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 September 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 0-16010
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
(Exact name of small business issuer as specified in its charter)
California 94-3004963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 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)
September 30, 1999
Assets
Cash and cash equivalents $ 1,827
Receivables and deposits, net of allowance of $129 296
Restricted escrows 241
Other assets 409
Investment properties:
Land $ 1,571
Buildings and related personal property 12,325
13,896
Less accumulated depreciation (7,065) 6,831
$ 9,604
Liabilities and Partners' (Deficit) Capital
Accounts payable $ 32
Tenant security deposit liabilities 75
Accrued property taxes 116
Other liabilities 99
Mortgage note payable 2,325
Partners' (Deficit) Capital
General partner $ (177)
Corporate limited partner on behalf of the
Unitholders - (128,810 units issued and
outstanding) 7,134 6,957
$ 9,604
See Accompanying Notes to Financial Statements
b)
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues:
Rental income $ 615 $ 553 $ 1,832 $ 1,688
Other income 31 39 93 183
Casualty gain -- 11 -- 226
Total revenues 646 603 1,925 2,097
Expenses:
Operating 224 234 643 678
General and administrative 54 61 208 200
Depreciation 144 133 456 397
Interest 47 46 139 138
Property taxes 38 43 82 128
Total expenses 507 517 1,528 1,541
Net income $ 139 $ 86 $ 397 $ 556
Net income allocated to general
partner (1%) $ 1 $ 1 $ 4 $ 6
Net income allocated to limited
partners (99%) 138 85 393 550
$ 139 $ 86 $ 397 $ 556
Net income per Unit of Depositary
Receipt $ 1.07 $ .66 $ 3.05 $ 4.27
Distributions per Unit of Depositary
Receipt $ 4.42 $ -- $ 4.42 $ 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
Units 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 nine months
ended September 30, 1999 -- 4 393 397
Distribution to partners -- (6) (569) (575)
Partners' (deficit) capital
at September 30, 1999 128,810 $ (177) $ 7,134 $ 6,957
See Accompanying Notes to Financial Statements
d)
JOHNSTOWN/CONSOLIDATED INCOME PARTNERS
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 397 $ 556
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 456 397
Amortization of lease commissions and loan costs 58 47
Casualty gain -- (226)
Change in accounts:
Receivables and deposits (118) (123)
Other assets (20) (167)
Accounts payable 18 (380)
Tenant security deposit liabilities 3 2
Accrued property taxes 67 128
Other liabilities 1 21
Net cash provided by operating activities 862 255
Cash flows from investing activities:
Property improvements and replacements (176) (530)
Net (deposits to) receipts from restricted escrows (27) 68
Lease commissions paid (11) --
Net insurance proceeds from casualty -- 254
Net cash used in investing activities (214) (208)
Cash flows used in financing activities:
Distribution to partners (575) (1,000)
Net increase (decrease) in cash and cash equivalents 73 (953)
Cash and cash equivalents at beginning of period 1,754 2,770
Cash and cash equivalents at end of period $ 1,827 $ 1,817
Supplemental disclosure of cash flow information:
Cash paid for interest $ 128 $ 128
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 the Johnstown/Consolidated
Income Partners (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 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 and nine month periods ended September 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 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 reclassification 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 - RELATED PARTY TRANSACTIONS
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 (i) certain payments to affiliates for services and (ii)
reimbursement of certain expenses incurred by affiliates on behalf of the
Partnership. The following expenses were paid or accrued to an affiliate of the
General Partner during the nine months ended September 30, 1999 and 1998:
1999 1998
(in thousands)
Asset management fees (included in general and
administrative expense) $ 70 $ 68
Property management fees (included in operating expenses) 75 86
Reimbursement for services of affiliates (included in
operating and general and administrative expenses,
and investment properties) 33 87
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 $70,000 and
$68,000 were paid to the General Partner and its affiliates for the nine months
ended September 30, 1999 and 1998, respectively.
During the nine months ended September 30, 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 $41,000 and $38,000 for
each of the nine months ended September 30, 1999 and 1998, respectively. For
the nine months ended September 30, 1999 and 1998, affiliates of the General
Partner were entitled to receive varying percentages of gross receipts from the
Partnership's Florida #11 Min-Warehouse commercial property for property
management services. The Partnership paid to such affiliates approximately
$34,000 and $33,000 for the nine months ended September 30, 1999 and 1998,
respectively. 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 nine months ended September 30, 1998,
the Partnership paid approximately $15,000 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 $33,000 and $87,000 for the
nine months ended September 30, 1999 and 1998, respectively. Included in these
expenses for the nine months ended September 30, 1998, is approximately $17,000
in reimbursements for construction oversight costs. No construction oversight
costs were paid during the nine months ended September 30, 1999.
The Partnership paid leasing commissions of approximately $80,000 to an
affiliate of the General Partner during the nine months ended September 30,
1998. No leasing commissions were paid to affiliates during the nine months
ended September 30, 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 Units in the Partnership. The Purchaser offered to
purchase up to 39,000 units of the outstanding Units of 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 (approximately
10.86%) in the Partnership at $68.00 per Unit.
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the General Partner
commenced a tender offer to purchase up to 44,521.76 (approximately 34.56% of
the total outstanding units) Units in the Partnership for a purchase price of
$86.00 per unit. The offer expired on July 30, 1999. Pursuant to the offer,
AIMCO Properties, L.P. acquired 7,214 units. As a result, AIMCO and its
affiliates currently own 38,045.50 Units in the Partnership representing
approximately 29.54% of the total outstanding Units. It is possible that AIMCO
or its affiliates will make one or more additional offers to acquire additional
units in the Partnership for cash or in exchange for Units in the operating
partnership of AIMCO (see "Note G - Legal Proceedings").
NOTE D - COMMITMENT
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
$1,902,000 at September 30, 1999, exceed the Partnership's reserve requirement
of approximately $1,338,500.
NOTE E - DISTRIBUTIONS
During the nine months ended September 30, 1999, the General Partner declared
and paid a distribution attributable to cash flow from operations of
approximately $575,000 (approximately $569,000 to the limited partners, $4.42
per unit of depository receipt). In March of 1998, the Partnership paid a
distribution attributable to cash flow from operations of approximately
$1,000,000 (approximately $990,000 to the limited partners, $7.69 per unit of
depository receipt).
NOTE F - SEGMENT REPORTING
Description of the types of products and services from which the reportable
segment derives its revenues: The Partnership has two reportable segments:
residential properties and commercial properties. The Partnership's residential
property segment consists of 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.
Measurement of segment profit or loss: The Partnership evaluates performance
based on net income. The accounting policies of the reportable segments are the
same as those 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 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 nine months ended September 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 segments.
1999 Residential Commercial Other Totals
(in thousands)
Rental income $ 762 $ 1,070 $ -- $ 1,832
Other income 32 28 33 93
Interest expense 139 -- -- 139
Depreciation 168 288 -- 456
General and administrative expense -- -- 208 208
Segment profit (loss) 132 440 (175) 397
Total assets 2,215 6,474 915 9,604
Capital expenditures for
investment properties 100 76 -- 176
1998 Residential Commercial Other Totals
(in thousands)
Rental income $ 713 $ 975 $ -- $ 1,688
Other income 37 74 72 183
Casualty gain 226 -- -- 226
Interest expense 138 -- -- 138
Depreciation 127 270 -- 397
General and administrative expense -- -- 200 200
Segment profit (loss) 309 375 (128) 556
Total assets 2,249 6,041 1,365 9,655
Capital expenditures for
investment properties 441 89 -- 530
NOTE G - 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 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 and the Insignia Merger (see
"Note B - Transfer of Control"). 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, the plaintiffs have filed an amended
complaint. The General Partner filed demurrers to the amended complaint which
were heard February 1999. Pending the ruling on such demurrers, settlement
negotiations commenced. On November 2, 1999, the parties executed and filed a
Stipulation of Settlement ("Stipulation"), settling claims, subject to final
court approval, on behalf of the Partnership and all limited partners who own
units as of November 3, 1999. The Court has preliminarily approved the
Settlement and scheduled a final approval hearing for December 10, 1999. In
exchange for a release of all claims, the Stipulation provides that, among other
things, an affiliate of the General Partner will make tender offers for all
outstanding limited partnership interests in 49 partnerships, including the
Registrant, subject to the terms and conditions set forth in the Stipulation,
and has agreed to establish a reserve to pay an additional amount in settlement
to qualifying class members (the "Settlement Fund"). At the final approval
hearing, Plaintiffs' counsel will make an application for attorneys' fees and
reimbursement of expenses, to be paid in part by the partnerships and in part
from the Settlement Fund. The General Partner does not anticipate that costs
associated with this case 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.
NOTE H - SUBSEQUENT EVENT
On November 4, 1999, the Partnership sold the Florida #11 Mini-Warehouse to an
unaffiliated third party for net sales proceeds of approximately $4,428,000
after payment of closing costs. The Partnership anticipates realizing a gain of
approximately $2,482,000 on the sale during the fourth quarter of 1999.
The sales transaction is summarized as follows (amounts in thousands):
Net sale price, net of selling costs $ 4,428
Net real estate (2) (1,946)
Gain on sale of real estate $ 2,482
(1) Net of accumulated depreciation of approximately $813,000.
The following pro-forma information reflects the operations of the Partnership
for the nine months ended September 30, 1999 and 1998, as if Florida #11 Mini-
Warehouse had been sold January 1, 1998.
1999 1998
(in thousands, except per unit data)
Revenues $ 1,367 $ 1,546
Net income 107 270
Net income per Unit of Depositary Receipt $ .82 $ 2.08
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 property consists of one apartment complex and two
commercial properties. The following table sets forth the average occupancy of
the properties for each of the nine month periods ended September 30, 1999 and
1998.
Average Occupancy
Property 1999 1998
Cedar Brooke Apartments 97% 94%
Independence, Missouri
Florida #11 Mini-Warehouse 96% 96%
Davie, Florida (1)
Phoenix Business Campus 87% 71%
College Park, Georgia (2)
(1) Property was sold November 4, 1999.
(2) Property is currently under contract for sale. The sale, which is subject
to the purchaser's due diligence and other customary conditions, is
expected to close either in the fourth quarter of 1999 or the first quarter
of 2000. However, there can be no assurance that the sale will be
consummated.
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 in
1999.
Results of Operations
The Partnership's net income for the nine months ended September 30, 1999, was
approximately $397,000 versus net income of approximately $556,000 for the nine
months ended September 30, 1998. The Partnership reported net income for the
three months ended September 30, 1999, of approximately $139,000 as compared to
net income of approximately $86,000 for the corresponding period in 1998. The
decrease in net income for the nine months ended September 30, 1999, is
primarily attributable to an overall decrease in total revenues slightly offset
by an overall decrease in total expenses. The increase in net income for the
three months ended September 30, 1999 is primarily attributable to an increase
in total revenues and a decrease in total expenses. The decrease in overall
revenues for the nine month period is attributable to a decrease in interest
income due to lower average cash balances held in interest-bearing accounts for
such periods in 1999 as compared to the same periods in 1998 and to the fact
that there was recognition of a casualty gain in 1998 and no such gain was
recognized in 1999. The decrease in revenues was partially offset by an
increase in rental income as a result of an increase in average rental rates at
all of the Partnership's investment properties, as well as an increase in the
average occupancy rate at both Cedar Brooke Apartments and Phoenix Business
Campus. The slight decrease in overall expenses for both the three and nine
months ended September 30, 1999 is the result of decreases in property tax and
operating expense which was almost entirely offset by an increase in
depreciation expense. The decrease in property tax expense is the result of
refunds received during the first quarter of 1999 on behalf of Phoenix Business
Campus for 1997 and 1998 taxes. Operating expense decreased due to decreases in
insurance and maintenance expense. Insurance expense decreased at all of the
investment properties due to a change in insurance carriers late in 1998 which
has resulted in lower premiums. Maintenance expense decreased due to parking
lot improvements made at Cedar Brook Apartments during 1998. The increase in
depreciation expense was caused mainly by a significant amount of fixed assets
placed into service over the past twelve months.
General and administrative expense increased slightly during the nine months
ended September 30, 1999, as a result of an increase in legal costs associated
with the settlement of a litigation case against the Partnership during the
first nine months of 1999 as disclosed previously in prior quarters. Included in
general and administrative expense for the nine months ended September 30, 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.
On November 4, 1999, the Partnership sold the Florida #11 Mini-Warehouse to an
unaffiliated third party for net sales proceeds of approximately $4,428,000
after payment of closing costs. The Partnership anticipates realizing a gain of
approximately $2,482,000 on the sale during the fourth quarter of 1999.
As part of the ongoing business plan of the Partnership, the General Partner
monitors the rental market environment 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 September 30, 1999, the Partnership had cash and cash equivalents of
approximately $1,827,000 as compared to approximately $1,817,000 at September
30, 1998. For the nine months ended September 30, 1999, cash and cash
equivalents increased by approximately $73,000 from the Partnership's year ended
December 31, 1998. The increase in cash and cash equivalents is due to
approximately $862,000 of cash provided by operating activities which was
partially offset by approximately $214,000 of cash used in investing activities
and approximately $575,000 of cash used in financing activities. Cash used in
investing activities consisted primarily of property improvements and
replacements, and, to a lesser extent, net deposits to escrow accounts
maintained by the mortgage lender and the payment of lease commissions. Cash
used in financing activities consisted of distributions to partners. The
Partnership invests its working capital reserves in a money market account.
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, consisting of
cash and cash equivalents and tenant security deposits totaling approximately
$1,902,000 at September 30, 1999, exceed 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 the Partnership's properties are discussed below.
Cedar Brooke Apartments
During the nine months ended September 30, 1999, the Partnership expended
approximately $100,000 for capital improvements at Cedar Brooke Apartments
consisting primarily of cabinet, flooring, landscaping, and appliance
replacement. These improvements were funded from replacement reserves and
operating cash flow. 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 next few years.
The Partnership has budgeted, but is not limited to, capital improvements of
approximately $348,000 for 1999 at this property which include certain of the
required improvements and consist of heating system upgrades, landscaping,
flooring and roof replacements and other building improvements.
Florida #11 Mini-Warehouse
During the nine months ended September 30, 1999, the Partnership expended
approximately $5,000 for capital improvements at the property, consisting of
floor covering, and land and building improvements. 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 General Partner on interior improvements, it is estimated that the
property requires approximately $205,000 of capital improvements over the next
few years. This property was sold on November 4, 1999.
Phoenix Business Campus
During the nine months ended September 30, 1999, the Partnership expended
approximately $71,000 for tenant improvements at Phoenix Business Campus. 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 General Partner on interior improvements,
it is estimated that the property requires approximately $174,000 of capital
improvements over the next few years. The Partnership has budgeted, but is not
limited to, capital improvements of approximately $62,000 for 1999 at this
property which include certain of the required improvements and consist of
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 on Cedar Brooke Apartments 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.
During the nine months ended September 30, 1999, a cash distribution
attributable to cash flow from operations of approximately $575,000
(approximately $569,000 to the limited partners, $4.42 per unit of depository
receipt) was paid to the Partners. During the nine months ended September 30,
1998, a cash distribution from operations of approximately $1,000,000
(approximately $990,000 to limited partners, $7.69 per unit of depositary
receipt) was paid to the partners. Future cash distributions will depend on the
levels of net cash generated from operations, the availability of working
capital 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
and required working capital reserves to permit further distributions to its
partners in 1999 or subsequent periods.
Tender Offer
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the General Partner
commenced a tender offer to purchase up to 44,521.76 (approximately 34.56% of
the total outstanding units) Units in the Partnership for a purchase price of
$86.00 per unit. The offer expired on July 30, 1999. Pursuant to the offer,
AIMCO Properties, L.P. acquired 7,214 units. As a result, AIMCO and its
affiliates currently own 38,045.50 Units in the Partnership representing
approximately 29.54% of the total outstanding units. It is possible that AIMCO
or its affiliates will make one or more additional offers to acquire additional
Units in the Partnership for cash or in exchange for units in the operating
partnership of AIMCO (see "Item I. Financial Statements, Note G - Legal
Proceedings").
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 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 September 30, 1999, had virtually completed 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.
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 virtually all of the server operating systems.
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 virtually
no Year 2000 issues. A complete, formal assessment of all the properties by the
Managing Agent was virtually completed by September 30, 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
September 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 has banking relationships with three major financial
institutions, all of which have designated their compliance. The Managing Agent
has updated data transmission standards with all of the financial institutions.
All financial institutions have communicated that they are Year 2000 compliant
and accordingly no accounts were required to be moved from the existing
financial institutions.
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 expenses
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 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 and the Insignia Merger (see
"Part I _ Financial Information, Item 1. Financial Statements, Note B _ Transfer
of Control"). 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, the plaintiffs have filed an amended complaint. The
General Partner filed demurrers to the amended complaint which were heard
February 1999. Pending the ruling on such demurrers, settlement negotiations
commenced. On November 2, 1999, the parties executed and filed a Stipulation of
Settlement ("Stipulation"), settling claims, subject to final court approval, on
behalf of the Partnership and all limited partners who own units as of November
3, 1999. The Court has preliminarily approved the Settlement and scheduled a
final approval hearing for December 10, 1999. In exchange for a release of all
claims, the Stipulation provides that, among other things, an affiliate of the
General Partner will make tender offers for all outstanding limited partnership
interests in 49 partnerships, including the Registrant, subject to the terms and
conditions set forth in the Stipulation, and has agreed to establish a reserve
to pay an additional amount in settlement to qualifying class members (the
"Settlement Fund"). At the final approval hearing, Plaintiffs' counsel will
make an application for attorneys' fees and reimbursement of expenses, to be
paid in part by the partnerships and in part from the Settlement Fund. The
General Partner does not anticipate that costs associated with this case will be
material to the Partnership's overall operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 10.36, Purchase and Sale Contract between
Johnston/Consolidated Income Partners and Everest Storage
Holdings, LLC dated July 2, 1999, documenting the sale of Florida
#11 Mini-warehouse located in Davie, Florida.
Exhibit 10.37, First Amendment to Purchase and Sale Contract
between Johnston/Consolidated Income Partners and Everest Storage
Holdings, LLC dated September 7, 1999, documenting the sale of
Florida #11 Mini-warehouse located in Davie, Florida.
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 September 30, 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/Martha L. Long
Martha L. Long
Senior Vice President and
Controller
Date: November 15, 1999