FORM 10-Q--QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
Commission file number 0-11723
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
(Exact name of registrant as specified in its charter)
California 94-2883067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
Registrant's telephone number
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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)
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
BALANCE SHEET
(in thousands, except unit data)
March 31, December 31,
1999 1998
(Unaudited)
Assets
Cash and cash equivalents $ 7,367 $ 10,969
Interest receivable on Master Loan 130 --
Other assets 11 12
Investment in Master Loan to affiliate 79,540 80,614
Less: Allowance for impairment loss (29,129) (29,129)
50,411 51,485
$ 57,919 $ 62,466
Liabilities and Partners' Capital (Deficit)
Liabilities
Other liabilities $ 48 $ 14
Distributions payable 141 141
189 155
Partners' Capital (Deficit)
General partner (405) (362)
Limited partners (909,134 units outstanding
at March 31, 1999 and December 31, 1998) 58,135 62,673
57,730 62,311
$ 57,919 $ 62,466
Note: The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Accompanying Notes to Financial Statements
b)
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended
March 31,
1999 1998
Revenues:
Interest income on investment
in Master Loan to affiliate $ -- $ 643
Reduction of provision for impairment loss -- 586
Interest income on investments 40 174
Total revenues 40 1,403
Expenses:
General and administrative 125 167
Total expenses 125 167
Net (loss) income $ (85) $1,236
Net (loss) income allocated to general partner (1%) $ (1) $ 12
Net (loss) income allocated to limited partners (99%) (84) 1,224
$ (85) $1,236
Net (loss) income per limited partnership unit $(0.09) $ 1.35
Distribution per limited partnership unit $ 4.90 $ 1.65
See Accompanying Notes to Financial Statements
c)
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 912,182 $ 1 $228,046 $228,047
Partners' capital (deficit) at
December 31, 1997 909,134 $ (507) $ 51,256 $ 50,749
Net income for the three months
ended March 31, 1998 -- 12 1,224 1,236
Distributions to partners -- -- (1,499) (1,499)
Partners' capital (deficit) at
March 31, 1998 909,134 $ (495) $ 50,981 $ 50,486
Partners' capital (deficit) at
December 31, 1998 909,134 $ (362) $ 62,673 $ 62,311
Net loss for the three months
ended March 31, 1999 -- (1) (84) (85)
Distributions to partners -- (42) (4,454) (4,496)
Partners' capital (deficit) at
March 31, 1999 909,134 $ (405) $ 58,135 $ 57,730
See Accompanying Notes to Financial Statements
d)
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net (loss) income $ (85) $ 1,236
Adjustments to reconcile net (loss) income to
net cash (used in) provided by
operating activities:
Reduction of provision for impairment loss -- (586)
Change in accounts:
Interest receivable on Master Loan (130) (9)
Other assets 1 10
Accounts payable -- (6)
Other liabilities 34 (2)
Net cash (used in) provided by operating
activities (180) 643
Cash flows from investing activities:
Principal receipts on Master Loan 1,074 --
Net cash provided by investing activities 1,074 --
Cash flows from financing activities:
Distributions to partners (4,496) (1,499)
Net cash used in financing activities (4,496) (1,499)
Net decrease in cash and cash equivalents (3,602) (856)
Cash and cash equivalents at beginning of period 10,969 12,417
Cash and cash equivalents at end of period $ 7,367 $11,561
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Consolidated Capital
Institutional Properties/2 (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-Q and Article 10 of
Regulation S-X. 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 Concap Equities, Inc. (the "General
Partner"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 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 financial statements and footnotes thereto
included in the Partnership's annual report on Form 10-K for the year ended
December 31, 1998.
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. and Insignia Properties Trust
merged into Apartment Investment and Management Company ("AIMCO"), a publicly
traded real estate investment trust, with AIMCO being the surviving corporation
(the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in
the General Partner. The General Partner does not believe that this
transaction will have a material effect on the affairs and operations of the
Partnership.
NOTE C - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all partnership activities.
The Partnership Agreement (the "Agreement") provides for reimbursement to the
General Partner and its affiliates for costs incurred in connection with the
administration of Partnership activities. The General Partner and its
affiliates received reimbursements as reflected in the following table:
For the Three Months
Ended
March 31,
1999 1998
(in thousands)
Reimbursements for services of affiliates
(included in general and administrative
expenses) $ 77 $ 72
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $77,000, and $72,000 for the
three months ended March 31, 1999 and 1998, respectively.
On October 30, 1997, an affiliate of the General Partner (the "Purchaser")
commenced tender offers for limited partnership interests in these Partnerships.
The Purchaser offered to purchase up to 300,000 of the outstanding units of
limited partnership interest in the Partnership, at $40.00 per Unit, net to the
seller in cash. As a result of the October 1997 tender offer, an Insignia
affiliate purchased 164,940.99 or 18.14% of the outstanding limited partner
units of the Partnership during December 1997 and an additional 4,164.30 in
February 1998.
NOTE D - NET INVESTMENT IN MASTER LOAN
At March 31, 1999, the recorded investment in the Master Loan is considered to
be impaired under "Statement of Financial Accounting Standard No. 114 ("SFAS
114") Accounting by Creditors for Impairment of a Loan." The Partnership
measures the impairment of the loan based upon the fair value of the collateral
due to the fact that repayment of the loan is expected to be provided solely by
the collateral. For the three months ended March 31, 1998, the Partnership
recorded approximately $586,000 in income based upon an increase in the fair
value of the collateral. For the three months ended March 31, 1999 there was no
change in the fair value of the collateral and accordingly no income was
recognized.
The fair value of the collateral properties was determined using the net
operating income of the collateral properties capitalized at a rate deemed
reasonable for the type of property, adjusted for market conditions, physical
condition of the property and other factors. This methodology has not changed
from that used in prior calculations performed by the General Partner in
determining the fair value of the collateral properties. The General Partner
evaluates the net realizable value of the collateral on a semi-annual basis.
The General Partner has seen a consistent increase in the net realizable value
of the collateral properties, taken as a whole, over the past two years. The
increase is deemed to be attributable to major capital improvement projects and
the strong effort to complete deferred maintenance items that have been ongoing
over the past few years at the various properties. This has enabled the
properties to increase their respective occupancy levels or in some cases to
maintain the properties' high occupancy levels. The vast majority of this work
was funded by cash flow from the collateral properties themselves as the total
amount borrowed on the master loan or from other sources in the past few years
for this totals $1,150,000.
Approximately $643,000 for the three months ended March 31, 1998, was recorded
as interest income on Investment in Master Loan to affiliate based upon cash
generated as a result of improved operations of the properties which secure the
loan. A cash payment of approximately $634,000 was received from Consolidated
Capital Equity Partners/2, L.P. ("CCEP/2") during the first quarter of 1998 for
interest income recognized in 1997. A cash payment of approximately $564,000
for the interest income recorded in the first quarter of 1998 was received
during the second quarter of 1998. There was no interest income recognized on
investment in Master Loan for the three months ended March 31, 1999.
The principal balance of the Master Loan due to the Partnership totaled
approximately $79,540,000 at March 31, 1999. Interest due to the Partnership
pursuant to the terms of the Master Loan Agreement, but not recognized in the
income statements, totaled approximately $6,493,000, and $5,212,000 for the
three months ended March 31, 1999, and 1998, respectively. At March 31, 1999
and December 31, 1998, such cumulative unrecognized interest totaled
approximately $183,472,000 and $176,979,000 and was not included in the balance
of the Investment in Master Loan. The allowance for possible losses totaled
approximately $29,129,000 at both March 31, 1999 and December 31, 1998,
respectively.
During the first three months of 1999, no advances were made to CCEP/2.
Principal payments received from CCEP/2 on the Master Loan were $1,074,000.
NOTE E - COMMITMENT
The Partnership is required by the Partnership Agreement to maintain working
capital reserves for contingencies of not less than 5% of Net Invested Capital,
as defined in the Partnership Agreement. In the event expenditures are made
from this reserve, operating revenue shall be allocated to such reserves to the
extent necessary to maintain the foregoing levels. Reserves, including cash and
cash equivalents totaling approximately $7,367,000, were greater than the
reserve requirement of approximately $6,991,000 for the three months ended March
31, 1999.
NOTE F - DISTRIBUTION
The Partnership distributed approximately $4,173,000 from operations
(approximately $4.54 per limited partnership unit) and $323,000 of surplus cash
(approximately $0.36 per limited partnership unit) for the three months ended
March 31, 1999.
The Partnership distributed approximately $1,499,000 from surplus cash
(approximately $1.65 per limited partnership unit) for the three months ended
March 31, 1998.
NOTE G - SEGMENT REPORTING
Description of the types of products and services from which the reportable
segment derives its revenue
The Partnership has only one reportable segment for the three months ended March
31, 1999 and 1998, that of income and expenses associated with the Partnership's
purpose to loan funds to CCEP/2.
Measurement of segment profit or loss
The Partnership evaluates performance of its loan segment based on net income.
The accounting policies of the reportable segment is the same as those described
in the summary of significant accounting policies in the Partnership's annual
report on Form 10-K for the year ended December 31, 1998.
Factors management used to identify the enterprises reportable segment
Segment information is not presented for the three months ended March 31, 1999
and 1998 as the Partnership's only segment is presented in the statement of
operations.
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. 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 General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates as well as a recently
announced agreement between Insignia and Apartment Investment and Management
Company. The complaint seeks monetary damages and equitable relief, including
judicial dissolution of the Partnership. On June 25, 1998, the General Partner
filed a motion seeking dismissal of the action. In lieu of responding to the
motion, the plaintiffs filed an amended complaint. The General Partner has filed
demurrers to the amended complaint which were heard during February 1999. No
ruling on such demurrers has been received. The General partner does not
anticipate that costs associated with this case, if any, will be material to the
Partnership's overall operations.
In April 1998, a limited partner of the Partnership commenced an action in the
Circuit Court for Jackson County, Missouri entitled BOND PURCHASE LLC V. IFGP
CORPORATION C/O CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2, ET AL. The
complaint claims that the Partnership and an affiliate of the General Partner
breached certain contractual and fiduciary duties allegedly owed to the claimant
and seeks damages and injunctive relief. This case was settled on April 9,
1999. The Partnership is responsible for settlement costs. These costs were
paid during April 1999. The expense will not have a material effect on the
Partnership's overall operations.
On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled EVEREST PROPERTIES LLC. V.
INSIGNIA FINANCIAL GROUP, INC. ET AL. in the Superior Court of the State of
California, County of Los Angeles. The action involves 44 real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia Affiliates allegedly manage or control (the
"Subject Partnerships"). This case was settled on March 3, 1999. The
Partnership is responsible for a portion of the settlement costs. The expense
will not have a material effect on 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 OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed in this Form 10-Q 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-Q and the other filings with the
Securities and Exchange Commission made by the Partnership from time to time.
The discussion of the Partnership'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 Partnership's business and
results of operation. 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.
Results of Operations
The Partnership realized a net loss of approximately $85,000 for the three
months ended March 31, 1999 as compared to net income of $1,236,000 for the
three months ended March 31, 1998. The decrease in net income is due to the
fact that there was no interest income on Investment in Master Loan to affiliate
and no reduction of provision for impairment loss during the three months ended
March 31, 1999 as compared to the three months ended March 31, 1998. As
discussed in "Item 1. Financial Statements, Note D - Net Investment in Master
Loan," the Partnership recorded interest income of approximately $643,000 and
recorded a reduction of allowance for impairment loss of approximately $586,000
for March 31, 1998. No interest income on the Master Loan or reduction of
allowance for impairment loss was recorded for the three months ended March 31,
1999. Interest income on investments also decreased due to a reduction in the
cash balance in interest-bearing money market accounts.
The decrease in net income was partially offset by a decrease in general and
administrative expenses. General and administrative expenses decreased
primarily due to a decrease in costs of communications with investors for the
three months ended March 31, 1999.
Liquidity and Capital Resources
At March 31, 1999, the Partnership had cash and cash equivalents of
approximately $7,367,000 as compared to approximately $11,561,000 at March 31,
1998. Cash and cash equivalents decreased approximately $3,602,000 for the
three months ended March 31, 1999 from the Partnership's year end, primarily due
to approximately $4,496,000 of cash used in financing activities and
approximately $180,000 of cash used in operating activities, which was partially
offset by approximately $1,074,000 of cash provided by investing activities.
Cash provided by investing activities consisted of principal receipts on the
Master Loan. Cash used in financing activities consisted of distributions to
the partners. The Partnership invests its working capital reserves in money
market accounts.
The sufficiency of existing liquid assets to meet future liquidity requirements
is directly related to the level of expenditures required to meet the ongoing
operating needs of the Partnership and to comply with Federal, state and local
legal and regulatory requirements. Such assets are currently thought to be
sufficient for any near-term needs of the Partnership. See "CCEP/2 Property
Operations" for discussion on CCEP/2's ability to provide future cash flow as
Master Loan debt service.
During the three months ended March 31, 1999 the Partnership made a
distribution of approximately $4,173,000 from operations and $323,000 of surplus
cash (approximately $4.54 per limited partnership unit from operations and $.36
per limited partnership unit from surplus cash). During the three months ended
March 31, 1998, the Partnership made a distribution from surplus cash of
approximately $1,499,000 (approximately $1.65 per limited partnership unit).
Future cash distributions will depend on CCEP/2's ability to make payments on
the account of the Master Loan and the availability of cash reserves. There can
be no assurance, however, that the Partnership will generate sufficient funds
from operations to permit any additional distributions to its partners in 1999
or subsequent periods.
The Partnership is required by the Partnership Agreement to maintain working
capital reserves for contingencies of not less than 5% of Net Invested Capital,
as defined by the Partnership Agreement. Reserves, including cash and cash
equivalents, totaling approximately $7,367,000, were greater than the reserve
requirement of $6,991,000 at March 31, 1999.
During the three months ended March 31, 1999, the Partnership received
approximately $1,074,000 as principal payments on the Master Loan consisting of
required cash flow payments. These funds are required to be transferred to the
Partnership under the terms of the Master Loan.
CCEP/2 Property Operations
For the three months ended March 31, 1999, CCEP/2's net loss totaled
approximately $6,125,000 on total revenues of approximately $4,826,000. CCEP/2
recognizes interest expense on the New Master Loan Agreement obligation
according to the note terms, although payments to the Partnership are required
only to the extent of Excess Cash Flow, as defined therein. During the three
months ended March 31, 1999, CCEP/2's statement of operations includes total
interest expense attributable to the Master Loan of approximately $6,493,000,
all of which represents interest accrued in excess of required payments. CCEP/2
is expected to continue to generate operating losses as a result of such
interest accruals and noncash charges for depreciation.
In April 1999, one of CCEP/2's residential properties, Village Brooke, was hit
by a tornado. As a result, all of the apartment units were destroyed. It is
estimated that the property sustained a minimum of $12,000,000 in damages.
Discussions with the insurance company are currently in progress. It is
expected that a majority of the damage costs will be covered by insurance.
Discussions are also expected to take place with the mortgage company concerning
the monthly payments required to be made on the property's mortgage loan. These
discussions are expected to take place during May 1999. Subsequent to March 31,
1999, the property received approximately $1,300,000 from the insurance company.
These proceeds are being used for initial costs in the reconstruction of the
property and to pay the first four mortgage payments. It is anticipated that
the reconstruction period will last between twelve and twenty-four months. The
General Partner is currently negotiating with the taxing authorities to have the
property taxed as undeveloped land during the reconstruction period.
No adjustment is deemed necessary for purposes of valuating the property as
collateral on the Master Loan as the General Partner anticipates that the value
of the undeveloped land and anticipated new construction is comparative to the
value of the property prior to the occurrence of the casualty.
Potential Tender Offer
On October 1, 1998, Insignia Financial Group, Inc. merged into AIMCO, a real
estate investment trust, whose Class A Common Shares are listed on the New York
Stock Exchange. As a result of such merger, AIMCO and AIMCO Properties, L.P., a
Delaware limited partnership and the operating partnership of AIMCO ("AIMCO OP")
acquired indirect control of the Corporate General Partner. AIMCO and its
affiliates currently own 30.02% of the limited partnership interests in the
Partnership. AIMCO is presently considering whether it will engage in an
exchange offer for additional limited partnership interests in the Partnership.
There is a substantial likelihood that, within a short period of time, AIMCO OP
will offer to acquire limited partnership interests in the Partnership for cash
or preferred units or common units of limited partnerships interests in AIMCO
OP. While such an exchange offer is possible, no definite plans exist as to when
or whether to commence such an exchange offer, or as to the terms of any such
exchange offer, and it is possible that none will occur.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-Q shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.
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 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 mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, 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
March 31, 1999, had completed approximately 75% 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 July
31, 1999.
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.
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 the testing process is
expected to be completed by July 31, 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 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.
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. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.
The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.
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 May 1999.
The Managing Agent has updated data transmission standards with two of the three
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 June 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 $2.8 million ($0.6 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK FACTORS
The Partnership is exposed to market risks associated with its Master Loan to
Affiliate ("Loan"). Receipts (interest income) on the Loan are based upon the
operations and cash flow of the underlying investment properties that
collateralize the Loan. Both the income and expenses of operating the
investment properties are subject to factors outside of the Partnership's
control, such as an oversupply of similar properties resulting from
overbuilding, increases in unemployment or population shifts, reduced
availability of permanent mortgage financing, changes in zoning laws, or changes
in the patterns or needs of users. The investment properties are also
susceptible to the impact of economic and other conditions outside of the
control of the Partnership as well as being affected by current trends in the
market area which they operate. In this regard, the General Partner of the
Partnership closely monitors the performance of the properties collateralizing
the loans.
Based upon the fact that the loan is considered impaired under Statement of
Financial Accounting Standards No. 114, "Accounting by Creditor for Impairment
of a Loan", interest rate fluctuations do not affect the recognition of income,
as income is only recognized to the extent of cash flow. Therefore, market risk
factors do not affect the Partnership's results of operations as it relates to
the Loan.
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 General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates as well as a recently
announced agreement between Insignia and Apartment Investment and Management
Company. The complaint seeks monetary damages and equitable relief, including
judicial dissolution of the Partnership. On June 25, 1998, the General Partner
filed a motion seeking dismissal of the action. In lieu of responding to the
motion, the plaintiffs filed an amended complaint. The General Partner has filed
demurrers to the amended complaint which were heard during February 1999. No
ruling on such demurrers has been received. The General partner does not
anticipate that costs associated with this case, if any, will be material to the
Partnership's overall operations.
In April 1998, a limited partner of the Partnership commenced an action in the
Circuit Court for Jackson County, Missouri entitled BOND PURCHASE LLC V. IFGP
CORPORATION C/O CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2, ET AL. The
complaint claims that the Partnership and an affiliate of the General Partner
breached certain contractual and fiduciary duties allegedly owed to the claimant
and seeks damages and injunctive relief. This case was settled on April 9,
1999. The Partnership's responsible for settlement costs. These costs were paid
during April 1999. The expense will not have a material effect on the
Partnership's overall operations.
On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled EVEREST PROPERTIES LLC. V.
INSIGNIA FINANCIAL GROUP, INC. ET AL. in the Superior Court of the State of
California, County of Los Angeles. The action involves 44 real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia Affiliates allegedly manage or control (the
"Subject Partnerships"). This case was settled on March 3, 1999. The
Partnership is responsible for a portion of the settlement costs. The expense
will not have a material effect on the Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
S-K Reference
Number Description
27 Financial Data Schedule is filed as an exhibit to this
report.
99.1 Consolidated Capital Equity Partners/Two, L.P.,
unaudited financial statements for the three months
ended March 31, 1999 and 1998.
(b) Reports on Form 8-K:
None filed during the quarter ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
By: CONCAP EQUITIES, INC.
Its 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: May 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary finacial information extracted from Consolidated
Capital Institutional Properties/2 1999 First Quarter 10-Q and is qualified in
its entirety by reference to such 10-Q filing.
</LEGEND>
<CIK> 0000719184
<NAME> CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,367
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,919
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 57,730
<TOTAL-LIABILITY-AND-EQUITY> 57,919
<SALES> 0
<TOTAL-REVENUES> 40
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (85)
<EPS-PRIMARY> (.09)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
EXHIBIT 99.1
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
a)
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
March 31, December 31,
1999 1998
---- ----
(Unaudited) (Note)
Assets
Cash and cash equivalents $ 2,064 $ 2,199
Receivables and deposits 1,817 2,142
Restricted escrows 1,889 1,699
Other assets 2,427 2,413
Investment properties:
Land 10,498 10,498
Buildings and related personal property 91,968 91,462
-------- --------
102,466 101,960
Less accumulated depreciation (65,724) (64,476)
-------- --------
36,742 37,484
-------- --------
$ 44,939 $ 45,937
======== ========
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 67 $ 194
Accrued property taxes 635 745
Tenant security deposit liabilities 582 581
Other liabilities 638 488
Mortgage notes 32,543 32,619
Master loan and interest payable 262,190 256,901
-------- --------
296,655 291,528
-------- --------
Partners' Deficit
General partner (2,503) (2,442)
Limited partners (249,213) (243,149)
-------- --------
(251,716) (245,591)
-------- --------
$ 44,939 $ 45,937
========= ========
Note: The balance sheet at December 31, 1998, has been derived from the audited
financial statements at that date, but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Accompanying Notes to Consolidated Financial Statements
b)
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
---- ----
Revenues:
Rental income $ 4,460 $ 4,383
Other income 366 358
------- -------
Total revenues 4,826 4,741
------- -------
Expenses:
Operating 2,150 2,045
General and administrative 128 181
Depreciation 1,248 1,208
Interest 7,024 6,530
Property taxes 401 320
------- -------
Total expenses 10,951 10,284
------- -------
Net loss $ (6,125) $ (5,543)
======= =======
Net loss allocated to general partner (1%) $ (61) $ (55)
Net loss allocated to limited partners (99%) (6,064) (5,488)
------- -------
$ (6,125) $ (5,543)
======= =======
See Accompanying Notes to Consolidated Financial Statements
c)
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
(Unaudited)
(in thousands)
General Limited
Partner Partners Total
------- -------- -----
Partners' deficit at December 31, 1997 $(2,216) $(220,762) $(222,978)
Net loss for the three months ended
March 31, 1998 (55) (5,488) (5,543)
------ -------- --------
Partners' deficit at March 31, 1998 $(2,271) $(226,250) $(228,521)
====== ======== ========
Partners' deficit at December 31, 1998 $(2,442) $(243,149) $(245,591)
Net loss for the three months ended
March 31, 1999 (61) (6,064) (6,125)
------ -------- --------
Partners' deficit at March 31, 1999 $(2,503) $(249,213) $(251,716)
====== ======== ========
See Accompanying Notes to Consolidated Financial Statements
d)
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
---- ----
Cash flows from operating activities:
Net loss $(6,125) $(5,543)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 1,248 1,208
Amortization of loan costs, lease commissions
and ground lease 170 123
Change in accounts:
Receivables and deposits 325 142
Other assets 5 177
Accounts payable (127) (342)
Accrued property taxes (110) (137)
Tenant security deposit liabilities 1 5
Other liabilities 20 (44)
Interest on Master Loan 6,493 5,223
------ ------
Net cash provided by operating activities 1,900 812
------ ------
Cash flows from investing activities:
Property improvements and replacements (506) (435)
Net deposits to restricted escrows (190) (107)
Lease commissions (189) (198)
------ ------
Net cash used in investing activities (885) (740)
------ ------
Cash flows from financing activities:
Principal payments on notes payable (76) (69)
Principal payments on Master Loan (1,074) --
------ ------
Net cash used in financing activities (1,150) (69)
------ ------
Net (decrease) increase in cash and cash equivalents (135) 3
Cash and cash equivalents at beginning of period 2,199 1,807
------ ------
Cash and cash equivalents at end of period $ 2,064 $ 1,810
======= ======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 637 $ 1,278
======= ======
See Accompanying Notes to Consolidated Financial Statements
e)
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited consolidated financial statements of Consolidated
Capital Equity Partners/Two, L.P. ("CCEP/2") have been prepared in accordance
with generally accepted accounting principles for interim financial information.
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 ConCap Equities, Inc., (the "General Partner"), all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended March 31, 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-K for the year ended December 31,
1998.
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. and Insignia Properties Trust
merged into Apartment Investment and Management Company ("AIMCO"), a publicly
traded real estate investment trust, with AIMCO being the surviving corporation
(the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in
the General Partner. The General Partner does not believe that this transaction
will have a material effect on the affairs and operations of the Partnership.
NOTE C - SUBSEQUENT EVENT
- -------------------------
In April 1999, one of the Partnership's residential properties, Village Brooke,
was hit by a tornado. As a result, all of the apartment units were destroyed.
It is estimated that the property sustained a minimum of $12,000,000 in damages.
Discussions with the insurance company are currently in progress. It is
expected that a majority of the damage costs will be covered by insurance.
Discussions are also expected to take place with the mortgage company concerning
the monthly payments required to be made on the property's mortgage loan. These
discussions are expected to take place during May 1999. Subsequent to March 31,
1999, the property received approximately $1,300,000 from the insurance company.
These proceeds are being used for initial costs in the reconstruction of the
property and to pay the first four mortgage payments. It is anticipated that
the reconstruction period will last between twelve and twenty-four months. The
General Partner is currently negotiating with the taxing authorities to have the
property taxed as undeveloped land during the reconstruction period.
NOTE D - RELATED PARTY TRANSACTIONS
-----------------------------------
CCEP/2 has no employees and is dependent on the General Partner and its
affiliates for management and administration of all partnership activities.
Affiliates of the General Partner provide property management and asset
management services to the Partnership. CCEP/2 paid property management fees
based upon collected gross rental revenues for property management services for
the three months ended March 31, 1999 and 1998. The Partnership Agreement (the
"Agreement") also provides for reimbursement to the General Partner and its
affiliates for costs incurred in connection with the administration of CCEP/2's
activities.
Also, CCEP/2 is subject to an Investment Advisory Agreement between CCEP/2 and
an affiliate of the General Partner. This agreement provides for an annual fee,
payable in monthly installments, to an affiliate of the General Partner for
advising and consulting services for CCEP/2's properties. The General Partner
and its affiliates received reimbursements and fees for the three months ended
March 31, 1999 and 1998 as follows:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ 85 $217
Investment advisory fees (included in general and
administrative expenses) 44 42
Lease commissions -- 60
Reimbursement for services of affiliates, (included in
operating, general and administrative expenses and
investment properties) (1) 68 81
(1)Included in "Reimbursement for services of affiliates" for the three months
ended March 31, 1998 is approximately $11,000 of reimbursements for
construction oversight costs. There were no such costs incurred for the
three months ended March 31, 1999.
During the three months ended March 31, 1999 and 1998 affiliates of the 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 $85,000 and $82,000 for the three months
ended March 31, 1999 and 1998, respectively. For the three months ended March
31, 1998, affiliates of the General Partner were entitled to receive varying
percentages of gross receipts from all of the Registrant's commercial properties
for providing property management services. The Registrant paid to such
affiliates $135,000 for the three months ended March 31, 1998. Effective October
1, 1998 (the effective date of the Insignia Merger) these services for the
commercial properties were provided by an unrelated party.
An affiliate of the General Partner received investment advisory fees amounting
to approximately $44,000 and $42,000 for the three months ended March 31, 1999
and 1998, respectively.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $68,000, and $81,000 for the
three months ended March 31, 1999 and 1998, respectively.
In addition to the compensation and reimbursements described above, interest
payments are made to and loan advances are received from Consolidated Capital
Institutional Properties/2 ("CCIP/2") pursuant to the Master Loan Agreement.
Such interest payments totaled approximately $643,000 for the three months ended
March 31, 1998. No advances were made under the Master Loan Agreement during
the three months ended March 31, 1999 or 1998, respectively. Additionally,
CCEP/2 made principal payments on the Master Loan of $1,074,000 in 1999. These
funds were received from distributions from three affiliated partnerships and
excess cash.
NOTE E - MASTER LOAN AND ACCRUED INTEREST PAYABLE
- -------------------------------------------------
The Master Loan principal and accrued interest payable balances at March 31,
1999, and December 31, 1998, are approximately $262,190,000 and approximately
$256,901,000, respectively.
Terms of Master Loan Agreement
- ------------------------------
Under the terms of the Master Loan Agreement, interest accrues at 10% per annum
and payments are due quarterly in an amount equal to Excess Cash Flow, generally
defined in the Master Loan Agreement as net cash flow from operations after
third-party debt service. If such Excess Cash Flow payments are less than the
current accrued interest during the quarterly period, the unpaid interest is
added to principal, compounded annually, and is payable at the loan's maturity.
If such Excess Cash Flow payments are greater than the currently payable
interest, the excess amount is applied to the principal balance of the loan.
Any net proceeds from the sale or refinancing of any of CCEP/2's properties are
paid to CCIP/2 under the terms of the Master Loan Agreement.
The Master Loan matures in November 2000. The General Partner has determined
that the Master Loan and related interest payable has no determinable fair value
since payments are limited to net cash flows, as defined, but is not believed to
be in excess of the fair values of the underlying collateral.
Effective January 1, 1993, CCEP/2 and CCIP/2 amended the Master Loan Agreement
to stipulate that Excess Cash Flow would be computed net of capital
improvements. Such expenditures were formerly funded from advances on the Master
Loan from CCIP/2 to CCEP/2. This amendment and change in the definition of
Excess Cash Flow will have the effect of reducing Master Loan payments to CCIP/2
by the amount of CCEP/2's capital expenditures since such amounts were
previously excluded from Excess Cash Flow. The amendment will have no effect on
the computation of interest expense on the Master Loan.
NOTE F - LEGAL PROCEEDING
-------------------------
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 General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates as well as a recently
announced agreement between Insignia and Apartment Investment and Management
Company. The complaint seeks monetary damages and equitable relief, including
judicial dissolution of the Partnership. On June 25, 1998, the General Partner
filed a motion seeking dismissal of the action. In lieu of responding to the
motion, the plaintiffs filed an amended complaint. The General Partner has filed
demurrers to the amended complaint which were heard during February 1999. No
ruling on such demurrers has been received. The 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.
NOTE G - YEAR 2000
------------------
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 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 mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, 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
March 31, 1999, had completed approximately 75% 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 July
31, 1999.
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.
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 the testing process is
expected to be completed by July 31, 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 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.
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. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.
The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.
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 May 1999.
The Managing Agent has updated data transmission standards with two of the three
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 June 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 $2.8 million ($0.6 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.
