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 June 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.) One Insignia Financial Plaza, 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) June 30, 1998 Assets Cash and cash equivalents $ 1,138 Receivables and deposits (net of allowance of $16 for doubtful accounts) 484 Other assets 77 Investment properties: Land $ 1,121 Buildings and related personal property 14,414 15,535 Less accumulated depreciation (5,216) 10,319 $12,018 Liabilities and Partners' Capital (Deficit) Liabilities Accounts payable $ 17 Tenant security deposit liabilities 105 Accrued property taxes 477 Other liabilities 78 Partners' Capital (Deficit) General partners $ (53) Limited partners (15,698 units issued and outstanding) 11,394 11,341 $12,018 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 Six Months Ended June 30, June 30, 1998 1997 1998 1997 Revenues: Rental income $ 591 $ 561 $ 1,303 $ 1,324 Other income 55 47 92 86 Total revenues 646 608 1,395 1,410 Expenses: Operating 315 330 707 627 General and administrative 69 73 136 142 Depreciation 177 163 355 320 Property taxes 109 101 217 203 Casualty loss 22 -- 22 -- Total expenses 692 667 1,437 1,292 Net (loss) income $ (46) $ (59) $ (42) $ 118 Net (loss) income allocated to general partners (2%) $ (1) $ (1) $ (1) $ 2 Net (loss) income allocated to limited partners (98%) (45) (58) (41) 116 $ (46) $ (59) $ (42) $ 118 Net (loss) income per limited partnership unit $ (2.87) $ (3.69) $ (2.61) $ 7.39 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 six months ended June 30, 1998 -- (1) (41) (42) Partners' (deficit) capital at June 30, 1998 15,698 $ (53) $ 11,394 $ 11,341 <FN> See Accompanying Notes to Financial Statements </FN> d) HCW PENSION REAL ESTATE FUND LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended June 30, 1998 1997 Cash flows from operating activities: Net (loss) income $ (42) $ 118 Adjustments to reconcile net (loss)income to net cash provided by operating activities: Depreciation 355 320 Amortization of leasing commissions 2 2 Casualty loss 22 -- Change in accounts: Receivables and deposits (174) 25 Other assets (1) (27) Accounts payable (34) (42) Tenant security deposit liabilities (7) (56) Accrued property taxes 217 203 Other liabilities (42) (15) Net cash provided by operating activities 296 528 Cash flows from investing activities: Property improvements and replacements (197) (518) Net cash used in investing activities (197) (518) Cash flows from financing activities: Distributions to partners (300) -- Net cash used in financing activities (300) -- Net (decrease) increase in cash and cash equivalents (201) 10 Cash and cash equivalents at beginning of period 1,339 1,392 Cash and cash equivalents at end of period $ 1,138 $1,402 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 six month periods ended June 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. The Managing General Partner is a wholly-owned subsidiary of Insignia Properties Trust ("IPT"), an affiliate of Insignia Financial Group, Inc. ("Insignia"). The Partnership paid property management fees for property management services as noted below for the six months ended June 30, 1998 and 1997, respectively. The Partnership Agreement ("Agreement") provides that the Managing General Partner and its affiliates 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: Six Months Ended June 30, 1998 1997 (in thousands) Property management fees (included in operating expense) $ 79 $ 82 Asset management fees (included in general and administrative expense) 67 68 Reimbursement for services of affiliates (included in operating, general and administrative and investment properties) (1) 44 51 (1) Included in "reimbursements for services of affiliates" for the six months ended June 30, 1998, is approximately $3,000 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. On March 17, 1998, Insignia entered into an agreement to merge its national residential property management operations, and its controlling interest in IPT with Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. The closing, which is anticipated to happen in September or October of 1998, is subject to customary conditions, including government approvals and the approval of Insignia's shareholders. If the closing occurs, AIMCO will then control both the General Partner and the Managing General Partner of the Partnership. NOTE C - CASUALTY During the quarter ended June 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. 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 six months ended June 30, 1998 and 1997: Average Occupancy Property 1998 1997 Lewis Park Apartments Carbondale, Illinois 82% 80% Highland Professional Tower Kansas City, Missouri 66% 76% The Managing General Partner attributes the decrease in occupancy at Highland Professional Tower throughout 1997 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 June 30, 1998. Results of Operations The Partnership's net loss for the three months ended June 30, 1998, was approximately $46,000 versus approximately $59,000 for the three months ended June 30, 1997. The Partnership's net (loss) income for the six months ended June 30, 1998, was approximately ($42,000) versus approximately $118,000 for the six months ended June 30, 1997. The decrease in net income for the six month period 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 heating 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 decrease in net loss for the three month period ended June 30, 1998 is primarily attributable to an increase in rental income. Rental income increased due to rental rate increases at Lewis Park Apartments. The increase in rental income was partially offset by the casualty loss as described above. 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 June 30, 1998 is approximately $91,000 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 June 30, 1997 is approximately $8,000 of major repairs and maintenance comprised primarily of major landscaping and construction services. Liquidity and Capital Resources At June 30, 1998, the Partnership had cash and cash equivalents of approximately $1,138,000 compared to approximately $1,402,000 at June 30, 1997. The net (decrease) increase in cash and cash equivalents for the six months ended June 30, 1998 and 1997 is ($201,000) and $10,000, 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 distributions 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 property to adequately maintain the physical assets and other operating needs of the Partnership. Such assets are currently thought to be sufficient for any near-term needs of the Partnership. The Partnership paid accrued cash distributions of $6,000 to the General Partner and $294,000 to the limited partners during the six months ended June 30, 1998. No cash distributions were made during the six months ended June 30, 1997. Future cash distributions will depend on the levels of net cash generated from operations, capital expenditure requirements, property sales, financing, and the availability of cash reserves. Year 2000 The Partnership is dependent upon the Managing General Partner and Insignia for management and administrative services. Insignia has completed an assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter (the "Year 2000 Issue"). The project is estimated to be completed not later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Managing General Partner believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Partnership. 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 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: None filed during the quarter ended June 30, 1998. 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/Carroll D. Vinson Carroll D. Vinson President and Director By: /s/Robert D. Long, Jr. Robert D. Long, Jr. Vice President and Chief Accounting Officer Date: August 11, 1998