FORM 10-QSB--QUARTERLY OR TRANSITIONAL 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-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 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 0-16877
FOX STRATEGIC HOUSING INCOME PARTNERS
(Exact name of small business issuer as specified in its charter)
California 94-3016373
(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 preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
FOX STRATEGIC HOUSING INCOME PARTNERS
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1999
Assets
Cash and cash equivalents $ 662
Receivables and deposits 350
Restricted escrows 106
Other assets 252
Investment properties:
Land $ 3,119
Buildings and related personal property 18,565
21,684
Less accumulated depreciation (7,508) 14,176
$ 15,546
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 38
Due to general partner 164
Tenant security deposit liabilities 44
Accrued property taxes 202
Other liabilities 109
Mortgage notes payable 10,376
Partners' (Deficit) Capital
General partner $ (291)
Limited partners (26,111 units issued and
outstanding) 4,904 4,613
$ 15,546
See Accompanying Notes to Consolidated Financial Statements
b)
FOX STRATEGIC HOUSING INCOME PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Rental income $ 734 $ 757 $ 2,129 $ 2,226
Other income 54 96 160 297
Total revenues 788 853 2,289 2,523
Expenses:
Operating 252 281 728 764
General and administrative 152 53 277 159
Depreciation 133 158 455 474
Interest 179 199 533 666
Property taxes 80 72 197 199
Total expenses 796 763 2,190 2,262
Net (loss) income $ (8) $ 90 $ 99 $ 261
Net (loss) income allocated
to general partner $ (2) $ 18 $ 20 $ 52
Net (loss) income allocated
to limited partners (6) 72 79 209
$ (8) $ 90 $ 99 $ 261
Net (loss) income per limited
partnership unit $ (.23) $ 2.75 $ 3.03 $ 8.00
Distributions per
limited partnership unit $ 69.82 $108.12 $ 69.93 $108.12
See Accompanying Notes to Consolidated Financial Statements
c)
FOX STRATEGIC HOUSING INCOME PARTNERS
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 26,111 $ -- $26,111 $26,111
Partners' (deficit) capital at
December 31, 1998 26,111 $ (274) $ 6,651 $ 6,377
Net income for the nine months
ended September 30, 1999 -- 20 79 99
Distributions to partners -- (37) (1,826) (1,863)
Partners' (deficit) capital
at September 30, 1999 26,111 $ (291) $ 4,904 $ 4,613
See Accompanying Notes to Consolidated Financial Statements
d)
FOX STRATEGIC HOUSING INCOME PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 99 $ 261
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 455 474
Amortization of loan costs 14 29
Change in accounts:
Receivables and deposits (40) (225)
Other assets 15 (103)
Accounts payable 21 (24)
Accrued property taxes 31 43
Accrued interest payable -- 578
Due to general partner 92 --
Other liabilities (2) (3)
Net cash provided by operating activities 685 1,030
Cash flows from investing activities:
Property improvements and replacements (219) (71)
Net withdrawals from (deposits to) restricted escrows 19 (125)
Net cash used in investing activities (200) (196)
Cash flows from financing activities:
Proceeds from long term borrowings -- 10,500
Repayment of mortgage notes payable -- (8,712)
Loan costs paid -- (239)
Distributions to partners (1,863) (2,881)
Payments on mortgage notes payable (87) (9)
Net cash used in financing activities (1,950) (1,341)
Net decrease in cash and cash equivalents (1,465) (507)
Cash and cash equivalents at beginning of period 2,127 4,968
Cash and cash equivalents at end of period $ 662 $ 4,461
Supplemental disclosure of cash flow information:
Cash paid for interest $ 520 $ 58
Supplemental disclosure of non cash investing and
financing activities:
Beginning accrued interest added to note payable $ -- $ 876
See Accompanying Notes to Consolidated Financial Statements
e)
FOX STRATEGIC HOUSING INCOME PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A _ BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Fox Strategic
Housing Income Partners (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 Fox Capital Management Corporation
("FCMC" or the "Managing General Partner"), a California corporation, 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-KSB for
the fiscal year ended December 31, 1998.
Principles of Consolidation: The consolidated financial statements include the
statements of the Partnership and Westlake East Associates, L.P., a limited
partnership in which the partnership owns a 100% interest. All significant
inter-partnership transactions and balances have been eliminated.
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 Managing General Partner. 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 Partnership Agreement provides for certain payments
to affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership. The following transactions with the
Managing General Partner and/or its affiliates were incurred during the nine
months ended September 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $114 $118
Reimbursement for services of affiliates (included in
investment properties and general and administrative
expenses) 40 46
Partnership management fee (included in general and
expenses) 149 115
During the nine months ended September 30, 1999 and 1998, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from all
of the Partnership's properties as compensation for providing property
management services. The Partnership paid to such affiliates approximately
$114,000 and $118,000 for the nine months ended September 30, 1999 and 1998,
respectively.
An affiliate of the Managing General Partner received reimbursements of
accountable administrative expenses amounting to approximately $40,000 and
$46,000 for the nine months ended September 30, 1999 and 1998, respectively.
Included in these amounts is approximately $6,000 and $1,000 of construction
service reimbursements for the nine months ended September 30, 1999 and 1998,
respectively.
In addition, the general partner earned $149,000 and $115,000 in Partnership
Management fees for 1999 and 1998, respectively, of which $92,000 and $72,000
are subordinated to the limited Partner's annual receipt of 8% of Adjusted
Investment Capital, as defined in the Partnership Agreement during 1999 and
1998, respectively.
On April 30, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner, commenced a tender offer to purchase up to 11,750 (45.00% of the total
outstanding units) units of limited partnership interest in the Partnership for
a purchase price of $260 per unit. The offer expired on July 30, 1999.
Pursuant to the offer, AIMCO Properties, L.P. acquired 1,156.00 units. As a
result, AIMCO and its affiliates currently own 5,328 units of limited
partnership interest in the Partnership representing 20.41% 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 G - Legal Proceedings").
NOTE D - REFINANCING OF MORTGAGE NOTES PAYABLE
On July 30, 1998, the Partnership refinanced the mortgage indebtedness
encumbering its properties. The new mortgage encumbering Woodview Apartments
had an original principal amount of $5,600,000, bears interest at a rate of
6.64% per annum and requires monthly debt service payments of approximately
$36,000. The new mortgage encumbering Barrington Place Apartments had an
original principal amount of $4,900,000, bears interest at a rate of 6.65% and
requires monthly debt service payments of approximately $31,000. Both mortgage
loans mature on August 1, 2008 at which time the properties will either be
refinanced or sold. The Partnership received net proceeds from these
refinancings in the aggregate amount of approximately $1,549,000 which proceeds
were distributed in October, 1998. In connection with these loans, the
Partnership was required to establish escrows with the lender for tax and
insurance costs.
NOTE E - DISTRIBUTIONS
During the nine month period ended September 30, 1999, the Partnership
distributed cash from operations of approximately $1,860,000 (approximately
$1,823,000 to the limited partners, $69.82 per limited partnership unit). In
April 1999, the Partnership paid approximately $3,000 for withholding taxes on
behalf of the limited partners.
During the nine months ended September 30, 1998, the Partnership distributed
cash from operations of approximately $480,000 (approximately $470,000 to the
limited partners, $18.00 per limited partnership unit) and proceeds from prior
year debt refinancings of approximately $2,401,000 (approximately $2,353,000 to
the limited partners, $90.12 per limited partnership unit).
NOTE F - SEGMENT INFORMATION
Description of the types of products and services from which the reportable
segment derives its revenues: The Partnership has one reportable segment:
residential properties. The Partnership's residential property segment consists
of two apartment complexes located in Ohio and Georgia. 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 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 investment properties that offer
similar products and services. Although each of the investment properties is
managed separately, they have been aggregated into one segment as they provide
services with similar types of products and customers.
Segment information for the nine months ended September 30, 1999 and 1998, is
shown in the following tables below. The "Other" column includes Partnership
administration related items and income and expense not allocated to the
reportable segment.
1999 Residential Other Totals
(in thousands)
Rental income $ 2,129 $ -- $ 2,129
Other income 156 4 160
Interest expense 533 -- 533
Depreciation 455 -- 455
General and administrative expense -- 277 277
Segment profit (loss) 372 (273) 99
Total assets 15,407 139 15,546
Capital expenditures for investment
properties 219 -- 219
1998 Residential Other Totals
(in thousands)
Rental income $ 2,226 $ -- $ 2,226
Other income 173 124 297
Interest expense 666 -- 666
Depreciation 474 -- 474
General and administrative expense -- 159 159
Segment profit (loss) 296 (35) 261
Total assets 17,228 2,581 19,809
Capital expenditures for investment
properties 71 -- 71
NOTE G - 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 Managing 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 Managing 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 Managing 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 Managing 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 Managing 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 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.
The Partnership's investment properties consist of two apartment complexes. The
following table sets forth the average occupancy of the properties for the nine
months ended September 30, 1999 and 1998:
Average Occupancy
Property 1999 1998
Barrington Place Apartments 86% 94%
Westlake, Ohio
Wood View Apartments 95% 95%
Atlanta, Georgia
The Managing General Partner attributes the decrease in occupancy at Barrington
Place to increased competition in the local market. The Partnership has
implemented a more aggressive marketing campaign and has offered concessions in
an attempt to increase occupancy. Occupancy at September 30, 1999 had increased
to 90%.
Results of Operations
The Partnership's net income for the nine months ended September 30, 1999, was
approximately $99,000 as compared to net income of approximately $261,000 for
the nine months ended September 30, 1998. The Partnership reported a net loss
for the three months ended September 30, 1999, of approximately $8,000 as
compared to net income of approximately $90,000 for the corresponding period of
1998. The decrease in net income for the nine months ended September 30, 1999
is attributable to a decrease in total revenues. In addition, for the
comparable three month periods an increase in expenses also contributed to the
decrease in net income. Although expenses decreased for the comparable nine
month periods, the decrease in revenue more than offset the decrease in
expenses. Total revenues for the comparable periods decreased due to decreases
in both rental and other income. The decrease in rental income is due to a
decrease in occupancy at Barrington Place Apartments, as discussed above, which
was partially offset by an increase in rental rates at Wood View Apartments.
The decrease in other income is primarily attributable to a decrease in interest
income due to lower average cash balances held in interest bearing accounts for
the nine months ended September 30, 1999, as compared to the same period of 1998
due to distributions to the partners during the third and the fourth quarters of
1998 and third quarter of 1999. Total expenses for the nine months ended
September 30, 1999, decreased primarily due to decreases in interest and
operating expenses partially offset by an increase in general and administrative
expense. Interest expense decreased due to the lower interest rates obtained on
the refinanced loans encumbering the Partnership's properties, as discussed
below. Operating expenses decreased due to the completion of repairs and
maintenance projects at both of the Partnership's properties during 1998. The
increase in general and administrative expense is primarily due to an increase
in legal expenses related to the settlement of a lawsuit as previously discussed
in the Partnership's Form 10-QSB at June 30, 1999, and an increase in
Partnership management fees as the result of the Partnership's distribution in
1999.
Included in general and administrative expenses for the nine months ended
September 30, 1999 and 1998, are reimbursements to the Managing General Partner
allowed under the Partnership Agreement associated with its management of the
Partnership. 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 each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expenses. 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 September 30, 1999, the Partnership had cash and cash equivalents of
approximately $662,000 as compared to approximately $4,461,000 at September 30,
1998. The net decrease in cash and cash equivalents for the nine months ended
September 30, 1999, is approximately $1,465,000 from the Partnership's year
ended December 31, 1998. The decrease is due to approximately $685,000 of cash
provided by operating activities being more than offset by approximately
$200,000 of cash used in investing activities and approximately $1,950,000 of
cash used in financing activities. Cash used in investing activities consisted
of property improvements and replacements which was partially offset by net
withdrawals from restricted escrows. Cash used in financing activities
consisted of payments of principal made on the mortgages encumbering the
Partnership's properties and distributions to partners. The Partnership invests
its working capital reserves in money market accounts.
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 properties to adequately maintain the physical
assets and other operating needs of the Partnership and to comply with Federal,
state, and local legal and regulatory requirements. Capital improvements
planned for each of the Partnership's properties are detailed below.
Barrington Place
During the nine months ended September 30, 1999, the Partnership expended
approximately $136,000 for capital improvements at Barrington Place primarily
consisting of floor covering, parking lot improvements, communication equipment
upgrades, and appliance replacement. The parking lot improvements are
approximately 50% complete as of September 30, 1999. These improvements were
funded from operating cash flow. 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 the property requires approximately $232,000 of capital improvements over
the next few years. Capital improvements budgeted for 1999 include certain of
the required improvements and consist of carpet and vinyl replacement, heating
units, parking lot improvements, water heaters, landscaping, major building
improvements, and improvements to its recreational facility.
Wood View
During the nine months ended September 30, 1999, the Partnership expended
approximately $83,000 for capital improvements at Wood View primarily consisting
of roofing, recreation facility upgrades, parking lot improvements, wall
covering, appliance replacement, and floor covering. The roofing is complete
and the parking lot improvements are approximately 50% complete as of September
30, 1999. These improvements were funded from operating cash flow. 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 the property requires approximately
$131,000 of capital improvements over the next several years. Capital
improvements budgeted for 1999 include, but are not limited to, approximately
$95,000 which include certain of the required improvements and consist of
interior and exterior building improvements.
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 Partnership's distributable cash flow,
if any, may be adversely affected at least in the short term.
The Partnership's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Partnership. Prior to
September 30, 1998, the Partnership's properties were cross-collateralized by a
zero coupon first mortgage which secured the entire amount of the note payable.
Interest accrued on the amount borrowed at a contract rate of 10.9 percent per
annum, with the accrued interest added to principal each January and July. On
September 30, 1998, the Partnership refinanced this indebtedness with new
mortgage loans on each of the properties. As a result, the properties are no
longer cross-collateralized. The new loan on the Wood View Apartments was in
the original principal amount of $5,600,000, bears interest at a rate of 6.64%
per annum and requires monthly debt service payments of approximately $36,000.
The new mortgage encumbering Barrington Place Apartments was in the original
principal amount of $4,900,000, bears interest at a rate of 6.65% and requires
monthly debt service payments of approximately $31,000. Both mortgage loans
mature on August 1, 2008, with balloon payments due, at which time the
properties will need to be refinanced or sold. If the properties cannot be
refinanced and/or sold for a sufficient amount, the Partnership will risk losing
such properties through foreclosure.
During the nine month period ended September 30, 1999, the Partnership
distributed cash from operations of approximately $1,860,000 (approximately
$1,823,000 to the limited partners, $69.82 per limited partnership unit). In
April 1999, the Partnership paid approximately $3,000 for withholding taxes on
behalf of the limited partners. During the nine months ended September 30,
1998, the Partnership distributed cash from operations of approximately $480,000
(approximately $470,000 to the limited partners, $18.00 per limited partnership
unit) and proceeds from prior year debt refinancings of approximately $2,401,000
(approximately $2,353,000 to the limited partners, $90.12 per limited
partnership unit). 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 property sales. The
Partnership's distribution policy is reviewed on a semi-annual basis. There
can be no assurance, however, that the Partnership will generate sufficient
funds from operations after required capital improvements to permit further
distributions to its partners during the remainder of 1999 or subsequent
periods.
Tender Offer
On April 30, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 11,750 (45.00% of the total
outstanding units) units of limited partnership interest in the Partnership for
a purchase price of $260 per unit. The offer expired on July 30, 1999.
Pursuant to the offer, AIMCO Properties, L.P. acquired 1,156.00 units. As a
result, AIMCO and its affiliates currently own 5,328 units of limited
partnership interest in the Partnership representing 20.41% 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 G - 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 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 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.
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:
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 September 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOX STRATEGIC HOUSING INCOME PARTNERS
(a California Limited Partnership)
By: FOX PARTNERS VIII
Its General Partner
By: Fox Capital Management Corporation
Its Managing 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:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Fox
Strategic Housing Income Partners 1999 Third Quarter 10-QSB and is qualified in
its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000800080
<NAME> FOX STRATEGIC HOUSING INCOME PARTNERS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 662
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 21,684
<DEPRECIATION> (7,508)
<TOTAL-ASSETS> 15,546
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 10,376
0
0
<COMMON> 0
<OTHER-SE> 4,613
<TOTAL-LIABILITY-AND-EQUITY> 15,546
<SALES> 0
<TOTAL-REVENUES> 2,289
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,190
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 533
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99
<EPS-BASIC> 3.03<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
