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 0-14578
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2825863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a)
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
September 30, 1999
Assets
Cash and cash equivalents $ 848
Receivables and deposits (net of allowance
of $51 for doubtful accounts) 357
Other assets 84
Investment properties:
Land $ 1,121
Buildings and related personal property 12,989
14,110
Less accumulated depreciation (6,215) 7,895
$ 9,184
Liabilities and Partners' (Deficit) Capital
Liabilities
Accounts payable $ 80
Tenant security deposit liabilities 150
Accrued property taxes 311
Other liabilities 115
Partners' (Deficit) Capital
General partner $ (110)
Limited partners (15,698 units issued and
outstanding) 8,638 8,528
$ 9,184
See Accompanying Notes to Financial Statements
b)
HCW PENSION REAL ESTATE FUND 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 $ 618 $ 586 $ 1,838 $ 1,889
Other income 25 51 114 143
Total revenues 643 637 1,952 2,032
Expenses:
Operating 339 371 923 1,078
General and administrative 74 61 227 197
Depreciation 230 219 602 574
Property taxes 80 75 295 292
Casualty loss -- -- -- 22
Impairment loss on property
held for investment
("Note D") 2,387 -- 2,387 --
Total expenses 3,110 726 4,434 2,163
Net loss $ (2,467) $ (89) $ (2,482) $ (131)
Net loss allocated to
general partner (2%) $ (49) $ (2) $ (50) $ (3)
Net loss allocated
to limited partners (98%) (2,418) (87) (2,432) (128)
$ (2,467) $ (89) $ (2,482) $ (131)
Net loss per limited
partnership unit $(154.03) $ (5.54) $(154.92) $ (8.15)
Distribution per limited
partnership unit $ 1.53 $ -- $ 1.53 $ --
See Accompanying Notes to Financial Statements
c)
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
(Unaudited)
(in thousands, except unit data)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 15,698 $ -- $15,698 $15,698
Partners' (deficit) capital at
December 31, 1998 15,698 $ (59) $11,094 $11,035
Distributions paid to partners -- (1) (24) (25)
Net loss for the nine months
ended September 30, 1999 -- (50) (2,432) (2,482)
Partners' (deficit) capital
at September 30, 1999 15,698 $ (110) $ 8,638 $ 8,528
See Accompanying Notes to Financial Statements
d)
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net loss $ (2,482) $ (131)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 602 574
Amortization of lease commissions -- 2
Casualty loss -- 22
Impairment loss on property held for investment 2,387 --
Change in accounts:
Receivables and deposits 128 (68)
Other assets (12) --
Accounts payable 19 29
Tenant security deposit liabilities 11 30
Accrued property taxes (99) 49
Other liabilities 17 (8)
Net cash provided by operating activities 571 499
Cash flows used in investing activities:
Property improvements and replacements (652) (381)
Cash flows used in financing activities:
Distributions to partners (425) (300)
Net decrease in cash and cash equivalents (506) (182)
Cash and cash equivalents at beginning of period 1,354 1,339
Cash and cash equivalents at end of period $ 848 $ 1,157
See Accompanying Notes to Financial Statements
e)
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements of HCW Pension Real Estate Fund
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. The General Partner of the Partnership is HCW General
Partner Ltd., whose sole general partner is IH, Inc. (the "Managing General
Partner"). In the opinion of the Managing 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 fiscal year ended
December 31, 1998.
NOTE B - TRANSFER OF CONTROL
Pursuant to a series of transactions which closed on October 1, 1998 and
February 26, 1999, Insignia Financial Group, Inc. 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 Managing General Partner. The Managing 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 Managing General
Partner and its affiliates for the management and administration of all
Partnership activities. The Partnership Agreement provides for (i) certain
payments to affiliates for services and (ii) reimbursement of certain expenses
incurred by affiliates on behalf of the Partnership. The following transactions
with the Managing General Partner and/or its affiliates were incurred during the
nine months ended September 30, 1999 and 1998:
1999 1998
(in thousands)
Property management fees (included in operating expenses) $ 61 $112
Asset management fees (included in general and
administrative expenses) 107 101
Reimbursement for services of affiliates (included in
operating and general and administrative expenses and
investment properties) 39 66
During the nine months ended September 30, 1999 and 1998, affiliates of the
Managing General Partner were entitled to receive 5% of gross receipts from the
Registrant's residential property for providing property management services.
The Registrant paid to such affiliates approximately $61,000 and $66,000 for the
nine months ended September 30, 1999 and 1998, respectively. For the nine
months ended September 30, 1998, affiliates of the Managing General Partner were
entitled to receive varying percentages of gross receipts from the Registrant's
commercial property for providing property management services. The Registrant
paid to such affiliates approximately $46,000 for the nine months ended
September 30, 1998. Effective October 1, 1998 (the effective date of the
Insignia Merger), these services for the commercial property were provided by an
unrelated party.
An affiliate of the Managing General Partner received reimbursement of asset
management fees amounting to approximately $107,000 and $101,000 for the nine
months ended September 30, 1999 and 1998, respectively.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $39,000 and
$66,000 for the nine months ended September 30, 1999 and 1998, respectively.
Included in these expenses for the nine months ended September 30, 1998, is
approximately $4,000 in reimbursements for construction oversight costs. There
were no such costs incurred for the nine months ended September 30, 1999.
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 5,872.96 (approximately
37.41% of the total outstanding units) units of limited partnership interest in
the Partnership for a purchase price of $475 per unit. The offer expired on
July 30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 745
units. As a result, AIMCO and its affiliates currently own 3,463 units of
limited partnership interest in the Partnership representing approximately
22.06% of the total outstanding units. It is possible that AIMCO or its
affiliates will make one or more additional offers to acquire additional limited
partnership interests in the Partnership for cash or in exchange for units in
the operating partnership of AIMCO.
NOTE D - IMPAIRMENT LOSS ON PROPERTY HELD FOR INVESTMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Partnership records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. During the three
months ended September 30, 1999, the Partnership determined that the Highland
Professional Tower located in Kansas City, Missouri, with a carrying value of
approximately, $4,637,000, was impaired and its value was written down by
approximately $2,387,000. The fair value was based upon current economic
conditions and projected future operational cash flows. The property is under
contract for sale. The sale, which is subject to the purchaser's due diligence
and other customary conditions, is expected to close during the fourth quarter
of 1999. However, there can be no assurance that the sale will be consummated.
NOTE E - DISTRIBUTIONS
A distribution payable from operations of $400,000 ($24.97 per limited
partnership unit) was recorded on December 31, 1998 and was paid on January 20,
1999. The limited partners received $392,000 and the general partner received
$8,000. A distribution from operations of $25,000 ($1.53 per limited
partnership unit) was paid on July 1, 1999. The limited partners received
approximately $24,000 and the general partner received approximately $1,000. A
distribution from operations of $300,000 ($18.73 per limited partnership unit)
was recorded on December 31, 1997 and was paid on January 6, 1998. The limited
partners received $294,000 and the general partner received $6,000.
NOTE F - SEGMENT INFORMATION
The Partnership has two reportable segments: residential properties and
commercial properties. The Partnership's residential property segment consists
of one apartment complex in Carbondale, Illinois. The Partnership rents
apartment units to tenants for terms that are typically twelve months or less.
The commercial property segment consists of a professional office building
located in Kansas City, Missouri. This property leases space to medical offices
at terms ranging from twelve months to six years.
The Partnership evaluates performance based on net income. The accounting
policies of the reportable segments are the same as those of the Partnership as
described in Partnership's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
The Partnership's reportable segments consist of investment properties that
offer different products and services. The reportable segments are each managed
separately as they provide services with different types of products and
customers.
Segment information for the nine months ended September 30, 1999 and 1998 is
shown in the tables below (in thousands). The "Other" column includes
Partnership administration related items and income and expense not allocated to
the reportable segments.
1999 Residential Commercial Other Totals
Rental income $ 1,190 $ 648 $ -- $1,838
Other income 80 15 19 114
Depreciation 382 220 -- 602
Impairment loss on property held
for investment -- 2,387 -- 2,387
General and administrative expense -- -- 227 227
Segment profit (loss) 271 (2,545) (208) (2,482)
Total assets 6,103 2,541 540 9,184
Capital expenditures 632 20 -- 652
1998 Residential Commercial Other Totals
Rental income $ 1,138 $ 751 $ -- $1,889
Other income 99 8 36 143
Depreciation 367 207 -- 574
General and administrative expense -- -- 197 197
Casualty loss 22 -- -- 22
Segment profit (loss) 163 (133) (161) (131)
Total assets 5,673 5,135 1,087 11,895
Capital expenditures 302 79 -- 381
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 one apartment complex and one
office building. 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
Lewis Park Apartments 79% 81%
Carbondale, Illinois
Highland Professional Tower 62% 65%
Kansas City, Missouri
The Managing General Partner renovated and repaired Highland Professional
Tower's common areas during the year ended December 31, 1997 in an effort to
attract additional tenants. Although all renovations were substantially
complete at the beginning of 1998, the property has continued to see a decline
in its tenant base through September 30, 1999. Occupancy for the nine months
ended September 30, 1999 has remained steady with the average occupancy for the
year ended December 31, 1998.
Results of Operations
The Partnership realized a net loss of approximately $2,482,000 for the nine
months ended September 30, 1999, compared to approximately $131,000 for the nine
months ended September 30, 1998. The Partnership had a net loss of
approximately $2,467,000 for the three months ended September 30, 1999, compared
to approximately $89,000 for the three months ended September 30, 1998. The
increase in net loss for the nine months ended September 30, 1999 is due to an
increase in total expenses and, to a lesser extent, a decrease in total revenue.
The increase in net loss for the three months ended September 30, 1999 is due to
an increase in total expenses partially offset by a slight increase in total
revenues. The increase in total expenses for the three and nine month periods
was primarily due to an impairment loss realized at Highlands Professional Tower
as discussed below. In addition, there were increases in general and
administrative expense and depreciation expense. These increases were offset by
reduced operating expenses and the casualty loss recognized in 1998. The
increase in general and administrative expenses was due to increased legal
expenses due to the settlement of a lawsuit as disclosed in the Partnership's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. This
increase was partially offset by reduced management reimbursements. Included in
general and administrative expense at both September 30, 1999 and 1998 are
management reimbursements to the General Partner allowed under the Partnership
Agreement. In addition, costs associated with the quarterly and annual
communications with investors and regulatory agencies and the annual audit
required by the Partnership Agreement are also included.
Depreciation expense increased due to capital improvements completed during the
past twelve months that are now being depreciated. Operating expenses
decreased primarily due to a decrease in maintenance expense as a result of the
completion during the nine months ended September 30, 1998 of parking lot
resurfacing at Highland Professional Tower. In addition, property insurance
decreased at both of the Partnership's properties due to reduced rates received
from a new insurance carrier, property management fees decreased due to the
decrease in rental revenue and professional fees decreased at Highland
Professional Tower. The casualty loss in 1998 resulted from a storm that damaged
the roofs at Lewis Park Apartments during 1997. The damage resulted in a loss
arising from the write-off of the basis of the property, which was replaced
during 1998.
Total revenues decreased for the nine months ended September 30, 1999 due to a
decrease in both rental income and other income. Rental income decreased due to
decreased occupancy at both the Partnership's properties, decreased average
rental rates at Lewis Park Apartments, increased bad debt expense and reduced
operating expense recoveries from the tenants at Highland Professional Tower.
These decreases were partially offset by reduced concessions at Lewis Park
Apartments. Other income decreased due to reduced interest income due to lower
cash balances in interest bearing accounts and reduced tenant charges at Lewis
Park Apartments. For the three months ended September 30, 1999, total revenues
increased slightly due to increased rental revenue due to reduced concessions at
Lewis Park Apartments.
During the three months ended September 30, 1999, the Partnership determined
that the Highland Professional Tower located in Kansas City, Missouri, with a
carrying value of approximately $4,736,000, was impaired and its value was
written down by approximately $2,387,000. The fair value was based upon current
economic conditions and projected future operational cash flows. The property
is under contract for sale. The sale, which is subject to the purchaser's due
diligence and other customary conditions, is expected to close during the fourth
quarter of 1999. However, there can be no assurance that the sale will be
consummated.
As part of the ongoing business plan of the Partnership, the Managing 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 Managing 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
Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At September 30, 1999, the Partnership had cash and cash equivalents of
approximately $848,000 as compared to approximately $1,157,000 at September 30,
1998. Cash and cash equivalents decreased approximately $506,000 for the nine
months ended September 30, 1999 from the Partnership's year end, primarily due
to approximately $425,000 of cash used in financing activities and approximately
$652,000 of cash used in investing activities, which was partially offset by
approximately $571,000 of cash provided by operating activities. Cash used in
financing activities consisted of distributions paid to the partners of which
$400,000 was accrued at December 31, 1998. Cash used in investing activities
consisted of property improvements and replacements. The Partnership invests
its working capital reserves in money market accounts.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the properties to adequately maintain the physical
assets and other operating needs of the Partnership and to comply with Federal,
state, and local legal and regulatory requirements. Capital improvements
planned for each of the Partnership's properties are detailed below.
Lewis Park Apartments
During the nine months ended September 30, 1999, the Partnership completed
approximately $632,000 of capital improvements consisting primarily of roofing,
parking lot resurfacing, landscaping, electrical upgrades, exterior building
enhancements, air conditioning units, water heaters, and other building
improvements. The parking lot resurfacing is complete as of September 30, 1999.
These improvements were funded from operating cash flow. Based on a report
received from an independent third party consultant analyzing necessary exterior
improvements and estimates made by the Managing General Partner on interior
improvements, it is estimated that the property requires approximately $526,000
of capital improvements over the next few years. The Partnership has budgeted,
but is not limited to, approximately $726,000 of capital improvements for 1999
which include certain of the required improvements and consist of maintenance
equipment, roofing and floor covering replacements.
Highland Professional Tower
During the nine months ended September 30, 1999, the Partnership completed
approximately $20,000 of capital improvements consisting of tenant improvements.
These improvements were funded from operating cash flow. Based on a report
received from an independent third party consultant analyzing necessary exterior
improvements and estimates made by the Managing General Partner on interior
improvements, it is estimated that the property requires approximately $495,000
of capital improvements over the next few years. The Partnership has budgeted,
but is not limited to, approximately $476,000 of capital improvements for 1999
which include certain of the required improvements and consist of asbestos
control and tenant 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 Partnership'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.
A distribution payable from operations of $400,000 ($24.97 per limited
partnership unit) was recorded on December 31, 1998 and was paid on January 20,
1999. The limited partners received $392,000 and the general partner received
$8,000. A distribution from operations of $25,000 ($1.53 per limited
partnership unit) was paid on July 1, 1999. The limited partners received
approximately $24,000 and the general partner received approximately $1,000. A
distribution from operations of $300,000 ($18.73 per limited partnership unit)
was recorded on December 31, 1997 and was paid on January 6, 1998. The limited
partners received $294,000 and the general partner received $6,000. The
Partnership's distribution policy is reviewed on an annual basis. Future cash
distributions will depend on the levels of net cash generated from operations,
the timing of debt financing, property sales, and the availability of cash
reserves. There can be no assurance, however, that the Partnership will generate
sufficient funds from operations, after planned capital improvement
expenditures, to permit any additional distributions to its partners during the
remainder of 1999 or subsequent periods.
Tender Offer
On May 19, 1999, AIMCO Properties, L.P., an affiliate of the Managing General
Partner commenced a tender offer to purchase up to 5,872.96 (approximately
37.41% of the total outstanding units) units of limited partnership interest in
the Partnership for a purchase price of $475 per unit. The offer expired on
July 30, 1999. Pursuant to the offer, AIMCO Properties, L.P. acquired 745
units. As a result, AIMCO and its affiliates currently own 3,463 units of
limited partnership interest in the Partnership representing approximately
22.06% of the total outstanding units. It is possible that AIMCO or its
affiliates will make one or more additional offers to acquire additional limited
partnership interests in the Partnership for cash or in exchange for units in
the operating partnership of AIMCO.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. The Partnership
is dependent upon the Managing 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:
None filed during the quarter ended September 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
By: HCW General Partner, Ltd.,
the General Partner
By: IH, Inc.,
the Managing General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Martha L. Long
Martha L. Long
Senior Vice President
and Controller
Date: