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 0-15656
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 unit data)
June 30, 1999
Assets
Restricted cash $ 296
Receivables and deposits 615
Restricted escrows 278
Other assets 29
Investment in discontinued operations 5,326
Investment properties:
Land $ 2,122
Buildings and related personal property 14,979
17,101
Less accumulated depreciation (6,491) 10,610
$17,154
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable $ 9
Tenant security deposit liabilities 63
Accrued property taxes 125
Other liabilities 524
Due to Corporate General Partner 584
Mortgage note payable 11,346
Partners' Capital (Deficit)
General partners $ (417)
Depositary unit certificate holders
(2,440,000 units authorized;
1,222,000 units issued and outstanding) 4,920 4,503
$17,154
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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenues:
Rental income $ 730 $ 665 $ 1,444 $ 1,332
Other income 42 41 79 85
Total revenues 772 706 1,523 1,417
Expenses:
Operating 250 274 534 521
General and administrative 44 54 94 119
Depreciation 115 114 230 227
Interest 309 536 707 1,085
Property taxes 51 65 59 129
Total expenses 769 1,043 1,624 2,081
Income (loss) before discontinued
operations 3 (337) (101) (664)
Income from discontinued operations 170 380 363 768
Gain on sale of discontinued operations (93) -- 2,701 --
Net income $ 80 $ 43 $ 2,963 $ 104
Net income allocated to general
partners (1%) $ 1 $ -- $ 30 $ 1
Net income allocated to depositary
unit certificate holders (99%) 79 43 2,933 103
$ 80 $ 43 $ 2,963 $ 104
Net income per depositary
unit certificate:
Income (loss) before discontinued
operations $ -- $ (.27) $ (.08) $ (.54)
Income from discontinued operations .14 .30 .29 .62
Gain on sale of discontinued operations (.08) -- 2.19 --
$ .06 $ .03 $ 2.40 $ .08
See Accompanying Notes to Financial Statements
c)
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Depositary
Depositary Unit
Unit General Certificate
Certificates Partners Partners Total
<S> <C> <C> <C> <C>
Original capital contributions 1,222,000 $ 2 $ 30,550 $ 30,552
Partners' capital (deficit) at
December 31, 1998 1,222,000 $ (447) $ 1,987 $ 1,540
Net income for the six months
ended June 30, 1999 -- 30 2,933 2,963
Partners' capital (deficit) at
June 30, 1999 1,222,000 $ (417) $ 4,920 $ 4,503
</TABLE>
See Accompanying Notes to Financial Statements
d)
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
1999 1998
Cash flows from operating activities:
Net income $2,963 $ 104
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 230 425
Amortization -- 7
Investment in discontinued operations 130
Gain on sale of discontinued operations (2,701)
Change in accounts:
Restricted cash 120 (104)
Receivables and deposits (346) (170)
Other assets (14) (1)
Accounts payable (6) --
Tenant security deposit liabilities (8) (1)
Accrued property taxes 58 165
Due to Corporate General Partner 24 6
Other liabilities (46) (45)
Net cash provided by operating activities 404 386
Cash flows from investing activities:
Net proceeds from sale of investment property 8,909 --
Property improvements and replacements (71) (85)
Net deposits to restricted escrows (6) --
Net cash provided by (used in) investing
activities 8,832 (85)
Cash flows from financing activities:
Payments on mortgage note payable (331) (301)
Repayment of mortgage note payable (8,905) --
Net cash used in financing activities (9,236) (301)
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 $ 704 $ 1,065
See Accompanying Notes to Financial Statements
e)
U.S. REALTY PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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
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 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. 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
reconstruction 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 terms of 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 (see Note E - Subsequent
Event) the results of the commercial segment have been shown as income and gain
on sale of discontinued operations as of June 30, 1999 and 1998. The net assets
of The Gallery - Knoxville which was sold subsequent to June 30, 1999 have been
classified as "Investment in Discontinued Operations" as of June 30, 1999. This
classification was also made as of December 31, 1998, for the statement of cash
flow.
NOTE E - SUBSEQUENT EVENT
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 $1,968,000, which will be recognized
during the third quarter. In connection with the sale, a commission of
approximately $73,100 was paid to the Corporate General Partner in accordance
with the Partnership Agreement.
NOTE F - 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 six months ended June
30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ 78 $147
Reimbursement for services of affiliates 38 58
(included in general and administrative and operating
expenses) (1)
Due to Corporate General Partner 584 554
During the six months ended June 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 $76,000 and $71,000 for the
six months ended June 30, 1999 and 1998, respectively. For the six months ended
June 30, 1999 and 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 $2,000 and $76,000 for the six
months ended June 30, 1999 and 1998. Effective October 1, 1998 (the effective
date of the Insignia Merger) a portion of these services for the commercial
property were provided by an unrelated party.
An affiliate of the Corporate General Partner received reimbursement of
accountable administrative expenses amounting to approximately $38,000 and
$58,000 for the six months ended June 30, 1999 and 1998 respectively. Included
in these expenses for the six months ended June 30, 1998 is approximately $1,000
in reimbursements for construction oversight cost. There were no such costs
incurred for the six months ended June 30, 1999.
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 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 (25.00% of the total
outstanding units) units of limited partnership interest 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 limited
partnership interest in the Partnership representing approximately 43.41% 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 G - 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 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 leases space to various retail businesses with terms ranging from
12 months to 10 years and a shopping center in Tennessee which was sold during
February 1999. The shopping center located in Alabama was sold on July 2, 1999.
As a result of the sale of both commercial properties during 1999 the commercial
segment is effected as discontinued operations.
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 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 segments
(in thousands).
<TABLE>
<CAPTION>
1999 RESIDENTIAL COMMERCIAL OTHER TOTALS
(discontinued)
<S> <C> <C> <C> <C>
Rental income $ 1,444 $ -- $ -- $ 1,444
Other income 65 -- 14 79
Interest expense -- -- 707 707
Depreciation 230 -- -- 230
General and administrative expense -- -- 94 94
Income from discontinued operations -- 363 -- 363
Gain on sale of discontinued
operations -- 2,701 -- 2,701
Segment profit (loss) 686 3,064 (787) 2,963
Total assets 10,865 5,326 963 17,154
Capital expenditures for
investment properties 71 -- -- 71
</TABLE>
<TABLE>
<CAPTION>
1998 RESIDENTIAL COMMERCIAL OTHER TOTALS
(discontinued)
<S> <C> <C> <C> <C>
Rental income $ 1,332 $ -- $ -- $ 1,332
Other income 70 -- 15 85
Interest expense -- -- 1,085 1,085
Depreciation 227 -- -- 227
General and administrative expense -- -- 119 119
Income from discontinued operations -- 768 -- 768
Segment profit (loss) 525 768 (1,189) 104
Total assets 11,100 12,148 806 24,054
Capital expenditures for
investment properties 73 12 -- 85
</TABLE>
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 and a
commercial shopping center. The following table sets forth the average
occupancy of the properties for the six months ended June 30, 1999 and 1998:
Average
Occupancy
Property 1999 1998
Twin Lakes Apartments
Palm Harbor, Florida 96% 92%
Governor's Park Apartments
Little Rock, Arkansas 94% 93%
The Gallery - Huntsville
Huntsville, Alabama 90% 93%
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 apartment'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 decrease in
occupancy at The Gallery _ Huntsville to the continuing vacancy of space that
was occupied during the six months ended June 30, 1998. On July 2, 1999 the
Gallery-Huntsville was sold to an unaffiliated party.
Results of Operations
The Registrant's net income for the three and six months ended June 30, 1999 was
approximately $80,000 and $2,963,000, respectively as compared to approximately
$43,000 and $104,000 for the three and six months ended June 30, 1998. The
increase in net income is primarily attributable to the gain on sale of
discontinued operations of approximately $2,701,000 realized on the sale of The
Gallery _ Knoxville. 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 used the proceeds
from the sale of the property to pay off the debt encumbering the property of
approximately $8,905,000.
Excluding the impact of the sale of The Gallery - Knoxville, and the results of
discontinued operations the Registrant had a net loss of approximately $101,000
for the six months ended June 30, 1999 as compared to a net loss of
approximately $664,000 for the six months ended June 30, 1998. For the three
months ended June 30, 1999 and 1998, the Registrant had net income of
approximately $3,000 and a net loss of approximately $337,000, respectively.
The increase in both the net income for the three months ended June 30, 1999 and
the decrease in net loss for the six months ended June 30, 1999 is the result of
both an increase in rental income and a decrease in total expenses at the
Partnership's residential properties. The increase in rental income was
attributed to the increase in occupancy at Twin Lakes Apartments and Governor's
Park.
The decrease in total expenses is primarily the result of a decrease in interest
expense and to a lesser extent a decrease in general and administrative
and property tax expenses. Interest expense decreased as 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 as noted above.
The decrease in property tax expense is the result of an adjustment to the
accrual for property tax expense as a result of prior overaccruals.
The decrease in general and administrative expense is primarily attributable to
a decrease in management reimbursements to the Corporate General Partner allowed
under the Partnership Agreement, which was offset slightly as a result of an
increase in legal fees. Legal fees increased as a result of the settlement of
an outstanding litigation case during the first quarter of 1999. Included in
general and administrative expenses for the three and six months ended June 30,
1999 and 1998 are management reimbursements to the Corporate General Partner
allowed under the Partnership Agreement. In addition, costs associated with the
quarterly communications with investors and regulatory agencies 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 June 30, 1999 the
Partnership had approximately $437,000 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 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 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.
The Gallery - Huntsville. This property was sold July 2, 1999 and had not
incurred any changes for capital improvements as of June 30, 1999.
The Gallery - Knoxville. This property was sold February 1, 1999.
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 repairs. As of June 30, 1999 approximately $11,000 have
been incurred consisting primarily of appliance and floor covering replacements.
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 appliances and floor covering replacements and land
and parking lot improvements roofing, gutter repairs, and exterior lighting. As
of June 30, 1999 approximately $60,000 of capital improvements have been
incurred consisting primarily of appliance and floor covering replacements and
land and parking lot 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 Registrant's distributable cash flow, if
any, may be adversely affected at least in the short term.
The total mortgage indebtedness of $11,346,000 requires a balloon payment on
August 1, 2001. As of July 2, 1999, The Gallery - Huntsville was sold to an
unaffiliated third party for $7,310,000. The net proceeds from the sale of the
property approximately $7,095,000 were used to pay down the mortgage. The total
mortgage indebtedness was reduced to $4,376,000 after payment of the net
proceeds from the sale. 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 (25.00% of the total
outstanding units) units of limited partnership interest 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 limited
partnership interest in the Partnership representing approximately 43.41% 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 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 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
By: /s/Carla R. Stoner
Carla R. Stoner
Senior Vice President Finance and
Administration
Date: August 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from U.S. Realty
Partners Limited Partnership Second 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 615
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 17,101
<DEPRECIATION> (6,491)
<TOTAL-ASSETS> 17,154
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 11,346
0
0
<COMMON> 0
<OTHER-SE> 4,503
<TOTAL-LIABILITY-AND-EQUITY> 17,154
<SALES> 0
<TOTAL-REVENUES> 1,523
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,624
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 707
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,963
<EPS-BASIC> 2.40<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
