Broken Promises Finally Clip the Wings of Angeles and Its Investors

For more than 30 years, Angeles Corp. has been the proverbial nine-lived cat of Southland investment companies, improbably surviving one after another of potentially fatal falls.

But this week, Angeles took what may have been its final tumble--this time into Chapter 11 bankruptcy, dragging behind a tangled net of bondholders, limited partnership owners and shareholders.

While largely unknown to Southland investors, the West Los Angeles-based company has had an extraordinarily rich history as an incubator of some of the greatest investment stars--and some of the biggest flops--of the modern era.

Fred Carr, best-known for presiding over the First Executive insurance debacle of 1991, got his start at Angeles' predecessor company. Ernest O. Ellison, now vice chairman of giant Trust Co. of the West, helped launch TCW with a big chunk of Angeles assets in the mid-1970s. George Michaelis, whose Source Capital fund was owned by Angeles until 1991, is a Warren Buffett-like stock picker of considerable renown.

For many years, Angeles' successes in financial and real estate management--or at least its success in raising money from new investors, primarily for real estate tax shelters--were enough to overcome the firm's periodic blunders. At one time in the '80s, as many as 200,000 individuals had some form of investment with Angeles.

But when the 1986 change in tax laws ended Americans' love affair with real estate partnerships, the easy-money spigot shut off for Angeles, as it did for most syndicators.

Left with a $1.5-billion real estate portfolio that it controlled for thousands of limited partners, Angeles became increasingly strapped for cash in recent years, as income from many of its properties deteriorated in the nationwide real estate collapse.

At the same time, former Chief Executive William H. Elliott had bet Angeles' future on two new--and cash-gobbling--real estate ventures: outlet malls and congregate-care apartments for active elderly people.

If Angeles were just another victim of the real estate slump, however, the story could have ended cleanly a few years ago. How the 60-year-old Elliott and his crew avoided the corporate gallows for so long is a classic tale of management making promises it couldn't keep, to investors who didn't know better.

Ironically, that also is what nearly sank Angeles in its first major crisis, in 1969.

At that time, Angeles was known as Shareholders Capital Corp. and owned six mutual funds, including the infamous Enterprise Fund run by Carr, then 37.

In the stock-fund boom of that era, Enterprise pulled in $800 million in assets in a short period, riding a wild bull market in highly illiquid smaller stocks. Investors came to believe that Carr was a genius who had no equal in picking "emerging growth" stars.

When the market collapsed in 1969, however, Enterprise's crash became the most celebrated financial disaster of the day.

It took years to work through the lawsuits that followed. By the mid-1970s, that chapter of Angeles Corp. was finally closed, with the sale of most of the mutual funds to American General in Houston.

For Angeles, however, the fund debacle was only the first of several crises the firm would eventually confront and overcome. In 1974, Elliott, then president, bailed the firm's still-young real estate division out of a crash of the ski-resort condo market. In the '80s, an investment in oil and gas partnerships became a financial morass.

While profitable from the late 1970s to 1984, Angeles became a money loser from then on. Like many firms primarily engaged in real estate in the '80s, the company was run for "cash flow" rather than real earnings--until the cash flow too began to dry up.

Yet throughout Angeles' calamitous history, the firm also served as a training ground for money managers whose ultimate success sharply contrasted with Angeles' failures. TCW's Ellison was among the first great stars. The last was Michaelis, whose $4-billion group of mutual funds, including Source Capital and the First Pacific Advisors funds, were a part of Angeles until they were sold to United Asset Management in 1991.

Michaelis, recalling his desire to exit Angeles at the time, says simply that the real estate market chaos that took hold in 1990 persuaded him that the mutual funds would be better protected under a stronger parent. "We didn't know anything, but we didn't want to go through a bankruptcy," he says.

How did Angeles finally unravel?

* As real estate financing became tougher in the late 1980s, Angeles turned to more complex deals to raise money. In a major move, the firm created two publicly traded trusts that lent cash to finance Angeles properties, mostly apartments, and the outlet shopping malls (including one near Barstow).

To attract investors to the trust securities (Angeles Mortgage Investment and Angeles Participating Mortgage), Angeles itself turned around and guaranteed that the trusts both would pay annual dividends of $2 a share, yielding lucrative double-digit returns to buyers.

Though all quite legal, Angeles was in effect doubly committing itself to the properties' success--first, via the mortgage loans the trusts held on Angeles buildings and, second, via the minimum-dividend guarantee.

* At the same time, Angeles committed heavily in the late '80s to the development of elderly care centers, financing those with more than $120 million in real estate trust dollars raised through PaineWebber. While Angeles insists that its 15 care centers nationwide remain a viable business, they have been a continual cash drain as Angeles builds a tenant base.

* Finally, as income from some of its properties began to falter with the real estate downturn, Angeles faced rising cash demands from the limited partnerships it had sponsored earlier in the '80s to help purchase the properties. As general partner, Angeles was suddenly expected to put up more cash to keep the limited partners whole.

Many other general partners who faced similar cash calls in the late '80s and early '90s decided against risking more of their own money and instead walked away--which is why the partnership business today is so riddled with deals gone bad.

Angeles, however, continued to pump millions of dollars into its partnerships on demand.

Now the numbers are grossly stacked against the firm. Angeles Corp., as holding company for its outlet mall and congregate-care subsidiaries, lists the book value of its assets as $35.4 million, while liabilities total $56.4 million.

But as Elliott figures it, the firm's various partnerships alone owe it $84 million, including fees and expenses Angeles has deferred. "At some point, earlier than we did, we should have said, 'We're not going to do this anymore,' " Elliott candidly admits.

In an apparent last-ditch effort to save itself, Angeles sold most of its general partner interests to Greenville, S.C.-based Insignia Financial Group last November. But that move actually hastened Angeles' end: In a surprise turn, Insignia quickly allowed a number of partnership loans to default, triggering claims on guarantees Angeles had previously made. By year-end, Angeles was on the path to bankruptcy.

While Elliott and William Tuthill, a longtime Angeles executive who replaced Elliott as CEO this year, both insist that the outlet mall and congregate-care properties have excellent potential in the long term, it isn't clear what will be left of Angeles when creditors get through.

Besides the two Angeles trusts' claims on Angeles properties, the PaineWebber investors have claims, along with Angeles bondholders--there are two "junk" issues outstanding from the firm.

One of the trusts, Angeles Mortgage, has plunged from $16.875 a share earlier this year to $2.625; the other--Angeles Participating, which financed the outlet malls--is at $10, down from $17.75. Both trade on the American Stock Exchange.

Angeles common stock, meanwhile, has plunged to about 31 cents a share on the Amex. It sold as high as $19.75 in 1983.

Elliott, who owns 18.7% of the stock, rejects the accusations some former insiders have made that Angeles executives have bled the company via high salaries. His salary in fiscal 1992 was $468,000, and he earned a bonus of $90,000.

Though in the end he couldn't stage another miraculous save of the company, Elliott says: "In all those years, there wasn't one day that I couldn't look in the mirror and say, 'I could go elsewhere and do better (salary-wise).' I stayed. Maybe some will say I shouldn't have."

Angeles, Present and Past

Angeles Corp.'s long history in the investment management business ended with the reign of William H. Elliott, its most recent CEO, and President Joseph Cattivera. The company's first investment superstar--until he crashed--was Fred Carr; the firm's last star was George Michaelis, whose successful FPA funds now are part of United Asset Management.

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