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