UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 0-14194
VMS NATIONAL PROPERTIES JOINT VENTURE
(Exact name of registrant as specified in its charter)
Illinois 36-3311347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
(Unaudited) (Note)
Assets:
Cash and cash equivalents $ 3,137 $ 5,048
Receivables and deposits 1,825 1,618
Restricted escrows 1,465 1,460
Other assets 701 308
Investment properties:
Land 13,404 13,404
Buildings and related personal property 147,480 146,056
160,884 159,460
Less accumulated depreciation (102,225) (98,975)
58,659 60,485
$ 65,787 $ 68,919
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 636 $ 1,718
Tenant security deposit liabilities 960 1,013
Accrued property taxes 518 569
Other liabilities 1,125 318
Accrued interest 1,000 999
Due to affiliate 3,753 3,608
Mortgage notes payable, including $26,529 and $28,250
due to an affiliate at June 30, 2002 and
December 31, 2001, respectively 130,773 133,272
Mortgage participation liability 6,312 4,091
Notes payable 42,060 42,060
Deferred gain on extinguishment of debt 42,225 42,225
Partners' Deficit (163,575) (160,954)
$ 65,787 $ 68,919
Note: The combined balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Revenues:
Rental income $ 7,463 $ 7,949 $14,819 $15,762
Other income 556 476 1,085 898
Casualty gain 208 24 208 24
Total revenues 8,227 8,449 16,112 16,684
Expenses:
Operating 2,581 2,309 4,977 4,714
Property management fee to an
affiliate 328 339 651 665
General and administrative 137 165 301 313
Depreciation 1,711 1,575 3,376 3,101
Interest 4,211 5,003 8,464 8,101
Property taxes 484 442 964 864
Total expenses 9,452 9,833 18,733 17,758
Net loss $(1,225) $(1,384) $(2,621) $(1,074)
Net loss allocated to general
partners (2%) $ (25) $ (27) $ (52) $ (21)
Net loss allocated to limited
partners (98%) (1,200) (1,357) (2,569) (1,053)
$(1,225) $(1,384) $(2,621) $(1,074)
Net loss per limited partnership interest:
Portfolio I (644 interests
issued and outstanding) $(1,317) $(1,489) $(2,820) $(1,155)
Portfolio II (267 interests
issued and outstanding) $(1,317) $(1,490) $(2,820) $(1,157)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands)
VMS National Residential Portfolio I
Limited Partners
Limited
General Accumulated Subscription Partners'
Partners Deficit Notes Total Total
Partners' deficit at
December 31, 2000 $(3,536) $(107,184) $ (502) $(107,686) $(111,222)
Net loss for the
six months ended
June 30, 2001 (15) (744) -- (744) (759)
Partners' deficit at
June 30, 2001 $(3,551) $(107,928) $ (502) $(108,430) $(111,981)
VMS National Residential Portfolio II
Limited Partners
Limited
General Accumulated Subscription Partners'
Partners Deficit Notes Total Total
Partners' deficit at
December 31, 2000 $(1,480) $ (45,014) $ (328) $ (45,342) $ (46,822)
Net loss for the
six months ended
June 30, 2001 (6) (309) -- (309) (315)
Partners' deficit at
June 30, 2001 $(1,486) $ (45,323) $ (328) $ (45,651) $ (47,137)
Combined total $(5,037) $(153,251) $ (830) $(154,081) $(159,118)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (continued)
(Unaudited)
(in thousands)
VMS National Residential Portfolio I
Limited Partners
General Accumulated Subscription
Partners Deficit Notes Total Total
Partners' deficit at
December 31, 2001 $(3,577) $(109,200) $ (502) $(109,702) $(113,279)
Net loss for the
six months ended
June 30, 2002 (37) (1,816) -- (1,816) (1,853)
Partners' deficit at
June 30, 2002 $(3,614) $(111,016) $ (502) $(111,518) $(115,132)
VMS National Residential Portfolio II
Limited Partners
General Accumulated Subscription
Partners Deficit Notes Total Total
Partners' deficit at
December 31, 2001 $(1,497) $ (45,850) $ (328) $ (46,178) $ (47,675)
Net loss for the
six months ended
June 30, 2002 (15) (753) -- (753) (768)
Partners' deficit at
June 30, 2002 $(1,512) $ (46,603) $ (328) $ (46,931) $ (48,443)
Combined total $(5,126) $(157,619) $ (830) $(158,449) $(163,575)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities:
Net loss $(2,621) $(1,074)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 3,376 3,101
Amortization of discounts 2,221 1,887
Casualty gain (208) (24)
Change in accounts:
Receivables and deposits (207) (106)
Other assets (393) (45)
Accounts payable (369) 238
Tenant security deposit liabilities (53) (11)
Due to affiliate 145 --
Accrued property taxes (51) (13)
Accrued interest 794 618
Other liabilities 807 245
Net cash provided by operating activities 3,441 4,816
Cash flows from investing activities:
Property improvements and replacements (2,315) (3,639)
Net (deposits to) withdrawals from restricted escrows (5) 1,648
Net insurance proceeds 260 31
Net cash used in investing activities (2,060) (1,960)
Cash flows from financing activities:
Payments on mortgage notes payable (3,292) (3,229)
Net decrease in cash and cash equivalents (1,911) (373)
Cash and cash equivalents at beginning of period 5,048 2,153
Cash and cash equivalents at end of period $ 3,137 $ 1,780
Supplemental disclosure of cash flow information:
Cash paid for interest, including approximately $796 and
$1,028 paid to an affiliate $ 5,304 $ 5,590
Supplemental disclosure of non-cash activity:
Accrued interest added to mortgage notes payable $ 793 $ 655
Mortgage participation liability and debt discounts $ -- $36,518
At June 30, 2002 and December 31, 2001 accounts payable and property
improvements and replacements were adjusted by approximately $130,000 and
$843,000, respectively.
At June 30, 2001 accounts payable and property improvements and replacements
were adjusted by approximately $499,000 which were included at December 31,
2000.
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited combined financial statements of VMS National
Properties Joint Venture (the "Venture" or "Registrant") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of MAERIL, Inc. ("MAERIL" or the "Managing General
Partner"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended June 30, 2002, are not necessarily indicative
of the results which may be expected for the year ending December 31, 2002. For
further information, refer to the combined financial statements and footnotes
thereto included in the Venture's Annual Report on Form 10-K for the year ended
December 31, 2001. The Managing General Partner is a wholly owned subsidiary of
Apartment Investment and Management Company ("AIMCO"), a publicly traded real
estate investment trust.
Note B - Deferred Gain and Notes Payable
Deferred Gain on Extinguishment of Debt:
When the senior and junior loans refinanced in 1997, the senior loans were
recorded at the agreed valuation amount of $110,000,000, which was less than the
$152,225,000 face amount of the senior debt. If the Venture defaults on the
mortgage notes payable or is unable to pay the outstanding agreed valuation
amounts upon maturity, then the note face amounts become due. Accordingly, the
Venture deferred recognition of a gain of $42,225,000, which is the difference
between the note face amounts and the agreed valuation amounts.
Assignment Note:
The Venture executed a purchase money subordinated note (the "Assignment Note")
payable to the VMS/Stout Venture, an affiliate of the former general partner, in
exchange for the assignment by the VMS/Stout Venture of its interest in the
contract of sale to the Venture. The Assignment Note is collateralized by the
pledge from Portfolio I and Portfolio II of their respective interests in the
Venture.
In November 1993, VMS Realty Partners assigned its 50% interest in the VMS/Stout
Venture to the Partners Liquidating Trust which was established for the benefit
of the former creditors of VMS Realty Partners and its affiliates.
At June 30, 2002 and December 31, 2001, the remaining $38,810,000 of the
Assignment Note is non-interest bearing and is payable only after payment of
debt of higher priority, including the senior and junior mortgage notes payable.
Pursuant to SOP 90-7, the Assignment Note, the Long-Term Loan Arrangement Fee
Note (as defined below) and related accrued interest were adjusted to the
present value of amounts to be paid using an estimated current interest rate of
11.5%. Interest expense was being recognized through the amortization of the
discount which became fully amortized in January 2000.
Long-Term Loan Arrangement Fee Note:
The Venture executed an unsecured, nonrecourse promissory note (the "Long-Term
Loan Arrangement Fee Note") payable to the VMS/Stout Venture as consideration
for arranging long-term financing.
The note in the amount of $3,250,000 does not bear interest and is payable only
after debt of a higher priority, including senior and junior mortgage loans have
been repaid.
Note C - Participating Mortgage Note
AIMCO Properties LP, which owns the Managing General Partner and which is a
controlled affiliate of AIMCO, purchased (i) the junior debt on November 19,
1999; (ii) a significant interest in the residual value of the properties on
November 16, 1999, and (iii) a significant interest in the Bankruptcy Claims (as
defined below) effective September 2000. These transactions occurred between
AIMCO Properties, LP and an unrelated third party and thus had no effect on the
combined financial statements of the Venture. Residual value is defined as the
amount remaining from a sale of the Venture's investment properties or
refinancing of the mortgages encumbering such investment properties after
payment of selling or refinancing costs and repayment of the senior and junior
debt, plus accrued interest on each. The agreement states that the Venture will
retain an amount equal to $13,500,000 plus accrued interest at 10% compounded
monthly (the "Partnership Advance Account") from the proceeds. Interest began
accruing on the Partnership Advance Account in 1993 when the bankruptcy plan was
finalized. Any proceeds remaining after the Partnership Advance Account is fully
funded are split equally (the "50/50 Split") between the Venture and AIMCO
Properties, LP. The Venture must repay the Assignment Note, the Long-term Loan
Arrangement Fee Note and other pre-petition claims (collectively the "Bankruptcy
Claims") which collectively total approximately $42,139,000 from the Partnership
Advance Account. Any amounts remaining in the Partnership Advance Account after
payment of the Bankruptcy Claims are split 75% to the Venture and 25% to AIMCO
Properties, LP.
The Venture has recorded the estimated fair value of the participation feature
as a liability and a debt discount of approximately $36,518,000. During the six
months ended June 30, 2002 and 2001, the Venture amortized approximately
$2,221,000 and $1,887,000, respectively, of the debt discount which is included
in interest expense. The Venture previously recognized amortization of
approximately $4,091,000 related to the debt discount as of December 31, 2001.
The fair value of the participation feature was calculated based upon
information currently available to the Managing General Partner and depends
largely upon the fair value of the collateral properties. These fair values were
determined using the net operating income of the properties capitalized at a
rate deemed reasonable for the type of property adjusted for market conditions,
the physical condition of the property and other factors. The Managing General
Partner evaluates the fair value of the participation feature on an annual basis
or as circumstances dictate that it should be analyzed.
Note D - Transactions with Affiliated Parties
The Venture has no employees and is dependent on the Managing General Partner
and its affiliates for the management and administration of all Venture
activities. The Revised and Amended Asset Management Agreement provides for (i)
certain payments to affiliates for real estate advisory services and asset
management of the Venture's retained properties for an annual compensation of
$300,000, adjusted annually by the consumer price index and (ii) reimbursement
of certain expenses incurred by affiliates on behalf of the Venture up to
$100,000 per annum.
Asset management fees of approximately $166,000 and $150,000 were paid to
affiliates of the Managing General Partner for the six months ended June 30,
2002 and 2001, respectively. These fees are included in general and
administrative expenses.
Affiliates of the Managing General Partner are entitled to receive a percentage
of the gross receipts from all of the Registrant's properties as compensation
for providing property management services. The Registrant paid to such
affiliates approximately $651,000 and $665,000 for the six months ended June 30,
2002 and 2001, respectively. These fees are included in operating expenses.
Affiliates of the Managing General Partner received reimbursement of accountable
administrative expenses amounting to approximately $50,000 and $59,000 for the
six month periods ended June 30, 2002 and 2001, respectively. These expenses are
included in general and administrative expenses.
During the six months ended June 30, 2002 and 2001, the Venture paid fees
related to construction management services provided by an affiliate of the
Managing General Partner of approximately $160,000 and $15,000, respectively.
The construction management service fees are calculated based on a percentage of
current additions to investment properties and are included in investment
properties.
An affiliate of the Managing General Partner received bookkeeping reimbursements
in the amount of approximately $62,000 for each of the six months ended June 30,
2002 and 2001. These expenses are included in operating expense.
At June 30, 2002 and December 31, 2001, the Venture owed loans of approximately
$3,606,000 to an affiliate of the Managing General plus accrued interest thereon
of approximately $147,000 and $2,000, respectively, which are included in due to
affiliate on the combined balance sheets. These loans were made in accordance
with the Joint Venture Agreement and bear interest at the prime rate plus 3%.
The Venture recognized interest expense of approximately $145,000 during the six
months ended June 30, 2002. No such interest was recognized during the six
months ended June 30, 2001.
Prepetition property management fees were approved by the Bankruptcy Court for
payment to a former affiliate. This allowed claim may be paid only from
available Venture cash. At June 30, 2002 and December 31, 2001, the outstanding
balance of $79,000 is included in other liabilities.
Certain affiliates of the former general partners and the VMS/Stout Venture may
be entitled to receive various fees upon disposition of the properties. These
fees will be paid from the disposition proceeds and are subordinated to the
distributions required by the bankruptcy plan. There were no property
dispositions for which proceeds were received during either of the six months
ended June 30, 2002 or 2001.
The junior debt is held by an affiliate of the Managing General Partner. The
monthly principal and interest payments are based on monthly excess cash flow
for each property, as defined in the mortgage agreement. During the six months
ended June 30, 2002 and 2001, the Venture recognized interest expense of
approximately $1,593,000 and $1,656,000, respectively.
Beginning in 2001, the Venture began insuring its properties 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 Venture insures its properties above the
AIMCO limits through insurance policies obtained by AIMCO from insurers
unaffiliated with the Managing General Partner. During the six months ended June
30, 2002 and 2001, the Venture was charged by AIMCO and its affiliates
approximately $440,000 and $308,000, respectively, for insurance coverage and
fees associated with policy claims administration.
Note E - Casualty Gain
During the six months ended June 30, 2002, a net casualty gain of approximately
$208,000 was recorded at Scotchollow. The casualty gain related to damage caused
by a fire at the property's clubhouse in January 2002. The gain was a result of
the receipt of insurance proceeds of approximately $260,000 offset by
approximately $52,000 of undepreciated fixed assets being written off.
During the six months ended June 30, 2001, a net casualty gain of approximately
$24,000 was recorded at Watergate Apartments. The casualty gain related to
damage caused by an ice storm in December 2000. The gain was a result of the
receipt of net insurance proceeds of approximately $31,000 offset by
approximately $7,000 of undepreciated fixed assets being written off.
Note F - Casualty Event
In February 2002, a fire occurred at Chapelle Le Grande which caused damage to
the property's clubhouse and surrounding structures. The restoration is
anticipated to be completed during 2002. Initial insurance proceeds of $101,000
were received during July 2002. The Managing General Partner does not anticipate
that this casualty will result in a loss to the Partnership.
Note G - Legal Proceedings
The Venture is not aware of any pending or outstanding litigation that is not of
a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The matters discussed in this Form 10-Q contain certain forward-looking
statements and involve risks and uncertainties (including changing market
conditions, competitive and regulatory matters, etc.) detailed in the
disclosures contained in this Form 10-Q and the other filings with the
Securities and Exchange Commission made by the Registrant from time to time. The
discussion of the Registrant's business and results of operations, including
forward-looking statements pertaining to such matters, does not take into
account the effects of any changes to the Registrant's business and results of
operation. Accordingly, actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those identified herein.
Average occupancy rates for the six months ended June 30, 2002 and 2001, for all
of the Venture's properties are as follows:
Average Occupancy
Property 2002 2001
North Park Apartments (1)
Evansville, IN 96% 89%
Chapelle Le Grande (2)
Merrillville, IN 98% 93%
Terrace Gardens
Omaha, NE 94% 94%
Forest Ridge Apartments (3)
Flagstaff, AZ 95% 98%
Scotchollow (4)
San Mateo, CA 89% 97%
Pathfinder (4)
Fremont, CA 84% 97%
Buena Vista Apartments (5)
Pasadena, CA 97% 94%
Mountain View Apartments
San Dimas, CA 97% 97%
Crosswood Park (6)
Citrus Heights, CA 92% 96%
Casa de Monterey
Norwalk, CA 97% 95%
The Bluffs (1)
Milwaukie, OR 95% 92%
Watergate Apartments (7)
Little Rock, AR 90% 94%
Shadowood Apartments
Monroe, LA 96% 96%
Vista Village Apartments (8)
El Paso, TX 97% 88%
The Towers of Westchester Park
College Park, MD 98% 98%
(1) The increase in occupancy at North Park Apartments and The Bluffs is due
to aggressive resident retention and marketing programs implemented by the
property management teams.
(2) The increase in occupancy at Chapelle Le Grande is due to several units
being uninhabitable during the first and second quarters of 2001 due to
water damage. The units were occupied during the first and second quarters
of 2002.
(3) The decrease in occupancy at Forest Ridge Apartments is due primarily to a
slow market caused by a warm winter affecting the local skiing industry.
(4) Scotchollow and Pathfinder are both located in the San Francisco Bay area
which was significantly impacted by layoffs in the airline industry as a
result of the terrorist attacks of September 11, 2001. In addition,
several local companies in the high tech industry have laid off employees.
Both complexes have experienced increases in occupancy near the end of the
second quarter.
(5) The increase in occupancy at Buena Vista Apartments is a result of a
policy of not increasing rental rates for renewing leases which has
decreased tenant turnover.
(6) The decrease in occupancy at Crosswood Park is due to many first-time home
buyers as a result of lower interest rates. Crosswood Park has also been
affected by a weak economy due to layoffs in the Citrus Heights area.
(7) The decrease in occupancy at Watergate Apartments is the result of local
competition reducing rental rates to attract tenants. The complex
management has implemented a similar plan to combat the effects of
competitor concessions.
(8) The increase in occupancy at Vista Village Apartments is a result of
concessions offered to potential tenants in order to better compete in the
local market.
Results of Operations
The Venture recorded a net loss for the six months ended June 30, 2002 of
approximately $2,621,000 compared to a net loss of approximately $1,074,000 for
the corresponding period in 2001. For the three months ended June 30, 2002 the
Venture recorded a net loss of approximately $1,225,000 as compared to a net
loss of approximately $1,384,000 for the corresponding period in 2001. The
increase in net loss for the six month period above is due to an increase in
expenses and a decrease in revenues. The decrease in net loss for the three
month period above is due to a decrease in expenses slightly offset by a
decrease in revenues.
For the six months ended June 30, 2002 as compared to June 30, 2001 the increase
in expenses is primarily attributable to increases in interest, operating,
depreciation and property tax expenses. Interest expense increased due to an
increase in the amortization of the debt discount related to the mortgage
participation liability and to the interest recognized on the loan made to the
Partnership in December 2001 by the Managing General Partner. Operating expenses
increased primarily due to increases in insurance costs at all of the Venture's
properties and increased maintenance expenses at Scotchollow and Pathfinder
Village offset by decreased natural gas costs at ten of the Venture's
properties. Depreciation expense increased due to property improvements and
replacements placed into service during the past twelve months which are now
being depreciated. Property tax expense increased due to an increase in the
assessed value and tax rates by the local taxing authorities at Crosswood Park,
Casa de Monterey and Vista Village Apartments. Revenues decreased primarily due
to significant decreases in occupancy at Scotchollow and Pathfinder Village and
decreases in rental rates at six of the Venture's properties. These decreases
were partially offset by the casualty gain at Scotchollow as discussed below and
increases in other income which consist primarily of increased utility
reimbursements.
The decrease in the net loss for the three month period ended June 30, 2002 as
compared with the same time period in 2001 is due to a decrease in interest
expense caused by a large principal reduction payment on the junior debt late in
the first quarter of 2002 offset by increases in operating and depreciation
expenses as discussed above.
During the six months ended June 30, 2002, a net casualty gain of approximately
$208,000 was recorded at Scotchollow. The casualty gain related to damage caused
by a fire at the property's clubhouse in January 2002. The gain was a result of
the receipt of insurance proceeds of approximately $260,000 offset by
approximately $52,000 of undepreciated fixed assets being written off.
During the six months ended June 30, 2001, a net casualty gain of approximately
$24,000 was recorded at Watergate Apartments. The casualty gain related to
damage caused by an ice storm in December 2000. The gain was a result of the
receipt of net insurance proceeds of approximately $31,000 offset by
approximately $7,000 of undepreciated fixed assets being written off.
As part of the ongoing business plan of the Venture, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Venture from increases in
expenses. As part of this plan, the Managing General Partner attempts to protect
the Venture from the burden of inflation-related increases in expenses by
increasing rents and maintaining a high overall occupancy level. However, due to
changing market conditions, which can result in the use of rental concessions
and rental reductions to offset softening market conditions, there is no
guarantee that the Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At June 30, 2002, the Venture had cash and cash equivalents of approximately
$3,137,000 as compared to approximately $1,780,000 at June 30, 2001. Cash and
cash equivalents decreased approximately $1,911,000 for the six months ended
June 30, 2002, from December 31, 2001. The decrease in cash and cash equivalents
is a result of approximately $3,292,000 and $2,060,000 of cash used in financing
and investing activities, respectively, which was partially offset by
approximately $3,441,000 of cash provided by operating activities. Cash used in
financing activities consisted of principal payments on the mortgages
encumbering the Venture's investment properties. Cash used in investing
activities consisted of property improvements and replacements and, to a lesser
extent, net deposits to restricted escrow accounts maintained by the mortgage
lender partially offset by the receipt of insurance proceeds from a casualty at
Scotchollow.
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 properties to adequately maintain the physical
assets and other operating needs of the Venture and to comply with Federal,
state and local legal and regulatory requirements. Capital improvements planned
for each of the Venture's properties are detailed below.
The Venture is restricted to annual capital improvements of $300 per unit for
all of the properties, which is the limit set by the junior debt for funding of
capital improvements. The Venture, the holder of the junior debt encumbering the
properties and the servicer of the senior debt encumbering the properties have
agreed to a procedure to assess whether or not capital expenditures, in addition
to those permitted under the $300 per unit limit, are needed at the properties
and the methodology for funding any such capital expenditures. During 1999, the
Venture and the holders of the junior and senior debt agreed that additional
capital expenditures were required and that these expenditures would be funded
out of the cash flows from the properties that otherwise would have been
utilized to pay debt services on the junior debt. In November 1999, an agreement
was signed relating to the required capital expenditures at Towers of
Westchester Park. In July 2000, similar agreements were signed relating to North
Park Apartments, Scotchollow, Pathfinder Village, Buena Vista Apartments,
Mountain View Apartments, Casa de Monterey and The Bluffs. In August 2000,
agreements were signed relating to Shadowood Apartments, Crosswood Park, Vista
Village Apartments, Watergate Apartments, Chapelle Le Grande, and Forest Ridge
Apartments and in September 2000, an agreement was signed relating to Terrace
Gardens. As of June 30, 2002, funds to pay for these expenditures have been set
aside and the Venture has resumed making monthly payments on the junior debt to
the extent of monthly excess cash flow.
North Park Apartments: As of June 30, 2002, all capital expenditures required
under the agreement signed in July 2000, as discussed above, have been
completed. In addition, approximately $85,000 is budgeted for capital
improvements for the year ending December 31, 2002, consisting primarily of
floor covering replacements, air conditioning upgrades and interior decorations.
The Venture completed approximately $64,000 in capital expenditures at North
Park Apartments during the six months ended June 30, 2002, consisting primarily
of floor covering replacements, plumbing fixtures and appliances. These
improvements were funded from operating cash flow and replacement reserves.
Chappelle Le Grande: As of June 30, 2002, all capital expenditures required
under the agreement signed in August 2000, as discussed above, have been
completed. In addition, approximately $32,000 is budgeted for capital
improvements for the year ending December 31, 2002, consisting primarily of
floor covering, appliance and air conditioning replacements. The Venture
completed approximately $17,000 in capital expenditures at Chappelle Le Grande
during the six months ended June 30, 2002, consisting primarily of floor
covering replacements and office computers. These improvements were funded from
operating cash flow and replacement reserves.
Terrace Gardens: The methodology discussed above for funding the required
capital expenditures has been applied to Terrace Gardens. The parties agreed
that this property required capital expenditures which have a revised completion
date of September 30, 2002 and which are estimated to cost approximately
$433,000, of which approximately $340,000 were completed as of June 30, 2002.
Approximately $23,000 of these expenditures were completed during 2002. These
costs were funded out of cash flows from the property that otherwise would have
been utilized to service the junior debt. In addition, approximately $38,000 is
budgeted for capital improvements for the year ending December 31, 2002,
consisting primarily of floor covering replacements. The Venture completed
approximately $31,000 in capital expenditures, including the aforementioned
capital expenditures, at Terrace Gardens during the six months ended June 30,
2002, consisting primarily of floor covering replacements. These improvements
were funded from operating cash flow and replacement reserves.
Forest Ridge Apartments: As of June 30, 2002, all capital expenditures required
under the agreement signed in August 2000, as discussed above, have been
completed. In addition, approximately $83,000 is budgeted for capital
improvements for the year ending December 31, 2002, consisting primarily of
floor covering and appliance replacements, water heaters and plumbing fixtures.
The Venture completed approximately $60,000 in capital expenditures at Forest
Ridge Apartments during the six months ended June 30, 2002, consisting primarily
of floor covering replacements, water heaters, plumbing fixtures, and office
computers. These improvements were funded from operating cash flow and
replacement reserves.
Scotchollow: The methodology discussed above for funding the required capital
expenditures has been applied to Scotchollow. The parties agreed that this
property required capital expenditures which have a revised completion date of
September 30, 2002 and which are estimated to cost approximately $941,000, of
which approximately $900,000 were completed as of June 30, 2002. Approximately
$7,000 of these expenditures were completed during 2002. These costs were funded
out of cash flows from the property that otherwise would have been utilized to
service the junior debt. In addition, approximately $133,000 is budgeted for
capital improvements for the year ending December 31, 2002, consisting primarily
of floor covering and appliance replacements, interior decoration, plumbing
fixtures and other structural improvements. The Venture completed approximately
$365,000 in capital expenditures, including the aforementioned capital
expenditures, at Scotchollow during the six months ended June 30, 2002 and
expenditures related to a fire at the property during January 2002 which
resulted in approximately $300,000 of replacement costs. The capital
expenditures to date consist primarily of floor covering replacements,
structural improvements, plumbing fixtures, interior decoration, and appliance
replacements. These improvements were funded from insurance proceeds, operating
cash flow and replacement reserves.
Pathfinder Village: The methodology discussed above for funding the required
capital expenditures has been applied to Pathfinder Village. The parties agreed
that this property required capital expenditures which have a revised completion
date of September 30, 2002 and which are estimated to cost approximately
$1,237,000. As of June 30, 2002, the Partnership has spent approximately
$1,261,000 on these budgeted items. Approximately $38,000 of these expenditures
were completed during 2002. These costs were funded out of cash flows from the
property that otherwise would have been utilized to service the junior debt. In
addition, approximately $128,000 is budgeted for capital improvements for the
year ending December 31, 2002, consisting primarily of floor covering and
appliance replacements, interior decoration, plumbing fixtures and other
structural improvements. The Venture completed approximately $440,000 in capital
expenditures, including the aforementioned expenditures, at Pathfinder Village
during the six months ended June 30, 2002, consisting primarily of floor
covering and roof replacements, structural improvements, window dressings, land
improvements, and appliance replacements. These improvements were funded from
operating cash flow and replacement reserves.
Buena Vista Apartments: As of June 30, 2002, all capital expenditures required
under the agreement signed in July 2000, as discussed above, have been
completed. In addition, approximately $46,000 is budgeted for capital
improvements for the year ending December 31, 2002, consisting primarily of
floor covering and appliance replacements. The Venture completed approximately
$35,000 in capital expenditures at Buena Vista Apartments during the six months
ended June 30, 2002, consisting primarily of floor covering and appliance
replacements and plumbing fixtures. These improvements were funded from
operating cash flow and replacement reserves.
Mountain View Apartments: As of June 30, 2002, all capital expenditures required
under the agreement signed in July 2000, as discussed above, have been
completed. In addition, approximately $68,000 is budgeted for capital
improvements for the year ending December 31, 2002, consisting primarily of
floor covering and appliance replacements, plumbing fixtures, water heaters, air
conditioning and cabinet upgrades and furniture and fixtures. The Venture
completed approximately $76,000 in capital expenditures at Mountain View
Apartments during the six months ended June 30, 2002, consisting primarily of
floor covering replacements, structural improvements and plumbing fixtures.
These improvements were funded from operating cash flow and replacement
reserves.
Crosswood Park: The methodology discussed above for funding the required capital
expenditures has been applied to Crosswood Park. The parties agreed that this
property required capital expenditures which have a revised completion date of
September 30, 2002 and which are estimated to cost approximately $301,000, of
which approximately $283,000 were completed as of June 30, 2002. Approximately
$35,000 of these expenditures were completed during 2002. These costs were
funded out of cash flows from the property that otherwise would have been
utilized to service the junior debt. In addition, approximately $132,000 is
budgeted for capital improvements for the year ending December 31, 2002,
consisting primarily of floor covering replacements, structural improvements,
major landscaping, appliance replacements and air conditioning upgrades. The
Venture completed approximately $136,000 in capital expenditures, including the
aforementioned capital expenditures, at Crosswood Park during the six months
ended June 30, 2002, consisting primarily of structural improvements, air
conditioning upgrades, floor covering replacements, major landscaping, and
appliance replacements. These improvements were funded from operating cash flow
and replacement reserves.
Casa de Monterey: As of June 30, 2002, all capital expenditures required under
the agreement signed in July 2000, as discussed above, have been completed. In
addition, approximately $43,000 is budgeted for capital improvements for the
year ending December 31, 2002, consisting primarily of floor covering and
appliance replacements, office computers, plumbing and air conditioning
upgrades. The Venture completed approximately $66,000 in capital expenditures at
Casa de Monterey during the six months ended June 30, 2002, consisting primarily
of floor covering replacements, structural improvements, appliance replacements,
plumbing fixtures and parking lot improvements. These improvements were funded
from operating cash flow and replacement reserves.
The Bluffs: The methodology discussed above for funding the required capital
expenditures has been applied to The Bluffs. The parties agreed that this
property required capital expenditures which have a revised completion date of
September 30, 2002 and which are estimated to cost approximately $52,000, of
which approximately $29,000 were completed as of June 30, 2002. Approximately
$12,000 of these expenditures were completed during 2002. These costs were
funded out of cash flows from the property that otherwise would have been
utilized to service the junior debt. In addition, approximately $41,000 is
budgeted for capital improvements for the year ending December 31, 2002,
consisting primarily of floor covering replacements, interior decoration and
plumbing fixtures. The Venture completed approximately $46,000 in capital
expenditures, including the aforementioned capital expenditures, at The Bluffs
during the six months ended June 30, 2002, consisting primarily of floor
covering and appliance replacements, plumbing fixtures, interior decoration and
furnishings. These improvements were funded from operating cash flow and
replacement reserves.
Watergate Apartments: The methodology discussed above for funding the required
capital expenditures has been applied to Watergate Apartments. The parties
agreed that this property required capital expenditures which have a revised
completion date of September 30, 2002 and which are estimated to cost
approximately $186,000, of which approximately $131,000 were completed as of
June 30, 2002. Approximately $45,000 of these expenditures were completed during
2002. These costs were funded out of cash flows from the property that otherwise
would have been utilized to service the junior debt. In addition, approximately
$125,000 is budgeted for capital improvements for the year ending December 31,
2002, consisting primarily of roof repairs, floor covering and appliance
replacements and air conditioning and plumbing upgrades. The Venture completed
approximately $87,000 in capital expenditures, including the aforementioned
capital expenditures, at North Park Apartments during the six months ended June
30, 2002, consisting primarily of roof repairs, floor covering and appliance
replacements and structural improvements. These improvements were funded from
operating cash flow and replacement reserves.
Shadowood Apartments: As of June 30, 2002, all capital expenditures required
under the agreement signed in August 2000, as discussed above, have been
completed. In addition, approximately $39,000 is budgeted for capital
improvements for the year ending December 31, 2002, consisting primarily of
floor covering and appliance replacements and water heater, air conditioning and
plumbing upgrades. The Venture completed approximately $28,000 in capital
expenditures at Shadowood Apartments during the six months ended June 30, 2002,
consisting primarily of floor covering and appliance replacements and air
conditioning upgrades. These improvements were funded from operating cash flow.
Vista Village Apartments: As of June 30, 2002, all capital expenditures required
under the agreement signed in August 2000, as discussed above, have been
completed. In addition, approximately $83,000 is budgeted for capital
improvements for the year ending December 31, 2002, consisting primarily of
floor covering replacements and parking lot resurfacing. The Venture completed
approximately $72,000 in capital expenditures at Vista Village Apartments during
the six months ended June 30, 2002, consisting primarily of water heaters, air
conditioning upgrades, floor covering and appliance replacements and parking lot
resurfacing. These improvements were funded from operating cash flow and
replacement reserves.
Towers of Westchester Park: As of June 30, 2002, all capital expenditures
required under the agreement signed in November 1999, as discussed above, have
been completed. In addition, approximately $106,000 is budgeted for capital
improvements for the year ending December 31, 2002, consisting primarily of
major landscaping, cabinet, floor covering and appliance replacements, interior
decoration, heating and air conditioning upgrades and plumbing fixtures. The
Venture completed approximately $79,000 in capital expenditures at Towers of
Westchester Park during the six months ended June 30, 2002, consisting primarily
of heating upgrades, plumbing fixtures, interior decorations, and appliance
replacements. These improvements were funded from operating cash flow and
replacement reserves.
The Venture initially budgeted $888,000 ($300 per unit) for all of the
properties which is equal to the limit set by the junior notes for funding of
capital improvements. As the Venture identifies properties which require
additional improvements discussions are held with the holders of both the senior
and junior mortgage notes for approval to perform agreed upon capital
improvements.
The Registrant's current assets are thought to be sufficient for any near-term
needs (exclusive of capital improvements) of the Registrant. The senior debt
encumbering all of the properties totals approximately $104,244,000 and is being
amortized over 25 years, with a balloon payment of $93,243,000 due January 2008.
Not including the debt discount relating to the mortgage participation
liability, the junior debt, which also matures January 2008, totals
approximately $26,529,000 and requires monthly payments based upon monthly
excess cash flow for each property. The Assignment Note and Long-Term
Arrangement Fee Notes totaling approximately $42,060,000 are non-interest
bearing and are subordinate to the senior and junior debt and are only payable
from the proceeds of the sale or refinancing of the properties.
There were no cash distributions to the partners of either of the Partnerships
for the six months ended June 30, 2002 and 2001. In accordance with the
respective Agreements of Limited Partnership, there are no material restrictions
on the Partnerships' ability to make cash distributions. Future cash
distributions are subject to the order of distributions as stipulated by
Venture's Plan of Reorganization. The source of future distributions will depend
upon the levels of net cash generated from operations, the availability of cash
reserves, and timing of debt maturities, refinancings and/or property sales. The
Partnerships' distribution policies are reviewed on a quarterly basis. There can
be no assurance that the Partnerships will generate sufficient funds from
operations, after required capital expenditures and the order of distributions
as stipulated by the Venture's Plan of Reorganization, to permit any
distributions to partners during the remainder of 2002 or subsequent periods.
Other
As a result of tender offers, AIMCO and its affiliates currently own 66.25 units
of limited partnership interest in Portfolio I representing 10.29% of the
outstanding limited partnership interests, along with the 2% general partner
interest for a combined ownership in Portfolio I of 12.29%. AIMCO and its
affiliates currently own 37.83 units of limited partnership interest in
Portfolio II representing 14.17% of the outstanding limited partnership
interests, along with the 2% general partner interest for a combined ownership
in Portfolio II of 16.17%. The Venture is owned 70.69% by Portfolio I and 29.31%
by Portfolio II which results in AIMCO and its affiliates currently owning
13.43% of the Venture. It is possible that AIMCO or its affiliates will make one
or more additional offers to acquire additional units of limited partnership
interest in the Partnerships 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 Agreements, unitholders holding a majority
of the Units are entitled to take action with respect to a variety of matters,
which would include without limitation, voting on certain amendments to the
Partnership Agreement and voting to remove the Managing General Partner.
Although the Managing General Partner owes fiduciary duties to the limited
partners of the Partnership, the Managing General Partner also owes fiduciary
duties to AIMCO as its sole stockholder. As a result, the duties of the Managing
General Partner, as managing general partner, to the Partnerships and its
limited partners may come into conflict with the duties of the Managing General
Partner to AIMCO, as its sole stockholder.
Critical Accounting Policies and Estimates
The combined financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the Venture to
make estimates and assumptions. The Venture believes that of its significant
accounting policies, the following may involve a higher degree of judgment and
complexity.
Impairment of Long-Lived Assets
Investment properties are recorded at cost, less accumulated depreciation,
unless considered impaired. If events or circumstances indicate that the
carrying amount of a property may be impaired, the Venture 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 Venture 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 Venture's
investment properties. 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 Venture's assets.
Revenue Recognition
The Venture generally leases apartment units for twelve-month terms or less.
Rental income attributable to leases is recognized monthly as it is earned. The
Venture 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.
Participating Mortgage Note
The Venture has a participating mortgage note which requires it to record the
estimated fair value of the participation feature as a liability and a debt
discount. The fair value of the participation feature is calculated based upon
information currently available to the Managing General Partner and depends
largely upon the fair value of the collateral properties. These fair values are
determined using the net operating income of the properties capitalized at a
rate deemed reasonable for the type of property adjusted for market conditions,
physical condition of the property and other factors. The Managing General
Partner evaluates the fair value of the participation feature on an annual basis
or as circumstances dictate that it should be analyzed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Venture is exposed to market risks from adverse changes in interest rates.
In this regard, changes in U.S. interest rates affect the interest earned on the
Venture's cash and cash equivalents as well as interest paid on its
indebtedness. As a policy, the Venture does not engage in speculative or
leveraged transactions, nor does it hold or issue financial instruments for
trading purposes. The Venture is exposed to changes in interest rates primarily
as a result of its borrowing activities used to maintain liquidity and fund
business operations. To mitigate the impact of fluctuations in U.S. interest
rates, the Venture maintains its debt as fixed rate in nature by borrowing on a
long-term basis except for advances made from an affiliate of the Managing
General Partner. These advances bear interest at the prime rate plus three basis
points. Based on interest rates at June 30, 2002, an increase or decrease of 100
basis points in market interest rates would not have a material impact on the
Venture.
The following table summarizes the Venture's debt obligations at June 30, 2002.
The interest rates represent the weighted-average rates. The fair value of the
Venture's first mortgages, after discounting the scheduled loan payments to
maturity, is approximately $109,839,000 at June 30, 2002, however, the Venture
is precluded from refinancing the first mortgage until January 2007. The
Managing General Partner believes that it is not appropriate to use the
Venture's incremental borrowing rate for the second mortgages, as there is
currently no market in which the Venture could obtain similar financing.
Therefore, the Managing General Partner considers estimation of fair value to be
impracticable for this indebtedness.
Long-term Debt
Principal Weighted-average
(in thousands) Interest Rate
2002 $ 787 8.50%
2003 1,705 8.50%
2004 1,832 8.50%
2005 2,022 8.50%
2006 2,201 8.50%
Thereafter 122,226 9.01%
$130,773
As principal payments for the junior loans are based upon monthly cash flow, all
principal is assumed to be repaid at maturity.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 3(a), VMS National Properties Joint Venture Agreement
(Exhibit 3 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001, is incorporated herein by
reference).
Exhibit 3(b), Amended and Restated Limited Partnership
Agreement and Certificate of Limited Partnership of VMS
National Properties Portfolio I (Exhibit 3 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
2001, is incorporated herein by reference).
Exhibit 3(c), Amended and Restated Limited Partnership
Agreement and Certificate of Limited Partnership of VMS
National Properties Portfolio II (Exhibit 3 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001, is incorporated herein by reference).
Exhibit 11, Calculation of Net Loss Per Investor.
Exhibit 99, Certification of Chief Executive Officer and
Chief Financial Officer.
b) Reports on Form 8-K:
None filed during the quarter ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VMS NATIONAL PROPERTIES JOINT VENTURE
(Registrant)
VMS National Residential Portfolio I
By: MAERIL, 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
VMS National Residential Portfolio II
By: MAERIL, Inc.
Managing General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Thomas C. Novosel
Thomas C. Novosel
Senior Vice President
and Chief Accounting Officer
Date: August 14, 2002
Exhibit 11
VMS NATIONAL PROPERTIES JOINT VENTURE
CALCULATION OF NET LOSS PER INVESTOR
(in thousands, except unit data)
For the Six Months
Ended June 30,
2002 2001
VMS National Properties net loss $(2,621) $(1,074)
Portfolio I net loss -- --
Portfolio II net loss -- --
Combined net loss $(2,621) $(1,074)
Portfolio I allocation: 70.69% $(1,853) $ (759)
Net loss to general partner (2%) $ (37) $ (15)
Net loss to limited partners (98%) $(1,816) $ (744)
Number of Limited Partner units 644 644
Net loss per limited partnership interest $(2,820) $(1,155)
Portfolio II allocation: 29.31% $ (768) $ (315)
Net loss to general partner (2%) $ (15) $ (6)
Net loss to limited partners (98%) $ (753) $ (309)
Number of Limited Partner units 267 267
Net loss per limited partnership interest $(2,820) $(1,157)
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-Q of VMS National Properties
Joint Venture (the "Venture"), for the quarterly period ended June 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Patrick J. Foye, as the equivalent of the Chief Executive Officer of
the Venture, and Paul J. McAuliffe, as the equivalent of the Chief Financial
Officer of the Venture, 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 Venture.
/s/ Patrick J. Foye
Name: Patrick J. Foye
Date: August 14, 2002
/s/ Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: August 14, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Venture for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.