FORM 10-Q_ QUARTERLY 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-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 September 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 0-11723
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
(Exact name of small business issuer 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, 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 Partnership 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)
September 30 December 31
1999 1998
(Unaudited)
Assets
Cash and cash equivalents $ 7,789 $ 10,969
Interest receivable on Master Loan 130 --
Other assets 20 12
Investment in Master Loan to affiliate 79,512 80,614
Less: allowance for impairment loss (29,129) (29,129)
50,383 51,485
$ 58,322 $ 62,466
Liabilities and Partners' (Deficit) Capital
Liabilities
Other liabilities 56 14
Distributions payable 141 141
197 155
Partners' (Deficit) Capital
General partner (401) (362)
Limited partners (909,134 units outstanding) 58,526 62,673
58,125 62,311
$ 58,322 $ 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Interest income on investment in
Master Loan to affiliate $ -- $ -- $ 575 $ 1,069
Reduction of provision for
impairment loss -- -- -- 27,586
Interest income on investments 50 143 162 454
Total revenues 50 143 737 29,109
Expenses:
General and administrative 122 248 427 592
Total expenses 122 248 427 592
Net (loss) income $ (72) $ (105) $ 310 $28,517
Net (loss) income allocated
to general partner (1%) $ (1) $ (1) $ 3 $ 285
Net (loss) income allocated
to limited partners (99%) (71) (104) 307 28,232
$ (72) $ (105) $ 310 $28,517
Net (loss) income per limited
partnership unit $ (.08) $ (.12) $ .34 $ 31.05
Distribution per limited
partnership unit $ -- $ 1.63 $ 4.90 $ 3.28
See Accompanying Notes to Financial Statements
c)
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENT 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 nine months
ended September 30, 1998 -- 285 28,232 28,517
Distributions to partners -- -- (2,984) (2,984)
Partners' capital (deficit)
at September 30, 1998 909,134 $ (222) $ 76,504 $ 76,282
Partners' capital (deficit)
at December 31, 1998 909,134 $ (362) $ 62,673 $ 62,311
Net income for the nine months
ended September 30, 1999 -- 3 307 310
Distributions to partners -- (42) (4,454) (4,496)
Partners' capital (deficit) at
September 30, 1999 909,134 $ (401) $ 58,526 $ 58,125
See Accompanying Notes to Financial Statements
d)
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 310 $ 28,517
Adjustments to reconcile net income to net cash
provided by operating activities:
Reduction of provision for impairment loss -- (27,586)
Change in accounts:
Interest receivable on Master Loan (130) 634
Other assets (8) 6
Accounts payable -- (6)
Other liabilities 42 12
Net cash provided by operating activities 214 1,577
Cash flows from investing activities:
Principal receipts on Master Loan 1,102 79
Cash flows from financing activities:
Distributions to partners (4,496) (2,984)
Net decrease in cash and cash equivalents (3,180) (1,328)
Cash and cash equivalents at beginning of period 10,969 12,417
Cash and cash equivalents at end of period $ 7,789 $ 11,089
See Accompanying Notes to Financial Statements
e)
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 and nine month periods ended September 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 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 _ RELATED PARTY TRANSACTIONS
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 following payments were made to
the General Partner and affiliates during the nine months ended September 30,
1999 and 1998:
1999 1998
(in thousands)
Reimbursements for services of affiliates (included in
general and administrative expenses) $ 162 $ 226
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $162,000 and $226,000 for the
nine months ended September 30, 1999 and 1998, respectively.
On October 30, 1997, an affiliate of the General Partner (the "Purchaser")
commenced a tender offer for limited partnership interest in the Partnership.
The Purchaser offered to purchase up to 300,000 of the outstanding units of
limited partnership interest (approximately 33.0% of the total outstanding
units) in the Partnership, at $40 per Unit, net to the seller in cash. As a
result of the October 1997 tender offer, the Purchaser purchased 164,940.99 or
approximately 18.14% of the outstanding limited partner units of the Partnership
during December 1997 and an additional 4,164.30 or .46% of the outstanding
limited partner units of the Partnership in February 1998.
On July 30, 1998, another affiliate of the General Partner (the "Second
Purchaser") commenced a tender offer for limited partnership interests in the
Partnership. The Second Purchaser offered to purchase up to 300,000 of the
outstanding units of limited partnership interest (approximately 33.0% of the
total outstanding units) in the Partnership, at $50 per Unit, net to the seller
in cash. As a result of the July 1998 tender offer, the Purchaser purchased
69,765.6 or 7.67% of the outstanding limited partner units of the Partnership
during November 1998.
On May 13, 1999, AIMCO Properties, L.P., an affiliate of the General Partner
commenced a tender offer to purchase up to 286,049.86 (approximately 31.46% of
the total outstanding units) units of limited partnership interest in the
Partnership for a purchase price of $60 per unit. The offer expired on July 30,
1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 43,841.20 units.
As a result, AIMCO and its affiliates currently own 320,093.10 units of limited
partnership interest in the Partnership representing approximately 35.21% of the
total outstanding units. It is possible that AIMCO or its affiliate 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. (See "Note H - Legal Proceedings").
NOTE D - NET INVESTMENT IN MASTER LOAN
At September 30, 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 nine months ended September 30, 1999 there was no
change in the fair value of the collateral and accordingly no income was
recognized. For the nine months ended September 30, 1998, the Partnership
recorded approximately $27,586,000 in income based upon an increase in the fair
value of the collateral. Subsequent to September 30, 1998, this amount was
reevaluated and for the year ended December 31, 1998 was adjusted to $13,586,000
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, the physical
condition of the property and other factors or by obtaining an appraisal by an
independent third party. 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. During the fourth quarter of 1998, the
Partnership recorded a $14,000,000 increase in the allowance for impairment loss
due to the continuing evaluation of the collateral properties resulting from
appraisals received during February 1999 on several of the collateral properties
and additional information received concerning Richmond Plaza. The approximate
$13,586,000 net reduction in the provision for impairment loss that was
recognized during the year ended December 31, 1998 is attributed to an increase
in the net realizable value of the collateral properties. The General Partner
evaluates the net realizable value 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 purpose totals
$1,150,000. Based upon the consistent increase in net realizable value of the
collateral properties the General Partner determined the increase to be
permanent in nature and accordingly reduced the allowance for impairment loss on
the master loan during the year ended December 31, 1998.
Approximately $575,000 and $1,069,000 for the nine months ended September 30,
1999 and 1998, respectively, 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 $575,000 was received from Consolidated Capital Equity Partners/2,
L.P. ("CCEP/2") during the second quarter of 1999. A cash payment of
approximately $634,000 was received 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. The cash payment for the interest income of
$505,000 recognized during the second quarter of 1998 was received during the
third quarter of 1998.
The principal balance of the Master Loan due to the Partnership totaled
approximately $79,512,000 at September 30, 1999. Interest due to the
Partnership pursuant to the terms of the Master Loan Agreement, but not
recognized in the income statements, totaled approximately $18,736,000, and
$16,704,000 for the nine months ended September 30, 1999 and 1998, respectively.
At September 30, 1999 and December 31, 1998, such cumulative unrecognized
interest totaled approximately $195,715,000 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 September 30, 1999 and
December 31, 1998, respectively.
During the first nine months of 1999, no advances were made to CCEP/2.
Principal payments received from CCEP/2 on the Master Loan were $1,102,000 for
the nine months ended September 30, 1999. Subsequent to September 30, 1999 the
Partnership received a principal payment on the Master Loan of $32,000,000 as a
result of the sale of six commercial properties owned by CCEP/2 in September
1999.
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 $7,789,000, were greater than the
reserve requirement of approximately $6,991,000 at September 30, 1999.
NOTE F - DISTRIBUTION
The Partnership distributed approximately $4,173,000 from operations
(approximately $4,131,000 to the limited partners, or approximately $4.54 per
limited partnership unit) and $323,000 to the limited partners from surplus cash
(approximately $0.36 per limited partnership unit) for the nine months ended
September 30, 1999. Subsequent to September 1999, the Partnership distributed
approximately $22,000,000 from surplus cash to the limited partners
(approximately $24.20 per limited partnership unit) and approximately $500,000
from operations (approximately $494,000 to the limited partners, or
approximately $0.54 per limited partnership unit).
The Partnership distributed approximately $2,984,000 to the limited partners
from surplus cash (approximately $3.28 per limited partnership unit) for the
nine months ended September 30, 1998.
NOTE G _ SEGMENT REPORTING
Description of the types of products and services from which the reportable
segment derives its revenues:
The Partnership has only one reportable segment for the nine months ended
September 30, 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 are the same as those
described 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 nine months ended September 30,
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 and the Insignia Merger (see
"Note B - Transfer of Control"). 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 have filed an amended
complaint. The General Partner filed demurrers to the amended complaint which
were heard February 1999. Pending the ruling on such demurrers, settlement
negotiations commenced. On November 2, 1999, the parties executed and filed a
Stipulation of Settlement ("Stipulation"), settling claims, subject to final
court approval, on behalf of the Partnership and all limited partners who own
units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the General Partner will make tender offers for all
outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The General Partner does not anticipate that costs
associated with this case 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.
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
UNAUDITED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
September 30, 1999 AND 1998
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
BALANCE SHEETS
(Unaudited)
(in thousands)
September 30 December 31
1999 1998
(Unaudited) (Note)
Assets
Cash and cash equivalents $ 37,587 $ 2,199
Receivables and deposits (net of allowance
for doubtful accounts of $215) 5,087 2,142
Restricted escrows 1,805 1,699
Other assets 580 2,413
Investment properties:
Land 4,750 10,498
Buildings and related personal property 33,040 91,462
37,790 101,960
Less accumulated depreciation (23,229) (64,476)
14,561 37,484
$ 59,620 $ 45,937
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 296 $ 194
Accrued property taxes 482 745
Tenant security deposit liabilities 115 581
Other liabilities 3,009 488
Mortgage notes 30,088 32,619
Master loan and interest payable 274,665 256,901
308,655 291,528
Partners' Deficit
General partner (2,476) (2,442)
Limited partners (246,559) (243,149)
(249,035) (245,591)
$ 59,620 $ 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 Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Rental income $ 3,172 $ 4,563 $ 11,959 $ 13,368
Other income 273 424 928 1,050
Gain on sale of investment property 15,517 52 15,517 52
Total revenues 18,962 5,039 28,404 14,470
Expenses:
Operating 1,906 2,119 5,992 6,185
General and administrative 126 153 350 498
Interest 7,170 6,578 21,348 19,783
Depreciation 1,062 1,274 3,367 3,698
Property taxes 30 323 751 967
Casualty loss 33 -- 33 --
Total expenses 10,327 10,447 31,841 31,131
Income (loss) before extraordinary
item 8,635 (5,408) (3,437) (16,661)
Extraordinary loss on early
extinguishment of debt (7) -- (7) --
Net income (loss) $ 8,628 $(5,408) $ (3,444) $(16,661)
Net income (loss) allocated
to general partner (1%) $ 86 $ (54) $ (34) $ (167)
Net income (loss) allocated
to limited partners (99%) 8,542 (5,354) (3,410) (16,494)
$ 8,628 $(5,408) $ (3,444) $(16,661)
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
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 nine months
ended September 30, 1998 (167) (16,494) (16,661)
Partners' deficit
at September 30, 1998 $ (2,383) $(237,256) $ (239,639)
Partners' deficit
at December 31, 1998 $ (2,442) $(243,149) $ (245,591)
Net loss for the nine months
ended September 30, 1999 (34) (3,410) (3,444)
Partners' deficit at
September 30, 1999 $ (2,476) $(246,559) $ (249,035)
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net loss $ (3,444) $ (16,661)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt 7
Gain on sale of properties (15,517) (52)
Depreciation 3,367 3,698
Amortization of loan costs, lease commissions
and ground lease 493 408
Casualty loss 33 --
Bad debt 110 106
Change in accounts:
Receivables and deposits (122) (5)
Other assets 556 (92)
Accounts payable 102 (182)
Accrued property taxes (263) (255)
Tenant security deposit liabilities (466) 30
Other liabilities 1,387 (161)
Interest on Master Loan 18,866 16,068
Net cash provided by operating activities 5,109 2,902
Cash flows from investing activities:
Deposits to restricted escrows (106) (604)
Property improvements and replacements (1,568) (1,993)
Lease commissions paid (439) (527)
Proceeds from sale of investment property 36,029 52
Net cash used in investing activities 33,916 (3,072)
Cash flows from financing activities:
Principal payments on notes payable (215) (213)
Principal payments on Master Loan (1,102) (79)
Repayment of notes payable (2,316) --
Prepayment penalty (4) --
Net cash used in financing activities (3,637) (292)
Net increase (decrease) in cash and cash equivalents 35,388 (462)
Cash and cash equivalents at beginning of period 2,199 1,807
Cash and cash equivalents at end of period $ 37,587 $ 1,345
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,530 $ 3,632
See Accompanying Notes to Financial Statements
CONSOLIDATED CAPITAL EQUITY PARTNERS/TWO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A _ BASIS OF PRESENTATION
The accompanying unaudited 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 Holdings, 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 and nine month
periods ended September 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-K for the year
ended December 31, 1998.
Reclassifications: Certain reclassifications have been made to the 1998
information to conform to the 1999 presentation.
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 - CASUALTY 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. All of the
property's fixed assets and related accumulated depreciation were written off in
June 1999. The difference of approximately $2,933,000 has been recorded as an
insurance receivable; therefore, no gain or loss relating to this damage has
been recognized at September 30, 1999. A receivable for lost rents of
approximately $500,000 has also been established. 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. Subsequent to March 31,
1999, the property received approximately $2,300,000 from the insurance company.
These proceeds are being used for initial costs in the reconstruction of the
property and to pay mortgage payments. At September 30, 1999, the difference of
approximately $1,419,000 between these payments and proceeds received to date
has been recorded as a deferred income liability. 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.
Also in April 1999, an electrical fire occurred at Town Center. At the time of
the sale, the property had sustained approximately $172,000 in damages and
realized a casualty loss of approximately $33,000. The purchaser of the
property assumed the remainder of the expenses resulting from the fire (See Note
D - Sale of Investment Property).
NOTE D - SALE OF INVESTMENT PROPERTY
On September 10, 1999, the five commercial properties located in Michigan
(Lahser One, Lahser Two, Crescent Centre, Central Park Place, and Central Park
Plaza) were sold to an unaffiliated third party for $26,125,000. After closing
expenses of approximately $1,092,000 the net proceeds received by the
Partnership were approximately $25,033,000. The sale of the properties resulted
in a gain on sale of investment property of approximately $10,556,000.
On September 22, 1999, Town Center Plaza, located in Santa Ana, California, was
sold to an unaffiliated third party for $11,650,000. After closing expenses of
approximately $654,000, the net proceeds received by the Partnership were
approximately $10,996,000. The Partnership used some of the proceeds from the
sale of the property to pay off the debt encumbering the property of
approximately $2,385,000. The sale of the property resulted in a gain on sale
of investment property of approximately $4,961,000 and a loss on early
extinguishment of debt of approximately $7,000.
NOTE E _ RELATED PARTY TRANSACTIONS
CCEP/2 has no employees and is dependent on the General Partner and its
affiliates for the 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 nine months ended September 30, 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 nine months ended
September 30, 1999 and 1998 as follows:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ 234 $ 675
Investment advisory fees (included in general
and administrative expense) 134 129
Lease commissions -- 381
Reimbursement for services of affiliates (included in
operating, general and administrative expenses,
and investment properties) 186 220
Real estate brokerage commissions (included in gain on sale
of investment property) 1,134 --
During the nine months ended September 30, 1999 and 1998, affiliates of the
General Partner were entitled to receive 5% of gross receipts from the
Registrant's residential properties for providing property management services.
The Registrant paid to such affiliates approximately $234,000 and $250,000 for
the nine months ended September 30, 1999 and 1998, respectively. For the nine
months ended September 30, 1998, affiliates of the General Partner were entitled
to receive varying percentages of gross receipts from all the Registrant's
commercial properties for providing property management services. The
Registrant paid to such affiliates $425,000 for the nine months ended September
30, 1998. No such fees were paid for the nine months ended September 30, 1999 as
these services were provided by an unrelated third party effective October 1,
1998.
An affiliate of the General Partner received investment advisory fees amounting
to approximately $134,000 and $129,000 for the nine months ended September 30,
1999 and 1998, respectively.
An affiliate of the General Partner received reimbursement of accountable
administrative expense amounting to approximately $186,000 and $220,000 for the
nine months ended September 30, 1999 and 1998, respectively. Included in theses
expenses for the nine months ended September 30, 1999 and 1998 is approximately
$27,000 and $13,000, respectively, of reimbursements for construction oversight
costs.
For acting as real estate broker in connection with the sales of six of the
Partnership's commercial properties, the General Partner was paid a real estate
commission of approximately $1,134,000 during the nine months ended September
30, 1999.
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 $575,000 and $1,069,000 for the
nine months ended September 30, 1999 and 1998, respectively. No advances were
made under the Master Loan Agreement during the nine months ended September 30,
1999 or 1998. Additionally, CCEP/2 made principal payments on the Master Loan
of $1,102,000 in 1999. These funds were received from distributions from three
affiliated partnerships and excess cash. Subsequent to September 30, 1999
CCEP/2 made a principal payment on the Master Loan of $32,000,000 from proceeds
received from the sale of the six commercial properties as discussed above (see
Note D - Sale of Investment Properties).
On June 18, 1999, AIMCO Properties, L.P., an affiliate of the General Partner
commenced a tender offer to purchase all of the total outstanding limited
partnership interest in the Partnership for a purchase price of $300 per limited
partnership interest. The offer expired on July 30, 1999. As of September 30,
1999, no interests were acquired. It is possible that AIMCO or its affiliate
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.
NOTE F - MASTER LOAN AND ACCRUED INTEREST PAYABLE
The Master Loan principal and accrued interest payable balances at September 30,
1999 and December 31, 1998, are approximately $274,665,000 and approximately
$256,901,000, respectively.
Terms of Master Loan Agreement
Under the terms of the Master Loan, 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
capital improvements and 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.
The Partnership's remaining commercial property, Richmond Plaza, is under
contract for sale. The sale, which is subject to the purchaser's due diligence
and other customary conditions, is expected to close during the first quarter of
2000. However, there can be no assurance that the sale will be consummated.
NOTE G - YEAR 2000 COMPLIANCE
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 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 September 30, 1999, had virtually completed 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.
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 virtually all of the server operating systems.
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 virtually
no Year 2000 issues. A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 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
September 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 has banking relationships with three major financial
institutions, all of which have designated their compliance. The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.
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 expenses
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 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 net (loss) income of approximately ($72,000) and
$310,000 for the three and nine months ended September 30, 1999 as compared to
net (loss) income of approximately ($105,000) and $28,517,000 for the three and
nine months ended September 30, 1998. Net income decreased for both the three
and nine months ended September 30, 1999 due to a decrease in total revenues
which was offset by a decrease in total expenses. The decrease in total
revenues for the nine months ended September 30, 1999 is due primarily to the
fact that there was no reduction of provision for impairment loss during the
nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998. As discussed in "Item 1. Financial Statements, Note D _ Net
Investment in Master Loan," the Partnership recorded interest income of
approximately $575,000 with no reduction of allowance for impairment loss for
September 30, 1999. The Partnership recorded interest income of approximately
$1,069,000 and recorded a reduction of allowance for impairment loss of
approximately $27,586,000 for the nine months ended September 30, 1998.
Interest income on investments decreased due to a reduction in the cash balance
in interest-bearing money market accounts as a result of the distributions to
partners made during 1999.
The decrease in net income was partially offset by a decrease in total expenses
resulting from a decrease in general and administrative expenses for the nine
months ended September 30, 1999. General and administrative expenses decreased
primarily due to a decrease in reimbursements to the General Partner and a
reduction in the amount of legal fees incurred by the Partnership.
Liquidity and Capital Resources
At September 30, 1999, the Partnership had cash and cash equivalents of
approximately $7,789,000 as compared to approximately $11,089,000 at September
30, 1998. Cash and cash equivalents decreased approximately $3,180,000 for the
nine months ended September 30, 1999 from the Partnership's year end, primarily
due to approximately $4,496,000 of cash used in financing activities, which was
partially offset by approximately $1,102,000 of cash provided by investing
activities and approximately $214,000 of cash provided by operating activities.
Cash provided by investing activities consisted primarily 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 a money market account.
The sufficiency of existing liquid assets to meet future liquidity requirements
is directly related to the level of expenditures required to meet the ongoing
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 nine months ended September 30, 1999 the Partnership made a
distribution of approximately $4,173,000 from operations, approximately
$4,131,000 to the limited partners and $323,000 from surplus cash to the limited
partners (approximately $4.54 per limited partnership unit from operations and
$.36 per limited partnership unit from surplus cash). During the nine months
ended September 30, 1998, the Partnership made a distribution from surplus cash
of approximately $2,984,000 (approximately $3.28 per limited partnership unit).
Subsequent to September 1999, the Partnership distributed approximately
$22,000,000 from surplus cash to the limited partners (approximately $24.20 per
limited partnership unit) and approximately $500,000 from operations
(approximately $494,000 to the limited partners, or approximately $0.54 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 $7,789,000, were greater than the reserve
requirement of $6,991,000 at September 30, 1999.
During the nine months ended September 30, 1999, the Partnership received
approximately $1,102,000 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. Subsequent to September 30,
1999 the Partnership received a principal payment of $32,000,000 as a result of
the sale of six commercial properties owned by CCEP/2 in September 1999.
CCEP/2 Property Operations
For the nine months ended September 30, 1999, CCEP/2's net loss totaled
approximately $3,444,000 on total revenues of approximately $28,404,000. Total
revenues includes approximately $15,517,000 of gain on sale of investment
property as discussed below. Excluding the gain on sale of investment property
and the results of operations for these same properties, CCEP/2 had a net loss
of approximately $18,921,000 on total revenues of approximately $12,887,000 for
the nine months ended September 30, 1999. 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 nine months ended September 30, 1999, CCEP/2's
statement of operations includes total interest expense attributable to the
Master Loan of approximately $19,311,000, of which $18,866,000 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 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. All of the
property's fixed assets and related accumulated depreciation were written off in
September 1999. The difference of approximately $2,933,000 has been recorded as
an insurance receivable; therefore, no gain or loss relating to this damage has
been recognized at September 30, 1999. A receivable for lost rents of
approximately $500,000 has also been established. 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. Subsequent to March 31,
1999, the property received approximately $2,300,000 from the insurance company.
These proceeds are being used for initial costs in the reconstruction of the
property and to pay mortgage payments. At September 30, 1999, the difference of
approximately $1,419,000 between these payments and proceeds to date received
has been recorded as a deferred income liability. 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.
Also in April 1999 an electrical fire occurred at Town Center. At the time of
the sale, the property had sustained approximately $172,000 in damages and
realized a casualty loss of approximately $33,000. This property was
subsequently sold in September 1999 and the purchaser of the property assumed
the remainder of the expenses resulting from the fire.
On September 10, 1999, the five commercial properties located in Michigan
(Lahser One, Lahser Two, Crescent Centre, Central Park Place, and Central Park
Plaza) were sold to an unaffiliated third party for $26,125,000. After closing
expenses of approximately $1,092,000 the net proceeds received by the
Partnership were approximately $25,033,000. The sale of the properties resulted
in a gain on sale of investment property of approximately $10,556,000.
In addition, on September 22, 1999, Town Center Plaza, located in Santa Ana,
California, was sold to an unaffiliated third party for $11,650,000. After
closing expenses of approximately $654,000, the net proceeds received by the
Partnership were approximately $10,996,000. The Partnership used a portion of
the proceeds from the sale of the property to pay off the debt encumbering the
property of approximately $2,316,000. The sale of the property resulted in a
gain on sale of investment property of approximately $4,961,000 and a loss on
early extinguishment of debt of approximately $7,000.
The Partnership's remaining commercial property, Richmond Plaza, is under
contract for sale. The sale, which is subject to the purchaser's due diligence
and other customary conditions, is expected to close during the first quarter of
2000. However, there can be no assurance that the sale will be consummated.
Tender Offer
On May 13, 1999, AIMCO Properties, L.P., an affiliate of the General Partner
commenced a tender offer to purchase up to 286,049.86 (31.46% of the total
outstanding units) units of limited partnership interest in the Partnership for
a purchase price of $60 per unit. The offer expired on July 30, 1999. Pursuant
to the offer, AIMCO Properties, L.P. acquired 43,841.20 units. As a result,
AIMCO and its affiliates currently own 320,093.10 units of limited partnership
interest in the Partnership representing approximately 35.21% of the total
outstanding units. It is possible that AIMCO or its affiliate 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. (See "Item 1. Financial Statements, Note H - Legal Proceedings").
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 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 September 30, 1999, had virtually completed 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.
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 virtually all of the server operating systems.
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 virtually
no Year 2000 issues. A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 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
September 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 has banking relationships with three major financial
institutions, all of which have designated their compliance. The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.
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 expenses
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 DISCLOSURES 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 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 Loan.
Based upon the fact that the Loan is considered impaired under Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors 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 and the Insignia Merger (see
"Part I _ Financial Information, Item 1. Financial Statements, Note B _ Transfer
of Control"). 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 have filed an amended complaint. The
General Partner filed demurrers to the amended complaint which were heard
February 1999. Pending the ruling on such demurrers, settlement negotiations
commenced. On November 2, 1999, the parties executed and filed a Stipulation of
Settlement ("Stipulation"), settling claims, subject to final court approval, on
behalf of the Partnership and all limited partners who own units as of November
3, 1999. The Court has preliminarily approved the Settlement and scheduled a
final approval hearing for December 10, 1999. In exchange for a release of all
claims, the Stipulation provides that, among other things, an affiliate of the
General Partner will make tender offers for all outstanding limited partnership
interests in 49 partnerships, including the Registrant, subject to the terms and
conditions set forth in the Stipulation, and has agreed to establish a reserve
to pay an additional amount in settlement to qualifying class members (the
"Settlement Fund"). At the final approval hearing, Plaintiffs' counsel will
make an application for attorneys' fees and reimbursement of expenses, to be
paid in part by the partnerships and in part from the Settlement Fund. The
General Partner does not anticipate that costs associated with this case will be
material to 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.
b) Reports on Form 8-K:
Current Report on Form 8-K filed on September 22, 1999 in
connection with the sale of Lahser One, Lahser Two, Cresent
Centre, Central Park Place, and Central Park Plaza by CCEP/2
on September 10, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSOLIDATED CAPITAL INSTITUTIONAL PROPERTIES/2
By: CONCAP EQUITIES, INC.
General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Martha L. Long
Martha L. Long
Senior Vice President and
Controller
Date: November 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Capital Institutional Properties/2 1999 Third 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,789
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 58,322
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 58,125
<TOTAL-LIABILITY-AND-EQUITY> 58,322
<SALES> 0
<TOTAL-REVENUES> 737
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310
<EPS-BASIC> .34<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
