FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-14569
SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
Maryland 04-2848939
(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
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)
(Unaudited)
June 30, 1999
Assets
Cash and cash equivalents $ 4,132
Receivables and deposits (net of $284 allowance
for doubtful accounts) 2,337
Restricted escrows 2,793
Other assets 717
Investment properties:
Land $ 5,833
Buildings and related personal property 97,313
103,146
Less accumulated depreciation (51,175) 51,971
$ 61,950
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 595
Tenant security deposit liabilities 468
Other liabilities 1,122
Due to affiliates 92
Mortgage notes payable 56,323
Minority interest 3,410
Partners' (Deficit) Capital
General partners $ (2,863)
Investor limited partners
(649 units issued and outstanding) 2,803 (60)
$ 61,950
See Accompanying Notes to Consolidated Financial Statements
b)
SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenues:
Rental income $ 6,355 $ 5,986 $12,438 $12,049
Other income 554 314 908 487
Casualty gain -- 2 -- 170
Total revenues 6,909 6,302 13,346 12,706
Expenses:
Operating 2,797 2,719 5,514 5,502
General and administrative 233 121 339 212
Depreciation 996 982 1,992 1,945
Interest 1,343 1,378 2,699 2,765
Property taxes 418 587 883 1,083
Bad debt expense 191 96 468 497
Total expenses 5,978 5,883 11,895 12,004
Income before minority interest 931 419 1,451 702
Minority interest in net earnings
of operating partnerships (228) (18) (350) (150)
Net income $ 703 $ 401 $ 1,101 $ 552
Net income allocated to
general partner (5%) $ 35 $ 20 $ 55 $ 28
Net income allocated to investor
limited partners (95%) 668 381 1,046 524
$ 703 $ 401 $ 1,101 $ 552
Net income per limited
partnership unit $ 1,030 $ 587 $ 1,612 $ 807
See Accompanying Notes to Consolidated Financial Statements
c)
SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(in thousands, except unit data)
(Unaudited)
Limited Investor
Partnership General Limited
Units Partners Partners Total
Original capital contributions 649 $ -- $40,563 $40,563
Partners' (deficit) capital at
December 31, 1998 649 $(2,918) $ 1,757 $(1,161)
Net income for the six months
ended June 30, 1999 -- 55 1,046 1,101
Partners' (deficit) capital at
June 30, 1999 649 $(2,863) $ 2,803 $ (60)
See Accompanying Notes to Consolidated Financial Statements
d)
SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net income $ 1,101 $ 552
Adjustments to reconcile net income
to net cash provided by operating activities:
Minority interest in net earnings of operating
partnerships 350 150
Depreciation 1,992 1,945
Amortization of loan costs 62 62
Bad debt expense 468 497
Casualty gain -- (170)
Change in accounts:
Receivables and deposits (1,433) (432)
Other assets 706 820
Accounts payable (1,142) (307)
Tenant security deposit liabilities 62 (8)
Other liabilities (106) (48)
Due to affiliates 92 (112)
Net cash provided by operating activities 2,152 2,949
Cash flows from investing activities:
Property improvements and replacements (1,315) (1,116)
Net receipts from (deposits to) restricted escrows 727 (418)
Net insurance proceeds from casualty gain -- 192
Net cash used in investing activities (588) (1,342)
Cash flows used in financing activities:
Payments on mortgage note payable (760) (691)
Net increase in cash and cash equivalents 804 916
Cash and cash equivalents at beginning of period 3,328 2,386
Cash and cash equivalents at end of period $ 4,132 $ 3,302
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,637 $ 2,705
Supplemental disclosure of non-cash activity:
At June 30, 1998, in connection with a fire at Springhill Lake Apartments,
accounts receivable, accounts payable and property improvements were adjusted by
approximately $58,000, $179,000 and $173,000, respectively, for non-cash
activity.
See Accompanying Notes to Consolidated Financial Statements
e)
SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Springhill Lake
Investors Limited Partnership (the "Partnership" or "Registrant") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of Three Winthrop Properties, Inc. (the
"Managing General Partner"), all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Partnership's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1998.
Reclassifications
Certain reclassifications have been made to the 1998 balances to conform to the
1999 presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Partnership and its 90% general partnership interest in Springhill Lake Limited
Partnerships I through IX and Springhill Commercial Limited Partnership (the
"Operating Partnerships"). Theodore N. Lerner's ownership in the Operating
Partnerships has been reflected as a minority interest in the accompanying
consolidated financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE B - TRANSFER OF CONTROL
On October 28, 1997, Insignia Financial Group, Inc. ("Insignia") acquired 100%
of the Class B stock of First Winthrop Corporation. Pursuant to this
transaction, the by-laws of Three Winthrop were amended to provide for the
creation of a Residential Committee. Pursuant to the amended and restated by-
laws, Insignia has the right to elect one director to Three Winthrop's Board of
Directors and appoint the members of the Residential Committee. The Residential
Committee is generally authorized to cause Three Winthrop to take such actions
as it deems necessary and advisable in connection with the activities of the
Registrant.
Pursuant to a series of transactions which closed on October 1, 1998, and
February 26, 1999, Insignia 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 the rights granted to Insignia in the
October 28, 1997 transaction. The Managing General Partner does not believe
that this transaction will have a material effect on the affairs and operations
of the Partnership.
NOTE C - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The Limited Partnership Agreement provides for certain
payments to affiliates for services and as reimbursements of certain expenses
incurred by affiliates on behalf of the Partnership and an annual asset
management fee of $100,000 and an annual administration fee of $10,000.
The following transactions with affiliates of the Managing General Partner were
charged to expense for the six months ended June 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating
expenses) $ 374 $ 368
Reimbursement for services of affiliates (included
in general and administrative and operating expenses) 211 143
During the six months ended June 30, 1999 and 1998, affiliates of the Managing
General Partner were entitled to receive 3% of tenant rent collections and 5% of
store commercial income from the Registrant's properties for providing property
management services. The Registrant paid to such affiliates approximately
$374,000 and $368,000 for the six months ended June 30, 1999 and 1998,
respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $211,000 and
$143,000 for the six months ended June 30, 1999 and 1998, respectively.
Included in these expenses is approximately $6,000 in reimbursements for
construction oversight costs for the six months ended June 30, 1998. No such
costs were paid for the six months ended June 30, 1999.
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 188.96 (29.12% of the total
outstanding units) units of limited partnership interest in the Partnership for
a purchase price of $20,936 per unit. The offer expired on June 29, 1999.
Pursuant to the offer, AIMCO Properties, L.P. acquired 70.50 units. As a
result, AIMCO and its affiliates currently own 311.65 units of limited
partnership interest in the Partnership representing 48.02% 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.
NOTE D - SEGMENT REPORTING
Description of the types of products and services from which reportable segment
derives its revenues:
The Partnership has one reportable segment: residential properties, consisting
of an apartment complex located in Greenbelt, Maryland. The Partnership rents
apartment units to tenants for terms that are typically twelve months or less.
Measurement of segment profit or loss:
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segment are the same as those of the Partnership as
described in the summary of significant accounting policies in the Partnership's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
Factors management used to identify the enterprise's reportable segment:
The Partnership's reportable segment consists of operating partnerships that
offer similar products and services and are managed as one entity.
Segment information for the six months ended June 30, 1999 and 1998 is shown in
the tables below (in thousands). The 'Other' column includes Partnership
administration related items and income and expense not allocated to the
reportable segment.
1999
Residential Other Totals
Rental income $ 12,438 $ -- $12,438
Other income 568 340 908
Interest expense 2,699 -- 2,699
Depreciation 1,992 -- 1,992
General and administrative expense -- 339 339
Minority interest in net earnings of
operating partnerships -- 350 350
Segment income (loss) 1,450 (349) 1,101
Total assets 60,011 1,939 61,950
Capital expenditures 1,315 -- 1,315
1998
Residential Other Totals
Rental income $ 12,049 $ -- $12,049
Other income 464 23 487
Casualty gain 170 -- 170
Interest expense 2,765 -- 2,765
Depreciation 1,945 -- 1,945
General and administrative expense -- 212 212
Minority interest in net earnings of
operating partnerships -- 150 150
Segment income (loss) 891 (339) 552
Total assets 59,721 2,609 62,330
Capital expenditures 1,116 -- 1,116
NOTE E - LEGAL PROCEEDINGS
Three Winthrop Properties, Inc. v. Lerner Corp. (Case No. 129192-V, filed in the
Circuit Court for Montgomery County, Maryland on November 18, 1994). Three
Winthrop, in its capacity as the Managing General Partner of the sole general
partner of the Registrant, filed this action seeking, in Count I, a declaratory
judgment that: (i) Three Winthrop was entitled to terminate the Lerner Agreement
effective as of January 31, 1995 so long as notice has been given 90 days prior
to that date; (ii) Three Winthrop gave Lerner Corporation proper notice to
terminate on October 17, 1994; and (iii) that the Lerner Agreement terminated on
January 31, 1995. In Count II, Three Winthrop sought monetary damages as the
result of Lerner Corporation's failure to cease acting as property management
agent for the project. Three Winthrop filed a summary judgment motion on Count
I, which Lerner Corporation opposed, and, on February 14, 1995, the Circuit
Court for Montgomery County, Maryland granted summary judgment in Three
Winthrop's favor on Count I. Lerner Corporation filed a notice of appeal from
this order.
In November 1997, the Court granted Three Winthrop's motion for summary judgment
with respect to Count II, which was stayed during the pendency of the
defendant's appeal, and entered judgment in favor of Three Winthrop for
approximately $226,000. In January 1998, the Court also awarded Three Winthrop
approximately $80,000 in attorney's fees and costs. Lerner Corporation appealed
the judgment in March 1998. On February 1, 1999, the judgement was affirmed. In
May 1999, the Partnership agreed to receive a reduced amount from Lerner and
this matter was dismissed.
Grady v. Springhill Lake Apartments (Pending before the Prince George's County
Human Relations Commission, case no. AP94-1233). This public accommodation
discrimination claim was filed on December 16, 1994, however, the Commission
failed to notify the Registrant of the charge until September 8, 1996. In his
charge, Complaintant claims that he was denied information regarding the rental
of an apartment for commercial use because of his race (African American). In
fact, the Property does not lease apartments for commercial use, and, at the
time, the Property had no commercial space available for lease. In addition,
the Registrant believes that the almost two year delay in notifying the
Registrant of the charge is so prejudicial that the charge should be dismissed.
The Registrant is vigorously defending this matter. On December 26, 1996, the
Registrant filed its position statement in this matter. No decision has yet
been rendered.
The Partnership is unaware of any other pending or outstanding litigation that
is not of a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time.
The discussion of the Registrant's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Registrant's business and results of
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.
The Operating Partnership's investment property is a complex which consists of
apartment and townhouse units and an eight store shopping center. The following
table sets forth the average occupancy of the property for the six months ended
June 30, 1999 and 1998:
Average Occupancy
1999 1998
Springhill Lake Apartments 92% 92%
Greenbelt, Maryland
Results from Operations
The Registrant's net income for the six months ended June 30, 1999, was
approximately $1,101,000 as compared to approximately $552,000 for the same
period in 1998. The Registrant's net income for the three months ended June 30,
1999, was approximately $703,000 as compared to $401,000 for the same period in
1998. Income before minority interest for the six months ended June 30, 1999
was approximately $1,451,000 as compared to approximately $702,000 for the same
period in 1998. Income before minority interest for the three months ended June
30, 1999 was approximately $931,000 as compared to approximately $419,000 for
the same period in 1998. The increase in income before minority interest is
primarily the result of an increase in total revenues for the three and six
months ended June 30, 1999 with a slight decrease in total expenses for the six
months ended June 30, 1999. The increase in total revenues is attributable to
an increase in rental and other income that more than offset a casualty gain
that was recognized at June 30, 1998. Rental income increased due to an
increase in average annual rental rates which was partially offset by an
increase in concessions offered to tenants. Other income increased due
primarily to the receipt of a court granted motion for summary judgment and
attorney fees and costs in favor of the Registrant (see "Note E"). In addition,
other income increased due to increases in laundry income, lease cancellation
fees, application fees and late charges. Offsetting the increase in total
revenues was a decrease in casualty gain. A casualty gain of approximately
$170,000 was recognized at June 30, 1998 as a result of three separate fires at
Springhill Lake Apartments, which occurred late in 1997.
Total expenses decreased for the six months ended June 30, 1999 primarily due to
a decrease in property tax, interest and bad debt expenses. Property tax
expense decreased primarily due to the payment, during the six months ended June
30, 1998, of two property tax bills from a prior year that were previously in
dispute. Interest expense decreased due to scheduled principal payments, which
reduced the carrying balance of the debt encumbering the property. Bad debt
expense decreased as a result of improved collections at the property.
Partially offsetting the decrease in total expenses were increases in operating,
general and administrative and depreciation expense. Operating expense
increased primarily due to increases in interior painting and referral fees,
which is partially offset by a decrease in utilities, sewer repairs, and
insurance expense. Insurance expense decreased due to a change in insurance
carriers. General and administrative expense increased due to increases in
general partner reimbursements, legal and auditing expense. Depreciation
expense increased due to the completion of capital improvements at the property.
Included in general and administrative expense for each of the six months ended
June 30, 1999 and 1998 are reimbursements to the Managing General Partner
allowed under the Partnership Agreement. In addition, costs associated with the
quarterly and annual communications with investors and regulatory agencies and
the annual audit required by the Partnership Agreement are also included.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of its investment property to
assess the feasibility of increasing rents, maintaining or increasing occupancy
levels and protecting the Partnership from increases in expense. As part of
this plan, the Managing General Partner attempts to protect the Partnership from
the burden of inflation-related increases in expenses by increasing rents and
maintaining a high overall occupancy level. However, due to changing market
conditions, which can result in the use of rental concessions and rental
reductions to offset softening market conditions, there is no guarantee that the
Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At June 30, 1999, the Partnership had cash and cash equivalents of approximately
$4,132,000 as compared to approximately $3,302,000 at June 30, 1998. Cash and
cash equivalents increased approximately $804,000 for the six months ended June
30, 1999, from the Partnership's fiscal year end. The increase in cash and cash
equivalents is due to approximately $2,152,000 of net cash provided by operating
activities, which was partially offset by approximately $760,000 of cash used in
financing activities and approximately $588,000 of cash used in investing
activities. Cash used in investing activities consisted of property
improvements and replacements and was partially offset by net withdrawals from
escrow accounts maintained by the mortgage lender. Cash used in financing
activities consisted of payments of principal made on the mortgages encumbering
the Registrant's property. The Registrant invests its working capital reserves
in a money market account.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the property to adequately maintain the physical asset
and other operating needs of the Registrant and to comply with Federal, state,
and local legal and regulatory requirements. Capital improvements planned for
the Registrant's property is detailed below.
Springhill Lake: Based on a report received from an independent third party
consultant analyzing necessary exterior improvements and estimates made by the
Managing General Partner on interior improvements, it is estimated that
Springhill Lake requires approximately $15,000,000 of capital improvements over
the next few years. The Partnership has budgeted capital improvements of
approximately $14,672,000 for 1999 which include certain of the required
improvements and consist of interior and exterior building improvements. As of
June 30, 1999, the Partnership has spent approximately $1,315,000 on capital
improvements consisting primarily of a roofing project, swimming pool and air
conditioning repairs, sewer upgrades, flooring replacement, office equipment,
drapery, appliance purchases other building improvements. These improvements
were funded from cash flow and replacement reserves.
The additional capital expenditures will be incurred only if cash is available
from operations or from Partnership reserves. To the extent that such budgeted
capital improvements are completed, the Registrant's distributable cash flow, if
any, may be adversely affected at least in the short term.
The Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The mortgage
indebtedness of approximately $56,323,000 is amortized over 120 months with a
balloon payment of approximately $49,017,000 due May 2003. The Managing General
Partner will attempt to refinance such indebtedness and/or sell the property
prior to such maturity date. If the property cannot be refinanced or sold for a
sufficient amount, the Registrant will risk losing the property through
foreclosure.
The Partnership did not make any distributions to its partners during the six
months ended June 30, 1999 or 1998. Future cash distributions will depend on
the levels of net cash generated from operations, the availability of cash
reserves, and the timing of debt maturities, refinancings, and/or sale of the
property. The Partnership's distribution policy will be reviewed on a quarterly
basis. There can be no assurance, however, that the Partnership will generate
sufficient funds from operations, after planned capital expenditures, to permit
distributions to its partners in 1999 or subsequent periods.
Tender Offer
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 188.96 (29.12% of the total
outstanding units) units of limited partnership interest in the Partnership for
a purchase price of $20,936 per unit. The offer expired on June 29, 1999.
Pursuant to the offer, AIMCO Properties, L.P. acquired 70.50 units. As a
result, AIMCO and its affiliates currently own 311.65 units of limited
partnership interest in the Partnership representing 48.02% 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.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the Managing General Partner and its affiliates for management
and administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the main computer system used by the Managing Agent became fully
functional. In addition to the main computer system, PC-based network servers,
routers and desktop PCs were analyzed for compliance. The Managing Agent has
begun to replace each of the non-compliant network connections and desktop PCs
and, as of June 30, 1999, had completed approximately 90% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by
September 30, 1999. The completion of this process is scheduled to coincide
with the release of a compliant version of the Managing Agent's operating
system.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
In April, 1999 the Managing Agent embarked on a data center consolidation
project that unifies its core financial systems under its Year 2000 compliant
system. The estimated completion date for this project is October, 1999.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at all
properties, is $200,000, and the implementation and testing process was
completed in June, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 90% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
September, 1999. The completion of this process is scheduled to coincide with
the release of a compliant version of the Managing Agent's operating system.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally.
A pre-assessment of the properties by the Managing Agent has indicated no Year
2000 issues. A complete, formal assessment of all the properties by the
Managing Agent is in process and will be completed in September, 1999. Any
operating equipment that is found non-compliant will be repaired or replaced.
The total cost incurred for all properties managed by the Managing Agent as of
June 30, 1999 to replace or repair the operating equipment was approximately
$75,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $125,000.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before July,
1999. The Managing Agent has updated data transmission standards with all of the
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by September 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.9 million ($0.7 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Three Winthrop Properties, Inc. v. Lerner Corp. (Case No. 129192-V, filed in the
Circuit Court for Montgomery County, Maryland on November 18, 1994). Three
Winthrop, in its capacity as the Managing General Partner of the sole general
partner of the Registrant, filed this action seeking, in Count I, a declaratory
judgment that: (i) Three Winthrop was entitled to terminate the Lerner Agreement
effective as of January 31, 1995 so long as notice has been given 90 days prior
to that date; (ii) Three Winthrop gave Lerner Corporation proper notice to
terminate on October 17, 1994; and (iii) that the Lerner Agreement terminated on
January 31, 1995. In Count II, Three Winthrop sought monetary damages as the
result of Lerner Corporation's failure to cease acting as property management
agent for the project. Three Winthrop filed a summary judgment motion on Count
I, which Lerner Corporation opposed, and, on February 14, 1995, the Circuit
Court for Montgomery County, Maryland granted summary judgment in Three
Winthrop's favor on Count I. Lerner Corporation filed a notice of appeal from
this order.
In November 1997, the Court granted Three Winthrop's motion for summary judgment
with respect to Count II, which was stayed during the pendency of the
defendant's appeal, and entered judgment in favor of Three Winthrop for
approximately $226,000. In January 1998, the Court also awarded Three Winthrop
approximately $80,000 in attorney's fees and costs. Lerner Corporation appealed
the judgment in March 1998. On February 1, 1999, the judgement was affirmed.
In May 1999, the Partnership agreed to receive a reduced amount from Lerner and
this matter was dismissed.
Grady v. Springhill Lake Apartments (Pending before the Prince George's County
Human Relations Commission, case no. AP94-1233). This public accommodation
discrimination claim was filed on December 16, 1994, however, the Commission
failed to notify the Registrant of the charge until September 8, 1996. In his
charge, Complaintant claims that he was denied information regarding the rental
of an apartment for commercial use because of his race (African American). In
fact, the Property does not lease apartments for commercial use, and, at the
time, the Property had no commercial space available for lease. In addition,
the Registrant believes that the almost two year delay in notifying the
Registrant of the charge is so prejudicial that the charge should be dismissed.
The Registrant is vigorously defending this matter. On December 26, 1996, the
Registrant filed its position statement in this matter. No decision has yet
been rendered.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report.
(b) Reports on Form 8-K: None filed during the quarter ended June 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP
By: THREE WINTHROP PROPERTIES, INC.
Managing General Partner
By: /s/ Patrick J. Foye
Patrick J. Foye
Vice President - Residential
By: /s/ Carla R. Stoner
Carla R. Stoner
Senior Vice President - Finance and
Administration
Date:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Springhill
Lake Investors L.P. 1999 Second Quarter 10-QSB and is qualified in its entirety
by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000763399
<NAME> SPRINGHILL LAKE INVESTORS L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,132
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 103,146
<DEPRECIATION> 51,175
<TOTAL-ASSETS> 61,950
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 56,323
0
0
<COMMON> 0
<OTHER-SE> (60)
<TOTAL-LIABILITY-AND-EQUITY> 61,950
<SALES> 0
<TOTAL-REVENUES> 13,346
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,699
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,101
<EPS-BASIC> 1,612<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
