172,000 on capital improvements at Fox Run Apartments, primarily consisting of carpet and cabinet replacements, landscaping, appliance replacements, water heater upgrades and other building improvements. These improvements were funded from cash flow. The additional capital improvements planned for 1999 at the Partnership's property will be incurred only if cash is available from operations and Partnership reserves. To the extent that such budgeted capital improvements are completed, the Registrant's distributable cash flow, if any, may be adversely affected at least in the short term. The Registrant's current assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Registrant. The mortgage indebtedness of approximately $31,200,000 encumbering Fox Run is being amortized over periods ranging from 15 to 30 years with balloon payments of $29,960,000 due January 2002. The Managing General Partner may attempt to refinance such indebtedness and/or sell the property prior to such maturity date. If the property cannot be refinanced or sold for a sufficient amount, the Partnership will risk losing such property through foreclosure. There were no cash distributions during the three months ended March 31, 1999, or March 31, 1998. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves and the timing of debt maturity, refinancing, and/or sale of the property. 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, after planned capital expenditures, to permit distributions to its partners in 1999 or subsequent periods. Potential Tender Offer On October 1, 1998, Insignia Financial Group, Inc. merged into AIMCO, a real estate investment trust whose Class A Common Shares are listed on the New York Stock Exchange. As a result of such merger, AIMCO and AIMCO Properties, L.P., a Delaware limited partnership and the operating partnership of AIMCO ("AIMCO OP") acquired indirect control of the Managing General Partner. AIMCO and its affiliates currently own 27.174% of the limited partnership interests in the Partnership. AIMCO is presently considering whether it will engage in an exchange offer for additional limited partnership interests in the Partnership. There is a substantial likelihood that, within a short period of time, AIMCO OP will offer to acquire limited partnership interests in the Partnership for cash or preferred units or common units of limited partnership interests in AIMCO OP. While such an exchange offer is possible, no definite plans exist as to when or whether to commence such an exchange offer, or as to the terms of any such exchange offer, and it is possible that none will occur. A Registration Statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Form 10-QSB shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state. Year 2000 Compliance 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 digits to define the applicable year. The Partnership is dependent upon the Managing General Partner and its affiliates for management and administrative services ("Managing Agent"). Any of the 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. Over the past two years, 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 not completed in time, the Year 2000 issue could have a material impact on the operations of the Partnership. The Managing Agent's plan to resolve Year 2000 issues involves four phases: assessment, remediation, testing, and implementation. To date, the Managing Agent has fully completed its assessment of all the information systems that could be significantly affected by the Year 2000, and has begun the remediation, testing and implementation phases on both hardware and software systems. Assessments are continuing in regards to embedded systems. The status of each is detailed below. Status of Progress in Becoming Year 2000 Compliant, Including Timetable for Completion of Each Remaining Phase Computer Hardware: During 1997 and 1998, the Managing Agent identified all of the computer systems at risk and formulated a plan to repair or replace each of the affected systems. In August 1998, the mainframe system used by the Managing Agent became fully functional. In addition to the mainframe, PC-based network servers, routers and desktop PCs were analyzed for compliance. The Managing Agent has begun to replace each of the non-compliant network connections and desktop PCs and, as of March 31, 1999, had completed approximately 75% of this effort. The total cost to the Managing Agent to replace the PC-based network servers, routers and desktop PCs is expected to be approximately $1.5 million of which $1.3 million has been incurred to date. The remaining network connections and desktop PCs are expected to be upgraded to Year 2000 compliant systems by July 31, 1999. Computer Software: The Managing Agent utilizes a combination of off-the-shelf, commercially available software programs as well as custom-written programs that are designed to fit specific needs. Both of these types of programs were studied, and implementation plans written and executed with the intent of repairing or replacing any non-compliant software programs. During 1998, the Managing Agent began converting the existing property management and rent collection systems to its management properties Year 2000 compliant systems. The estimated additional costs to convert such systems at all properties, is $200,000, and the implementation and the testing process is expected to be completed by July 31, 1999. The final software area is the office software and server operating systems. The Managing Agent has upgraded all non-compliant office software systems on each PC and has upgraded 80% of the server operating systems. The remaining server operating systems are planned to be upgraded to be Year 2000 compliant by July 31, 1999. Operating Equipment: The Managing Agent has operating equipment, primarily at the property sites, which needed to be evaluated for Year 2000 compliance. In September 1997, the Managing Agent began taking a census and inventory of embedded systems (including those devices that use time to control systems and machines at specific properties, for example elevators, heating, ventilating, and air conditioning systems, security and alarm systems, etc.). The Managing Agent has chosen to focus its attention mainly upon security systems, elevators, heating, ventilating and air conditioning systems, telephone systems and switches, and sprinkler systems. While this area is the most difficult to fully research adequately, management has not yet found any major non-compliance issues that put the Managing Agent at risk financially or operationally. The Managing Agent intends to have a third-party conduct an audit of these systems and report their findings by July 31, 1999. Any of the above operating equipment that has been found to be non-compliant to date has been replaced or repaired. To date, these have consisted only of security systems and phone systems. As of March 31, 1999 the Managing Agent has evaluated approximately 86% of the operating equipment for the Year 2000 compliance. The total cost incurred for all properties managed by the Managing Agent as of March 31, 1999 to replace or repair the operating equipment was approximately $400,000. The Managing Agent estimates the cost to replace or repair any remaining operating equipment is approximately $325,000, which is expected to be completed by August 30, 1999. The Managing Agent continues to have "awareness campaigns" throughout the organization designed to raise awareness and report any possible compliance issues regarding operating equipment within its enterprise. Nature and Level of Importance of Third Parties and Their Exposure to the Year 2000 The Managing Agent continues to conduct surveys of its banking and other vendor relationships to assess risks regarding their Year 2000 readiness. The Managing Agent has banking relationships with three major financial institutions, all of which have indicated their compliance efforts will be complete before May 1999. The Managing Agent has updated data transmission standards with two of the three financial institutions. The Managing Agent's contingency plan in this regard is to move accounts from any institution that cannot be certified Year 2000 compliant by June 1, 1999. The Partnership does not rely heavily on any single vendor for goods and services, and does not have significant suppliers and subcontractors who share information systems (external agent). To date the Partnership is not aware of any external agent with a Year 2000 compliance issue that would materially impact the Partnership's results of operations, liquidity, or capital resources. However, the Partnership has no means of ensuring that external agents will be Year 2000 compliant. The Managing Agent does not believe that the inability of external agents to complete their Year 2000 remediation 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. Costs to Address Year 2000 The total cost of the Year 2000 project to the Managing Agent is estimated at $3.5 million and is being funded from operating cash flows. To date, the Managing Agent has incurred approximately $2.8 million ($0.6 million expensed and $2.2 million capitalized for new systems and equipment) related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $0.5 million is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $0.2 million relates to repair of hardware and software and will be expensed as incurred. The Partnership's portion of these costs are not material. Risks Associated with the Year 2000 The Managing Agent believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Managing Agent has not yet completed all necessary phases of the Year 2000 program. In the event that the Managing Agent does not complete any additional phases, certain worst case scenarios could occur. The worst case scenarios could include elevators, security and heating, ventilating and air conditioning systems that read incorrect dates and operate with incorrect schedules (e.g., elevators will operate on Monday as if it were Sunday). Although such a change would be annoying to residents, it is not business critical. In addition, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Partnership. The Partnership could be subject to litigation for, among other things, computer system failures, equipment shutdowns or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. Contingency Plans Associated with the Year 2000 The Managing Agent has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and selecting new relationships for such activities as banking relationships and elevator operating systems. 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. in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, the Managing General Partner and several of their affiliated partnerships and corporate entities. The complaint purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging the acquisition by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia ("Insignia Affiliates") of interests in certain general partner entities, past tender offers by Insignia Affiliates to acquire limited partnership units, the management of partnerships by Insignia Affiliates as well as a recently announced agreement between Insignia and Apartment Investment and Management Company. The complaint seeks monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Managing General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The Managing General Partner has filed demurrers to the amended complaint which were heard during February 1999. No ruling on such demurrers has been received. The Managing General Partner does not anticipate that costs associated with this case, if any, will be material to the Partnership's overall operations. 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 filed a complaint entitled EVEREST PROPERTIES, LLC. V. INSIGNIA FINANCIAL GROUP, INC., ET AL. 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"). This case was settled on March 3, 1999. The Partnership is responsible for a portion of the settlement costs. The expense will not have a material effect on the Partnership's overall operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 27 is filed as an exhibit to this report. b) Reports on Form 8-K: None filed during the three months ended March 31, 1999. 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 PARTNERS XI By: Angeles Realty Corporation II Managing General Partner By: /s/ Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/ Timothy R. Garrick Timothy R. Garrick Vice President - Accounting Date: