-----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, SKq0U2KKINdpMc91G/X/lR94AGwphxzrkrzU7nSTafrgq7FCaBpc3djst3TokRCg VZ8pTXtoOfDQnmxiwLJiRw== 0000711642-99-000128.txt : 19990518 0000711642-99-000128.hdr.sgml : 19990518 ACCESSION NUMBER: 0000711642-99-000128 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVESTORS FIRST STAGED EQUITY L P CENTRAL INDEX KEY: 0000768834 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 363310965 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-14470 FILM NUMBER: 99625181 BUSINESS ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH STREET 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 March 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period.........to......... Commission file number 0-14470 INVESTORS FIRST-STAGED EQUITY L.P. (Exact name of small business issuer as specified in its charter) Delaware 36-3310965 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 55 Beattie Place, PO Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 Issuer's telephone number Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the 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) INVESTORS FIRST-STAGED EQUITY L.P. CONSOLIDATED BALANCE SHEET (in thousands, except unit data) (Unaudited) March 31, 1999 Assets Cash and cash equivalents $ 1,368 Receivables and deposits 861 Restricted escrows 592 Other assets 1,533 Investment properties: Land $ 8,402 Buildings and related improvements 40,102 48,504 Less accumulated depreciation (26,423) 22,081 $ 26,435 Liabilities and Partners' Deficit Liabilities Accounts payable $ 37 Accrued interest 400 Tenant security deposit liabilities 464 Accrued property taxes 86 Other liabilities 130 Advances from affiliates of General Partner 327 Mortgage notes payable 41,853 Partners' Deficit General partner $ (350) Limited partners (16,261.152 units issued and outstanding) (16,512) (16,862) $ 26,435 See Accompanying Notes to Consolidated Financial Statements b) INVESTORS FIRST-STAGED EQUITY L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except unit data) (Unaudited) Three Months Ended March 31, 1999 1998 Revenues: Rental income $ 2,119 $ 1,978 Other income 74 86 Total revenues 2,193 2,064 Expenses: Operating 636 665 General and administrative 57 69 Depreciation 474 464 Interest 813 828 Property taxes 110 113 Total expenses 2,090 2,139 Income (loss) before extraordinary item 103 (75) Extraordinary item - gain on early extinguishment of debt 874 10 Net income (loss) $ 977 $ (65) Net income (loss) allocated to general partner (1%) $ 10 $ (1) Net income (loss) allocated to limited partners (99%) 967 (64) $ 977 $ (65) Per limited partnership unit: Income (loss) before extraordinary item $ 6.27 $ (4.54) Extraordinary item 53.19 .61 Net income (loss) per limited partnership unit $ 59.46 $ (3.93) See Accompanying Notes to Consolidated Financial Statements c) INVESTORS FIRST-STAGED EQUITY L.P. CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT (in thousands, except unit data) (Unaudited) Limited Partnership General Limited Units Partner Partners Total Partners' deficit at December 31, 1998 16,261 $ (360) $ (17,479) $ (17,839) Net income for the three months ended March 31, 1999 -- 10 967 977 Partners' deficit at March 31, 1999 16,261 $ (350) $ (16,512) $ (16,862) See Accompanying Notes to Consolidated Financial Statements d) INVESTORS FIRST-STAGED EQUITY L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Three Months Ended March 31, 1999 1998 Cash flows from operating activities: Net income (loss) $ 977 $ (65) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 474 464 Amortization of loan costs and leasing commissions 45 47 Extraordinary gain on early extinguishment of debt (874) (10) Change in accounts: Receivables and deposits (123) (52) Other assets (60) 6 Accounts payable (42) (4) Accrued interest 8 186 Tenant security deposit liabilities (4) 19 Accrued property taxes 86 113 Other liabilities 20 (20) Net cash provided by operating activities 507 684 Cash flows from investing activities: Property improvements and replacements (38) (190) Net (deposits to) withdrawals from restricted escrows (68) 375 Net cash (used in) provided by investing activities (106) 185 Cash flows from financing activities: Payment of loan costs -- (106) Payments on mortgage notes payable (218) (635) Advances to affiliates 1 1 Net cash used in financing activities (217) (740) Net increase in cash and cash equivalents 184 129 Cash and cash equivalents at beginning of period 1,184 2,640 Cash and cash equivalents at end of period $ 1,368 $ 2,769 Supplemental disclosure of cash flow information: Cash paid for interest $ 768 $ 602 See Accompanying Notes to Consolidated Financial Statements e) INVESTORS FIRST-STAGED EQUITY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Investors First- Staged Equity L.P. (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 MAERIL, Inc. (the "General Partner"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three 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. Principles of Consolidation: The Partnership's consolidated financial statements include the accounts of its 99.99% limited partnership interests in Serramonte, LP, VMS Apartments Portfolio II and VMS Apartments Portfolio III. The General Partner of the consolidated partnership is MAERIL, Inc. MAERIL, Inc., may be removed by the Registrant; therefore, the consolidated partnership is controlled and consolidated by the Registrant. 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 General Partner. The General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Partnership. NOTE C - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES The Partnership has no employees and is dependent on the General Partner and its affiliates for the management and administration of all partnership activities. The Partnership Agreement provides for certain payments to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. During the three months ended March 31, 1999 and 1998, affiliates of the General Partner were entitled to receive 5% of gross receipts from all of the Registrant's residential properties for providing property management services. The Registrant paid to such affiliates approximately $56,000 and $63,000 for the three months ended March 31, 1999 and 1998, respectively. For the three months ended March 31, 1998, affiliates of the 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 $53,000 for the three months ended March 31, 1998. Effective October 1, 1998 (the effective date of the Insignia Merger) these services for the commercial property were provided by an unrelated party. An affiliate of the General Partner received reimbursements of accountable administrative expenses amounting to approximately $39,000 and $37,000 for the three months ended March 31, 1999 and 1998, respectively. During the three months ended March 31, 1998 the Partnership paid affiliates of the General Partner approximately $40,000 for loan costs which were capitalized and are included in other assets in the accompanying Consolidated Balance Sheet. These loan costs related to the refinancing of the investment properties. In prior years the Partnership was advanced funds from a former General Partner in order to meet its existing obligations. Interest accrues on these advances at rates agreed to by the Partnership and the former General Partner. The interest rates at March 31, 1999 ranged from 4.70% to 9.50%. The unpaid balance on these advances at March 31, 1999 and the related accrued interest is $327,000 and $138,000, respectively. NOTE D - EARLY EXTINGUISHMENT OF DEBT At March 31, 1999, the total estimated future cash payments, on the Partnership's properties second mortgages, are less than the recorded balance. Therefore, in compliance with Financial Accounting Standards 15, the Partnership reduced the carrying balance to the estimated future cash payments of $1,895,000 on the second mortgage encumbering Rivercrest Village Apartments. In January 1999, the Partnership made the final payment on the second mortgage encumbering the Richardson Highlands property. As a result of the payment, the Partnership recognized an extraordinary gain of $874,000. NOTE E - SEGMENT REPORTING Description of the types of products and services from which the reportable segment derives its revenues: The Partnership has two reportable segments: residential properties and commercial properties. The Partnership's residential property segment consists of two apartment complexes located in California. The Partnership rents apartment units to tenants for terms that are typically twelve months or less. The commercial property segment consists of office space located in Serramonte, California. This property leases space to management, restaurant, and dental enterprises at terms ranging from month to month to ten years. 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 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 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 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 reportable segments. 1999 Residential Commercial Other Totals Rental income $ 1,352 $ 767 $ -- $ 2,119 Other income 63 5 6 74 Interest expense 544 269 -- 813 Depreciation 360 114 -- 474 General and administrative expenses -- -- 57 57 Gain on extraordinary items 874 -- -- 874 Segment profit (loss) 917 111 (51) 977 Total assets 17,476 8,296 663 26,435 Capital expenditures 33 5 -- 38 1998 Residential Commercial Other Totals Rental income $ 1,237 $ 741 $ -- $ 1,978 Other income 49 6 31 86 Interest expense 556 272 -- 828 Depreciation 356 108 -- 464 General and administrative expenses -- -- 69 69 Gain on extraordinary items 10 -- -- 10 Segment profit (loss) (131) 104 (38) (65) Total assets 18,231 7,989 2,394 28,614 Capital expenditures 44 146 -- 190 NOTE F - LEGAL PROCEEDINGS The Partnership is unaware of any 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 two apartment complexes and one commercial property. The following table sets forth the average occupancy for these properties for the three months ended March 31, 1999 and 1998: 1999 1998 Rivercrest Village Apartments Sacramento, California 90% 90% Richardson Highlands Apartments Marin City, California 99% 99% Serramonte Plaza Daly City, California 97% 95% Results of Operations The Registrant's net income for the three months ended March 31, 1999 was approximately $977,000 as compared to a net loss of approximately $65,000 for the three months ended March 31, 1998. The increase in net income was primarily attributed to the extraordinary gain on early extinguishment of debt at Richardson Highlands Apartments. During the three months ended March 31, 1999, the Partnership made the final mortgage payment on the second mortgage encumbering the Richardson Highlands Apartments resulting in the extraordinary gain on early extinguishment of debt. The Registrant's income before extraordinary items for the three months ended March 31, 1999 was approximately $103,000 as compared to a loss of approximately $75,000 for the three months ended March 31, 1998. The increase in net income before extraordinary item was due to an increase in total revenues and a decrease in total expenses. The increase in total revenues was due to an increase in rental income, which was primarily attributable to the increase in average rental rates at all of the Registrant's investment properties. The increase in rental income was partially offset by a decrease in other income. The decrease in other income was primarily attributable to a decrease in the Registrant's balances in interest bearing accounts. Total expenses decreased primarily due to a reduction in operating expense and to a lesser extent, a decrease in interest expense and general and administrative expense. Operating expense decreased due to a reduction in insurance. Insurance expense decreased due to the change in insurance carriers at the Registrant's investment properties during the fourth quarter of 1998 which resulted in lower insurance premiums. The decrease in general and administrative expense is primarily attributable to a decrease in professional expenses and general costs of the Partnership. Interest expense decreased due to the repayment of Richardson Highlands' second mortgage, which encumbered the property. Depreciation expense increased slightly for the three months ended March 31, 1999 as compared to the comparable period. Property tax expense remained relatively constant for the comparable periods. Included in general and administrative expenses at both March 31, 1999 and 1998 are management reimbursements to the 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 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 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 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 $1,368,000 as compared to approximately $2,769,000 at March 31, 1998. Cash and cash equivalents increased approximately $184,000 for the three months ended March 31, 1999 from the Registrant's fiscal year end, primarily due to approximately $507,000 of cash provided by operating activities, which was partially offset by approximately $217,000 of cash used in financing activities and approximately $106,000 of cash used in investing activities. Cash used in financing activities consisted primarily of principal payments on the mortgage encumbering the Registrant's properties. Cash used in investing activities consisted of property improvements and replacements and net deposits to the escrow accounts maintained by the mortgage lender. The Registrant 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 Registrant's properties are detailed below. Rivercrest Village Apartments Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the General Partner on interior improvements, it is estimated that the property requires approximately $365,000 of capital improvements over the near term. Capital improvements budgeted for, but not limited to, approximately $467,000 are planned for 1999 consisting of clubhouse renovations, carpet replacement and other interior improvements. As of March 31, 1999 approximately $12,000 has been incurred consisting primarily of appliance and floor covering replacements. Richardson Highlands Apartments Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the General Partner on interior improvements, it is estimated that the property requires approximately $213,000 of capital improvements over the near term. Capital improvements budgeted for, but not limited to, approximately $213,000 are planned for 1999 consisting of balcony and stairway replacement and repairs, carpet, cabinet, countertop and roof replacements, parking lot repairs and other building improvements. As of March 31, 1999 approximately $21,000 has been incurred consisting primarily of interior improvements and floor covering replacement. Serramonte Plaza Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the General Partner on interior improvements, it is estimated that the property requires approximately $1,000,000 of capital improvements over the near term. Capital improvements budgeted for, but not limited to, approximately $423,000 are planned for 1999 consisting of door and entrance way and parking lot repairs and tenant improvements. As of March 31, 1999 approximately $5,000 has been incurred consisting primarily of tenant improvements. The additional capital improvements will be incurred only if cash is available from operations or 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 $41,853,000 matures from January 2000 until January 2008, with balloon payments due at maturity, at which time the properties will either be refinanced and/or sold. Rivercrest Village has a balloon second mortgage, which includes a "shadow debt" portion, payable only in the event that the mortgage goes to maturity, January 15, 2000. The "shadow debt" portion for Rivercrest is approximately $1,307,000. On March 31, 1999, the total remaining balance on the second mortgage for Rivercrest Village is approximately $1,895,000. The Partnership made the final payment on the second mortgage encumbering the Richardson Highlands Apartments during January 1999. No cash distributions were paid during the three months ended March 31, 1999 and 1998. The Registrant's distribution policy is reviewed on a quarterly basis. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves, debt refinancing, and/or property sales. There can be no assurance, however, that the Registrant will generate sufficient funds from operations after required capital expenditures, to permit distributions to its partners in 1999. Potential Tender Offer On October 1, 1998, Insignia Financial Group, Inc. merged into 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 General Partner. AIMCO and its affiliates currently do not own any of the limited partnership interests in the Partnership. AIMCO is presently considering whether it will engage in an exchange offer for 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 partnerships 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 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 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 March 31, 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. INVESTORS FIRST-STAGED EQUITY L.P. (Registrant) By: VMS Realty Investment II, its General Partner By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/Carla R. Stoner Carla R. Stoner Senior Vice President Finance and Administration Date: May 17, 1999 EX-27 2
5 This schedule contains summary financial information extracted from Investors First-Staged Equity L.P. 1999 First Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000768834 INVESTORS FIRST-STAGED EQUITY L.P. 1,000 3-MOS DEC-31-1999 MAR-31-1999 1,368 0 861 0 0 0 48,504 26,423 26,435 0 41,853 0 0 0 (16,862) 26,435 0 2,193 0 0 2,090 0 813 0 0 0 0 0 0 977 59.46 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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