-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HCg4vTO3/Nv5kjvvnTZwtVjtXM78+1mBUgHlcBS20sEayUWvN1s3yUth1sQHl6dJ jAZm0cAXSd6XfaIaHGlWfg== 0000711642-99-000127.txt : 19990518 0000711642-99-000127.hdr.sgml : 19990518 ACCESSION NUMBER: 0000711642-99-000127 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: US REALTY PARTNERS LTD PARTNERSHIP CENTRAL INDEX KEY: 0000788955 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE OPERATORS (NO DEVELOPERS) & LESSORS [6510] IRS NUMBER: 570814502 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-15656 FILM NUMBER: 99625179 BUSINESS ADDRESS: STREET 1: 55 BEATTIE PLACE STREET 2: P O BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 10QSB 1 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 March 31, 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) March 31, 1999 Assets Restricted cash $ 370 Receivables and deposits, net of $328 for doubtful accounts 636 Restricted escrows 275 Other assets 168 Investment properties: Land $ 4,464 Buildings and related personal property 20,000 24,464 Less accumulated depreciation (8,751) 15,713 $17,162 Liabilities and Partners' Capital (Deficit) Liabilities Accounts payable $ 9 Tenant security deposit liabilities 79 Accrued property taxes 91 Other liabilities 551 Due to Corporate General Partner 578 Mortgage note payable 11,431 Partners' Capital (Deficit) General partners $ (418) Depositary unit certificate holders (2,440,000 units authorized; 1,222,000 units issued and outstanding) 4,841 4,423 $17,162 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 March 31, 1999 1998 Revenues: Rental income $ 1,130 $ 1,328 Other income 40 48 Gain on sale of investment property 2,794 -- Total revenues 3,964 1,376 Expenses: Operating 350 373 General and administrative 50 65 Depreciation 178 212 Interest 398 549 Property taxes 105 116 Total expenses 1,081 1,315 Net income $2,883 $ 61 Net income allocated to general partners (1%) $ 29 $ 1 Net income allocated to depositary unit certificate holders (99%) 2,854 60 $2,883 $ 61 Net income per depositary unit certificate $ 2.34 $ .05 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) Depositary Depositary Unit Unit General Certificate Certificates Partners Partners Total 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 three months ended March 31, 1999 -- 29 2,854 2,883 Partners' capital (deficit) at March 31, 1999 1,222,000 $ (418) $ 4,841 $ 4,423 See Accompanying Notes to Financial Statements d) U.S. REALTY PARTNERS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 1999 1998 Cash flows from operating activities: Net income $ 2,883 $ 61 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 178 212 Amortization 2 4 Gain on sale of investment property (2,794) -- Change in accounts: Restricted cash 187 (50) Receivables and deposits (216) (84) Other assets 101 20 Accounts payable (6) 1 Tenant security deposit liabilities (41) 9 Accrued property taxes (112) 47 Due to Corporate General Partner 18 6 Other liabilities (19) (51) Net cash provided by operating activities 181 175 Cash flows from investing activities: Net proceeds from sale of investment property 9,002 -- Property improvements and replacements (29) (40) Net (deposits to) withdrawals from restricted escrows (3) 3 Net cash provided by (used in) investing activities 8,970 (37) Cash flows from financing activities: Payments on mortgage notes payable (246) (138) Repayment of mortgage note payable (8,905) -- Net cash used in financing activities (9,151) (138) Net increase 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 $ 402 $ 528 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 month period ended March 31, 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. NOTE B - TRANSFER OF CONTROL Pursuant to a series of transactions which closed on October 1, 1998 and February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust merged into Apartment Investment and Management Company, a publicly traded real estate investment trust ("AIMCO"), with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in the 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 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 $298,000, the net proceeds received by the Partnership were approximately $9,002,000. 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 $2,794,000. 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 three months ended March 31, 1999 and 1998: 1999 1998 (in thousands) Property management fees (included in operating expenses) $ 37 $ 72 Reimbursement for services of affiliates 29 28 (included in general and administrative and operating expenses) (1) Due to Corporate General Partner 578 554 (1) Included in "Reimbursement for services of affiliates" for the three months ended March 31, 1998 is approximately $1,000 in reimbursements for construction oversight cost. There were no such costs incurred for the three months ended March 31, 1999. During the three months ended March 31, 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 $37,000 and $34,000 for the three months ended March 31, 1999 and 1998, respectively. For the three months ended March 31, 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 $38,000 for the three months ended March 31, 1998. Effective October 1, 1998 (the effective date of the Insignia Merger) these services for the commercial properties were provided by an unrelated party. An affiliate of the Corporate General Partner received reimbursement of accountable administrative expenses amounting to approximately $29,000 and $28,000 for the three months ended March 31, 1999 and 1998 respectively. 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. During April 1999, an affiliate of the Corporate General Partner (the "Purchaser") commenced a tender offer for up to 305,500 of the outstanding DUC's in the Partnership at $6.35 per unit, net to the seller in cash. The tender offer is scheduled to expire May 20, 1999. NOTE F - SUBSEQUENT EVENT The General Partner has received a non-binding letter of intent from an unaffiliated party interested in pursuing the purchase of The Gallery - Huntsville. The General Partner is currently evaluating the terms of the offer and plans to make a decision with regard to the sale before June 30, 1999. 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. 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 described in the summary of significant accounting policies 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 three months ended March 31, 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). 1999 RESIDENTIAL COMMERCIAL OTHER TOTALS Rental income $ 715 $ 415 $ -- $ 1,130 Other income 30 3 7 40 Interest expense -- -- 398 398 Depreciation 115 63 -- 178 General and administrative expense -- -- 50 50 Gain on sale of assets -- 2,794 -- 2,794 Segment profit (loss) 339 2,985 (441) 2,883 Total assets 10,920 5,398 844 17,162 Capital expenditures for investment properties 29 -- -- 29 1998 Rental income $ 666 $ 662 $ -- $ 1,328 Other income 38 4 6 48 Interest expense -- -- 549 549 Depreciation 113 99 -- 212 General and administrative expense -- -- 65 65 Segment profit (loss) 280 389 (608) 61 Total assets 11,192 12,253 616 24,061 Capital expenditures for investment properties 40 -- -- 40 NOTE H - LEGAL PROCEEDINGS On July 30, 1998, certain entities claiming to own limited partnership interests in certain limited partnerships whose general partners were, at the time, affiliates of Insignia filed a complaint entitled EVEREST PROPERTIES, LLC. V. INSIGNIA FINANCIAL GROUP, INC., ET AL. in the Superior Court of the State of California, county of Los Angeles. The action involves 44 real estate limited partnerships (including the Partnership) in which the plaintiffs allegedly own interests and which Insignia Affiliates allegedly manage or control (the "Subject Partnerships"). This case was settled on March 3, 1999. The Partnership is responsible for a portion of the settlement costs. The expense will not have a material effect on the Partnership's overall operations. The Partnership is unaware of any other pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The matters discussed in this Form 10-QSB contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosures contained in this Form 10-QSB and the other filings with the Securities and Exchange Commission made by the 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 operation. Accordingly, actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. The Partnership's investment properties consist of two apartment complexes and a commercial shopping center. The following table sets forth the average occupancy of the properties for the three months ended March 31, 1999 and 1998: Average Occupancy Property 1999 1998 Twin Lakes Apartments Palm Harbor, Florida 96% 93% Governor's Park Apartments Little Rock, Arkansas 94% 94% The Gallery _ Huntsville Huntsville, Alabama 90% 95% 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 three months ended March 31, 1998. Results of Operations The Registrant's net income for the three months ended March 31, 1999 was approximately $2,883,000 as compared to approximately $61,000 for the three months ended March 31, 1998. The increase in net income is primarily attributable to the gain on sale of investment property of approximately $2,794,000 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 $297,000 the net proceeds received by the Partnership were approximately $9,002,000. The Partnership used the proceeds from the sale of the property to pay down the mortgage encumbering the Partnership's properties by approximately $8,905,000. Excluding the impact of the sale of The Gallery _ Knoxville, the increase in net income was attributable to an increase in total revenues and a decrease in total expenses. Total revenues increased due to an increase in rental income at the Partnership's investment properties. The increase in rental income was attributable to an increase in occupancy at Twin Lakes Apartments, which was partially offset by a decrease in occupancy at The Gallery _ Huntsville, as noted above. The decrease in total expenses was primarily attributable to a decrease in interest expense. Interest expense decreased as a result of the pay down of the mortgage encumbering the Partnership's investment properties, as noted above. Operating, depreciation, and general and administrative expenses remained relatively constant for the comparable periods. Included in general and administrative expenses for the three months ended March 31, 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 March 31, 1999 the Partnership had approximately $187,000 of restricted cash as compared to approximately $184,000 of restricted cash at December 31, 1998. During April 1999, an affiliate of the Corporate General Partner (the "Purchaser") commenced a tender offer to acquire up to 305,500 of the outstanding Depository Unit Certificates ("DUCs") in the Partnership at a purchase price of $5.50 per DUC, which price was subsequently increased to $6.35 per DUC, net to the seller in cash. The tender offer is scheduled to expire May 20, 1999. In addition to the Purchaser's offer, affiliates of MacKenzie Patterson, Inc., an unaffiliated third party, commenced a tender offer on March 25, 1999 to acquire up to 70,000 DUCs at a purchase price of $5.00 per DUC, which price was subsequently increased to $6.25 per DUC, net to seller in cash. The MacKenzie Patterson offer is scheduled to expire on May 18, 1999. Depending on the number of DUCs tendered in these offers, the ability of holders of DUCs over the next twelve months may be severely restricted. 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 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 $144,000 of capital improvements over the near term. The Partnership has budgeted, but is not limited to, capital improvements of approximately $11,000 for 1999 which includes tenant improvements. As of March 31, 1999, no capital improvements have been performed. 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 near term. The Partnership has budgeted, but is not limited to, capital improvements of approximately $257,000, for 1999 which includes roofing, stairwells, and balcony repairs. As of March 31, 1999 approximately $3,000 has 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 near term. The Partnership has budgeted, but is not limited to, capital improvements of approximately $454,000 for 1999 which includes roofing, gutter repairs, and exterior lighting. As of March 31, 1999 approximately $26,000 has been incurred consisting primarily of appliance and floor covering replacements and land 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 $11,431,000 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. 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 mainframe system used by the Managing Agent became fully functional. In addition to the mainframe, 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 March 31, 1999, had completed approximately 75% 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 July 31, 1999. 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. 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 the testing process is expected to be completed by July 31, 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 80% of the server operating systems. The remaining server operating systems are planned to be upgraded to be Year 2000 compliant by July 31, 1999. 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. The Managing Agent intends to have a third-party conduct an audit of these systems and report their findings by July 31, 1999. Any of the above operating equipment that has been found to be non-compliant to date has been replaced or repaired. To date, these have consisted only of security systems and phone systems. As of March 31, 1999 the Managing Agent has evaluated approximately 86% of the operating equipment for the Year 2000 compliance. The total cost incurred for all properties managed by the Managing Agent as of March 31, 1999 to replace or repair the operating equipment was approximately $400,000. The Managing Agent estimates the cost to replace or repair any remaining operating equipment is approximately $325,000, which is expected to be completed by August 30, 1999. 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 May 1999. The Managing Agent has updated data transmission standards with two of the three 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 June 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 $2.8 million ($0.6 million expensed and $2.2 million capitalized for new systems and equipment) related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $0.5 million is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $0.2 million relates to repair of hardware and software and will be expensed as incurred. The Partnership's portion of these costs are not material. Risks Associated with the Year 2000 The Managing Agent believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Managing Agent has not yet completed all necessary phases of the Year 2000 program. In the event that the Managing Agent does not complete any additional phases, certain worst case scenarios could occur. The worst case scenarios could include elevators, security and heating, ventilating and air conditioning systems that read incorrect dates and operate with incorrect schedules (e.g., elevators will operate on Monday as if it were Sunday). Although such a change would be annoying to residents, it is not business critical. In addition, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Partnership. The Partnership could be subject to litigation for, among other things, computer system failures, equipment shutdowns or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. Contingency Plans Associated with the Year 2000 The Managing Agent has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and selecting new relationships for such activities as banking relationships and elevator operating systems. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 30, 1998, certain entities claiming to own limited partnership interests in certain limited partnerships whose general partners were, at the time, affiliates of Insignia filed a complaint entitled Everest Properties, LLC. v. Insignia Financial Group, Inc., et al. in the Superior Court of the State of California, county of Los Angeles. The action involves 44 real estate limited partnerships (including the Partnership) in which the plaintiffs allegedly own interests and which Insignia Affiliates allegedly manage or control (the "Subject Partnerships"). This case was settled on March 3, 1999. The Partnership is responsible for a portion of the settlement costs. The expense will not have a material effect on the Partnership's overall operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. b) Reports on Form 8-K: None filed during the quarter ended March 31, 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: May 17, 1999 EX-27 2
5 This schedule contains summary financial information extracted from U.S. Realty Partners Limited Partnership 1999 First Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000788955 U.S. REALTY PARTNERS LIMITED PARTNERSHIP 1,000 3-MOS DEC-31-1999 MAR-31-1999 0 0 636 328 0 0 24,464 (8,751) 17,162 0 11,431 0 0 0 4,423 17,162 0 3,964 0 0 1,081 0 398 0 0 0 0 0 0 2,883 2.34 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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