-----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, Il3K8q/adznBnodM7iyS1LxawxHK82GpfGknMqIn1Z5sG8f/B/SOKSSj7jyN/RXo JO0wVap3HddTxsKsTdLZxw== 0000711642-99-000176.txt : 19990810 0000711642-99-000176.hdr.sgml : 19990810 ACCESSION NUMBER: 0000711642-99-000176 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990809 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: SEC FILE NUMBER: 000-11767 FILM NUMBER: 99681075 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 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 June 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 (IRS 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) June 30, 1999 Assets Cash and cash equivalents $ 3,505 Receivables and deposits (net of allowance for doubtful accounts of $396) 561 Restricted escrows 798 Other assets 657 Investment in joint venture 58 Investment properties: Land $ 2,198 Buildings and related personal property 34,707 36,905 Less accumulated depreciation (26,597) 10,308 $ 15,887 Liabilities and Partners' Deficit Liabilities Accounts payable $ 113 Tenant security deposit liabilities 282 Accrued property taxes 235 Other liabilities 179 Mortgage notes payable 17,894 Partners' Deficit General partners $ (468) Limited partners (99,784 units issued and outstanding) (2,348) (2,816) $ 15,887 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 Six Months Ended June 30, June 30, 1999 1998 1999 1998 Revenues: Rental income $1,595 $1,749 $3,409 $3,532 Other income 122 152 212 256 Total revenues 1,717 1,901 3,621 3,788 Expenses: Operating 592 903 1,184 1,526 General and administrative 78 72 149 142 Depreciation 386 459 853 917 Interest 357 360 714 721 Property taxes 155 140 307 289 Total expenses 1,568 1,934 3,207 3,595 Equity in income of joint venture 26 25 427 9 Income (loss) before extraordinary item 175 (8) 841 202 Equity in extraordinary loss on the extinguishment of debt of joint venture (Note C) -- -- (1) -- Net income (loss) $ 175 $ (8) $ 840 $ 202 Net income allocated to general partners (1%) $ 2 $ -- $ 8 $ 2 Net income (loss) allocated to limited partners (99%) 173 (8) 832 200 $ 175 $ (8) $ 840 $ 202 Net income (loss) per limited partnership unit: Income (loss) before extraordinary item $ 1.73 $(0.08) $ 8.35 $ 2.00 Extraordinary item -- -- (0.01) -- Net income (loss) $ 1.73 $(0.08) $ 8.34 $ 2.00 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) Net income for the six months ended June 30, 1999 -- 8 832 840 Partners' deficit at June 30, 1999 99,784 $ (468) $ (2,348) $ (2,816) See Accompanying Notes to Consolidated Financial Statements d) ANGELES INCOME PROPERTIES, LTD. II CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended June 30, 1999 1998 Cash flows from operating activities: Net income $ 840 $ 202 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 853 917 Amortization of discounts, loan costs and lease commissions 49 49 Bad debt expense (recovery), net 75 (77) Equity in income of joint venture (427) (9) Equity in extraordinary loss on extinguishment of debt of joint venture 1 -- Loss on disposal of property 35 39 Change in accounts: Receivables and deposits 18 (22) Other assets (42) 7 Accounts payable (6) (169) Tenant security deposit payable 13 5 Accrued property taxes (19) (26) Other liabilities (53) 17 Net cash provided by operating activities 1,337 933 Cash flows from investing activities: Property improvements and replacements (265) (656) Net withdrawals from restricted escrows 54 285 Distributions from joint venture 380 -- Repayment of advances to joint venture 46 -- Net cash provided by (used in) investing activities 215 (371) Cash flows used in financing activities: Payments on mortgage notes payable (110) (102) Net increase in cash and cash equivalents 1,442 460 Cash and cash equivalents at beginning of period 2,063 3,099 Cash and cash equivalents at end of period $ 3,505 $ 3,559 Supplemental disclosure of cash flow information: Cash paid for interest $ 674 $ 682 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 six month periods ended June 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 fiscal 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 interentity 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, a publicly traded real estate investment trust ("AIMCO"), 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 $3,108,000. The Partnership's 1999 pro-rata share of this gain is approximately $448,000. 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 June 30, 1999, is as follows: June 30, 1999 (in thousands) Assets Cash $ 355 Other assets 51 Total $ 406 Liabilities and Partners' Capital Other liabilities $ 15 Partners' capital 391 Total $ 406 The condensed profit and loss statement of the Joint Venture is summarized as follows: Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 (in thousands) (in thousands) Revenue $ 61 $ 541 $ 91 $ 744 Costs and expenses (100) (364) (231) (681) (Loss) income before gain on sale of property and extraordinary loss on extinguishment of debt (39) 177 (140) 63 Gain on sale of property 223 -- 3,108 -- Extraordinary loss on extinguishment of debt -- -- (7) -- Net income $ 184 $ 177 $2,961 $ 63 The Partnership's 14.4% equity interest in the income of the Joint Venture for the six months ended June 30, 1999, was approximately $427,000. The equity interest in the income of the Joint Venture for the six months ended June 30, 1998, was approximately $9,000. The Partnership also realized equity in the extraordinary loss on extinguishment of debt of approximately $1,000 for the six months ended June 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 DEP of the findings when they were first discovered. However, 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 to be sometime in 1999. The Joint Venture originally recorded a liability of $199,000 for the costs of the clean- up. At February 26, 1999, the balance in the liability for clean-up costs was approximately $53,000. Upon the sale of the Golf Course, as noted above, the joint venture received documents from the Purchaser releasing the Joint Venture from any further responsibility or liability with respect to the clean-up. NOTE 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 six months ended June 30, 1999 and 1998: 1999 1998 (in thousands) Property management fees (included in operating expense) $169 $172 Reimbursement for services of affiliates, (included in operating expense, general and administrative expense and investment properties) 114 121 Due from affiliate 26 -- During the six months ended June 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 $169,000 and $161,000 for the six months ended June 30, 1999 and 1998, respectively. During the six months ended June 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 six months ended June 30, 1998 and were approximately $11,000. 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 $114,000 and $121,000 for the six months ended June 30, 1999 and 1998, respectively, including approximately $53,000 and $34,000, respectfully, in construction oversight costs. Additionally, the Partnership paid approximately $6,000 during the six months ended June 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 ("Units") 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 Limited Partner Units (8.93% of the total outstanding Units) being acquired by the Purchaser at $150.00 per Unit. 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 27,271.00 units of limited partnership interest in the Partnership representing approximately 27.33% 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. 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 Angeles Mortgage Investment Trust ("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 current 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 - 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 six months ended June 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 $ 3,142 $ 267 $ -- $ 3,409 Other income 183 4 25 212 Interest expense 714 -- -- 714 Depreciation 782 71 -- 853 General and administrative expense -- -- 149 149 Equity in income of joint venture -- -- 427 427 Equity in extraordinary loss on extinguishment of debt of joint venture -- -- (1) (1) Segment profit 488 50 302 840 Total assets 12,920 883 2,084 15,887 Capital expenditures for investment properties 265 -- -- 265 1998 Residential Commercial Other Totals Rental income $ 3,046 $ 486 $ -- $ 3,532 Other income 174 5 77 256 Interest expense 721 -- -- 721 Depreciation 784 133 -- 917 General and administrative expense -- -- 142 142 Equity in income of joint venture -- -- 9 9 Segment profit (loss) 70 188 (56) 202 Total assets 13,007 1,267 2,526 16,800 Capital expenditures for investment properties 579 77 -- 656 NOTE F - LEGAL PROCEEDINGS In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, the Managing General Partner and several of their affiliated partnerships and corporate entities. The complaint purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging the acquisition by Insignia and entities which were, at the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain general partner entities, past tender offers by Insignia Affiliates as well as a recently announced agreement between Insignia and AIMCO. The complaint seeks monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Managing General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The Managing General Partner has filed demurrers to the amended complaint which were scheduled to be heard during February 1999. No ruling on such demurrers has been received. The Managing General Partner does not anticipate that costs associated with this case, if any, will be material to the Partnership's overall operations. 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 six months ended June 30, 1999 and 1998: Average Occupancy Property 1999 1998 Atlanta Crossing Shopping Center 56% 73% Montgomery, Alabama Deer Creek Apartments 98% 97% Plainsboro, New Jersey Georgetown Apartments 94% 95% South Bend, Indiana Landmark Apartments 93% 91% Raleigh, North Carolina 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 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 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 six months ended June 30, 1999 and 1998 is 87% and 91%, respectively. Results of Operations The Partnership's net income for the six months ended June 30, 1999, was approximately $840,000 compared to approximately $202,000 for the six months ended June 30, 1998. The Partnership's net income for the three months ended June 30, 1999, was approximately $175,000 compared to a net loss of approximately $8,000 for the three months ended June 30, 1998. The increase in net income for the three and six months ended June 30, 1999, is primarily due to the equity in income of the joint venture due to the sale of Princeton Meadows Golf Course as discussed below. The increase in net income before the equity in income of joint venture of approximately $182,000 and $221,000, respectively, for the three and six months ended June 30, 1999, is primarily due to a decrease in total expenses which is partially offset by a decrease in total revenues. The decrease in expenses is primarily due to a decrease in operating and depreciation 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. The Partnership recorded losses on disposal of property of approximately $35,000 and $39,000 for the six months ended June 30, 1999 and 1998, respectively. Both the 1999 and 1998 losses resulted from the write-off of siding at Dear 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. The decrease in total revenue is due to a decrease in rental and other income. Rental income decreased for the three and six month periods ended June 30, 1999, primarily due to increased bad debt expense at Atlanta Crossing, as well as decreased tenant reimbursements at Atlanta Crossing. 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. The decrease in other income is primarily due to a decrease in interest income as a result of a lower cash balance in interest-bearing accounts. General and administrative expenses remained relatively constant for the comparable periods. Included in general and administrative expenses at both June 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. The Partnership had a 14.4% investment in the Princeton Meadows Golf Course Joint Venture ("Joint Venture"). For the six months ended June 30, 1999, the Partnership realized equity in the income of the joint venture of approximately $427,000, compared to equity in the income of the joint venture of approximately $9,000 for the six months ended June 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 $3,108,000. The Partnership's 1999 pro-rata share of this gain is approximately $448,000. 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. 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 needed 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 and cash equivalents of approximately $3,505,000 at June 30, 1999, compared to approximately $3,559,000 at June 30, 1998. The increase in cash and cash equivalents of approximately $1,442,000 since December 31, 1998, is due to approximately $1,337,000 of cash provided by operating activities and approximately $215,000 of cash provided by investing activities which was partially offset by approximately $110,000 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 of 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 six months ended June 30, 1999, the Partnership did not complete any capital 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 six months ended June 30, 1999, the Partnership spent approximately $189,000 on capital improvements consisting primarily of building improvements, parking lot resurfacing, and interior decoration. These improvements were funded from 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 $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 and pool repairs, exterior painting, and other interior and exterior building improvements. Georgetown During the six months ended June 30, 1999, the Partnership spent approximately $33,000 on capital improvements which consisted primarily of carpet and vinyl replacement and appliances. These improvements were funded from 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 repairs, exterior painting, and other interior and exterior building improvements. Landmark During the six months ended June 30, 1999, the Partnership spent approximately $43,000 on capital improvements consisting primarily of carpet and vinyl replacement and air conditioning unit replacements. These improvements were funded from 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 repairs, siding replacement, exterior painting 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 $17,894,000, 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. There were no cash distributions to the partners during the six months ended June 30, 1999 and 1998. Subsequent to June 30, 1999, a distribution from operations in the amount of $700,000 (approximately $693,000 to the limited partners or $6.95 per limited partnership unit) was declared and paid. 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 will be 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 in 1999 or subsequent periods. 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 27,271.00 units of limited partnership interest in the Partnership representing approximately 27.33% 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. 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 June 30, 1999, had completed approximately 90% of this effort. The total cost to the Managing Agent to replace the PC-based network servers, routers and desktop PCs is expected to be approximately $1.5 million of which $1.3 million has been incurred to date. The remaining network connections and desktop PCs are expected to be upgraded to Year 2000 compliant systems by September 30, 1999. The completion of this process is scheduled to coincide with the release of a compliant version of the Managing Agent's operating system. 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 90% of the server operating systems. The remaining server operating systems are planned to be upgraded to be Year 2000 compliant by September, 1999. The completion of this process is scheduled to coincide with the release of a compliant version of the Managing Agent's operating system. 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 no Year 2000 issues. A complete, formal assessment of all the properties by the Managing Agent is in process and will be completed in September, 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 June 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 continues to conduct surveys of its banking and other vendor relationships to assess risks regarding their Year 2000 readiness. The Managing Agent has banking relationships with three major financial institutions, all of which have indicated their compliance efforts will be complete before July, 1999. The Managing Agent has updated data transmission standards with all of the financial institutions. The Managing Agent's contingency plan in this regard is to move accounts from any institution that cannot be certified Year 2000 compliant by September 1, 1999. The Partnership does not rely heavily on any single vendor for goods and services, and does not have significant suppliers and subcontractors who share information systems (external agent). To date the Partnership is not aware of any external agent with a Year 2000 compliance issue that would materially impact the Partnership's results of operations, liquidity, or capital resources. However, the Partnership has no means of ensuring that external agents will be Year 2000 compliant. The Managing Agent does not believe that the inability of external agents to complete their Year 2000 remediation process in a timely manner will have a material impact on the financial position or results of operations of the Partnership. However, the effect of non-compliance by external agents is not readily determinable. Costs to Address Year 2000 The total cost of the Year 2000 project to the Managing Agent is estimated at $3.5 million and is being funded from operating cash flows. To date, the Managing Agent has incurred approximately $2.9 million ($0.7 million expensed and $2.2 million capitalized for new systems and equipment) related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $0.5 million is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $0.2 million relates to repair of hardware and software and will be expensed as incurred. The Partnership's portion of these costs are not material. Risks Associated with the Year 2000 The Managing Agent believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Managing Agent has not yet completed all necessary phases of the Year 2000 program. In the event that the Managing Agent does not complete any additional phases, certain worst case scenarios could occur. The worst case scenarios could include elevators, security and heating, ventilating and air conditioning systems that read incorrect dates and operate with incorrect schedules (e.g., elevators will operate on Monday as if it were Sunday). Although such a change would be annoying to residents, it is not business critical. In addition, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Partnership. The Partnership could be subject to litigation for, among other things, computer system failures, equipment shutdowns or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. Contingency Plans Associated with the Year 2000 The Managing Agent has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and selecting new relationships for such activities as banking relationships and elevator operating systems. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 1998, several putative unit holders of limited partnership units of the Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia Financial Group, Inc., et al. in the Superior Court of the State of California for the County of San Mateo. The plaintiffs named as defendants, among others, the Partnership, the Managing General Partner and several of their affiliated partnerships and corporate entities. The complaint purports to assert claims on behalf of a class of limited partners and derivatively on behalf of a number of limited partnerships (including the Partnership) which are named as nominal defendants, challenging the acquisition by Insignia and entities which were, at the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain general partner entities, past tender offers by Insignia Affiliates as well as a recently announced agreement between Insignia and AIMCO. The complaint seeks monetary damages and equitable relief, including judicial dissolution of the Partnership. On June 25, 1998, the Managing General Partner filed a motion seeking dismissal of the action. In lieu of responding to the motion, the plaintiffs filed an amended complaint. The Managing General Partner has filed demurrers to the amended complaint which were scheduled to be heard during February 1999. No ruling on such demurrers has been received. The Managing General Partner does not anticipate that costs associated with this case, if any, will be material to the Partnership's overall operations. 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 were filed during the quarter ended June 30, 1999. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has 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/ Carla R. Stoner Carla R. Stoner Senior Vice President Finance and Administration Date: August 6, 1999 EX-27 2
5 This schedule contains summary financial information extracted from Angeles Income Properties, Ltd. II 1999 Second Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000711642 ANGELES INCOME PROPERTIES, LTD. II 1,000 6-MOS DEC-31-1999 JUN-30-1999 3,505 0 561 0 0 0 36,905 26,597 15,887 0 17,894 0 0 0 (2,816) 15,887 0 3,621 0 0 3,207 0 714 0 0 0 0 (1) 0 840 8.34 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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