UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] 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 registrant 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)
March 31, 2003
Assets
Cash and cash equivalents $ 363
Receivables and deposits 130
Other assets 88
Investment property:
Land $ 621
Buildings and related personal property 10,036
10,657
Less accumulated depreciation (6,499) 4,158
$ 4,739
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 1
Tenant security deposit liabilities 125
Accrued property taxes 332
Other liabilities 89
Mortgage note payable 5,194
Partners' Deficit
General partner $ (153)
Limited partners (15,696 units issued and
outstanding) (849) (1,002)
$ 4,739
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
March 31,
2003 2002
Revenues:
Rental income $ 493 $ 480
Other income 24 30
Total revenues 517 510
Expenses:
Operating 121 121
General and administrative 51 49
Depreciation 130 132
Property taxes 70 63
Interest expense 106 109
Total expenses 478 474
Net income $ 39 $ 36
Net income allocated to general partner (2%) $ 1 $ 1
Net income allocated to limited partners (98%) 38 35
$ 39 $ 36
Net income per limited partnership unit $ 2.42 $ 2.23
Distributions per limited partnership unit $ -- $ 2.48
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, 2002 15,696 $ (154) $ (887) $(1,041)
Net income for the three months
ended March 31, 2003 -- 1 38 39
Partners' deficit at
March 31, 2003 15,696 $ (153) $ (849) $(1,002)
See Accompanying Notes to Financial Statements
HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
2003 2002
Cash flows from operating activities:
Net income $ 39 $ 36
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 130 132
Amortization of loan costs 1 1
Change in accounts:
Receivables and deposits (6) (6)
Other assets (2) (18)
Accounts payable (8) 3
Tenant security deposit liabilities 10 7
Accrued property taxes 70 63
Other liabilities (78) (61)
Net cash provided by operating activities 156 157
Cash flows used in investing activities:
Property improvements and replacements (20) (36)
Cash flows from financing activities:
Distributions to partners -- (40)
Payments on mortgage note payable (33) (31)
Net cash used in financing activities (33) (71)
Net increase in cash and cash equivalents 103 50
Cash and cash equivalents at beginning of period 260 301
Cash and cash equivalents at end of period $ 363 $ 351
Supplemental disclosure of cash flow information:
Cash paid for interest $ 105 $ 108
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 month period
ended March 31, 2003, are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2003. 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, 2002. The General Partner and Managing General Partner are both affiliates
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 are entitled to receive 5% of gross
receipts from the Partnership's residential property for providing property
management services. The Partnership paid to such affiliates approximately
$25,000 and $26,000 for the three months ended March 31, 2003 and 2002,
respectively, which is included in operating expenses.
Affiliates of the Managing General Partner received reimbursement of asset
management fees and accountable administrative expenses amounting to
approximately $39,000 and $37,000 for the three months ended March 31, 2003 and
2002, respectively, which is included in general and administrative expenses.
The Partnership insures 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 2003 and 2002 the Partnership's cost for
insurance coverage and fees associated with policy claims administration
provided by AIMCO and its affiliates will be approximately $17,000 and $21,000,
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 three
months ended March 31, 2003 and 2002 was 91% and 87%, respectively. The Managing
General Partner attributes the increase in occupancy to the implementation of a
resident retention program and the restructuring of the property's leases to
allow for lease terms to coincide with the local university school term as a
large portion of the tenants are university students.
Results of Operations
The Partnership realized net income of approximately $39,000 for the three
months ended March 31, 2003 compared to net income of approximately $36,000 for
the three months ended March 31, 2002. The increase in net income is due to an
increase in total revenues offset by an increase in total expenses.
Total revenues increased due primarily 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 as discussed above. Other income decreased
due to a decrease in late charges and administrative charges billed to
residents.
Total expenses increased for the three months ended March 31, 2003 due to an
increase in property tax expense slightly offset by a decrease in interest
expense. Property tax expense increased due to an understatement of the expense
recognized at Lewis Park Apartments during the three months ended March 31,
2002, which was based on an estimate of the 2002 tax liability. Interest expense
decreased due to scheduled principal payments made on the mortgage encumbering
Lewis Park Apartments which reduced the average outstanding balance during the
periods.
Included in general and administrative expense at both March 31, 2003 and 2002
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 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 March 31, 2003, the Partnership had cash and cash equivalents of
approximately $363,000 compared to approximately $351,000 at March 31, 2002.
Cash and cash equivalents increased approximately $103,000 from December 31,
2002, due to approximately $156,000 of cash provided by operating activities
which was partially offset by approximately $20,000 and $33,000 of cash used in
investing and financing activities, respectively. Cash used in investing
activities consisted of property improvements and replacements. Cash used in
financing activities consisted of principal payments made on the mortgage
encumbering Lewis Park Apartments. 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 three months ended March 31, 2003, the Partnership completed
approximately $20,000 of capital improvements at Lewis Park, consisting
primarily of floor covering replacements, furniture and fixtures, and cabinets.
These improvements were funded from operating cash flow. The Partnership
evaluates the capital improvement needs of the property during the year and
currently expects to complete an additional $60,000 in capital improvements
during the remainder of 2003. The additional capital improvements will consist
primarily of floor covering replacements, plumbing fixtures, appliances, air
conditioning and furniture and fixtures. 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 Partnership's assets are thought to be sufficient for any short-term needs
(exclusive of capital improvements) of the Partnership. The mortgage
indebtedness of approximately $5,194,000 is 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 three months ended
March 31, 2003 and 2002 (in thousands, except per unit data):
Three Months Per Limited Three Months Per Limited
Ended Partnership Ended Partnership
March 31, 2003 Unit March 31, 2002 Unit
Operations $ -- $ -- $ 40 $ 2.48
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 distributions to its partners
during the remainder of 2003 or subsequent periods.
Other
In addition to its indirect ownership of the general partner interest in the
Partnership, AIMCO and its affiliates owned 5,608 limited partnership units (the
"Units") in the Partnership representing 35.73% of the outstanding units as of
March 31, 2003. 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 and
the Partnership fully reserves all balances outstanding over thirty days. 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 Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b) Reports on Form 8-K filed during the first quarter of 2003:
None.
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.,
the 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: May 13, 2003
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: May 13, 2003
/s/Patrick J. Foye
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: May 13, 2003
/s/Paul J. McAuliffe
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 March 31, 2003 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: May 13, 2003
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: May 13, 2003
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.