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 0-17645
UNITED INVESTORS GROWTH PROPERTIES
(Exact name of small business issuer as specified in its charter)
Missouri 43-1483928
(State or other jurisdiction of (IRS 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)
UNITED INVESTORS GROWTH PROPERTIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
March 31, 1999
Assets
Cash and cash equivalents $ 1,584
Receivables and deposits 209
Restricted escrows 182
Other assets 359
Investment properties:
Land $ 1,480
Buildings and related personal property 13,836
15,316
Less accumulated depreciation (4,826) 10,490
$ 12,824
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 94
Tenant security deposit liabilities 76
Accrued property taxes 41
Other liabilities 102
Mortgage notes payable 10,847
Partners' Capital
General partner's $ 11
Limited partners' (39,287 units issued
and outstanding) 1,653 1,664
$ 12,824
See Accompanying Notes to Consolidated Financial Statements
b)
UNITED INVESTORS GROWTH PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
Three Months Ended
March 31,
1999 1998
Revenues:
Rental income $ 615 $ 731
Other income 31 41
Total revenues 646 772
Expenses:
Operating 282 329
General and administrative 33 25
Depreciation 134 144
Interest 212 263
Property taxes 60 80
Total expenses 721 841
Net loss $ (75) $ (69)
Net loss allocated to general partner (1%) $ (1) $ (1)
Net loss allocated to limited partners (99%) (74) (68)
$ (75) $ (69)
Net loss per limited partnership unit $(1.88) $(1.73)
Distributions per limited partner unit $ -- $10.08
See Accompanying Notes to Consolidated Financial Statements
c)
UNITED INVESTORS GROWTH PROPERTIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner's Partners' Total
Original capital contributions 39,297 $ -- $ 9,824 $ 9,824
Partners' capital at
December 31, 1998 39,287 $ 12 $ 1,727 $ 1,739
Net loss for the three months
ended March 31, 1999 -- (1) (74) (75)
Partners' capital at
March 31, 1999 39,287 $ 11 $ 1,653 $ 1,664
See Accompanying Notes to Consolidated Financial Statements
d)
UNITED INVESTORS GROWTH PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Net loss $ (75) $ (69)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 134 144
Amortization of loan costs, lease commissions
and loan premiums, net 6 (9)
Change in accounts:
Receivables and deposits 20 70
Other assets 26 (7)
Accounts payable (1) (4)
Tenant security deposit liabilities 4 2
Accrued property taxes (4) 1
Other liabilities (35) (22)
Net cash provided by operating activities 75 106
Cash flows from investing activities:
Property improvements and replacements (34) (23)
Net deposits to restricted escrows (52) (18)
Net cash used in investing activities (86) (41)
Cash flows from financing activities:
Payments on mortgage notes payable (32) (35)
Payoff of mortgage note payable (2,397) --
Proceeds from debt refinancing 3,500 --
Loan costs paid (169) (16)
Distribution to partners -- (400)
Net cash provided by (used in)
financing activities 902 (451)
Net increase (decrease) in cash
and cash equivalents 891 (386)
Cash and cash equivalents at beginning of period 693 1,120
Cash and cash equivalents at end of period $ 1,584 $ 734
Supplemental disclosure of cash flow information:
Cash paid for interest $ 223 $ 276
See Accompanying Notes to Consolidated Financial Statements
e)
UNITED INVESTORS GROWTH PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of United Investors
Growth Properties (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., a
Delaware corporation (the "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
consolidated financial statements and footnotes thereto included in the
Partnership's annual report on Form 10-KSB for the fiscal year ended December
31, 1998.
Principles of Consolidation
The consolidated financial statements include all the accounts of the
Partnership and its two 100% owned limited liability companies, Cheyenne Woods
United Investors, L.L.C. and Deerfield Apartments, L.L.C. Although legal
ownership of the respective asset remains with these entities, the Partnership
retains all economic benefits from the properties. As a result, the Partnership
consolidates its interest in these two entities, whereby all accounts are
included in the consolidated financial statements of the Partnership with all
inter-entity accounts being eliminated.
NOTE B - TRANSFER OF CONTROL
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust
merged into Apartment Investment and Management Company ("AIMCO"), a publicly
traded real estate investment trust, with AIMCO being the surviving corporation
(the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in
the 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 - 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 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 General
Partner and affiliates during the three month periods ended March 31, 1999 and
1998:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ 33 $ 40
Reimbursement for services of affiliates, (included in
operating and general and administrative expenses) (1) 13 11
(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 costs. No such costs were incurred for the three
months ended March 31, 1999.
During the three months ended March 31, 1999 and 1998, affiliates of the General
Partner were entitled to receive 5% of gross receipts from all of the
Registrant's residential properties as compensation for providing property
management services. The Registrant paid to such affiliates approximately
$33,000 for both the three months ended March 31, 1999 and 1998. During the
three months ended March 31, 1998, affiliates of the General Partner were
entitled to varying percentages of gross receipts from the Registrant's
commercial property as compensation for providing property management services.
These services were performed by affiliates of the General Partner during the
three months ending March 31, 1998 and were approximately $7,000. On December
15, 1998, the lender foreclosed on the commercial property.
An affiliate of the General Partner received reimbursement of accountable
administrative expenses amounting to approximately $13,000 and $11,000 for the
three months ended March 31, 1999 and 1998, respectively.
NOTE D - REFINANCING
On January 29, 1999, the Partnership refinanced the mortgage encumbering Terrace
Royale Apartments. The refinancing replaced indebtedness of approximately
$2,397,000 with a new mortgage in the amount of $3,500,000 at an interest rate
of 6.51%. The interest rate on the old mortgage was 13.5%, under the forbearance
agreement in effect at the time of the refinancing. Payments are due on the
first day of each month beginning on March 1, 1999 until the loan matures on
February 1, 2019. Total capitalized loan costs were approximately $169,000.
Terrace Royale's mortgage was never in default due to a forebearance agreement
that was in effect while the Partnership was acquiring new financing.
NOTE E - SEGMENT REPORTING
The Partnership had two reportable segments: residential properties and
commercial properties. The Partnership's residential property segment consists
of three apartment complexes in Bothell, Washington; North Las Vegas, Nevada and
Memphis, Tennessee. The Partnership rents apartment units to tenants for terms
that are typically twelve months or less. The commercial property segment
consisted of a retail shopping center located in Lenexa, Kansas. This property
leased space to a home furnishing retailer, various specialty retail outlets,
and several food enterprises at terms ranging from 3 to 10 years. The
commercial property was foreclosed upon by the lender on December 15, 1998.
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 fiscal year
ended December 31, 1998.
The Partnership's reportable segments are 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 (in thousands). The "Other" column includes Partnership
administration related items and income and expense not allocated to the
reportable segment.
1999
Residential Other Totals
Rental income $ 615 $ -- $ 615
Other income 24 7 31
Interest expense 212 -- 212
Depreciation 134 -- 134
General and administrative expense -- 33 33
Segment loss (49) (26) (75)
Total assets 11,326 1,498 12,824
Capital expenditures for investment
properties 34 -- 34
1998
Residential Commercial Other Totals
Rental income $ 624 $ 107 $ -- $ 731
Other income 30 1 10 41
Interest expense 201 63 (1) 263
Depreciation 130 14 -- 144
General and administrative expense -- -- 25 25
Segment loss (25) (30) (14) (69)
Total assets 11,275 1,644 682 13,601
Capital expenditures for investment
properties 22 1 -- 23
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 three apartment complexes.
The following table sets forth the average occupancy of the properties for each
of the three month periods ended March 31, 1999 and 1998:
Average Occupancy
Property 1999 1998
Terrace Royale Apartments
Bothell, Washington 97% 99%
Cheyenne Woods Apartments
North Las Vegas, Nevada 90% 89%
Deerfield Apartments
Memphis, Tennessee 95% 94%
Results of Operations
The Registrant's net loss for the three months ended March 31, 1999 was
approximately $75,000, compared to a net loss of approximately $69,000 for the
three months ended March 31, 1998. The increase in net loss was due primarily
to a decrease in rental revenue partially offset by a decrease in total expenses
due to the foreclosure of Greystone South Plaza Center in December 1998, as
discussed below. Excluding the operations of Greystone South Plaza Center, the
Partnership had a net loss of approximately $39,000 for the three months ended
March 31, 1998, with total revenues decreasing approximately $19,000 and total
expenses increasing approximately $15,000 in the comparable period in 1999.
Total revenues decreased due to a decrease in rental income and other income.
Rental income decreased due to lower average rental rates at Cheyenne Woods
partially offset by increased rates at Terrace Royale and Deerfield. Other
income decreased primarily due to lower tenant charges at Cheyenne Woods.
Total expenses, excluding Greystone South Plaza Center, increased due to
increases in general and administrative and interest expenses, which were
partially offset by decreased operating expenses. The increase in interest
expense is due to additional interest incurred at Terrace Royale during the
forebearance period on the previous mortgage. During the forebearance period
the interest rate was increased by the lender to 13.50%. General and
administrative expenses increased primarily due to increased professional fees
associated with managing the Partnership. Included in general and
administrative expenses at both March 31, 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 also included. The decrease in operating expenses was
primarily due to lower maintenance expenses at Deerfield Apartments due to the
completion in 1998 of an exterior painting project. No such projects were
undertaken during the three months ended March 31, 1999. This was partially
offset by an increase in fees charged by the lender at the time of the
refinancing of Terrace Royale Apartments.
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
At March 31, 1999, the Registrant had cash and cash equivalents of approximately
$1,584,000 as compared to approximately $734,000 at March 31, 1998. The
increase in cash and cash equivalents of approximately $891,000 from the
Registrant's year ended December 31, 1998, is due to approximately $75,000 of
cash provided by operating activities and approximately $902,000 of cash
provided by financing activities which was partially offset by approximately
$86,000 of cash used in investing activities. Cash used in investing activities
consisted of property improvements and replacements and deposits to escrow
accounts maintained by the mortgage lender. Cash provided by financing
activities consisted of proceeds from the refinancing of Terrace Royale
Apartments which was partially offset by payments of principal made on the
mortgages encumbering the Registrant's properties and additional loan costs
paid. The Partnership invests its working capital reserves in money market
accounts.
On December 15, 1998, the lender foreclosed on Greystone South Plaza Center.
The mortgage note payable had been in default since December 1997. In the
General Partner's opinion, it was not in the Partnership's best interest to
contest the foreclosure action.
On January 29, 1999, the Partnership refinanced the mortgage encumbering Terrace
Royale Apartments. The refinancing replaced indebtedness of approximately
$2,397,000 with a new mortgage in the amount of $3,500,000 at an interest rate
of 6.51%. The interest rate on the old mortgage was 13.5%, under the
forebearance agreement in effect at the time of the refinancing. Payments are
due on the first day of each month until the loan matures on February 1, 2019.
Total capitalized loan costs were approximately $169,000. Terrace Royale's
mortgage was never in default due to a forbearance agreement that was in effect
while the Partnership was acquiring new financing.
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 Registrant 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.
Terrace Royale Apartments
During the three months ended March 31, 1999, the Partnership completed
approximately $5,000 of capital improvements at Terrace Royale Apartments
consisting primarily of swimming pool repairs and plumbing repairs. These
improvements were funded from cash flow from operations. Based on a report
received from an independent third party consultant analyzing necessary exterior
improvements and estimates made by the General Partner on interior improvements,
it is estimated that the property requires approximately $183,000 of capital
improvements over the near term. Capital improvements budgeted for, but not
limited to, approximately $83,000 are planned for 1999, including HVAC
condensing units, carpet replacement, painting the exterior of the buildings and
other building improvements.
Cheyenne Woods
During the three months ended March 31, 1999, the Partnership completed
approximately $6,000 of capital improvements at Cheyenne Woods, which consisted
primarily of carpet and vinyl replacements. These capital improvements were
funded from cash flow from operations. Based on a report received from an
independent third party consultant analyzing necessary exterior improvements and
estimates made by the General Partner on interior improvements, it is estimated
that the property requires approximately $183,000 of capital improvements over
the near term. Capital improvements budgeted for, but not limited to,
approximately $254,000 are planned for 1999 consisting of carpet and vinyl
replacement and other interior and exterior building improvements.
Deerfield Apartments:
During the three months ended March 31, 1999, the Partnership completed
approximately $23,000 of capital improvements at Deerfield Apartments consisting
primarily of swimming pool repairs, signage, appliances and carpet and vinyl
replacements. These improvements were funded from the Partnership's operating
cash flow. Based on a report received from an independent third party
consultant analyzing necessary exterior improvements and estimates made by the
General Partner on interior improvements, it is estimated that the property
requires approximately $183,000 of capital improvements over the near term.
Capital improvements planned for 1999 consist of stairwell improvements, roof
replacement, and other interior and exterior building improvements. These
improvements are budgeted for, but not limited to, approximately $450,000.
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 Partnership's current assets are thought to be sufficient for any near term
needs (exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $10,847,000 matures at various times with balloon
payments due at maturity (see discussion above related to Terrace Royale
indebtedness). The General Partner will attempt to refinance such indebtedness
and/or sell the properties prior to such maturity date. If the properties cannot
be refinanced and/or sold for a sufficient amount, the Partnership may risk
losing such properties through foreclosure.
No distributions were made during the three months ended March 31, 1999. A cash
distribution of approximately $400,000 ($10.08 per limited partnership unit) was
made during the three months ended March 31, 1998. This distribution
represented a portion of the net proceeds from the mortgage refinancing at
Deerfield. Future cash distributions will depend on the levels of net cash
generated from operations, the timing of debt maturities, refinancings and/or
property sales and the availability of cash reserves. The Registrant's
distribution policy is reviewed on a quarterly basis. There can be no
assurance, however, that the Registrant will generate sufficient funds from
operations after required capital expenditures to permit any distributions to
its partners in 1999 or subsequent periods.
Potential Tender Offer
On October 1, 1998, Insignia Financial Group, Inc. merged into AIMCO, a real
estate investment trust, whose Class A Common Shares are listed on the New York
Stock Exchange. As a result of such merger, AIMCO and AIMCO Properties, L.P., a
Delaware limited partnership and the operating partnership of AIMCO ("AIMCO OP")
acquired indirect control of the General Partner. AIMCO and its affiliates
currently own 9.993% of the limited partnership interests in the Partnership.
AIMCO is presently considering whether it will engage in an exchange offer for
additional limited partnership interests in the Partnership. There is a
substantial likelihood that, within a short period of time, AIMCO OP will offer
to acquire limited partnership interests in the Partnership for cash or
preferred units or common units of limited partnerships interests in AIMCO OP.
While such an exchange offer is possible, no definite plans exist as to when or
whether to commence such an exchange offer, or as to the terms of any such
exchange offer, and it is possible that none will occur.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This Form 10-QSB shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state.
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 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 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.
UNITED INVESTORS GROWTH PROPERTIES
By: United Investors Real Estate, Inc.
Its 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 12, 1999