FORM 10-QSB.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Quarterly or Transitional Report (As last amended by 34-32231, eff. 6/3/93.) U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT For the transition period.........to......... Commission file number 0-11767 ANGELES INCOME PROPERTIES, LTD. II (Exact name of small business issuer as specified in its charter) California 95-3793526 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Insignia Financial Plaza, P.O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (Zip Code) Issuer's telephone number (803) 239-1000 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) ANGELES INCOME PROPERTIES, LTD. II BALANCE SHEET (Unaudited) June 30, 1995 Assets Cash: Unrestricted $ 1,452,355 Restricted--tenant security deposits 251,712 Accounts receivable (net of allowance for doubtful accounts of $29,663) 17,279 Escrows for taxes 235,292 Restricted escrows 384,093 Other assets 507,106 Investment in joint venture 50,722 Investment properties: Land $ 2,197,403 Buildings and related personal property 32,058,901 34,256,304 Less accumulated depreciation (20,416,875) 13,839,429 $16,737,988 Liabilities and Partners' Deficit Liabilities Accounts payable $ 82,495 Tenant security deposits 253,957 Accrued taxes 134,902 Other liabilities 288,564 Mortgage notes payable 16,852,959 Partners' Deficit General partner $ (447,058) Limited partners (99,852 units issued and outstanding) (427,831) (874,889) $16,737,988 See Accompanying Notes to Financial Statements 1 b) ANGELES INCOME PROPERTIES, LTD. II STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 Revenues: Rental income $1,552,245 $1,814,979 $3,454,447 $ 3,681,270 Other income 73,037 101,443 142,694 192,390 Total revenue 1,625,282 1,916,422 3,597,141 3,873,660 Expenses: Operating 391,812 547,070 896,047 1,083,125 Administrative 94,203 175,054 173,692 327,052 Property management fees 76,119 90,506 167,845 176,750 Maintenance 215,026 244,705 355,951 541,996 Depreciation 423,535 587,757 995,300 1,170,128 Amortization 4,921 18,763 16,910 35,751 Interest 402,080 592,225 979,753 1,212,312 Property taxes 154,222 161,378 279,363 295,364 Tenant reimbursements (10,791) (23,152) (20,963) (27,838) Total expenses 1,751,127 2,394,306 3,843,898 4,814,640 Equity in loss of joint venture 2,286 18,612 (16,505) 2,593 Gain on foreclosure 13,777 -- 1,950,057 -- Loss on disposal of property (502) -- (40,328) (9,168) Net income (loss) $ (110,284) $ (459,272) $1,646,467 $ (947,555) Net loss allocated to general partners (1%) $ (1,103) $ (4,593) $ 16,465 $ (9,476) Net loss allocated to limited partners (99%) (109,181) (454,679) 1,630,002 (938,079) Net loss $ (110,284) $ (459,272) $1,646,467 $ (947,555) Net loss per limited partnership unit $ (1.09) $ (4.55) $ 16.32 $ (9.38) See Accompanying Notes to Financial Statements 2 c) ANGELES INCOME PROPERTIES, LTD, II STATEMENT OF CHANGES IN PARTNERS' DEFICIT (Unaudited) Limited Partnership General Limited Units Partners Partners Total Original capital contributions 100,000 $ 1,000 $ 50,000,000 $50,001,000 Partners' deficit at December 31, 1994 99,852 $(463,523) $ (2,057,833) $(2,521,356) Net income for the six months ended June 30, 1995 -- 16,465 1,630,002 1,646,467 Partners' deficit at June 30, 1995 99,852 $(447,058) $ (427,831) $ (874,889) See Accompanying Notes to Consolidated Financial Statements 3 d) ANGELES INCOME PROPERTIES, LTD. II STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1995 1994 Cash flows from operating activities: Net income (loss) $ 1,646,467 $ (947,555) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 995,300 1,170,128 Amortization of discounts, loan costs and lease commissions 71,001 92,007 Equity in (loss) income of joint venture 16,505 (2,593) Gain on foreclosure of investment property (1,950,057) -- Loss on disposal of asset 40,328 9,168 Change in accounts: Restricted cash 4,601 (10,199) Accounts receivable (58) 30,893 Escrows for taxes (99,368) (88,339) Other assets 20,317 (34,581) Accounts payable (140,437) (18,799) Tenant security deposit liabilities 10,216 8,533 Accrued taxes 51,416 60,763 Other liabilities 141,153 47,267 Net cash provided by operating activities 807,384 316,693 Cash flows from investing activities: Property improvements and replacements (290,107) (316,735) Insurance proceeds 18,550 -- Deposits to restricted escrows (48,946) (23,870) Receipts from restricted escrows 30,245 96,634 Net cash used in investing activities (290,258) (243,971) See Accompanying Notes to Financial Statements 4 ANGELES INCOME PROPERTIES, LTD. II STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Six Months Ended June 30, 1995 1994 Cash flows from financing activities: Payments on mortgage notes payable $ (128,220) $ (154,478) Net increase (decrease) in cash balance 388,906 (81,756) Cash at beginning of period 1,063,449 845,033 Cash at end of period $ 1,452,355 $ 763,277 Supplemental disclosure of cash flow information: Cash paid for interest $ 751,975 $1,135,193 See Accompanying Notes to Financial Statements 5 ANGELES INCOME PROPERTIES, LTD. II SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES (Unaudited) Foreclosures On March 20, 1995, the Partnership negotiated a Deed in Lieu of Foreclosure for Executive Plaza Office Park, located in Huntsville, Alabama. The property was lost to the wrap note holder. The Managing General Partner believes that the Deed in Lieu of Foreclosure was in the best interest of the Partnership. In connection with the foreclosure of Executive Plaza Office Park on March 20, 1995, the following accounts were adjusted by the following non-cash amounts: Accounts receivable $ (101,035) Investment properties (4,481,841) Other assets (88,775) Taxes 144,629 Tenant security deposits 39,919 Mortgage 5,987,086 Other liabilities 509,904 6 e) ANGELES INCOME PROPERTIES, LTD. II NOTES TO FINANCIAL STATEMENTS (Unaudited) Note A - Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Managing General Partner, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1995, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1995. For further information, refer to the financial statements and footnotes thereto included in the Partnership's annual report on Form 10-KSB for the fiscal year ended December 31, 1994. Certain reclassifications have been made to the 1994 information to conform to the 1995 presentation. Note B - Transactions with Affiliated Parties The Partnership has no employees and is dependent on the Managing General Partner and its affiliates for the management and administration of all partnership activities. The Partnership Agreement provides for payments to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following amounts were paid or accrued to the Managing General Partner and affiliates for the six months ended June 30, 1995 and 1994: 1995 1994 Property management fees $167,845 $176,750 Marketing services 4,613 919 Reimbursement for services of affiliates 134,685 267,936 The Partnership insures its properties under a master policy through an agency and insurer unaffiliated with the Managing General Partner. An affiliate of the Managing General Partner acquired, in the acquisition of a business, certain financial obligations from an insurance agency which was later acquired by the agent who placed the current year's master policy. The current agent assumed the financial obligations to the affiliate of the Managing General Partner, who receives payments on these obligations from the agent. The amount of the Partnership's insurance premiums accruing to the benefit of the affiliate of the Managing General Partner by virtue of the agent's obligations is not significant. 7 Note B - Transactions with Affiliated Parties - (continued) Angeles Mortgage Investment Trust, ("AMIT"), a lending trust sponsored by an affiliate of the Managing General Partner, has provided financing to the Joint Venture secured by it's investment property in the amount of $1,320,419 (see Part II, Item 1. Legal Proceedings). This debt was in default at June 30, 1995 and remains in default at present. MAE GP Corporation ("MAE GP"), an affiliate of the General Partner, owns 1,675,113 Class B Shares of AMIT. MAE GP has the option to convert these Class B Shares, in whole or in part, into Class A Shares on the basis of 1 Class A Share for every 49 Class B Shares. These Class B Shares entitle MAE GP to receive 1% of the distributions of net cash distributed by AMIT. The Class B Shares also entitle MAE GP to vote on the same basis as Class A Shares which allows MAE GP to vote approximately 33% of the total shares (unless and until converted to Class A Shares at which time the percentage of the vote controlled represented by the Shares held by MAE GP would approximate 1% of the vote). Between the date of acquisition of these shares (November 24, 1992) and March 31, 1995, MAE GP declined to vote these shares. Since that date, MAE GP voted its shares at the 1995 annual meeting in connection with the election of trustees and other matters. MAE GP has not exerted, and continues to decline to exert, any management control over or participate in the management of AMIT. However, MAE GP may choose to vote these shares as it deems appropriate in the future. As part of a settlement of certain disputes with AMIT, MAE GP granted to AMIT an option to acquire the Class B Shares. This option can be exercised at the end of 10 years or when all loans made by AMIT to partnerships affiliated with MAE GP as of November 9, 1994, (which is the date of execution of a definitive Settlement Agreement) have been paid in full, but in no event prior to November 9, 1997. AMIT delivered to MAE GP cash in the sum of $250,000 at closing, which occurred April 14, 1995, as payment for the option. Upon exercise of the option, AMIT would remit to MAE GP an additional $94,000. Simultaneously with the execution of the option, MAE GP executed an irrevocable proxy in favor of AMIT, the result of which is MAE GP will be able to vote the Class B Shares on all matters except those involving transactions between AMIT and MAE GP affiliated borrowers or the election of any MAE GP affiliate as an officer or trustee of AMIT. On those matters, MAE GP granted to the AMIT trustees, in their capacity as trustees of AMIT, proxies with regard to the Class B Shares instructing such trustees to vote said Class B Shares in accordance with the vote of the majority of the Class A Shares voting to be determined without consideration of the votes of "Excess Class A Shares" as defined in Section 6.13 of the Declaration of Trust of AMIT. Note C - Investment in Joint Venture The Partnership owns a 14.4% interest in Princeton Meadows Golf Course Joint Venture ("Joint Venture"). The Partnership accounts for the Joint Venture on the equity method. 8 Note C - Investment in Joint Venture - (continued) Condensed balance sheet information of the Joint Venture at June 30, 1995, is as follows: Assets Cash $ 215,177 Deferred charges and other assets 136,312 Investment properties, net 1,903,381 Total $2,254,870 Liabilities and Partners' Capital Notes payable to AMIT, in default $1,320,419 Other liabilities 585,478 Partners' capital 348,973 $2,254,870 The condensed statements of operations of the Joint Venture are summarized as follows: Three Months Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 Revenue $ 379,075 $ 441,581 $ 483,728 $ 545,935 Costs and expenses (363,196) (312,331) (598,344) (527,927) Net (loss) income $ 15,879 $ 129,250 $(114,616) $ 18,008 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. Reports were filed with the proper authorities, however, no directives have been given as to corrective action. The Managing General Partner can not define the extent of the contamination without further testing. Based on discussions with environmental engineers, this is a low priority site with the New Jersey Department of Environmental Protection and any remediation costs are expected to be immaterial. The Joint Venture is currently under negotiations to sell the Princeton Meadows Golf Course. 9 Note D - Gain on Foreclosure of Investment Property On March 20, 1995, the Partnership negotiated a Deed in Lieu of Foreclosure for Executive Plaza Office Park located in Huntsville, Alabama and as a result, the property was transferred to the wrap note holder. The Managing General Partner believes the Deed In Lieu of Foreclosure was in the best interest of the Partnership. The Partnership realized a gain of $1,950,057 on this transaction. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS Results of Operations The Partnership's investment properties consist of three apartment complexes and one commercial property. The following table sets forth the average occupancy of the properties for the quarters ended June 30, 1995, and June 30, 1994: Average Occupancy Property 1995 1994 Atlanta Crossing Shopping Center Montgomery, Alabama 89% 83% Deer Creek Apartments Plainsboro, New Jersey 95% 92% Georgetown Apartments South Bend, Indiana 98% 99% Landmark Apartments Raleigh, North Carolina 96% 94% The Partnership's net income for the six months ended June 30, 1995, was $1,646,467 versus a net loss of $947,555 for the six months ended June 30, 1994. The Partnership generated a net loss for the three months ended June 30, 1995, of $110,284 as compared to a net loss of $459,272 for the same period in 1994. The increase in net income for the six month period ended June 30, 1995, is due primarily to the gain on foreclosure of Executive Plaza Office Park, on March 20, 1995, (see discussion below). Total revenues decreased for the three and six month periods ended June 30, 1995, as compared to the three and six month periods ended June 30, 1994, due to the lost rents related to the foreclosure of Executive Plaza. This decrease in rents was partially offset by increases in rental revenue from Deer Creek and Landmark Apartments due to increases in occupancy. Landmark Apartments also increased rental rates in 1995. Overall expenses decreased for the three and six month periods ended June 30, 1994, due primarily to the foreclosure of Executive Plaza. The decrease in operating expense can also be attributed to reduced land lease expense at Atlanta Crossing and decreased salaries and utilities at Deer Creek Apartments. Maintenance expense decreased due to reduced snow removal as a result of milder weather conditions at the Deer Creek apartments and lower trash removal costs at Landmark Apartments. Administrative expenses decreased due to a decrease in reimbursements for partnership administration costs. The Partnership has a 14.4% investment in the Princeton Meadows Golf Course Joint Venture. For the three and six months ended June 30, 1995, the Partnership realized equity in income and equity in loss of the Joint Venture of $2,286 and $16,505 respectively, as compared to an equity in income of the Joint Venture of $18,612 and $2,593 for the three and six months ended June 30, 1994, respectively. (See Note C - Investment in Joint Venture). The loss for the six months ended June 30, 1995, can be attributed to bad debt expense recorded during the year due to reserving uncollectible receivables. In addition, the Joint Venture has experienced a decrease in association dues from 1994 to 1995. 11 For the six month period ended June 30, 1995, the Partnership recognized a loss on disposal of property of $40,328. This loss is made up of the write off of the net book value of roofs replaced at Georgetown Apartments in the amount of $47,715 and a gain of $7,388 on Deer Creek for a unit destroyed by fire damage which was covered by insurance. During the six months ended June 30, 1994, the Partnership realized a loss on disposal of assets of $9,168 due to the write off of the net book value of roofs for a section of Atlanta Crossing that was re-roofed. On March 20, 1995, the Partnership negotiated a Deed in Lieu of Foreclosure for Executive Plaza Office Park located in Huntsville, Alabama and as a result the property was transferred to the wrap note holder. The Managing General Partner believes the Deed In Lieu of Foreclosure was in the best interest of the Partnership. The Partnership realized a gain of $1,950,057 on this transaction for the six months ended June 30, 1995. As part of the ongoing business plan of the Partnership, the Managing General Partner monitors the rental market environment of each of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expense. As part of this plan, the Managing General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the Managing General Partner will be able to sustain such a plan. At June 30, 1995, the Partnership had unrestricted cash of $1,452,355 compared to $763,277 at June 30, 1994. Net cash provided by operating activities increased primarily as a result of the increase in net income for the period ended June 30, 1995, as compared to June 30, 1994, and the increase in other liabilities. Net cash used in investing activities increased as a result of increased deposits to restricted escrows and decreased receipts from restricted escrows. Net cash used in financing activities decreased due to decreased principal payments on long-term debt primarily related to the foreclosure of Executive Plaza. 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. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. Future cash distributions will depend on the levels of net cash generated from operations, refinancings, property sales and the availability of cash reserves. 12 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS AMIT made a loan to the Joint Venture on a non-recourse basis in September 1991, in the amount of $1,280,000 secured by the Joint Venture's real property known as Princeton Meadows Golf Course. Due to default interest and late fees that are delinquent and have been added to the principal balance, the current balance of this indebtedness is $1,320,419. AMIT now asserts that the loan is recourse by virtue of a certain amendment purportedly entered into as of November 1, 1992, but which the Partnership and the Joint Venture have been informed and believe were actually executed in December of 1992. The Partnership and the Joint Venture have been further informed and believe that the amendment may have been executed at the direction of Angeles Corporation ("Angeles") by an individual in his purported capacity as an officer of the Managing General Partner of the Partnership and the Joint Venture at a time when such person was not in fact an officer of such entities. In the event AMIT prevails in its assertion that the loan is recourse, rather than a non-recourse loan, the Partnership and the Joint Venture may have a claim against Angeles for any damages caused by Angeles' conduct in purporting to enter into the amendment. Accordingly, the Partnership and the Joint Venture have filed Proofs of Claim in the Angeles bankruptcy proceeding with respect to such purported amendment. Additionally, the Partnership filed a Proof of Claim in the Angeles Funding Corporation and Angeles Real Estate Corporation bankruptcy proceedings on similar grounds. Both Angeles Funding Corporation and Angeles Real Estate Corporation are affiliates of Angeles. While a plan of reorganization in the Angeles bankruptcy case was confirmed in March 1995, Angeles reserved the right to object to certain claims. Angeles has in fact indicated that it will object to the above described claim. The pursuit of this claim would be expensive and the outcome uncertain. In considering all of its options, the Partnership decided that the costs of pursuing this claim are not warranted in light of all of the relevant facts and circumstances. The Partnership has been in and continues to have discussions with AMIT regarding resolution of this issue. No agreement has been reached with AMIT at this time. MAE GP Corporation ("MAE GP"), an affiliate of the General Partner, owns 1,675,113 Class B Shares of AMIT. MAE GP has the option to convert these Class B Shares, in whole or in part, into Class A Shares on the basis of 1 Class A Share for every 49 Class B Shares. These Class B Shares entitle MAE GP to receive 1% of the distributions of net cash distributed by AMIT. The Class B Shares also entitle MAE GP to vote on the same basis as Class A Shares which allows MAE GP to vote approximately 33% of the total shares (unless and until converted to Class A Shares at which time the percentage of the vote controlled represented by the shares held by MAE GP would approximate 1% of the vote). Between the date of acquisition of these shares (November 24, 1992) and March 31, 1995, MAE GP has declined to vote these shares. Since that date, MAE GP voted its shares at the 1995 annual meeting in connection with the election of trustees and other matters. MAE GP has not exerted, and continues to decline to exert, any management control over or participate in the management of AMIT. However, MAE GP may choose to vote these shares as it deems appropriate in the future. 13 As part of a settlement of certain disputes with AMIT, MAE GP granted to AMIT an option to acquire the Class B Shares. This option can be exercised at the end of 10 years or when all loans made by AMIT to partnerships affiliated with MAE GP as of November 9, 1994, (which is the date of execution of a definitive Settlement Agreement) have been paid in full, but in no event prior to November 9, 1997. AMIT delivered to MAE GP cash in the sum of $250,000 at closing, which occurred April 14, 1995, as payment for the option. Upon exercise of the option, AMIT would remit to MAE GP an additional $94,000. Simultaneously with the execution of the option, MAE GP executed an irrevocable proxy in favor of AMIT the result of which is MAE GP will be able to vote the Class B Shares on all matters except those involving transactions between AMIT and MAE GP affiliated borrowers or the election of any MAE GP affiliate as an officer or trustee of AMIT. On those matters, MAE GP granted to the AMIT trustees, in their capacity as trustees of AMIT, proxies with regard to the Class B Shares instructing such trustees to vote said Class B Shares in accordance with the vote of the majority of the Class A Shares voting to be determined without consideration of the votes of "Excess Class A Shares" as defined in Section 6.13 of the Declaration of Trust of AMIT. Also, Angeles, either directly or through an affiliate, maintained a central disbursement account (the "Account") for the properties and partnerships managed by Angeles and its affiliates, including the Registrant. Angeles caused the Partnership to make deposits to the Account ostensibly to fund the payment of certain obligations of the Partnership. Angeles further caused checks on such Account to be written to or on behalf of certain other partnerships. At least $63,412 deposited by or on behalf of the Partnership was used for purposes other than satisfying the liabilities of the Partnership. Accordingly, the Partnership has filed a Proof of Claim in the Angeles bankruptcy proceedings for such amount. However, subsequently the Managing General Partner of the Partnership has determined that the cost involved to pursue such claim would likely exceed any amount received, if in fact such claim were to be resolved in favor of the Partnership. Therefore, the Partnership anticipates that it will not pursue its Proof of Claim. Except as mentioned above, the Partnership is not involved in any legal proceedings other than those arising in the normal course of business. The Managing General Partner believes that any losses experienced as a result of such proceedings will not have a material adverse effect upon the Partnership's 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. 14 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: Carroll D. Vinson President By: Robert D. Long, Jr. Controller and Principal Accounting Officer Date: August 10, 1995 15 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANGELES INCOME PROPERTIES, LTD. II By: Angeles Realty Corporation II Managing General Partner By: /s/Carroll D. Vinson Carroll D. Vinson President By: /s/Robert D. Long, Jr. Robert D. Long, Jr. Controller and Principal Accounting Officer Date: August 10, 1995 15