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 September 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)
September 30, 2002
Assets
Cash and cash equivalents $ 124
Receivables and deposits 133
Other assets 96
Investment property:
Land $ 621
Buildings and related personal property 10,011
10,632
Less accumulated depreciation (6,239) 4,393
$ 4,746
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 1
Tenant security deposit liabilities 113
Accrued property taxes 191
Other liabilities 142
Mortgage note payable 5,260
Partners' Deficit
General partner $ (153)
Limited partners (15,698 units issued and
outstanding) (808) (961)
$ 4,746
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Revenues:
Rental income $ 429 $ 367 $ 1,345 $ 1,203
Other income 53 33 128 133
Total revenues 482 400 1,473 1,336
Expenses:
Operating 180 232 456 523
General and administrative 54 39 157 154
Depreciation 129 132 396 403
Interest 108 110 324 332
Property taxes 71 53 196 173
Total expenses 542 566 1,529 1,585
Net loss $ (60) $ (166) $ (56) $ (249)
Net loss allocated to
general partner (2%) $ (1) $ (3) $ (1) $ (5)
Net loss allocated to
limited partners (98%) (59) (163) (55) (244)
$ (60) $ (166) $ (56) $ (249)
Net loss per limited
partnership unit $ (3.76) $(10.38) $ (3.50) $(15.54)
Distributions per limited
partnership unit $ 7.13 $ -- $ 15.22 $ 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 -- (5) (239) (244)
Net loss for the nine months
Ended September 30, 2002 -- (1) (55) (56)
Partners' deficit
at September 30, 2002 15,698 $ (153) $ (808) $ (961)
See Accompanying Notes to Financial Statements
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
2002 2001
Cash flows from operating activities:
Net loss $ (56) $ (249)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 396 403
Amortization of loan costs 3 3
Change in accounts:
Receivables and deposits 11 (1)
Other assets (5) (4)
Due from affiliate -- 57
Accounts payable (5) 16
Tenant security deposit liabilities (15) 2
Accrued property taxes (58) (194)
Other liabilities (9) (86)
Net cash provided by (used in) operating activities 262 (53)
Cash flows used in investing activities:
Property improvements and replacements (100) (70)
Cash flows from financing activities:
Distributions to partners (244) (700)
Payments on mortgage note payable (95) (87)
Net cash used in financing activities (339) (787)
Net decrease in cash and cash equivalents (177) (910)
Cash and cash equivalents at beginning of period 301 1,152
Cash and cash equivalents at end of period $ 124 $ 242
Supplemental disclosure of cash flow information:
Cash paid for interest $ 322 $ 329
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 nine month
periods ended September 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.
Reclassifications
Certain reclassifications have been made to the 2001 information to conform to
the 2002 presentation.
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 $73,000 and
$69,000 for the nine months ended September 30, 2002 and 2001, respectively,
which is included in operating expenses.
An affiliate of the Managing General Partner received reimbursement of asset
management fees amounting to approximately $67,000 and $65,000 for the nine
months ended September 30, 2002 and 2001, respectively, which is included in
general and administrative expenses.
An affiliate of the Managing General Partner received reimbursement of
accountable administrative expenses amounting to approximately $54,000 and
$61,000 for the nine months ended September 30, 2002 and 2001, respectively,
which is 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 Managing General Partner. During the nine months ended
September 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 Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. The matters discussed
in this report contain certain forward-looking statements, including, without
limitation, statements regarding future financial performance and the effect of
government regulations. The discussions of the Registrant's business and results
of operations, including forward-looking statements pertaining to such matters,
do not take into account the effects of any changes to the Registrant's business
and results of operations. Actual results may differ materially from those
described in the forward-looking statements and will be affected by a variety of
risks and factors including, without limitation: national and local economic
conditions; the terms of governmental regulations that affect the Registrant and
interpretations of those regulations; the competitive environment in which the
Registrant operates; financing risks, including the risk that cash flows from
operations may be insufficient to meet required payments of principal and
interest; real estate risks, including variations of real estate values and the
general economic climate in local markets and competition for tenants in such
markets; and possible environmental liabilities. Readers should carefully review
the Registrant's financial statements and the notes thereto, as well as the risk
factors described in the documents the Registrant files from time to time with
the Securities and Exchange Commission.
The Partnership's investment property consists of one apartment complex located
in Carbondale, Illinois. The average occupancy of the property for the nine
months ended September 30, 2002 and 2001 was 82% and 74%, 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 a net loss of approximately $56,000 and $249,000 for
the nine months ended September 30, 2002 and 2001, respectively. The Partnership
recognized a net loss of approximately $60,000 and $166,000 for the three months
ended September 30, 2002 and 2001, respectively. The decrease in net loss for
the three and nine month periods ended September 30, 2002 was attributable to an
increase in total revenues and a decrease in total expenses. Total revenues
increased due primarily to an increase in rental income. Rental income increased
due to an increase in occupancy at Lewis Park Apartments and an increase in
student housing fees partially offset by reduced rental rates. In addition,
other income increased for the three months ended September 30, 2002 due to an
increase in parking income and nonrefundable administrative fees at Lewis Park
Apartments.
Total expenses decreased for the three and nine month periods ended September
30, 2002 due to a decrease in operating expense partially offset by an increase
in property tax expense. Operating expense decreased due to a decrease in
maintenance and advertising costs at the Partnership's investment property. The
decrease in maintenance expense is primarily the result of a decrease in the
costs of interior painting for the periods presented. Advertising costs
decreased as a result of the increase in occupancy at the Partnership's
investment property, as discussed above. Property tax expense increased due to
the timing of the receipt of the property tax bills from the taxing authorities.
The decrease in total expenses for the three months ended September 30, 2002 was
also offset by an increase in general and administrative expense due to
increased professional fees associated with the management of the Partnership.
Included in general and administrative expense at both September 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 September 30, 2002, the Partnership had cash and cash equivalents of
approximately $124,000 as compared to approximately $242,000 at September 30,
2001. Cash and cash equivalents decreased approximately $177,000 from December
31, 2001, due to approximately $339,000 and $100,000 of cash used in financing
and investing activities, respectively, slightly offset by approximately
$262,000 of cash provided by operating activities. 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. The Managing General Partner
monitors developments in the area of legal and regulatory compliance and is
studying new federal laws, including the Sarbanes-Oxley Act of 2002. The
Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures
with regard to governance, disclosure, audit and other areas. In light of these
changes, the Partnership expects that it will incur higher expenses related to
compliance, including increased legal and audit fees.
During the nine months ended September 30, 2002, the Partnership completed
approximately $100,000 of capital improvements at Lewis Park Apartments,
consisting primarily of floor covering and appliance replacements, parking lot
improvements, swimming pool upgrades, and gutter replacements. These
improvements were funded from operating cash flow. The Partnership has budgeted
approximately $111,000 for capital improvements for 2002, consisting primarily
of parking lot improvements and floor covering and gutter 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 $5,260,000 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 nine months ended
September 30, 2002 and 2001 (in thousands, except per unit data):
Nine Months Per Limited Nine Months Per Limited
Ended Partnership Ended Partnership
September 30, 2002 Unit September 30, 2001 Unit
Operations $ 244 $15.22 $ 153 $ 9.56
Financing (1) -- -- 547 34.84
$ 244 $15.22 $ 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
September 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 Partnership 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.
ITEM 3. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of the Managing
General Partner, who are the equivalent of the Partnership's principal executive
officer and principal financial officer, respectively, have, within 90 days of
the filing date of this quarterly report, evaluated the effectiveness of the
Partnership's disclosure controls and procedures (as defined in Exchange Act
Rules (13a-14(c) and (15d-14(c)) and have determined that such disclosure
controls and procedures are adequate. There have been no significant changes in
the Partnership's internal controls or in other factors that could significantly
affect the Partnership's internal controls since the date of evaluation. The
Partnership does not believe any significant deficiencies or material weaknesses
exist in the Partnership's internal controls. Accordingly, no corrective actions
have been taken.
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
September 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: November 13, 2002
CERTIFICATION
I, Patrick J. Foye, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of HCW Pension Real
Estate Fund Limited Partnership;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
_______________________
Patrick J. Foye
Executive Vice President of IH, Inc.,
equivalent of the chief executive officer of
the Partnership
CERTIFICATION
I, Paul J. McAuliffe, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of HCW Pension Real
Estate Fund Limited Partnership;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
_______________________
Paul J. McAuliffe
Executive Vice President and Chief Financial
Officer of IH, Inc., equivalent of the chief
financial officer of the Partnership
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 September 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: November 13, 2002
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: November 13, 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.