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 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 0-11766
ANGELES PARTNERS XI
(Exact name of small business issuer as specified in its charter)
California 95-3788040
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
55 Beattie Place, Post Office Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
ANGELES PARTNERS XI
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
March 31, 1999
Assets
Cash and cash equivalents $ 1,423
Receivables and deposits 1,440
Other assets 372
Investment in, and advances of $164 to, joint venture 1,337
Investment property:
Land $ 3,998
Buildings and related personal property 25,917
29,915
Less accumulated depreciation (19,040) 10,875
$ 15,447
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 43
Due to affiliates 33
Tenant security deposit liabilities 576
Other liabilities 848
Notes payable 31,200
Partners' Deficit
General partners $ (488)
Limited partners (39,627 units issued and outstanding) (16,765) (17,253)
$ 15,447
See Accompanying Notes to Financial Statements
b)
ANGELES PARTNERS XI
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended
March 31,
1999 1998
Revenues:
Rental income $ 1,886 $ 1,761
Other income 87 90
Total revenues 1,973 1,851
Expenses:
Operating 493 467
General and administrative 55 44
Depreciation 378 374
Interest 727 727
Property taxes 175 201
Total expenses 1,828 1,813
Income before equity in income (loss) and extraordinary
loss on debt extinguishment of joint venture 145 38
Equity in income (loss) of joint venture (Note D) 1,144 (47)
Income (loss) before equity in extraordinary loss
on debt extinguishment of joint venture 1,289 (9)
Equity in extraordinary loss on debt extinguishment
(Note D) (3) --
Net income (loss) $ 1,286 $ (9)
Net income allocated to general partners (1%) $ 13 $ --
Net income (loss) allocated to limited partners (99%) 1,273 (9)
$ 1,286 $ (9)
Net income (loss) per limited partnership unit $ 32.12 $ (.23)
See Accompanying Notes to Financial Statements
c)
ANGELES PARTNERS XI
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partners Partners Total
Original capital contributions 40,000 $ 30 $ 40,000 $ 40,030
Partners' deficit at
December 31, 1998 39,627 $ (501) $(18,038) $(18,539)
Net income for the three months
ended March 31, 1999 -- 13 1,273 1,286
Partners' deficit at
March 31, 1999 39,627 $ (488) $(16,765) $(17,253)
See Accompanying Notes to Financial Statements
d)
ANGELES PARTNERS XI
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net income (loss) $1,286 $ (9)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity in (income) loss of joint venture (1,144) 47
Equity in extraordinary loss on debt
extinguishment of joint venture 3 --
Depreciation 378 374
Amortization of loan costs 28 28
Casualty gain -- (28)
Change in accounts:
Receivables and deposits (231) 1
Other assets (54) 19
Accounts payable (15) (52)
Tenant security deposit liabilities 14 (13)
Other liabilities 191 (12)
Net cash provided by operating activities 456 355
Cash flows from investing activities:
Property improvements and replacements (172) (91)
Insurance proceeds received related to casualty -- 58
Net cash used in investing activities (172) (33)
Cash flows used in financing activities:
Payment on mortgage notes payable (68) (1)
Net increase in cash and cash equivalents 216 321
Cash and cash equivalents at beginning of period 1,207 746
Cash and cash equivalents at end of period $1,423 $1,067
Supplemental disclosure of cash flow information:
Cash paid for interest $ 699 $ 699
See Accompanying Notes to Financial Statements
e)
ANGELES PARTNERS XI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Angeles Partners
XI (the "Partnership" or "Registrant") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of Angeles Realty Corporation II (the "Managing General
Partner"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three 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 Registrant's financial statements include the accounts of Fox Run AP XI,
L.P., of which the Partnership owns a 99% limited partnership interest. The
general partner of Fox Run AP XI, L.P. is AP XI Fox Run GP, LLC, a single member
limited liability corporation wholly-owned by the Registrant. Thus, these
entities are deemed controlled and, therefore, consolidated by the Partnership.
All 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
("IPT") 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 a 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's partnership agreement provides for (i)
certain payments to affiliates for services and (ii) reimbursement of certain
expenses incurred by affiliates on behalf of the Partnership. The following
expenses owed to the Managing General Partner and its affiliates during the
three months ended March 31, 1999 and 1998 were paid or accrued:
Three Months Ended
March 31,
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ 98 $ 91
Reimbursement for services of affiliates (included in
investment properties, general and administrative
and operating expenses) 33 39
Due to affiliates 33 470
Included in "Reimbursement for services of affiliates" at March 31, 1998 is
approximately $7,000 in reimbursements for construction oversight costs. No
such costs were paid for the three months ended March 31, 1999.
During the three months ended March 31, 1999 and 1998, affiliates of the
Managing General Partner were entitled to receive 5% of the gross receipts from
the Registrant's property for providing property management services. The
Registrant paid to such affiliates approximately $98,000 and $91,000 for the
three months ended March 31, 1999 and 1998, respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $33,000 and
$39,000 for the three months ended March 31, 1999 and 1998, respectively.
The decrease in "Due to affiliates" relates to the payment of amounts owed to
affiliates of the Managing General Partner for reimbursement of expenses in
prior years. The amounts had been previously accrued by the Partnership due to
the Partnership's liquidity problems in previous years. The Managing General
Partner postponed payment of the amounts until the Partnership's cash flow
position improved. In the third quarter of 1998, the Managing General Partner
determined that the Partnership had sufficient liquid assets to meet its current
operational needs and to provide the necessary maintenance and improvements to
its investment property in the near term. As a result, approximately $460,000
was repaid to an affiliate of the Managing General Partner, thereby reducing the
balance outstanding as of September 30, 1998 to approximately $10,000. Since
September 30, 1998, an additional $23,000 relating to reimbursement for services
of affiliates have been accrued bringing the balance due to affiliates to
approximately $33,000 as of March 31, 1999.
Angeles Mortgage Investment Trust ("AMIT"), a real estate investment trust,
provided financing (the "AMIT Loan") to the Princeton Meadows Golf Course Joint
Venture ("Joint Venture"), (see "Note D"). Pursuant to a series of
transactions, affiliates of the Managing General Partner acquired ownership
interests in AMIT. On September 17, 1998, AMIT was merged with and into IPT,
the entity which controlled the Managing General Partner. Effective February 26,
1999, IPT was merged into AIMCO. As a result, AIMCO became the holder of the
AMIT loan.
Also on February 26, 1999, Princeton Meadows Golf Course was sold to an
unaffiliated third party. Upon closing, the AMIT principal balance of
$1,567,000 plus accrued interest of approximately $17,000 was paid off.
The Partnership may make advances to the Joint Venture as deemed appropriate by
the Managing General Partner. These advances do not bear interest and do not
have stated terms of repayment. At March 31, 1999, the amount of advances
receivable from the Joint Venture was approximately $164,000. It is anticipated
that this amount will be repaid by the Joint Venture upon the finalization of
its operations during the next several months.
NOTE D - INVESTMENT IN JOINT VENTURE
The Partnership had a 41.1% investment in Princeton Meadows Golf Course Joint
Venture. On February 26, 1999, the Joint Venture sold its only investment
property, Princeton Meadows Golf Course, to an unaffiliated third party. The
sale resulted in net proceeds of approximately $3,411,000 after payment of
closing costs, resulting in a gain on sale of approximately $2,885,000. The
Partnership's 1999 pro-rata share of this gain is approximately $1,186,000.
Furthermore, as a result of the sale, unamortized loan costs of approximately
$7,000 were written off. This resulted in an extraordinary loss on early
extinguishment of debt of approximately $7,000. The Partnership's pro-rata
share of this extraordinary loss is approximately $3,000.
Condensed balance sheet information of the Joint Venture at March 31, 1999, is
as follows (in thousands):
Assets
Cash $ 3,454
Other assets 113
Total $ 3,567
Liabilities and Partners' Capital
Other liabilities $ 715
Partners' capital 2,852
Total $ 3,567
NOTE D - INVESTMENT IN JOINT VENTURE
The condensed statements of operations of the Joint Venture for the three months
ended March 31, 1999 and 1998 are summarized as follows:
Three Months Ended
March 31,
1999 1998
(in thousands)
Revenues $ 30 $ 203
Costs and expenses (131) (317)
Loss before gain on sale of investment
property and extraordinary loss on
Extinguishment of debt (101) (114)
Gain on sale of investment property 2,885 --
Extraordinary loss on extinguishment of debt (7) --
Net income $ 2,777 $ (114)
The Partnership realized equity income (loss) of approximately $1,144,000 and
$47,000 in the Joint Venture for the three months ended March 31, 1999, and
1998, respectively. The Partnership also realized an extraordinary loss on
extinguishment of debt of $3,000 for the three months ended March 31, 1999.
The Princeton Meadows Golf Course property had an underground fuel storage tank
that was removed in 1992. This fuel storage tank caused contamination to the
area. Management installed monitoring wells in the area where the tank was
formerly buried. Some samples from these wells indicated lead and phosphorous
readings that were higher than the range prescribed by the New Jersey Department
of Environmental Protection ("DEP"). The Joint Venture notified the DEP of the
findings when they were first discovered. However, the DEP did not give any
directives as to corrective action until late 1995.
In November 1995, representatives of the Joint Venture and the New Jersey DEP
met and developed a plan of action to clean-up the contamination site at
Princeton Meadows Golf Course. The Joint Venture engaged an engineering firm to
conduct consulting and compliance work and a second firm to perform the field
work necessary for the clean-up. Field work was in process, with skimmers
having been installed at three test wells on the site. These skimmers were in
place to detect any residual fuel that may have still been in the ground. The
completion date of field work was expected to be in 1999. The Joint Venture
originally recorded a liability of $199,000 for the costs of the clean-up. At
February 26, 1999, the balance in the liability for clean-up costs was
approximately $53,000. Upon the sale of the Golf Course, as noted above, the
Joint Venture received documents from the Purchaser releasing the joint Venture
from any further responsibility or liability with respect to the clean-up.
NOTE E - SEGMENT REPORTING
Description of the types of products from which the reportable segment derives
its revenues:
The Partnership has one reportable segment: residential properties. The
Partnership's residential property segment consists of one apartment complex
located in Plainsboro, New Jersey. 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.
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 Other Totals
Rental income $ 1,886 $ -- $ 1,886
Other income 80 7 87
Interest expense 727 -- 727
Depreciation 378 -- 378
General and administrative expense -- 55 55
Equity in income of joint venture -- 1,144 1,144
Equity in extraordinary loss or
debt extinguishment of
joint venture -- (3) (3)
Segment profit (loss) 193 1,093 1,286
Total assets 12,860 2,587 15,447
Capital expenditures for
investment property 172 -- 172
1998 Residential Other Totals
Rental income $ 1,761 $ -- $ 1,761
Other income 85 5 90
Interest expense 727 -- 727
Depreciation 374 -- 374
General and administrative expense -- 44 44
Equity in loss of JV -- (47) (47)
Segment profit (loss) 77 (86) (9)
Total assets 13,342 816 14,158
Capital expenditures for
investment property 91 -- 91
NOTE F - LEGAL PROCEEDINGS
In March 1998, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates 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 has 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.
On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled EVEREST PROPERTIES, LLC. V.
INSIGNIA FINANCIAL GROUP, INC., ET AL. in the Superior Court of the State of
California, county of Los Angeles. The action involves 44 real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia Affiliates allegedly manage or control (the
"Subject Partnerships"). This case was settled on March 3, 1999. The
Partnership is responsible for a portion of the settlement costs. The expense
will 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 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 property consists of one apartment complex. The
following table sets forth the average occupancy of the property for the three
months ended March 31, 1999 and 1998:
Average Occupancy
1999 1998
Fox Run Apartments
Plainsboro, New Jersey 98% 97%
Results of Operations
The Partnership incurred net income of approximately $1,286,000 for the three
months ended March 31, 1999, as compared to a net loss of approximately $9,000
for the three months ended March 31, 1998. The increase in net income is
primarily due to the recognition of the gain on disposal of the Princeton
Meadows Joint Venture and, to a lesser extent, an increase in total revenues,
which is offset by a slight increase in total expenses. Total revenues
increased primarily due to an increase in rental income resulting from an
increase in occupancy as well as an increase in the average annual rental rate
at Fox Run Apartments.
Total expenses for the three months ended March 31, 1999 increased slightly,
primarily due to an increase in operating expenses, which was partially offset
by a decrease in property taxes. The increase in operating expense is primarily
attributable to increases in corporate unit expenses, snow removal and
utilities, which is partially offset by a decrease in insurance expense. All of
the Registrant's corporate units were vacant for the three months ended March
31, 1999, resulting in the Registrant absorbing the full costs of operating
these units. During the three months ended March 31, 1998, the Partnership
received insurance proceeds relating to a 1997 fire at Fox Run Apartments, which
reduced operating expenses during the three months ended March 31, 1998. No
such proceeds were received during the three months ended March 31, 1999. The
decrease in insurance expense is the result of a change in insurance carriers.
Property taxes decreased due to the timing of the receipt of tax bills for 1999
and 1998 which affected the accruals recorded at March 31 1999 and 1998.
General and administrative expense increased slightly during the three months
ended March 31, 1999. Included in general and administrative expense at both
March 31, 1999 and 1998 are management reimbursements to the Managing General
Partner allowed under the Partnership Agreement. In addition costs associated
with the quarterly and annual communications with investors and regulatory
agencies and the annual audit required by the Partnership Agreement are also
included.
The Partnership had a 41.1% investment in Princeton Meadows Golf Course Joint
Venture. On February 26, 1999, the Joint Venture sold the Princeton meadows Golf
Course to an unaffiliated third party for gross sale proceeds of $5,100,000.
The Joint Venture received net proceeds of $3,411,000 after payment of closing
costs, resulting in a gain on sale of approximately $2,885,000. For the three
months ended March 31, 1999 the Partnership realized equity in income of the
Joint Venture of approximately $1,144,000, which included its equity in the gain
on disposal of Princeton Meadows Golf Course of $1,186,000 and the equity in
loss on operations of $42,000, as compared to equity in loss of the Joint
Venture of approximately $47,000 for the three months ended March 31, 1998.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment at its investment property to
assess the feasibility of increasing rents, maintaining or increasing occupancy
levels and protecting the Partnership from 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 March 31, 1999, the Partnership had cash and cash equivalents of
approximately $1,423,000 as compared to approximately $1,067,000 at March 31,
1998. Cash and cash equivalents increased approximately $216,000 for the period
March 31, 1999, from the Registrant's fiscal year-end and is primarily due to
approximately $456,000 of cash provided by operating activities, which is
partially offset by approximately $172,000 of cash used in investing activities
and approximately $68,000 of cash used in financing activities. Cash used in
investing activities consisted of property improvements and replacements. Cash
used in financing activities consisted of payments of principal made on the
mortgages encumbering Fox Run Apartments. The Registrant invests its working
capital reserves in a money market cash account.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the property 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.
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 Fox Run Apartments
requires approximately $2,192,000 of capital improvements over the near-term.
The Partnership has budgeted, but is not limited to, capital improvements of
approximately $2,021,000 for 1999 at this property, which includes roof repairs,
landscaping and irrigation improvements, and parking lot repairs. As of March
31, 1999, the Partnership spent approximately $172,000 on capital improvements
at Fox Run Apartments, primarily consisting of carpet and cabinet replacements,
landscaping, appliance replacements, water heater upgrades and other building
improvements. These improvements were funded from cash flow. The additional
capital improvements planned for 1999 at the Partnership's property will be
incurred only if cash is available from operations and 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 $31,200,000 encumbering Fox Run is being amortized
over periods ranging from 15 to 30 years with balloon payments of $29,960,000
due January 2002. The Managing General Partner may 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 cash distributions during the three months ended March 31, 1999,
or March 31, 1998. Future cash distributions will depend on the levels of net
cash generated from operations, the availability of cash reserves and the timing
of debt maturity, refinancing, and/or sale of the property. 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 planned capital expenditures, to permit 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 Managing General Partner. AIMCO and its
affiliates currently own 27.174% 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 Managing General Partner and its affiliates for management
and administrative services ("Managing Agent"). Any of the computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Managing Agent presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
not completed in time, the Year 2000 issue could have a material impact on the
operations of the Partnership.
The Managing Agent's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Managing
Agent has fully completed its assessment of all the information systems that
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each
is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems
at risk and formulated a plan to repair or replace each of the affected systems.
In August 1998, the 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, several putative unit holders of limited partnership units of the
Partnership commenced an action entitled Rosalie Nuanes, et al. v. Insignia
Financial Group, Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs named as defendants, among others,
the Partnership, the Managing General Partner and several of their affiliated
partnerships and corporate entities. The complaint purports to assert claims on
behalf of a class of limited partners and derivatively on behalf of a number of
limited partnerships (including the Partnership) which are named as nominal
defendants, challenging the acquisition by Insignia Financial Group, Inc.
("Insignia") and entities which were, at one time, affiliates of Insignia
("Insignia Affiliates") of interests in certain general partner entities, past
tender offers by Insignia Affiliates to acquire limited partnership units, the
management of partnerships by Insignia Affiliates 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 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 has 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.
On July 30, 1998, certain entities claiming to own limited partnership interests
in certain limited partnerships whose general partners were, at the time,
affiliates of Insignia filed a complaint entitled EVEREST PROPERTIES, LLC. V.
INSIGNIA FINANCIAL GROUP, INC., ET AL. in the Superior Court of the State of
California, county of Los Angeles. The action involves 44 real estate limited
partnerships (including the Partnership) in which the plaintiffs allegedly own
interests and which Insignia Affiliates allegedly manage or control (the
"Subject Partnerships"). This case was settled on March 3, 1999. The
Partnership is responsible for a portion of the settlement costs. The expense
will not have a material effect on the Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27 is filed as an exhibit to this report.
b) Reports on Form 8-K:
None filed during the three months 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.
ANGELES PARTNERS XI
By: Angeles Realty Corporation II
Managing 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: