-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BFBpUMMjSVJBhxZ91HsNjGA3FreeFuxIAjx2RQQpFXY0k6tEDph2Hivlk1HNLZD5 wVSuPP59Qo5Y3uEDK9bF2w== 0000711642-99-000289.txt : 19991115 0000711642-99-000289.hdr.sgml : 19991115 ACCESSION NUMBER: 0000711642-99-000289 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANGELES INCOME PROPERTIES LTD III CENTRAL INDEX KEY: 0000720460 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 953903984 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-13192 FILM NUMBER: 99748484 BUSINESS ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 10QSB 1 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 0-13192 ANGELES INCOME PROPERTIES, LTD. III (Exact name of small business issuer as specified in its charter) California 95-3903984 (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) ANGELES INCOME PROPERTIES, LTD. III CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except unit data) September 30, 1999 Assets Cash and cash equivalents $ 703 Receivables and deposits 386 Restricted escrows 281 Other assets 236 Investment properties: Land $ 1,527 Buildings and related personal property 13,108 14,635 Less accumulated depreciation (10,451) 4,184 $ 5,790 Liabilities and Partners' (Deficit) Capital Liabilities Accounts payable $ 28 Tenant security deposit liabilities 49 Accrued property taxes 56 Other liabilities 86 Mortgage note payable 3,673 Partners' (Deficit) Capital General partners $ (357) Limited partners (86,738 units issued and outstanding) 2,255 1,898 $ 5,790 See Accompanying Notes to Consolidated Financial Statements b) ANGELES INCOME PROPERTIES, LTD. III 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 $ 494 $ 465 $1,374 $1,346 Other income 15 19 53 55 Total revenues 509 484 1,427 1,401 Expenses: Operating 131 132 400 395 General and administrative 30 44 116 123 Depreciation 170 170 511 510 Interest 89 90 267 270 Property taxes 37 37 105 116 Total expenses 457 473 1,399 1,414 Net income (loss) $ 52 $ 11 $ 28 $ (13) Net income allocated to general partners (1%) $ -- $ -- $ -- $ -- Net income (loss) allocated to limited partners (99%) 52 11 28 (13) $ 52 $ 11 $ 28 $ (13) Net income (loss) per limited partnership unit $ .60 $ .13 $ .32 $ (.15) Distributions per limited partnership unit $ 11.41 $ -- $11.41 $ .02 See Accompanying Notes to Consolidated Financial Statements c) ANGELES INCOME PROPERTIES, LTD. III CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL (Unaudited) (in thousands, except unit data) Limited Partnership General Limited Units Partners Partners Total Original capital contributions 86,920 $ 1 $43,460 $43,461 Partners' (deficit) capital at December 31, 1998 86,738 $ (347) $ 3,217 $ 2,870 Distributions to partners -- (10) (990) (1,000) Net income for the nine months ended September 30, 1999 -- -- 28 28 Partners' (deficit) capital at September 30, 1999 86,738 $ (357) $ 2,255 $ 1,898 See Accompanying Notes to Consolidated Financial Statements ANGELES INCOME PROPERTIES, LTD. III CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 1999 1998 Cash flows from operating activities: Net income (loss) $ 28 $ (13) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 511 510 Amortization of loan costs and leasing commissions 29 28 Change in accounts: Receivables and deposits (146) (95) Other assets 38 44 Accounts payable 7 (14) Tenant security deposit liabilities 1 -- Accrued property taxes 56 19 Other liabilities (20) 25 Net cash provided by operating activities 504 504 Cash flows from investing activities: Property improvements and replacements (69) (48) Net deposits to restricted escrows (21) (20) Lease commissions paid (21) -- Net cash used in investing activities (111) (68) Cash flows from financing activities: Payments on mortgage note payable (37) (34) Distributions to partners (1,000) (247) Net cash used in financing activities (1,037) (281) Net (decrease) increase in cash and cash equivalents (644) 155 Cash and cash equivalents at beginning of period 1,347 1,081 Cash and cash equivalents at end of period $ 703 $ 1,236 Supplemental disclosure of cash flow information: Cash paid for interest $ 255 $ 258 See Accompanying Notes to Consolidated Financial Statements e) ANGELES INCOME PROPERTIES, LTD. III NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Angeles Income Properties, Ltd. III (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 Angeles Realty Corporation II (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 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 year ended December 31, 1998. Principles of Consolidation: The consolidated financial statements of the Partnership include its 99% limited partnership interests in Poplar Square AIP III, L.P. and Poplar Square GP LP. Because the Partnership may remove the general partner of both Poplar Square AIP III, L.P. and Poplar Square GP LP, the partnerships are controlled and consolidated by the Partnership. All significant interpartnership 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 (i) for certain payments to affiliates for services and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following payments were made to the Managing General Partner and affiliates during the nine months ended September 30, 1999 and 1998: 1999 1998 (in thousands) Property management fees (included in operating expenses) $ 32 $ 54 Reimbursement for services of affiliates (included in general and administrative expenses and other assets) 42 67 Lease commissions (included in other assets) -- 4 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 the Registrant's residential property as compensation for providing property management services. The Registrant paid to such affiliates approximately $32,000 for both nine month periods ended September 30, 1999 and 1998. For the nine months ended September 30, 1998, affiliates of the Managing General Partner were entitled to receive varying percentages of gross receipts from the Registrant's commercial property for providing property management services. The Registrant paid to such affiliates approximately $22,000 for the nine months ended September 30, 1998. Effective October 1, 1998 (the effective date of the Insignia Merger), these services for the commercial property were performed by an unrelated third party. An affiliate of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $42,000 and $71,000 for the nine months ended September 30, 1999 and 1998, respectively. The Partnership also paid approximately $4,000 in leasing commissions to an affiliate of the Managing General Partner for the nine months ended September 30, 1998. No such fees were paid for the nine months ended September 30, 1999. On June 2, 1999, AIMCO Properties, L.P., an affiliate of the Managing General Partner commenced a tender offer to purchase up to 31,737 units of limited partnership interest in the Partnership (approximately 36.59% of the total outstanding units) for a purchase price of $78 per unit. The offer expired on July 30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 2,234 units. As a result, AIMCO and its affiliates currently own 18,609 units of limited partnership interest in the Partnership representing approximately 21.45% 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 E - Legal Proceedings"). NOTE D - SEGMENT REPORTING Description of the types of products and services from which reportable segment derives its revenues: The Partnership has two reportable segments: Residential properties and commercial properties. The Partnership's residential property segment consists of one apartment complex located in Brandon, Mississippi. The Partnership rents apartment units to tenants for terms that are typically twelve months or less. The commercial property segment consists of a retail shopping center located in Medford, Oregon. This property leases space to clothing, fabric and craft retailers, a fitness center and various other specialty retail outlets. Measurement of segment profit or loss: The Partnership evaluates performance based on net income. The accounting policies of the reportable segments are the same as those described 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 segments are investment properties that offer different products and services. The reportable segments are each managed separately because they provide distinct services with different types of products and customers. Segment information for the nine months ended September 30, 1999 and 1998 is shown (in thousands) in the tables below. The "Other" column includes Partnership administration related items and income and expense not allocated to the reportable segments. 1999 Residential Commercial Other Totals Rental income $ 601 $ 773 $ -- $ 1,374 Other income 19 6 28 53 Interest expense -- 267 -- 267 Depreciation 193 318 -- 511 General and administrative expense -- -- 116 116 Segment profit (loss) 146 (30) (88) 28 Total assets 2,251 3,334 205 5,790 Capital expenditures 69 -- -- 69 1998 Residential Commercial Other Totals Rental income $ 601 $ 745 $ -- $ 1,346 Other income 19 2 34 55 Interest expense -- 270 -- 270 Depreciation 193 317 -- 510 General and administrative expense -- -- 123 123 Segment profit (loss) 139 (63) (89) (13) Total assets 2,122 3,619 1,053 6,794 Capital expenditures 36 12 -- 48 NOTE E - 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 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 Partnership's investment properties consist of one apartment complex and one commercial property. 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 Lake Forest Apartments 92% 93% Brandon, Mississippi Poplar Square Shopping Center 92% 95% Medford, Oregon The Managing General Partner attributes the decrease in occupancy at Poplar Square Shopping Center to the bankruptcy of one of the tenants during the first quarter of 1999. This property is currently under contract for sale. The sale which is subject to the purchaser's due diligence and other customary conditions, is expected to close during the fourth quarter of 1999. There can be no assurance, however, that the sale will be consummated. Results from Operations The Registrant's net income for the nine month period ended September 30, 1999 was approximately $28,000 as compared to a net loss of approximately $13,000 for the nine months ended September 30, 1998. The Registrant's net income for the three months ended September 30, 1999 was approximately $52,000 as compared to net income of approximately $11,000 for the three months ended September 30, 1998. The increase in net income for both the three and nine months ended September 30, 1999 is due to an increase in total revenues and a decrease in total expenses. The increase in total revenues is attributable to an increase in rental income due to increased average annual rental rates at both properties despite the decrease in occupancy at both Lake Forest Apartments and Poplar Square Shopping Center. The decrease in total expenses is the result of small changes in all of the expenses, none of which are individually significant. 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. 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 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 Registrant had cash and cash equivalents of approximately $703,000 as compared to approximately $1,236,000 at September 30, 1998. The net decrease in cash and cash equivalents was approximately $644,000 for the nine months ended September 30, 1999, from the Registrant's fiscal year end. The decrease in cash and cash equivalents is due to approximately $1,037,000 of cash used in financing activities and approximately $111,000 of cash used in investing activities, which is partially offset by approximately $504,000 of cash provided by operating activities. Cash used in financing activities consisted primarily of distributions to partners and, to a lesser extent, payments of principal made on the mortgage encumbering Poplar Square Shopping Center. Cash used in investing activities consisted of property improvements and replacements, net deposits to escrow accounts maintained by the mortgage lender and lease commissions paid to the third party management company for new leases signed at Poplar Square Shopping Center. 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 various properties 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 both of the Registrant's properties are detailed below. Poplar Square Shopping Center: 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 Poplar Square Shopping Center requires approximately $479,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $11,000 for 1999, which include certain of the required improvements and consist of tenant improvements and exterior lighting upgrades. As of September 30, 1999, no expenditures for capital improvements have been incurred. Lake Forest Apartments: 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 Lake Forest Apartments requires approximately $147,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $149,000 for 1999, which include certain of the required improvements and consist of carpet and roof replacements. As of September 30, 1999, approximately $69,000 has been incurred consisting primarily of sewer replacements, air conditioning unit and plumbing upgrades, flooring and appliance replacements. These improvements were funded from cash flow from operations. 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 $3,673,000 encumbering Poplar Square Shopping Center is amortized over 25 years with a balloon payment of approximately $3,167,000 due November 2006. 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 such property through foreclosure. The Partnership made an operating cash distribution of approximately $1,000,000 during the nine months ended September 30, 1999, of which, approximately $990,000 was paid to limited partners (approximately $11.41 per limited partnership unit). A cash distribution from operations of approximately $247,000 was paid during the nine months ended September 30, 1998, to the limited partners (approximately $2.85 per limited partnership unit) with $245,000 of this amount being paid to satisfy a liability at December 31, 1997. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves, and the timing of the debt maturity, 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 planned capital expenditures, to permit any additional distributions to its partners during the remainder of 1999 or subsequent periods. Tender Offer On June 2, 1999, AIMCO Properties, L.P., an affiliate of the Managing General Partner commenced a tender offer to purchase up to 31,737 units of the limited partnership interest in the Partnership (approximately 36.59% of the total outstanding units) for a purchase price of $78 per unit. The offer expired on July 30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 2,234 units. As a result, AIMCO and its affiliates currently own 18,609 units of limited partnership interest in the Partnership representing approximately 21.45% 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 E - 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 PROCEDINGS 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 "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 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. 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. ANGELES INCOME PROPERTIES, LTD. III By: Angeles Realty Corporation II 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: November 11, 1999 EX-27 2
5 This schedule contains summary financial information extracted from Angeles Income Properties, Ltd. III 1999 Third Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000720460 ANGELES INCOME PROPERTIES, LTD. III 1,000 9-MOS DEC-31-1999 SEP-30-1999 703 0 0 0 0 0 14,635 10,451 5,790 0 3,673 0 0 0 1,898 5,790 0 1,427 0 0 1,399 0 267 0 0 0 0 0 0 28 .32 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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