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
For the transition period from_________to_________
Commission file number 0-16010
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
(Exact name of small business issuer as specified in its charter)
California 94-3004963
(State or other jurisdiction of (IRS 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)
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
March 31, 1999
Assets
Cash and cash equivalents $ 1,984
Receivables and deposits, net of allowance of $127 167
Restricted escrows 212
Other assets 430
Investment properties:
Land $ 1,571
Buildings and related personal property 12,211
13,782
Less accumulated depreciation (6,744) 7,038
$ 9,831
Liabilities and Partners' (Deficit) Capital
Accounts payable $ 14
Tenant security deposit liabilities 73
Accrued property taxes 37
Other liabilities 94
Mortgage note payable 2,325
Partners' (Deficit) Capital
General partner $ (173)
Corporate limited partner on behalf
of the Unitholders - (128,810 units
issued and outstanding) 7,461 7,288
$ 9,831
See Accompanying Notes to Financial Statements
b)
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended
March 31,
1999 1998
Revenues:
Rental income $ 595 $ 586
Other income 33 64
Casualty gain -- 108
Total revenues 628 758
Expenses:
Operating 223 233
General and administrative 67 65
Depreciation 135 129
Interest 46 46
Property taxes 4 43
Total expenses 475 516
Net income $ 153 $ 242
Net income allocated to general partner (1%) $ 2 $ 2
Net income allocated to limited partners (99%) 151 240
$ 153 $ 242
Net income per Unit of Depositary Receipt $1.17 $1.86
Distributions per Unit of Depositary Receipt $ -- $7.69
See Accompanying Notes to Financial Statements
c)
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
Unitholders
Units of
Units of Depositary
Depositary General Receipt
Receipt Partner (Note A) Total
Original capital contributions 129,266 $ 1 $ 32,317 $ 32,318
Partners' (deficit) capital
at December 31, 1998 128,810 $ (175) $ 7,310 $ 7,135
Net income for the three months
ended March 31, 1999 -- 2 151 153
Partners' (deficit) capital at
March 31, 1999 128,810 $ (173) $ 7,461 $ 7,288
See Accompanying Notes to Financial Statements
d)
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net income $ 153 $ 242
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 135 129
Amortization of lease commissions and loan costs 21 16
Casualty gain -- (108)
Change in accounts:
Receivables and deposits 11 (37)
Other assets (4) (5)
Accounts payable -- (25)
Tenant security deposit liabilities 1 (1)
Accrued property taxes (12) 43
Other liabilities (4) (4)
Net cash provided by operating activities 301 250
Cash flows from investing activities:
Property improvements and replacements (62) (358)
Net withdrawals from (deposits to) restricted escrows 2 (17)
Lease commissions paid (11) (33)
Net insurance proceeds from casualty -- 175
Net cash used in investing activities (71) (233)
Cash flows used in financing activities:
Distribution to partners -- (1,000)
Net increase (decrease) in cash and cash equivalents 230 (983)
Cash and cash equivalents at beginning of period 1,754 2,770
Cash and cash equivalents at end of period $1,984 $1,787
Supplemental disclosure of cash flow information:
Cash paid for interest $ 43 $ 43
See Accompanying Notes to Financial Statements
e)
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Johnstown/Consolidated 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 ConCap Equities, 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
financial statements and footnotes thereto included in the Partnership's annual
report on Form 10-KSB for the fiscal year ended December 31, 1998.
Certain reclassifications have been made to the 1998 balances to conform to the
1999 presentation.
Units of Depositary Receipt
Johnstown/Consolidated Depositary Corporation (the "Corporate Limited Partner"),
an affiliate of the General Partner, serves as a depositary of certain units of
depositary receipt ("Units"). The Units represent economic rights attributable
to the limited partnership interests in the Partnership and entitle the
unitholders thereof ("Unitholders") to certain economic benefits, allocations
and distributions of the Partnership. For this reason, partners' (deficit)
capital is herein represented as an interest of the Unitholder.
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 AFFILIATED 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,
as provided for in the Partnership Agreement. The Partnership Agreement
provides for certain payments to affiliates for services and as reimbursements
of certain expenses incurred by affiliates on behalf of the Partnership. The
following transactions with the General Partner and its affiliates were incurred
during the three months ended March 31, 1999 and 1998:
1999 1998
(in thousands)
Asset management fees (included in
general and administrative expense) $ 22 $ 24
Property management fees (included
in operating expenses) 25 29
Reimbursement for services of affiliates
(included in operating and general and
administrative expenses, and investment
properties) (1) 24 30
(1) Included in "Reimbursements for services of affiliates" for the three
months ended March 31, 1998 is approximately $6,000 in reimbursements for
construction oversight costs. No construction oversight costs were paid
during the three months ended March 31, 1999.
The Partnership Agreement provides that the Partnership shall pay in monthly
installments to the General Partner, or an affiliate, a yearly asset management
fee equal to: (i) 3/8 of 1% of the original principal balance of mortgage loans
outstanding at the end of the month preceding the installment payment; (ii) 1/8
of 1% of the market value of guaranteed mortgage-backed securities as of the end
of the Partnership quarter immediately preceding the installment payment; and
(iii) 5/8 of 1% of the purchase price of the properties plus improvements for
managing the Partnership's assets. In the event the property was not owned at
the beginning or end of the year, such fee shall be pro-rated for the short-year
period of ownership. Under this provision, fees of approximately $22,000 and
$24,000 were paid to the General Partner and its affiliates for the three months
ended March 31, 1999 and 1998, respectively, and are included in general and
administrative expenses.
During the three months ended March 31, 1999 and 1998, affiliates of the General
Partner were entitled to receive 5% of gross receipts from the Partnership's
residential property for providing property management services. The
Partnership paid to such affiliates approximately $14,000 and $13,000 for the
three months ended March 31, 1999 and 1998, respectively. For the three months
ended March 31, 1999 and 1998, affiliates of the General Partner were entitled
to receive varying percentages of gross receipts from the Partnership's Florida
#11 Mini-Warehouse commercial property for providing property management
services. The Partnership paid to such affiliates approximately $11,000 for
each of the three months ended March 31, 1999 and 1998. Effective October 1,
1998 (the effective date of the Insignia Merger) these services for the Phoenix
Business Campus commercial property were provided by an unrelated party. For
the three months ended March 31, 1998, the Partnership paid approximately $5,000
to an affiliate of the Managing General Partner for providing property
management services for Phoenix Business Campus.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $24,000 and $30,000 for the
three months ended March 31, 1999 and 1998, respectively.
The Partnership paid leasing commissions of approximately $31,000 to an
affiliate of the General Partner during the three months ended March 31, 1998.
No leasing commissions were paid to affiliates during the three months ended
March 31, 1999. Leasing commissions are capitalized and amortized over the lives
of the respective leases. Unamortized leasing commissions are included in other
assets.
On December 19, 1997, an affiliate of the General Partner (the "Purchaser")
commenced a tender offer for limited partnership interests in the Partnership.
The Purchaser offered to purchase up to 39,000 units of the outstanding units of
limited partnership interest in the Partnership, at $68.00 per Unit, net to the
seller in cash. During February 1998, the tender offer was completed and the
Purchaser acquired 13,985.5 units of limited partnership interest in the
Partnership.
NOTE D - COMMITMENT
The Partnership is required by the Partnership Agreement to maintain working
capital for contingencies of not less than 5% of Net Invested Capital as defined
in the Partnership Agreement. In the event expenditures are made from these
reserves, operating revenues shall be allocated to such reserves to the extent
necessary to maintain the foregoing level. Reserves, including cash and cash
equivalents and tenant security deposits totaling approximately $2,042,000 at
March 31, 1999, exceeded the Partnership's reserve requirement of approximately
$1,338,500.
NOTE E - DISTRIBUTIONS
During the three months ended March 31, 1999, no distributions were declared or
paid. In March of 1998, the Partnership paid a distribution attributable to
cash flow from operations of approximately $1,000,000.
NOTE F - SEGMENT INFORMATION
The Partnership has two reportable segments: residential properties and
commercial properties. The Partnership's residential property segment consists
of one apartment complex located in Independence, Missouri. The Partnership
rents apartment units to tenants for terms that are typically twelve months or
less. The commercial property segment consists of an office building located in
Atlanta, Georgia, and a self-storage mini-warehouse located in Davie, Florida.
The office building leases space to a mortgage lender, construction company,
travel agency, computer software company and various other businesses at terms
ranging from 12 months to 5 years. The self-storage mini-warehouse leases its
space to individual and commercial customers for terms that are typically twelve
months or less.
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segments 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.
The Partnership's reportable segments consist of 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 $ 256 $ 339 $ -- $ 595
Other income 12 11 10 33
Interest expense 46 -- -- 46
Depreciation 43 92 -- 135
General and administrative expense -- -- 67 67
Segment profit (loss) 56 154 (57) 153
Total assets 2,105 6,672 1,054 9,831
Capital expenditures for
investment properties 18 44 -- 62
1998 Residential Commercial Other Totals
Rental income $ 236 $ 350 $ -- $ 586
Other income 12 13 39 64
Interest expense 46 -- -- 46
Depreciation 41 88 -- 129
General and administrative expense -- -- 65 65
Casualty gain 108 -- -- 108
Segment profit (loss) 141 127 (26) 242
Total assets 1,998 6,217 1,194 9,409
Capital expenditures for
investment properties 358 -- -- 358
NOTE G - LEGAL PROCEEDINGS
In March 1998, the Managing General Partner was named in a legal 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 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 the 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 as well
as a recently announced agreement between Insignia and Apartment Investment and
Management Company. The complaint seeks monetary damages and equitable relief,
including judicial dissolution of the Partnership. On June 25, 1998, the
General Partner filed a motion seeking dismissal of the action. In lieu of
responding to the motion, plaintiffs have recently filed an amended complaint.
The General Partner filed demurrers to the amended complaint which were heard
during February 1999. No ruling on such demurrers has been received. The
General Partner does not anticipate that costs associated with this case, if
any, 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 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 one apartment complex and two
commercial properties. The following table sets forth the average occupancy of
the properties for the three months ended March 31, 1999 and 1998:
Average Occupancy
1999 1998
Cedar Brooke Apartments
Independence, Missouri 97% 96%
Florida #11 Mini-Warehouse
Davie, Florida 97% 97%
Phoenix Business Campus
College Park, Georgia 82% 75%
The General Partner attributes the increase in occupancy at Phoenix Business
Campus to the addition of several tenants in the third quarter of 1998 and the
first quarter of 1999.
Results of Operations
The Partnership's net income for the three months ended March 31, 1999, was
approximately $153,000 versus net income of approximately $242,000 for the three
months ended March 31, 1998. The decrease in net income is primarily
attributable to an overall decrease in total revenues partially offset by an
overall decrease in total expenses. The decrease in overall revenues is
attributable to a decrease in interest income due to lower average cash balances
for the three months ended March 31, 1999 as compared to the same period of 1998
and to the fact that there was recognition of a casualty gain in 1998. The
decrease in revenues was partially offset by an increase in average rental rates
at all of the Partnership's investment properties, as well as an increase in
occupancy rate at both Cedar Brooke Apartments and Phoenix Business Campus. The
decrease in overall expenses is primarily due to a decrease in property tax
expense as a result of refunds received during the first quarter of 1999 on
behalf of the Phoenix Business Center property for 1997 and 1998 taxes. All
other items of expense remained relatively constant for the comparable periods.
Included in general and administrative expenses for the three months ended March
31, 1999 and 1998, are reimbursements to the 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 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 Partnership held cash and cash equivalents of
approximately $1,984,000 compared to approximately $1,787,000 at March 31, 1998.
The net increase in cash and cash equivalents for the three months ended March
31, 1999, from the Partnership's year ended December 31, 1998, was approximately
$230,000. This increase is due to approximately $301,000 of cash provided by
operating activities, which was partially offset by approximately $71,000 of
cash used in investing activities. Cash used in investing activities consisted
primarily of property improvements and replacements and, to a lesser extent,
lease commissions slightly offset by net withdrawals from escrow accounts
maintained by the mortgage lender. The Partnership invests its working capital
reserves in money market accounts.
The Partnership is required by the Partnership Agreement to maintain working
capital reserves for contingencies of not less than 5% of Net Invested Capital
as defined in the Partnership Agreement. In the event expenditures are made
from these reserves, operating revenue shall be allocated to such reserves to
the extent necessary to maintain the foregoing level. Reserves, including cash
and cash equivalents and tenant security deposits totaling approximately
$2,042,000 at March 31, 1999, exceeded the Partnership's reserve requirement of
approximately $1,338,500.
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 investment 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.
Cedar Brooke Apartments
During the three months ended March 31, 1999, the Partnership expended
approximately $18,000 for capital improvements at Cedar Brooke Apartments
consisting primarily of cabinet, carpet, and appliance replacement. These
improvements were funded primarily from replacement reserves. 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 $205,000 of capital
improvements over the near term. Capital improvements budgeted for 1999
include, but are not limited to, heating system upgrades, landscaping, flooring
and roof replacements and other building improvements, which are expected to
cost approximately $348,000.
Florida #11 Mini-Warehouse
During the three months ended March 31, 1999, the Partnership expended
approximately $400 for capital improvements at the property, consisting of
building improvements. 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 $205,000 of capital improvements over the near term. The
General Partner is still in the process of finalizing budgeted
capital improvements for 1999.
Phoenix Business Campus
During the three months ended March 31, 1999, the Partnership completed
approximately $44,000 of tenant improvements at Phoenix Business Campus. 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
$174,000 of capital improvements over the near term. For 1999, the Partnership
has budgeted approximately $62,000 of capital improvements which include, but
are not limited to, tenant 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 assets are currently thought to be sufficient for any near-
term needs (exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of $2,325,000, which carries a stated interest rate of 7.33%
(interest only), matures in 2003. The 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 Partnership
will risk losing such property through foreclosure.
There were no distributions declared or paid during the three months ended March
31, 1999. During the three months ended March 31, 1998, a cash distribution from
operations of approximately $1,000,000 ($7.69 per unit of depositary receipt)
was paid to the partners. The Partnership's distribution policy will be
reviewed on a quarterly basis. 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. 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.
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 own approximately 23.336% of the limited partnership interests in the
Partnership. AIMCO is presently considering whether it will engage in an
exchange offer for additional limited partnership interests in the Partnership.
There is a substantial likelihood that, within a short period of time, AIMCO OP
will offer to acquire limited partnership interests in the Partnership for cash
or preferred units or common units of limited partnership interests in AIMCO OP.
While such an exchange offer is possible, no definite plans exist as to when or
whether to commence such an exchange offer, or as to the terms of any such
exchange offer, and it is possible that none will occur.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-QSB shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the mainframe system used by the Managing Agent became fully
functional. In addition to the mainframe, PC-based network servers, routers and
desktop PCs were analyzed for compliance. The Managing Agent has begun to
replace each of the non-compliant network connections and desktop PCs and, as of
March 31, 1999, had completed approximately 75% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers,
routers and desktop PCs is expected to be approximately $1.5 million of which
$1.3 million has been incurred to date. The remaining network connections and
desktop PCs are expected to be upgraded to Year 2000 compliant systems by July
31, 1999.
Computer Software:
The Managing Agent utilizes a combination of off-the-shelf, commercially
available software programs as well as custom-written programs that are designed
to fit specific needs. Both of these types of programs were studied, and
implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems. The estimated additional costs to convert such systems at
all properties, is $200,000, and the implementation and the testing process is
expected to be completed by July 31, 1999.
The final software area is the office software and server operating systems.
The Managing Agent has upgraded all non-compliant office software systems on
each PC and has upgraded 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
July 31, 1999.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites,
which needed to be evaluated for Year 2000 compliance. In September 1997, the
Managing Agent began taking a census and inventory of embedded systems
(including those devices that use time to control systems and machines at
specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security
systems, elevators, heating, ventilating and air conditioning systems, telephone
systems and switches, and sprinkler systems. While this area is the most
difficult to fully research adequately, management has not yet found any major
non-compliance issues that put the Managing Agent at risk financially or
operationally. The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by July 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of March 31, 1999 the Managing Agent has
evaluated approximately 86% of the operating equipment for the Year 2000
compliance.
The total cost incurred for all properties managed by the Managing Agent as of
March 31, 1999 to replace or repair the operating equipment was approximately
$400,000. The Managing Agent estimates the cost to replace or repair any
remaining operating equipment is approximately $325,000, which is expected to be
completed by August 30, 1999.
The Managing Agent continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within its enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Managing Agent continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. The Managing
Agent has banking relationships with three major financial institutions, all of
which have indicated their compliance efforts will be complete before May 1999.
The Managing Agent has updated data transmission standards with two of the three
financial institutions. The Managing Agent's contingency plan in this regard is
to move accounts from any institution that cannot be certified Year 2000
compliant by June 1, 1999.
The Partnership does not rely heavily on any single vendor for goods and
services, and does not have significant suppliers and subcontractors who share
information systems (external agent). To date the Partnership is not aware of
any external agent with a Year 2000 compliance issue that would materially
impact the Partnership's results of operations, liquidity, or capital resources.
However, the Partnership has no means of ensuring that external agents will be
Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of operations of the
Partnership. However, the effect of non-compliance by external agents is not
readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at
$3.5 million and is being funded from operating cash flows. To date, the
Managing Agent has incurred approximately $2.8 million ($0.6 million expensed
and $2.2 million capitalized for new systems and equipment) related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Managing Agent has not
yet completed all necessary phases of the Year 2000 program. In the event that
the Managing Agent does not complete any additional phases, certain worst case
scenarios could occur. The worst case scenarios could include elevators,
security and heating, ventilating and air conditioning systems that read
incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be
annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Partnership. The Partnership could be
subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and
is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and selecting new relationships for such
activities as banking relationships and elevator operating systems.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, the Managing General Partner was named in a legal 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 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 the 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 as well
as a recently announced agreement between Insignia and Apartment Investment and
Management Company. The complaint seeks monetary damages and equitable relief,
including judicial dissolution of the Partnership. On June 25, 1998, the
General Partner filed a motion seeking dismissal of the action. In lieu of
responding to the motion, plaintiffs have recently filed an amended complaint.
The General Partner filed demurrers to the amended complaint which were heard
during February 1999. No ruling on such demurrers has been received. The
General Partner does not anticipate that costs associated with this case, if
any, 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 March 31, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Partnership caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
By: CONCAP EQUITIES, INC.
General Partner
By: /s/ Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/ Timothy R. Garrick
Timothy R. Garrick
Vice President - Accounting
Date: May 4, 1999