FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 QUARTERLY OR TRANSITIONAL REPORT U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from.........to......... Commission file number 0-14578 HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP (Exact name of small business issuer as specified in its charter) Massachusetts 04-2825863 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, P.O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP BALANCE SHEET (Unaudited) (in thousands, except unit data) September 30, 1998 Assets Cash and cash equivalents $ 1,157 Receivables and deposits (net of allowance of $17 for doubtful accounts) 378 Other assets 76 Investment properties: Land $ 1,121 Buildings and related personal property 14,598 15,719 Less accumulated depreciation (5,435) 10,284 $11,895 Liabilities and Partners' Capital (Deficit) Liabilities Accounts payable $ 80 Tenant security deposit liabilities 142 Accrued property taxes 309 Other liabilities 112 Partners' Capital (Deficit) General partners $ (55) Limited partners (15,698 units issued and outstanding) 11,307 11,252 $11,895 See Accompanying Notes to Financial Statements b) HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except unit data) Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Revenues: Rental income $ 586 $ 586 $ 1,889 $1,910 Other income 51 58 143 144 Total revenues 637 644 2,032 2,054 Expenses: Operating 371 400 1,078 1,027 General and administrative 61 74 197 216 Depreciation 219 174 574 494 Property taxes 75 103 292 306 Casualty loss -- -- 22 -- Total expenses 726 751 2,163 2,043 Net (loss) income $ (89) $ (107) $ (131) $ 11 Net (loss) income allocated to general partners (2%) $ (2) $ (2) $ (3) $ -- Net (loss) income allocated to limited partners (98%) (87) (105) (128) 11 $ (89) $ (107) $ (131) $ 11 Net (loss) income per limited partnership unit $ (5.54) $(6.68) $ (8.15) $ .69 See Accompanying Notes to Financial Statements c) HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) (Unaudited) (in thousands, except unit data) Limited Partnership General Limited Units Partners Partners Total Original capital contributions 15,698 $ -- $15,698 $15,698 Partners' (deficit) capital at December 31, 1997 15,698 $ (52) $11,435 $11,383 Net loss for the nine months ended September 30, 1998 -- (3) (128) (131) Partners' (deficit) capital at September 30, 1998 15,698 $ (55) $11,307 $11,252 See Accompanying Notes to Financial Statements d) HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 1998 1997 Cash flows from operating activities: Net (loss) income $ (131) $ 11 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 574 494 Amortization of leasing commissions 2 3 Casualty loss (gain) 22 (1) Change in accounts: Receivables and deposits (68) 130 Other assets -- (23) Accounts payable 29 (50) Tenant security deposit liabilities 30 (45) Accrued property taxes 49 59 Other liabilities (8) 53 Net cash provided by operating activities 499 631 Cash flows from investing activities: Net insurance proceeds -- 51 Property improvements and replacements (381) (943) Net cash used in investing activities (381) (892) Cash flows from financing activities: Distribution to partners (300) -- Net decrease in cash and cash equivalents (182) (261) Cash and cash equivalents at beginning of period 1,339 1,392 Cash and cash equivalents at end of period 1,157 1,131 See Accompanying Notes to Financial Statements e) HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of HCW Pension Real Estate Fund Limited Partnership (the "Partnership") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Article 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 Partners 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, 1998, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1998. For further information, refer to the financial statements and footnotes thereto included in the Partnership's annual report on Form 10-KSB for the year ended December 31, 1997. Certain reclassifications have been made to the 1997 information to conform to the 1998 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. Affiliates of the Managing General Partner provide property management and asset management services to the Partnership. The Partnership paid property management fees for property management services as noted below for the nine months ended September 30, 1998 and 1997, respectively. The Partnership Agreement (the "Agreement") provides for the Managing General Partner and its affiliates to be paid asset management fees based on "tangible asset value" as defined in the Agreement. The Agreement also provides for reimbursement to the Managing General Partner and its affiliates for costs incurred in connection with the administration of Partnership activities. The Managing General Partner and its affiliates received reimbursements and fees as reflected in the following table: Nine Months Ended September 30, 1998 1997 (in thousands) Property management fees (included in operating expense) $112 $117 Asset management fees (included in general and administrative expense) 101 102 Reimbursement for services of affiliates (included in operating, general and administrative and investment properties) (1) 66 110 (1) Included in "reimbursements for services of affiliates" for the nine months ended September 30, 1998 and 1997, is approximately $4,000 and $28,000, respectively, in reimbursements for construction oversight costs. For the period January 1, 1997 to August 31, 1997, the Partnership insured its properties under a master policy through an agency affiliated with the Managing General Partner with an insurer unaffiliated with the Managing General Partner. An affiliate of the Managing General Partner acquired, in the acquisition of a business, certain financial obligations from an insurance agency which was later acquired by the agent who placed the master policy. The agent assumed the financial obligations to the affiliate of the Managing General Partner, which receives payments on these obligations from the agent. The amount of the Partnership's insurance premiums accruing to the benefit of the affiliate of the General Partner by virtue of the agent's obligations is not significant. NOTE C - CASUALTY During the nine months ended September 30, 1998, the Partnership recorded a casualty loss resulting from a storm that damaged the roofs at Lewis Park Apartments during 1997. The damage resulted in a loss of approximately $22,000 arising from the write-off of the basis of the property which was replaced. NOTE D - TRANSFER OF CONTROL; SUBSEQUENT EVENT On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and into Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control of the Managing General Partner. In addition, AIMCO also acquired approximately 51% of the outstanding common shares of beneficial interest of Insignia Properties Trust ("IPT"), the sole shareholder of the Managing General Partner of the Partnership. Also, effective October 1, 1998 IPT and AIMCO entered into an Agreement and plan of Merger pursuant to which IPT is to be merged with and into AIMCO or a subsidiary of AIMCO (the "IPT Merger"). The IPT Merger requires the approval of the holders of a majority of the outstanding IPT Shares. AIMCO has agreed to vote all of the IPT Shares owned by it in favor of the IPT Merger and has granted an irrevocable limited proxy to unaffiliated representatives of IPT to vote the IPT Shares acquired by AIMCO and its subsidiaries in favor of the IPT Merger. As a result of AIMCO's ownership and its agreement, the vote of no other holder of IPT is required to approve the merger. The Managing General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Partnership. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The Partnership's investment properties consist of one apartment complex and one office building. The following table sets forth the average occupancy of the properties for the nine months ended September 30, 1998 and 1997: Average Occupancy Property 1998 1997 Lewis Park Apartments Carbondale, Illinois 81% 80% Highland Professional Tower Kansas City, Missouri 65% 75% The Managing General Partner attributes the decrease in occupancy at Highland Professional Tower to the loss of a major tenant during the fourth quarter of 1997 and to deferred maintenance that needed to be performed at the property. The Managing General Partner renovated and repaired Highland Professional Tower's common areas during the year ending December 31, 1997 in an effort to attract additional tenants. Although all renovations were substantially complete at the beginning of 1998, the property has not seen any resulting increase in its tenant base as of September 30, 1998. Results of Operations The Partnership's net loss for the three months ended September 30, 1998, was approximately $89,000 versus a loss of approximately $107,000 for the three months ended September 30, 1997. The Partnership's net (loss) income for the nine months ended September 30, 1998, was approximately ($131,000) versus approximately $11,000 for the nine months ended September 30, 1997. The decrease in net income for the nine month comparable periods is primarily attributable to a decrease in rental income, and increases in operating and depreciation expense and the casualty loss recognized in 1998. Rental income decreased due to the decrease in occupancy at Highland Professional Tower as discussed above. Operating expenses increased due to an increase in maintenance expense as a result of parking lot repairs and air conditioning repairs at Highland Professional Tower and gutter repairs at Lewis Park. Depreciation expense increased due to fixed asset additions related to the renovation project at Highland Professional Park as discussed above. The casualty loss resulted from a storm that damaged the roofs at Lewis Park Apartments during 1997. The damage resulted in a loss arising from the write-off of the basis of the property, which was replaced during 1998. The increase in net income for the comparable three month period was due to a decrease in operating, general and administrative, and property tax expenses while revenues remained relatively constant. 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. Included in operating expense at September 30, 1998 is approximately $108,000 of major repairs and maintenance comprised primarily of parking lot repairs at Highland Professional Tower and gutter repairs at Lewis Park. Included in operating expense at September 30, 1997 is approximately $21,000 of major repairs and maintenance comprised primarily of major landscaping and construction services. Liquidity and Capital Resources At September 30, 1998, the Partnership had cash and cash equivalents of approximately $1,157,000 compared to approximately $1,131,000 at September 30, 1997. The net decrease in cash and cash equivalents for the nine months ended September 30, 1998 and 1997 is $182,000 and $261,000, respectively. Net cash provided by operating activities decreased due to the decrease in net income as discussed above and an increase in receivables and deposits as a result of an increase in required tax escrow accounts. Net cash used in investing activities decreased due to a decrease in property improvements and replacements in 1998 as compared to 1997 as a result of the renovation project at Highlands Professional Tower. Net cash used in financing activities increased due to the payment in January 1998 of a distribution to partners declared and accrued December 1997. 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 various properties to adequately maintain the physical assets and other operating needs of the Partnership and to comply with federal, state and local legal and regulatory requirements. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. The General Partner is currently assessing the need for capital improvements at each of the Partnership's properties. To the extent that additional capital improvements are required, the Partnership's distributable cash flow, if any, may be adversely affected at least in the short term. The Partnership paid accrued cash distributions of $6,000 to the General Partner and $294,000 to the limited partners during the nine months ended September 30, 1998. No cash distributions were made during the nine months ended September 30, 1997. Future cash distributions will depend on the levels of net cash generated from operations, refinancings, property sales and the availability of cash reserves. The Partnership's distribution policy will be reviewed on a quarterly basis. There can be no assurance, however, that the Partnership will generate sufficient funds from operations to permit distributions to its partners in 1998 or subsequent periods. Transfer of Control; Subsequent Event On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and into Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control of the Managing General Partner. In addition, AIMCO also acquired approximately 51% of the outstanding common shares of beneficial interest of Insignia Properties Trust ("IPT"), the sole shareholder of the Managing General Partner of the Partnership. Also, effective October 1, 1998 IPT and AIMCO entered into an Agreement and plan of Merger pursuant to which IPT is to be merged with and into AIMCO or a subsidiary of AIMCO (the "IPT Merger"). The IPT Merger requires the approval of the holders of a majority of the outstanding IPT Shares. AIMCO has agreed to vote all of the IPT Shares owned by it in favor of the IPT Merger and has granted an irrevocable limited proxy to unaffiliated representatives of IPT to vote the IPT Shares acquired by AIMCO and its subsidiaries in favor of the IPT Merger. As a result of AIMCO's ownership and its agreement, the vote of no other holder of IPT is required to approve the merger. The Managing General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Partnership. Year 2000 GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Partnership is dependent upon the Managing General Partner and its affiliates for management and administrative services ("Managing Agent"). Any computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Managing Agent has determined that it will be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Managing Agent presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Managing Agent and the Partnership. STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT The Managing Agent's plan to resolve the Year 2000 Issue involves the following four phases: assessment, remediation, testing and implementation. To date, the Managing Agent has fully completed its assessment of all information systems that could be significantly affected by the Year 2000, and has begun the remediation, testing and implementation phase on both hardware and software systems. Assessments are continuing in regards to embedded systems in operating equipment. The Managing Agent anticipates having all phases complete by June 1, 1999. In addition to the areas the Partnership is relying on the Managing Agent to verify compliance with, the Partnership has certain operating equipment, primarily at the property sites, which needed to be evaluated for Year 2000 compliance. The focus of the Managing General Partner was to the security systems, elevators, heating-ventilation-air-conditioning systems, telephone systems and switches, and sprinkler systems. The Managing General Partner is currently engaged in the identification of all non-compliant operational systems, and is in the process of estimating the costs associated with any potential modifications or replacements needed to such systems in order for them to be Year 2000 compliant. It is not expected that such costs would have a material adverse affect upon the operations of the Partnership. RISK ASSOCIATED WITH THE YEAR 2000 The Managing General Partner believes that the Managing Agent has an effective program in place to resolve the Year 2000 issue in a timely manner and has appropriate contingency plans in place for critical applications that could affect the Partnership's operations. To date, the Managing General Partner is not aware of any external agent with a Year 2000 issue that would materially impact the Partnership's results of operations, liquidity or capital resources. However, the Managing General Partner has no means of ensuring that external agents will be Year 2000 compliant. The Managing General Partner does not believe that the inability of external agents to complete their Year 2000 resolution process in a timely manner will have a material impact on the financial position or results of operations of the Partnership. However, the effect of non-compliance by external agents is not readily determinable. Other Certain items discussed in this quarterly report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act") and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Partnership to be materially different from future results, performance, or achievements expressed or implied by such forward- looking statements. Such forward-looking statements speak only as of the date of this quarterly report. The Partnership expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained herein to reflect any change in the Partnership's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDING On July 30, 1998, certain entities claiming to own limited partnership interests in certain limited partnerships whose general partners were, at the time, affiliates of Insignia filed a complaint entitled EVEREST PROPERTIES LLC. V. INSIGNIA FINANCIAL GROUP, INC. in the Superior Court of the State of California, County of Los Angeles. The action involves 44 real estate limited partnerships (including the Partnership) in which the plaintiffs allegedly own interests and which Insignia Affiliates allegedly manage or control (the "Subject Partnerships"). The complaint names as defendants Insignia, several Insignia Affiliates alleged to be managing partners of the Subject Partnerships, the Partnership and the Managing General Partner. Plaintiffs allege that they have requested from, but have been denied by each of the Subject Partnerships, lists of their respective limited partners for the purpose of making tender offers to purchase up to 4.9% of the limited partner units of each of the Subject Partnerships. The complaint also alleges that certain of the defendants made tender offers to purchase limited partner units in many of the Subject Partnerships, with the alleged result that plaintiffs have been deprived of the benefits they would have realized from ownership of the additional units. The plaintiffs assert eleven causes of action, including breach of contract, unfair business practices, and violations of the partnership statutes of the states in which the Subject Partnerships are organized. Plaintiffs seek compensatory, punitive and treble damages. The Managing General Partner filed an answer to the complaint on September 15, 1998. The Managing General Partner believes the claims to be without merit and intends to defend the action vigorously. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. b) Reports on Form 8-K: Form 8-K filed on September 30, 1998 to disclose a change in auditors (amended on October 26, 1998 on Form 8-K/A). SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP By: HCW General Partner Ltd., the General Partner By: IH, Inc., the General Partner By: /s/Patrick Foye Patrick Foye Executive Vice President By: /s/ Timothy R. Garrick Timothy R. Garrick Vice President - Accounting (Duly Authorized Officer) Date: November 12, 1998