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 March 31, 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)
March 31, 1999
Assets
Cash and cash equivalents $ 3,305
Receivables and deposits 1,791
Restricted escrows 3,231
Other assets 1,132
Investment Properties:
Land $ 5,833
Buildings and related personal property 96,690
102,523
Less accumulated depreciation (50,179) 52,344
$ 61,803
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 1,079
Tenant security deposit liabilities 408
Other liabilities 1,188
Mortgage notes payable 56,709
Minority interest 3,182
Partners' (Deficit) Capital
General partners $ (2,898)
Investor limited partners
(649 units issued and outstanding) 2,135 (763)
$ 61,803
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 March 31,
1999 1998
Revenues:
Rental income $ 6,083 $ 6,063
Other income 354 173
Casualty gain -- 168
Total revenues 6,437 6,404
Expenses:
Operating 2,621 2,687
General and administrative 106 91
Depreciation 996 963
Interest 1,356 1,387
Property taxes 561 592
Bad debt expense 277 401
Total expenses 5,917 6,121
Income before minority interest 520 283
Minority interest in net earnings of
operating partnerships (122) (132)
Net income $ 398 $ 151
Net income allocated to general partners (5%) $ 20 $ 8
Net income allocated to investor limited partners (95%) 378 143
$ 398 $ 151
Net income per limited partnership unit $ 582 $ 220
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 three months
ended March 31, 1999 -- 20 378 398
Partners' (deficit) capital at
March 31, 1999 649 $(2,898) $ 2,135 $ (763)
See Accompanying Notes to Consolidated Financial Statements
d)
SPRINGHILL LAKE INVESTORS LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net income $ 398 $ 151
Adjustments to reconcile net income
to net cash provided by operating activities:
Minority interest in net earnings of operating
partnerships 122 132
Depreciation 996 963
Amortization 31 31
Bad debt expense 277 401
Casualty gain -- (168)
Change in accounts:
Receivables and deposits (696) 23
Other assets 322 354
Accounts payable (658) (602)
Tenant security deposit liabilities 2 (7)
Other liabilities (40) 97
Due to affiliates -- (112)
Net cash provided by operating activities 754 1,263
Cash flows from investing activities:
Property improvements and replacements (692) (258)
Net withdrawals from (deposits to) restricted escrows 289 (276)
Net insurance proceeds from casualty gain -- 190
Net cash used in investing activities (403) (344)
Cash flows used in financing activities:
Payments on mortgage note payable (374) (340)
Net (decrease) increase in cash and cash equivalents (23) 579
Cash and cash equivalents at beginning of period 3,328 2,386
Cash and cash equivalents at end of period $ 3,305 $ 2,965
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,332 $ 1,358
Supplemental disclosure of non-cash activity:
At March 31, 1998, in connection with a fire at Springhill Lake Apartments,
accounts receivable, accounts payable and property improvements were adjusted by
approximately $58,000, $6,000 and $245,000, 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 month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1999. For further information, refer to the 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 the 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 three months ended March 31, 1999 and 1998:
For the Three Months
Ended
March 31,
1999 1998
(in thousands)
Property management fees (included in operating
expenses) $ 183 $ 182
Reimbursement for services of affiliates (included
in general and administrative and
operating expenses)(1) 64 73
During the three months ended March 31, 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 $183,000 and $182,000 for the three months ended March 31, 1999
and 1998, respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $64,000 and
$73,000 for the three months ended March 31, 1999 and 1998, respectively.
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 three months ended March 31, 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 $ 6,083 $ -- $ 6,083
Other income 335 19 354
Interest expense 1,356 -- 1,356
Depreciation 996 -- 996
General and administrative expense -- 106 106
Minority interest in net earnings of
operating partnerships -- (122) (122)
Segment income (loss) 607 (209) 398
Total assets 60,059 1,744 61,803
Capital expenditures 692 -- 692
1998
Residential Other Totals
Rental income $ 6,063 $ -- $ 6,063
Other income 173 -- 173
Casualty gain 168 -- 168
Interest expense 1,387 -- 1,387
Depreciation 963 -- 963
General and administrative expense -- 91 91
Minority interest in net earnings of
operating partnerships -- (132) (132)
Segment income (loss) 374 (223) 151
Total assets 59,812 2,373 62,185
Capital expenditures 503 -- 503
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, as discussed in the immediately following paragraph.
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.
Moton v. Springhill Lake Apartments, Springhill Lake Associates Limited
Partnership and/or Lerner Corporation (various claims pending before the Prince
George's County Human Relations Commission). The Complaintant, a former
employee at the Project, filed a number of claims with the Prince George's
County Human Relations Commission arising from his demotion. The claims allege
that the Complaintant was demoted because of his race (African American) and
because of prior discrimination claims made by the Complaintant. Further, the
Complaintant alleges that property management made racially derogatory remarks.
The Registrant alleges that Mr. Moton's demotion was due to his work performance
and the elimination of his position. Decisions on Mr. Moton's claims are
currently pending from the Prince George's County Human Relations Commission.
This matter was settled and dismissed in February 1999. The Partnership did not
incur any material costs in connection with this settlement.
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 three months
ended March 31, 1999 and 1998:
Average Occupancy
1999 1998
Springhill Lake Apartments 91% 93%
Greenbelt, Maryland
Results from Operations
The Registrant's net income for the three months ended March 31, 1999, was
approximately $398,000 as compared to approximately $151,000 for the same period
in 1998. Income before minority interest for the three months ended March 31,
1999 was approximately $520,000 as compared to approximately $283,000 for the
same period in 1998. The increase in income before minority interest is the
result of an increase in total revenues and a decrease in total expenses. The
increase in total revenues is primarily attributable to an increase in other
income which more than offset a casualty gain recognized at March 31, 1998.
Other income increased due to increases in laundry income, lease cancellation
fees, deposit forfeits, application fees and late charges. In addition, rental
income increased slightly due to an increase in average annual rental rates
which more than offset a slight decrease in occupancy. Offsetting the increase
in total revenues was a decrease in casualty gain. A casualty gain of
approximately $168,000 was recognized at March 31, 1998 as a result of three
separate fires at Springhill Lake Apartments, which occurred late in 1997.
Total expenses decreased primarily due to decreases in bad debt, operating,
interest and property tax expenses which was partially offset by an increase in
depreciation and general and administration expense. Bad debt expense decreased
as a result of improved collections at the property. The decrease in operating
expense is primarily attributable to a decrease in utilities as well as
insurance expense due to a change in insurance carriers. Interest expense
decreased due to scheduled principal payments which reduced the carrying balance
of the debt encumbering the property. Property taxes decreased due to the
timing of receipt of property tax bills for 1999 and 1998 which affected the
accruals as of March 31, 1999 and 1998. Depreciation expense increased due to
the completion of capital improvements at the property.
General and administrative expense increased slightly. Included in general and
administrative expenses at both March 31, 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 March 31, 1999, the Registrant had cash and cash equivalents of approximately
$3,305,000 as compared to approximately $2,965,000 at March 31, 1998. Cash and
cash equivalents decreased approximately $23,000 for the three months ended
March 31, 1999, from the Registrant's fiscal year end. The decrease in cash and
cash equivalents is due to approximately $403,000 of cash used in investing
activities and approximately $374,000 of cash used in financing activities,
which was partially offset by approximately $754,000 of cash provided by
operating 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 assets
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 near term. The Partnership has budgeted capital improvements of
approximately $14,672,000 for 1999 consisting of interior and exterior building
improvements. As of March 31, 1999 the Partnership has spent approximately
$692,000 on capital improvements consisting primarily of a roofing project,
sewer upgrades, flooring replacement, appliance purchases and 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 $56,709,000 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 three
months ended March 31, 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.
Potential Tender Offer
On October 1, 1998, Insignia Financial Group, Inc. merged into Apartment
Investment and Management Company ("AIMCO"), a real estate investment trust,
whose Class A Common Shares are listed on the New York Stock Exchange. As a
result of such merger, AIMCO and AIMCO Properties, L.P., a Delaware limited
partnership and the operating partnership of AIMCO ("AIMCO OP") acquired
indirect control of the Managing General Partner. AIMCO and its affiliates
currently own 37.157% of the limited partnership interests in the Partnership.
AIMCO is presently considering whether it will engage in an exchange offer for
additional limited partnership interests in the Partnership. There is a
substantial likelihood that, within a short period of time, AIMCO OP will offer
to acquire limited partnership interests in the Partnership for cash or
preferred units or common units of limited partnership interests in AIMCO OP.
While such an exchange offer is possible, no definite plans exist as to when or
whether to commence such an exchange offer, or as to the terms of any such
exchange offer, and it is possible that none will occur.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-QSB shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.
YEAR 2000 COMPLIANCE
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the 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 mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, PC-based network servers, routers and
desktop PCs were analyzed for compliance. The Managing Agent has begun to
replace each of the non-compliant network connections and desktop PCs and, as of
March 31, 1999, had completed approximately 75% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by July
31, 1999.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at
all properties, is $200,000, and the implementation and the testing process is
expected to be completed by July 31, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.
The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before May 1999.
The Managing Agent has updated data transmission standards with two of the three
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by June 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.8 million ($0.6 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
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, as discussed in the immediately following paragraph.
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.
Moton v. Springhill Lake Apartments, Springhill Lake Associates Limited
Partnership and/or Lerner Corporation (various claims pending before the Prince
George's County Human Relations Commission). The Complaintant, a former
employee at the Project, filed a number of claims with the Prince George's
County Human Relations Commission arising from his demotion. The claims allege
that the Complaintant was demoted because of his race (African American) and
because of prior discrimination claims made by the Complaintant. Further, the
Complaintant alleges that property management made racially derogatory remarks.
The Registrant alleges that Mr. Moton's demotion was due to his work performance
and the elimination of his position. Decisions on Mr. Moton's claims are
currently pending from the Prince George's County Human Relations Commission.
This matter was settled and dismissed in February 1999. The Partnership did not
incur any material costs in connection with this settlement.
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 three months ended
March 31, 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: May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Springhill
Lake Investors Limited Partnership 1999 First Quarter 10-QSB and is qualified in
its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000763399
<NAME> SPRINGHILL LAKE INVESTORS LIMITED PARTNERHSIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,305
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 102,523
<DEPRECIATION> (50,179)
<TOTAL-ASSETS> 61,803
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 56,709
0
0
<COMMON> 0
<OTHER-SE> (763)
<TOTAL-LIABILITY-AND-EQUITY> 61,803
<SALES> 0
<TOTAL-REVENUES> 6,437
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,356
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 398
<EPS-PRIMARY> 582<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
