-----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, Vi8nZ1ljYTfoPbxEYfPv05GwyNnS/2Wc7/dzGtANiAjnE6Qp1QYXtasILIhS3sNQ wUsq5ghk+/hWbIdN9pA18g== 0000711642-99-000291.txt : 19991115 0000711642-99-000291.hdr.sgml : 19991115 ACCESSION NUMBER: 0000711642-99-000291 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748492 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 September 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to _________ Commission file number 0-15656 U.S. REALTY PARTNERS LIMITED PARTNERSHIP (Exact name of small business issuer as specified in its charter) South Carolina 57-0814502 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, P.O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No PART I _ FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) U.S. REALTY PARTNERS LIMITED PARTNERSHIP BALANCE SHEET (Unaudited) (in thousands, except per unit data) September 30, 1999 Assets Restricted cash $ 430 Receivables and deposits 722 Restricted escrows 280 Other assets 41 Investment in discontinued operations 77 Investment properties: Land $ 2,123 Buildings and related personal property 15,108 17,231 Less accumulated depreciation (6,610) 10,621 $ 12,171 Liabilities and Partners' Capital (Deficit) Liabilities Accounts payable $ 31 Tenant security deposit liabilities 60 Accrued property taxes 251 Other liabilities 514 Due to Corporate General Partner 590 Mortgage notes payable 4,264 Partners' Capital (Deficit) General partners $ (398) Depositary unit certificate holders (2,440,000 units authorized; 1,222,000 units issued and outstanding) 6,859 6,461 $ 12,171 See Accompanying Notes to Financial Statements b) U.S. REALTY PARTNERS LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except unit data) Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 Revenues: Rental income $ 743 $ 659 $2,187 $ 1,991 Other income 33 40 112 125 Total revenues 776 699 2,299 2,116 Expenses: Operating 294 304 828 825 General and administrative 59 48 153 167 Depreciation 118 115 348 342 Interest 135 579 842 1,664 Property taxes 126 118 185 247 Total expenses 732 1,164 2,356 3,245 Income (loss) before discontinued operations 44 (465) (57) (1,129) (Loss) income from discontinued operations (57) 231 306 999 Gain on sale of discontinued operations 1,971 -- 4,672 -- Net income (loss) $1,958 $ (234) $4,921 $ (130) Net income (loss) allocated to general partners (1%) 20 (2) 49 (1) Net income (loss) allocated to depositary unit certificate holders (99%) $1,938 $ (232) $4,872 $ (129) $1,958 $ (234) $4,921 $ (130) Net income (loss) per depositary unit certificate: Income (loss) before discontinued operations $ .04 $ (.38) $ (.05) $ (.92) (Loss) income from discontinued operations (.05) .19 .25 .81 Gain on sale of discontinued operations 1.60 -- 3.79 -- $ 1.59 $ (.19) $ 3.99 $ (.11) See Accompanying Notes to Financial Statements c) U.S. REALTY PARTNERS LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL (Unaudited) (in thousands, except unit data) Depositary Depositary Unit Unit General Certificate Certificates Partners Partners Total Original capital contributions 1,222,000 $ 2 $30,550 $30,552 Partners' (deficit) capital at December 31, 1998 1,222,000 $ (447) $ 1,987 $ 1,540 Net income for the nine months ended September 30, 1999 -- 49 4,872 4,921 Partners' (deficit) capital at September 30, 1999 1,222,000 $ (398) $ 6,859 $ 6,461 See Accompanying Notes to Financial Statements d) U.S. REALTY PARTNERS LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 1999 1998 Cash flows from operating activities: Net income (loss) $ 4,921 $ (130) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 348 640 Amortization of lease commissions and software -- 10 Gain on sale of discontinued operations (4,672) -- Change in accounts: Restricted cash (14) (58) Receivables and deposits (454) (87) Investment in discontinued operations 254 -- Other assets (25) 10 Accounts payable 16 14 Tenant security deposit liabilities (10) (5) Accrued property taxes 184 271 Due to Corporate General Partner 30 12 Other liabilities (56) (38) Net cash provided by operating activities 522 639 Cash flows from investing activities: Net proceeds from sale of investment property 16,004 -- Property improvements and replacements (200) (122) Net deposits to restricted escrows (8) (3) Net cash provided by (used in) investing activities 15,796 (125) Cash flows from financing activities: Payments on mortgage notes payable (443) (514) Repayment of mortgage note payable (15,875) -- Net cash used in financing activities (16,318) (514) Net change in cash and cash equivalents -- -- Cash and cash equivalents at beginning of period -- -- Cash and cash equivalents at end of period $ -- $ -- Supplemental disclosure of cash flow information: Cash paid for interest $ 848 $ 1,630 See Accompanying Notes to Financial Statements e) U.S. REALTY PARTNERS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Unaudited) September 30, 1999 NOTE A - BASIS OF PRESENTATION The accompanying unaudited financial statements of U.S. Realty Partners Limited Partnership (the "Partnership" or "Registrant") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 (b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of U.S Realty I Corporation (the "Corporate General Partner"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1999, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1999. For further information, refer to the financial statements and footnotes thereto included in the Partnership's Annual Report on Form 10-KSB for the year ended December 31, 1998. Certain reclassifications have been made to the 1998 financial statements to conform with the 1999 presentation. NOTE B - TRANSFER OF CONTROL Pursuant to a series of transactions which closed on October 1, 1998 and February 26, 1999, Insignia Financial Group, Inc. ("Insignia") and Insignia Properties Trust merged into Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in the Corporate General Partner. The Corporate General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Partnership. NOTE C - RECONCILIATION OF CASH FLOWS The Partnership considers all cash to be restricted for tenant security deposits and for the purpose of the deposit of Net Cash Flow, as defined by the debt restructuring in October of 1993. NOTE D - DISPOSITION OF PROPERTY/OPERATING SEGMENT On February 1, 1999, The Gallery - Knoxville, located in Knoxville, Tennessee, was sold to an unaffiliated third party for $9,300,000. After closing expenses of approximately $391,000, the net proceeds received by the Partnership were approximately $8,909,000. The Partnership was required to use the net proceeds from the sale of the property to pay down the mortgage encumbering the Partnership's properties. The sale of the property resulted in a gain on sale of investment property of approximately $2,701,000. In connection with the sale, a commission of approximately $93,000 was paid to the Corporate General Partner in accordance with the terms of the Partnership Agreement. On July 2, 1999, The Gallery - Huntsville, located in Huntsville, Alabama, was sold to an unaffiliated third party for $7,310,000. After closing expenses of approximately $215,000, the net proceeds received by the Partnership were approximately $7,095,000. The Partnership was required to use the net proceeds from the sale of the property to pay down the mortgage encumbering the Partnership's properties. The sale of the property resulted in a gain on sale of investment property of approximately $1,971,000. In connection with the sale, a commission of approximately $73,100 was paid to the Corporate General Partner in accordance with the Partnership Agreement. The Gallery - Knoxville and The Gallery - Huntsville were the only two commercial properties owned by the Partnership and represented one segment of the Partnership's operations. Due to the sale of both of these properties one on February 1, 1999 and the other on July 2, 1999, the results of the commercial segment have been shown as income from and gain on sale of discontinued operations as of September 30, 1999 and 1998. The net assets remaining as of September 30, 1999 represent cash and deposits of both commercial properties and have been classified as "Investment in Discontinued Operations". NOTE E - TRANSACTIONS WITH AFFILIATED PARTIES The Partnership has no employees and is dependent on the Corporate General Partner and its affiliates for the management and administration of all partnership activities. The Partnership Agreement provides for certain payments to affiliates for services and as reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. The following payments were made to the Corporate General Partner and its affiliates during the nine months ended September 30, 1999 and 1998: 1999 1998 (in thousands) Property management fees (included in operating expenses) $114 $220 Reimbursement for services of affiliates (included in general and administrative, operating expenses and investment properties) 61 89 Due to Corporate General Partner 590 560 Real estate brokerage commissions (included in gain on sale of discontinued operations) 166 -- During the nine months ended September 30, 1999 and 1998, affiliates of the Corporate General Partner were entitled to receive 5% of gross receipts from all of the Registrant's residential properties for providing property management services. The Registrant paid to such affiliates approximately $114,000 and $107,000 for the nine months ended September 30, 1999 and 1998, respectively. For the nine months ended September 30, 1998, affiliates of the Corporate General Partner were entitled to receive varying percentages of gross receipts from the Registrant's commercial properties for providing property management services. The Registrant paid to such affiliates approximately $113,000 for the nine months ended September 30, 1998. No such fees were paid for the nine months ended September 30, 1999 as these services were provided by an unrelated third party effective October 1, 1998. An affiliate of the Corporate General Partner received reimbursement of accountable administrative expenses amounting to approximately $61,000 and $89,000 for the nine months ended September 30, 1999 and 1998, respectively. Included in these expenses for the nine months ended September 30, 1999 and 1998 is approximately $1,000 and $3,000, respectively in reimbursements for construction oversight costs. In connection with both the sale of The Gallery - Knoxville and The Gallery - Huntsville the Corporate General Partner was entitled to a commission of 1% of the selling price. Accordingly, $93,000 was paid during April 1999 as a commission on the sale of The Gallery - Knoxville and $73,100 was paid during July 1999 as a commission on the sale of The Gallery - Huntsville. During the first quarter of 1999, an affiliate of the Corporate General Partner acquired 243,831 DUC's representing approximately 19.95% of the total outstanding DUC's. On April 9, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General Partner commenced a tender offer to purchase up to 305,500 (approximately 25% of the total outstanding units) units of depositary unit certificates in the Partnership for a purchase price of $6.35 per unit. The offer expired on June 15, 1999. Pursuant to this offer, AIMCO Properties, L.P. acquired 286,677 units. As a result, AIMCO and its affiliates currently own 530,508 units of depositary unit certificates in the Partnership representing approximately 43.41% of the total outstanding units. It is possible that AIMCO or its affiliates will make one or more additional offers to acquire additional depositary unit certificates interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO. NOTE F - SEGMENT REPORTING Description of the types of products and services from which the reportable segment derives its revenues: The Partnership had two reportable segments: residential properties and commercial properties. The Partnership's residential property segment consists of two apartment complexes located in Arkansas and Florida. The Partnership rents apartment units to tenants for terms that are typically twelve months or less. The commercial property segment consists of a shopping center located in Alabama, which was sold on July 2, 1999 and a shopping center in Tennessee which was sold during February 1999. As a result of the sale of both commercial properties during 1999 the commercial segment is shown as discontinued operations. Measurement of segment profit and loss: The Partnership evaluates performance based on net income. The accounting policies of the reportable segment are the same as those of the Partnership as described in the Partnership's Annual Report on Form 10-KSB for the year ended December 31, 1998. Factors management used to identify the enterprise's reportable segment: The Partnership's reportable segment consists of investment properties that offer different products and services. The reportable segments are each managed separately because they provide distinct services with different types of products and customers. Segment information for the nine month periods ended September 30, 1999 and 1998 is shown in the tables below. The "Other" column includes partnership administration related items and income and expense not allocated to the reportable segment. 1999 Residential Commercial Other Totals (discontinued) (in thousands) Rental income $ 2,187 $ -- $ -- $ 2,187 Other income 91 -- 21 112 Interest expense -- -- 842 842 Depreciation 348 -- -- 348 General and administrative expense -- -- 153 153 Income from discontinued operations -- 306 -- 306 Gain on sale of discontinued operations -- 4,672 -- 4,672 Segment profit (loss) 917 4,978 (974) 4,921 Total assets 10,758 77 1,336 12,171 Capital expenditures for investment properties 200 -- -- 200 1998 Residential Commercial Other Totals (discontinued) (in thousands) Rental income $ 1,991 $ -- $ -- $ 1,991 Other income 102 -- 23 125 Interest expense -- -- 1,664 1,664 Depreciation 342 -- -- 342 General and administrative expense -- -- 167 167 Income from discontinued operations -- 999 -- 999 Segment profit (loss) 679 999 (1,808) (130) Total assets 10,970 11,896 870 23,736 Capital expenditures for investment properties 110 12 -- 122 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The matters discussed in this Form 10-QSB contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosures contained in this Form 10-QSB and the other filings with the Securities and Exchange Commission made by the Registrant from time to time. The discussions of the Registrant's business and results of operations, including forward-looking statements pertaining to such matters, does not take into account the effects of any changes to the Registrant's business and results of operations. Accordingly, actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. The Partnership's investment properties consist of two apartment complexes. The following table sets forth the average occupancy of the properties for the nine months ended September 30, 1999 and 1998: Average Occupancy Property 1999 1998 Twin Lakes Apartments Palm Harbor, Florida 97% 93% Governor's Park Apartments Little Rock, Arkansas 95% 92% The Corporate General Partner attributes the increase in occupancy at Twin Lakes Apartments to a strong reputation in the Palm Harbor area concerning customer service provided by the property's personnel. Management has been able to maintain a higher standard of service for their tenants than local competition at lower rental rates. The Corporate General Partner attributes the increase in occupancy at Governor's Park Apartments to improved conditions in the apartment industry in the Little Rock area. Results of Operations The Registrant's net income for the three and nine months ended September 30, 1999 was approximately $1,958,000 and $4,921,000, respectively as compared to a net loss of approximately $234,000 and $130,000 for the three and nine months ended September 30, 1998. The increase in net income for both the three and nine month periods is primarily attributable to the gain on sale of discontinued operations of approximately $4,672,000 realized on the sale of The Gallery _ Knoxville and The Gallery - Huntsville. On February 1, 1999, The Gallery _ Knoxville, located in Knoxville, Tennessee, was sold to an unaffiliated third party for $9,300,000. After closing expenses of approximately $391,000 the net proceeds received by the Partnership were approximately $8,909,000. On July 2, 1999, The Gallery _ Huntsville, located in Huntsville, Alabama, was sold to an unaffiliated third party for approximately $7,310,000. After closing expenses of approximately $215,000, the net proceeds received by the Partnership were approximately $7,095,000. The Partnership used the proceeds from the sale of the properties to pay down the debt encumbering the Partnership's properties by approximately $15,875,000. Excluding the impact of the operations and the sale of The Gallery - Knoxville and The Gallery - Huntsville, the Registrant had a net loss of approximately $57,000 for the nine months ended September 30, 1999 as compared to a net loss of approximately $1,129,000 for the nine months ended September 30, 1998. For the three months ended September 30, 1999 and 1998, the Registrant had net income of approximately $44,000 and a net loss of approximately $465,000, respectively. The increase in the net income for the three and nine months ended September 30, 1999 is the result of both an increase in total revenues and a decrease in total expenses at the Partnership's residential properties. The increase in total revenues is attributable to the increase in occupancy at both Twin Lakes Apartments and Governor's Park Apartments as discussed above. The decrease in total expenses is primarily the result of a decrease in interest expense and to a lesser extent a decrease in property tax expense. Interest expense decreased as a result of the pay down of the mortgage encumbering the Partnership's investment properties, with the net proceeds from the sale of The Gallery _ Knoxville and The Gallery _ Huntsville as noted above. The decrease in property tax expense is the result of being overstated for the nine months ended September 30, 1998. An adjustment to property tax expense was made during the fourth quarter of 1998 to properly reflect the expenses for the twelve months. Operating, depreciation, and general and administrative expenses remained relatively constant for the comparable periods. Included in general and administrative expenses for the three and nine months ended September 30, 1999 and 1998 are management reimbursements to the Corporate General Partner allowed under the Partnership Agreement. In addition, costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership agreement are also included. As part of the ongoing business plan of the Partnership, the Corporate General Partner monitors the rental market environment of each of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Partnership from increases in expenses. As part of this plan, the Corporate General Partner attempts to protect the Partnership from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the Corporate General Partner will be able to sustain such a plan. Liquidity and Capital Resources All of the Partnership's cash is restricted pursuant to the terms of the mortgage loan encumbering the Partnership's properties. At September 30, 1999 the Partnership had approximately $461,000 of restricted cash from both continuing and discontinued operations as compared to approximately $557,000 of restricted cash from both continuing and discontinued operations at December 31, 1998. The Partnership had approximately $522,000 of cash provided by operating activities and approximately $15,796,000 of cash provided by investing activities which was offset by $16,318,000, of cash used in financing activities. Cash provided by investing activities consisted of proceeds from the sale of the two commercial properties (see discussion above) partially offset by property improvements and replacements and net deposits to restricted escrows. Cash used in financing activities consisted primarily of the partial repayment of the mortgage encumbering all of the Partnership's properties. The sufficiency of existing liquid assets to meet future liquidity and capital expenditures requirements is directly related to the level of capital expenditures required at the various properties to adequately maintain the physical assets and other operating needs of the Partnership and to comply with Federal, State, and Local legal and regulatory requirements. Capital improvements planned for each of the Registrant's properties are detailed below. Governor's Park Apartments Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Corporate General Partner on interior improvements, it is estimated that the property requires approximately $231,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $257,000 for 1999 which include certain of the required improvements and consist of appliance and floor covering replacements, roofing, stairwells, and balcony improvements. As of September 30, 1999 approximately $112,000 has been incurred consisting primarily of appliance and floor covering replacements, roof and stairwell improvements. These improvements were funded from operations. Twin Lakes Apartments Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Corporate General Partner on interior improvements, it is estimated that the property requires approximately $436,000 of capital improvements over the next few years. The Partnership has budgeted, but is not limited to, capital improvements of approximately $454,000 for 1999 which include certain of the required improvements and consist of appliance and floor covering replacements, and land and parking lot improvements, roofing, gutter additions, and exterior lighting. As of September 30, 1999 approximately $88,000 of capital improvements have been incurred consisting primarily of appliance and floor covering replacements and land and parking lot improvements. These improvements were funded from operations. The additional capital expenditures will be incurred only if cash is available from operations or from Partnership reserves. The total mortgage indebtedness of $4,264,000 requires a balloon payment on August 1, 2001. The Corporate General Partner will attempt to refinance such indebtedness and/or sell the properties prior to such maturity date. If the properties cannot be refinanced or sold for a sufficient amount, the Partnership will risk losing such properties through foreclosure. Pursuant to the loan agreement, Net Cash Flow of the Partnership is required to be paid to the mortgage holder on a monthly basis to reduce accrued interest and principal. No distributions can be made until all long-term debt is repaid. The Corporate General Partner is currently assessing the feasibility of refinancing the mortgage encumbering the Partnership's investment properties. Tender Offer On April 9, 1999, AIMCO Properties, L.P., an affiliate of the Corporate General Partner commenced a tender offer to purchase up to 305,500 (approximately 25.00% of the total outstanding units) units of depositary unit certificate in the Partnership for a purchase price of $6.35 per unit. The offer expired on June 15, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 286,677 units. As a result, AIMCO and its affiliates currently own 530,508 units of depositary unit certificate interest in the Partnership representing approximately 43.41% of the total outstanding units. It is possible that AIMCO or its affiliates will make one or more additional offers to acquire additional depositary unit certificate interests in the Partnership for cash or in exchange for units in the operating partnership of AIMCO. Year 2000 Compliance General Description of the Year 2000 Issue and the Nature and Effects of the Year 2000 on Information Technology (IT) and Non-IT Systems The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. The Partnership is dependent upon the Corporate General Partner and its affiliates for management and administrative services ("Managing Agent"). Any of the computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Over the past two years, the Managing Agent has determined that it will be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Managing Agent presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or not completed in time, the Year 2000 issue could have a material impact on the operations of the Partnership. The Managing Agent's plan to resolve Year 2000 issues involves four phases: assessment, remediation, testing, and implementation. To date, the Managing Agent has fully completed its assessment of all the information systems that could be significantly affected by the Year 2000, and has begun the remediation, testing and implementation phases on both hardware and software systems. Assessments are continuing in regards to embedded systems. The status of each is detailed below. Status of Progress in Becoming Year 2000 Compliant, Including Timetable for Completion of Each Remaining Phase Computer Hardware: During 1997 and 1998, the Managing Agent identified all of the computer systems at risk and formulated a plan to repair or replace each of the affected systems. In August 1998, the main computer system used by the Managing Agent became fully functional. In addition to the main computer system, PC-based network servers, routers and desktop PCs were analyzed for compliance. The Managing Agent has begun to replace each of the non-compliant network connections and desktop PCs and, as of September 30, 1999, had virtually completed this effort. The total cost to the Managing Agent to replace the PC-based network servers, routers and desktop PCs is expected to be approximately $1.5 million of which $1.3 million has been incurred to date. Computer Software: The Managing Agent utilizes a combination of off-the-shelf, commercially available software programs as well as custom-written programs that are designed to fit specific needs. Both of these types of programs were studied, and implementation plans written and executed with the intent of repairing or replacing any non-compliant software programs. In April 1999 the Managing Agent embarked on a data center consolidation project that unifies its core financial systems under its Year 2000 compliant system. The estimated completion date for this project is October 1999. During 1998, the Managing agent began converting the existing property management and rent collection systems to its management properties Year 2000 compliant systems. The estimated additional costs to convert such systems at all properties, is $200,000, and the implementation and testing process was completed in June 1999. The final software area is the office software and server operating systems. The Managing Agent has upgraded all non-compliant office software systems on each PC and has upgraded virtually all of the server operating systems. Operating Equipment: The Managing Agent has operating equipment, primarily at the property sites, which needed to be evaluated for Year 2000 compliance. In September 1997, the Managing Agent began taking a census and inventory of embedded systems (including those devices that use time to control systems and machines at specific properties, for example elevators, heating, ventilating, and air conditioning systems, security and alarm systems, etc.). The Managing Agent has chosen to focus its attention mainly upon security systems, elevators, heating, ventilating and air conditioning systems, telephone systems and switches, and sprinkler systems. While this area is the most difficult to fully research adequately, management has not yet found any major non-compliance issues that put the Managing Agent at risk financially or operationally. A pre-assessment of the properties by the Managing Agent has indicated virtually no Year 2000 issues. A complete, formal assessment of all the properties by the Managing Agent was virtually completed by September 30, 1999. Any operating equipment that is found non-compliant will be repaired or replaced. The total cost incurred for all properties managed by the Managing Agent as of September 30, 1999 to replace or repair the operating equipment was approximately $75,000. The Managing Agent estimates the cost to replace or repair any remaining operating equipment is approximately $125,000. The Managing Agent continues to have "awareness campaigns" throughout the organization designed to raise awareness and report any possible compliance issues regarding operating equipment within its enterprise. Nature and Level of Importance of Third Parties and Their Exposure to the Year 2000 The Managing Agent has banking relationships with three major financial institutions, all of which have designated their compliance. The Managing Agent has updated data transmission standards with all of the financial institutions. All financial institutions have communicated that they are Year 2000 compliant and accordingly no accounts were required to be moved from the existing financial institutions. The Partnership does not rely heavily on any single vendor for goods and services, and does not have significant suppliers and subcontractors who share information systems (external agent). To date, the Partnership is not aware of any external agent with a Year 2000 compliance issue that would materially impact the Partnership's results of operations, liquidity, or capital resources. However, the Partnership has no means of ensuring that external agents will be Year 2000 compliant. The Managing Agent does not believe that the inability of external agents to complete their Year 2000 remediation process in a timely manner will have a material impact on the financial position or results of operations of the Partnership. However, the effect of non-compliance by external agents is not readily determinable. Costs to Address Year 2000 The total cost of the Year 2000 project to the Managing Agent is estimated at $3.5 million and is being funded from operating cash flows. To date, the Managing Agent has incurred approximately $2.9 million ($0.7 million expenses and $2.2 million capitalized for new systems and equipment) related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $0.5 million is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $0.2 million relates to repair of hardware and software and will be expensed as incurred. The Partnership's portion of these costs are not material. Risks Associated with the Year 2000 The Managing Agent believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Managing Agent has not yet completed all necessary phases of the Year 2000 program. In the event that the Managing Agent does not complete any additional phases, certain worst case scenarios could occur. The worst case scenarios could include elevators, security and heating, ventilating and air conditioning systems that read incorrect dates and operate with incorrect schedules (e.g., elevators will operate on Monday as if it were Sunday). Although such a change would be annoying to residents, it is not business critical. In addition, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Partnership. The Partnership could be subject to litigation for, among other things, computer system failures, equipment shutdowns or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. Contingency Plans Associated with the Year 2000 The Managing Agent has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and selecting new relationships for such activities as banking relationships and elevator operating systems. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. b) Reports on Form 8-K filed during the quarter ended September 30, 1999: Current report on Form 8-K dated July 2, 1999 and filed on July 13, 1999 in connection with the sale of The Gallery - Huntsville on July 2, 1999. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. REALTY PARTNERS LIMITED PARTNERSHIP By: U.S. Realty I Corporation Corporate General Partner By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President and Director By: /s/Martha L. Long Martha L. Long Senior Vice President and Controller Date: November 12, 1999 EX-27 2
5 This schedule contains summary financial information extracted from U.S. Realty Partners Limited Partnership 1999 Third Quarter 10-QSB and is qualified in its entirety by reference to such 10-QSB filing. 0000788955 U.S. REALTY PARTNERS LIMITED PARTNERSHIP 1,000 9-MOS DEC-31-1999 SEP-30-1999 0 0 722 0 0 0 17,231 (6,610) 12,171 0 4,264 0 0 0 6,461 12,171 0 2,299 0 0 2,356 0 842 0 0 0 0 0 0 4,921 3.99 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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