-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gc5mkdZMCils49ARW0lEfaSTTKs8L35DHzhkGpLni7OH2KElZiwqBgI0TtjYbrza 6TNYnZqAISp1fnW+Jl8jDA== 0000711642-01-500219.txt : 20020410 0000711642-01-500219.hdr.sgml : 20020410 ACCESSION NUMBER: 0000711642-01-500219 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANGELES INCOME PROPERTIES LTD II CENTRAL INDEX KEY: 0000711642 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 953793526 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-11767 FILM NUMBER: 1783182 BUSINESS ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 10QSB 1 aipl2.txt AIPL2 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, 2001 [ ] 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, 2001
Assets Cash and cash equivalents $ 827 Receivables and deposits 387 Restricted escrows 98 Other assets 575 Investment properties: Land $ 1,984 Buildings and related personal property 32,586 34,570 Less accumulated depreciation (25,649) 8,921 $ 10,808 Liabilities and Partners' Deficit Liabilities Accounts payable $ 175 Tenant security deposit liabilities 261 Accrued property taxes 292 Other liabilities 275 Mortgage notes payable 25,101 Partners' Deficit General partners $ (592) Limited partners (99,784 units issued and outstanding) (14,704) (15,296) $ 10,808 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, 2001 2000 2001 2000 Revenues: Rental income $ 1,702 $ 1,628 $ 5,084 $ 4,843 Other income 121 97 325 341 Casualty gains 40 -- 65 -- Total revenues 1,863 1,725 5,474 5,184 Expenses: Operating 646 600 1,719 1,676 General and administrative 77 163 249 325 Depreciation 454 433 1,366 1,299 Interest 493 357 1,200 1,043 Property taxes 191 154 556 401 Total expenses 1,861 1,707 5,090 4,744 Income from continuing operations 2 18 384 440 (Loss) income from discontinued operation -- (2) -- 114 Gain on sale of discontinued operation -- -- -- 2,060 Income before extraordinary item 2 16 384 2,614 Extraordinary loss on early extinguishment of debt -- -- (57) -- Net income $ 2 $ 16 $ 327 $ 2,614 Net income allocated to general partners $ -- $ -- $ 3 $ 112 Net income allocated to limited partners 2 16 324 2,502 $ 2 $ 16 $ 327 $ 2,614 Per limited partnership unit: Income before discontinued operation and extraordinary item $ 0.02 $ 0.18 $ 3.81 $ 4.36 (Loss) income from discontinued operation -- (0.02) -- 1.13 Gain on sale of discontinued operation -- -- -- 19.58 Extraordinary loss on early extinguishment of debt -- -- (0.56) -- Net income $ 0.02 $ 0.16 $ 3.25 $ 25.07 Distributions per limited partnership unit $ 72.13 $ -- $ 80.63 $ 51.19 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, 2000 99,784 $ (514) $ (6,982) $ (7,496) Distributions to partners -- (81) (8,046) (8,127) Net income for the nine months ended September 30, 2001 -- 3 324 327 Partners' deficit at September 30, 2001 99,784 $ (592) $(14,704) $(15,296) 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, 2001 2000 Cash flows from operating activities: Net income $ 327 $ 2,614 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,366 1,299 Amortization of discounts, loan costs and lease commissions 62 65 Gain on sale of discontinued operation -- (2,060) Extraordinary loss on early extinguishment of debt 57 -- Casualty gains (65) -- Change in accounts: Receivables and deposits (59) (212) Other assets (31) 157 Accounts payable 71 10 Tenant security deposit liabilities (29) (6) Accrued property taxes 179 114 Due to affiliates (81) (158) Other liabilities (21) (227) Net cash provided by operating activities 1,776 1,596 Cash flows from investing activities: Property improvements and replacements (1,047) (1,183) Net withdrawals from restricted escrows 45 201 Net proceeds from sale of discontinued operation -- 2,746 Insurance proceeds received 72 -- Net cash (used in) provided by investing activities (930) 1,764 Cash flows from financing activities: Payments on mortgage notes payable (224) (180) Advance from affiliate -- 265 Distributions to partners (8,127) (6,746) Proceeds from mortgage note payable 13,750 -- Repayment of mortgage note payable (5,985) -- Loan costs paid (408) -- Net cash used in financing activities (994) (6,661) Net decrease in cash and cash equivalents (148) (3,301) Cash and cash equivalents at beginning of period 975 4,229 Cash and cash equivalents at end of period $ 827 $ 928 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,091 $ 996 At December 31, 2000 and 1999, approximately $150,000 and $157,000, respectively, of property improvements and replacements were included in accounts payable. Distributions to partners of approximately $1,500,000 were declared at December 31, 1999 and paid in January 2000. 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, 2001, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2001. 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, 2000. The Managing General Partner is an affiliate of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. Principles of Consolidation The consolidated financial statements of the Partnership include all accounts of the Partnership, Georgetown AIP II, LP in which the Partnership holds a 99% limited partnership interest and AIPL II GP, LLC in which the Partnership is the sole member. Although legal ownership of the respective asset remains with these entities, the Partnership retains all economic benefits from the properties. 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 - 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 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, 2001 and 2000: 2001 2000 (in thousands) Property management fees (included in operating expenses) $ 271 $ 255 Reimbursement for services of affiliates (included in operating expense, general and administrative expense and investment properties) 310 153 Disposition fee (included in general partner distribution) -- 86 Refinancing fee (included in other assets) 138 -- Due to affiliate 11 335 During the nine months ended September 30, 2001 and 2000, 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 $271,000 and $255,000 for the nine months ended September 30, 2001 and 2000, respectively. An affiliate of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $310,000 and $153,000 for the nine months ended September 30, 2001 and 2000, respectively. Included in the total is approximately $174,000 and $21,000 in construction service reimbursements for the nine months ended September 30, 2001 and 2000, respectively. The Partnership Agreement provides for a fee equal to 10% of "Net cash flow from operations," as defined in the Partnership Agreement to be paid to the Managing General Partner for executive and administrative management services. The fee earned was approximately $11,000 and $70,000 for the nine months ended September 30, 2001 and 2000, respectively. Pursuant to the Partnership Agreement, the Managing General Partner is entitled to receive a distribution equal to 3% of the aggregate disposition price of sold properties. The Partnership paid a distribution of approximately $86,000 to the Managing General Partner related to the sale of Atlanta Crossing Shopping Center in September 2000. This amount is subordinate to the limited partners receiving their original capital contributions plus a cumulative preferred return of 6% per annum of their adjusted capital investment, as defined in the Partnership Agreement. If the limited partners have not received these returns when the Partnership terminates, the Managing General Partner will return this amount to the Partnership. In addition to reimbursement for services of affiliates, the Partnership paid a commission to an affiliate of the Managing General Partner of approximately $138,000 related to the refinance of Deer Creek Apartments during the nine months ended September 30, 2001. These costs were capitalized and are included in other assets on the consolidated balance sheet. In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates currently own 59,012 limited partnership units in the Partnership representing 59.14% of the outstanding units at September 30, 2001. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO either through private purchases or tender offers. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters which would include voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 59.14% of the outstanding units, AIMCO is in a position to control all voting decisions with respect to the Registrant. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of its affiliation with the Managing General Partner. Note C - Sale of Discontinued Operation In March 2000, Atlanta Crossing Shopping Center, located in Montgomery, Alabama, was sold to an unaffiliated party for $2,875,000. After payment of closing expenses, the net sales proceeds received by the Partnership were approximately $2,746,000. The sale resulted in a gain of approximately $2,060,000, which was recognized during the nine months ended September 30, 2000. Atlanta Crossing Shopping Center was the only commercial property owned by the Partnership and represented one segment of the Partnership's operations. Due to the sale of this property, the results of the commercial segment have been shown as (loss) income from discontinued operation on the consolidated statement of operations. Revenues of this property were approximately $193,000 for the nine months ended September 30, 2000. (Loss) income from operations was approximately ($2,000) and $114,000 for the three and nine months ended September 30, 2000, respectively. Note D - Distributions During the nine months ended September 30, 2001, the Partnership declared and paid distributions of approximately $8,127,000 (approximately $8,046,000 to the limited partners or $80.63 per limited partnership unit) of which approximately $857,000 (approximately $848,000 to the limited partners or $8.50 per limited partnership unit) was from operations and approximately $7,270,000 (approximately $7,198,000 to the limited partners or $72.13 per limited partnership unit) was from proceeds of the refinancing of the mortgage encumbering Deer Creek Apartments. Subsequent to September 30, 2001, the Partnership declared and paid a distribution of approximately $553,000 (approximately $547,000 to the limited partners or $5.48 per limited partnership unit) of which approximately $445,000 (approximately $440,000 to the limited partners or $4.41 per limited partnership unit) was from operations and approximately $108,000 (approximately $107,000 to the limited partners or $1.07 per limited partnership unit) was from proceeds of the refinance of Deer Creek Apartments. During the nine months ended September 30, 2000, the Partnership paid a distribution that was accrued in December 1999 of approximately $1,500,000 of which approximately $1,074,000 (approximately $1,063,000 to the limited partners or $10.65 per limited partnership unit) was from operations and approximately $426,000 (approximately $422,000 to the limited partners or $4.23 per limited partnership unit) was from proceeds from the sale of Princeton Meadows Golf Course Joint Venture during 1999. During the nine months ended September 30, 2000, the Partnership declared and paid distributions of approximately $5,246,000 (approximately $5,108,000 to the limited partners or $51.19 per limited partnership unit) of which approximately $2,500,000 (approximately $2,476,000 to the limited partners or $24.81 per limited partnership unit) is from operations and approximately $2,746,000 (approximately $2,632,000 to the limited partners or $26.38 per limited partnership unit) is from proceeds of the sale of Atlanta Crossing Shopping Center. Pursuant to the Partnership Agreement, the Partnership accrued and paid a distribution of approximately $86,000 to the Managing General Partner related to the sale of Atlanta Crossing Shopping Center in March 2000. This amount is subordinate to the limited partners receiving their original capital contributions plus a cumulative preferred return of 6% per annum of their adjusted capital investment, as defined in the Partnership Agreement. This distribution was paid during the third quarter of 2000. If the limited partners have not received the required returns when the Partnership terminates, the Managing General Partner will return this amount to the Partnership. Note E - Refinancing of Mortgage Note Payable On June 27, 2001, the Partnership refinanced the mortgage encumbering Deer Creek Apartments. The refinancing replaced indebtedness of approximately $5,985,000 with a new mortgage of $13,750,000. The new mortgage carries a stated interest rate of 7.43% as compared to the 7.33% interest rate on the old mortgage. Payments on the mortgage loan are due monthly until the loan matures on July 1, 2021. Total capitalized loan costs were approximately $408,000. These costs included $138,000 in fees paid to the Managing General Partner. The Partnership recognized an extraordinary loss on the early extinguishment of debt of approximately $57,000 due to the write-off of unamortized loan costs. Note F - Casualties During the nine months ended September 30, 2001, a net casualty gain was recorded at Georgetown Apartments. The casualty gain related to ice damage in January 2001. The gain was the result of insurance proceeds of approximately $29,000 less the net book value of the damaged property of approximately $3,000. During the nine months ended September 30, 2001, two net casualty gains were recorded at Landmark Apartments. One casualty gain related to a fire in January 2001. This gain was the result of insurance proceeds of approximately $22,000 less the net book value of the damaged property of approximately $2,000. The other casualty gain related to a fire in March 2001. This gain was the result of insurance proceeds of approximately $22,000 less the net book value of the damaged property of approximately $2,000. Note G - Segment Reporting Description of the types of products and services from which the reportable segment derives its revenues: The Partnership had two reportable segments: residential properties and commercial properties. The Partnership's residential property segment consists of three apartment complexes, one each 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 consisted of a retail shopping center located in Montgomery, Alabama. This property leased space to a discount store, various specialty retail outlets, and several restaurants at terms ranging from twelve months to twenty years. The commercial property was sold on March 15, 2000 (see "Note C"). Therefore, the commercial segment is reflected as discontinued operations. Measurement of segment profit or loss: The Partnership evaluates performance based on segment profit (loss) before depreciation. 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, 2000. Factors management used to identify the enterprise's reportable segment: 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 three and nine month periods ended September 30, 2001 and 2000 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. Three Months Ended September 30, 2001 Residential Other Totals Rental income $ 1,702 $ -- $ 1,702 Other income 114 7 121 Casualty gain 40 -- 40 Interest expense 493 -- 493 Depreciation 454 -- 454 General and administrative expense -- 77 77 Segment profit (loss) 72 (70) 2 Nine Months Ended September 30, 2001 Residential Other Totals Rental income $ 5,084 $ -- $ 5,084 Other income 314 11 325 Casualty gain 65 -- 65 Interest expense 1,200 -- 1,200 Depreciation 1,366 -- 1,366 General and administrative expense -- 249 249 Extraordinary loss on early extinguishment of debt (57) -- (57) Segment profit (loss) 565 (238) 327 Total assets 10,723 85 10,808 Capital expenditures for investment properties 897 -- 897
Three Months Ended September 30, 2000 Residential Commercial Other Totals (discontinued) Rental income $ 1,628 $ -- $ -- $ 1,628 Other income 94 -- 3 97 Interest expense 357 -- -- 357 Depreciation 433 -- -- 433 General and administrative expense -- -- 163 163 Loss from discontinued operation -- (2) -- (2) Segment profit (loss) 178 (2) (160) 16 Nine Months Ended September 30, 2000 Residential Commercial Other Totals (discontinued) Rental income $ 4,843 $ -- $ -- $ 4,843 Other income 296 -- 45 341 Interest expense 1,043 -- -- 1,043 Depreciation 1,299 -- -- 1,299 General and administrative expense -- -- 325 325 Income from discontinued operation -- 114 -- 114 Gain on sale of discontinued operation -- 2,060 -- 2,060 Segment profit (loss) 720 2,174 (280) 2,614 Total assets 11,223 -- 183 11,406 Capital expenditures for investment properties 1,020 6 -- 1,026
Note H - 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. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Managing General Partner and several of their affiliated partnerships and corporate entities. The action 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, among other things, the acquisition of interests in certain general partner entities by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs seek 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 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, settling claims, subject to court approval, on behalf of the Partnership and all limited partners who owned units as of November 3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999 from the Court, at which time the Court set a final approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing, the Court received various objections to the settlement, including a challenge to the Court's preliminary approval based upon the alleged lack of authority of prior lead counsel to enter the settlement. On December 14, 1999, the Managing General Partner and its affiliates terminated the proposed settlement. In February 2000, counsel for some of the named plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated the settlement. On June 27, 2000, the Court entered an order disqualifying them from the case and an appeal was taken from the order on October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the putative class. Plaintiffs filed a third amended complaint on January 19, 2001. On March 2, 2001, the Managing General Partner and its affiliates filed a demurrer to the third amended complaint. On May 14, 2001, the Court heard the demurrer to the third amended complaint. On July 10, 2001, the Court issued an order sustaining defendants' demurrer on certain grounds. On July 20, 2001, plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer. On September 7, 2001, plaintiffs filed a fourth amended class and derivative action complaint. On September 12, 2001, the Court denied plaintiffs' motion for reconsideration. On October 5, 2001, the Managing General Partner and affiliated defendants filed a demurrer to the fourth amended complaint, which, together with a demurrer filed by other defendants, is currently scheduled to be heard on November 15, 2001. The Court has set the matter for trial in January 2003. During the third quarter of 2001, a complaint (the "Heller action") was filed against the same defendants that are named in the Nuanes action, captioned Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed a first amended complaint. The first amended complaint in the Heller action is brought as a purported derivative action, and asserts claims for among other things breach of fiduciary duty; unfair competition; conversion, unjust enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a motion to consolidate the Heller action with the Nuanes action and stated that the Heller action was filed in order to preserve the derivative claims that were dismissed without leave to amend in the Nuanes action by the Court order dated July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated defendants moved to strike the first amended complaint in its entirety for violating the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer in the Nuanes action, or alternatively, to strike certain portions of the complaint based on the statute of limitations. Other defendants in the action demurred to the fourth amended complaint, and, alternatively, moved to strike the complaint. The matters are currently scheduled to be heard on November 15, 2001. The Managing General Partner does not anticipate that any costs, whether legal or settlement costs, associated with these cases 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 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 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. The following table sets forth the average occupancy of the properties for both of the nine months ended September 30, 2001 and 2000: Average Occupancy Property 2001 2000 Deer Creek Apartments 96% 98% Plainsboro, New Jersey Georgetown Apartments 96% 96% South Bend, Indiana Landmark Apartments 91% 89% Raleigh, North Carolina Results of Operations The Partnership's net income for the nine months ended September 30, 2001 was approximately $327,000 compared to approximately $2,614,000 for the nine months ended September 30, 2000. The Partnership's net income for the three month period ended September 30, 2001 was approximately $2,000 compared to approximately $16,000 for the three month period ended September 30, 2000. The decrease in net income for the nine month period ended September 30, 2001 is primarily attributable to the sale of Atlanta Crossing Shopping Center in March 2000 (see discussion below) offset by the extraordinary loss on the early extinguishment of debt recognized in 2001. The extraordinary loss on early extinguishment of debt relates to the refinancing of the mortgage encumbering Deer Creek Apartments (see discussion in "Liquidity and Capital Resources"). Excluding the operations and sale of the discontinued operation and the extraordinary loss on the early extinguishment of debt, the Partnership had income from continuing operations of approximately $384,000 for the nine months ended September 30, 2001, compared to approximately $440,000 for the nine months ended September 30, 2000. Excluding the operations of the discontinued operation, the Partnership had income from continuing operations of approximately $2,000 for the three month period ended September 30, 2001, compared to approximately $18,000 for the three month period ended September 30, 2000. Net income remained comparable for the three and nine month periods ended September 30, 2001 due to an increase in total revenues partially offset by an increase in total expenses. The increase in total revenues for the nine month period ended September 30, 2001 is due to an increase in rental income and the casualty gain at Georgetown Apartments due to an ice storm in January 2001 and the casualty gains at Landmark Apartments due to fires in January 2001 and March 2001 which were partially offset by a decrease in other income. The increase in total revenues for the three month period ended September 30, 2001 is due to an increase in rental income and other income and the casualty gains recognized in the third quarter upon receipt of insurance proceeds. The increase in rental income is the result of increased average rental rates at all of the Partnership's properties and an increase in occupancy at Landmark Apartments which was partially offset by a decrease in occupancy at Deer Creek Apartments and an increase in rental concessions and military discounts primarily at Landmark Apartments. The decrease in other income for the nine months ended September 30, 2001 is primarily due to a decrease in interest income as a result of a lower cash balance in interest bearing accounts, which was partially offset by an increase in tenant reimbursements at all of the Partnership's properties. The increase in other income for the three month period ended September 30, 2001 is primarily due to an increase in tenant reimbursements at all of the Partnership's properties. During the nine months ended September 30, 2001, a net casualty gain was recorded at Georgetown Apartments. The casualty gain related to ice damage in January 2001. The gain was the result of insurance proceeds of approximately $29,000 less the net book value of the damaged property of approximately $3,000. During the nine months ended September 30, 2001, two net casualty gains were recorded at Landmark Apartments. One casualty gain related to a fire in January 2001. This gain was the result of insurance proceeds of approximately $22,000 less the net book value of the damaged property of approximately $2,000. The other casualty gain related to a fire in March 2001. This gain was the result of insurance proceeds of approximately $22,000 less the net book value of the damaged property of approximately $2,000. Total expenses increased for the three and nine month periods ended September 30, 2001 due to increases in depreciation, interest, and property tax expenses partially offset by a decrease in general and administrative expenses. Depreciation expense increased for the three and nine month periods ended September 30, 2001 due to capital improvements completed during the past twelve months. Interest expense increased for the three and nine month periods ended September 30, 2001 due to the refinancing of Deer Creek Apartments in June 2001, which increased the debt balance at the property, as discussed in Liquidity and Capital Resources. Property tax expense increased for the three and nine month periods ended September 30, 2001 due to an increase in the tax rate at Deer Creek Apartments and the timing of the receipt of tax bills at Georgetown Apartments. General and administrative expenses decreased for the three and nine month periods ended September 30, 2001 due to a decrease in Partnership management fees accrued at September 30, 2001, a decrease in professional fees associated with the administration of the Partnership, and a decrease in legal expenses. Included in general and administrative expenses at both September 30, 2001 and 2000 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. In March 2000, Atlanta Crossing Shopping Center, located in Montgomery, Alabama, was sold to an unaffiliated party for $2,875,000. After payment of closing expenses, the net sales proceeds received by the Partnership were approximately $2,746,000. The sale resulted in a gain of approximately $2,060,000, which was recognized during the nine months ended September 30, 2000. Atlanta Crossing Shopping Center was the only commercial property owned by the Partnership and represented one segment of the Partnership's operations. Due to the sale of this property, the results of the commercial segment have been shown as (loss) income from discontinued operation on the consolidated statement of operations. Revenues of this property were approximately $193,000 for the nine months ended September 30, 2000. (Loss) income from operations was approximately ($2,000) and $114,000 for the three and nine months ended September 30, 2000, respectively. 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. Liquidity and Capital Resources At September 30, 2001, the Partnership had cash and cash equivalents of approximately $827,000 compared to approximately $928,000 at September 30, 2000. The decrease in cash and cash equivalents of approximately $148,000 since December 31, 2000 is due to approximately $994,000 of cash used in financing activities and approximately $930,000 of cash used in investing activities partially offset by approximately $1,776,000 of cash provided by operating activities. Cash used in financing activities consisted of repayment of the mortgage encumbering Deer Creek Apartments, loan costs paid, distributions to the partners, and payments of principal made on the mortgages encumbering the Partnership's properties partially offset by proceeds received from the refinancing of Deer Creek Apartments. Cash used in investing activities consisted of property improvements and replacements partially offset by net withdrawals from escrow accounts maintained by the mortgage lenders and insurance proceeds received. The Partnership invests its working capital reserves in interest bearing accounts. On June 27, 2001, the Partnership refinanced the mortgage encumbering Deer Creek Apartments. The refinancing replaced indebtedness of approximately $5,985,000 with a new mortgage of $13,750,000. The new mortgage carries a stated interest rate of 7.43% as compared to the 7.33% interest rate on the old mortgage. Payments on the mortgage loan are due monthly until the loan matures on July 1, 2021. Total capitalized loan costs were approximately $408,000. These costs included $138,000 in fees paid to the Managing General Partner. The Partnership recognized an extraordinary loss on the early extinguishment of debt of approximately $57,000 due to the write-off of unamortized loan costs. 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. Deer Creek During the nine months ended September 30, 2001, the Partnership spent approximately $570,000 on capital improvements consisting primarily of air conditioning unit replacements, swimming pool improvements, carpet and vinyl replacements, maintenance equipment, water submetering, and cabinet replacements. These improvements were funded from Partnership reserves and operating cash flow. The Partnership has evaluated the capital improvement needs of the property for the year 2001. The amount budgeted is approximately $1,029,000, consisting primarily of cabinets, appliances, and water submetering. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Georgetown During the nine months ended September 30, 2001, the Partnership spent approximately $184,000 on budgeted and non-budgeted capital improvements consisting primarily of buildings, appliances, and carpet replacements. These improvements were funded from Partnership reserves, insurance proceeds, and operating cash flow. The Partnership has evaluated the capital improvement needs of the property for the year 2001. The amount budgeted is approximately $159,000, consisting primarily of carpet and vinyl replacements, appliances, and structural improvements. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Landmark During the nine months ended September 30, 2001, the Partnership spent approximately $143,000 on budgeted and non-budgeted capital improvements consisting primarily of buildings, structural improvements, water heater replacements, countertop replacements, and carpet and vinyl replacements. These improvements were funded from Partnership reserves, operating cash flow and insurance proceeds. The Partnership has evaluated the capital improvement needs of the property for the year 2001. The amount budgeted is approximately $99,000, consisting primarily of air conditioning unit replacements, carpet and vinyl replacement, window treatments, cabinets, and appliances. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. 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 Registrant'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 encumbering Deer Creek Apartments of $13,700,000 is amortized over 20 years and matures July 1, 2021. The mortgage indebtedness encumbering Georgetown Apartments and Landmark Apartments of approximately $11,401,000, 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 the mortgages encumbering Georgetown and Landmark 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, 2001, the Partnership declared and paid distributions of approximately $8,127,000 (approximately $8,046,000 to the limited partners or $80.63 per limited partnership unit) of which approximately $857,000 (approximately $848,000 to the limited partners or $8.50 per limited partnership unit) was from operations and approximately $7,270,000 (approximately $7,198,000 to the limited partners or $72.13 per limited partnership unit) was from proceeds of the refinancing of the mortgage encumbering Deer Creek Apartments. Subsequent to September 30, 2001, the Partnership declared and paid a distribution of approximately $553,000 (approximately $547,000 to the limited partners or $5.48 per limited partnership unit) of which approximately $445,000 (approximately $440,000 to the limited partners or $4.41 per limited partnership unit) was from operations and approximately $108,000 (approximately $107,000 to the limited partners or $1.07 per limited partnership unit) was from proceeds of the refinance of Deer Creek Apartments. During the nine months ended September 30, 2000, the Partnership paid a distribution that was accrued in December 1999 of approximately $1,500,000 of which approximately $1,074,000 (approximately $1,063,000 to the limited partners or $10.65 per limited partnership unit) was from operations and approximately $426,000 (approximately $422,000 to the limited partners or $4.23 per limited partnership unit) was from proceeds from the sale of Princeton Meadows Golf Course Joint Venture during 1999. During the nine months ended September 30, 2000, the Partnership declared and paid distributions of approximately $5,246,000 (approximately $5,108,000 to the limited partners or $51.19 per limited partnership unit) of which approximately $2,500,000 (approximately $2,476,000 to the limited partners or $24.81 per limited partnership unit) is from operations and approximately $2,746,000 (approximately $2,632,000 to the limited partners or $26.38 per limited partnership unit) is from proceeds of the sale of Atlanta Crossing Shopping Center. Pursuant to the Partnership Agreement, the Partnership accrued and paid a distribution of approximately $86,000 to the Managing General Partner related to the sale of Atlanta Crossing Shopping Center in March 2000. This amount is subordinate to the limited partners receiving their original capital contributions plus a cumulative preferred return of 6% per annum of their adjusted capital investment, as defined in the Partnership Agreement. This distribution was paid during the third quarter of 2000. If the limited partners have not received the required returns when the Partnership terminates, the Managing General Partner will return this amount to the Partnership. 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 monthly 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 2001 or subsequent periods. In addition, the Partnership may be restricted from making distributions by the requirement to deposit in the reserve account maintained by the mortgage lender for Georgetown Apartments a minimum of $200 and a maximum of $400 per apartment unit for a total of $40,000 to $80,000. As of September 30, 2001, the reserve account totaled approximately $78,000. In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates currently own 59,012 limited partnership units in the Partnership representing 59.14% of the outstanding units at September 30, 2001. A number of these units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO either through private purchases or tender offers. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters which would include voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. As a result of its ownership of 59.14% of the outstanding units, AIMCO is in a position to control all voting decisions with respect to the Registrant. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of its affiliation with the Managing General Partner. 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. (the "Nuanes action") in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, its Managing General Partner and several of their affiliated partnerships and corporate entities. The action 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, among other things, the acquisition of interests in certain general partner entities by Insignia Financial Group, Inc. ("Insignia") and entities which were, at one time, affiliates of Insignia; past tender offers by the Insignia affiliates to acquire limited partnership units; management of the partnerships by the Insignia affiliates; and the series of transactions which closed on October 1, 1998 and February 26, 1999 whereby Insignia and Insignia Properties Trust, respectively, were merged into AIMCO. The plaintiffs seek 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 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, settling claims, subject to court approval, on behalf of the Partnership and all limited partners who owned units as of November 3, 1999. Preliminary approval of the settlement was obtained on November 3, 1999 from the Court, at which time the Court set a final approval hearing for December 10, 1999. Prior to the December 10, 1999 hearing, the Court received various objections to the settlement, including a challenge to the Court's preliminary approval based upon the alleged lack of authority of prior lead counsel to enter the settlement. On December 14, 1999, the Managing General Partner and its affiliates terminated the proposed settlement. In February 2000, counsel for some of the named plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who negotiated the settlement. On June 27, 2000, the Court entered an order disqualifying them from the case and an appeal was taken from the order on October 5, 2000. On December 4, 2000, the Court appointed the law firm of Lieff Cabraser Heimann & Bernstein LLP as new lead counsel for plaintiffs and the putative class. Plaintiffs filed a third amended complaint on January 19, 2001. On March 2, 2001, the Managing General Partner and its affiliates filed a demurrer to the third amended complaint. On May 14, 2001, the Court heard the demurrer to the third amended complaint. On July 10, 2001, the Court issued an order sustaining defendants' demurrer on certain grounds. On July 20, 2001, plaintiffs filed a motion for reconsideration of the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer. On September 7, 2001, plaintiffs filed a fourth amended class and derivative action complaint. On September 12, 2001, the Court denied plaintiffs' motion for reconsideration. On October 5, 2001, the Managing General Partner and affiliated defendants filed a demurrer to the fourth amended complaint, which, together with a demurrer filed by other defendants, is currently scheduled to be heard on November 15, 2001. The Court has set the matter for trial in January 2003. During the third quarter of 2001, a complaint (the "Heller action") was filed against the same defendants that are named in the Nuanes action, captioned Heller v. Insignia Financial Group. On or about August 6, 2001, plaintiffs filed a first amended complaint. The first amended complaint in the Heller action is brought as a purported derivative action, and asserts claims for among other things breach of fiduciary duty; unfair competition; conversion, unjust enrichment; and judicial dissolution. Plaintiffs in the Nuanes action filed a motion to consolidate the Heller action with the Nuanes action and stated that the Heller action was filed in order to preserve the derivative claims that were dismissed without leave to amend in the Nuanes action by the Court order dated July 10, 2001. On October 5, 2001, the Managing General Partner and affiliated defendants moved to strike the first amended complaint in its entirety for violating the Court's July 10, 2001 order granting in part and denying in part defendants' demurrer in the Nuanes action, or alternatively, to strike certain portions of the complaint based on the statute of limitations. Other defendants in the action demurred to the fourth amended complaint, and, alternatively, moved to strike the complaint. The matters are currently scheduled to be heard on November 15, 2001. The Managing General Partner does not anticipate that any costs, whether legal or settlement costs, associated with these cases will be material to the Partnership's overall operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: None. b) Reports on Form 8-K filed during the quarter ended September 30, 2001: None. 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: -----END PRIVACY-ENHANCED MESSAGE-----