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 0-14578
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, P.O. 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
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 2002
Assets
Cash and cash equivalents $ 463
Receivables and deposits 128
Other assets 103
Investment property:
Land $ 621
Buildings and related personal property 9,953
10,574
Less accumulated depreciation (6,110) 4,464
$ 5,158
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 11
Tenant security deposit liabilities 114
Accrued property taxes 375
Other liabilities 153
Mortgage note payable 5,292
Partners' Deficit
General partner $ (150)
Limited partners (15,698 units issued and
outstanding) (637) (787)
$ 5,158
See Accompanying Notes to Financial Statements
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Revenues:
Rental income $ 436 $ 377 $ 916 $ 836
Other income 45 64 75 100
Total revenues 481 441 991 936
Expenses:
Operating 155 151 276 291
General and administrative 54 50 103 115
Depreciation 135 135 267 271
Interest 107 110 216 222
Property taxes 62 54 125 120
Total expenses 513 500 987 1,019
Net (loss) income $ (32) $ (59) $ 4 $ (83)
Net (loss) income allocated
to general partner (2%) $ (1) $ (2) $ -- $ (2)
Net (loss) income allocated
to limited partners (98%) (31) (57) 4 (81)
$ (32) $ (59) $ 4 $ (83)
Net (loss) income per limited
partnership unit $ (1.97) $ (3.63) $ 0.25 $ (5.16)
Distributions per limited
partnership unit $ 5.61 $ 8.15 $ 8.09 $ 44.40
See Accompanying Notes to Financial Statements
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(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 at
December 31, 2001 15,698 $ (147) $ (514) $ (661)
Distributions paid to partners -- (3) (127) (130)
Net income for the six months
ended June 30, 2002 -- -- 4 4
Partners' deficit
at June 30, 2002 15,698 $ (150) $ (637) $ (787)
See Accompanying Notes to Financial Statements
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net income (loss) $ 4 $ (83)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 267 271
Amortization of loan costs 2 2
Change in accounts:
Receivables and deposits 16 31
Other assets (11) (10)
Due from affiliate -- 57
Accounts payable 5 23
Tenant security deposit liabilities (14) (23)
Accrued property taxes 126 (123)
Other liabilities 2 (126)
Net cash provided by operating activities 397 19
Cash flows used in investing activities:
Property improvements and replacements (42) (22)
Cash flows from financing activities:
Distributions to partners (130) (700)
Payments on mortgage note payable (63) (57)
Net cash used in financing activities (193) (757)
Net increase (decrease) in cash and cash equivalents 162 (760)
Cash and cash equivalents at beginning of period 301 1,152
Cash and cash equivalents at end of period $ 463 $ 392
Supplemental disclosure of cash flow information:
Cash paid for interest $ 215 $ 220
See Accompanying Notes to Financial Statements
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 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 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 an affiliate of Apartment Investment
and Management Company ("AIMCO"), a publicly traded real estate investment
trust.
Note B - 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.
Affiliates of the Managing General Partner were entitled to receive 5% of gross
receipts from the Registrant's property for providing property management
services. The Registrant paid to such affiliates approximately $51,000 for both
of the six month periods ended June 30, 2002 and 2001, which is included in
operating expenses.
An affiliate of the Managing General Partner received reimbursement of asset
management fees amounting to approximately $42,000 and $50,000 for the six
months ended June 30, 2002 and 2001, respectively, which is included in
operating expenses.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $37,000 and
$36,000 for the six months ended June 30, 2002 and 2001, respectively, which is
included in operating 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 Managing General Partner. During the six months ended June
30, 2002 and 2001, the Partnership was charged by AIMCO and its affiliates
approximately $14,000 and $15,000, 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 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 property consists of one apartment complex located
in Carbondale, Illinois. The average occupancy of the property for the six
months ended June 30, 2002 and 2001 was 84% and 78%, respectively. The Managing
General Partner attributes the increase in occupancy to the restructuring of the
property's leases and the implementation of a resident retention program.
Results of Operations
The Partnership recognized net income of approximately $4,000 for the six months
ended June 30, 2002 as compared to a net loss of approximately $83,000 for the
six months ended June 30, 2001. The Partnership recognized a net loss of
approximately $32,000 and $59,000 for the three months ended June 30, 2002 and
2001, respectively. The increase in net income for the six months ended June 30,
2002 was attributable to an increase in total revenues and a decrease in total
expenses. The decrease in net loss for the three months ended June 30, 2002 was
due to an increase in total revenues partially offset by an increase in total
expenses. Total revenues increased for the three and six month periods ended
June 30, 2002 due to an increase in rental income slightly offset by a decrease
in other income. Rental income increased due to an increase in occupancy at
Lewis Park Apartments, increased student housing fees and reduced concessions
partially offset by reduced rental rates. Other income decreased due to
decreases in cleaning and damage fees and interest income partially offset by
increased nonrefundable administrative fees.
Total expenses decreased for the six months ended June 30, 2002 due to a
decrease in operating and general and administrative expenses. Operating
expenses decreased for the six months ended June 30, 2002 due to reduced
advertising and property expenses. Advertising expenses decreased due to the
increase in occupancy at the Partnership's investment property as discussed
above. Property expenses decreased due to reduced payroll and related benefits
at the Partnership's investment property. General and administrative expenses
decreased for the six months ended June 30, 2002 due to a decrease in asset
management fees paid to the Managing General Partner pursuant to the Partnership
Agreement.
Total expenses increased for the three months ended June 30, 2002 due to
increased property tax and general and administrative expenses. Property tax
expense increased for the three months ended June 30, 2002 due to a refund
received for prior years during the three months ended June 30, 2001. General
and administrative expenses increased for the three months ended June 30, 2002
due to increased professional fees associated with the management of the
Partnership, largely offset by reduced asset management fees paid to the
Managing General Partner.
Included in general and administrative expense at both June 30, 2002 and 2001
are management reimbursements to the Managing 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 Managing 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 Registrant 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 June 30, 2002, the Partnership had cash and cash equivalents of approximately
$463,000 as compared to approximately $392,000 at June 30, 2001. Cash and cash
equivalents increased approximately $162,000 from December 31, 2001, due to
approximately $397,000 of cash provided by operating activities slightly offset
by approximately $193,000 and $42,000 of cash used in financing and investing
activities, respectively. Cash used in financing activities consisted of
distributions paid to the partners and, to a lesser extent, principal payments
on the mortgage encumbering Lewis Park Apartments. Cash used in investing
activities consisted of property improvements and replacements. 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.
During the six months ended June 30, 2002, the Partnership completed
approximately $42,000 of capital improvements at Lewis Park Apartments,
consisting primarily of floor covering and appliance replacements, furniture and
fixtures and gutter replacements. These improvements were funded from operating
cash flow. The Partnership has budgeted approximately $90,000 for capital
improvements for 2002, consisting primarily of parking lot improvements and
appliance and floor covering replacements. Additional improvements may be
considered and will depend on the physical condition of the property as well as
anticipated cash flow generated by the property.
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 Registrant's current assets are thought to be sufficient for any short term
needs exclusive of capital improvements of the Partnership. The mortgage
indebtedness of approximately $5,292,000 is being amortized over 20 years with a
maturity date of September 1, 2020, at which time the loan is scheduled to be
fully amortized.
The Partnership distributed the following amounts during the six months ended
June 30, 2002 and 2001 (in thousands, except per unit data):
Six Months Per Limited Six Months Per Limited
Ended Partnership Ended Partnership
June 30, 2002 Unit June 30, 2001 Unit
Operations $ 130 $ 8.09 $ 153 $ 9.56
Financing (1) -- -- 547 34.84
$ 130 $ 8.09 $ 700 $44.40
(1) From the financing of Lewis Park Apartments in August 2000.
The Partnership's cash available for distribution is reviewed on a monthly
basis. Future cash distributions will depend on the levels of net cash generated
from operations, the availability of cash reserves, and the timing of debt
refinancing and/or a property sale. There can be no assurance 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 2002 or subsequent periods.
Other
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 5,464 limited partnership units (the
"Units") in the Partnership representing 34.81% of the outstanding units as of
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 without limitation, voting on certain amendments to the Partnership
Agreement and voting to remove the Managing General Partner. Although the
Managing General Partner owes fiduciary duties to the limited partners of the
Partnership, the Managing General Partner also owes fiduciary duties to AIMCO as
its sole stockholder. As a result, the duties of the Managing General Partner,
as managing general partner, to the Partnerships and its limited partners may
come into conflict with the duties of the Managing General Partner to AIMCO, as
its sole stockholder.
Critical Accounting Policies and Estimates
The 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
The Partnership's investment property is recorded at cost, less accumulated
depreciation, unless considered impaired. If events or circumstances indicate
that the carrying amount of the 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 property. 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, Limited Partnership Agreement, incorporated by
reference to Registration Statement No. 2-91006 on Form
S-11 filed by Registrant.
Exhibit 99, Certification of Chief Executive Officer and
Chief Financial Officer.
b) Reports on Form 8-K filed during the quarter ended June 30,
2002:
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.
HCW PENSION REAL ESTATE FUND LIMITED
PARTNERSHIP
By: HCW General Partner, Ltd.,
General Partner
By: IH, Inc.,
Managing 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 HCW Pension Real
Estate Fund Limited Partnership (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.