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 0-19243
UNITED INVESTORS INCOME PROPERTIES II
(Exact name of small business issuer as specified in its charter)
Missouri 43-1542903
(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 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)
UNITED INVESTORS INCOME PROPERTIES II
BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1999
Assets
Cash and cash equivalents $ 2,307
Other assets 20
Investment in joint ventures 2,106
Investment properties:
Land $ 172
Buildings and related personal property 1,141
1,313
Less accumulated depreciation (418) 895
$ 5,328
Liabilities and Partners' (Deficit) Capital
Liabilities
Due to general partner 23
Other liabilities 26
Distribution payable 1,625
Partners' (Deficit) Capital
General partner $ (32)
Limited partners (32,601 units
issued and outstanding) 3,686 3,654
$ 5,328
See Accompanying Notes to Financial Statements
b)
UNITED INVESTORS INCOME PROPERTIES II
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 $ 55 $ 127 $ 314 $ 382
Other income 5 8 18 24
Total revenues 60 135 332 406
Expenses:
Operating 5 5 17 27
General and administrative 49 16 141 51
Depreciation 10 27 65 83
Impairment loss on property
held for investment ("Note H") -- -- 790 --
Loss on sale of investment
property ("Note G") -- -- 195 --
Total expenses 64 48 1,208 161
Equity in net income of joint ventures 33 41 100 109
Net income (loss) $ 29 $ 128 $ (776) $ 354
Net income (loss) allocated
to general partner (1%) $ -- $ 1 $ (8) $ 4
Net income (loss) allocated
to limited partners (99%) 29 127 (768) 350
$ 29 $ 128 $ (776) $ 354
Net income (loss) per limited
partnership unit $ .89 $ 3.90 $(23.56) $10.74
Distributions per limited
partnership unit $49.35 $ 4.32 $ 57.82 $12.88
See Accompanying Notes to Financial Statements
c)
UNITED INVESTORS INCOME PROPERTIES II
STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 32,601 $ -- $ 8,150 $ 8,150
Partners' (deficit) capital at
December 31, 1998 32,601 $ (5) $ 6,339 $ 6,334
Partners' distribution -- (19) (1,885) (1,904)
Net loss for the nine months
ended September 30, 1999 -- (8) (768) (776)
Partners' (deficit) capital
at September 30, 1999 32,601 $ (32) $ 3,686 $ 3,654
See Accompanying Notes to Financial Statements
d)
UNITED INVESTORS INCOME PROPERTIES II
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net (loss) income $ (776) $ 354
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Equity in net income of joint ventures (100) (109)
Depreciation 65 83
Impairment loss on property held for investment 790 --
Loss on sale of investment property 195 --
Change in accounts:
Receivables and deposits 21 --
Other assets 2 (14)
Due to general partner 23 --
Accrued liabilities 1 (4)
Net cash provided by operating activities 221 310
Cash flows from investing activities:
Distributions from joint ventures, net of advances 136 93
Proceeds from sale of investment property 1,420 --
Net cash provided by investing activities 1,556 93
Cash flows used in financing activities:
Partners' distributions (279) (424)
Net increase (decrease) in cash and cash equivalents 1,498 (21)
Cash and cash equivalents at beginning of period 809 834
Cash and cash equivalents at end of period $ 2,307 $ 813
Supplemental disclosure of non-cash financing activity:
Distribution payable $ 1,625 $ --
See Accompanying Notes to Financial Statements
e)
UNITED INVESTORS INCOME PROPERTIES II
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of United Investors Income
Properties II (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 United Investors Real Estate, Inc. (the
"General Partner"), a Delaware corporation, 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.
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 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 - INVESTMENT IN CORINTH SQUARE JOINT VENTURE
The Partnership owns a 65% interest in Corinth Square, a joint venture with
United Investors Income Properties, an affiliated partnership in which the
General Partner is also the sole general partner. The joint venture owns a
24,000 square foot medical office building located in Prairie Village, Kansas.
Corinth Square is accounted for using the equity method, whereby the original
investment is increased by advances to the joint venture and by the
Partnership's share of the earnings of the joint venture. The investment is
decreased by distributions from the joint venture and by the Partnership's share
of losses of the joint venture.
The Partnership received distributions from Corinth Square of approximately
$58,000 during the nine months ended September 30, 1999. There were no
distributions during the nine months ended September 30, 1998. The Partnership
also advanced approximately $3,000 during the nine months ended September 30,
1999, to Corinth Square.
The condensed balance sheet of Corinth Square at September 30, 1999, is
summarized as follows (in thousands):
Assets
Commercial property, net $1,705
Other assets 154
Total $1,859
Liabilities and Partners' Capital
Liabilities $ 53
Partners' capital 1,806
Total $1,859
Condensed statements of operations of Corinth Square for the nine months ended
September 30, 1999 and 1998, are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenue $ 96 $ 95 $ 301 $ 283
Costs and expenses 76 75 238 241
Net income $ 20 $ 20 $ 63 $ 42
NOTE D - INVESTMENT IN COVINGTON PIKE JOINT VENTURE
As of December 31, 1992, the Partnership had advanced approximately $1,058,000
to the General Partner for the benefit of Covington Pike, which was a joint
venture between the General Partner and an unaffiliated party. On January 1,
1993, the General Partner assigned its 55% interest in the joint venture to the
Partnership with no additional consideration beyond the funds advanced as of
December 31, 1992. The $1,058,000 consisted of land and building costs of
approximately $1,032,000 and cash of approximately $26,000. Capital contributed
by the unaffiliated partner was $82. Covington Pike is accounted for using the
equity method of accounting. The Partnership sold its 55% interest in this
joint venture on October 4, 1999 (see "Note J" for additional information
regarding the sale).
The Partnership received distributions of approximately $81,000 and $93,000
during the nine months ended September 30, 1999 and 1998, respectively, from
Covington Pike.
The condensed balance sheet of Covington Pike at September 30, 1999, is
summarized as follows (in thousands):
Assets
Commercial property, net $ 805
Other assets 55
Total $ 860
Liabilities and Partners' Capital
Liabilities $ 73
Partners' capital 787
Total $ 860
Condensed statements of operations of Covington Pike for the nine months ended
September 30, 1999 and 1998, are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenue $ 75 $ 76 $ 238 $ 238
Costs and expenses 39 26 131 89
Net income $ 36 $ 50 $ 107 $ 149
NOTE E - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all Partnership activities.
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 payments were made to affiliates of
the General Partner during the nine month periods ended September 30, 1999 and
1998:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ -- $ 10
Reimbursement for services of affiliates (included in
general and administrative expenses) 42 22
Real estate brokerage commissions (included in due to
general partner) 23 --
During the nine months ended September 30, 1998, affiliates of the General
Partner were entitled to varying percentages of gross receipts from both of the
Registrant's commercial properties as compensation for providing property
management services. These services were provided by affiliates of the General
Partner during the nine months ended September 30, 1998, and were approximately
$10,000. Effective October 1, 1998 (the effective date of the Insignia Merger
(see "Note B")) these services for the commercial properties were provided by an
unrelated party.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $42,000 and $22,000 for the
nine months ended September 30, 1999 and 1998, respectively.
For acting as a real estate broker in connection with the sale of the Keebler
Distribution Center in Chesapeake, Virginia, the General Partner earned a real
estate commission of approximately $23,000 during the nine months ended
September 30, 1999 (see "Note G" for additional information about the sale).
The commission will be paid to the General Partner during the fourth quarter of
1999. These fees are subordinate to the limited partners receiving a preferred
return, as specified in the Partnership Agreement. If the limited partners have
not received their preferred return when the Partnership terminates, the General
Partner will return this amount to the Partnership.
NOTE F - DISTRIBUTIONS
During the nine months ended September 30, 1999, the Partnership distributed
cash generated from operations of approximately $279,000 (approximately $276,000
to the limited partners or $8.47 per limited partnership unit). Subsequent to
September 30, 1999, a cash distribution was paid to the partners of
approximately $1,625,000 (approximately $1,609,000 to the limited partners or
$49.35 per limited partnership unit) which was approved and accrued during the
nine months ended September 30, 1999. Of this, approximately $205,000
(approximately $203,000 to the limited partners or $6.22 per limited partnership
unit) was cash from operations and $1,420,000 (approximately $1,406,000 to the
limited partners or $43.13 per limited partnership unit) was proceeds from the
sale of Keebler Distribution Center located in Chesapeake, Virginia. During the
nine months ended September 30, 1998, the Partnership made distributions of cash
generated from operations of approximately $424,000 (approximately $420,000 to
the limited partners or $12.88 per limited partnership unit).
NOTE G - SALE OF INVESTMENT PROPERTY
On July 23, 1999, Keebler Distribution Center, located in Chesapeake, Virginia,
was sold to an unaffiliated party for $1,550,000. After payment of closing
expenses, the net sales proceeds received by the Partnership were approximately
$1,420,000. For financial statement purposes, the sale resulted in a loss of
approximately $195,000, which was recognized during the second quarter of 1999.
NOTE H - IMPAIRMENT LOSS ON PROPERTY HELD FOR INVESTMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Partnership records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. During the second
quarter of 1999, the Partnership determined that the Keebler Distribution Center
located in Columbia, South Carolina, with a carrying value of approximately
$1,690,000, was impaired and its value was written down by approximately
$790,000 to reflect its fair value of approximately $900,000. The fair value is
based upon current economic conditions and projected future operational cash
flows. This property is under contract for sale. The sale, which is subject to
the purchaser's due diligence and other customary conditions, is expected to
close during the fourth quarter of 1999. However, there can be no assurance that
the sale will be consummated.
NOTE I - SEGMENT REPORTING
The Partnership has one reportable segment: commercial properties. The
Partnership's commercial property segment consists of a distribution facility in
Columbia, South Carolina. The Partnership leases this distribution facility to
a single tenant. The tenant is obligated under its leases through the year
2000. The Partnership's other distribution facility was sold in July 1999 (see
"Note G").
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.
The Partnership's reportable segment consists of investment properties that
offer similar products and services. Although each of the investment properties
is managed separately, they have been aggregated into one segment as they
provide services with similar types of products and customers.
Segment information for the nine month periods ended September 30, 1999 and
1998, is shown in the tables below (in thousands). The "Other" column includes
Partnership administration related items and income and expense not allocated to
the reportable segment.
1999 Commercial Other Totals
Rental income $ 314 $ -- $ 314
Other income 1 17 18
Depreciation 65 -- 65
General and administrative expense -- 141 141
Impairment loss on property held
for investment (790) -- (790)
Loss on sale of investment
property (195) -- (195)
Equity in income of joint venture -- 100 100
Segment loss (752) (24) (776)
Total assets 974 4,354 5,328
1998 Commercial Other Totals
Rental income $ 382 $ -- $ 382
Other income -- 24 24
Depreciation 83 -- 83
General and administrative expense -- 51 51
Equity in income of joint ventures -- 109 109
Segment profit 272 82 354
Total assets 3,493 2,870 6,363
NOTE J - SUBSEQUENT EVENT
The Partnership sold its 55% interest in the Covington Pike joint venture on
October 4, 1999. The joint venture owned a mini-storage facility located in
Memphis, Tennessee. The interest was sold to an unrelated party for $1,000,000.
For financial statement purposes, the Partnership realized a gain on its
investment in the joint venture which will be recognized during the fourth
quarter of 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The matters discussed in this Form 10-QSB contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-QSB and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time.
The discussion of the Registrant's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Registrant's business and results of
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 property consists of a distribution center. The
Partnership's joint venture properties consist of an office building and a mini-
storage facility. The following table sets forth the average occupancy of the
properties for each of the nine months ended September 30, 1999 and 1998:
Average Occupancy
Investment Properties 1999 1998
Keebler Distribution Center 100% 100%
Columbia, South Carolina
Joint Venture Properties
Corinth Square Professional Building 90% 85%
Prairie Village, Kansas
Covington Pike (1) 98% 99%
Memphis, Tennessee
(1) See "Item 1. Financial Statements, Note J - Subsequent Event" regarding the
sale in October 1999 of the Partnership's interest in this property.
The Keebler Company vacated the Columbia, South Carolina facility in January of
1996. The Keebler Company has indicated its intentions to honor its financial
obligations to the Partnership. Keebler is obligated to continue paying rent on
the vacated space through the year 2000. Should the tenant fail to honor its
lease obligations, operating results would be adversely affected. The tenant has
thus far paid the scheduled rental payments on the vacated facility. In
addition, Keebler, with approval from the Partnership, entered into sub-lease
agreements effective July 1, 1996, for the Columbia, South Carolina facility.
The new tenants are obligated to pay rent to Keebler for the facility through
December 31, 2000.
The increase in occupancy at Corinth Square Professional Building is primarily
attributable to a new tenant occupying 1,240 square feet during the latter part
of 1998.
Results of Operations
The Partnership realized a net loss for the nine month period ended September
30, 1999, of approximately $776,000 as compared to net income of approximately
$354,000 for the nine month period ended September 30, 1998. For the three
months ended September 30, 1999, the Partnership realized net income of
approximately $29,000 compared to net income of approximately $128,000 for the
three months ended September 30, 1998. The decrease in net income for the three
and nine month periods ended September 30, 1999, is due to an increase in total
expenses primarily as a result of a loss realized on the sale of Keebler
Distribution Center in Chesapeake, Virginia and an impairment loss for the
Keebler Distribution Center in Columbia, South Carolina as discussed below.
Excluding the operations of the Keebler Distribution Center in Chesapeake,
Virginia, the impairment loss on the Keebler Distribution Center in Columbia,
South Carolina and the loss on sale of the Keebler Distribution Center in
Chesapeake, Virginia, the Partnership's net income decreased approximately
$33,000 and $90,000 for the three and nine month periods ended September 31,
1999 as compared to the same periods in 1998, due primarily to an increase in
total expenses and to a lessor extent to a decrease in equity in income from
joint ventures. Total expenses increased due to an increase in general and
administrative expenses which was partially offset by a decrease in depreciation
expense. The increase in general and administrative expenses is primarily due
to increases in professional fees associated with the oversight of the
Partnership, legal expenses associated with the settlement of a lawsuit as
disclosed in the Partnership's Annual Report on Form 10-KSB for fiscal year
ended December 31, 1998 and increased management reimbursements to the General
Partner. Included in general and administrative expenses at both September 30,
1999 and 1998 are management reimbursements to the 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 included. Depreciation expense
decreased due to assets becoming fully depreciated during 1998. The decrease in
equity in income from joint ventures was due to a decrease in income from
Covington Pike which was partially offset by an increase in income from Corinth
Square. The decrease in income at Covington Pike was primarily due to an
increase in property tax expense due to an increase in rates for 1999. The
increase in income at Corinth Square was primarily due to an increase in rental
income due to increased rental rates and occupancy.
Excluding the operations of the Keebler Distribution Center in Chesapeake,
Virginia, Total revenues remained constant for the three and nine month periods
ended September 30, 1999 as compared to the same periods in 1998. Increased
rental income was offset by decreased other income. Rental income increased due
to increased rental rates at the Keebler Distribution Center at Columbia, SC.
Other income decreased due to lower cash balances in interest bearing accounts.
On July 23, 1999, Keebler Distribution Center, located in Chesapeake, Virginia,
was sold to an unaffiliated party for $1,550,000. After payment of closing
expenses, the net sales proceeds received by the Partnership were approximately
$1,420,000. For financial statement purposes, the sale resulted in a loss of
approximately $195,000, which was recognized during the second quarter of 1999.
During the second quarter of 1999, the Partnership determined that the Keebler
Distribution Center located in Columbia, South Carolina, with a carrying value
of approximately $1,690,000, was impaired and its value was written down by
approximately $790,000 to reflect its fair value of approximately $900,000. The
fair value is based upon current economic conditions and projected future
operational cash flows.
The Partnership sold its 55% interest in the Covington Pike joint venture on
October 4, 1999. The joint venture owned a mini-storage facility located in
Memphis, Tennessee. The interest was sold to an unrelated party for $1,000,000.
For financial statement purposes, the Partnership realized a gain on its
investment in the joint venture which will be recognized during the fourth
quarter of 1999.
The Keebler Distribution Center, located in Columbia, South Carolina and Corinth
Square, located in Prairie Village, Kansas, are both under contract for sale.
The sales, which are subject to the purchaser's due diligence and other
customary conditions, are expected to close during the fourth quarter of 1999.
However, there can be no assurance that the sales will be consummated.
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
Exclusive of cash held by the joint ventures at September 30, 1999, the
Partnership had cash and cash equivalents of approximately $2,307,000 as
compared to approximately $813,000 at September 30, 1998. The increase in cash
and cash equivalents of approximately $1,498,000 from the Partnership's year
ended December 31, 1998, is due to approximately $1,585,000 of cash provided by
investing activities and approximately $192,000 of cash provided by operating
activities, partially offset by approximately $279,000 of cash used in financing
activities. Cash provided by investing activities consisted of primarily
proceeds from the sale of Keebler Distribution Center located in Chesapeake,
Virginia, and to a lessor extent of distributions from the joint ventures, net
of advances and a loss on the sale of the Partnership's 55% interest in the
Covington Pike joint venture. The cash used in financing activities was due to
distributions made to the partners. The Partnership invests its working capital
reserves in money market accounts.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the properties to adequately maintain the physical
assets and other operating needs of the Partnership and to comply with Federal,
state and local legal and regulatory requirements. During the nine months ended
September 30, 1999, the Partnership did not complete any capital improvements at
its commercial property, nor has it budgeted any capital improvements for the
property in 1999.
The Registrant's current assets are thought to be sufficient for any near-term
needs of the Registrant.
During the nine months ended September 30, 1999, the Partnership distributed
cash generated from operations of approximately $279,000 (approximately $276,000
to the limited partners or $8.47 per limited partnership unit). Subsequent to
September 30, 1999, a cash distribution was paid to the partners of
approximately $1,625,000 (approximately $1,609,000 to the limited partners or
$49.35 per limited partnership unit) which was approved and accrued as of
September 30, 1999. Of this, approximately $205,000 (approximately $203,000 to
the limited partners or $6.22 per limited partnership unit) was cash from
operations and $1,420,000 (approximately $1,406,000 to the limited partners or
$43.13 per limited partnership unit) was proceeds from the sale of Keebler
Distribution Center located in Chesapeake, Virginia. During the nine months
ended September 30, 1998, the Partnership made distributions of cash generated
from operations of approximately $424,000 (approximately $420,000 to the limited
partners or $12.88 per limited partnership unit). The Partnership's
distribution policy is reviewed on a quarterly basis. Future cash distributions
will depend on the levels of net cash generated from operations, property sales,
financings, and the availability of cash reserves. There can be no assurance,
however, that the Partnership will generate sufficient funds from operations to
permit additional distributions to its partners during the remainder of 1999 or
subsequent periods.
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 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:
Current report on Form 8-K was filed August 6, 1999, relating to
the sale of Keebler Distribution Center on July 23, 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.
UNITED INVESTORS INCOME PROPERTIES II
By: United Investors Real Estate, Inc.
Its 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:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from United
Investors Income Properties II 1999 Third Quarter 10-QSB and is qualified in its
entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000862028
<NAME> UNITED INVESTORS INCOME PROPERTIES II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,307
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,313
<DEPRECIATION> 418
<TOTAL-ASSETS> 5,328
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,654
<TOTAL-LIABILITY-AND-EQUITY> 5,328
<SALES> 0
<TOTAL-REVENUES> 332
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (776)
<EPS-BASIC> (23.56)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
