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, 1999
[ ] 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 small business issuer as specified in its charter)
California 95-3793526
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
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)
September 30, 1999
Assets
Cash and cash equivalents $ 3,861
Receivables and deposits, net of allowance
for doubtful accounts of $374 628
Restricted escrows 269
Other assets 631
Investment in joint venture 55
Investment properties:
Land $ 2,198
Buildings and related personal property 34,870
37,068
Less accumulated depreciation (27,032) 10,036
$ 15,480
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 59
Tenant security deposit liabilities 288
Accrued property taxes 311
Other liabilities 185
Mortgage notes payable 17,840
Partners' Deficit
General partners $ (471)
Limited partners (99,784 units issued and
outstanding) (2,732) (3,203)
$ 15,480
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Rental income $1,787 $1,724 $5,196 $5,256
Other income 98 124 310 380
Total revenues 1,885 1,848 5,506 5,636
Expenses:
Operating 547 873 1,731 2,399
General and administrative 83 71 232 213
Depreciation 435 470 1,288 1,387
Interest 355 360 1,069 1,081
Property taxes 149 145 456 434
Total expenses 1,569 1,919 4,776 5,514
Equity in (loss) income of joint
venture (3) 10 424 19
Income (loss) before extraordinary
item 313 (61) 1,154 141
Equity in extraordinary loss on the
extinguishment of debt of joint
venture (Note C) -- -- (1) --
Net income (loss) $ 313 $ (61) $1,153 $ 141
Net income (loss) allocated
to general partners (1%) $ 3 $ (1) $ 12 $ 1
Net income (loss) allocated
to limited partners (99%) 310 (60) 1,141 140
$ 313 $ (61) $1,153 $ 141
Per limited partnership unit:
Income (loss) before extraordinary
item 3.11 (.60) 11.44 1.40
Extraordinary item -- -- (.01) --
Net income (loss) 3.11 (.60) 11.43 1.40
Distributions per limited
partnership unit $ 6.95 $14.75 $ 6.95 $14.75
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, 1998 99,784 $ (476) $(3,180) $(3,656)
Distribution to partners -- (7) (693) (700)
Net income for the nine months
ended September 30, 1999 -- 12 1,141 1,153
Partners' deficit
at September 30, 1999 99,784 $ (471) $(2,732) $(3,203)
See Accompanying Notes to Consolidated Financial Statements
d)
ANGELES INCOME PROPERTIES, LTD. II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 1,153 $ 141
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,288 1,387
Amortization of discounts, loan costs and lease
commissions 74 73
Bad debt expense (recovery), net 53 (16)
Equity in income of joint venture (424) (19)
Equity in extraordinary loss on extinguishment of
debt of joint venture 1 --
Loss on disposal of property 35 117
Change in accounts:
Receivables and deposits (27) (126)
Other assets (38) (71)
Accounts payable (60) (7)
Tenant security deposit payable 19 15
Accrued property taxes 57 64
Other liabilities (47) 22
Net cash provided by operating activities 2,084 1,580
Cash flows from investing activities:
Property improvements and replacements (428) (1,285)
Net withdrawals from restricted escrows 583 305
Distributions from joint venture 380 --
Repayment of advances to joint venture 46 --
Net cash provided by (used in) investing
activities 581 (980)
Cash flows from financing activities:
Payments on mortgage notes payable (167) (155)
Distributions to partners (700) (1,487)
Net cash used in financing activities (867) (1,642)
Net increase (decrease) in cash and cash equivalents 1,798 (1,042)
Cash and cash equivalents at beginning of period 2,063 3,099
Cash and cash equivalents at end of period $ 3,861 $ 2,057
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,010 $ 1,021
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 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"), 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, 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 year ended December 31, 1998.
Certain reclassifications have been made to the 1998 balances to conform to the
1999 presentation.
Principles of Consolidation
The consolidated financial statements of the Partnership include all accounts of
the Partnership and its 99% limited partnership interest in Georgetown AIP II,
LP and its 100% owned limited liability corporation interest in AIPL II GP, LLC.
Although legal ownership of the respective asset remains with these entities,
the Partnership retains all economic benefits from the properties. As a result,
the Partnership consolidates its interests in these two entities, whereby all
accounts are included in the consolidated financial statements of the
Partnership with all inter-entity accounts being 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. ("Insignia") 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 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 - INVESTMENT IN JOINT VENTURE
The Partnership had a 14.4% investment in Princeton Golf Course JV ("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 $3,088,000. The
Partnership's 1999 pro-rata share of this gain is approximately $445,000. In
connection with the sale, a commission of $153,000 was paid to the Managing
General Partner in accordance with the Joint Venture Agreement. The Joint
Venture also recognized an extraordinary loss on the early extinguishment of
debt of approximately $7,000 as a result of unamortized loan costs being written
off. The Partnership's pro-rata share of this extraordinary loss is
approximately $1,000.
Condensed balance sheet information of the Joint Venture at September 30, 1999,
is as follows:
Assets
Cash $ 336
Other assets 51
Total $ 387
Liabilities and Partners' Capital
Other Liabilities $ 12
Partners' capital 375
Total $ 387
The condensed profit and loss statement of the Joint Venture is summarized as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(in thousands) (in thousands)
Revenue $ 4 $ 575 $ 94 $ 1,319
Costs and expenses -- (490) (230) (1,171)
Income (loss) before gain on sale
of investment property and
extraordinary loss on
extinguishment of debt 4 85 (136) 148
(Loss) gain on sale of property (20) -- 3,088 --
Extraordinary loss on
extinguishment of debt -- -- (7) --
Net (loss) income $ (16) $ 85 $ 2,945 $ 148
The Partnership's 14.4% equity interest in the income of the Joint Venture for
the nine months ended September 30, 1999, was approximately $424,000. The
equity interest in the income of the Joint Venture for the nine months ended
September 30, 1998, was approximately $19,000. The Partnership also realized
equity in the extraordinary loss on extinguishment of debt of approximately
$1,000 for the nine months ended September 30, 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 slightly 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 had not
given 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 in
place at three test wells on the site. These skimmers were in place to detect
any residual fuel that may still have been in the ground. The expected
completion date of the compliance work was expected to be in 1999. Upon the
sale of the Golf Course, as noted above, the Joint Venture was released from any
further responsibility or liability with respect to the clean-up.
NOTE D - 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 as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following payments were paid or
accrued to the Managing General Partner and affiliates during the nine months
ended September 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in
operating expenses) $ 254 $ 262
Reimbursement for services of affiliates
(included in operating expense, general and
administrative expense and investment properties) 152 175
During the nine months ended September 30, 1999 and 1998, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from all
of the Registrant's residential properties for providing property management
services. The Registrant paid to such affiliates approximately $254,000 and
$244,000 for the nine months ended September 30, 1999 and 1998, respectively.
During the nine months ended September 30, 1998, affiliates of the Managing
General Partner were entitled to varying percentages of gross receipts from the
Registrant's commercial property for providing property management services.
These services were performed by affiliates of the Managing General Partner for
the nine months ended September 30, 1998 and were approximately $18,000.
Effective October 1, 1998 (the effective date of the Insignia Merger), these
services for the commercial property were provided by an unrelated party.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $152,000 and
$175,000 for the nine months ended September 30, 1999 and 1998, respectively,
including approximately $53,000 and $45,000, respectively, in construction
oversight costs.
Additionally, the Partnership paid approximately $57,000 during the nine months
ended September 30, 1998, to an affiliate of the Managing General Partner for
lease commissions at the Partnership's commercial property. These lease
commissions are included in other assets and are amortized over the terms of the
respective leases.
On April 24, 1998, an affiliate of the Managing General Partner ("the
Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Purchaser offered to purchase up to 40,000 of the outstanding
units of limited partnership interest in the Partnership at a purchase price of
$150 per unit, net to the seller in cash. On May 21, 1998, the tender offer was
officially closed with 8,908 units (approximately 8.93% of the total outstanding
units) being acquired.
On August 13, 1998, the Purchaser commenced a second tender offer for limited
partnership interests in the Partnership. The Purchaser offered to purchase up
to 30,000 of the outstanding units of limited partnership interest in the
Partnership at $175.00 per unit, net to the seller in cash. The Purchaser
acquired 5,864 units (approximately 5.88% of the total outstanding units)
pursuant to this tender offer.
On May 13, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner, commenced a tender offer to purchase up to 34,849.06 (approximately
34.92% of the total outstanding units) units of limited partnership interest in
the Partnership for a purchase price of $191 per unit. The offer expired on
July 30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 4,687.00
units. As a result, AIMCO and its affiliates currently own 27,871.00 units of
limited partnership interest in the Partnership representing approximately
27.93% of the total outstanding units. It is possible that AIMCO or its
affiliates will make one or more additional offers to acquire additional limited
partnership interests in the Partnership for cash or in exchange for units in
the operating partnership of AIMCO (see "Note G - Legal Proceedings").
Angeles Mortgage Investment Trust, ("AMIT"), a real estate investment trust,
provided financing to the Joint Venture (see "Note C" above). 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 controls the Managing General Partner. Effective
February 26, 1999, IPT was merged into AIMCO. As a result, AIMCO was the holder
of the AMIT loan. 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.
NOTE E - DISTRIBUTIONS
During the nine months ended September 30, 1999, the Partnership made a
distribution in the amount of $700,000 (approximately $693,000 to the limited
partners or $6.95 per limited partnership unit) from operations. During the
nine months ended September 30, 1998, the Partnership made a distribution in the
amount of $1,487,000 (approximately $1,472,000 to the limited partners or $14.75
per limited partnership unit) from operations.
NOTE F - SEGMENT REPORTING
The Partnership has two reportable segments: residential properties and
commercial properties. The Partnership's residential property segment consists
of three apartment complexes in New Jersey, Indiana and North Carolina. The
Partnership rents apartment units to tenants for terms that are typically twelve
months or less. The commercial property segment consists of a retail shopping
center located in Montgomery, Alabama. This property leases space to a discount
store, various specialty retail outlets, and several restaurants at terms
ranging from 12 months to twenty years.
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segments 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.
The Partnership's reportable segments are investment properties that offer
different products and services. The reportable segments are each managed
separately because they provide distinct services with different types of
products and customers.
Segment information for the nine months ended September 30, 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
the reportable segments.
1999 Residential Commercial Other Totals
Rental income $ 4,747 $ 449 $ -- $ 5,196
Other income 268 5 37 310
Interest expense 1,069 -- -- 1,069
Depreciation 1,181 107 -- 1,288
General and administrative expense -- -- 232 232
Equity in income of joint venture -- -- 424 424
Equity in extraordinary loss on the
extinguishment of debt of
joint venture -- -- (1) (1)
Segment profit 810 115 228 1,153
Total assets 13,194 883 1,403 15,480
Capital expenditures for investment
properties 423 5 -- 428
1998 Residential Commercial Other Totals
Rental income $ 4,612 $ 644 $ -- $ 5,256
Other income 284 6 90 380
Interest expense 1,081 -- -- 1,081
Depreciation 1,188 199 -- 1,387
General and administrative expense -- -- 213 213
Equity in income of joint venture -- -- 19 19
Segment profit (loss) 56 189 (104) 141
Total assets 13,272 1,191 1,006 15,469
Capital expenditures for investment
properties 1,204 81 -- 1,285
NOTE G - 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 and the Insignia Merger (see
"Note B - Transfer of Control"). 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 have filed an
amended complaint. The Managing General Partner filed demurrers to the amended
complaint which were heard February 1999. Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed
and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Managing General Partner will make tender offers for
all outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The Managing General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The 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 discussions 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 operations. 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 properties consist of three apartment complexes and
one commercial property. The following table sets forth the average occupancy
of the properties for both of the nine months ended September 30, 1999 and 1998:
Average Occupancy
Property 1999 1998
Atlanta Crossing Shopping Center 56% 61%
Montgomery, Alabama (1)
Deer Creek Apartments 98% 97%
Plainsboro, New Jersey
Georgetown Apartments 95% 96%
South Bend, Indiana
Landmark Apartments 93% 91%
Raleigh, North Carolina
(1) The Partnership's only commercial property, Atlanta Crossing Shopping
Center, is under contract for sale. The sale, which is subject to the
purchaser's due diligence and other customary conditions, is expected to
close during the fourth quarter of 1999. However, there can be no
assurance that the sale will be consummated.
Bruno's, an anchor tenant, declared bankruptcy and vacated its space in Atlanta
Crossing during February of 1998. This tenant was subleasing the space and the
previous tenant is liable for, and the Partnership expects that it will continue
to pay, its rental payments through the year 2007. It is unknown to what extent
this vacancy will negatively impact the performance of the shopping center in
the future. Atlanta Crossing's average occupancy for 1999 and 1998 shown above
represents the center's physical occupancy. Because the original tenant has
continued making the rental payments, the center's economic average occupancy
for both of the nine months ended September 30, 1999 and 1998 is 88% and 89%,
respectively.
Results of Operations
The Partnership's net income for the nine months ended September 30, 1999, was
approximately $1,153,000 compared to approximately $141,000 for the nine months
ended September 30, 1998. The Partnership's net income for the three months
ended September 30, 1999, was approximately $313,000 compared to a net loss of
approximately $61,000 for the three months ended September 30, 1998. The
increase in net income for the nine months ended September 30, 1999, is due to
the increase in equity in income of the joint venture due to the sale of
Princeton Meadows Golf Course as discussed below and a decrease in total
expenses which is partially offset by a decrease in total revenues. The
increase in net income for the three months ended September 30, 1999, is due to
a decrease in total expenses and to a lesser extent, an increase in total
revenues. The decrease in expenses for the three and nine months ended
September 30, 1999 is due primarily to a decrease in operating and depreciation
expense partially offset by increased general and administrative expenses and
property tax expenses. The decrease in operating expenses was primarily due to
decreased spending on major repairs and maintenance. These repairs were mostly
related to a renovation project at Landmark Apartments which was completed
during 1998. This renovation project included the correction of drainage
problems and related foundation repairs along with exterior building repairs and
painting in order to improve the appearance of the property. In addition,
insurance expense decreased for all the Partnership's properties due to a change
in insurance carriers late in 1998. The Partnership recorded losses on disposal
of property of approximately $35,000 and $117,000 for the nine months ended
September 30, 1999 and 1998, respectively. Both the 1999 and 1998 losses
resulted from the write-off of siding at Deer Creek Apartments. Both of these
write-offs were the result of assets not fully depreciated at the time of
replacement. Depreciation expense decreased due to assets becoming fully
depreciated at Atlanta Crossing. General and administrative expenses increased
due to increased legal expenses due to the settlement of a lawsuit as disclosed
in the Partnership's Annual Report on Form 10-KSB for the year ended December
31, 1998 and increased appraisal fees. These increases were partially offset by
reduced expense reimbursements to the Managing General Partner. Included in
general and administrative expenses at both September 30, 1999 and 1998, are
reimbursements to the Managing General Partner allowed under the Partnership
Agreement associated with its management of the partnership. 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. Property tax expense increased due to the timing of receipt of the
property tax bills for 1999 and 1998 which affected the accruals as of September
30, 1999 and 1998.
Total revenues decreased for the nine months ended September 30, 1999 due to a
decrease in rental income and other income. Total revenues increased for the
three months ended September 30, 1999 due to an increase in rental income which
was partially offset by a decrease in other income. Rental income decreased for
the nine month period ended September 30, 1999, primarily due to increased bad
debt expense at Atlanta Crossing, as well as decreased tenant reimbursements at
Atlanta Crossing and increased concession costs at Landmark Apartments.
Partially offsetting these decreases was increased average rental rates at all
the Partnership's residential properties and increased occupancy at Deer Creek
Apartments and Landmark Apartments which more than offset decreases in occupancy
at Atlanta Crossing and Georgetown Apartments and decreased rental rates at
Atlanta Crossing. Rental income increased for the three month period ended
September 30, 1999, primarily due to increased average rental rates at all of
the Partnership's residential properties, increased occupancy at Deer Creek
Apartments and Landmark Apartments and reduced bad debt expense at Atlanta
Crossing which more than offset decreased occupancy, rental rates and tenant
reimbursements at Atlanta Crossing. The decrease in other income for the three
and nine month periods ended September 30, 1999 is primarily due to a decrease
in interest income as a result of a lower cash balance in interest-bearing
accounts.
The Partnership had a 14.4% investment in the Princeton Meadows Golf Course
Joint Venture ("Joint Venture"). For the nine months ended September 30, 1999,
the Partnership realized equity in the income of the joint venture of
approximately $424,000, compared to equity in the income of the joint venture of
approximately $19,000 for the nine months ended September 30, 1998. (See "Note
C - Investment in 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
$3,088,000. The Partnership's 1999 pro-rata share of this gain is approximately
$445,000. In connection with the sale, a commission of $153,000 was paid to the
Managing General Partner in accordance with the Joint Venture Agreement. The
Joint Venture also recognized an extraordinary loss on the early extinguishment
of debt of approximately $7,000 as a result of unamortized loan costs being
written off. The Partnership's pro-rata share of the extraordinary loss is
approximately $1,000.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environments of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expense. As part of this plan, the Managing General Partner attempts to protect
the Partnership from the burden of inflation-related increases in expenses by
increasing rents and maintaining a high overall occupancy level. However, due
to changing market conditions, which can result in the use of rental concessions
and rental reductions to offset softening market conditions, there is no
guarantee that the Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
The Partnership held cash equivalents of approximately $3,861,000 at September
30, 1999, compared to approximately $2,057,000 at September 30, 1998. The
increase in cash and cash equivalents of approximately $1,798,000 since December
31, 1998, is due to approximately $2,084,000 of cash provided by operating
activities and approximately $581,000 of cash provided by investing activities
which was partially offset by approximately $867,000 of cash used in financing
activities. Cash provided by investing activities consisted of net withdrawals
from escrow accounts maintained by the mortgage lenders, a distribution from the
Joint Venture and repayment of an advance to the Joint Venture which was
partially offset by property improvements and replacements. Cash used in
financing activities consisted primarily of a distribution to the partners and,
to a lesser extent, payments of principal made on the mortgages encumbering the
Partnership's properties. The Partnership invests its working capital reserves
in money market 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. Capital
improvements planned for each of the Registrant's properties are detailed below.
Atlanta Crossing
During the nine months ended September 30, 1999, the Partnership spent
approximately $5,000 on capital improvements consisting primarily of tenant
improvements. 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 the
property requires approximately $300,000 of capital improvements over the next
few years. The Partnership has budgeted, but is not limited to, capital
improvements of approximately $58,000 for 1999, which includes certain of the
required improvements and consists of tenant improvements.
Deer Creek
During the nine months ended September 30, 1999, the Partnership spent
approximately $292,000 on capital improvements consisting primarily of building
improvements, parking lot resurfacing, landscaping, and interior improvements.
The landscaping and interior improvements were approximately 50% complete as of
September 30, 1999. The parking lot resurfacing is complete as of September 30,
1999. These improvements were funded from the Partnership's reserves. 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 the property requires approximately
$535,000 of capital improvements over the next few years. The Partnership has
budgeted, but is not limited to, capital improvements of approximately $649,000
for 1999, which includes certain of the required improvements and consists of
landscaping and irrigation improvements, parking lot resurfacing, pool upgrades,
and other interior and exterior building improvements.
Georgetown
During the nine months ended September 30, 1999, the Partnership spent
approximately $55,000 on capital improvements consisting primarily of carpet and
vinyl replacement and appliances. These improvements were funded from the
Partnership's reserves and operating cash flow. 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 the property requires approximately $259,000 of capital
improvements over the next few years. The Partnership has budgeted, but is not
limited to, capital improvements of approximately $683,000 for 1999, which
includes certain of the required improvements and consists of roof replacement,
parking lot resurfacing, and other interior and exterior building improvements.
Landmark
During the nine months ended September 30, 1999, the Partnership spent
approximately $76,000 on capital improvements consisting primarily of carpet and
vinyl replacement and air conditioning unit replacements. The air conditioning
unit replacements were substantially complete as of September 30, 1999. These
improvements were funded from the Partnership's capital and replacement
reserves. 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 the property
requires approximately $378,000 of capital improvements over the next few years.
The Partnership has budgeted, but is not limited to, capital improvements of
approximately $458,000 for 1999, which includes certain of the required
improvements and consists of landscaping and irrigation improvements, parking
lot resurfacing, siding replacement, exterior building improvements, and carpet
replacements.
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 Partnership's distributable cash flow,
if any, may be adversely affected at least in the short term.
The Partnership's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $17,840,000, net of discount, is amortized over
periods ranging from 29 to 30 years with balloon payments due in 2003. The
Managing General Partner will attempt to refinance such indebtedness and/or sell
the properties prior to such maturity date. If the properties cannot be
refinanced or sold for a sufficient amount, the Partnership may risk losing such
properties through foreclosure.
During the nine months ended September 30, 1999, the Partnership made a
distribution in the amount of $700,000 (approximately $693,000 to the limited
partners or $6.95 per limited partnership unit) from operations. During the
nine months ended September 30, 1998, the Partnership made a distribution in the
amount of $1,487,000 (approximately $1,472,000 to the limited partners or $14.75
per limited partnership unit) from operations. 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 distribution policy is reviewed on a semi-annual 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 1999 or subsequent
periods.
Tender Offers
On April 24, 1998, an affiliate of the Managing General Partner ("the
Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Purchaser offered to purchase up to 40,000 of the outstanding
units of limited partnership interest in the Partnership at a purchase price of
$150 per unit, net to the seller in cash. On May 21, 1998, the tender offer was
officially closed with 8,908 units (approximately 8.93% of the total outstanding
units) being acquired.
On August 13, 1998, the Purchaser commenced a second tender offer for limited
partnership interests in the Partnership. The Purchaser offered to purchase up
to 30,000 of the outstanding units of limited partnership interest in the
Partnership at $175.00 per unit, net to the seller in cash. The Purchaser
acquired 5,864 units (approximately 5.88% of the total outstanding units)
pursuant to this tender offer.
On May 13, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 34,849.06 (approximately
34.92% of the total outstanding units) units of limited partnership interest in
the Partnership for a purchase price of $191 per unit. The offer expired on
July 30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 4,687.00
units. As a result, AIMCO and its affiliates currently own 27,871.00 units of
limited partnership interest in the Partnership representing approximately
27.93% of the total outstanding units. It is possible that AIMCO or its
affiliates will make one or more additional offers to acquire additional limited
partnership interests in the Partnership for cash or in exchange for units in
the operating partnership of AIMCO (see "Item 1. Financial Statements, Note G -
Legal Proceedings").
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 main computer system used by the Managing Agent became fully
functional. In addition to the main computer system, 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 September 30, 1999, had virtually completed 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.
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.
In April 1999 the Managing Agent embarked on a data center consolidation project
that unifies its core financial systems under its Year 2000 compliant system.
The estimated completion date for this project is October 1999.
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 testing process was
completed in June 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 virtually all of the server operating systems.
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.
A pre-assessment of the properties by the Managing Agent has indicated virtually
no Year 2000 issues. A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 1999. Any operating
equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
September 30, 1999 to replace or repair the operating equipment was
approximately $75,000. The Managing Agent estimates the cost to replace or
repair any remaining operating equipment is approximately $125,000.
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 has banking relationships with three major financial
institutions, all of which have designated their compliance. The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.
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 $2.9 million ($0.7 million expenses
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 PROCEDINGS
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 and the Insignia Merger (see
"Part I - Financial Information, Item 1. Financial Statements, Note B - Transfer
of Control"). 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 have filed an amended
complaint. The Managing General Partner filed demurrers to the amended complaint
which were heard February 1999. Pending the ruling on such demurrers,
settlement negotiations commenced. On November 2, 1999, the parties executed
and filed a Stipulation of Settlement ("Stipulation"), settling claims, subject
to final court approval, on behalf of the Partnership and all limited partners
who own units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the Managing General Partner will make tender offers for
all outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The Managing General Partner does not anticipate that
costs associated with this case will be material to the Partnership's overall
operations.
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 quarter ended September 30, 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 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/ Martha L. Long
Martha L. Long
Senior Vice President
and Controller
Date: