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 0-15656
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
South Carolina 57-0814502
(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)
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
BALANCE SHEET
(Unaudited)
(in thousands, except per unit data)
September 30, 1999
Assets
Restricted cash $ 430
Receivables and deposits 722
Restricted escrows 280
Other assets 41
Investment in discontinued operations 77
Investment properties:
Land $ 2,123
Buildings and related personal property 15,108
17,231
Less accumulated depreciation (6,610) 10,621
$ 12,171
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 31
Tenant security deposit liabilities 60
Accrued property taxes 251
Other liabilities 514
Due to Corporate General Partner 590
Mortgage notes payable 4,264
Partners' Capital (Deficit)
General partners $ (398)
Depositary unit certificate holders (2,440,000 units
authorized; 1,222,000 units issued and outstanding) 6,859 6,461
$ 12,171
See Accompanying Notes to Financial Statements
b)
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
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 $ 743 $ 659 $2,187 $ 1,991
Other income 33 40 112 125
Total revenues 776 699 2,299 2,116
Expenses:
Operating 294 304 828 825
General and administrative 59 48 153 167
Depreciation 118 115 348 342
Interest 135 579 842 1,664
Property taxes 126 118 185 247
Total expenses 732 1,164 2,356 3,245
Income (loss) before discontinued
operations 44 (465) (57) (1,129)
(Loss) income from discontinued
operations (57) 231 306 999
Gain on sale of discontinued
operations 1,971 -- 4,672 --
Net income (loss) $1,958 $ (234) $4,921 $ (130)
Net income (loss) allocated to
general partners (1%) 20 (2) 49 (1)
Net income (loss) allocated to
depositary unit certificate
holders (99%) $1,938 $ (232) $4,872 $ (129)
$1,958 $ (234) $4,921 $ (130)
Net income (loss) per depositary
unit certificate:
Income (loss) before discontinued
operations $ .04 $ (.38) $ (.05) $ (.92)
(Loss) income from discontinued
operations (.05) .19 .25 .81
Gain on sale of discontinued
operations 1.60 -- 3.79 --
$ 1.59 $ (.19) $ 3.99 $ (.11)
See Accompanying Notes to Financial Statements
c)
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(Unaudited)
(in thousands, except unit data)
Depositary
Depositary Unit
Unit General Certificate
Certificates Partners Partners Total
Original capital contributions 1,222,000 $ 2 $30,550 $30,552
Partners' (deficit) capital at
December 31, 1998 1,222,000 $ (447) $ 1,987 $ 1,540
Net income for the nine months
ended September 30, 1999 -- 49 4,872 4,921
Partners' (deficit) capital at
September 30, 1999 1,222,000 $ (398) $ 6,859 $ 6,461
See Accompanying Notes to Financial Statements
d)
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income (loss) $ 4,921 $ (130)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 348 640
Amortization of lease commissions and software -- 10
Gain on sale of discontinued operations (4,672) --
Change in accounts:
Restricted cash (14) (58)
Receivables and deposits (454) (87)
Investment in discontinued operations 254 --
Other assets (25) 10
Accounts payable 16 14
Tenant security deposit liabilities (10) (5)
Accrued property taxes 184 271
Due to Corporate General Partner 30 12
Other liabilities (56) (38)
Net cash provided by operating activities 522 639
Cash flows from investing activities:
Net proceeds from sale of investment property 16,004 --
Property improvements and replacements (200) (122)
Net deposits to restricted escrows (8) (3)
Net cash provided by (used in) investing
activities 15,796 (125)
Cash flows from financing activities:
Payments on mortgage notes payable (443) (514)
Repayment of mortgage note payable (15,875) --
Net cash used in financing activities (16,318) (514)
Net change in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period -- --
Cash and cash equivalents at end of period $ -- $ --
Supplemental disclosure of cash flow information:
Cash paid for interest $ 848 $ 1,630
See Accompanying Notes to Financial Statements
e)
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of U.S. Realty Partners Limited
Partnership (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 U.S Realty I Corporation (the "Corporate 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 year ended
December 31, 1998.
Certain reclassifications have been made to the 1998 financial statements to
conform with the 1999 presentation.
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. ("Insignia") 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 Corporate General Partner. The Corporate General
Partner does not believe that this transaction will have a material effect on
the affairs and operations of the Partnership.
NOTE C - RECONCILIATION OF CASH FLOWS
The Partnership considers all cash to be restricted for tenant security deposits
and for the purpose of the deposit of Net Cash Flow, as defined by the debt
restructuring in October of 1993.
NOTE D - DISPOSITION OF PROPERTY/OPERATING SEGMENT
On February 1, 1999, The Gallery - Knoxville, located in Knoxville, Tennessee,
was sold to an unaffiliated third party for $9,300,000. After closing expenses
of approximately $391,000, the net proceeds received by the Partnership were
approximately $8,909,000. The Partnership was required to use the net proceeds
from the sale of the property to pay down the mortgage encumbering the
Partnership's properties. The sale of the property resulted in a gain on sale
of investment property of approximately $2,701,000. In connection with the
sale, a commission of approximately $93,000 was paid to the Corporate General
Partner in accordance with the terms of the Partnership Agreement.
On July 2, 1999, The Gallery - Huntsville, located in Huntsville, Alabama, was
sold to an unaffiliated third party for $7,310,000. After closing expenses of
approximately $215,000, the net proceeds received by the Partnership were
approximately $7,095,000. The Partnership was required to use the net proceeds
from the sale of the property to pay down the mortgage encumbering the
Partnership's properties. The sale of the property resulted in a gain on sale
of investment property of approximately $1,971,000. In connection with the
sale, a commission of approximately $73,100 was paid to the Corporate General
Partner in accordance with the Partnership Agreement.
The Gallery - Knoxville and The Gallery - Huntsville were the only two
commercial properties owned by the Partnership and represented one segment of
the Partnership's operations. Due to the sale of both of these properties one
on February 1, 1999 and the other on July 2, 1999, the results of the commercial
segment have been shown as income from and gain on sale of discontinued
operations as of September 30, 1999 and 1998. The net assets remaining as of
September 30, 1999 represent cash and deposits of both commercial properties and
have been classified as "Investment in Discontinued Operations".
NOTE E - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Corporate 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 payments were made to
the Corporate General Partner and its affiliates during the nine months ended
September 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in
operating expenses) $114 $220
Reimbursement for services of affiliates
(included in general and administrative,
operating expenses and investment properties) 61 89
Due to Corporate General Partner 590 560
Real estate brokerage commissions (included in gain
on sale of discontinued operations) 166 --
During the nine months ended September 30, 1999 and 1998, affiliates of the
Corporate General Partner were entitled to receive 5% of gross receipts from all
of the Registrant's residential properties for providing property management
services. The Registrant paid to such affiliates approximately $114,000 and
$107,000 for the nine months ended September 30, 1999 and 1998, respectively.
For the nine months ended September 30, 1998, affiliates of the Corporate
General Partner were entitled to receive varying percentages of gross receipts
from the Registrant's commercial properties for providing property management
services. The Registrant paid to such affiliates approximately $113,000 for the
nine months ended September 30, 1998. No such fees were paid for the nine
months ended September 30, 1999 as these services were provided by an unrelated
third party effective October 1, 1998.
An affiliate of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $61,000 and
$89,000 for the nine months ended September 30, 1999 and 1998, respectively.
Included in these expenses for the nine months ended September 30, 1999 and 1998
is approximately $1,000 and $3,000, respectively in reimbursements for
construction oversight costs.
In connection with both the sale of The Gallery - Knoxville and The Gallery -
Huntsville the Corporate General Partner was entitled to a commission of 1% of
the selling price. Accordingly, $93,000 was paid during April 1999 as a
commission on the sale of The Gallery - Knoxville and $73,100 was paid during
July 1999 as a commission on the sale of The Gallery - Huntsville.
During the first quarter of 1999, an affiliate of the Corporate General Partner
acquired 243,831 DUC's representing approximately 19.95% of the total
outstanding DUC's.
On April 9, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General
Partner commenced a tender offer to purchase up to 305,500 (approximately 25% of
the total outstanding units) units of depositary unit certificates in the
Partnership for a purchase price of $6.35 per unit. The offer expired on June
15, 1999. Pursuant to this offer, AIMCO Properties, L.P. acquired 286,677
units. As a result, AIMCO and its affiliates currently own 530,508 units of
depositary unit certificates in the Partnership representing approximately
43.41% of the total outstanding units. It is possible that AIMCO or its
affiliates will make one or more additional offers to acquire additional
depositary unit certificates interests in the Partnership for cash or in
exchange for units in the operating partnership of AIMCO.
NOTE F - SEGMENT REPORTING
Description of the types of products and services from which the reportable
segment derives its revenues:
The Partnership had two reportable segments: residential properties and
commercial properties. The Partnership's residential property segment consists
of two apartment complexes located in Arkansas and Florida. The Partnership
rents apartment units to tenants for terms that are typically twelve months or
less. The commercial property segment consists of a shopping center located in
Alabama, which was sold on July 2, 1999 and a shopping center in Tennessee which
was sold during February 1999. As a result of the sale of both commercial
properties during 1999 the commercial segment is shown as discontinued
operations.
Measurement of segment profit and 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 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 month periods 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 segment.
1999
Residential Commercial Other Totals
(discontinued)
(in thousands)
Rental income $ 2,187 $ -- $ -- $ 2,187
Other income 91 -- 21 112
Interest expense -- -- 842 842
Depreciation 348 -- -- 348
General and administrative expense -- -- 153 153
Income from discontinued operations -- 306 -- 306
Gain on sale of discontinued
operations -- 4,672 -- 4,672
Segment profit (loss) 917 4,978 (974) 4,921
Total assets 10,758 77 1,336 12,171
Capital expenditures for investment
properties 200 -- -- 200
1998
Residential Commercial Other Totals
(discontinued)
(in thousands)
Rental income $ 1,991 $ -- $ -- $ 1,991
Other income 102 -- 23 125
Interest expense -- -- 1,664 1,664
Depreciation 342 -- -- 342
General and administrative expense -- -- 167 167
Income from discontinued operations -- 999 -- 999
Segment profit (loss) 679 999 (1,808) (130)
Total assets 10,970 11,896 870 23,736
Capital expenditures for investment
properties 110 12 -- 122
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 discussions 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 operations. 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 the nine
months ended September 30, 1999 and 1998:
Average
Occupancy
Property 1999 1998
Twin Lakes Apartments
Palm Harbor, Florida 97% 93%
Governor's Park Apartments
Little Rock, Arkansas 95% 92%
The Corporate General Partner attributes the increase in occupancy at Twin Lakes
Apartments to a strong reputation in the Palm Harbor area concerning customer
service provided by the property's personnel. Management has been able to
maintain a higher standard of service for their tenants than local competition
at lower rental rates. The Corporate General Partner attributes the increase in
occupancy at Governor's Park Apartments to improved conditions in the apartment
industry in the Little Rock area.
Results of Operations
The Registrant's net income for the three and nine months ended September 30,
1999 was approximately $1,958,000 and $4,921,000, respectively as compared to a
net loss of approximately $234,000 and $130,000 for the three and nine months
ended September 30, 1998. The increase in net income for both the three and
nine month periods is primarily attributable to the gain on sale of discontinued
operations of approximately $4,672,000 realized on the sale of The Gallery _
Knoxville and The Gallery - Huntsville. On February 1, 1999, The Gallery _
Knoxville, located in Knoxville, Tennessee, was sold to an unaffiliated third
party for $9,300,000. After closing expenses of approximately $391,000 the net
proceeds received by the Partnership were approximately $8,909,000. On July 2,
1999, The Gallery _ Huntsville, located in Huntsville, Alabama, was sold to an
unaffiliated third party for approximately $7,310,000. After closing expenses
of approximately $215,000, the net proceeds received by the Partnership were
approximately $7,095,000. The Partnership used the proceeds from the sale of
the properties to pay down the debt encumbering the Partnership's properties by
approximately $15,875,000.
Excluding the impact of the operations and the sale of The Gallery - Knoxville
and The Gallery - Huntsville, the Registrant had a net loss of approximately
$57,000 for the nine months ended September 30, 1999 as compared to a net loss
of approximately $1,129,000 for the nine months ended September 30, 1998. For
the three months ended September 30, 1999 and 1998, the Registrant had net
income of approximately $44,000 and a net loss of approximately $465,000,
respectively. The increase in the net income for the three and nine months
ended September 30, 1999 is the result of both an increase in total revenues and
a decrease in total expenses at the Partnership's residential properties. The
increase in total revenues is attributable to the increase in occupancy at both
Twin Lakes Apartments and Governor's Park Apartments as discussed above.
The decrease in total expenses is primarily the result of a decrease in interest
expense and to a lesser extent a decrease in property tax expense. Interest
expense decreased as a result of the pay down of the mortgage encumbering the
Partnership's investment properties, with the net proceeds from the sale of The
Gallery _ Knoxville and The Gallery _ Huntsville as noted above. The decrease
in property tax expense is the result of being overstated for the nine months
ended September 30, 1998. An adjustment to property tax expense was made during
the fourth quarter of 1998 to properly reflect the expenses for the twelve
months.
Operating, depreciation, and general and administrative expenses remained
relatively constant for the comparable periods. Included in general and
administrative expenses for the three and nine months ended September 30, 1999
and 1998 are management reimbursements to the Corporate 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.
As part of the ongoing business plan of the Partnership, the Corporate General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Partnership from increases in
expenses. As part of this plan, the Corporate 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 Corporate General Partner will be able to sustain
such a plan.
Liquidity and Capital Resources
All of the Partnership's cash is restricted pursuant to the terms of the
mortgage loan encumbering the Partnership's properties. At September 30, 1999
the Partnership had approximately $461,000 of restricted cash from both
continuing and discontinued operations as compared to approximately $557,000 of
restricted cash from both continuing and discontinued operations at December 31,
1998. The Partnership had approximately $522,000 of cash provided by operating
activities and approximately $15,796,000 of cash provided by investing
activities which was offset by $16,318,000, of cash used in financing
activities. Cash provided by investing activities consisted of proceeds from
the sale of the two commercial properties (see discussion above) partially
offset by property improvements and replacements and net deposits to restricted
escrows. Cash used in financing activities consisted primarily of the partial
repayment of the mortgage encumbering all of the Partnership's properties.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditures requirements is directly related to the level of capital
expenditures required at the various 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 Registrant's properties are detailed below.
Governor's Park Apartments
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements, it is estimated that the property requires
approximately $231,000 of capital improvements over the next few years. The
Partnership has budgeted, but is not limited to, capital improvements of
approximately $257,000 for 1999 which include certain of the required
improvements and consist of appliance and floor covering replacements, roofing,
stairwells, and balcony improvements. As of September 30, 1999 approximately
$112,000 has been incurred consisting primarily of appliance and floor covering
replacements, roof and stairwell improvements. These improvements were funded
from operations.
Twin Lakes Apartments
Based on a report received from an independent third party consultant analyzing
necessary exterior improvements and estimates made by the Corporate General
Partner on interior improvements, it is estimated that the property requires
approximately $436,000 of capital improvements over the next few years. The
Partnership has budgeted, but is not limited to, capital improvements of
approximately $454,000 for 1999 which include certain of the required
improvements and consist of appliance and floor covering replacements, and land
and parking lot improvements, roofing, gutter additions, and exterior lighting.
As of September 30, 1999 approximately $88,000 of capital improvements have been
incurred consisting primarily of appliance and floor covering replacements and
land and parking lot improvements. These improvements were funded from
operations.
The additional capital expenditures will be incurred only if cash is available
from operations or from Partnership reserves.
The total mortgage indebtedness of $4,264,000 requires a balloon payment on
August 1, 2001. The Corporate General Partner will attempt to refinance such
indebtedness and/or sell the properties prior to such maturity date. If the
properties cannot be refinanced or sold for a sufficient amount, the Partnership
will risk losing such properties through foreclosure. Pursuant to the loan
agreement, Net Cash Flow of the Partnership is required to be paid to the
mortgage holder on a monthly basis to reduce accrued interest and principal. No
distributions can be made until all long-term debt is repaid. The Corporate
General Partner is currently assessing the feasibility of refinancing the
mortgage encumbering the Partnership's investment properties.
Tender Offer
On April 9, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General
Partner commenced a tender offer to purchase up to 305,500 (approximately 25.00%
of the total outstanding units) units of depositary unit certificate in the
Partnership for a purchase price of $6.35 per unit. The offer expired on June
15, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 286,677 units.
As a result, AIMCO and its affiliates currently own 530,508 units of depositary
unit certificate interest in the Partnership representing approximately 43.41%
of the total outstanding units. It is possible that AIMCO or its affiliates
will make one or more additional offers to acquire additional depositary unit
certificate 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 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 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 filed during the quarter ended September 30,
1999:
Current report on Form 8-K dated July 2, 1999 and filed on July
13, 1999 in connection with the sale of The Gallery - Huntsville
on July 2, 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.
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
By: U.S. Realty I Corporation
Corporate General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President and Director
By: /s/Martha L. Long
Martha L. Long
Senior Vice President and
Controller
Date: November 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from U.S. Realty
Partners Limited Partnership 1999 Third Quarter 10-QSB and is qualified in its
entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000788955
<NAME> U.S. REALTY PARTNERS LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 722
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 17,231
<DEPRECIATION> (6,610)
<TOTAL-ASSETS> 12,171
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 4,264
0
0
<COMMON> 0
<OTHER-SE> 6,461
<TOTAL-LIABILITY-AND-EQUITY> 12,171
<SALES> 0
<TOTAL-REVENUES> 2,299
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,356
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 842
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,921
<EPS-BASIC> 3.99<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
