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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number 1-13232

Apartment Investment and Management Company

(303) 757-8101
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report)

     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 [   ]

     The number of shares of Class A Common Stock outstanding as of October 31, 2002: 93,649,333

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

FORM 10-Q

INDEX

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

See notes to consolidated financial statements.

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)

See notes to consolidated financial statements.

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

See notes to consolidated financial statements.

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APARTMENT INVESTMENT AND MANAGEMENT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)

NOTE 1 — Organization

     Apartment Investment and Management Company (“AIMCO”), a Maryland corporation incorporated on January 10, 1994, owns a majority of the ownership interests in AIMCO Properties, L.P. (the “AIMCO Operating Partnership”) through its wholly owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP, Inc. AIMCO held approximately an 88% interest in the AIMCO Operating Partnership as of September 30, 2002. AIMCO-GP, Inc. is the sole general partner of the AIMCO Operating Partnership. Except where the context otherwise requires, “Company” refers to AIMCO, the AIMCO Operating Partnership and AIMCO’s consolidated corporate subsidiaries and consolidated real estate partnerships.

     As of September 30, 2002, the Company:

	•		owned a controlling equity interest in 179,663 units in 694 apartment properties (which the Company refers to as “consolidated”);
	•		owned a non-controlling equity interest in 122,149 units in 933 apartment properties (which the Company refers to as “unconsolidated”), of which 78,413 units were also managed by the Company; and
	•		provided services or managed, for third party owners, 25,058 units in 203 apartment properties, primarily pursuant to long term, non-cancelable agreements.

     At September 30, 2002, 93,195,129 shares of AIMCO’s Class A Common Stock (the “Common Stock”) were outstanding. Interests in the AIMCO Operating Partnership that are held by limited partners other than the Company are referred to as “OP Units.” Holders of common OP Units may redeem such units for cash or, at the Company’s option, Common Stock. At September 30, 2002, the AIMCO Operating Partnership had 12,446,817 common OP Units and equivalents outstanding. At September 30, 2002, a combined total of 105,641,946 shares of Common Stock and OP Units were outstanding (excluding preferred OP Units).

NOTE 2 — Basis of Presentation

     The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

     The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

     For further information, refer to the statements and notes thereto included in the AIMCO annual report on Form 10-K for the year ended December 31, 2001. Certain 2001 financial statement amounts have been reclassified to conform to the 2002 presentation, including certain eliminations of self-charged income, as well as the treatment of discontinued operations.

     The accompanying consolidated financial statements include the accounts of AIMCO, the AIMCO Operating Partnership, majority owned corporate subsidiaries and consolidated real estate partnerships. As used herein, and except where the context otherwise requires, “partnership” refers to a limited partnership or a limited liability company and “partner” refers to a limited partner in a limited partnership or a member in a limited liability company. All significant intercompany balances and transactions have been eliminated in consolidation. The assets

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of consolidated real estate partnerships owned or controlled by AIMCO or the AIMCO Operating Partnership generally are not available to pay creditors of AIMCO or the AIMCO Operating Partnership.

     Interests held in consolidated real estate partnerships by limited partners other than the Company are reflected as minority interest in consolidated real estate partnerships. Minority interest in real estate partnerships represents the minority partners’ share of the underlying net assets of the Company’s consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions in excess of net income, the Company, as the majority partner, records a charge equal to the minority partners’ excess of distributions over net income, even though the Company does not suffer any economic effect, cost or risk. This charge is classified in the consolidated statements of income as distributions to minority partners in excess of income. Losses are allocated to minority partners until such time as such losses exceed the minority interest basis, in which case, the Company recognizes 100% of the losses in operating earnings, even though the Company does not suffer any economic effect, cost or risk. With regard to such consolidated real estate partnerships, approximately $0.8 million in non-cash depreciation losses related to the minority interest ownership were charged to operations for the three and nine months ended September 30, 2002, respectively, and no losses were charged to operations for the three and nine months ended September 30, 2001, respectively.

NOTE 3 — Notes Receivable from Unconsolidated Real Estate Partnerships

     The following table summarizes the Company’s notes receivable from unconsolidated real estate partnerships at September 30, 2002 and 2001 (in thousands):

     The Company recognizes interest income earned from its investments in notes receivable when the collectibility of such amounts is both probable and estimable. The notes receivable were either extended by the Company and are carried at the face amount plus accrued interest (“par value notes”) or were made by predecessors whose positions have been acquired at a discount (“discounted notes”).

     As of September 30, 2002 and 2001, the Company held, primarily through its consolidated corporate subsidiaries, $115.3 million and $128.9 million, respectively, of par value notes receivable from unconsolidated real estate partnerships, including accrued interest, for which the Company believes the collectibility of such amounts is both probable and estimable. As such, interest income from the par value notes is generally recognized as it is earned. Interest income from such notes for the three and nine months ended September 30, 2002 totaled $7.3 million and $24.2 million, respectively, and for the three and nine months ended September 30, 2001 totaled $8.1 million and $22.8 million, respectively.

     As of September 30, 2002 and 2001, the Company held discounted notes, including accrued interest, with a carrying value of $132.2 million and $128.5 million, respectively. The total face value plus accrued interest of these notes was $221.7 million and $289.3 million at September 30, 2002 and 2001, respectively.

     Under the cost recovery method, the discounted notes are carried at the acquisition amount, less subsequent cash collections, until such time as collectibility of principal and interest is probable and the timing and amounts are estimable. Based upon closed or pending transactions (which include sales, refinancing, foreclosures and rights offering activities), the Company has determined that certain notes are collectible for amounts greater than their carrying value. Accordingly, the Company is amortizing, as interest income, on a prospective basis over the estimated remaining life of the loans, the difference between the carrying value of the discounted notes and the estimated collectible value. For the three and nine months ended September 30, 2002, the Company recognized deferred interest income and discounts of approximately $3.8 million ($0.04 per basic and diluted share) and $19.3 million ($0.20 per basic and diluted share), respectively, and for the three and nine months ended September 30, 2001, the Company recognized deferred interest income and discounts of approximately $3.1 million ($0.04 per basic and diluted share) and $5.7 million ($0.07 per basic and diluted share), respectively. These amounts are net of allocated expenses of $0.2 million and $0.8 million for the three and nine months ended September 30, 2002,

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respectively, and none and $2.2 million for the three and nine months ended September 30, 2001, respectively. The notes receivable generally are realizable through collection of cash or obtaining ownership of the property.

     The Company continues to assess the collectibility or impairment of each note on a periodic basis. During the three and nine months ended September 30, 2002, the Company identified and recorded provisions for losses on notes receivable of $1.7 million and $4.8 million, respectively. The Company will continue to monitor and assess these notes, and expects to identify both recoveries and impairments, but does not expect any net impairments to have a material adverse affect on its consolidated financial condition or results of operations taken as a whole.

NOTE 4 — Commitments and Contingencies

  Legal

     The Company is a party to various legal actions resulting from its operating activities. These actions are routine litigation and administrative proceedings arising in the ordinary course of business, some of which are covered by liability insurance, and none of which are expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.

  Limited Partnerships

     In connection with the Company’s acquisitions of interests in real estate partnerships, it is sometimes subject to legal actions, including allegations that such activities may involve breaches of fiduciary duties to the limited partners of such real estate partnerships or violations of the relevant partnership agreements.

     The Company may incur costs in connection with the defense or settlement of such litigation. The Company believes it complies with its fiduciary obligations and relevant partnership agreements. Although the outcome of any litigation is uncertain, the Company does not expect any such legal actions to have a material adverse affect on the Company’s consolidated financial condition or results of operations taken as a whole.

  Environmental

     Various federal, state and local laws subject property owners or operators to liability for the costs of removal or remediation of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. The presence of, or the failure to properly remedy, hazardous substances may adversely affect occupancy at affected apartment communities and the ability to sell or finance affected properties. In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous wastes on a property could result in claims by private plaintiffs for personal injury, disease, disability or other infirmities. Various laws also impose liability for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous or toxic substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of properties, the Company could potentially be liable for environmental liabilities or costs associated with its properties or properties it acquires or manages in the future.

     There have been recent reports of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold in residential units. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Company has been named as a defendant in lawsuits that have alleged personal injury as a result of the presence of mold. Prior to March 31, 2002, the Company generally was insured against claims arising from the presence of mold due to water intrusion. However, since March 31, 2002, certain of the Company’s insurance carriers have excluded from insurance coverage property damage loss claims arising from the presence of mold, although the Company does retain some limited coverage for catastrophic property damage due to mold. In addition, certain of the Company’s insurance carriers do provide some coverage for personal injury claims, which coverage generally expires on December 31, 2002.

     The Company has implemented protocols and procedures to prevent or eliminate mold from its properties and believes that its measures will eliminate, or at least minimize, the effects that mold could have on its residents. To date, the Company has not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. Because the law regarding mold is unsettled and subject to change, however, the Company can

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make no assurance that liabilities resulting from the presence of or exposure to mold will not have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.

  Other Legal Matters

     In December 2001, AIMCO and certain of its affiliated partnerships that own properties voluntarily entered into an agreement with the U.S. Environmental Protection Agency (“EPA”) and the U.S. Department of Housing and Urban Development (“HUD”) pursuant to which AIMCO agreed to pay a fine of $130,000, conduct lead-based paint inspections and other testing, if necessary, on properties initially built prior to 1978, and re-issue lead-based paint disclosures to residents of such properties that have not been certified as lead-base paint free. In return, neither AIMCO nor its properties will be subject to any additional fines for inadequate disclosures prior to the execution of the agreement. The cost of the settlement, inspections and remediations incurred to date had been reserved for at the time the Company acquired the NHP Incorporated and Insignia Financial Group, Inc. portfolios. Any remaining costs are not expected to be material.

     On January 30, 2002, AIMCO and four of its affiliated partnerships were named as defendants in a lawsuit brought by the City Attorney for the City and County of San Francisco in the Superior Court, County of San Francisco. The City Attorney asserts that the defendants have violated certain state and local residential housing codes, and engaged in unlawful business practices and unfair competition, in connection with four properties owned and operated by the affiliated partnerships. The City Attorney asserts civil penalties from $500 to $1,000 per day for each affected unit, as well as other statutory and equitable relief. The Company has engaged in preliminary discussions with the City Attorney to resolve the lawsuit. In the event it is unable to resolve the lawsuit, the Company believes it has meritorious defenses to assert and it will vigorously defend itself. The matter has been set for trial on July 7, 2003. Although the outcome of any litigation is uncertain, the Company does not believe that the ultimate outcome will have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.

     National Program Services, Inc. and Vito Gruppuso (collectively “NPS”) are insurance agents who in 2000 sold to the Company property insurance issued by National Union Fire Insurance Company of Pittsburgh, PA (“National Union”). The financial failure of NPS resulted in defaults in June 2002 under two agreements by which NPS indemnified the Company from losses relating to the matters described below. As a result of such defaults, the Company faces the risk of impairment of a $16.7 million insurance-related receivable as well as a contingent liability of $5.7 million. The Company’s receivable arose from the improper and premature cancellation by National Union of its property insurance coverage in April 2001. The Company had paid to National Union amounts in excess of $10 million in prepaid premiums for property insurance coverage that was to continue through at least April 2002. In addition, the Company has a $6.7 million receivable from NPS to reimburse it for payments on a premium finance agreement, proceeds of which were to pay premiums to National Union. The Company holds two $5 million surety bonds issued by Lumberman’s Mutual Insurance Company to secure the NPS indemnities. In addition, the Company has pending litigation in the U.S. District Court for the District of Colorado against National Union, First Capital Group, a New York based insurance wholesaler, NPS and other agents of National Union, for a refund of at least $10 million of the prepaid premium plus other damages resulting from the cancellation of the coverage. The cancellation of the property insurance coverage in 2001 has no effect on the Company’s present property insurance coverage or on coverage that existed through April 2001.

     With respect to the contingent liability arising from the NPS defaults, in July 2002 the Company received a demand for payment of $5.7 million from Cananwill, Inc., a premium funding company, allegedly due for premium payments made to National Union. The Company believes it has meritorious defenses to assert, and it will vigorously defend itself in the event Cananwill commences any litigation. In the event of litigation and an adverse determination, the Company will seek reimbursement of any loss from the bonds securing the NPS indemnification agreements as well as from all third parties responsible for the misapplication of its payments.

     Although the outcome of any claim or matter in litigation is uncertain, the Company does not believe that it will incur any material loss in connection with the receivable or that the ultimate outcome of these separate but related matters will have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.

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NOTE 5 — Stockholders’ Equity

  Preferred Stock

     On March 19, 2002, AIMCO announced that on April 18, 2002 it would redeem for Common Stock all 5,000,000 outstanding shares of its Class K Convertible Cumulative Preferred Stock, par value $0.01 per share (the “Class K Preferred Stock”) at a redemption price of $27.2125 per share of Class K Preferred Stock. The redemption price was payable in shares of Common Stock at a price of $45.7835 per share, or the issuance of 0.5944 shares of Common Stock for each share of Class K Preferred Stock redeemed. Subsequent to this announcement, the holders of all 5,000,000 shares of Class K Preferred Stock converted such shares into approximately 2,972,000 shares of Common Stock.

     On March 25, 2002, AIMCO sold 1,000,000 shares of Class R Cumulative Preferred Stock, par value $0.01 per share (the “Class R Preferred Stock”) in a registered public offering, and on April 11, 2002, AIMCO sold an additional 1,000,000 shares of Class R Preferred Stock in a registered public offering. The total net proceeds from both of these offerings of approximately $50 million were used to repay short-term indebtedness. Holders of the Class R Preferred Stock are entitled to receive dividends in an annual amount of $2.50, or 10% of the $25 per share liquidation preference. These dividends are cumulative from the date of original issuance and are payable quarterly each year. Class R Preferred Stock is senior to Common Stock as to dividends and liquidation. Upon any liquidation, dissolution or winding up of AIMCO, before payments of distributions by AIMCO are made to any holders of Common Stock, the holders of Class R Preferred Stock are entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. Each share of Class R Preferred Stock is redeemable beginning July 20, 2006 at the option of AIMCO, at a price equal to the liquidation preference of $25 per share, plus all accrued and unpaid dividends, if any, to the date fixed for redemption.

     On May 6, 2002, the holder of 2,500,000 shares of AIMCO Class L Convertible Cumulative Preferred Stock, par value $0.01 per share (the “Class L Preferred Stock”), with a face value of $62.5 million, converted such shares into 1,344,664 shares of Common Stock. Following this conversion, as of September 30, 2002, 2,500,000 shares of Class L Preferred Stock remained outstanding.

     On July 29, 2002, AIMCO announced that on August 28, 2002, it would redeem all outstanding shares of its Class B Convertible Cumulative Preferred Stock, par value $0.01 per share (the “Class B Preferred Stock”) for cash equal to the liquidation preference of $100 per share, plus accrued and unpaid dividends through the redemption date of $1.73545 per share. On August 20, 2002, the holder of all 419,471 shares of Class B Preferred Stock converted such shares into 1,377,573 shares of Common Stock.

  Common Stock

     On June 5, 2002, AIMCO completed the sale of 8,000,000 shares of Common Stock in an underwritten public offering at a net price of $46.17 per share. The net proceeds of approximately $369 million were used to repay outstanding short-term indebtedness under the Company’s credit facility and the term loan that was used to finance the Company’s acquisition of Casden Properties, Inc. (“Casden”), in March 2002, which included the merger of Casden into the Company (the “Casden Merger”).

     In August and September of 2002, the holders of mandatorily redeemable convertible preferred securities (“TOPRS”) converted approximately $5.3 million of TOPRS into approximately 107,000 shares of Common Stock. The TOPRS were assumed by AIMCO in October 1998 in connection with its merger with Insignia Financial Group, Inc. The TOPRS have a conversion price of $49.61 per share, which, based on a liquidation amount of $50 per security, results in the issuance of 1.0079 shares of Common Stock for each TOPRS converted.

     During the three and nine months ended September 30, 2002, approximately 169,000 and 441,000 shares of Common Stock, respectively, were issued in exchange for common OP Units tendered for redemption.

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NOTE 6 — Earnings Per Share

     Earnings per share is calculated based on the weighted average number of shares of Common Stock, common stock equivalents and dilutive convertible securities outstanding during the period. The following table illustrates the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2002 and 2001 (in thousands, except per share data):

     Convertible preferred shares/units that could be converted into 10,814 and 17,352 weighted average shares of Common Stock for the three months ended September 30, 2002 and 2001, respectively, and 13,147 and 16,538 weighted average shares of Common Stock for the nine months ended September 30, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.

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NOTE 7 — Industry Segments

     The Company has two reportable segments: real estate (owning and operating apartments); and investment management business (providing, to third parties and affiliates, services relating to the apartment business). The Company owns and operates multifamily apartment communities throughout the United States and Puerto Rico that generate rental and other property related income through the leasing of apartment units to a diverse base of tenants. The Company separately evaluates the performance of each of its apartment communities. However, because each of its apartment communities has similar economic characteristics, the apartment communities have been aggregated into a single apartment communities, or real estate, segment. The Company considers disclosure of different components of the multifamily housing business to be useful. All real estate revenues are from external customers and no revenues are generated from transactions with other segments. A significant portion of the revenues earned in the investment management business are from transactions with affiliates in the real estate segment.

     No single tenant or related group of tenants contributed 10% or more of total revenues during the three and nine months ended September 30, 2002 or 2001. The Company also manages apartment properties and provides other services for third parties and affiliates through its investment management business segment. As disclosed, a significant portion of the revenues of the investment management business is from affiliates.

     A performance measure the Company uses for each segment is its contribution to free cash flow (“Free Cash Flow” or “FCF”). The Company defines Free Cash Flow as net operating income less the capital spending required to maintain and improve the related assets. Free Cash Flow measures profitability prior to the cost of capital. Other performance measures the Company uses include funds from operations, adjusted funds from operations and earnings before structural depreciation. The Company deducts Capital Replacement spending to arrive at Free Cash Flow and adjusted funds from operations. In addition, beginning in the second quarter of 2002, the Company began deducting Capital Enhancement spending as well as Capital Replacement spending. This additional deduction is reflected on a prospective basis.

     The following tables present the contribution (separated between consolidated and unconsolidated activity) to the Company’s Free Cash Flow for the three and nine months ended September 30, 2002 and 2001, from these segments, and a reconciliation of Free Cash Flow to funds from operations, funds from operations less actual spending for Capital Replacements and Capital Enhancements, and net income (in thousands, except equivalent units (ownership effected) and monthly rents):

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FREE CASH FLOW FROM BUSINESS COMPONENTS
For the Three Months Ended September 30, 2002 and 2001
(in thousands, except unit data)