10QSB 1 mcrp.txt MCRP UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 [] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to _________ Commission file number 0-14570 MCCOMBS REALTY PARTNERS (Exact name of small business issuer as specified in its charter) California 33-0068732 (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) PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MCCOMBS REALTY PARTNERS CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except unit data) June 30, 2002
Assets Cash and cash equivalents $ 161 Receivables and deposits 20 Restricted escrow 73 Other assets 90 Investment property: Land $ 499 Buildings and related personal property 5,996 6,495 Less accumulated depreciation (4,408) 2,087 $ 2,431 Liabilities and Partners' Deficit Liabilities Accounts payable $ 11 Tenant security deposit liabilities 12 Accrued property taxes 52 Other liabilities 91 Mortgage note payable 5,424 Partners' Deficit General partner $ (1) Limited partners (17,196.39 units issued and outstanding) (3,158) (3,159) $ 2,431 See Accompanying Notes to Consolidated Financial Statements
MCCOMBS REALTY PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except unit data)
Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 Revenues: Rental income $ 329 $ 386 $ 654 $ 757 Other income 37 25 59 56 Total revenues 366 411 713 813 Expenses: Operating 153 162 306 305 General and administrative 32 35 65 70 Depreciation 68 70 136 136 Interest 115 116 230 233 Property taxes 26 26 52 49 Total expenses 394 409 789 793 Net (loss) income $ (28) $ 2 $ (76) $ 20 Net (loss) income allocated to general partner $ -- $ -- $ -- $ -- Net (loss) income allocated to limited partners (28) 2 (76) 20 $ (28) $ 2 $ (76) $ 20 Net (loss) income per limited partnership unit $ (1.63) $ .12 $ (4.42) $ 1.16 Distribution per limited partnership unit $ 32.62 $ -- $ 32.62 $ -- See Accompanying Notes to Consolidated Financial Statements
MCCOMBS REALTY PARTNERS CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT (Unaudited) (in thousands, except unit data)
Limited Partnership General Limited Units Partner Partners Total Partners' deficit at December 31, 2001 17,196.39 $ -- $(2,521) $(2,521) Distribution to partners (1) (561) (562) Net loss for the six months ended June 30, 2002 -- -- (76) (76) Partners' deficit at June 30, 2002 17,196.39 $ (1) $(3,158) $(3,159) See Accompanying Notes to Consolidated Financial Statements
MCCOMBS REALTY PARTNERS CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six Months Ended June 30, 2002 2001 Cash flows from operating activities: Net (loss) income $ (76) $ 20 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation 136 136 Amortization of loan costs 10 10 Bad debt expense 41 21 Change in accounts: Receivables and deposits (38) (13) Other assets (15) (9) Accounts payable (4) 3 Tenant security deposit liabilities 1 (3) Accrued property taxes (49) (34) Other liabilities (45) (17) Net cash (used in) provided by operating activities (39) 114 Cash flows from investing activities: Property improvements and replacements (72) (78) Net (deposits to) receipts from restricted escrows (22) 1 Net cash used in investing activities (94) (77) Cash flows from financing activities: Payments on mortgage note payable (39) (37) Distribution to partners (562) -- Net cash used in financing activities (601) (37) Net decrease in cash and cash equivalents (734) -- Cash and cash equivalents at beginning of period 895 782 Cash and cash equivalents at end of period $ 161 $ 782 Supplemental disclosure of cash flow information: Cash paid for interest $ 220 $ 224 See Accompanying Notes to Consolidated Financial Statements
MCCOMBS REALTY PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note A - Basis of Presentation The accompanying unaudited consolidated financial statements of McCombs Realty Partners (the "Partnership" or "Registrant"), a California limited partnership, 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 Partnership's general partner is CRPTEX, Inc. (the "General Partner"). In the opinion of the General Partner, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2002. 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, 2001. The General Partner is a subsidiary of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. Note B - Plan of Reorganization On March 9, 1987, the original general partners of the Partnership, on behalf of the Partnership, filed a voluntary petition under Chapter 11 of the Federal Bankruptcy Code in U.S. Bankruptcy Court, Central District of California ("Court"). The Partnership continued as Debtor-In-Possession to operate its business in the ordinary course until the Court confirmed the Partnership's Plan effective October 25, 1988. The Plan was approved by all required classes of creditors. The Plan required that the Partnership make the following payments on October 20, 1998: 1) First, all existing creditors, except prebankruptcy Class 12 creditors ($23,100), would be satisfied; 2) Limited Partners, both original and substitute, who made additional capital contributions under the plan would receive a repayment of the additional contributions totaling approximately $730,000; if sufficient funds were unavailable to fully satisfy this amount then a pro-rata portion would be paid based upon available funds; 3) Class 12 creditors would be paid claims aggregating $23,100; 4) Limited Partners who made additional capital contributions and were original Limited Partners would receive a repayment of their original capital contributions totaling approximately $9,818,000; if sufficient funds were unavailable to fully satisfy this amount then a pro-rata portion would be paid based upon available funds; 5) Limited Partners who did not make additional capital contributions would receive a repayment of one-third of their original capital contributions (i.e., one-third of $1,200,000); if sufficient funds were unavailable to fully satisfy this amount then a pro-rata portion would be paid based upon available funds. Additionally, the Plan required CRPTEX, Inc. to make a capital contribution of $14,500 and loan or expend an additional $117,500 on behalf of the Partnership on an as-needed basis. The Partnership received the $14,500 capital contribution but did not require the additional $117,500 to be loaned. The payments required by numbers 1 and 3 above were timely satisfied. In addition, all other claims provided for in the Plan then outstanding were settled on June 25, 1995 when the Partnership refinanced the then outstanding mortgages encumbering the property. With respect to the amounts due to the Limited Partners under numbers 2,4, and 5 above there were not sufficient funds available to completely satisfy these obligations at October 20, 1998. It was not anticipated that at October 20, 1998 there would be available funds to fully satisfy the unsecured claims of the Limited Partners, as indicated under the Plan. The limited partners were approached in August 1998 and asked to either approve a sale of the Partnership's sole investment property or for the General Partner to petition the Bankruptcy Court for an extension of the settlement date. The required fifty-one percent response was not received. As a result, the Partnership did not make any payments to the Limited Partners on October 20, 1998 as required by the Plan from available funds. There is no requirement, however, that the Partnership sell or again refinance the property in order to pay in part or in whole, the payments to the Limited Partners referred to above. The General Partner has determined that although all of the required payments under the Plan to the Limited Partners were not made that no default exists and that it is proper for the Partnership to continue operating under the terms of its Partnership Agreement as modified by the Plan. Since the expiration of the Plan on October 20, 1998, the General Partner had reserved all excess cash to ensure that the Partnership would be able to meet its operating and capital improvement needs rather than making pro-rata payments to the limited partners in accordance with numbers 2, 4, and 5 above. During the fourth quarter of 2001, the General Partner determined that the Partnership had accumulated approximately $562,000 in excess funds. Approximately $530,000 which had been reserved since 1998 to ensure that the property was fully able to meet its operating and capital improvement needs with existing operating funds was distributed during the six months ended June 30, 2002 in accordance with number 2 above. In addition, approximately $32,000 was distributed from recent operations during the six months ended June 30, 2002. Any additional funds will be distributed in accordance with the terms of the Partnership Agreement as modified by the Plan. 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 for reimbursement of certain expenses incurred by affiliates on behalf of the Partnership. During the six months ended June 30, 2002 and 2001, affiliates of the General Partner were entitled to receive 5% of gross receipts from the Partnership's investment property as compensation for providing property management services. The Partnership paid to such affiliates approximately $37,000 and $40,000 for the six months ended June 30, 2002 and 2001, respectively, which are included in operating expenses. Affiliates of the General Partner received reimbursement of accountable administrative expenses amounting to approximately $37,000 for both the six months ended June 30, 2002 and 2001, which are included in general and administrative expenses. Beginning in 2001, the Partnership began insuring its property up to certain limits through coverage provided by AIMCO which is generally self-insured for a portion of losses and liabilities related to workers compensation, property casualty and vehicle liability. The Partnership insures its property above the AIMCO limits through insurance policies obtained by AIMCO from insurers unaffiliated with the General Partner. During the six months ended June 30, 2002 and 2001, the Partnership was charged by AIMCO and its affiliates approximately $19,000 and $25,000, respectively, for insurance coverage and fees associated with policy claims administration. 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 Partnership from time to time. The discussion of the Partnership'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 Partnership'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 property consists of one apartment complex. The following table sets forth the average occupancy of the property for the six months ended June 30, 2002 and 2001: Average Occupancy Property 2002 2001 Lakewood at Pelham 88% 96% Greenville, South Carolina The General Partner attributes the decrease in occupancy at Lakewood at Pelham to increased market competition as a result of the slowdown in the economy in the Greenville area. Results of Operations The Registrant's net loss for the three and six months ended June 30, 2002 was approximately $28,000 and $76,000, respectively, compared to net income of approximately $2,000 and $20,000, respectively, for the three and six months ended June 30, 2001. The decrease in net income for both the three and six months ended June 30, 2002 is primarily due to a decrease in total revenues. The decrease in total revenues for the three months ended June 30, 2002 was partially offset by a slight decrease in total expenses. Total revenues decreased for both the three and six months ended June 30, 2002 due to a decrease in rental income and for the three months ended June 30, 2002 was partially offset by an increase in other income. The decrease in rental income for both the three and six months ended June 30, 2002 is due to the decrease in occupancy at Lakewood at Pelham, a decrease in the average rental rates charged, an increase in bad debt expense, and an increase in concessions at the property. The increase in other income for the three months ended June 30, 2002 is primarily due to an increase in lease cancellation fees. Other income remained relatively constant for the six months ended June 30, 2002. The decrease in total expenses for the three months ended June 30, 2002 is primarily due to a decrease in operating expense. The decrease in operating expense is primarily due to decreases in payroll related expenses, advertising expense, and management fees. The decrease in operating expense was partially offset by increases in utility expenses and insurance expense as a result of higher insurance premiums at the property. Operating expense remained relatively constant for the six months ended June 30, 2002 as an increase in insurance expense was offset by a decrease in management fees and payroll related expenses. General and administrative, depreciation, interest, and property tax expenses remained relatively constant for both the three and six months ended June 30, 2002. Included in general and administrative expenses at both June 30, 2002 and 2001 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. As part of the ongoing business plan of the Partnership, the General Partner monitors the rental market environment of its investment property 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 June 30, 2002, the Partnership had cash and cash equivalents of approximately $161,000 as compared to approximately $782,000 at June 30, 2001. The decrease in cash and cash equivalents of approximately $734,000, from the Partnership's calendar year end, is due to approximately $601,000 of cash used in financing activities, approximately $94,000 of cash used in investing activities, and approximately $39,000 of cash used in operating activities. Cash used in investing activities consisted of property improvements and replacements and, to a lesser extent, net deposits to escrow accounts maintained by the mortgage lender. Cash used in financing activities consisted primarily of distributions to partners and, to a lesser extent, payments of principal made on the mortgage encumbering the Partnership's investment property. The Partnership invests its working capital reserves in interest bearing 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 property 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 at the Partnership's investment property are detailed below. For 2002, the Partnership has budgeted approximately $110,000 for capital improvements at Lakewood at Pelham, consisting primarily of interior building improvements, lighting, and floor covering replacement. The Partnership completed approximately $72,000 in capital expenditures at Lakewood at Pelham as of June 30, 2002, consisting primarily of structural and interior building improvements and floor covering replacement. These improvements were funded from operations and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as the anticipated cash flow generated by the property and replacement reserve balances. 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 mortgage indebtedness on Lakewood at Pelham of approximately $5,424,000 is being amortized over 30 years with a balloon payment due July 2005. The General Partner may attempt to refinance such indebtedness and/or sell the property prior to such maturity date. If the property cannot be refinanced or sold for a sufficient amount, the Partnership will risk losing such property through foreclosure. On March 9, 1987, the original general partners of the Partnership, on behalf of the Partnership, filed a voluntary petition under Chapter 11 of the Federal Bankruptcy Code in U.S. Bankruptcy Court, Central District of California ("Court"). The Partnership continued as Debtor-In-Possession to operate its business in the ordinary course until the Court confirmed the Partnership's Plan of Reorganization (The "Plan") effective October 25, 1988. The Plan was approved by all required classes of creditors. The Plan required that the Partnership make the following payments on October 20, 1998: 1) First, all existing creditors, except prebankruptcy Class 12 creditors ($23,100), would be satisfied; 2) Limited Partners, both original and substitute, who made additional capital contributions under the plan would receive a repayment of the additional contributions totaling approximately $730,000; if sufficient funds were unavailable to fully satisfy this amount then a pro-rata portion would be paid based upon available funds; 3) Class 12 creditors would be paid claims aggregating $23,100; 4) Limited Partners who made additional capital contributions and were original Limited Partners would receive a repayment of their original capital contributions totaling approximately $9,818,000; if sufficient funds were unavailable to fully satisfy this amount then a pro-rata portion would be paid based upon available funds; 5) Limited Partners who did not make additional capital contributions would receive a repayment of one-third of their original capital contributions (i.e., one-third of $1,200,000); if sufficient funds were unavailable to fully satisfy this amount then a pro-rata portion would be paid based upon available funds. Additionally, the Plan required CRPTEX, Inc. to make a capital contribution of $14,500 and loan or expend an additional $117,500 on behalf of the Partnership on an as-needed basis. The Partnership received the $14,500 capital contribution but did not require the additional $117,500 to be loaned. The payments required by numbers 1 and 3 above were timely satisfied. In addition, all other claims provided for in the Plan then outstanding were settled on June 25, 1995 when the Partnership refinanced the then outstanding mortgages encumbering the property. With respect to the amounts due to the Limited Partners under numbers 2,4, and 5 above there were not sufficient funds available to completely satisfy these obligations at October 20, 1998. It was not anticipated that at October 20, 1998 there would be available funds to fully satisfy the unsecured claims of the Limited Partners, as indicated under the Plan. The limited partners were approached in August 1998 and asked to either approve a sale of the Partnership's sole investment property or for the General Partner to petition the Bankruptcy Court for an extension of the settlement date. The required fifty-one percent response was not received. As a result, the Partnership did not make any payments to the Limited Partners on October 20, 1998 as required by the Plan from available funds. There is no requirement, however, that the Partnership sell or again refinance the property in order to pay in part or in whole, the payments to the Limited Partners referred to above. The General Partner has determined that although all of the required payments under the Plan to the Limited Partners were not made that no default exists and that it is proper for the Partnership to continue operating under the terms of its Partnership Agreement as modified by the Plan. Since the expiration of the Plan on October 20, 1998, the General Partner had reserved all excess cash to ensure that the Partnership would be able to meet its operating and capital improvement needs rather than making pro-rata payments to the limited partners in accordance with numbers 2, 4, and 5 above. During the fourth quarter of 2001, the General Partner determined that the Partnership had accumulated approximately $562,000 in excess funds. Approximately $530,000 ($30.82 per limited partnership unit) which had been reserved since 1998 to ensure that the property was fully able to meet its operating and capital improvement needs with existing operating funds was distributed during the six months ended June 30, 2002 in accordance with number 2 above. In addition, approximately $32,000 (approximately $31,000 to the limited partners or $1.80 per limited partnership unit) was distributed from recent operations during the six months ended June 30, 2002. Any additional funds will be distributed in accordance with the terms of the Partnership Agreement as modified by the Plan. Other In addition to its indirect ownership of the general partner interests in the Partnership, AIMCO and its affiliates owned 3,666.5 limited partnership units in the Partnership representing 21.32% of the outstanding Units at June 30, 2002. A number of these Units were acquired pursuant to tender offers made by AIMCO or its affiliates. It is possible that AIMCO or its affiliates will acquire additional units of limited partnership interest in the Partnership in exchange for cash or a combination of cash and units in the operating partnership of AIMCO either through private purchases or tender offers. Under the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters which would include voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owed fiduciary duties to AIMCO as its sole Stockholder. As a result, the duties of the General Partner, as general partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to AIMCO, as its sole stockholder. Critical Accounting Policies and Estimates The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States which require the Partnership to make estimates and assumptions. The Partnership believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity. Impairment of Long-Lived Assets Investment property is recorded at cost, less accumulated depreciation, unless considered impaired. If events or circumstances indicate that the carrying amount of a property may be impaired, the Partnership will make an assessment of its recoverability by estimating the undiscounted future cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, the Partnership would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. Real property investments are subject to varying degrees of risk. Several factors may adversely affect the economic performance and value of the Partnership's investment properties. These factors include changes in the national, regional and local economic climate; local conditions, such as an oversupply of multifamily properties; competition from other available multifamily property owners and changes in market rental rates. Any adverse changes in these factors could cause an impairment in the Partnership's assets. Revenue Recognition The Partnership generally leases apartment units for twelve-month terms or less. Rental income attributable to leases is recognized monthly as it is earned. The Partnership will offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Concessions are charged to income as incurred. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 3.1, Amended and Restated Certificate and Agreement of Limited Parnters of McCombs Realty Partners, a California Limited Partnership, incorporated by reference to the exhibits to the Registrant's Annual Report filed on Form 10-K, filed on April 13, 1990. Exhibit 3.2, Certificate of Limited Partnership of the Partnership, incorporated by reference to the exhibits to the Registrant's Annual Report filed on Form 10-K, filed on April 13, 1990. Exhibit 99, Certification of Chief Executive Officer and Chief Financial Officer b) Reports on Form 8-K: Current Report on Form 8-K/A dated June 27, 2002 and filed on July 16, 2002, disclosing the dismissal of KPMG LLP as the Registrant's certifying auditor and the appointment of Ernst & Young LLP, as the certifying auditor for the year ending December 31, 2002. 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. MCCOMBS REALTY PARTNERS By: CRPTEX, INC. General Partner By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/Thomas C. Novosel Thomas C. Novosel Senior Vice President and Chief Accounting Officer Date: August 14, 2002 Exhibit 99 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-QSB of McCombs Realty Partners (the "Partnership"), for the quarterly period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Patrick J. Foye, as the equivalent of the Chief Executive Officer of the Partnership, and Paul J. McAuliffe, as the equivalent of the Chief Financial Officer of the Partnership, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/Patrick J. Foye Name: Patrick J. Foye Date: August 14, 2002 /s/Paul J. McAuliffe Name: Paul J. McAuliffe Date: August 14, 2002 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Partnership for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.