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.
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.
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.
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.
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.
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.
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.
Item 6. Selected Financial Data (in thousands, except per interest data):
The above selected financial data should be read in conjunction with the combined financial statements and the related notes.
Item 7.
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.
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.
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)
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF OPERATIONS (in thousands, except per limited partnership interest data)
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (in thousands)
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CASH FLOWS (in thousands)
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CASH FLOWS (continued) (in thousands)
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
(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
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):
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):
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
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.
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.
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.
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.
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.
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)
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.