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. Collectively, Portfolio I and Portfolio II are 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"). 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 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 States. At December 31, 1998, 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
Buena Vista Apartments 10/26/84 Apartment - Pasadena, CA 92 Units
Casa de Monterey 10/26/84 Apartment - Norwalk, CA 144 Units
Crosswood Park 12/05/84 Apartment - Citrus Heights, CA 180 Units
Mountain View Apartments 10/26/84 Apartment - San Dimas, CA 168 Units
Pathfinder 10/26/84 Apartment - Fremont, CA 246 Units
Scotchollow 10/26/84 Apartment - San Mateo, CA 418 Units
The Bluffs 10/26/84 Apartment - Milwaukee, OR 137 Units
Vista Village Apartments 10/26/84 Apartment - El Paso, TX 220 Units
Chapelle Le Grande 12/05/84 Apartment - Merrillville, IN 105 Units
North Park Apartments 11/14/84 Apartment - Evansville, IN 284 Units
Shadowood Apartments 11/14/84 Apartment - Monroe, LA 120 Units
Towers of Westchester Park 10/26/84 Apartment - College Park, MD 303 Units
Terrace Gardens 10/26/84 Apartment -
Omaha, NE 126 Units
Watergate Apartments 10/26/84 Apartment - Little Rock, AR 140 Units
Forest Ridge Apartments 10/26/84 Apartment - Flagstaff, AZ 278 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 Registrant's properties is the gross carrying value, accumulated depreciation, depreciable life, method of depreciation and Federal tax basis.
See "Note A" to the combined financial statements included in "Item 8. Financial Statements and Supplementary Data" for a description of the Venture's depreciation policy.
SCHEDULE OF PROPERTY INDEBTEDNESS:
The following table sets forth certain information relating to the loans encumbering the Registrant's property.
Principal Principal
Balance At Balance
December 31, Interest Period Maturity Due At
Property 1998 Rate Amortized Date Maturity
(in thousands) (in thousands)
Buena Vista
1st mortgage $ 4,975 8.50% 25 years 01/08 $ 4,171
2nd mortgage 1,332 10.84% (A) 01/08 (A)
Casa de Monterey
1st mortgage 4,119 8.50% 25 years 01/08 3,454
2nd mortgage 1,235 10.84% (A) 01/08 (A)
Crosswood Park
1st mortgage 5,592 8.50% 25 years 01/08 4,688
2nd mortgage 1,389 10.84% (A) 01/08 (A)
Mountain View
1st mortgage 7,188 8.50% 25 years 01/08 6,026
2nd mortgage 2,125 10.84% (A) 01/08 (A)
Pathfinder
1st mortgage 13,521 8.50% 25 years 01/08 11,336
2nd mortgage 3,740 10.84% (A) 01/08 (A)
Scotchollow
1st mortgage 29,262 8.50% 25 years 01/08 24,533
2nd mortgage 8,255 10.84% (A) 01/08 (A)
The Bluffs
1st mortgage 3,740 8.50% 25 years 01/08 3,135
2nd mortgage 1,060 10.84% (A) 01/08 (A)
Vista Village
1st mortgage 3,336 8.50% 25 years 01/08 2,797
2nd mortgage 995 10.84% (A) 01/08 (A)
Chapelle Le Grande
1st mortgage 3,219 8.50% 25 years 01/08 2,702
2nd mortgage 968 10.84% (A) 01/08 (A)
Principal Principal
Balance At Balance
December 31,Interest Period Maturity Due At
Property 1998 Rate Amortized Date Maturity
(in thousands) (in thousands)
North Park
1st mortgage 6,273 8.50% 25 years 01/08 $ 5,264
2nd mortgage 1,803 10.84% (A) 01/08 (A)
Shadowood
1st mortgage 2,261 8.50% 25 years 01/08 1,896
2nd mortgage 619 10.84% (A) 01/08 (A)
Towers of Westchester Park
1st mortgage 12,158 8.50% 25 years 01/08 10,203
2nd mortgage 3,557 10.84% (A) 01/08 (A)
Terrace Gardens
1st mortgage 4,455 8.50% 25 years 01/08 3,739
2nd mortgage 1,126 10.84% (A) 01/08 (A)
Watergate
1st mortgage 2,911 8.50% 25 years 01/08 2,440
2nd mortgage 851 10.84% (A) 01/08 (A)
Forest Ridge
1st mortgage 5,926 8.50% 25 years 01/08 4,968
2nd mortgage 1,741 10.84% (A) 01/08 (A)
Total $139,732 $91,352
(A) Payments based on excess monthly cash flow at each property, with any unpaid balance due at maturity.
Pursuant to the Plan of Reorganization, the mortgages formerly held by the FDIC were modified effective September 30, 1993. The face value of the notes were restated to agreed valuation amounts. Under the terms of the modification, the lender may reinstate the full claim upon the default of any note. As a result, the Venture deferred recognition of a gain of $54,053,000, which was the difference between the note face amounts and the agreed valuation amounts of the modified debt.
On December 29, 1997, the Venture refinanced the mortgages encumbering all of its remaining 15 properties. The refinancing resulted in each property being encumbered by new senior and junior loans. The senior loans each have an interest rate of 8.5% per annum and require monthly payments of principal and interest. The junior loans each have 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 loans include prepayment penalties if paid prior to January 1, 2007. The senior loans retained similar terms regarding note face amounts and agreed valuation amounts. These new loans were recorded at the agreed valuation amount of $110,000,000, which is less than the $152,225,000 face amount of the senior loans. If the Venture defaults on the new 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 refinanced note face amounts and the agreed valuation amounts. All the loans are cross-collateralized but they are not cross-defaulted. As a result of the refinancing, the Venture recognized an extraordinary gain on extinguishment of debt of $10,303,000, of which $11,828,000 is the result of a decreased difference between the note face amounts and agreed valuation amounts for the refinanced mortgage notes as compared to the old indebtedness. This gain was partially offset by debt
extinguishment costs of $41,000 and the write-off of discounts and loan costs on the old debt of $1,484,000.
SCHEDULE OF RENTAL RATES AND OCCUPANCY:
Average annual rental rate and occupancy for 1998 and 1997 for each property:
Average Annual Average
Rental Rates Per Unit Occupancy
Property 1998 1997 1998 1997
(in thousands)
Buena Vista $12,326 $11,491 99% 99%
Casa de Monterey 8,049 7,922 95% 94%
Crosswood Park 9,050 8,543 96% 96%
Mountain View 10,567 9,977 98% 98%
Pathfinder 13,575 11,618 90% 96%
Scotchhollow 14,819 12,467 95% 98%
The Bluffs 6,883 6,642 96% 95%
Vista Village 6,305 6,219 95% 92%
Chapelle Le Grande 8,231 7,945 93% 97%
North Park 6,072 5,843 97% 96%
Shadowood 6,349 6,156 95% 92%
Towers of Westchester Park 11,221 10,827 97% 91%
Terrace Gardens 9,057 8,524 95% 94%
Watergate 7,115 6,925 90% 95%
Forest Ridge 7,390 7,274 89% 84%
The Managing General Partner attributes the occupancy fluctuations at the properties to the following: a decrease at Pathfinder Village due to a fire which caused repairs to be made to one entire building during 1998 and rental rate increases; decrease at Chapelle Le Grande due to increased home purchases in the area; an increase at The Towers of Westchester Park due to a stronger rental market and more aggressive marketing; a decrease at Watergate Apartments due to a more competitive market; and an increase at Forest Ridge Apartments due to effective marketing efforts.
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. All of the properties are in good physical condition subject to normal depreciation and deterioration as is typical for assets of this type and age.
Real estate taxes and effective rates in 1998 for each property were as follows:
1998 1998
Taxes Rate
(in thousands)
Buena Vista $ 68 1.19%
Casa de Monterey 63 1.24%
Crosswood Park 84 1.03%
Mountain View 116 1.20%
Pathfinder 215 1.47%
Scotchollow 334 1.27%
The Bluffs 62 1.14%
Vista Village 107 2.95%
Chapelle Le Grande 50 12.12%
North Park 155 10.49%
Shadowood 31 12.30%
Towers of Westchester Park 203 3.71%
Terrace Gardens 83 2.40%
Watergate 54 6.39%
Forest Ridge 88 1.00%
CAPITAL IMPROVEMENTS:
North Park Apartments paid approximately $138,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of carpet replacements, HVAC condensing unit replacements, building improvements and lighting improvements. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $129,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $85,000 for 1999 at this property consisting primarily of electrical upgrades, balconies and driveway and parking lot repairs.
Chapelle Le Grande Apartments paid approximately $178,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of roof replacements, building improvements, carpet replacements, balcony replacements, land improvements and HVAC condensing units. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $122,000 of capital improvements over the near term. The Venture has budgeted capital improvements
of approximately $32,000 for 1999 at this property consisting primarily of roofing, siding/trim/facia/soffits, driveway and parking lot repairs, landscaping and irrigation.
Terrace Garden Townhouses paid approximately $219,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of balcony replacements, carpet replacements, parking lot repairs, replacement siding, carpet replacement and building improvements. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $370,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $38,000 for 1999 at this property consisting primarily of roofing, gutters and downspouts, HVAC, siding/trim/facia/soffits, exterior painting, balconies, driveway and parking lot repairs, landscaping and irrigation.
Forest Ridge Apartments paid approximately $86,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of HVAC condensing units, carpet replacements, new water heaters, refrigerators and new vinyl flooring. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $284,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $83,000 for 1999 at this property consisting primarily of gutters and downspouts, exterior painting, driveway and parking lot repairs, exterior lighting, and landscaping and irrigation.
Scotchollow Apartments paid approximately $624,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of roof replacements, carpet replacements, parking lot repairs, perimeter fencing and balcony replacements. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $382,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $125,000 for 1999 at this property consisting primarily of balconies, driveway and parking lot repairs, exterior lighting, landscaping and irrigation, and termite protection.
Pathfinder Village Apartments paid approximately $898,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of roof replacements and carpet replacements. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $591,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $74,000 for 1999 at this property consisting primarily of roofing, electrical upgrades, siding/trim/facia/soffits, exterior painting, stairwells, balconies, driveway and parking lot repairs, landscaping and irrigation, and termite protection.
Buena Vista Apartments paid approximately $23,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of carpet replacements, stove replacements, and land improvements. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and
estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $102,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $28,000 for 1999 at this property consisting primarily of carpet and vinyl replacements and swimming pool repairs.
Mountain View Apartments paid approximately $154,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of roof replacement and carpet and vinyl replacement. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $149,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $50,000 for 1999 at this property consisting primarily of carpet and vinyl replacements, land improvements and outdoor furniture.
Crosswood Park Apartments paid approximately $337,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of roof replacement, handicap renovations and carpet and vinyl replacements. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $129,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $54,000 for 1999 at this property consisting primarily of siding/trim/soffits, exterior painting, stairwells, and balconies.
Casa De Monterey Apartments paid approximately $179,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of roof replacement and carpet and vinyl replacements. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $106,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $43,000 for 1999 at this property consisting primarily of carpet and vinyl replacements.
The Bluffs Apartments paid approximately $29,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of carpet and vinyl replacements and signage. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $75,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $41,000 for 1999 at this property consisting primarily of carpet and vinyl replacements, parking lot repairs, building improvements and signage.
Watergate Apartments paid approximately $76,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of carpet replacements, roof replacements and water heater replacement. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $211,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $42,000
for 1999 at this property consisting primarily of roofing, electrical upgrades, landscaping and irrigation.
Shadowood Apartments paid approximately $64,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of carpet replacements, HVAC condensing units and outdoor furniture. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $435,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $36,000 for 1999 at this property consisting primarily of gutters and downspouts, HVAC, siding/trim/facia/soffits, exterior painting, balconies, driveway and parking lot repairs, landscaping and irrigation, fences, and pool repairs.
Vista Village Apartments paid approximately $73,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of carpet replacements, HVAC condensing units, refrigerator replacements and swimming pool repairs. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $326,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $66,000 for 1999 at this property consisting primarily of roofing, HVAC, electrical upgrades, driveway and parking lot repairs, exterior lighting, landscaping and irrigation, termite protection, and life support systems.
Tower of Westchester Apartments paid approximately $138,000 in capital improvements for the year ended December 31, 1998. This consisted primarily of carpet replacements, HVAC condensing units, refrigerator replacements, clubhouse renovations and other building improvements. These improvements were funded from replacement reserves. Based on a report received from an independent third party consultant analyzing necessary exterior improvements and estimates made by the Managing General Partner on interior improvements, it is estimated that the property requires approximately $681,000 of capital improvements over the near term. The Venture has budgeted capital improvements of approximately $91,000 for 1999 at this property consisting primarily of carpet replacements, cabinet replacements and appliance replacements.
Budgeted capital improvements which total approximately $888,000 for the Venture are expected to be funded from each of the property's replacement reserves. In conjunction with the December, 1997 refinancing of the mortgages encumbering all of the properties, the second mortgage note holder limits the funding of capital improvements to $300.00 per unit per annum. As a result, the capital improvement budgets for each of the Venture's properties have been prepared in accordance with the maximum limits permitted by the second mortgage notes.
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 unit holders of the Partnerships did not vote on any matter during the quarter ended December 31, 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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, 1998, there were 823 holders of record of Portfolio I and 332 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. During 1997, the number of Limited Partnership Units in Portfolio II decreased by 1 unit from 268 to 267 units due to a limited partner abandoning his/her unit. In abandoning his or her Limited Partnership Unit, a limited partner relinquishes all right, title and interest in the Partnership as of the date of abandonment.
There were no cash distributions to the partners of either of the Partnerships for the years ended December 31, 1998, 1997, and 1996. In accordance with the respective Agreements of Limited Partnership, there are no material restrictions on the Partnerships' ability to make cash distributions; future cash distributions are, however, subject to the order of distributions as stipulated by the Venture's Plan of Reorganization. The source of future distributions will depend upon the levels of net cash generated from operations, refinancings, property sales and the availability of cash reserves. The Partnerships' distribution policy will be reviewed on a quarterly basis. There can be no assurance, however, that the Partnerships will generate sufficient funds from operations, after required capital expenditures and the order of distributions as stipulated by the Venture's Plan of Reorganization, to permit any distributions to partners in 1999 or subsequent periods.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER INTEREST DATA):
A) During 1994, 1995 and 1996 respectively, four, five and two of the Ventures nonretained properties were foreclosed. As a result of these events, the Venture recognized extraordinary gains on the extinguishment of the related debt. As of December 31, 1996, all of the nonretained properties have been foreclosed.
B) During 1997, all of the Ventures' properties were refinanced. As a result, the Venture recognized an extraordinary gain on the extinguishment of debt.
C) During 1997, one Partnership interest was abandoned. In abandoning Partnership Units, a limited partner relinquishes all right, title and interest in the Partnership as of the date of abandonment. However, during the year of abandonment, the Limited Partner will still be allocated his or her share of the income or loss for that year.
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
The matters discussed in this Form 10-K contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosure contained in this Form 10-K and the other filings with the Securities and Exchange Commission made by the Registrant from time to time. The discussion of the Registrant's business and results of operations, including forward-looking statements pertaining to such matters, does not take into account the effects of any changes to the Registrant's business and results of operation. Accordingly, actual results could differ materially from those projected in the forward- looking statements as a result of a number of factors, including those identified herein.
This item should be read in conjunction with the combined financial statements and other items contained elsewhere in this report.
Results from Operations
1998 Compared with 1997
The Venture recorded a net loss for the year ended December 31, 1998 of $6,958,000 as compared to net income of $606,000 for the year ended December 31, 1997. (See "Note K" of the financial statements for a reconciliation of these amounts to the Registrant's federal taxable income (loss)). The decrease in net income is primarily attributable to an extraordinary gain on extinguishment of debt related to the refinancing of the Venture's properties on December 29, 1997. Net loss before the extraordinary gain on extinguishment of debt was $6,958,000 and $9,697,000 for the years ended December 31, 1998 and 1997, respectively. The decrease in net loss before the extraordinary gain is primarily attributable to an increase in total revenues as well as a slight decrease in total expenses. The increase in total revenues is due primarily to an increase in rental income and to a lesser extent an increase in other income and the recognition of a casualty gain. Rental income increased mainly due to an increase in average annual rental rates at all fifteen of the Venture's investment properties. In addition, occupancy at eight of the investment properties increased for 1998; occupancy at three other properties remained the same while the four remaining properties experienced decreases. Other income increased primarily due to an increase in corporate units at Shadowood Apartments. The Venture also recorded a casualty gain of $279,000 in connection with a fire that damaged eight of the 246 units at Pathfinder Village.
Total expenses decreased due to reductions in operating, general and administrative, interest and property tax expenses, which more than offset the increase in depreciation and the loss on disposal of property. Operating expenses decreased primarily due to the completion of a major landscaping project at Watergate Apartments and exterior building improvements at Terrace Gardens, Forest Ridge and Scotch Hollow in 1997. Also contributing to the reduction in operating expense was a decrease in hazard insurance expense at all of the Venture's investment properties. Finally, the cost of contract garbage removal services decreased at Scotch Hollow and Pathfinder. The decrease in general and administrative expenses is primarily due to a decrease in asset management fees and reimbursements resulting from the revised Asset Management Agreement, which was effective January 1, 1998. Interest expense decreased due to the 1997 refinancing of the Ventures senior loans to a lower interest rate.
The decrease in property taxes is primarily the result of reduced assessments at Casa de Monterey, Crosswood Park, Chapelle Le Grande and North Park.
Depreciation expense increased as the result of depreciation taken on property improvements and replacements for 1998. The loss on disposal of property resulted from the write-off of roofs that were not fully depreciated when replaced at Chapelle Le Grande, Pathfinder Village, Mountain View Apartments and Casa de Monterey during 1998.
Included in general and administrative expenses at both December 31, 1998 and 1997 are reimbursements to the Managing General Partner allowed under the Partnership Agreement associated with its management of the Venture. 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.
1997 Compared with 1996
The Venture realized net income of approximately $606,000 for the year ended December 31, 1997, compared to approximately $1,823,000 for the year ended December 31, 1996. Included in net income for the year ended December 31, 1997, is approximately $10,303,000 of extraordinary gain on extinguishment of debt related to the refinancing of the Venture's properties on December 29, 1997. Included in net income for the year ended December 31, 1996, is an extraordinary gain on extinguishment of debt of approximately $14,095,000 resulting from the foreclosures of two properties during 1996. Loss before extraordinary gain on extinguishment of debt was approximately $9,697,000 for 1997 compared to approximately $12,272,000 for 1996. The decrease in loss before extraordinary items is primarily attributable to the write-down of investment properties and the foreclosures of Weatheridge and Sierra Gardens during 1996, which caused a reduction in expenses during 1997. Loss before extraordinary items for Weatheridge and Sierra Gardens was approximately $2,480,000 in 1996. Included in this loss were write-downs of investment properties of approximately $1,850,000 to adjust the properties to their estimated fair market value. Included in other income in 1996 was approximately $59,000 in gains from the sales of Carlisle Square and Bellevue Towers.
With respect to the remaining properties, the loss before extraordinary items decreased by approximately $173,000. The decrease is primarily attributable to increased revenues and decreased expenses. Revenues increased due to increases in rental revenue of approximately $1,500,000 due to increased rental rates at all of the Venture's properties. Expenses decreased due to decreases in general and administrative expense, operating expense and property taxes, which were offset by increases in depreciation and interest expense. General and administrative expenses decreased as a result of decreases in professional and asset management fees. Operating expenses decreased primarily as a result of a decrease in leasing costs in an effort to increase occupancy and rental revenue at the properties. Interest expense increased as a result of increasing accrued interest balances causing compounded interest on the unpaid balances to increase.
As part of the ongoing business plan of the Venture, the Managing General Partner monitors the rental market environment of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Venture from increases in expense. 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, 1998, the Venture had cash and cash equivalents of approximately $931,000 as compared to approximately $2,510,000 at December 31, 1997. The decrease in cash and cash equivalents is due to $5,348,000 of cash used in investing activities and $1,776,000 used in financing activities, offset by $5,545,000 of cash provided by operating activities. Cash used in investing activities consisted of property improvements and replacements and net deposits to escrow accounts maintained by the mortgage lender, which is partially offset by net insurance proceeds received from the fire at Pathfinder Village. Cash used in financing activities consisted of payments of principal made on the mortgages encumbering the Venture's properties slightly offset by payments received on subscription notes. The Venture invests its working capital reserves in a money market account.
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. Such assets are currently thought to be sufficient for any near-term needs of the Venture. The Registrant has budgeted approximately $888,000 in capital improvements for all of the Registrant's properties in 1999. The capital expenditures will be incurred only if cash is available from operations or from the Registrant's reserves. To the extent that such budgeted capital improvements are completed, and the requirement to remit operating cash flow as payment on the junior loans of the Registrant's properties, distributable cash flow, if any, may be adversely affected at least in the short term.
On December 29, 1997, the Venture refinanced the mortgages encumbering all of its remaining 15 properties. The refinancing resulted in each property being encumbered by new senior and junior loans. The senior loans all have an interest rate of 8.5% per annum and require monthly payment of principal and interest. The junior loans all have 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. The senior loans are recorded at the agreed valuation amount of $110,000,000, which is less than the $152,225,000 face amount of the senior loans. In accordance with the terms of the notes, if the related junior note is prepaid and the outstanding agreed valuation amount of the senior note is paid between January 1, 2007 and January 1, 2008, the notes will be discharged without further liability. All of the loans are cross- collateralized, but they are not cross-defaulted. As a result of the refinancing, the Venture recognized an extraordinary gain on extinguishment of debt of $10,303,000 during 1997. The extraordinary gain is the result of the recognition of $11,828,000 of the deferred gain on extinguishment of debt, which was reduced by debt extinguishment costs of $41,000 and the write-off of discounts and loan costs on the old debt of $1,484,000. The reduction in the deferred gain on extinguishment of debt results from the reduction of the difference between the aggregate note face amounts and the aggregate agreed valuation amounts. Under the terms of the old notes, the aggregate note face amounts exceeded the aggregate valuation amounts by $54,053,000. Under the terms of the new notes, the aggregate note face amounts exceed the aggregate agreed valuation amounts by $42,225,000.
The Registrant's current assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Registrant. The Registrant's senior loans encumbering all of its properties total approximately $108,938,000 and are being amortized over 25 years, with a balloon payment of $91,352,000 due January 2008. The Registrant's junior loans, which also mature January 2008, total approximately $30,794,000 and require monthly payments based upon monthly excess cash flow for each property. The Managing General Partner may attempt to refinance such indebtedness and/or sell the properties prior to such maturity date. If the properties cannot be refinanced or sold for a sufficient amount, the Venture will risk losing such properties through foreclosure.
There were no cash distributions to the partners of either of the Partnerships for the years ended December 31, 1998, 1997, and 1996. In accordance with the respective Agreements of Limited Partnership, there are no material restrictions on the Partnerships' ability to make cash distributions; future cash distributions are, however, subject to the order of distributions as stipulated by the Venture's Plan of Reorganization. The source of future distributions will depend upon the levels of net cash generated from operations, refinancings, property sales and the availability of cash reserves. The Partnerships' distribution policy will be reviewed on a quarterly basis. There can be no assurance, however, that the Partnerships will generate sufficient funds from operations, after required capital expenditures and the order of distributions as stipulated by the Venture's Plan of Reorganization, to permit any distributions to partners in 1999 or subsequent periods.
Year 2000 Compliance
General Description of the Year 2000 Issue and the Nature and Effects of the Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. The Venture is
dependent upon the Managing General Partner and its affiliates for management and administrative services ("Managing Agent"). Any of the computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
Over the past two years, the Managing Agent has determined that it will be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Managing Agent presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made or not completed in time, the Year 2000 issue could have a material impact on the operations of the Venture.
The Managing Agent's plan to resolve Year 2000 issues involves four Phases: assessment, remediation, testing, and implementation. To date, the Managing Agent has fully completed its assessment of all the information systems that could be significantly affected by the Year 2000, and has begun the remediation, testing and implementation phases on both hardware and software systems. Assessments are continuing in regards to embedded systems. The status of each is detailed below.
Status of Progress in Becoming Year 2000 Compliant, Including Timetable for Completion of Each Remaining Phase
Computer Hardware:
During 1997 and 1998, the Managing Agent identified all of the computer systems at risk and formulated a plan to repair or replace each of the affected systems. In August 1998, the mainframe system used by the Managing Agent became fully functional. In addition to the mainframe, PC-based network servers and routers and desktop PCs were analyzed for compliance. The Managing Agent has begun to replace each of the non-compliant network connections and desktop PCs and, as of December 31, 1998, had completed approximately 75% of this effort.
The total cost to the Managing Agent to replace the PC-based network servers, routers and desktop PCs is expected to be approximately $1.5 million of which $1.3 million has been incurred to date. The remaining network connections and desktop PCs are expected to be upgraded to Year 2000 compliant systems by March 31, 1999.
Computer software:
The Managing Agent utilizes a combination of off-the-shelf, commercially available software programs as well as custom-written programs that are designed to fit specific needs. Both of these types of programs were studied, and implementation plans written and executed with the intent of repairing or replacing any non-compliant software programs.
During 1998, the Managing Agent began converting the existing property management and rent collection systems to its management properties Year 2000 compliant systems. The estimated additional costs to convert such systems at all properties, is $200,000, and the implementation and the testing process is expected to be completed by March 31, 1999.
The final software area is the office software and server operating systems. The Managing Agent has upgraded all non-compliant office software systems on each PC and has upgraded 80% of the server operating systems. The remaining server operating systems are planned to be upgraded to be Year 2000 compliant by March 31, 1999.
Operating Equipment:
The Managing Agent has operating equipment, primarily at the property sites, which needed to be evaluated for Year 2000 compliance. In September 1997, the Managing Agent began taking a census and inventory of embedded systems (including those devices that use time to control systems and machines at specific properties, for example elevators, heating, ventilating, and air conditioning systems, security and alarm systems, etc.).
The Managing Agent has chosen to focus its attention mainly upon security systems, elevators, heating, ventilating and air conditioning systems, telephone systems and switches, and sprinkler systems. While this area is the most difficult to fully research adequately, management has not yet found any major non-compliance issues that put the Managing Agent at risk financially or operationally. The Managing Agent intends to have a third-party conduct an audit of these systems and report their findings by March 31, 1999.
Any of the above operating equipment that has been found to be non-compliant to date has been replaced or repaired. To date, these have consisted only of security systems and phone systems. As of December 31, 1998 the Managing Agent has evaluated approximately 86% of the operating equipment for the Year 2000 compliance.
The total cost incurred for all properties managed by the Managing Agent as of December 31, 1998 to replace or repair the operating equipment was approximately $400,000. The Managing Agent estimates the cost to replace or repair any remaining operating equipment is approximately $325,000, which is expected to be completed by April 30, 1999.
The Managing Agent continues to have "awareness campaigns" throughout the organization designed to raise awareness and report any possible compliance issues regarding operating equipment within our enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
The Managing Agent continues to conduct surveys of its banking and other vendor relationships to assess risks regarding their Year 2000 readiness. The Managing Agent has banking relationships with three major financial institutions, all of which have indicated their compliance efforts will be complete before May 1999. The Managing Agent has updated data transmission standards with two of the three financial institutions. The Managing Agent's contingency plan in this regard is to move accounts from any institution that cannot be certified Year 2000 compliant by June 1, 1999.
The Venture does not rely heavily on any single vendor for goods and services, and does not have significant suppliers and subcontractors who share information systems (external agent). To date the Venture is not aware of any external agent with a Year 2000 compliance issue that would materially impact the Venture's results of operations, liquidity, or capital resources. However, the Venture has no means of ensuring that external agents will be Year 2000 compliant.
The Managing Agent does not believe that the inability of external agents to complete their Year 2000 remediation process in a timely manner will have a material impact on the financial position or results of operations of the Venture. However, the effect of non-compliance by external agents is not readily determinable.
Costs to Address Year 2000
The total cost of the Year 2000 project to the Managing Agent is estimated at $3.5 million and is being funded from operating cash flows. To date, the Managing Agent has incurred approximately $2.8 million ($0.6 million expensed and $2.2 million capitalized for new systems and equipment) related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $0.5 million is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $0.2 million relates to repair of hardware and software and will be expensed as incurred. The Venture's portion of these costs are not material.
Risks Associated with the Year 2000
The Managing Agent believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Managing Agent has not yet completed all necessary phases of the Year 2000 program. In the event that the Managing Agent does not complete any additional phases, certain worst case scenarios could occur. The worst case scenarios could include elevators, security and heating, ventilating and air conditioning systems that read incorrect dates and operate with incorrect schedules (e.g., elevators will
operate on Monday as if it were Sunday). Although such a change would be annoying to residents, it is not business critical.
In addition, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Partnership. The Venture could be subject to litigation for, among other things, computer system failures, equipment shutdowns or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time.
Contingency Plans Associated with the Year 2000
The Managing Agent has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and selecting new relationships for such activities as banking relationships and elevator operating systems.
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 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 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. Based on interest rates at December 31, 1998, a 1% increase or decrease 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, 1998. The interest rates are weighted-average rates. The fair value of the debt obligations approximate the recorded value as of December 31, 1998.
Weighted-average Principal Interest Rate (in thousands) 1999 $ 1,211 10.84% 2000 1,293 10.84% 2001 1,436 10.84% 2002 1,565 10.84% 2003 1,705 10.84% Thereafter 132,522 9.05% Total $ 139,732
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF COMBINED FINANCIAL STATEMENTS
Report of Independent Auditors
Combined Balance Sheets - Years ended December 31, 1998 and 1997
Combined Statements of Operations - Years ended December 31, 1998, 1997, and
Combined Statements of Changes in Partners' Deficit - Years ended December 31, 1998, 1997, and 1996
Combined Statements of Cash Flows - Years ended December 31, 1998, 1997, and
Notes to Combined Financial Statements
Report of Ernst & Young LLP, Independent Auditors
The Partners VMS National Residential Portfolio I and VMS National Residential Portfolio II
We have audited the accompanying combined balance sheets of VMS National Residential Portfolio I (an Illinois Limited Partnership), VMS National Residential Portfolio II (an Illinois Limited Partnership) and VMS National Properties (an Illinois Partnership) and Subpartnerships (collectively the "Venture") as of December 31, 1998 and 1997, 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, 1998. 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 generally accepted auditing standards. 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 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 Residential Portfolio I, VMS National Residential Portfolio II and VMS National Properties and Subpartnerships at December 31, 1998 and 1997, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
/s/ERNST & YOUNG LLP
Greenville, South Carolina March 3, 1999
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS
COMBINED BALANCE SHEETS (in thousands)
December 31, December 31,
1998 1997
Assets:
Cash and cash equivalents $ 931 $ 2,510
Receivables and deposits 2,163 1,872
Restricted escrows 2,596 86
Other assets 418 478
Investment properties:
Land 13,404 13,404
Buildings and personal property 133,223 130,603
Less accumulated depreciation (80,798) (75,411)
65,829 68,596
$ 71,937 $ 73,542
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 405 $ 369
Tenant security deposit liabilities 1,108 1,105
Accrued property taxes 1,047 605
Other liabilities 493 994
Accrued interest 1,076 --
Mortgage notes payable 139,732 139,449
Notes payable 37,458 33,455
Deferred gain on extinguishment of debt 42,225 42,225
Partners' Deficit (151,607) (144,660)
$ 71,937 $ 73,542
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS (in thousands, except per interest data)
For The Years Ended December 31,
1998 1997 1996
Revenues:
Rental income $ 26,511 $ 24,507 $ 23,847
Other income 1,166 1,070 1,154
Casualty gain 279 -- --
Total revenues 27,956 25,577 25,001
Expenses:
Operating 8,832 9,192 9,465
Property management fees 1,222 1,013 994
General and administrative 685 953 1,063
Depreciation 5,696 5,465 5,447
Interest 16,600 16,924 16,652
Property taxes 1,691 1,727 1,802
Write-down of investment properties -- -- 1,850
Loss on disposal of property 188 -- --
Total expenses 34,914 35,274 37,273
Loss before extraordinary item (6,958) (9,697) (12,272)
Extraordinary item - gain on
extinguishment of debt -- 10,303 14,095
Net (loss) income $ (6,958) $ 606 $ 1,823
Net (loss) income allocated to $ (9,262)
general partners $ (139) $ 12 $ 36
Net (loss) income allocated to
limited partners (6,819) 594 1,787
$ (6,958) $ 606 $ 1,823
Net (loss) income per limited
partnership interest:
Loss before extraordinary item
Portfolio I (644 interests) $ (7,483) $(10,417) $(13,185)
Portfolio II (1) $ (7,493) $(10,425) $(13,193)
Extraordinary item
Portfolio I (644 interests) $ -- $ 11,071 $ 15,146
Portfolio II (1) $ -- $ 11,071 $ 15,146
Net (loss) income
Portfolio I (644 interests) $ (7,483) $ 654 $ 1,961
Portfolio II (1) $ (7,493) $ 646 $ 1,953
(1) 267, 268 and 268 interests at December 31, 1998, 1997 and 1996, respectively.
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (in thousands)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (CONTINUED) (in thousands)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS (in thousands)
For The Years Ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net (loss) income $ (6,958) $ 606 $ 1,823
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating
Activities:
Write-down of investment properties -- -- 1,850
Extraordinary gain on
Extinguishment of debt -- (10,303) (14,095)
Depreciation 5,696 5,465 5,447
Amortization of mortgage discounts
and loan costs 4,003 3,688 3,309
Loss on disposal of property 188 76 163
Gain on sale of properties -- -- (59)
Casualty gain (279)
Change in accounts:
Receivables and deposits (291) 670 (201)
Other assets 60 43 201
Accounts payable 36 67 (62)
Tenant security deposit liabilities 3 25 4
Accrued interest 3,146 (11,948) 4,220
Accrued property taxes 442 113 39
Other liabilities (501) 197 (389)
Net cash provided by (used in)
operating activities 5,545 (11,301) 2,250
Cash flows from investing activities:
Property improvements and replacements (3,216) (2,297) (2,029)
Proceeds from sale of property -- -- 3,847
Net insurance proceeds from casualty 378 -- --
Net deposits to restricted escrow: (2,510) (20) (103)
Net cash (used in) provided by
investing activities $ (5,348) $(2,317) $ 1,715
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED) (in thousands)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998
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" or the "Former Managing General Partner") (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"). Thus the Managing General Partner is now a wholly-owned subsidiary of AIMCO. See "Note B _ Transfer of
Control." The directors and officers of the Managing General Partner also serve as executive officers of AIMCO.
The Venture originally acquired 51 residential apartment properties located throughout the United States. Of these 51 properties, four were foreclosed prior to 1993. As more fully described in "Note C", the Venture filed for Chapter 11 bankruptcy protection on February 22, 1991. The Venture's Second Amended and Restated Plan of Reorganization (the "Plan") became effective on September 30, 1993. Pursuant to the Plan, 19 of the Venture's properties were foreclosed in 1993, four properties were foreclosed in 1994, five properties were foreclosed in 1995 and an additional two properties foreclosed in 1996. Also, the Venture sold two of the residential properties during 1996. The Venture continues to own and operate 15 of the residential apartment complexes it originally acquired. These properties are 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 combined financial statements include the accounts of Portfolio I, Portfolio II, the Venture and Subpartnerships. 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 and the Venture's properties are allocated to Portfolio I and Portfolio II on a pro-rata, cumulative basis using the ratio of their respective Limited Partnership Interests issued and outstanding. The operating profits and losses of Portfolio I and Portfolio II are allocated 98% to the respective Limited Partners and 2% to the respective general partners.
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 Plan and approved by the Bankruptcy Court. 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 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 generally accepted accounting principles 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 amount of its financial instruments (except for long term debt) approximates their fair value due to the short term maturity of these instruments. The fair value of the Venture's long term debt, after discounting the scheduled loan payments to maturity, approximates its carrying balance.
Cash and Cash Equivalents:
The Venture considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits.
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. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," 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. The adoption of this statement during 1996 resulted in a write-down of investment properties of $1,850,000 in 1996. No adjustments for impairment of value were recorded in the years ended December 31, 1998 or 1997.
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 lesser 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, 1998 is $2,596,000, including interest.
Depreciation:
Depreciation is computed by the straight-line method over estimated useful lives ranging from 25 to 29 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. 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.
Segment Reporting:
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("Statement 131"), which is effective for years beginning
after December 15, 1997. Statement 131 established standards for the way that 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. See "Note L" for detailed disclosure of the Venture's segments.
Advertising Costs:
The Venture expenses the cost of advertising as incurred. Advertising costs of approximately $335,000, $334,000, and $313,000, are included in operating expense for the years ended December 31, 1998, 1997, and 1996, respectively.
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.
Reclassifications:
Certain reclassifications have been made to the 1996 and 1997 balances to conform to the 1998 presentation.
Note B - Transfer of Control
Pursuant to a series of transactions which closed on October 1, 1998 and February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust merged into Apartment Investment and Management Company, a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO ultimately acquired a 100% ownership interest in Insignia Properties Trust ("IPT"), the entity which controls the Managing General Partner. The Managing General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Venture.
Note C - Petition for Relief under Chapter 11 and Plan of Reorganization
On February 22, 1991, the Venture filed for Chapter 11 bankruptcy protection in the United States Bankruptcy court in the Central District of California. The initial filing included only the residential apartment complexes directly owned by the Venture (entities included in the filing herein after referred to collectively as the Debtor) and excluded the 10 Subpartnerships consisting of 10 residential apartment complexes encumbered by financing insured or held by the Department of Housing and Urban Development ("HUD"), and the investing limited partnerships Portfolio I and Portfolio II. Due to the partnership agreements existing between the Venture, Portfolio I and Portfolio II, which provide the Venture with exclusive rights to the limited partner investor contributions, the
Venture's initial filing was amended to reflect the Venture's right to receive any excess limited partner investor contributions.
The Venture's Plan was confirmed by the Bankruptcy Court in March 1993 and became effective on September 30, 1993 (the "Effective Date"). During 1997, the Plan was modified in order to allow the Venture to refinance the debt encumbering it's properties (see "Note C"). The bankruptcy plan was closed by the bankruptcy court on April 29, 1998.
The Primary aspects of the Venture's Plan of Reorganization included the following:
(a) The Venture retained 17 properties from the existing portfolio (the "retained properties"), and abandoned title of the remaining properties (the "non-retained properties") to the Federal Deposit Insurance Corporation (the "FDIC"). The retained properties consisted of one HUD property and sixteen non- HUD properties. Two of the seventeen retained properties were sold during the second quarter of 1996. All of the non-retained properties were foreclosed upon as of December 31, 1996 (see "Note D").
(b) The Venture restructured the existing senior-lien debt obligations on the retained properties (except for one of the retained properties which had a first mortgage lien insured by HUD and two of the retained properties which had senior liens formerly payable to the FDIC, as successor to Beverly Hills Mortgage Corporation ("BH")) to provide for an interest rate of 8.75% per annum effective as of the first day of the month of the Effective Date with payments based on a 30 year amortization commencing on the first monthly payment due thereafter with a maturity of January 15, 2000.
The senior lien collateralized by HUD on one of the retained properties was not modified, and the senior liens formerly held by the FDIC were modified to accrue at 9% per annum effective as of the first day of the month of the Effective Date with monthly payments of interest only made at 7% per annum commencing with the first monthly payments due thereafter on the FDIC value, as defined in "c" below.
All of the senior-lien debt was refinanced on December 29, 1997 (see "Note D").
(c) As it pertained to the existing BH junior mortgages on the retained properties, the FDIC reduced its claim on two of the properties to $300,000 per property evidenced by a non-interest bearing note scheduled to mature January 15, 2000, and left in place liens for the full amount of its claims at the petition date for all other retained properties. Interest on the former FDIC loans for these retained properties accrued at 10% per annum on the FDIC value (total property value per the FDIC's June 1992 valuations less the property's senior lien indebtedness) commencing as of the first day of the month of the Effective Date and monthly payments of interest only at 7% per annum on the FDIC value will commence with the first monthly payment due thereafter. (The retained property governed by a HUD Regulatory Agreement made payments of interest only following the approval by HUD of the Surplus Cash calculation.) On October 28,
1995, the FDIC sold all of the debt it held related to the retained properties to BlackRock Capital Finance, L.P. The debt amounts and terms were not modified. On December 29, 1997, all of the junior mortgages were refinanced (see "Note D").
(d) The Venture distributed the following amounts in conjunction with the terms of the Plan: (1) approximately $5,980,000 to satisfy unsecured prepetition creditor claims of the nonaffiliated note payable to Security Pacific National Bank, trade creditors, and property taxes on the retained properties; (2) approximately $1,056,000 to provide for allowed and unclassified administrative claims; and (3) approximately $5,960,000 to make capital improvements at the retained properties. This capital improvement reserve was exhausted during 1995.
(e) The VMS/Stout Joint Venture (the "VMS/Stout Venture") was formed pursuant to an agreement dated August 18, 1984, which was amended and restated on October 4, 1984. VMS Realty Partners has a 50% interest and affiliates of the Seller (as defined below) have a 50% interest in the VMS/Stout Venture. The VMS/Stout Venture, the J.D. Stout Company ("Stout") and certain affiliates of Stout entered into a contract of sale dated August 18, 1984, which was amended on October 4, 1984. The contract provided for the sale by Stout and other owners (collectively the "Seller") of the 51 residential apartment complexes to the VMS/Stout Venture. The VMS/Stout Venture assigned its interest as purchaser to the Venture. During 1987, Stout assigned its interest in the VMS/Stout Joint Venture to ContiTrade Service Corporation ("ContiTrade"). On November 17, 1993, VMS Realty Partners assigned its interest in the VMS/Stout Joint Venture to the Partners Liquidating Trust (see "Note F"). The VMS/Stout Joint Venture was granted an allowed claim in the amount of $49,535,000 for the Assignment and Long-Term Loan Arrangement Notes payable to them by the Venture. Payments totaling $3,475,000 in conjunction with this allowed claim were made to the nonaffiliated members of the VMS/Stout Joint Venture on October 7, 1993. The Venture also executed a $4,000,000 promissory note dated September 1, 1993, to ContiTrade Services Corporation (the "ContiTrade Note") in connection with these allowed note claims. The ContiTrade Note represented a prioritization of payments to ContiTrade of the first $4,000,000 in repayments made under the existing Assignment and Long-Term Loan Arrangement Notes payable to the VMS/Stout Joint Venture, and did not represent an additional $4,000,000 claim payable to ContiTrade. In addition to prioritizing ContiTrade's receipt of the first $4,000,000 of repayments on the old notes, the ContiTrade Note provided for 5% non-compounding interest on the outstanding principal balance calculated daily on the basis of a 360 day year. The ContiTrade Note was secured by a Deed of Trust, Assignment of Rents and Security Agreement on each of the Venture's retained properties, and provided ContiTrade with other approval rights as to
the ongoing operations of the Venture's retained properties. The ContiTrade Note, which was scheduled to mature January 15, 2000, was paid off on December 29, 1997 (see "Note D").
(f) The Venture entered into a Revised Restructured Amended and Restated Asset Management Agreement (the "Revised Asset Management Agreement") with Insignia. Effective October 1, 1993, Insignia took over the asset management of the Venture's retained properties and partnership functions for the Venture. The Revised Asset Management Agreement provided for an annual compensation of $500,000 to be paid to Insignia in equal monthly installments. In addition, Insignia received reimbursement for all accountable expenses incurred in connection with their services up to $200,000 per calendar year. These amounts are to be paid from the available operating cash flow of the Venture's retained complexes after the payment of operating expenses and priority reserve funding for insurance, real estate and personal property taxes and senior and junior mortgage payments. If insufficient operating cash flow exists after the funding of these items, the balance of asset management fees and reimbursements may be paid from available partnership cash sources. Additionally, the asset management fee payable will be reduced proportionately for each of the Venture's retained complexes which are sold or otherwise disposed of from time to time. Accordingly, the fee was reduced upon the disposition of Bellevue and Carlisle Square in 1996. Effective January 1, 1998, in relation to the refinancing of the senior-lien debt on December 29, 1997 (see "Note D"), the Venture and Managing General Partner agreed to amend the Asset Management Agreement to reduce the annual asset management fee payable to $300,000 per year and to reduce the annual reimbursement for accountable expenses to $100,000.
Note D - Extraordinary Gain On Extinguishment Of Debt
Pursuant to the Plan of Reorganization (see "Note C"), the mortgages formerly held by the FDIC were modified effective September 30, 1993. The face value of the notes were restated to agreed valuation amounts. Under the terms of the modification, the lender may reinstate the full claim upon the default of any note. As a result, the Venture deferred recognition of a gain of $54,053,000, which was the difference between the note face amounts and the agreed valuation amounts of the modified debt.
On December 29, 1997, the Venture refinanced the mortgages encumbering all of its remaining 15 properties. The refinancing resulted in each property being encumbered by new senior and junior loans. The senior loans each have an interest rate of 8.5% per annum and require monthly payments of principal and interest. The junior loans each have an interest rate of 10.84% per annum and require monthly payments based on excess monthly cash flow, as defined, for each property. All of the loans mature on January 1, 2008, and the senior loans include prepayment penalties if paid prior to January 1, 2007. The senior loans retained similar terms regarding note face amounts and agreed valuation amounts. These new 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 loans. If the Venture defaults on the new 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 refinanced note face amounts and the agreed valuation amounts. All the loans are cross-collateralized, but they are not cross-defaulted. In conjunction with the refinancing, the Venture paid the outstanding principal and accrued interest on the $4,000,000 ContiTrade Note (see "Note F"). As a result of the refinancing, the Venture recognized an extraordinary gain on extinguishment of debt of $10,303,000, of which $11,828,000 is the result of a decreased difference between the note face amounts and agreed valuation amounts for the refinanced mortgage notes as
compared to the old indebtedness. This gain was partially offset by debt extinguishment costs of $41,000 and the write-off of discounts and loan costs on the old debt of $1,484,000.
For the year ended December 31, 1996, the Combined Statements of Operations reflect the foreclosures of Weatheridge and Sierra Gardens. As a result of these foreclosures, the following liabilities and assets were written off (in thousands):
Mortgage principal payable $ 6,291
Accrued interest payable 9,941
Other 26
Investment in properties (5,781)
Accumulated depreciation 3,618
Extraordinary gain $14,095
Note E - Mortgage Notes Payable
Principal Monthly Principal
Balance At Payment Balance
December 31, Including Interest Maturity Due At
Property 1998 Interest Rate Date Maturity
(in thousands) (in thousands)
Buena Vista
1st mortgage $ 4,975 $40 8.50% 01/08 $4,171
2nd mortgage 1,332 (A) 10.84% 01/08 (A)
Casa de Monterey
1st mortgage 4,119 33 8.50% 01/08 3,454
2nd mortgage 1,235 (A) 10.84% 01/08 (A)
Crosswood Park
1st mortgage 5,592 45 8.50% 01/08 4,688
2nd mortgage 1,389 (A) 10.84% 01/08 (A)
Mountain View
1st mortgage 7,188 58 8.50% 01/08 6,026
2nd mortgage 2,125 (A) 10.84% 01/08 (A)
Pathfinder
1st mortgage 13,521 109 8.50% 01/08 11,336
2nd mortgage 3,740 (A) 10.84% 01/08 (A)
Scotchollow
1st mortgage 29,262 236 8.50% 01/08 24,533
2nd mortgage 8,255 (A) 10.84% 01/08 (A)
Principal Monthly Principal
Balance At Payment Balance
December 31, Including Interest Maturity Due At
Property 1998 Interest Rate Date Maturity
(in thousands) (in thousands)
The Bluffs
1st mortgage $ 3,740 $30 8.50% 01/08 $3,135
2nd mortgage 1,060 (A) 10.84% 01/08 (A)
Vista Village
1st mortgage 3,336 27 8.50% 01/08 2,797
2nd mortgage 995 (A) 10.84% 01/08 (A)
Chapelle Le Grande
1st mortgage 3,219 26 8.50% 01/08 2,702
2nd mortgage 968 (A) 10.84% 01/08 (A)
North Park
1st mortgage 6,273 51 8.50% 01/08 5,264
2nd mortgage 1,803 (A) 10.84% 01/08 (A)
Shadowood
1st mortgage 2,261 18 8.50% 01/08 1,896
2nd mortgage 619 (A) 10.84% 01/08 (A)
Towers of
Westchester Park
1st mortgage 12,158 98 8.50% 01/08 10,203
2nd mortgage 3,557 (A) 10.84% 01/08 (A)
Principal Monthly Principal
Balance At Payment Balance
December 31, Including Interest Maturity Due At
Property 1998 Interest Rate Date Maturity
(in thousands) (in thousands)
Terrace Gardens
1st mortgage $ 4,455 $ 36 8.50% 01/08 $3,739
2nd mortgage 1,126 (A) 10.84% 01/08 (A)
Watergate
1st mortgage 2,911 23 8.50% 01/08 2,440
2nd mortgage 851 (A) 10.84% 01/08 (A)
Forest Ridge
1st mortgage 5,926 48 8.50% 01/08 4,968
2nd mortgage 1,741 (A) 10.84% 01/08 (A)
$139,732 $878 $91,352
(A) Payments are based on excess monthly cash flow, as defined, with any unpaid balance due at maturity.
Scheduled principal payments on mortgage loans payable subsequent to December 31, 1998, are as follows (in thousands):
1999 $ 1,211
2000 1,293
2001 1,436
2002 1,565
2003 1,705
Thereafter 132,522
$ 139,732
Note F - Notes Payable
Assignment Note:
The Venture executed a $29,000,000 purchase money subordinated note (the "Assignment Note") payable to the VMS/Stout Venture 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.
On November 17, 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.
The stated rate of interest on the Assignment Note (prior to modification by the Plan) was 12% per annum (compounded semi-annually) with monthly payments of interest only at a rate of 6%. Monthly payments on this note were discontinued in May 1990, and the accrual of interest was discontinued after the February 22, 1991 petition filing date. Additionally, effective April 10, 1991, VMS Realty Partners waived its right to collect interest on its portion of the Assignment Note.
Pursuant to the Plan, the allowed claim for the Assignment Note and related interest was $46,285,000; $3,475,000 of this amount was paid in October 1993, in accordance with the terms of the Plan. The Venture also executed a $4,000,000 promissory note payable dated September 1, 1993 to ContiTrade Services Corporation ("ContiTrade Note") with interest at 5% per annum. This note represented a prioritization of payment to ContiTrade and did not represent the assumption of any additional debt. The ContiTrade Note was to mature on January 15, 2000, and was collateralized by a Deed of Trust, Assignment of Rents and
Security Agreement on each of the Venture's retained complexes. This note was paid with the December 29, 1997, refinancing (see "Note D").
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%. At December 31, 1998, the carrying amount of the Assignment Note is $34,208,000, net of discount for imputed interest of $4,602,000. Interest expense is being recognized through the amortization of the discount which totaled approximately $4,003,000, $3,618,000, and $3,227,000 in 1998, 1997, and 1996, respectively.
Long-Term Loan Arrangement Fee Note:
The Venture executed a $3,000,000 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 stated rate of interest on this note prior to modification by the Plan was 10% per annum, payable on a monthly basis. Monthly interest payments on this Note were discontinued in May 1990. Additionally, the accrual of interest on this Note was discontinued after the February 22, 1991 petition filing date.
Pursuant to the Plan, the entire $3,250,000 balance, which included $250,000 in unpaid accrued interest that was rolled into principal, was granted as an allowed claim. None of this balance bears interest, and the balance is payable only after debt of a higher priority, including senior and junior mortgage loans.
Note G - 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 partnership activities. The Revised Asset Management Agreement, which was executed in conjunction with the Venture's Plan, provided 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 $500,000 and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Venture up to $200,000 per annum. Effective January 1, 1998, in relation to the refinancing of the senior-lien debt on December 29, 1997 (see "Note D"), the Venture and Managing General Partner agreed to amend the Asset Management Agreement to reduce the annual asset management fee payable to $300,000 per year and to reduce the annual reimbursement for accountable expenses to $100,000.
Included in investment properties and operating expenses are construction oversight reimbursements, paid to an affiliate of the Managing General Partner, of approximately $54,000 and $43,000 for the years ended December 31, 1998 and 1997. There were no construction oversight reimbursements paid for the year ended December 31, 1996.
Asset management fees of approximately $300,000, $441,000 and $461,000 were paid to an affiliate of the Managing General Partner for the years ended December 31, 1998, 1997 and 1996, respectively.
Affiliates of the Managing General Partner are entitled to receive a percentage of the gross receipts from all of Registrant's properties as compensation for providing property management services. The Registrant paid to such affiliates $1,122,000, $1,013,000 and $994,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
In addition, affiliates of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $100,000, $200,000 and $200,000 for the years ended December 31, 1998, 1997, and 1996, respectively. These expenses are included in general and administrative expenses.
An affiliate of the Managing General Partner received bookkeeping reimbursements in the amount of approximately $144,000, $145,000 and $11,000 for the years ended December 31, 1998, 1997, and 1996, respectively. These expenses are included in general and administrative expenses.
In connection with the Venture's Plan, the court approved the payment of certain fees and expense reimbursements due to the Former Managing General Partner relating to the prepetition period. In 1996, the Venture paid approximately $586,000 in asset management fees, approximately $186,000 in property management fees and approximately $755,000 in expense reimbursements to the Former Managing General Partner primarily from the proceeds of the sale of Carlisle Square and Bellevue Towers. An unpaid balance of approximately $397,000 in management fees owing to the Former Managing General Partner was assigned to MF VMS, L.L.C., the note holder for the senior and junior notes. This balance was paid during 1998.
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 partnership cash. During the year ended December 31, 1997, payments of approximately $336,000 were made. At December 31, 1998 and 1997, the outstanding balance of $79,000 is included in other liabilities.
Certain affiliates of the former general partners and the VMS/Stout Venture may be entitled to receive various fees upon disposition of the properties. These fees will be paid from the disposition proceeds and are subordinated to the distributions required by the Plan. There were no property dispositions for which proceeds were received through December 31, 1998.
Note H - 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 $135,055,000 was contributed in cash through December 31, 1998, and $910,000 was deemed uncollectible and written-off prior to December 31, 1998. The following table represents the remaining Limited Partners' subscription notes principal balances and the related accrued interest receivable at December 31, 1998 (in thousands):
Portfolio I Portfolio II
Subscription notes receivable $ 506 $ 329
Accrued interest receivable 63 67
Total subscription notes and
accrued interest receivable $ 569 $ 396
All amounts outstanding at December 31, 1998, are considered past due and bear interest at the default rate of 18%. No interest will be recognized until collection is assured.
Note I - Investment Properties and Accumulated Depreciation
The aggregate costs of the investment properties for Federal income tax purposes at December 31, 1998 and 1997, is approximately $164,090,000 and $160,565,000, respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 1998 and 1997, is approximately $121,859,000 and $115,792,000, respectively.
Reconciliation of Investment Properties and Accumulated Depreciation:
1998 1997 1996
Investment Properties
Balance at beginning of year $144,007 $141,859 $155,440
Property improvements
and replacements 3,216 2,297 2,029
Write-down of investment property -- -- (1,850)
Dispositions of property (596) (149) (13,760)
Balance at end of Year $146,627 $144,007 $141,859
Accumulated Depreciation
Balance at beginning of year $ 75,411 $ 70,019 $ 72,219
Additions charged to expense 5,696 5,465 5,447
Dispositions of property (309) (73) (7,647)
Balance at end of Year $ 80,798 $ 75,411 $ 70,019
Note J - Sale of Investment Properties
The Venture sold two of the retained properties, Carlisle Square Apartments and Bellevue Towers Apartments, to an unaffiliated party on April 19, 1996, and April 30, 1996, respectively. The properties sold had a net book value of approximately $2,247,000 for Carlisle Square Apartments and approximately $1,541,000 for Bellevue Towers Apartments. The Venture received net proceeds from the sales of Carlisle Square and Bellevue Towers after payments of costs related to the sales of approximately $2,291,000 and $1,556,000, respectively. The total gains on the sale of Carlisle Square and Bellevue Towers were approximately $44,000 and $15,000, respectively, and are included in other income in the accompanying combined statements of operations. The gain has been allocated to the partners in accordance with the Limited Partnership Agreement. Of the combined proceeds, approximately $2,356,000 was used to pay down the mortgage note payable and $1,388,000, was used to repay advances from affiliates of the Former Managing General Partner.
Note K - Income Taxes
The following is a reconciliation of reported net (loss) income per the financial statements to the Federal taxable income to partners:
1998 1997 1996
(in thousands)
Net (loss) income as reported $ (6,958) $ 606 $ 1,823
Depreciation and amortization
differences (371) (260) (1,036)
Unearned income 66 181 (179)
Gain on refinancing -- (8,787) --
Gains on foreclosures and sales -- -- 793
Casualty loss 161 -- --
Write-down of fixed assets 125 208 1,936
Other 185 129 (149)
Federal taxable (loss) income $ (6,792) $(7,923) $ 3,188
The following is a reconciliation between the Venture's reported amounts and Federal tax basis of net liabilities at December 31, 1998 (in thousands):
Net liabilities as reported $(151,607)
Land and buildings 17,463
Accumulated depreciation (41,061)
Syndication costs 17,650
Deferred gain 42,225
Other deferred costs 9,601
Other (53,355)
Notes payable 4,822
Subscription note receivable 1,842
Mortgage payable (47,727)
Accrued interest 9,571
Net liabilities - Federal tax basis $(190,516)
Note L _ Segment Reporting
As defined by SFAS No. 131, Disclosures about Segment of an Enterprise and Related Information, VMS National Properties Joint Venture has one reportable segment: residential properties. The Venture's residential property segment consists of fifteen apartment complexes located in nine states throughout the United States. The Venture rents apartment units to people for terms that are typically twelve months or less.
The Venture evaluates performance based on net income. The accounting policies of the reportable segment are the same as those described in the summary of significant accounting policies.
The Venture's reportable segment consists of business units (investment properties) that offer similar products and services. Although each of the investment properties is managed separately, they have been aggregated into one segment as they provide services with similar types of products and customers.
Segment information for the years 1998, 1997 and 1996 is shown in the tables below (in thousands). The 'Other' column includes Venture administration related items and income and expense not allocated to the reportable segment.
Residential Other Totals Rental income $26,511 $ -- $ 26,511 Other income 1,108 58 1,166 Interest expense 12,596 4,004 16,600 Depreciation 5,696 -- 5,696 General and administrative expense -- 685 685 Casualty gain 279 -- 279 Loss on disposal of assets (188) -- (188) Segment loss (2,327) (4,631) (6,958) Total assets 71,454 483 71,937 Capital expenditures 3,216 -- 3,216
Residential Other Totals Rental income $ 24,507 $ -- $ 24,507 Other income 967 103 1,070 Interest expense 13,148 3,776 16,924 Depreciation 5,465 -- 5,465 General and administrative expense -- 953 953 Extraordinary item - gain on extinguishment of debt 10,303 -- 10,303 Segment profit (loss) 5,232 (4,626) 606 Total assets 71,961 1,581 73,542 Capital expenditures 2,297 -- 2,297
Residential Other Totals Rental income $ 23,847 $ -- $ 23,847 Other income 1,055 99 1,154 Interest expense 13,225 3,427 16,652 Depreciation 5,447 -- 5,447 General and administrative expense -- 1,063 1,063 Write-down of investment properties 1,850 -- 1,850 Extraordinary item - gain on extinguishment of debt 13,880 215 14,095 Segment profit (loss) 5,999 (4,176) 1,823 Total assets 73,924 2,855 76,779 Capital expenditures 2,029 -- 2,029
Note M - 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 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with Ernst & Young, LLP regarding the 1998, 1997, or 1996 audits of the Venture's financial statements.
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, 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 41 Executive Vice President and Director
Timothy R. Garrick 42 Vice President _ Accounting and Director
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. Prior to joining AIMCO, Mr. Foye was a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998 and was Managing Partner of the firm's Brussels, Budapest and Moscow offices from 1992 through 1994. Mr. Foye is also Deputy Chairman of the Long Island Power Authority and serves as a member of the New York State Privatization Council. He received a B.A. from Fordham College and a J.D. from Fordham University Law School.
Timothy R. Garrick has served as Vice President-Accounting of AIMCO and Vice President-Accounting and Director of the Managing General Partner since October 1, 1998. Prior to that date, Mr. Garrick served as Vice President-Accounting Services of Insignia Financial Group since June of 1997. From 1992 until June of 1997, Mr. Garrick served as Vice President of Partnership Accounting and from 1990 to 1992 as an Asset Manager for Insignia Financial Group. From 1984 to 1990, Mr. Garrick served in various capacities with U.S. Shelter Corporation. From 1979 to 1984, Mr. Garrick worked on the audit staff of Ernst & Whinney. Mr. Garrick received his B.S. Degree from the University of South Carolina and is a Certified Public Accountant.
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" below.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners.
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, 1998.
(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.
(c) Change in control
Pursuant to a series of transactions which closed on October 1, 1998 and February 26, 1999, Insignia Financial Group, Inc. and Insignia Properties Trust merged into Apartment Investment and Management Company, a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO ultimately acquired a 100% ownership interest in Insignia Properties Trust ("IPT"), the entity which controls the Managing General Partner. The Managing General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Partnership.
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 partnership activities. The Revised Asset Management Agreement, which was executed in conjunction with the Venture's Plan, provided 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 $500,000 and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Venture up to $200,000 per annum. Effective January 1, 1998, in relation to the refinancing of the senior-lien debt on December 29, 1997 (see "Note D"), the Venture and Managing General Partner agreed to amend the Asset Management Agreement to reduce the annual asset management fee payable to $300,000 per year and to reduce the annual reimbursement for accountable expenses to $100,000.
Included in investment properties and operating expenses are construction oversight reimbursements, paid to an affiliate of the Managing General Partner, of approximately $54,000 and $43,000 for the years ended December 31, 1998 and 1997. There were no construction oversight reimbursements paid for the year ended December 31, 1996.
Asset management fees of approximately $300,000, $441,000 and $461,000 were paid to an affiliate of the Managing General Partner for the years ended December 31, 1998, 1997 and 1996, respectively.
Affiliates of the Managing General Partner are entitled to receive a percentage of the gross receipts from all of Registrant's properties as compensation for providing property management services. The Registrant paid to such affiliates
$1,122,000, $1,013,000 and $994,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
In addition, affiliates of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $100,000, $200,000 and $200,000 for the years ended December 31, 1998, 1997, and 1996, respectively. These expenses are included in general and administrative expenses.
An affiliate of the Managing General Partner received bookkeeping reimbursements in the amount of approximately $144,000, $145,000 and $11,000 for the years ended December 31, 1998, 1997, and 1996, respectively. These expenses are included in general and administrative expenses.
In connection with the Venture's Plan, the court approved the payment of certain fees and expense reimbursements due to the Former Managing General Partner relating to the prepetition period. In 1996, the Venture paid approximately $586,000 in asset management fees, approximately $186,000 in property management fees and approximately $755,000 in expense reimbursements to the Former Managing General Partner primarily from the proceeds of the sale of Carlisle Square and Bellevue Towers. An unpaid balance of approximately $397,000 in management fees owing to the Former Managing General Partner was assigned to MF VMS, L.L.C., the note holder for the senior and junior notes. This balance was paid during 1998.
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 partnership cash. During the year ended December 31, 1997, payments of approximately $336,000 were made. At December 31, 1998 and 1997, the outstanding balance of $79,000 is included in other liabilities.
Certain affiliates of the former general partners and the VMS/Stout Venture may be entitled to receive various fees upon disposition of the properties. These fees will be paid from the disposition proceeds and are subordinated to the distributions required by the Plan. There were no property dispositions for which proceeds were received through December 31, 1998.
PART IV
ITEM 14.
ITEM 14. 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, 1998 and 1997.
Combined Statements of Operations for the years ended December 31, 1998, 1997 and 1996.
Combined Statements of Changes in Partners' Deficit for the years ended December 31, 1998, 1997 and 1996.
Combined Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.
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:
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.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1998.
Current Report on Form 8-K dated October 1, 1998, filed on October 16, 1998 disclosing change in control of Registrant from Insignia Financial Group, Inc. to AIMCO.
(c) Exhibits:
See Exhibit Index
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/Timothy R. Garrick Timothy R. Garrick Vice President - Accounting
VMS National Residential Portfolio II
By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President
By: /s/Timothy R. Garrick Timothy R. Garrick Vice President - Accounting
Date: March 30, 1999
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 30, 1999 Patrick J. Foye Executive Vice President and Director
/s/Timothy R. Garrick Date: March 30, 1999 Timothy R. Garrick Vice President _ Accounting and Director
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.
27 Financial Data Schedule
99.1 Current Report on Form 8-K dated October 1, 1998, filed on October 16, 1998, disclosing change in control from Insignia Financial Group, Inc. to AIMCO.