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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] 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)
Registrant's telephone number (864) 239-1000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the registrant: (1) has 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___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rate 12b-2). Yes ___ No X__
State the aggregate market value of the voting partnership interests held by
non-affiliates computed by reference to the price at which the partnership
interests were sold, or the average bid and asked prices of such partnership
interests, as of December 31, 2002. No market exists for the limited partnership
interests of the Registrant, and, therefore, no aggregate market value can be
determined.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
The matters discussed in this report contain certain forward-looking statements,
including, without limitation, statements regarding future financial performance
and the effect of government regulations. The discussions of the Registrant's
business and results of operations, including forward-looking statements
pertaining to such matters, do not take into account the effects of any changes
to the Registrant's business and results of operations. Actual results may
differ materially from those described in the forward-looking statements and
will be affected by a variety of risks and factors including, without
limitation: national and local economic conditions; the terms of governmental
regulations that affect the Registrant and interpretations of those regulations;
the competitive environment in which the Registrant operates; financing risks,
including the risk that cash flows from operations may be insufficient to meet
required payments of principal and interest; real estate risks, including
variations of real estate values and the general economic climate in local
markets and competition for tenants in such markets; and possible environmental
liabilities. Readers should carefully review the Registrant's financial
statements and the notes thereto, as well as the risk factors described in the
documents the Registrant files from time to time with the Securities and
Exchange Commission.
PART I
Item 1. Description of Business
VMS National Properties Joint Venture (the "Venture" or the "Registrant"), of
which the general partners are VMS National Residential Portfolio I ("Portfolio
I") and VMS National Residential Portfolio II ("Portfolio II"), was formed in
September 1984. Portfolio I and Portfolio II are collectively referred to as the
"Partnerships". The Partnerships are limited partnerships formed in September
1984, under the Uniform Limited Partnership Act of the State of Illinois.
Effective December 12, 1997, the managing general partner of each of the
Partnerships was transferred from VMS Realty Investment, Ltd. ("VMSRIL")
(formerly VMS Realty Partners) to MAERIL, Inc. ("MAERIL" or the "Managing
General Partner"), a wholly-owned subsidiary of MAE GP Corporation ("MAE GP")
and an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective
February 25, 1998, MAE GP was merged with Insignia Properties Trust ("IPT"),
which was an affiliate of Insignia. Effective October 1, 1998 and February 26,
1999, Insignia and IPT were respectively merged into Apartment Investment and
Management Company ("AIMCO"), a publicly traded real estate investment trust.
Thus, the Managing General Partner is now a wholly-owned subsidiary of AIMCO.
From the period October 26, 1984, through June 16, 1985, the Partnerships sold
912 Limited Partnership Interests ("Interests") at a price of $150,000 per
Limited Partnership Interest for a total of $136,800,000. The Interests of each
Partnership were offered in reliance upon exemptions from registration under the
Securities Act of 1933, as amended (the "Act"), and Regulation D thereunder. The
participation interest in the Venture of Portfolio I and Portfolio II is
approximately 71% and 29%, respectively.
The Venture originally acquired 51 residential apartment complexes located
throughout the United Sates. At December 31, 2002, 34 of the Venture's
properties had been foreclosed and two had been sold. The Venture continues to
own and operate the remaining 15 residential apartment complexes (see "Item 2.
Description of Properties").
The Managing General Partner intends to maximize the operating results and,
ultimately, the net realizable value of each of the Venture's properties in
order to achieve the best possible return for the investors. Such results may
best be achieved through property sales, refinancings, debt restructurings or
relinquishment of the assets. The Venture intends to evaluate each of its
holdings periodically to determine the most appropriate strategy for each of the
assets.
The Registrant has no employees. Management and administrative services are
provided by the Managing General Partner and by agents retained by the Managing
General Partner. In addition to day-to-day management of the properties'
operations, affiliates of the Managing General Partner also provide real estate
advisory and asset management services to the Venture. As advisor, such
affiliates provide all partnership accounting and administrative services,
investment management, and supervisory services over property management and
leasing.
Risk Factors
The real estate business in which the Registrant is engaged is highly
competitive. There are other residential properties within the market area of
the Registrant's properties. The number and quality of competitive properties,
including those which may be managed by an affiliate of the Managing General
Partner, in such market area could have a material effect on the rental market
for the apartments at the Registrant's properties and the rents that may be
charged for such apartments. While the Managing General Partner and its
affiliates own and/or control a significant number of apartment units in the
United States, such units represent an insignificant percentage of total
apartment units in the United States and competition for the apartments is
local.
Laws benefiting disabled persons may result in the Partnership's incurrence of
unanticipated expenses. Under the Americans with Disabilities Act of 1990, or
ADA, all places intended to be used by the public are required to meet certain
Federal requirements related to access and use by disabled persons. Likewise,
the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties
first occupied after March 13, 1990 to be accessible to the handicapped. These
and other Federal, state and local laws may require modifications to the
Partnership's properties, or restrict renovations of the properties.
Noncompliance with these laws could result in the imposition of fines or an
award of damages to private litigants and also could result in an order to
correct any non-complying feature, which could result in substantial capital
expenditures. Although the Managing General Partner believes that the
Partnership's properties are substantially in compliance with present
requirements, the Venture may incur unanticipated expenses to comply with the
ADA and the FHAA.
Both the income and expenses of operating the properties owned by the Registrant
are subject to factors outside of the Registrant's control, such as changes in
the supply and demand for similar properties resulting from various market
conditions, increases in unemployment or population shifts, changes in the
availability of permanent mortgage financing, changes in zoning laws, or changes
in patterns or needs of users. In addition, there are risks inherent in owning
and operating residential properties because such properties are susceptible to
the impact of economic and other conditions outside of the control of the
Registrant.
There have been, and it is possible there may be other, Federal, state, and
local legislation and regulations enacted relating to the protection of the
environment. The Venture is unable to predict the extent, if any, to which such
new legislation or regulations might occur and the degree to which such existing
or new legislation or regulations might adversely affect the properties owned by
the Venture.
The Venture monitors its properties for evidence of pollutants, toxins and other
dangerous substances, including the presence of asbestos. In certain cases
environmental testing has been performed, which resulted in no material adverse
conditions or liabilities. In no case has the Venture received notice that it is
a potentially responsible party with respect to an environmental clean up site.
Insurance coverage is becoming more expensive and difficult to obtain. The
current insurance market is characterized by rising premium rates, increasing
deductibles, and more restrictive coverage language. Recent developments have
resulted in significant increases in insurance premiums and have made it more
difficult to obtain certain types of insurance. As an example, many insurance
carriers are excluding mold-related risks from their policy coverages, or are
adding significant restrictions to such coverage. Continued deterioration in
insurance market place conditions may have a negative effect on the
Partnership's operating results.
A further description of the Registrant's business is included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in "Item 7" of this Form 10-K.
Item 2. Description of Properties
The following table sets forth the Venture's remaining investment in properties:
Date of
Property (1) Purchase Use
North Park Apartments 11/14/84 Apartment
Evansville, IN 284 Units
Chapelle Le Grande 12/05/84 Apartment
Merrillville, IN 105 Units
Terrace Gardens 10/26/84 Apartment
Omaha, NE 126 Units
Forest Ridge Apartments 10/26/84 Apartment
Flagstaff, AZ 278 Units
Scotchollow 10/26/84 Apartment
San Mateo, CA 418 Units
Pathfinder Village 10/26/84 Apartment
Freemont, CA 246 Units
Buena Vista Apartments 10/26/84 Apartment
Pasadena, CA 92 Units
Mountain View Apartments 10/26/84 Apartment
San Dimas, CA 168 Units
Crosswood Park 12/05/84 Apartment
Citrus Heights, CA 180 Units
Casa de Monterey 10/26/84 Apartment
Norwalk, CA 144 Units
The Bluffs 10/26/84 Apartment
Milwaukee, OR 137 Units
Watergate Apartments 10/26/84 Apartment
Little Rock, AR 140 Units
Shadowood Apartments 11/14/84 Apartment
Monroe, LA 120 Units
Vista Village Apartments 10/26/84 Apartment
El Paso, TX 220 Units
Towers of Westchester Park 10/26/84 Apartment
College Park, MD 303 Units
(1) All properties are fee ownership, each subject to a first and second
mortgage.
Schedule of Properties
Set forth below for each of the Venture's properties is the gross carrying
value, accumulated depreciation, depreciable life, method of depreciation and
Federal tax basis.
Gross
Carrying Accumulated Depreciable Federal
Property Value Depreciation Method Life Tax Basis
(in thousands) (in thousands)
North Park Apartments $ 10,959 $ 7,790 SL/200% DBL 5-30 yrs $ 1,228
Chapelle Le Grande 5,229 3,559 SL/200% DBL 5-30 yrs 604
Terrace Gardens 6,974 4,376 SL/150% and 5-30 yrs 1,604
200% DBL
Forest Ridge Apartments 9,682 6,539 SL/150% and 5-30 yrs 1,605
200% DBL
Scotchollow 30,584 19,515 SL/150% DBL 5-30 yrs 6,050
Pathfinder Village 18,900 10,840 SL/200% DBL 5-30 yrs 6,199
Buena Vista Apartments 6,372 4,081 SL/200% DBL 5-30 yrs 1,227
Mountain View Apartments 11,503 6,811 SL/200% DBL 5-30 yrs 2,164
Crosswood Park 10,101 6,401 SL/150% DBL 5-30 yrs 2,302
Casa de Monterey 9,075 5,789 SL/200% DBL 5-30 yrs 1,906
The Bluffs 4,756 3,360 SL/200% DBL 5-30 yrs 506
Watergate Apartments 7,606 5,296 SL/200% DBL 5-30 yrs 1,057
Shadowood Apartments 4,666 3,328 SL 5-30 yrs 549
Vista Village Apartments 7,433 4,889 SL 5-30 yrs 1,315
Towers of Westchester Park 18,638 12,920 SL 5-30 yrs 2,691
$162,478 $105,494 $31,007
See "Note A" of the Notes to the Combined Financial Statements included in "Item
8" for a description of the Venture's capitalization and depreciation policies.
Schedule of Property Indebtedness
The following table sets forth certain information relating to the loans
encumbering the Venture's properties.
Principal Principal Principal
Balance At Balance At Balance
December 31, December 31, Period Due At
Property 2002 2001 Amortized Maturity
(in thousands) (in thousands)
North Park Apartments
1st mortgage $ 5,955 $ 6,052 25 yrs $ 5,376
2nd mortgage 2,101 1,977 (A) (A)
Chapelle Le Grande
1st mortgage 3,056 3,106 25 yrs 2,759
2nd mortgage 1,080 1,047 (A) (A)
Terrace Gardens
1st mortgage 4,229 4,298 25 yrs 3,818
2nd mortgage 1,184 1,258 (A) (A)
Forest Ridge Apartments
1st mortgage 5,626 5,711 25 yrs 5,073
2nd mortgage 803 1,156 (A) (A)
Scotchollow
1st mortgage 27,784 28,204 25 yrs 25,054
2nd mortgage 7,970 7,914 (A) (A)
Pathfinder Village
1st mortgage 12,838 13,032 25 yrs 11,576
2nd mortgage 2,941 3,443 (A) (A)
Buena Vista Apartments
1st mortgage 4,718 4,795 25 yrs 4,260
2nd mortgage 800 1,180 (A) (A)
Mountain View Apartments
1st mortgage 6,825 6,928 25 yrs 6,154
2nd mortgage 851 1,539 (A) (A)
Crosswood Park
1st mortgage 5,309 5,390 25 yrs 4,788
2nd mortgage 724 1,018 (A) (A)
Casa de Monterey
1st mortgage 3,911 3,971 25 yrs 3,479
2nd mortgage 763 1,153 (A) (A)
The Bluffs
1st mortgage 3,551 3,605 25 yrs 3,202
2nd mortgage 1,138 1,159 (A) (A)
Watergate Apartments
1st mortgage 2,760 2,805 25 yrs 2,492
2nd mortgage 775 853 (A) (A)
Shadowood Apartments
1st mortgage 2,145 2,180 25 yrs 1,936
2nd mortgage 385 507 (A) (A)
Vista Village Apartments
1st mortgage 3,164 3,215 25 yrs 2,856
2nd mortgage 1,074 1,048 (A) (A)
Towers of Westchester Park
1st mortgage 11,542 11,730 25 yrs 10,420
2nd mortgage 2,098 2,998 (A) (A)
Totals $128,100 $133,272 $93,243
Interest rates are 8.50% and 10.84% for all first and second mortgages,
respectively. All notes mature January 1, 2008.
(A) Payments based on excess monthly cash flow at each property, with any
unpaid balance due at maturity. Per the junior loan agreements, excess
monthly cash flow is defined as revenue generated from operation of a
property less (1) operating expenses of the property, (2) the debt service
payment for the senior loans, (3) the tax and insurance reserve deposit
and (4) replacement reserve deposit.
Rental Rates and Occupancy
The following table sets forth the average annual rental rates and occupancy for
2002 and 2001 for each property.
Average Annual Average
Rental Rates Per Unit Occupancy
Property 2002 2001 2002 2001
North Park Apartments (1) $ 6,296 $ 6,559 95% 89%
Chapelle Le Grande 8,641 8,772 94% 93%
Terrace Gardens 9,663 9,828 93% 92%
Forest Ridge Apartments (2) 8,080 7,866 94% 98%
Scotchollow (3) 17,102 18,814 91% 95%
Pathfinder Village (3) 16,722 18,250 90% 95%
Buena Vista Apartments (1) 15,811 15,912 97% 93%
Mountain View Apartments 14,525 13,489 96% 98%
Crosswood Park 10,981 10,944 93% 95%
Casa de Monterey 10,704 10,037 97% 96%
The Bluffs (1) 7,438 7,404 93% 90%
Watergate Apartments 7,587 7,603 90% 92%
Shadowood Apartments 7,002 6,988 95% 97%
Vista Village Apartments (4) 6,265 6,619 97% 90%
Towers of Westchester Park 12,886 12,564 98% 98%
(1) The increase in occupancy at North Park Apartments, The Bluffs and Buena
Vista Apartments is due to aggressive resident retention and marketing
programs implemented by the property management teams.
(2) 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 in
early 2002.
(3) Scotchollow and Pathfinder Village 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 slight increases in occupancy
in the third and fourth quarters of 2002. Average rental rates decreased
in an effort to increase occupancy levels.
(4) 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.
As noted under "Item 1. Description of Business", the real estate industry is
highly competitive. All of the properties are subject to competition from other
residential apartment complexes in the area. The Managing General Partner
believes that all of the properties are adequately insured. Each property is an
apartment complex which leases units for lease terms of one year or less. No
residential tenant leases 10% or more of the available rental space.
Real Estate Taxes and Rates
Real estate taxes and rates in 2002 for each property were as follows:
2002 2002
Taxes Rate
(in thousands)
North Park Apartments $149 3.18%
Chapelle Le Grande 63 4.82%
Terrace Gardens 103 2.01%
Forest Ridge Apartments 102 10.24%
Scotchollow 375 1.32%
Pathfinder Village 222 1.40%
Buena Vista Apartments 75 1.22%
Mountain View Apartments 126 1.21%
Crosswood Park 123 1.04%
Casa de Monterey 96 1.16%
The Bluffs 74 1.49%
Watergate Apartments 58 6.90%
Shadowood Apartments 43 12.00%
Vista Village Apartments 121 2.99%
Towers of Westchester Park 220 1.37%
Capital Improvements
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 ("AIMCO LP") 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 maximum,
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 service 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 December 31, 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: All capital expenditures required under the agreement
signed in July 2000, as discussed above, were completed in 2001. The Venture
completed approximately $124,000 in capital expenditures at North Park
Apartments during the twelve months ended December 31, 2002, consisting
primarily of floor covering and door replacements, air conditioning and swimming
pool upgrades and structural improvements. These improvements were funded from
operating cash flow and replacement reserves. The Partnership is currently
evaluating the capital improvement needs of the property for the upcoming year
and currently expects to budget approximately $85,000. Additional improvements
may be considered during 2003 and will depend on the physical condition of the
property as well as debt restrictions, replacement reserves and anticipated cash
flow generated by the property.
Chapelle Le Grande: All capital expenditures required under the agreement signed
in August 2000, as discussed above, were completed in 2001. The Venture
completed approximately $217,000 in capital expenditures at Chapelle Le Grande
during the twelve months ended December 31, 2002, consisting primarily of
building improvements, floor covering replacements and office computers. These
improvements were funded from operating cash flow, replacement reserves and
insurance proceeds. The Partnership is currently evaluating the capital
improvement needs of the property for the upcoming year and currently expects to
budget approximately $32,000. Additional improvements may be considered during
2003 and will depend on the physical condition of the property as well as debt
restrictions, replacement reserves and anticipated cash flow generated by the
property.
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 March 31, 2003 and which are estimated to cost approximately $433,000,
of which approximately $340,000 were completed as of December 31, 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. The Venture completed approximately
$128,000 in capital expenditures, including the aforementioned capital
expenditures, at Terrace Gardens during the twelve months ended December 31,
2002, consisting primarily of floor covering replacements and structural
improvements. These improvements were funded from operating cash flow and
replacement reserves. The Partnership is currently evaluating the capital
improvement needs of the property for the upcoming year and currently expects to
budget approximately $38,000. Additional improvements may be considered during
2003 and will depend on the physical condition of the property as well as debt
restrictions, replacement reserves and anticipated cash flow generated by the
property.
Forest Ridge Apartments: All capital expenditures required under the agreement
signed in August 2000, as discussed above, were completed in 2001. The Venture
completed approximately $236,000 in capital expenditures at Forest Ridge
Apartments during the twelve months ended December 31, 2002, consisting
primarily of floor covering replacements, water heaters, plumbing fixtures, and
structural improvements. These improvements were funded from operating cash flow
and replacement reserves. The Partnership is currently evaluating the capital
improvement needs of the property for the upcoming year and currently expects to
budget approximately $83,000. Additional improvements may be considered during
2003 and will depend on the physical condition of the property as well as debt
restrictions, replacement reserves and anticipated cash flow generated by the
property.
Scotchollow: As of December 31, 2002, all capital expenditures required under
the agreement signed in July 2000, as discussed above, have been completed.
Approximately $7,000 of these expenditures were completed during 2002. The
Venture completed approximately $705,000 in capital expenditures, including the
aforementioned capital expenditures, at Scotchollow during the twelve months
ended December 31, 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 building
improvements, floor covering and appliance replacements, structural
improvements, plumbing fixtures and interior decorations. These improvements
were funded from insurance proceeds, operating cash flow and replacement
reserves. The Partnership is currently evaluating the capital improvement needs
of the property for the upcoming year and currently expects to budget
approximately $125,000. Additional improvements may be considered during 2003
and will depend on the physical condition of the property as well as debt
restrictions, replacement reserves and anticipated cash flow generated by the
property.
Pathfinder Village: As of December 31, 2002, all capital expenditures required
under the agreement signed in July 2000, as discussed above, have been
completed. Approximately $38,000 of these expenditures were completed during
2002. The Venture completed approximately $676,000 in capital expenditures,
including the aforementioned expenditures, at Pathfinder Village during the
twelve months ended December 31, 2002, consisting primarily of floor covering,
appliance and roof replacements, structural improvements, window dressings,
cabinets and countertops. These improvements were funded from operating cash
flow and replacement reserves. The Partnership is currently evaluating the
capital improvement needs of the property for the upcoming year and currently
expects to budget approximately $74,000. Additional improvements may be
considered during 2003 and will depend on the physical condition of the property
as well as debt restrictions, replacement reserves and anticipated cash flow
generated by the property.
Buena Vista Apartments: All capital expenditures required under the agreement
signed in July 2000, as discussed above, were completed in 2001. The Venture
completed approximately $49,000 in capital expenditures at Buena Vista
Apartments during the twelve months ended December 31, 2002, consisting
primarily of floor covering and appliance replacements and plumbing fixtures.
These improvements were funded from operating cash flow and replacement
reserves. The Partnership is currently evaluating the capital improvement needs
of the property for the upcoming year and currently expects to budget
approximately $28,000. Additional improvements may be considered during 2003 and
will depend on the physical condition of the property as well as debt
restrictions, replacement reserves and anticipated cash flow generated by the
property.
Mountain View Apartments: All capital expenditures required under the agreement
signed in July 2000, as discussed above, were completed in 2001. The Venture
completed approximately $184,000 in capital expenditures at Mountain View
Apartments during the twelve months ended December 31, 2002, consisting
primarily of floor covering replacements, water heaters, structural improvements
and plumbing fixtures. These improvements were funded from operating cash flow
and replacement reserves. The Partnership is currently evaluating the capital
improvement needs of the property for the upcoming year and currently expects to
budget approximately $50,000. Additional improvements may be considered during
2003 and will depend on the physical condition of the property as well as debt
restrictions, replacement reserves and anticipated cash flow generated by the
property.
Crosswood Park: As of December 31, 2002, all capital expenditures required under
the agreement in August 2000, as discussed above, have been completed.
Approximately $35,000 of these expenditures were completed during 2002. The
Venture completed approximately $287,000 in capital expenditures, including the
aforementioned capital expenditures, at Crosswood Park during the twelve months
ended December 31, 2002, consisting primarily of structural improvements, air
conditioning upgrades, floor covering and appliance replacements, major
landscaping and swimming pool upgrades. These improvements were funded from
operating cash flow and replacement reserves. The Partnership is currently
evaluating the capital improvement needs of the property for the upcoming year
and currently expects to budget approximately $54,000. Additional improvements
may be considered during 2003 and will depend on the physical condition of the
property as well as debt restrictions, replacement reserves and anticipated cash
flow generated by the property.
Casa de Monterey: All capital expenditures required under the agreement signed
in July 2000, as discussed above, were completed in 2001. The Venture completed
approximately $157,000 in capital expenditures at Casa de Monterey during the
twelve months ended December 31, 2002, consisting primarily of floor covering
and appliance replacements, structural improvements, air conditioning upgrades,
and plumbing fixtures. These improvements were funded from operating cash flow
and replacement reserves. The Partnership is currently evaluating the capital
improvement needs of the property for the upcoming year and currently expects to
budget approximately $43,000. Additional improvements may be considered during
2003 and will depend on the physical condition of the property as well as debt
restrictions, replacement reserves and anticipated cash flow generated by the
property.
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
March 31, 2003 and which are estimated to cost approximately $52,000, of which
approximately $30,000 were completed as of December 31, 2002. Approximately
$13,000 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. The Venture completed approximately $96,000
in capital expenditures, including the aforementioned capital expenditures, at
The Bluffs during the twelve months ended December 31, 2002, consisting
primarily of floor covering and appliance replacements, interior decorations,
plumbing fixtures, and structural improvements. These improvements were funded
from operating cash flow and replacement reserves. The Partnership is currently
evaluating the capital improvement needs of the property for the upcoming year
and currently expects to budget approximately $41,000. Additional improvements
may be considered during 2003 and will depend on the physical condition of the
property as well as debt restrictions, replacement reserves and anticipated cash
flow generated by the property.
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 June 30, 2003 and which are estimated to cost approximately
$186,000, of which approximately $132,000 were completed as of December 31,
2002. Approximately $49,000 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. The Venture completed
approximately $144,000 in capital expenditures, including the aforementioned
capital expenditures, at Watergate Apartments during the twelve months ended
December 31, 2002, consisting primarily of roof repairs, floor covering and
appliance replacements, water heaters and structural improvements. These
improvements were funded from operating cash flow and replacement reserves. The
Partnership is currently evaluating the capital improvement needs of the
property for the upcoming year and currently expects to budget approximately
$42,000. Additional improvements may be considered during 2003 and will depend
on the physical condition of the property as well as debt restrictions,
replacement reserves and anticipated cash flow generated by the property.
Shadowood Apartments: All capital expenditures required under the agreement
signed in August 2000, as discussed above, were completed in 2001. The Venture
completed approximately $53,000 in capital expenditures at Shadowood Apartments
during the twelve months ended December 31, 2002, consisting primarily of floor
covering and appliance replacements, plumbing fixtures and major landscaping.
These improvements were funded from operating cash flow. The Partnership is
currently evaluating the capital improvement needs of the property for the
upcoming year and currently expects to budget approximately $36,000. Additional
improvements may be considered during 2003 and will depend on the physical
condition of the property as well as debt restrictions, replacement reserves and
anticipated cash flow generated by the property.
Vista Village Apartments: All capital expenditures required under the agreement
signed in August 2000, as discussed above, were completed in 2001. The Venture
completed approximately $118,000 in capital expenditures at Vista Village
Apartments during the twelve months ended December 31, 2002, consisting
primarily of parking lot resurfacing, water heaters, air conditioning upgrades,
floor covering and appliance replacements and swimming pool improvements. These
improvements were funded from operating cash flow and replacement reserves. The
Partnership is currently evaluating the capital improvement needs of the
property for the upcoming year and currently expects to budget approximately
$66,000. Additional improvements may be considered during 2003 and will depend
on the physical condition of the property as well as debt restrictions,
replacement reserves and anticipated cash flow generated by the property.
Towers of Westchester Park: All capital expenditures required under the
agreement signed in November 1999, as discussed above, were completed in 2001.
The Venture completed approximately $195,000 in capital expenditures at Towers
of Westchester Park during the twelve months ended December 31, 2002, consisting
primarily of heating and air conditioning upgrades, plumbing fixtures, interior
decorations, and floor covering and appliance replacements. These improvements
were funded from operating cash flow and replacement reserves. The Partnership
is currently evaluating the capital improvement needs of the property for the
upcoming year and currently expects to budget approximately $91,000. Additional
improvements may be considered during 2003 and will depend on the physical
condition of the property as well as debt restrictions, replacement reserves and
anticipated cash flow generated by the property.
The Venture has budgeted $300 per unit or approximately $888,000 for all of the
properties which is equal to the limit set by the second mortgage notes for
funding of capital improvements. In addition, approximately $169,000 has been
budgeted to complete the additional capital expenditures agreed upon by the
Venture and the holders of the Junior and Senior Debt during 1999 and 2000 which
have yet to be fully completed. As the Venture identifies properties which
require additional improvements discussions are held with the holders of both
the first and second mortgage notes for approval to perform agreed upon capital
improvements.
Item 3. Legal Proceedings
The Venture is unaware of any pending or outstanding litigation that is not of a
routine nature arising in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders
The unitholders of the Partnerships did not vote on any matter during the
quarter ended December 31, 2002.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters
From the period October 26, 1984, through June 16, 1985, Portfolio I and
Portfolio II sold a total of 912 Limited Partnership Interests at a price of
$150,000 per Limited Partnership Interest, for a total of $136,800,000. As of
December 31, 2002, there were 665 holders of record of Portfolio I and 258
holders of record of Portfolio II, owning 644 and 267 units, respectively. As of
December 31, 2001, there were 739 holders of record of Portfolio I and 288
holders of record of Portfolio II, owning a total of 644 and 267 units,
respectively. As of December 31, 2000, there were 770 holders of record of
Portfolio I and 297 holders of record of Portfolio II, owning a total of 644 and
267 units, respectively. No public trading market has developed for the Units,
and it is not anticipated that such a market will develop in the future.
There were no cash distributions to the partners of either of the Partnerships
for the years ended December 31, 2002, 2001 or 2000. In accordance with the
respective Agreements of Limited Partnership, there are no material restrictions
on the Partnerships' ability to make cash distributions; however, future cash
distributions are subject to the order of distributions as stipulated by the
Venture's plan of reorganization (see "Note D" to the combined financial
statements for further details of the order of distribution). Future cash
distributions will depend on the levels of net cash generated from operations,
the availability of cash reserves and the timing of debt maturities,
refinancings and/or property sales. There can be no assurance that the
Partnerships will generate sufficient funds from operations, after required
capital expenditures, required cash flow payments on the Junior Debt and the
order of distributions as stipulated by the Venture's Plan of Reorganization, to
permit any distributions to their partners in 2003 or subsequent periods. See
"Item 2. Description of Properties - Capital Improvements" for information
relating to anticipated capital expenditures at the properties.
As a result of tender offers, AIMCO and its affiliates owned 118.50 units of
limited partnership interest in Portfolio I representing 18.40% of the
outstanding limited partnership interests, along with the 2% general partner
interest for a combined ownership in Portfolio I of 20.40% at December 31, 2002.
AIMCO and its affiliates owned 64.42 units of limited partnership interest in
Portfolio II representing 24.13% of the outstanding limited partnership
interests, along with the 2% general partner interest for a combined ownership
in Portfolio II of 26.13% at December 31, 2002. The Venture is owned 70.69% by
Portfolio I and 29.31% by Portfolio II which results in AIMCO and its affiliates
currently owning 22.08% 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 Venture 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 Venture, 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 Venture and
its limited partners may come into conflict with the duties of the Managing
General Partner to AIMCO, as its sole stockholder.
Item 6. Selected Financial Data (in thousands, except per interest data):
2002 2001 2000 1999 1998
Total revenues from rental
operations $ 32,471 $ 33,249 $ 31,015 $ 28,658 $ 27,956
Net loss $ (4,573) $ (2,910) $ (40) $ (6,402) $ (6,958)
Net loss per limited
Partnership interest
Portfolio I - 644 $ (4,921) $ (3,130) $ (43) $ (6,842) $ (7,483)
interests
Portfolio II - 267 $ (4,918) $ (3,131) $ (45) $ (6,992) $ (7,493)
interests
Total assets $ 62,731 $ 68,919 $ 68,879 $ 68,445 $ 71,937
Mortgage loans and notes $174,062 $178,940 $179,809 $179,468 $177,190
The above selected financial data should be read in conjunction with the
combined financial statements and the related notes.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This item should be read in conjunction with the combined financial statements
and other items contained elsewhere in this report.
Results from Operations
2002 Compared with 2001
The Venture recorded a net loss for the twelve months ended December 31, 2002 of
approximately $4,573,000 compared to a net loss of approximately $2,910,000 for
the corresponding period in 2001 (see "Item 8. Financial Statements and
Supplementary Data, Note I - Income Taxes" for a reconciliation of these amounts
to the Registrant's federal taxable loss). The increase in net loss for the
twelve month period above is due to both an increase in total expenses and a
decrease in total revenues.
For the twelve months ended December 31, 2002 as compared to December 31, 2001
the increase in total expenses is primarily attributable to increases in
interest, depreciation and property tax expenses offset by a decrease in
operating expense. 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 loans made to the Partnership in
December 2001 by the Managing General Partner. 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 by the local taxing
authorities at Mountain View, Pathfinder, Scotchollow, and Casa de Monterey and
an increase in tax rates at The Bluffs and Terrace Gardens. Operating expense
decreased primarily due to a decrease in natural gas costs at ten of the
Venture's fifteen investment properties and a decrease in salaries and related
employee costs, especially at Scotchollow, partially offset by an increase in
hazard insurance premiums and legal costs at many of the Venture's investment
properties. Also contributing to the decrease in operating expense was an
increase in the capitalization of certain direct and indirect project costs,
primarily payroll related costs, at the properties (see Item 8. Financial
Statements and Supplementary Data, Note A - Organization and Significant
Accounting Policies). Total revenues decreased primarily due to decreases in
occupancy at Forest Ridge, Scotchollow and Pathfinder Village and decreases in
rental rates at eight of the Venture's properties. These decreases were
partially offset by the casualty gain at Scotchollow, Chapelle Le Grande and
Terrace Gardens as discussed below and increases in other income which consist
primarily of increased utility reimbursements.
During the twelve months ended December 31, 2002, the Partnership recorded a net
casualty gain of approximately $513,000. The casualty gain resulted from both
fire and wind damage at Chappelle Le Grande, a fire at Scotchollow and wind
damage at Terrace Gardens as discussed below.
In March 2002, a wind storm caused roof damage at Chappelle Le Grande. The gain
of approximately $62,000 associated with this casualty was the result of the
receipt of insurance proceeds of approximately $74,000 offset by approximately
$12,000 of undepreciated property improvements and replacements being written
off.
In February 2002, a fire at Chappelle Le Grande caused damage to the clubhouse
and surrounding structures. A net casualty gain of approximately $69,000 was
recorded in relation to this fire. The gain was the result of the receipt of
insurance proceeds of approximately $126,000 offset by approximately $15,000 of
undepreciated property improvements and replacements being written off and
approximately $42,000 of emergency repairs made at the property.
In January 2002, a fire caused damage to the fitness center at Scotchollow. A
net casualty gain of approximately $349,000 was recorded in relation to this
fire. The gain was a result of the receipt of insurance proceeds of
approximately $423,000 offset by approximately $74,000 of undepreciated property
improvements and replacements being written off.
During the twelve months ended December 31, 2002, final insurance proceeds of
approximately $33,000 related to the 2001 casualty at Terrace Gardens, described
below, were received and recorded as an additional casualty gain.
2001 Compared with 2000
The Venture recorded a net loss for the twelve months ended December 31, 2001 of
approximately $2,910,000 compared to a net loss of approximately $40,000 for the
corresponding period in 2000 (see "Item 8. Financial Statements and
Supplementary Data, Note I - Income Taxes" for a reconciliation of these amounts
to the Registrant's federal taxable loss). The increase in net loss for the
twelve month period is primarily due to an increase in total expenses partially
offset by an increase in total revenues.
The increase in total expenses is attributable to increases in interest,
operating, depreciation, property tax and property management fee expenses. The
increase in interest expense is due to the amortization of the debt discount
related to the mortgage participation liability. The liability was recorded
during 2001 as a result of improved operations and cash flows due to extensive
rehabilitation projects at the properties which have resulted in a significant
increase in the estimated fair value of the properties (see "Item 8. Financial
Statements and Supplementary Data, Note D - Participating Mortgage Note"). The
increases in operating expense are primarily due to increases in the cost of
natural gas and insurance rates at all 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 by the local
taxing authority at Crosswood Park, Vista Village, Watergate and Mountain View
Apartments. The property management fee increased due to increased rental income
at a majority of the investment properties.
The increase in total revenues was due to an increase in rental and other income
and casualty gains at Terrace Gardens Apartments and Watergate Apartments as
discussed below. Rental income increased due to increases in average rental
rates at all of the Venture's properties which more than offset a slight
decrease in occupancy at eight of the Venture's investment properties. Other
income increased due to an increase in tenant reimbursements and fees and
interest income due to higher average cash balances in interest bearing
accounts.
During the year ended December 31, 2001, a net casualty gain of approximately
$23,000 was recorded at Watergate Apartments. The casualty gain related to
damage caused by an ice storm in December 2000. The gain was the result of the
receipt of insurance proceeds of approximately $30,000 offset by approximately
$7,000 of undepreciated fixed assets being written off.
During the year ended December 31, 2001, a casualty gain of approximately
$40,000 was recorded at Terrace Garden Apartments. The casualty gain related to
wind damage in April 2001. The gain was the result of the receipt of insurance
proceeds of approximately $58,000 offset by approximately $18,000 of
undepreciated fixed assets being written off.
Included in general and administrative expenses at both December 31, 2002 and
2001 are management reimbursements to the Managing General Partner allowed under
the Partnership Agreement. In addition, costs associated with the quarterly and
annual communications with investors and regulatory agencies and the annual
audit required by the Partnership Agreement are also included.
As part of the ongoing business plan of the Venture, the Managing General
Partner monitors the rental market environment of each of its investment
properties within the Venture 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 December 31, 2002, the Venture had cash and cash equivalents of approximately
$2,809,000 as compared to approximately $5,048,000 at December 31, 2001, a
decrease of approximately $2,239,000. The decrease in cash and cash equivalents
is a result of approximately $6,222,000 and $2,920,000 of cash used in financing
and investing activities, respectively, which was partially offset by
approximately $6,903,000 of cash provided by operating activities. Cash used in
financing activities consisted of principal payments on the mortgages
encumbering the Venture's investment properties slightly offset by advances from
an affiliate of the Managing General Partner. Cash used in investing activities
consisted of property improvements and replacements partially offset by net
withdrawals from restricted escrow accounts maintained by the mortgage lender
and by the receipt of insurance proceeds related to the casualties at
Scotchollow, Chapelle Le Grande and Terrace Gardens.
In December 2002, an affiliate of the Managing General Partner loaned
approximately $3,000 to cover operating expenses at Pathfinder Village. In
addition, during December 2001, an affiliate of the Managing General Partner
loaned the Venture's investment properties approximately $3,590,000 to cover
capital expenditures required at all of the properties. An additional $15,000
was loaned during the year ended December 31, 2000 to cover operational expenses
required at Mountain View Apartments and Casa de Monterey. In accordance with
the terms of the Partnership Agreement, interest is charged on these loans at
the prime rate plus 3%. At December 31, 2002 and 2001, the balance of the loans
and accrued interest on the loans was approximately $3,902,000 and $3,608,000,
respectively. Interest expense amounted to approximately $290,000 and $2,000 for
the years ended December 31, 2002 and 2001, respectively.
Certain affiliates of the former general partners 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 Venture's 1993 bankruptcy plan. There were no property dispositions for
which proceeds were received during the years ended December 31, 2002, 2001 or
2000.
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. The Managing General Partner
monitors developments in the area of legal and regulatory compliance and is
studying new federal laws, including the Sarbanes-Oxley Act of 2002. The
Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures
with regard to governance, disclosure, audit and other areas. In light of these
changes, the Venture expects that it will incur higher expenses related to
compliance, including increased legal and audit fees.
With respect to the capital improvements planned for the Venture's properties,
the Venture budgeted $300 per unit or approximately $888,000 for all of the
properties for 2003. The Venture's Junior Debt restricts capital expenditures
from exceeding $300 per unit annually for all of the properties. The Venture,
the holder ("AIMCO LP") 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 maximum, 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 service on the Junior Debt. As a result, the balloon payments due on
the Junior Debt may be higher at its maturity in January 2008 as accrued but
unpaid interest is added to the principal balance.
Each of the Venture's properties is encumbered by senior and junior debt. The
senior debt has an interest rate of 8.5% per annum and requires monthly payments
of principal and interest. The junior debt has an interest rate of 10.84% per
annum and the monthly payments are based on excess monthly cash flow for each
property. All of the loans mature on January 1, 2008, and the senior debt
includes prepayment penalties if paid prior to January 1, 2007. In 1997, these
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 in 1997,
which is the difference between the note face amounts and the agreed valuation
amounts. All the loans are cross-collateralized but they are not
cross-defaulted. Therefore, a default by one property under the terms of its
debt agreement does not in and of itself create a default under all of the
senior and junior debt agreements. However, if the proceeds upon the sale or
refinancing of any property are insufficient to fully repay the outstanding
senior and junior debt related to that property, any deficiency is to be
satisfied from the sale or refinancing of the remaining properties.
Both on a short-term and long-term basis, the Managing General Partner monitors
the rental market environment of each of the investment properties to assess the
feasibility of increasing rents, maintaining or increasing occupancy levels and
protecting the Venture from increases in expenses all of which have an impact on
the Venture's liquidity. The Venture's assets are thought to be sufficient for
any short-term needs (exclusive of capital improvements, as discussed above and
below) of the Venture. The Senior Debt encumbering all of the properties totals
approximately $103,413,000 and is being amortized over 25 years, with a balloon
payment of $93,243,000 due January 2008. The Junior Debt, which also matures
January 2008, totals approximately $24,687,000 and requires monthly payments
based upon monthly excess cash flow for each property. Per the Junior Debt
Agreements, excess cash flow is defined as revenue generated from the operation
of a property less (1) operating expenses of the property, (2) the debt service
payment for the Senior Loan, (3) tax and insurance reserve deposit, and (4)
replacement reserve deposit. The Venture anticipates that cash flow is
sufficient to meet the operating needs of the Venture as well as the
requirements of the Senior Debt with any excess cash flow being utilized to meet
the requirements of the Junior Debt. 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.
AIMCO 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) economic and voting rights in a 0.61% interest in Partners
Liquidating Trust in September 2000. These transactions occurred between AIMCO
LP and unrelated third parties 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
years ended December 31, 2002 and 2001, the Venture amortized approximately
$4,562,00 and $4,091,000, respectively of the debt discount which is included in
interest expense. 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.
There were no cash distributions to the partners of either of the Partnerships
for the years ended December 31, 2002, 2001 or 2000. In accordance with the
respective Agreements of Limited Partnership, there are no material restrictions
on the Partnerships' ability to make cash distributions; however, future cash
distributions are subject to the order of distributions as stipulated by the
Venture's plan of reorganization (see "Item 8. Financial Statements and
Supplementary Data, Note A" for further details of the order of distribution).
Future cash distributions will depend on the levels of net cash generated from
operations, the availability of cash reserves and the timing of debt maturities,
refinancings and/or property sales. There can be no assurance that the
Partnerships will generate sufficient funds from operations, after required
capital expenditures, required cash flow payments on the Junior Debt and the
order of distributions as stipulated by the Venture's Plan of Reorganization, to
permit any distributions to their partners in 2003 or subsequent periods.
As a result of tender offers, AIMCO and its affiliates owned 118.50 units of
limited partnership interest in Portfolio I representing 18.40% of the
outstanding limited partnership interests, along with the 2% general partner
interest for a combined ownership in Portfolio I of 20.40% at December 31, 2002.
AIMCO and its affiliates owned 64.42 units of limited partnership interest in
Portfolio II representing 24.13% of the outstanding limited partnership
interests, along with the 2% general partner interest for a combined ownership
in Portfolio II of 26.13% at December 31, 2002. The Venture is owned 70.69% by
Portfolio I and 29.31% by Portfolio II which results in AIMCO and its affiliates
currently owning 22.08% 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 Venture 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 Venture, 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 Venture 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
A summary of the Venture's significant accounting policies is included in "Note
A - Organization and Significant Accounting Policies" which is included in the
combined financial statements in "Item 8. Financial Statements". The Managing
General Partner believes that the consistent application of these policies
enables the Venture to provide readers of the financial statements with useful
and reliable information about the Venture's operating results and financial
condition. The preparation of combined financial statements in conformity with
accounting principles generally accepted in the United States requires the
Venture to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities at the date of the
financial statements as well as reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Judgments and assessments of uncertainties are required in applying the
Venture's accounting policies in many areas. 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 and
the Venture fully reserves all balances outstanding over thirty days. 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 7a. Market Risk Factors
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 December 31, 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 December 31,
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 $111,883,000 at December 31, 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. The Managing General Partner does not
believe that there have been any material changes in market risk exposure
between the current year and the preceding year.
Long-term Debt
Principal Weighted-average
(in thousands) Interest Rate
2003 $ 1,660 8.50%
2004 1,832 8.50%
2005 2,022 8.50%
2006 2,201 8.50%
2007 2,403 8.50%
Thereafter 117,982 8.99%
$128,100
As principal payments for the junior loans are based upon monthly cash flow, all
principal is assumed to be repaid at maturity.
Item 8. Financial Statements and Supplementary Data
LIST OF COMBINED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors
Combined Balance Sheets - Years ended December 31, 2002 and 2001
Combined Statements of Operations - Years ended December 31, 2002, 2001
and 2000
Combined Statements of Changes in Partners' Deficit - Years ended December
31, 2002, 2001 and 2000
Combined Statements of Cash Flows - Years ended December 31, 2002, 2001
and 2000
Notes to Combined Financial Statements
Report of Ernst & Young LLP, Independent Auditors
The Partners
VMS National Properties Joint Venture
We have audited the accompanying combined balance sheets of VMS National
Properties Joint Venture as of December 31, 2002 and 2001, and the related
combined statements of operations, changes in partners' deficit, and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Venture's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Venture's management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of VMS National
Properties Joint Venture at December 31, 2002 and 2001, and the combined results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
/s/ERNST & YOUNG LLP
Greenville, South Carolina
February 14, 2003
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED BALANCE SHEETS
(in thousands)
December 31, December 31,
2002 2001
Assets:
Cash and cash equivalents $ 2,809 $ 5,048
Receivables and deposits 1,711 1,618
Restricted escrows 849 1,460
Other assets 378 308
Investment properties (Notes B and H):
Land 13,404 13,404
Buildings and related personal property 149,074 146,056
Less accumulated depreciation (105,494) (98,975)
56,984 60,485
$ 62,731 $ 68,919
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 340 $ 1,718
Tenant security deposits liabilities 893 1,013
Accrued property taxes 603 569
Other liabilities 779 318
Accrued interest 703 999
Due to affiliate (Note F) 3,902 3,608
Mortgage notes payable, including $24,687 due to
an affiliate at 2002 and $28,250 at 2001 (Note B) 128,100 133,272
Notes payable (Note C) 42,060 42,060
Deferred gain on extinguishment of debt (Note A) 42,225 42,225
Mortgage participation liability (Note D) 8,653 4,091
Partners' Deficit (165,527) (160,954)
$ 62,731 $ 68,919
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per limited partnership interest data)
For The Years Ended December 31,
2002 2001 2000
Revenues:
Rental income $29,692 $31,236 $29,566
Other income 2,266 1,950 1,449
Casualty gains (Note E) 513 63 --
Total revenues 32,471 33,249 31,015
Expenses:
Operating 9,523 9,733 8,567
Property management fees to an affiliate 1,289 1,344 1,238
General and administrative 596 615 643
Depreciation 6,769 6,299 5,929
Interest, including approximately
$7,884, $7,236 and $3,353 to
an affiliate 16,877 16,344 12,989
Property taxes 1,990 1,824 1,689
Total expenses 37,044 36,159 31,055
Net loss (Note I) $(4,573) $(2,910) $ (40)
Net loss allocated to general partners (2%) $ (91) $ (58) $ (1)
Net loss allocated to limited partners (98%) (4,482) (2,852) (39)
$(4,573) $(2,910) $ (40)
Net loss per limited partnership interest:
Portfolio I (644 interests issued and
outstanding) $(4,921) $(3,130) $ (43)
Portfolio II (267 interests issued and
outstanding) $(4,918) $(3,131) $ (45)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(in thousands)
VMS National Residential Portfolio I
Limited Partners
General Accumulated Subscription
Partner Deficit Notes Total Total
Partners' deficit at December 31,
1999 $(3,535) $(107,157) $ (506) $(107,663) $(111,198)
Collections of subscription notes -- -- 4 4 4
Net loss for the year ended
December 31, 2000 (1) (27) -- (27) (28)
Partner's deficit at December 31,
2000 (3,536) (107,184) (502) (107,686) (111,222)
Net loss for the year ended
December 31, 2001
(41) (2,016) -- (2,016) (2,057)
Partners' deficit at December 31,
2001 (3,577) (109,200) (502) (109,702) (113,279)
Net loss for the year ended
December 31, 2002
(64) (3,169) -- (3,169) (3,233)
Partners' deficit at December 31,
2002 $(3,641) $(112,369) $(502) $(112,871) $(116,512)
VMS National Residential Portfolio II
Limited Partners
General Accumulated Subscription
Partner Deficit Notes Total Total
Partners' deficit at December 31,
1999 $(1,480) $(45,002) $ (329) $(45,331) $(46,811)
Collections of subscription notes -- -- 1 1 1
Net loss for the year ended
December 31, 2000 -- (12) -- (12) (12)
Partner's deficit at December 31,
2000 (1,480) (45,014) (328) (45,342) (46,822)
Net loss for the year ended
December 31, 2001 (17) (836) -- (836) (853)
Partners' deficit at December 31,
2001 (1,497) (45,850) (328) (46,178) (47,675)
Net loss for the year ended
December 31, 2002 (27) (1,313) -- (1,313) (1,340)
Partners' deficit at December 31,
2002 $(1,524) $(47,163) $ (328) $(47,491) $(49,015)
Combined partners' deficit at
December 31, 2002 $(5,165) $(159,532) $ (830) $(160,362) $(165,527)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
For The Years Ended December 31,
2002 2001 2000
Cash flows from operating activities:
Net loss $(4,573) $(2,910) $ (40)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 6,769 6,299 5,929
Amortization of mortgage discounts 4,562 4,091 403
Casualty gain (513) (63) --
Change in accounts:
Receivables and deposits (135) 125 120
Other assets (70) 21 (18)
Accounts payable (560) 129 97
Tenant security deposit liabilities (120) (98) 36
Accrued interest 757 938 2,965
Accrued property taxes 34 48 (77)
Due to affiliate 291 1 2
Other liabilities 461 (623) (785)
Net cash provided by operating activities 6,903 7,958 8,632
Cash flows from investing activities:
Property improvements and replacements (4,187) (6,090) (4,119)
Insurance proceeds received 656 88 --
Net withdrawals from (deposits to) restricted
escrows 611 2,819 (1,698)
Net cash used in investing activities (2,920) (3,183) (5,817)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
For The Years Ended December 31,
2002 2001 2000
Cash flows from financing activities:
Payments on mortgage notes payable $(6,225) $(5,470) $(2,686)
Payments received on subscription notes -- -- 5
Advances from an affiliate 3 3,590 15
Net cash used in financing activities (6,222) (1,880) (2,666)
Net (decrease) increase in cash and cash
equivalents (2,239) 2,895 149
Cash and cash equivalents at beginning of year 5,048 2,153 2,004
Cash and cash equivalents at end of year $ 2,809 $ 5,048 $ 2,153
Supplemental disclosure of cash flow information:
Cash paid for interest, including approximately
$1,984, $2,179, and $733
paid to an affiliate $11,268 $11,302 $ 9,622
Supplemental disclosure of non-cash information:
Accrued interest added to mortgage notes payable $ 1,053 $ 1,010 $ 2,607
Property improvements and replacements included
in accounts payable and other liabilities $ 25 $ 843 $ 499
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 2002
Note A - Organization and Significant Accounting Policies
Organization:
VMS National Properties Joint Venture (the "Venture") was formed as a general
partnership pursuant to the Uniform Partnership Act of the State of Illinois and
a joint venture agreement (the "Venture Agreement") dated September 27, 1984,
between VMS National Residential Portfolio I ("Portfolio I") and VMS National
Residential Portfolio II ("Portfolio II") (collectively, the "Partnerships").
Effective December 12, 1997, the managing general partner of each of the
Partnerships was transferred from VMS Realty Investment, Ltd. ("VMSRIL")
(formerly VMS Realty Partners) to MAERIL, Inc. ("MAERIL" or the "Managing
General Partner"), a wholly-owned subsidiary of MAE GP Corporation ("MAE GP")
and an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective
February 25, 1998, MAE GP was merged with Insignia Properties Trust ("IPT"),
which was an affiliate of Insignia. Effective October 1, 1998 and February 26,
1999, Insignia and IPT were respectively merged into Apartment Investment and
Management Company ("AIMCO"), a publicly traded real estate investment trust.
Thus the Managing General Partner is now a wholly-owned subsidiary of AIMCO. The
directors and officers of the Managing General Partner also serve as executive
officers of AIMCO. The Partnership Agreement provides that the Venture is to
terminate on December 8, 2044, unless terminated prior to such date. The Venture
owns and operates 15 residential apartment complexes located in or near major
urban areas in the United States.
Pursuant to the terms of the Joint Venture Agreement for the Venture and the
respective Partnership Agreements for Portfolio I and Portfolio II, the Managing
General Partner will manage Portfolio I, Portfolio II, VMS National Properties
and each of the Venture's operating properties. The Limited Partners do not
participate in or control the management of their respective partnership, except
that certain events must be approved by the Limited Partners. These events
include: (1) voluntary dissolution of either Portfolio I or Portfolio II, and
(2) amending substantive provisions of either Partnership Agreement.
Basis of Accounting:
The accompanying financial statements represent the combined financial
statements of Portfolio I, Portfolio II, and the Venture. Significant
interpartnership accounts and transactions have been eliminated from these
combined financial statements.
Allocation of Income, Loss, and Distributions:
The operating profits and losses of VMS National Properties Joint Venture are
allocated to Portfolio I and Portfolio II based on their respective ownership of
VMS National Properties Joint Venture which is 70.69% and 29.31%, respectively.
Portfolio I and Portfolio II then combine their respective share of the
operating profits and losses of VMS National Properties Joint Venture with their
respective operating profits and losses which is then allocated 98% to the
respective limited partners and 2% to the respective general partners of both
Portfolio I and Portfolio II.
Operating cash flow distributions for Portfolio I and Portfolio II will be made
at the discretion of the Managing General Partner subject to the order of
distribution indicated in the Venture's Second Amended and Restated Plan of
Reorganization (the "Plan") as approved by the US Bankruptcy Court in September
1993. Such distributions will be allocated first to the respective Limited
Partners in an amount equal to 12% per year (on a noncumulative basis) of their
contributed capital; then, to the general partners, a subordinated incentive fee
equal to 10.45% of remaining operating cash flow; and finally, of the balance to
be distributed, 98% to the Limited Partners and 2% to the general partners.
Distributions of proceeds arising from the sale or refinancing of the Venture's
properties will be allocated to Portfolio I and Portfolio II in proportion to
their respective Venture interests subject to the order of distribution
indicated in the Plan and approved by the U.S. Bankruptcy Court. Distributions
by Portfolio I and Portfolio II will then be allocated as follows: (1) first to
the Limited Partners in an amount equal to their aggregate capital
contributions; (2) then to the general partners in an amount equal to their
aggregate capital contributions; (3) then, among the Limited Partners, an amount
equal to $62,000,000 multiplied by the respective percentage interest of
Portfolio I or Portfolio II in the Venture; and (4) finally, of the balance, 76%
to the Limited Partners and 24% to the general partners.
In any event, there shall be allocated to the general partners not less than 1%
of profits or losses.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value is defined in the SFAS as the amount at which
the instruments could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Venture believes that
the carrying amounts of its financial instruments (except for long term debt)
approximate their fair values due to the short term maturity of these
instruments. The fair value of the Venture's first mortgages, after discounting
the scheduled loan payments to maturity, is approximately $111,883,000; however,
the Venture is precluded from refinancing the first mortgages 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, the
Assignment Note and the long term arrangement fee, 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.
Cash and Cash Equivalents:
Cash and cash equivalents include cash on hand and in banks. At certain times,
the amount of cash deposited at a bank may exceed the limit on insured deposits.
At December 31, 2002 and 2001, cash balances included approximately $2,623,000
and $4,957,000, respectively, that are maintained by an affiliated management
company on behalf of affiliated entities in cash concentration accounts.
Tenant Security Deposits:
The Venture requires security deposits from lessees for the duration of the
lease and such deposits are included in receivables and deposits. The security
deposits are refunded when the tenant vacates, provided the tenant has not
damaged its space, and is current on its rental payments.
Investment Properties:
Investment properties consist of fifteen apartment complexes and are stated at
cost. Acquisition fees are capitalized as a cost of real estate. Expenditures in
excess of $250 that maintain an existing asset which has a useful life of more
than one year are capitalized as capital replacement expenditures and
depreciated over the estimated useful life of the asset. Expenditures for
ordinary repairs, maintenance and apartment turnover costs are expensed as
incurred. In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires impairment losses to be recorded
on long-lived assets used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
The impairment loss is measured by comparing the fair value of the asset to its
carrying amount. No adjustments for impairment of value were recorded in the
years ended December 31, 2002, 2001 or 2000.
During 2001, AIMCO, an affiliate of the Managing General Partner, commissioned a
project to study process improvement ideas to reduce operating costs. The result
of the study led to a re-engineering of business processes and eventual
redeployment of personnel and related capital spending. The implementation of
these plans during 2002, accounted for as a change in accounting estimate,
resulted in a refinement of the Venture's process for capitalizing certain
direct and indirect project costs (principally payroll related costs) and
increased capitalization of such costs by approximately $358,000 in 2002
compared to 2001.
Escrows:
In connection with the December 1997 refinancing of the Venture's 15 remaining
properties, a replacement escrow was required for each property. Each property
was required to deposit an initial lump sum amount plus make monthly deposits
over the term of the loan, which varies by property. These funds are to be used
to cover replacement costs. The balance of the replacement reserves at December
31, 2002 and 2001 is approximately $849,000 and $1,460,000, respectively,
including interest.
Depreciation:
Depreciation is computed by the straight-line method over estimated useful lives
ranging from 25 to 30 years for buildings and improvements and the 150% or 200%
declining balance method for five to fifteen years for personal property.
Leases:
The Venture generally leases apartment units for twelve-month terms or less. The
Venture recognizes income as earned on its leases and fully reserves all
balances outstanding over thirty days. In addition, the Managing General
Partner's policy is to offer rental concessions during particularly slow months
or in response to heavy competition from other similar complexes in the area.
Concessions are charged against rental income as incurred.
Advertising Costs:
The Venture expenses the cost of advertising as incurred. Advertising costs of
approximately $390,000, $351,000 and $355,000, are included in operating expense
for the years ended December 31, 2002, 2001, and 2000, respectively.
Segment Reporting:
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" established standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
As defined in SFAS No. 131, the Partnership has only one reportable segment.
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.
Income Taxes:
Taxable income or loss of the Venture is reported in the income tax returns of
its partners. Accordingly, no provision for income taxes is made in the
financial statements of the Venture.
Recent Accounting Pronouncements:
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
provides accounting guidance for financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. Effective January 1, 2002, the Venture adopted SFAS
144. The adoption of which did not have a material effect on the financial
position or results of operations of the Venture.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64". SFAS No. 4 "Reporting Gains
and Losses from Extinguishment of Debt," required that all gains and losses from
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item. SFAS No. 145 rescinds SFAS No. 4, and accordingly, gains and
losses from extinguishment of debt should only be classified as extraordinary if
they are unusual in nature and occur infrequently. Neither of these criteria
applies to the Venture. SFAS 145 is effective for fiscal years beginning after
May 15, 2002 with early adoption an option. The Venture adopted SFAS 145
effective April 1, 2002. The adoption of which did not have a material effect on
the financial position or results of operations of the Venture.
Note B - Mortgage Notes Payable
Principal Principal Principal
Balance At Balance At Balance
December 31, December 31, Period Due At
Property 2002 2001 Amortized Maturity
(in thousands) (in thousands)
North Park Apartments
1st mortgage $ 5,955 $ 6,052 25 yrs $ 5,376
2nd mortgage 2,101 1,977 (A) (A)
Chapelle Le Grande
1st mortgage 3,056 3,106 25 yrs 2,759
2nd mortgage 1,080 1,047 (A) (A)
Terrace Gardens
1st mortgage 4,229 4,298 25 yrs 3,818
2nd mortgage 1,184 1,258 (A) (A)
Forest Ridge Apartments
1st mortgage 5,626 5,711 25 yrs 5,073
2nd mortgage 803 1,156 (A) (A)
Scotchollow
1st mortgage 27,784 28,204 25 yrs 25,054
2nd mortgage 7,970 7,914 (A) (A)
Pathfinder Village
1st mortgage 12,838 13,032 25 yrs 11,576
2nd mortgage 2,941 3,443 (A) (A)
Buena Vista Apartments
1st mortgage 4,718 4,795 25 yrs 4,260
2nd mortgage 800 1,180 (A) (A)
Mountain View Apartments
1st mortgage 6,825 6,928 25 yrs 6,154
2nd mortgage 851 1,539 (A) (A)
Crosswood Park
1st mortgage 5,309 5,390 25 yrs 4,788
2nd mortgage 724 1,018 (A) (A)
Casa de Monterey
1st mortgage 3,911 3,971 25 yrs 3,479
2nd mortgage 763 1,153 (A) (A)
The Bluffs
1st mortgage 3,551 3,605 25 yrs 3,202
2nd mortgage 1,138 1,159 (A) (A)
Watergate Apartments
1st mortgage 2,760 2,805 25 yrs 2,492
2nd mortgage 775 853 (A) (A)
Shadowood Apartments
1st mortgage 2,145 2,180 25 yrs 1,936
2nd mortgage 385 507 (A) (A)
Vista Village Apartments
1st mortgage 3,164 3,215 25 yrs 2,856
2nd mortgage 1,074 1,048 (A) (A)
Towers of Westchester Park
1st mortgage 11,542 11,730 25 yrs 10,420
2nd mortgage 2,098 2,998 (A) (A)
Totals $128,100 $133,272 $93,243
(A) Payments are based on excess monthly cash flow with any unpaid balance due
at maturity. Excess monthly cash flow is defined as revenue generated from
the operation of a property less: (1) operating expenses of the property;
(2) the debt service payment for the senior loan; (3) the tax and
insurance reserve deposit; and (4) the replacement reserve deposit.
Interest rates are 8.50% and 10.84% for all first and second mortgages,
respectively. All notes mature January 1, 2008.
The senior debt includes prepayment penalties if repaid prior to January 1,
2007. All of the loans are cross-collateralized, but they are not
cross-defaulted; therefore, a default by one property under the terms of its
debt agreement does not in and of itself create a default under all of the
senior and junior debt agreements. However, if the proceeds upon the sale or
refinancing of any property are insufficient to fully repay the outstanding
senior or junior debt related to that property, any deficiency is to be
satisfied from the sale or refinancing of the remaining properties.
Scheduled principal payments on mortgage notes payable subsequent to December
31, 2002 are as follows (in thousands):
2003 $ 1,660
2004 1,832
2005 2,022
2006 2,201
2007 2,403
Thereafter 117,982
$128,100
As principal payments for the junior loans are based upon monthly cash flow, all
principal is assumed to be repaid at maturity.
Note C - Notes Payable
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 December 31, 2002 and 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 D - 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 year
ended December 31, 2002 and 2001, the Venture amortized approximately $4,562,00
and $4,091,000, respectively of the debt discount which is included in interest
expense. 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 E - Casualty Gain
During the twelve months ended December 31, 2002, the Partnership recorded a net
casualty gain of approximately $513,000. The casualty gain resulted from both
fire and wind damage at Chappelle Le Grande, a fire at Scotchollow and wind
damage at Terrace Gardens as discussed below.
In March 2002, a wind storm caused roof damage at Chappelle Le Grande. The gain
of approximately $62,000 associated with this casualty was the result of the
receipt of insurance proceeds of approximately $74,000 offset by approximately
$12,000 of undepreciated property improvements and replacements being written
off.
In February 2002, a fire at Chappelle Le Grande caused damage to the clubhouse
and surrounding structures. A net casualty gain of approximately $69,000 was
recorded in relation to this fire. The gain was the result of the receipt of
insurance proceeds of approximately $126,000 offset by approximately $15,000 of
undepreciated property improvements and replacements being written off and
approximately $42,000 of emergency repairs made at the property.
In January 2002, a fire caused damage to the fitness center at Scotchollow. A
net casualty gain of approximately $349,000 was recorded in relation to this
fire. The gain was a result of the receipt of insurance proceeds of
approximately $423,000 offset by approximately $74,000 of undepreciated property
improvements and replacements being written off.
During the twelve months ended December 31, 2001, a net casualty gain of
approximately $40,000 was recorded at Terrace Gardens. The casualty gain related
to wind damage in April 2001. The gain was the result of the receipt of
insurance proceeds of approximately $58,000 offset by approximately $18,000 of
undepreciated property improvements and replacements being written off. During
the twelve months ended December 31, 2002, final insurance proceeds of
approximately $33,000 related to this casualty were received and recorded as an
additional casualty gain.
During the twelve months ended December 31, 2001, a net casualty gain of
approximately $23,000 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 insurance proceeds of approximately $30,000 offset by
approximately $7,000 of undepreciated fixed assets being written off.
Note F - 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 Subpartnership
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 $326,000 were paid to an affiliate of the
Managing General Partner for the year ended December 31, 2002 and asset
management fees of approximately $300,000 were paid to an affiliate of the
Managing General Partner for each of the years ended December 31, 2001 and 2000.
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 Venture's properties as compensation for
providing property management services. The Venture paid to such affiliates
approximately $1,289,000, $1,344,000 and $1,238,000 for the years ended December
31, 2002, 2001 and 2000, respectively, which are included in operating expenses.
Affiliates of the Managing General Partner received reimbursement of accountable
administrative expenses amounting to approximately $100,000 for each of the
years ended December 31, 2002, 2001 and 2000. These expenses are included in
general and administrative expenses. During the years ended December 31, 2002,
2001 and 2000, the Venture paid fees related to construction management services
provided by an affiliate of the Managing General Partner of approximately
$308,000, $940,000 and $125,000, respectively. The construction management
service fees are calculated based on a percentage of current year additions to
investment properties. These fees are included in investment properties.
An affiliate of the Managing General Partner received bookkeeping reimbursements
in the amount of approximately $123,000, $123,000 and $131,000 for the years
ended December 31, 2002, 2001 and 2000, respectively, which are included in
operating expenses.
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 December 31, 2002 and 2001, the outstanding balance
of $79,000 is included in other liabilities.
During December 2002 and 2001, respectively, the Managing General Partner loaned
the Venture approximately $3,000 to cover operating costs at Pathfinder Village
and approximately $3,590,000 to cover capital expenditures required at all of
the properties. During the year ended December 31, 2000, the Managing General
Partner loaned the Venture approximately $15,000 to cover operational expenses
required at Mountain View Apartments and Casa de Monterey. These loans were made
in accordance with the terms of the Partnership Agreement and bear interest at
the prime rate plus 3%. The balance of the above loans from the Managing General
Partner is approximately $3,902,000 and $3,608,000 for the years ended December
31, 2002 and 2001, respectively, which includes accrued interest. Interest
expense on the loans was approximately $290,000 and $2,000 for the years ended
December 31, 2002 and 2001, respectively. Interest expense was less than $1,000
for the year ended December 31, 2000.
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 the years ended December
31, 2002, 2001 or 2000.
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 year ended
December 31, 2002, 2001 and 2000, the Venture recognized interest expense on the
junior debt of approximately $3,029,000, $3,132,000 and $3,351,000,
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 years ended December
31, 2002 and 2001, the Venture paid AIMCO and its affiliates approximately
$574,000 and $308,000, respectively, for insurance coverage and fees associated
with policy claims administration.
As a result of tender offers, AIMCO and its affiliates owned 118.50 units of
limited partnership interest in Portfolio I representing 18.40% of the
outstanding limited partnership interests, along with the 2% general partner
interest for a combined ownership in Portfolio I of 20.40% at December 31, 2002.
AIMCO and its affiliates owned 64.42 units of limited partnership interest in
Portfolio II representing 24.13% of the outstanding limited partnership
interests, along with the 2% general partner interest for a combined ownership
in Portfolio II of 26.13% at December 31, 2002. The Venture is owned 70.69% by
Portfolio I and 29.31% by Portfolio II which results in AIMCO and its affiliates
currently owning 22.08% 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 Venture 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 Venture, 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 Venture and
its limited partners may come into conflict with the duties of the Managing
General Partner to AIMCO, as its sole stockholder.
Note G - Subscription Notes And Accrued Interest Receivable
Portfolio I and Portfolio II executed promissory notes requiring cash
contributions from the partners aggregating $136,800,000 to the capital of
Portfolios I and II for 644 and 267 units, respectively. Of this amount,
approximately $135,060,000 was contributed in cash through December 31, 2002,
and $910,000 was deemed uncollectible and written-off prior to December 31,
2002. The following table represents the remaining Limited Partners'
subscription notes principal balances and the related accrued interest
receivable at December 31, 2002 (in thousands):
Portfolio I Portfolio II
Subscription notes receivable $502 $328
Accrued interest receivable 63 67
Allowance for uncollectible interest
receivable (63) (67)
Total subscription notes and accrued
interest receivable $502 $328
All amounts outstanding at December 31, 2002, are considered past due and bear
interest at the default rate of 18%. No interest will be recognized until
collection is assured. The balances have been appropriately included as a
reduction of Partners' Capital.
Note H - Investment Properties and Accumulated Depreciation
Initial Cost
(in thousands)
Buildings and Costs
Related Capitalized Provision to
Personal Subsequent to Reduce to
Description Encumbrances Land Property Acquisition Fair Value
(in thousands) (in thousands) (in thousands)
North Park Apartments $ 8,056 $ 557 $ 8,349 $ 2,053 $ --
Chapelle Le Grande 4,136 166 3,873 1,190 --
Terrace Garden 5,413 433 4,517 2,024 --
Forest Ridge Apartments 6,429 701 6,930 2,051 --
Scotchollow 35,754 3,510 19,344 7,730 --
Pathfinder Village 15,779 3,040 11,698 5,412 (1,250)
Buena Vista Apartments 5,518 893 4,538 941 --
Mountain View Apartments 7,676 1,289 8,490 1,724 --
Crosswood Park 6,033 611 8,597 2,893 (2,000)
Casa De Monterey 4,674 869 6,136 2,070 --
The Bluffs 4,689 193 3,667 896 --
Watergate Apartments 3,535 263 5,625 1,718 --
Shadowood Apartments 2,530 209 3,393 1,064 --
Vista Village Apartments 4,238 568 5,209 1,656 --
Towers Of Westchester Park 13,640 529 13,491 4,618 --
TOTAL $128,100 $13,831 $113,857 $38,040 $(3,250)
Gross Amount At Which Carried
At December 31, 2002
(in thousands)
Buildings Accum-
And ulated Year of Date of
Related
Personal Deprec- Construc-Acquis- Depreciable
Description Land Property Total iation tion ition Life Years
North Park Apartments $ 557 $ 10,402 $ 10,959 $ 7,790 1968 11/14/84 5-27.5
Chapelle Le Grande 166 5,063 5,229 3,559 1972 12/05/84 5-27.5
Terrace Gardens 433 6,541 6,974 4,376 1973 10/26/84 5-27.5
Forest Ridge Apartments 701 8,981 9,682 6,539 1974 10/26/84 5-27.5
Scotchollow 3,510 27,074 30,584 19,515 1973 10/26/84 5-27.5
Pathfinder Village 2,753 16,147 18,900 10,840 1971 10/26/84 5-27.5
Buena Vista Apartments 893 5,479 6,372 4,081 1972 10/26/84 5-27.5
Mountain View Apartments 1,289 10,214 11,503 6,811 1978 10/26/84 5-29
Crosswood Park 471 9,630 10,101 6,401 1977 12/05/84 5-29
Casa De Monterey 869 8,206 9,075 5,789 1970 10/26/84 5-27.5
The Bluffs 193 4,563 4,756 3,360 1968 10/26/84 5-27.5
Watergate Apartments 263 7,343 7,606 5,296 1972 10/26/84 5-27.5
Shadowood Apartments 209 4,457 4,666 3,328 1974 11/14/84 5-27.5
Vista Village Apartments 568 6,865 7,433 4,889 1971 10/26/84 5-27.5
Towers Of Westchester 529 18,109 18,638 12,920 1971 10/26/84 5-27.5
Park
TOTAL $13,404 $149,074 $162,478 $105,494
The aggregate cost of the investment properties for Federal income tax purposes
at December 31, 2002 and 2001, is approximately $179,611,000 and $176,911,000,
respectively. The accumulated depreciation for Federal income tax purposes at
December 31, 2002 and 2001, is approximately $148,604,000 and $143,272,000,
respectively.
Reconciliation of Investment Properties and Accumulated Depreciation (in
thousands):
2002 2001 2000
Investment Properties
Balance at beginning of year $159,460 $153,102 $148,484
Property improvements and
replacements 3,369 6,434 4,618
Dispositions of property (351) (76) --
Balance at end of year $162,478 $159,460 $153,102
Accumulated Depreciation
Balance at beginning of year $ 98,975 $ 92,727 $ 86,798
Additions charged to expense 6,769 6,299 5,929
Dispositions of property (250) (51) --
Balance at end of year $105,494 $ 98,975 $ 92,727
Note I - Income Taxes
The following is a reconciliation of reported net loss per the financial
statements to the Federal taxable income (loss) to partners (in thousands except
percent amounts):
2002 2001 2000
Net loss as reported $(4,573) $(2,910) $ (40)
Depreciation differences 1,437 (1,204) (1,233)
Unearned income 166 (304) (577)
Casualty loss (566) (63) --
Residual proceeds expense 4,562 4,091 --
Other 63 65 (80)
Federal taxable income (loss) $ 1,089 $ (325) $(1,930)
Portfolio I Allocation $ 768.62 $ (229.41) $(1,362,72)
Portfolio II Allocation 319.86 (95.47) (567.10)
Net income (loss) per limited
partnership interest:
Portfolio I Allocation $ 2,568.82 $(537.89) $(2,074.90)
Portfolio II Allocation 2,590.95 (542.51) (2,084.98)
The following is a reconciliation between the Venture's reported amounts and
Federal tax basis of net liabilities at December 31, 2002 and 2001 (in
thousands):
2002 2001
Net liabilities as reported $(165,527) $(160,954)
Land and buildings 17,134 17,451
Accumulated depreciation (43,110) (44,297)
Syndication costs 17,650 17,650
Deferred gain 42,225 42,225
Other deferred costs 9,601 9,601
Other (53,116) (53,345)
Notes payable 4,882 4,882
Subscription notes receivable 1,837 1,837
Mortgage payable (47,727) (47,727)
Residual proceeds liability 8,653 4,091
Accrued interest 9,571 9,571
Net liabilities - Federal tax basis $(197,927) $(199,015)
Note J - Legal Proceedings
The Venture is unaware of any pending or outstanding litigation that is not of a
routine nature arising in the ordinary course of business.
Note K - Selected Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the Venture (in thousands, except per interest data):
1st 2nd 3rd 4th
2002 Quarter Quarter Quarter Quarter Total
Total revenues $ 7,885 $ 8,227 $ 8,369 $ 7,990 $32,471
Total expenses 9,281 9,452 9,252 9,059 37,044
Net loss $(1,396) $(1,225) $ (883) $(1,069) $(4,573)
Net loss per limited partnership interest:
Portfolio I (644 interests issued and
outstanding) $(1,502) $(1,317) $ (949) $(1,153) $(4,921)
Portfolio II (267 interests issued
and outstanding) $(1,502) $(1,317) $ (948) $(1,151) $(4,918)
1st 2nd 3rd 4th
2001 Quarter Quarter Quarter Quarter Total
Total revenues $ 8,235 $ 8,449 $ 8,329 $ 8,236 $33,249
Total expenses 7,925 9,833 9,288 9,113 36,159
Net income (loss) $ 310 $(1,384) $ (959) $ (877) $(2,910)
Net income (loss) per limited partnership interest:
Portfolio I (644 interests issued and
outstanding) $ 334 $(1,489) $(1,031) $ (944) $(3,130)
Portfolio II (267 interests issued
and outstanding) $ 333 $(1,490) $(1,030) $ (944) $(3,131)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnerships have no officers or directors. The Managing General Partner
manages substantially all of the affairs and has general responsibility in all
matters affecting the business of the Venture. Effective December 12, 1997, the
managing general partner of each of the Partnerships was transferred from VMS
Realty Investment, Ltd. ("VMSRIL") (formerly VMS Realty Partners) to MAERIL,
Inc. ("MAERIL" or the "Managing General Partner"), a wholly-owned subsidiary of
MAE GP Corporation ("MAE GP") and an affiliate of Insignia Financial Group, Inc.
("Insignia"). Effective February 25, 1998, MAE GP was merged with Insignia
Properties Trust ("IPT"), which is an affiliate of Insignia. Effective October
1, 1998 and February 26, 1999; Insignia and IPT were respectively merged into
Apartment Investment and Management Company ("AIMCO"). Thus, the Managing
General Partner is now a wholly-owned subsidiary of AIMCO.
The names of the directors and executive officers of the Managing General
Partner, their ages and the nature of all positions with the Managing General
Partner presently held by them are set forth below. There are no family
relationships between or among any officers or directors.
Name Age Position
Patrick J. Foye 45 Executive Vice President and Director
Paul J. McAuliffe 46 Executive Vice President and Chief
Financial Officer
Thomas C. Novosel 44 Senior Vice President and Chief Accounting
Officer
Patrick J. Foye has been Executive Vice President and Director of the Managing
General Partner since October 1, 1998. Mr. Foye has served as Executive Vice
President of AIMCO since May 1998, where he is responsible for continuous
improvement, acquisitions of partnership securities, consolidation of minority
interests, and corporate and other acquisitions. Prior to joining AIMCO, Mr.
Foye was a Merger and Acquisitions Partner in the law firm of Skadden, Arps,
Slate, Meagher & Flom LLP from 1989 to 1998.
Paul J. McAuliffe has been Executive Vice President and Chief Financial Officer
of the Managing General Partner since April 1, 2002. Mr. McAuliffe has served as
Executive Vice President of AIMCO since February 1999 and Chief Financial
Officer of AIMCO since October 1999. From May 1996 until he joined AIMCO, Mr.
McAuliffe was Senior Managing Director of Secured Capital Corp.
Thomas C. Novosel has been Senior Vice President and Chief Accounting Officer of
the Managing General Partner since April 1, 2002. Mr. Novosel has served as
Senior Vice President and Chief Accounting Officer of AIMCO since April 2000.
From October 1993 until he joined AIMCO, Mr. Novosel was a partner at Ernst &
Young LLP, where he served as the director of real estate advisory services for
the southern Ohio Valley area offices but did not work on any assignments
related to AIMCO or the Venture.
One or more of the above persons are also directors and/or officers of a general
partner (or general partner of a general partner) of limited partnerships which
either have a class of securities registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, or are subject to the reporting requirements of
Section 15(d) of such Act. Further, one or more of the above persons are also
directors and/or officers of Apartment Investment and Management Company and the
general partner of AIMCO Properties, L.P., entities that have a class of
securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934, or are subject to the reporting requirements of Section 15 (d) of such
Act.
The executive officers and director of the Managing General Partner fulfill the
obligations of the Audit Committee and oversee the Venture's financial reporting
process on behalf of the Managing General Partner. Management has the primary
responsibility for the combined financial statements and the reporting process
including the systems of internal controls. In fulfilling its oversight
responsibilities, the executive officers and director of the Managing General
Partner reviewed the audited financial statements with management including a
discussion of the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments, and the clarity of
disclosures in the financial statements.
The executive officers and director of the Managing General Partner reviewed
with the independent auditors, who are responsible for expressing an opinion on
the conformity of those audited financial statements with accounting principles
generally accepted in the United States, their judgments as to the quality, not
just the acceptability, of the Venture's accounting principles and such other
matters as are required to be discussed with the Audit Committee or its
equivalent under auditing standards generally accepted in the United States. In
addition, the Venture has discussed with the independent auditors the auditors'
independence from management and the Venture including the matters in the
written disclosures required by the Independence Standards Board and considered
the compatibility of non-audit services with the auditors' independence.
The executive officers and director of the Managing General Partner discussed
with the Venture's independent auditors the overall scope and plans for their
audit. In reliance on the reviews and discussions referred to above, the
executive officers and director of the Managing General Partner have approved
the inclusion of the audited financial statements in the Form 10-K for the year
ended December 31, 2002 for filing with the Securities and Exchange Commission.
The Managing General Partner has reappointed Ernst & Young LLP as independent
auditors to audit the combined financial statements of the Venture for 2003.
Fees for 2002 were audit services of approximately $108,000 and non-audit
services (principally tax-related) of approximately $51,000.
Item 11. Executive Compensation
No compensation or remuneration was paid by the Venture to any officer or
director of the Managing General Partner. However, reimbursements and other
payments have been made to the Venture's current and former managing general
partners and their affiliates, as described in "Item 13. Certain Relationships
and Related Transactions".
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners.
Except as noted below, no persons or entity owns of record or is known by the
Venture to own beneficially more than 5% of the outstanding Interests of either
of the Partnerships as of December 31, 2002.
Entity Number of Units Percentage
National Residential Portfolio I
AIMCO Properties, LP 118.50 18.40%
(an affiliate of AIMCO)
National Residential Portfolio II
AIMCO Properties, LP 64.42 24.13%
(an affiliate of AIMCO)
AIMCO Properties, LP is indirectly ultimately controlled by AIMCO. Its business
address is Stanford Place 3, 4582 S. Ulster St. Parkway, Suite 1100, Denver,
Colorado 80237.
(b) Security ownership of management.
No officers or directors of MAERIL or of Prudential-Bache Properties, Inc., the
general partners of the Partnerships, own any Limited Partnership Interests in
the Partnerships.
No general partners, officers or directors of the general partners of the
Venture possess the right to acquire a beneficial ownership of Interests of
either of the Partnerships.
Item 13. Certain Relationships and Related Transactions
The Venture has no employees and is dependent on the Managing General Partner
and its affiliates for the management and administration of all Subpartnership
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 $326,000 were paid to an affiliate of the
Managing General Partner for the year ended December 31, 2002 and asset
management fees of approximately $300,000 were paid to an affiliate of the
Managing General Partner for each of the years ended December 31, 2001 and 2000.
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 Venture's properties as compensation for
providing property management services. The Venture paid to such affiliates
approximately $1,289,000, $1,344,000 and $1,238,000 for the years ended December
31, 2002, 2001 and 2000, respectively, which are included in operating expenses.
Affiliates of the Managing General Partner received reimbursement of accountable
administrative expenses amounting to approximately $100,000 for each of the
years ended December 31, 2002, 2001 and 2000. These expenses are included in
general and administrative expenses. During the years ended December 31, 2002,
2001 and 2000, the Venture paid fees related to construction management services
provided by an affiliate of the Managing General Partner of approximately
$308,000, $940,000 and $125,000, respectively. The construction management
service fees are calculated based on a percentage of current year additions to
investment properties. These fees are included in investment properties.
An affiliate of the Managing General Partner received bookkeeping reimbursements
in the amount of approximately $123,000, $123,000 and $131,000 for the years
ended December 31, 2002, 2001 and 2000, respectively, which are included in
operating expenses.
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 December 31, 2002 and 2001, the outstanding balance
of $79,000 is included in other liabilities.
During December 2002 and 2001, respectively, the Managing General Partner loaned
the Venture approximately $3,000 to cover operating costs at Pathfinder Village
and approximately $3,590,000 to cover capital expenditures required at all of
the properties. During the year ended December 31, 2000, the Managing General
Partner loaned the Venture approximately $15,000 to cover operational expenses
required at Mountain View Apartments and Casa de Monterey. These loans were made
in accordance with the terms of the Partnership Agreement and bear interest at
the prime rate plus 3%. The balance of the above loans from the Managing General
Partner is approximately $3,902,000 and $3,608,000 for the years ended December
31, 2002 and 2001, respectively, which includes accrued interest. Interest
expense on the loans was approximately $290,000 and $2,000 for the years ended
December 31, 2002 and 2001, respectively. Interest expense was less than $1,000
for the year ended December 31, 2000.
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 the years ended December
31, 2002, 2001 or 2000.
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 year ended
December 31, 2002, 2001 and 2000, the Venture recognized interest expense on the
junior debt of approximately $3,029,000, $3,132,000 and $3,351,000,
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 years ended December
31, 2002 and 2001, the Venture paid AIMCO and its affiliates approximately
$574,000 and $308,000, respectively, for insurance coverage and fees associated
with policy claims administration.
As a result of tender offers, AIMCO and its affiliates owned 118.50 units of
limited partnership interest in Portfolio I representing 18.40% of the
outstanding limited partnership interests, along with the 2% general partner
interest for a combined ownership in Portfolio I of 20.40% at December 31, 2002.
AIMCO and its affiliates owned 64.42 units of limited partnership interest in
Portfolio II representing 24.13% of the outstanding limited partnership
interests, along with the 2% general partner interest for a combined ownership
in Portfolio II of 26.13% at December 31, 2002. The Venture is owned 70.69% by
Portfolio I and 29.31% by Portfolio II which results in AIMCO and its affiliates
currently owning 22.08% 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 Venture 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 Venture, 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 Venture and
its limited partners may come into conflict with the duties of the Managing
General Partner to AIMCO, as its sole stockholder.
Item 14. Controls and Procedures
The principal executive officer and principal financial officer of the Managing
General Partner, who are the equivalent of the Venture's principal executive
officer and principal financial officer, respectively, have, within 90 days of
the filing date of this annual report, evaluated the effectiveness of the
Venture's disclosure controls and procedures (as defined in Exchange Act Rules
13a-14(c) and 15d-14(c)) and have determined that such disclosure controls and
procedures are adequate. There have been no significant changes in the Venture's
internal controls or in other factors that could significantly affect the
Venture's internal controls since the date of evaluation. The Venture does not
believe any significant deficiencies or material weaknesses exist in the
Venture's internal controls. Accordingly, no corrective actions have been taken.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following combined financial statements of the Registrant are included
in Item 8:
Combined Balance Sheets at December 31, 2002 and 2001.
Combined Statements of Operations for the years ended December 31, 2002,
2001 and 2000.
Combined Statements of Changes in Partners' Deficit for the years ended
December 31, 2002, 2001 and 2000.
Combined Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000.
Notes to Combined Financial Statements
Schedules are omitted for the reason that they are inapplicable or
equivalent information has been included elsewhere herein.
The following items are incorporated by reference:
Part V - Amended Restated Certificate and Agreement of:
Item 1(b)(i) Limited Partnership of VMS National Residential Portfolio I.
Item 1(b)(ii) Limited Partnership of VMS National Residential Portfolio
II.
Item 1(b)(iii) Joint Venture Agreement between VMS National Residential
Portfolio I and VMS National Residential Portfolio II.
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).
(b) Reports on Form 8-K:
None filed during the quarter ended December 31, 2002.
(c) Exhibits:
See Exhibit index
EXHIBIT INDEX
Exhibit No. Description
3 and 21 Portions of the Prospectus of the Partnership dated May 15,
1986 as supplemented by Supplement Numbers 1 through 7 dated December
18, 1986, February 11, 1987, March 31, 1987, August 19, 1987, January
4, 1988, April 18, 1988 and June 30, 1988 as filed with the Commission
pursuant to Rule 424(b) and (c), as well as the Restated Limited
Partnership Agreement set forth as Exhibit A to the Prospectus, are
hereby incorporated by reference, specifically pages 15 - 21, 44 - 68,
76, 86 - 90, 106 - 108, A9 - A13, A16 - A20 and Supplements Numbers 1
and 2.
10.1 Stipulation Regarding Entry of Agreed Final Judgment of Foreclosure
and Order Relieving Receiver of Obligation to Operate Subject Property
- Kendall Mall is incorporated by reference to the Form 10-QSB dated
June 30, 1995.
10.2 Form of Amended, Restated and Consolidated Senior Secured Promissory
Note between the Venture and MF VMS, L.L.C. relating to each of the
Venture's properties.
10.3 Form of Amended, Restated and Consolidated Junior Secured Promissory
Note between the Venture and MF VMS, L.L.C. relating to each of the
Venture's properties.
11 Calculation of Net Loss Per Investor.
99 Certification of Chief Executive Officer and Chief Financial Officer.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: /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: March 31, 2003
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/Patrick J. Foye Date: March 31, 2003
Patrick J. Foye
Executive Vice President
and Director
/s/Thomas C. Novosel Date: March 31, 2003
Thomas C. Novosel
Senior Vice President
and Chief Accounting Officer
CERTIFICATION
I, Patrick J. Foye, certify that:
1. I have reviewed this annual report on Form 10-K of VMS National Properties
Joint Venture;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/Patrick J. Foye
Patrick J. Foye
Executive Vice President of MAERIL,
Inc., equivalent of the chief executive
officer of the Venture
CERTIFICATION
I, Paul J. McAuliffe, certify that:
1. I have reviewed this annual report on Form 10-K of VMS National Properties
Joint Venture;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/Paul J. McAuliffe
Paul J. McAuliffe
Executive Vice President and Chief Financial
Officer of MAERIL, Inc., equivalent of the chief
financial officer of the Venture
Exhibit 11
VMS NATIONAL PROPERTIES JOINT VENTURE
CALCULATION OF NET LOSS PER INVESTOR
(in thousands, except per unit data)
For the Years Ended December 31,
2002 2001 2000
VMS National Properties net loss $(4,573) $(2,910) $ (38)
Portfolio I net loss -- -- (1)
Portfolio II net loss -- -- (1)
Combined net loss $(4,573) $(2,910) $ (40)
Portfolio I allocation:
70.69% VMS National Properties net loss $(3,233) $(2,057) $ (27)
100.00% Portfolio I net loss -- -- (1)
$(3,233) $(2,057) $ (28)
Net loss to general partner (2%) $ (64) $ (41) $ (1)
Net loss to limited partners (98%) $(3,169) $(2,016) $ (27)
Number of Limited Partner interests 644 644 644
Net loss per limited Partnership interest $(4,921) $(3,130) $ (43)
Portfolio II allocation:
29.31% VMS National Properties net loss $(1,340) $ (853) $ (11)
100% Portfolio II net loss -- -- (1)
$(1,340) $ (853) $ (12)
Net loss to general partner (2%) $ (27) $ (17) $ --
Net loss to limited partners (98%) $(1,313) $ (836) $ (12)
Number of Limited Partner interests 267 267 267
Net loss per limited Partnership interest $(4,918) $(3,131) $ (45)
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 Annual Report on Form 10-K of VMS National Properties
Joint Venture (the "Venture"), for the year ended December 31, 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: March 31, 2003
/s/Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: March 31, 2003
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Venture for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.