-----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, E5RpQ1nykA8B8Qr4MWtAyARvDmpaJ1G9EMjHrsYERjehaKn+pPprDXeXsH+w3Yzf OYtPlSP0w5CCT4GlUET5kg== 0000711642-99-000207.txt : 19990813 0000711642-99-000207.hdr.sgml : 19990813 ACCESSION NUMBER: 0000711642-99-000207 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOX STRATEGIC HOUSING INCOME PARTNERS CENTRAL INDEX KEY: 0000800080 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 943016373 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-16877 FILM NUMBER: 99686372 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8642391000 MAIL ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: C/O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 FORMER COMPANY: FORMER CONFORMED NAME: FOX STRATEGIC HOUSING PARTNERS /CA/ DATE OF NAME CHANGE: 19870402 FORMER COMPANY: FORMER CONFORMED NAME: CENTURY PROPERTIES GROWTH FUND XXVI DATE OF NAME CHANGE: 19870208 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 June 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-16877 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, 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) FOX STRATEGIC HOUSING INCOME PARTNERS CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except unit data) June 30, 1999 Assets Cash and cash equivalents $ 2,432 Receivables and deposits 291 Restricted escrows 105 Other assets 255 Investment properties: Land $ 3,119 Buildings and related personal property 18,430 21,549 Less accumulated depreciation (7,375) 14,174 $ 17,257 Liabilities and Partners' (Deficit) Capital Liabilities Accounts payable $ 20 Due to general partner 72 Tenant security deposit liabilities 46 Accrued property taxes 121 Other liabilities 111 Mortgage notes payable 10,406 Partners' (Deficit) Capital: General partner's $ (253) Limited partners' (26,111 units issued and outstanding) 6,734 6,481 $ 17,257 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 Six Months Ended June 30, June 30, 1999 1998 1999 1998 Revenues: Rental income $ 707 $ 755 $ 1,395 $ 1,469 Other income 56 101 106 201 Total revenues 763 856 1,501 1,670 Expenses: Operating 248 252 476 483 General and administrative 67 51 125 106 Depreciation 159 158 322 316 Interest 171 236 354 467 Property taxes 67 64 117 127 Total expenses 712 761 1,394 1,499 Net income $ 51 $ 95 $ 107 $ 171 Net income allocated to general partner $ 10 $ 19 $ 21 $ 34 Net income allocated to limited partners 41 76 86 137 $ 51 $ 95 $ 107 $ 171 Net income per limited partnership unit $ 1.57 $ 2.91 $ 3.29 $ 5.24 Distribution per limited partnership unit $ .11 $ -- $ .11 $ -- 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's 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 six months ended June 30, 1999 -- 21 86 107 Distribution to limited partners -- -- (3) (3) Partners' (deficit) capital at June 30, 1999 26,111 $ (253) $ 6,734 $ 6,481
See Accompanying Notes to Consolidated Financial Statements d) FOX STRATEGIC HOUSING INCOME PARTNERS CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended June 30, 1999 1998 Cash flows from operating activities: Net income $ 107 $ 171 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 322 316 Amortization of loan costs 6 21 Interest added to note payable principal -- 71 Change in accounts: Receivables and deposits 19 (111) Other assets 20 2 Accounts payable 3 (26) Tenant security deposit liabilities 2 4 Accrued property taxes (50) (28) Accrued interest payable -- 375 Other liabilities -- (11) Net cash provided by operating activities 429 784 Cash flows from investing activities: Property improvements and replacements (84) (47) Withdrawals from restricted escrows 20 -- Net cash used in investing activities (64) (47) Cash flows from financing activities: Distributions to partners (3) -- Payments on mortgage notes payable (57) -- Net cash used in financing activities (60) -- Net increase in cash and cash equivalents 305 737 Cash and cash equivalents at beginning of period 2,127 4,968 Cash and cash equivalents at end of period $ 2,432 $ 5,705 Supplemental disclosure of cash flow information: Cash paid for interest $ 347 $ -- Supplemental disclosure of non cash investing and financing activities: Beginning accrued interest added to note payable principal $ -- $ 356 See Accompanying Notes to Consolidated Financial Statements 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") 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 six month periods ended June 30, 1999, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Partnership's Annual Report on Form 10-KSB for the 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 wholly-owned subsidiary. All significant intercompany 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, a publicly traded real estate investment trust ("AIMCO"), 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 its affiliates were incurred during the six months ended June 30, 1999 and 1998: 1999 1998 (in thousands) Property management fees (included in operating expenses) $ 74 $ 78 Reimbursement for services of affiliates (included in general and administrative expenses) 24 31 Due to General Partner 72 72 During the six months ended June 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 $74,000 and $78,000 for the six months ended June 30, 1999 and 1998, respectively. An affiliate of the Managing General Partner received reimbursements of accountable administrative expenses amounting to approximately $24,000 and $31,000 for the six months ended June 30, 1999 and 1998, respectively. In addition, the General Partner earned $115,000 in Partnership Management Fees for 1998, of which $72,000 are subordinated to the Limited Partner's annual receipt of 8% of Adjusted Investment Capital, as defined in the Partnership Agreement. 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 5,288 units of limited partnership interest in the Partnership representing 20.25 of the total outstanding units. It is possible that AIMCO or its affiliate will make one or more additional offers to acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO. NOTE D - SEGMENT 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 the Partnership's Annual Report on Form 10-KSB for the year ended December 31, 1998. Factors management used to identify the enterprise's reportable segment: The Partnership's reportable segment consists of 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 six months ended June 30, 1999 and 1998, is shown in the 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 $ 1,395 $ -- $ 1,395 Other income 103 3 106 Interest expense 354 -- 354 Depreciation 322 -- 322 General and administrative expense -- 125 125 Segment profit (loss) 229 (122) 107 Total assets 17,078 179 17,257 Capital expenditures for investment properties 84 -- 84 1998 Residential Other Totals (in thousands) Rental income $ 1,469 $ -- $ 1,469 Other income 114 87 201 Interest expense 467 -- 467 Depreciation 316 -- 316 General and administrative expense -- 106 106 Segment profit (loss) 190 (19) 171 Total assets 16,703 3,909 20,612 Capital expenditures for investment properties 47 -- 47 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 and entities which were, at the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain general partner entities, past tender offers by Insignia Affiliates as well as a recently announced agreement between Insignia and AIMCO. 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 filed an amended complaint. The Managing General Partner filed demurrers to the amended complaint which were heard during February 1999. No ruling on such demurrers has been received. The Managing General Partner does not anticipate that costs associated with this case, if any, will be material to the Partnership's overall operations. In April 1998, a limited partner of the Partnership commenced an action in the Circuit Court for Jackson County, Missouri entitled Bond Purchase LLC v. Fox Strategic Housing Income Partners, et al. The complaint claims that the Partnership and the Managing General Partner breached certain contractual and fiduciary duties allegedly owed to the claimant and seeks damages and injunctive relief. This case was settled on April 9, 1999. The Partnership is responsible for a portion of the settlement costs. The costs associated with the settlement are included in total expenses for the six months ended June 30, 1999, and did not have a material effect on 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 each of the six months ended June 30, 1999 and 1998: Average Occupancy Property 1999 1998 Barrington Place Apartments Westlake, Ohio 83% 95% Wood View Apartments Atlanta, Georgia 95% 93% 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 in an attempt to increase occupancy which resulted in an occupancy of 96% at June 30, 1999. Results of Operations The Partnership's net income for the six months ended June 30, 1999, was approximately $107,000 as compared to net income of approximately $171,000 for the six months ended June 30, 1998. The Partnership reported net income for the three months ended June 30, 1999, of approximately $51,000 as compared to net income of approximately $95,000 for the corresponding period of 1998. The decrease in net income is attributable to a decrease in total revenues which more than offset a decrease in total 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 the Barrington Place property as discussed above, which was partially offset by an increase in rental rates and occupancy at the Wood View property. The decrease in other income is primarily attributable to a decrease in interest income due to lower average cash balances for the six months ended June 30, 1999, as compared to the same period of 1998 due to a distribution to the partners during the third quarter of 1998. Overall expenses for the comparable periods decreased primarily due to a decrease in interest expense 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. The increase in general and administrative expense is primarily due to an increase in legal expenses related to settlement of a lawsuit (see "Item 1. Financial Statements, Note E - Legal Proceedings" for further discussion). All other items of expense remained relatively constant for the comparable periods. Included in general and administrative expenses for the six months ended June 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 the burden of increases in expense. As part of this plan, the Managing General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the Managing General Partner will be able to sustain such a plan. Liquidity and Capital Resources At June 30, 1999, the Partnership had cash and cash equivalents of approximately $2,432,000 as compared to approximately $5,705,000 at June 30, 1998. The net increase in cash and cash equivalents for the six months ended June 30, 1999, is approximately $305,000 from the Partnership's year ended December 31, 1998, and is comprised of approximately $429,000 of cash provided by operating activities which was partially offset by approximately $64,000 and $60,000 of cash used in investing and financing activities, respectively. Cash used in investing activities consisted of property improvements and replacements which was partially offset by withdrawals from restricted escrows. Cash used in financing activities consisted of payments of principal made on the mortgages encumbering the Partnership's properties. 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 six months ended June 30, 1999, the Partnership expended approximately $29,000 for capital improvements at Barrington Place primarily consisting of floor covering. 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 several years. Capital improvements budgeted for 1999 include, but are not limited to, approximately $338,000 and which include certain of the required improvements and consist of carpet and vinyl replacement, heating units, parking lot repairs, water heaters, landscaping, major building repairs and improvements to its recreational facility. Wood View During the six months ended June 30, 1999, the Partnership expended approximately $55,000 for capital improvements at Wood View primarily consisting of roof repairs, recreation facility upgrades, and floor covering. 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 July 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 July 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. No distributions were declared or paid during the six month periods ended June 30, 1999 and 1998. In April 1999, the Partnership paid approximately $3,000 for withholding taxes on behalf of the limited partners. 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 will be reviewed on a quarterly basis. There can be no assurance, however, that the Partnership will generate sufficient funds from operations after required capital expenditures to permit further distributions to its partners in 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 5,288 units of limited partnership interest in the Partnership representing 20.25 of the total outstanding units. It is possible that AIMCO or its affiliate will make one or more additional offers to acquire additional limited partnership interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO. Year 2000 Compliance General Description of the Year 2000 Issue and the Nature and Effects of the Year 2000 on Information Technology (IT) and Non-IT Systems The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. The Partnership is dependent upon the Corporate General Partner and its affiliates for management and administrative services ("Managing Agent"). Any of the computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Over the past two years, the Managing Agent has determined that it will be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Managing Agent presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or not completed in time, the Year 2000 issue could have a material impact on the operations of the Partnership. The Managing Agent's plan to resolve Year 2000 issues involves four phases: assessment, remediation, testing, and implementation. To date, the Managing Agent has fully completed its assessment of all the information systems that could be significantly affected by the Year 2000, and has begun the remediation, testing and implementation phases on both hardware and software systems. Assessments are continuing in regards to embedded systems. The status of each is detailed below. Status of Progress in Becoming Year 2000 Compliant, Including Timetable for Completion of Each Remaining Phase Computer Hardware: During 1997 and 1998, the Managing Agent identified all of the computer systems at risk and formulated a plan to repair or replace each of the affected systems. In August 1998, the main computer system used by the Managing Agent became fully functional. In addition to the main computer system, PC-based network servers, routers and desktop PCs were analyzed for compliance. The Managing Agent has begun to replace each of the non-compliant network connections and desktop PCs and, as of June 30, 1999, had completed approximately 90% of this effort. The total cost to the Managing Agent to replace the PC-based network servers, routers and desktop PCs is expected to be approximately $1.5 million of which $1.3 million has been incurred to date. The remaining network connections and desktop PCs are expected to be upgraded to Year 2000 compliant systems by September 30, 1999. The completion of this process is scheduled to coincide with the release of a compliant version of the Managing Agent's operating system. Computer Software: The Managing Agent utilizes a combination of off-the-shelf, commercially available software programs as well as custom-written programs that are designed to fit specific needs. Both of these types of programs were studied, and implementation plans written and executed with the intent of repairing or replacing any non-compliant software programs. In April, 1999 the Managing Agent embarked on a data center consolidation project that unifies its core financial systems under its Year 2000 compliant system. The estimated completion date for this project is October, 1999. During 1998, the Managing Agent began converting the existing property management and rent collection systems to its management properties Year 2000 compliant systems. The estimated additional costs to convert such systems at all properties, is $200,000, and the implementation and testing process was completed in June, 1999. The final software area is the office software and server operating systems. The Managing Agent has upgraded all non-compliant office software systems on each PC and has upgraded 90% of the server operating systems. The remaining server operating systems are planned to be upgraded to be Year 2000 compliant by September, 1999. The completion of this process is scheduled to coincide with the release of a compliant version of the Managing Agent's operating system. Operating Equipment: The Managing Agent has operating equipment, primarily at the property sites, which needed to be evaluated for Year 2000 compliance. In September 1997, the Managing Agent began taking a census and inventory of embedded systems (including those devices that use time to control systems and machines at specific properties, for example elevators, heating, ventilating, and air conditioning systems, security and alarm systems, etc.). The Managing Agent has chosen to focus its attention mainly upon security systems, elevators, heating, ventilating and air conditioning systems, telephone systems and switches, and sprinkler systems. While this area is the most difficult to fully research adequately, management has not yet found any major non-compliance issues that put the Managing Agent at risk financially or operationally. A pre-assessment of the properties by the Managing Agent has indicated no Year 2000 issues. A complete, formal assessment of all the properties by the Managing Agent is in process and will be completed in September, 1999. Any operating equipment that is found non-compliant will be repaired or replaced. The total cost incurred for all properties managed by the Managing Agent as of June 30, 1999 to replace or repair the operating equipment was approximately $75,000. The Managing Agent estimates the cost to replace or repair any remaining operating equipment is approximately $125,000. The Managing Agent continues to have "awareness campaigns" throughout the organization designed to raise awareness and report any possible compliance issues regarding operating equipment within its enterprise. Nature and Level of Importance of Third Parties and Their Exposure to the Year 2000 The Managing Agent continues to conduct surveys of its banking and other vendor relationships to assess risks regarding their Year 2000 readiness. The Managing Agent has banking relationships with three major financial institutions, all of which have indicated their compliance efforts will be complete before July, 1999. The Managing Agent has updated data transmission standards with all of the financial institutions. The Managing Agent's contingency plan in this regard is to move accounts from any institution that cannot be certified Year 2000 compliant by September 1, 1999. The Partnership does not rely heavily on any single vendor for goods and services, and does not have significant suppliers and subcontractors who share information systems (external agent). To date the Partnership is not aware of any external agent with a Year 2000 compliance issue that would materially impact the Partnership's results of operations, liquidity, or capital resources. However, the Partnership has no means of ensuring that external agents will be Year 2000 compliant. The Managing Agent does not believe that the inability of external agents to complete their Year 2000 remediation process in a timely manner will have a material impact on the financial position or results of operations of the Partnership. However, the effect of non-compliance by external agents is not readily determinable. Costs to Address Year 2000 The total cost of the Year 2000 project to the Managing Agent is estimated at $3.5 million and is being funded from operating cash flows. To date, the Managing Agent has incurred approximately $2.9 million ($0.7 million expensed and $2.2 million capitalized for new systems and equipment) related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $0.5 million is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $0.2 million relates to repair of hardware and software and will be expensed as incurred. The Partnership's portion of these costs are not material. Risks Associated with the Year 2000 The Managing Agent believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Managing Agent has not yet completed all necessary phases of the Year 2000 program. In the event that the Managing Agent does not complete any additional phases, certain worst case scenarios could occur. The worst case scenarios could include elevators, security and heating, ventilating and air conditioning systems that read incorrect dates and operate with incorrect schedules (e.g., elevators will operate on Monday as if it were Sunday). Although such a change would be annoying to residents, it is not business critical. In addition, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Partnership. The Partnership could be subject to litigation for, among other things, computer system failures, equipment shutdowns or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. Contingency Plans Associated with the Year 2000 The Managing Agent has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and selecting new relationships for such activities as banking relationships and elevator operating systems. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 and entities which were, at the time, affiliates of Insignia ("Insignia Affiliates") of interests in certain general partner entities, past tender offers by Insignia Affiliates as well as a recently announced agreement between Insignia and AIMCO. 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 filed an amended complaint. The Managing General Partner filed demurrers to the amended complaint which were heard during February 1999. No ruling on such demurrers has been received. The Managing General Partner does not anticipate that costs associated with this case, if any, will be material to the Partnership's overall operations. In April 1998, a limited partner of the Partnership commenced an action in the Circuit Court for Jackson County, Missouri entitled Bond Purchase LLC v. Fox Strategic Housing Income Partners, et al. The complaint claims that the Partnership and the Managing General Partner breached certain contractual and fiduciary duties allegedly owed to the claimant and seeks damages and injunctive relief. This case was settled on April 9, 1999. The Partnership is responsible for a portion of the settlement costs. The costs associated with the settlement are included in total expenses for the six months ended June 30, 1999, and did not have a material effect on 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 June 30, 1999. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant duly 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/ Carla R. Stoner Carla R. Stoner Senior Vice President Finance and Administrator Date: August 12, 1999 EX-27 2
5 This schedule contains summary financial information extracted from Fox Strategic Housing Income Partners 1999 Second Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000800080 FOX STRATEGIC HOUSING INCOME PARTNERS 1,000 6-MOS DEC-31-1999 JUN-30-1999 2,432 0 0 0 0 0 21,549 (7,375) 17,257 0 10,406 0 0 0 6,481 17,257 0 1,501 0 0 1,040 0 354 0 0 0 0 0 0 107 3.29 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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