UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________to _________
Commission file number 0-14194
VMS NATIONAL PROPERTIES JOINT VENTURE
(Exact name of registrant as specified in its charter)
Illinois 36-3311347
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
55 Beattie Place, PO Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X_
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED BALANCE SHEETS
(in thousands)
March 31, December 31,
2003 2002
(Unaudited) (Note)
Assets:
Cash and cash equivalents $ 1,980 $ 2,809
Receivables and deposits 2,139 1,711
Restricted escrows 820 849
Other assets 192 378
Investment properties:
Land 13,404 13,404
Buildings and related personal property 150,090 149,074
163,494 162,478
Less accumulated depreciation (107,197) (105,494)
56,297 56,984
$ 61,428 $ 62,731
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 535 $ 340
Tenant security deposit liabilities 908 893
Accrued property taxes 995 603
Other liabilities 721 779
Accrued interest 699 703
Due to affiliate 3,971 3,902
Mortgage notes payable, including $23,809 and $24,687
due to an affiliate at March 31, 2003 and
December 31, 2002, respectively 126,789 128,100
Mortgage participation liability 9,872 8,653
Notes payable 42,060 42,060
Deferred gain on extinguishment of debt 42,225 42,225
Partners' Deficit (167,347) (165,527)
$ 61,428 $ 62,731
Note: The combined balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit data)
Three Months Ended
March 31,
2003 2002
Revenues:
Rental income $ 7,325 $ 7,356
Other income 564 529
Casualty gain 38 --
Total revenues 7,927 7,885
Expenses:
Operating 2,900 2,396
Property management fees to an affiliate 323 323
General and administrative 150 164
Depreciation 1,737 1,665
Interest 4,123 4,253
Property taxes 514 480
Total expenses 9,747 9,281
Net loss $(1,820) $(1,396)
Net loss allocated to general partners (2%) $ (37) $ (28)
Net loss allocated to limited partners (98%) (1,783) (1,368)
$(1,820) $(1,396)
Net loss per limited partnership interest:
Portfolio I (644 interests issued and outstanding) $(1,958) $(1,502)
Portfolio II (267 interests issued and outstanding) $(1,955) $(1,502)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands)
VMS National Residential Portfolio I
Limited Partners
Limited
General Accumulated Subscription Partners'
Partners Deficit Notes Total Total
Partners' deficit at
December 31, 2002 $(3,641) $(112,369) $ (502) $(112,871) $(116,512)
Net loss for the
three months ended
March 31, 2003 (26) (1,261) -- (1,261) (1,287)
Partners' deficit at
March 31, 2003 $(3,667) $(113,630) $ (502) $(114,132) $(117,799)
VMS National Residential Portfolio II
Limited Partners
Limited
General Accumulated Subscription Partners'
Partners Deficit Notes Total Total
Partners' deficit at
December 31, 2002 $(1,524) $ (47,163) $ (328) $ (47,491) $ (49,015)
Net loss for the
three months ended
March 31, 2003 (11) (522) -- (522) (533)
Partners' deficit at
March 31, 2003 $(1,535) $ (47,685) $ (328) $ (48,013) $ (49,548)
Combined total $(5,202) $(161,315) $ (830) $(162,145) $(167,347)
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
2003 2002
Cash flows from operating activities:
Net loss $(1,820) $(1,396)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 1,737 1,665
Amortization of mortgage discounts 1,219 1,092
Casualty gain (38) --
Change in accounts:
Receivables and deposits (428) (272)
Other assets 186 (712)
Accounts payable 179 (541)
Tenant security deposit liabilities 15 (56)
Accrued property taxes 392 288
Accrued interest 198 437
Other liabilities (58) 650
Due to affiliate 72 69
Net cash provided by operating activities 1,654 1,224
Cash flows from investing activities:
Property improvements and replacements (1,047) (1,538)
Net withdrawals from restricted escrows 29 141
Insurance proceeds received 51 --
Net cash used in investing activities (967) (1,397)
Cash flows from financing activities:
Payments on mortgage notes payable (1,513) (2,370)
Payments on advances from affiliates (3) --
Net cash used in financing activities (1,516) (2,370)
Net decrease in cash and cash equivalents (829) (2,543)
Cash and cash equivalents at beginning of period 2,809 5,048
Cash and cash equivalents at end of period $ 1,980 $ 2,505
Supplemental disclosure of cash flow information:
Cash paid for interest, including approximately $507 and
$428 paid to an affiliate $ 2,637 $ 2,654
Supplemental disclosure of non-cash activity:
Accrued interest added to mortgage notes payable $ 202 $ 423
At March 31, 2003 and December 31, 2002 accounts payable and property
improvements and replacements were adjusted by approximately $41,000 and
$25,000, respectively.
Included in property improvements and replacements for the three months ended
March 31, 2002 are approximately $843,000 of improvements which were included in
accounts payable at December 31, 2001.
See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited combined financial statements of VMS National
Properties Joint Venture (the "Venture" or "Registrant") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of MAERIL, Inc. ("MAERIL" or the "Managing General
Partner"), all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 2003 are not necessarily indicative of the
results which may be expected for the year ending December 31, 2003. For further
information, refer to the combined financial statements and footnotes thereto
included in the Venture's Annual Report on Form 10-K for the year ended December
31, 2002. The Managing General Partner is a wholly owned subsidiary of Apartment
Investment and Management Company ("AIMCO"), a publicly traded real estate
investment trust.
Note B - Deferred Gain and Notes Payable
Deferred Gain on Extinguishment of Debt:
When the senior and junior loans refinanced in 1997, the senior loans were
recorded at the agreed valuation amount of $110,000,000, which was less than the
$152,225,000 face amount of the senior debt. If the Venture defaults on the
mortgage notes payable or is unable to pay the outstanding agreed valuation
amounts upon maturity, then the note face amounts become due. Accordingly, the
Venture deferred recognition of a gain of $42,225,000, which is the difference
between the note face amounts and the agreed valuation amounts.
Assignment Note:
The Venture executed a purchase money subordinated note (the "Assignment Note")
payable to the VMS/Stout Venture, an affiliate of the former general partner, in
exchange for the assignment by the VMS/Stout Venture of its interest in the
contract of sale to the Venture. The Assignment Note is collateralized by the
pledge from Portfolio I and Portfolio II of their respective interests in the
Venture.
In November 1993, VMS Realty Partners assigned its 50% interest in the VMS/Stout
Venture to the Partners Liquidating Trust which was established for the benefit
of the former creditors of VMS Realty Partners and its affiliates.
At March 31, 2003 and December 31, 2002, the remaining $38,810,000 of the
Assignment Note is non-interest bearing and is payable only after payment of
debt of higher priority, including the senior and junior mortgage notes payable.
Pursuant to SOP 90-7, the Assignment Note, the Long-Term Loan Arrangement Fee
Note (as defined below) and related accrued interest were adjusted to the
present value of amounts to be paid using an estimated current interest rate of
11.5%. Interest expense was being recognized through the amortization of the
discount which became fully amortized in January 2000.
Long-Term Loan Arrangement Fee Note:
The Venture executed an unsecured, nonrecourse promissory note (the "Long-Term
Loan Arrangement Fee Note") payable to the VMS/Stout Venture as consideration
for arranging long-term financing.
The note in the amount of $3,250,000 does not bear interest and is payable only
after debt of a higher priority, including senior and junior mortgage loans,
have been repaid.
Note C - Participating Mortgage Note
AIMCO Properties LP, which owns the Managing General Partner and which is a
controlled affiliate of AIMCO, purchased (i) the junior debt on November 19,
1999; (ii) a significant interest in the residual value of the properties on
November 16, 1999, and (iii) a significant interest in the Bankruptcy Claims (as
defined below) effective September 2000. These transactions occurred between
AIMCO Properties, LP and an unrelated third party and thus had no effect on the
combined financial statements of the Venture. Residual value is defined as the
amount remaining from a sale of the Venture's investment properties or
refinancing of the mortgages encumbering such investment properties after
payment of selling or refinancing costs and repayment of the senior and junior
debt, plus accrued interest on each. The agreement states that the Venture will
retain an amount equal to $13,500,000 plus accrued interest at 10% compounded
monthly (the "Partnership Advance Account") from the proceeds. Interest began
accruing on the Partnership Advance Account in 1993 when the bankruptcy plan was
finalized. Any proceeds remaining after the Partnership Advance Account is fully
funded are split equally (the "50/50 Split") between the Venture and AIMCO
Properties, LP. The Venture must repay the Assignment Note, the Long-term Loan
Arrangement Fee Note and other pre-petition claims (collectively the "Bankruptcy
Claims") which collectively total approximately $42,139,000 from the Partnership
Advance Account. Any amounts remaining in the Partnership Advance Account after
payment of the Bankruptcy Claims are split 75% to the Venture and 25% to AIMCO
Properties, LP.
The Venture has recorded the estimated fair value of the participation feature
as a liability and a debt discount of approximately $36,518,000. During the
three months ended March 31, 2003 and 2002, the Venture amortized approximately
$1,219,000 and $1,092,000, respectively, of the debt discount which is included
in interest expense. The Venture previously recognized amortization of
approximately $8,653,000 related to the debt discount as of December 31, 2002.
The fair value of the participation feature was calculated based upon
information currently available to the Managing General Partner and depends
largely upon the fair value of the collateral properties. These fair values were
determined using the net operating income of the properties capitalized at a
rate deemed reasonable for the type of property adjusted for market conditions,
the physical condition of the property and other factors. The Managing General
Partner evaluates the fair value of the participation feature on an annual basis
or as circumstances dictate that it should be analyzed.
Note D - Transactions with Affiliated Parties
The Venture has no employees and is dependent on the Managing General Partner
and its affiliates for the management and administration of all Venture
activities. The Revised and Amended Asset Management Agreement provides for (i)
certain payments to affiliates for real estate advisory services and asset
management of the Venture's retained properties for an annual compensation of
$300,000, adjusted annually by the consumer price index and (ii) reimbursement
of certain expenses incurred by affiliates on behalf of the Venture up to
$100,000 per annum.
Asset management fees of approximately $81,000 and $86,000 were paid to
affiliates of the Managing General Partner for the three months ended March 31,
2003 and 2002, respectively. These fees are included in general and
administrative expense. Additionally, $2,000 of such fees was unpaid at March
31, 2003 and is included in due to affiliates.
Affiliates of the Managing General Partner are entitled to receive a percentage
of the gross receipts from all of the Venture's properties as compensation for
providing property management services. The Venture paid to such affiliates
approximately $323,000 for each of the three month periods ended March 31, 2003
and 2002.
Affiliates of the Managing General Partner received reimbursement of accountable
administrative expenses amounting to approximately $25,000 for each of the three
month periods ended March 31, 2003 and 2002. These expenses are included in
general and administrative expense.
During the three months ended March 31, 2003 and 2002, the Venture paid fees
related to construction management services provided by an affiliate of the
Managing General Partner of approximately $16,000 and $137,000, respectively.
The construction management service fees are calculated based on a percentage of
current additions to investment properties and are included in investment
properties.
An affiliate of the Managing General Partner received bookkeeping reimbursements
in the amount of approximately $31,000 for each of the three month periods ended
March 31, 2003 and 2002. These expenses are included in operating expense.
At March 31, 2003 and December 31, 2002, the Venture owed loans of approximately
$3,606,000 and $3,609,000 to an affiliate of the Managing General Partner plus
accrued interest thereon of approximately $363,000 and $293,000, respectively,
which are included in due to affiliate on the combined balance sheets. These
loans were made in accordance with the Joint Venture Agreement and bear interest
at the prime rate plus 3%. The Venture recognized interest expense of
approximately $70,000 and $69,000 during the three months ended March 31, 2003
and 2002.
Prepetition property management fees were approved by the Bankruptcy Court for
payment to a former affiliate. This allowed claim may be paid only from
available Venture cash. At March 31, 2003 and December 31, 2002, the outstanding
balance of $79,000 is included in other liabilities.
Certain affiliates of the former general partners and the VMS/Stout Venture may
be entitled to receive various fees upon disposition of the properties. These
fees will be paid from the disposition proceeds and are subordinated to the
distributions required by the bankruptcy plan. There were no property
dispositions for which proceeds were received during either of the three month
periods ended March 31, 2003 or 2002.
The junior debt is held by an affiliate of the Managing General Partner. The
monthly principal and interest payments are based on monthly excess cash flow
for each property, as defined in the mortgage agreement. During the three months
ended March 31, 2003 and 2002, the Venture recognized interest expense of
approximately $638,000 and $864,000, respectively.
The Venture insures its properties up to certain limits through coverage
provided by AIMCO which is generally self-insured for a portion of losses and
liabilities related to workers compensation, property casualty and vehicle
liability. The Venture insures its properties above the AIMCO limits through
insurance policies obtained by AIMCO from insurers unaffiliated with the
Managing General Partner. During 2003 and 2002, the Venture's cost for insurance
coverage and fees associated with policy claims administration provided by AIMCO
will be approximately $474,000 and $574,000, respectively.
Note E - Casualty Gain
During the three months ended March 31, 2003 a net casualty gain of
approximately $38,000 was recorded at Shadowood Apartments. The casualty gain
related to a fire, occurring in September 2002, which caused damage to eight
units at the property. The gain was the result of the receipt of initial
insurance proceeds of approximately $51,000 during the first quarter of 2003
offset by approximately $13,000 of undepreciated property improvements and
replacements being written off. Additional insurance proceeds of approximately
$27,000 were received subsequent to March 31, 2003 and will be recognized as
additional gain during the second quarter of 2003.
Note F - Legal Proceedings
The Venture is not aware of any pending or outstanding litigation that is not of
a routine nature arising in the ordinary course of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed in this report contain certain forward-looking statements,
including, without limitation, statements regarding future financial performance
and the effect of government regulations. The discussions of the Registrant's
business and results of operations, including forward-looking statements
pertaining to such matters, do not take into account the effects of any changes
to the Registrant's business and results of operations. Actual results may
differ materially from those described in the forward-looking statements and
will be affected by a variety of risks and factors including, without
limitation: national and local economic conditions; the terms of governmental
regulations that affect the Registrant and interpretations of those regulations;
the competitive environment in which the Registrant operates; financing risks,
including the risk that cash flows from operations may be insufficient to meet
required payments of principal and interest; real estate risks, including
variations of real estate values and the general economic climate in local
markets and competition for tenants in such markets; and possible environmental
liabilities. Readers should carefully review the Registrant's financial
statements and the notes thereto, as well as the risk factors described in the
documents the Registrant files from time to time with the Securities and
Exchange Commission.
Average occupancy rates for the three months ended March 31, 2003 and 2002, for
all of the Venture's properties are as follows:
Average Occupancy
Property 2003 2002
North Park Apartments (1)
Evansville, IN 91% 94%
Chapelle Le Grande (1)
Merrillville, IN 93% 97%
Terrace Gardens (2)
Omaha, NE 88% 91%
Forest Ridge Apartments
Flagstaff, AZ 93% 95%
Scotchollow (3)
San Mateo, CA 92% 85%
Pathfinder Village (3)
Fremont, CA 94% 79%
Buena Vista Apartments
Pasadena, CA 97% 97%
Mountain View Apartments (4)
San Dimas, CA 94% 97%
Crosswood Park (3)
Citrus Heights, CA 95% 89%
Casa de Monterey
Norwalk, CA 97% 96%
The Bluffs (2)
Milwaukie, OR 89% 95%
Watergate Apartments (5)
Little Rock, AR 93% 87%
Shadowood Apartments (6)
Monroe, LA 90% 95%
Vista Village Apartments
El Paso, TX 98% 97%
The Towers of Westchester Park
College Park, MD 98% 99%
(1) The average occupancy at Northpark Apartments and Chappelle Le Grande
decreased due to increased competition in the property's respective local
markets and a large number of lease terms expiring during the first
quarter of 2003. The property management has focused on increasing
occupancy through tenant retention and more effective lease management
techniques which included staggering lease expiration dates.
(2) Occupancy at Terrace Gardens and The Bluffs decreased due to a weak
economy and significant job loss in their respective markets.
(3) Occupancy at Scotchollow, Pathfinder Village and Crosswood Park increased
due to incentives such as rent concessions and reduced rental rates
implemented to attract tenants.
(4) The decrease in occupancy at Mountain View Apartments is due to a weak
economy in the property's market area.
(5) The increase in occupancy at Watergate Apartments is primarily
attributable to the implementation of more effective lease management
techniques focusing on customer retention.
(6) Shadowood Apartments average occupancy decreased due to a fire in
September of 2002 resulting in eight units being uninhabitable for several
months. The restoration of these units has been completed and occupancy is
expected to return to historic levels.
Results of Operations
The Venture recorded a net loss for the three months ended March 31, 2003 of
approximately $1,820,000 compared to a net loss of approximately $1,396,000 for
the corresponding period in 2002. The increase in net loss for the three month
period is due to an increase in total expenses partially offset by an increase
in total revenues.
Total revenues increased due to an increase in other income and the recognition
of a casualty gain which were partially offset by a decrease in rental income.
The increase in other income is primarily from increases in late charges at
North Park Apartments and Watergate Apartments and lease cancellation fees at
Pathfinder Village and The Bluffs. The decrease in rental income is the result
of the various decreases in occupancy at many of the properties more than
outweighing the occupancy increases at Scotchollow, Crosswood Park, Watergate,
and Pathfinder Village.
During the three months ended March 31, 2003 a net casualty gain of
approximately $38,000 was recorded at Shadowood Apartments. The casualty gain
related to a fire, occurring in September 2002, which caused damage to eight
units at the property. The gain was the result of the receipt of initial
insurance proceeds of approximately $51,000 during the first quarter of 2003
offset by approximately $13,000 of undepreciated property improvements and
replacements being written off. Additional insurance proceeds of approximately
$27,000 were received subsequent to March 31, 2003 and will be recognized as
additional gain during the second quarter of 2003.
Total expenses increased primarily due to increases in operating and
depreciation expenses partially offset by a decrease in interest expense.
Operating expense increased due primarily to increases in utilities, interior
painting and trash removal costs at Scotchollow and Pathfinder Village,
increases in snow removal costs at Towers of Westchester Park and increases in
hazard insurance premiums at thirteen of the Partnership's fifteen investment
properties. Depreciation expense increased due to property improvements and
replacements placed into service during the past twelve months which are now
being depreciated. The decrease in interest expense is attributable to a
decrease in interest on the senior and junior debt due to principal reduction
payments partially offset by an increase in the amortization of the debt
discount related to the mortgage participation liability.
Included in general and administrative expenses for the three months ended March
31, 2003 and 2002 are reimbursements to the Managing General Partner allowed
under the Partnership Agreement associated with its management of the Venture.
Costs associated with quarterly and annual communications with investors and
regulatory agencies and the annual audit required by the Partnership Agreement
are also included.
As part of the ongoing business plan of the Venture, the Managing General
Partner monitors the rental market environment of each of its investment
properties to assess the feasibility of increasing rents, maintaining or
increasing occupancy levels and protecting the Venture from increases in
expenses. As part of this plan, the Managing General Partner attempts to protect
the Venture from the burden of inflation-related increases in expenses by
increasing rents and maintaining a high overall occupancy level. However, due to
changing market conditions, which can result in the use of rental concessions
and rental reductions to offset softening market conditions, there is no
guarantee that the Managing General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
At March 31, 2003, the Venture had cash and cash equivalents of approximately
$1,980,000 as compared to approximately $2,505,000 at March 31, 2002. Cash and
cash equivalents decreased approximately $829,000 for the three months ended
March 31, 2003, from December 31, 2002. The decrease in cash and cash
equivalents is a result of approximately $1,516,000 and $967,000 of cash used in
financing and investing activities, respectively, which was partially offset by
approximately $1,654,000 of cash provided by operating activities. Cash used in
financing activities consisted of principal payments on the mortgages
encumbering the Venture's investment properties and a payment on advances from
affiliates loaned temporarily in December 2002. Cash used in investing
activities consisted of property improvements and replacements partially offset
by net withdrawals from restricted escrow accounts maintained by the mortgage
lender and the receipt of insurance proceeds related to the casualty at
Shadowood Apartments.
The sufficiency of existing liquid assets to meet future liquidity and capital
expenditure requirements is directly related to the level of capital
expenditures required at the properties to adequately maintain the physical
assets and other operating needs of the Venture and to comply with Federal,
state and local legal and regulatory requirements. The Managing General Partner
monitors developments in the area of legal and regulatory compliance and is
studying new federal laws, including the Sarbanes-Oxley Act of 2002. The
Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures
with regard to governance, disclosure, audit and other areas. In light of these
changes, the Venture expects that it will incur higher expenses related to
compliance, including increased legal and audit fees. Capital improvements
planned for each of the Venture's properties are detailed below.
The Venture is restricted to annual capital improvements of $300 per unit for
all of the properties, which is the limit set by the junior debt for funding of
capital improvements. The Venture, the holder of the junior debt encumbering the
properties and the servicer of the senior debt encumbering the properties have
agreed to a procedure to assess whether or not capital expenditures, in addition
to those permitted under the $300 per unit limit, are needed at the properties
and the methodology for funding any such capital expenditures. During 1999, the
Venture and the holders of the junior and senior debt agreed that additional
capital expenditures were required and that these expenditures would be funded
out of the cash flows from the properties that otherwise would have been
utilized to pay debt services on the junior debt. In November 1999, an agreement
was signed relating to the required capital expenditures at Towers of
Westchester Park. In July 2000, similar agreements were signed relating to North
Park Apartments, Scotchollow, Pathfinder Village, Buena Vista Apartments,
Mountain View Apartments, Casa de Monterey and The Bluffs. In August 2000,
agreements were signed relating to Shadowood Apartments, Crosswood Park, Vista
Village Apartments, Watergate Apartments, Chapelle Le Grande, and Forest Ridge
Apartments and in September 2000, an agreement was signed relating to Terrace
Gardens. Funds to pay for these expenditures were placed in escrow accounts in
prior years and the Venture resumed making monthly payments on the junior debt
to the extent of monthly excess cash flow. As of December 31, 2002, reserve
balances still existed for Terrace Gardens, The Bluffs, and Watergate Apartments
pending completion of the agreed upon work. During the first quarter of 2003,
The Bluffs and Watergate Apartments completed all their agreed upon work.
North Park Apartments: Approximately $85,000 is budgeted for capital
improvements for the year ending December 31, 2003, consisting primarily of
floor coverings, appliances and HVAC improvements. The Venture completed
approximately $10,000 in capital expenditures at North Park Apartments during
the three months ended March 31, 2003, consisting primarily of floor covering
replacements. These improvements were funded from operating cash flow and
replacement reserves.
Chapelle Le Grande: Approximately $32,000 is budgeted for capital improvements
for the year ending December 31, 2003, consisting primarily of floor coverings,
appliances and HVAC improvements. The Venture completed approximately $6,000 in
capital expenditures at Chapelle Le Grande during the three months ended March
31, 2003, consisting primarily of floor covering replacements and fire safety
improvements. These improvements were funded from operating cash flow and
replacement reserves.
Terrace Gardens: The methodology discussed above for funding the required
capital expenditures has been applied to Terrace Gardens. The parties agreed
that this property required capital expenditures which have a revised completion
date of June 30, 2003 and which are estimated to cost approximately $433,000, of
which approximately $340,000 were completed as of March 31, 2003. None of these
expenditures were completed during 2003. These costs were funded out of cash
flows from the property that otherwise would have been utilized to service the
junior debt. In addition, approximately $38,000 is budgeted for capital
improvements for the year ending December 31, 2003, consisting primarily of
floor covering replacements and appliances. The Venture completed approximately
$21,000 in capital expenditures at Terrace Gardens during the three months ended
March 31, 2003, consisting primarily of floor covering replacements. These
improvements were funded from operating cash flow and replacement reserves.
Forest Ridge Apartments: Approximately $83,000 is budgeted for capital
improvements for the year ending December 31, 2003, consisting primarily of
floor covering replacements, appliances and HVAC improvements. The Venture
completed approximately $71,000 in capital expenditures at Forest Ridge
Apartments during the three months ended March 31, 2003, consisting primarily of
floor covering replacements, plumbing fixtures, and heating upgrades. These
improvements were funded from operating cash flow and replacement reserves.
Scotchollow: Approximately $125,000 is budgeted for capital improvements for the
year ending December 31, 2003, consisting primarily of floor covering
replacements, appliances, HVAC improvements and cabinets. The Venture completed
approximately $96,000 in budgeted capital expenditures at Scotchollow during the
three months ended March 31, 2003, consisting primarily of structural
improvements, appliances and floor covering replacements. These improvements
were funded from operating cash flow and replacement reserves. An additional
$429,000 was spent during the three months ended March 31, 2003 consisting of
building additions associated with the fire that occurred in January 2002. The
insurance proceeds and asset write-offs related to this fire were recorded
during 2002.
Pathfinder Village: Approximately $74,000 is budgeted for capital improvements
for the year ending December 31, 2003, consisting primarily of floor covering
replacements, appliances, lighting and HVAC improvements. The Venture completed
approximately $61,000 in capital expenditures at Pathfinder Village during the
three months ended March 31, 2003, consisting primarily of floor covering
replacements, structural improvements, and interior decoration and painting.
These improvements were funded from operating cash flow and replacement
reserves.
Buena Vista Apartments: Approximately $28,000 is budgeted for capital
improvements for the year ending December 31, 2003, consisting primarily of
floor covering replacements, office equipment and pool upgrades. The Venture
completed approximately $12,000 in capital expenditures at Buena Vista
Apartments during the three months ended March 31, 2003, consisting primarily of
floor covering replacements and pool upgrades. These improvements were funded
from operating cash flow and replacement reserves.
Mountain View Apartments: Approximately $50,000 is budgeted for capital
improvements for the year ending December 31, 2003, consisting primarily of
floor covering replacements, appliances, plumbing and parking lot upgrades. The
Venture completed approximately $48,000 in capital expenditures at Mountain View
Apartments during the three months ended March 31, 2003, consisting primarily of
floor covering replacements, parking lot upgrades, water heaters and plumbing
fixtures. These improvements were funded from operating cash flow and
replacement reserves.
Crosswood Park: Approximately $54,000 is budgeted for capital improvements for
the year ending December 31, 2003, consisting primarily of floor covering
replacements, appliances and water heaters. The Venture completed approximately
$81,000 in budgeted and unbudgeted capital expenditures at Crosswood Park during
the three months ended March 31, 2003, consisting primarily of structural
improvements, air conditioning upgrades, and floor covering and appliance
replacements. These improvements were funded from operating cash flow and
replacement reserves.
Casa de Monterey: Approximately $43,000 is budgeted for capital improvements for
the year ending December 31, 2003, consisting primarily of floor covering
replacements, plumbing, maintenance equipment, HVAC and signs. The Venture
completed approximately $38,000 in capital expenditures at Casa de Monterey
during the three months ended March 31, 2003, consisting primarily of floor
covering replacements, plumbing and HVAC. These improvements were funded from
operating cash flow and replacement reserves.
The Bluffs: As of March 31, 2003, all capital expenditures required under the
agreement signed July 2000 were completed by March 31, 2003 with approximately
$20,000 incurred during 2003. These costs were funded out of cash flows from the
property that otherwise would have been utilized to service the junior debt.
Approximately $41,000 is budgeted for capital improvements for the year ending
December 31, 2003, consisting primarily of floor covering replacements,
appliances, HVAC and cabinets. The Venture completed approximately $26,000 in
capital expenditures, including the aforementioned capital expenditures, at The
Bluffs during the three months ended March 31, 2003, consisting primarily of
floor covering replacements, structural improvements and ground lighting. These
improvements were funded from operating cash flow and replacement reserves.
Watergate Apartments: As of March 31, 2003 all capital expenditures required
under the agreement signed August 2000 have been completed. Approximately
$16,000 of these expenditures were completed during 2003. These costs were
funded out of cash flows from the property that otherwise would have been
utilized to service the junior debt. In addition, approximately $42,000 is
budgeted for capital improvements for the year ending December 31, 2003,
consisting primarily of floor covering replacements and appliances. The Venture
completed approximately $36,000 in capital expenditures, including the
aforementioned capital expenditures, at Watergate Apartments during the three
months ended March 31, 2003, consisting primarily of structural improvements,
upgrades to comply with the Americans With Disabilities Act and swimming pool
upgrades. These improvements were funded from operating cash flow and
replacement reserves.
Shadowood Apartments: Approximately $36,000 is budgeted for capital improvements
for the year ending December 31, 2003, consisting primarily of floor covering
replacements, appliances and structural improvements. The Venture completed
approximately $12,000 in budgeted capital expenditures at Shadowood Apartments
during the three months ended March 31, 2003, consisting primarily of floor
covering and appliances. An additional $87,000 was spent during the three months
ended March 31, 2003 consisting of building improvements associated with the
fire that occurred in September 2002. These improvements were funded from
operating cash flow and insurance proceeds.
Vista Village Apartments: Approximately $66,000 is budgeted for capital
improvements for the year ending December 31, 2003, consisting primarily of
floor covering replacements and appliances. The Venture completed approximately
$18,000 in capital expenditures at Vista Village Apartments during the three
months ended March 31, 2003, consisting primarily of floor covering
replacements. These improvements were funded from operating cash flow and
replacement reserves.
Towers of Westchester Park: Approximately $91,000 is budgeted for capital
improvements for the year ending December 31, 2003, consisting primarily of
floor covering replacements, appliances, structural improvements and parking lot
upgrades. The Venture completed approximately $11,000 in capital expenditures at
Towers of Westchester Park during the three months ended March 31, 2003,
consisting primarily of floor covering replacements and cabinets. These
improvements were funded from operating cash flow and replacement reserves.
The Venture initially budgeted $888,000 ($300 per unit) for all of the
properties which is equal to the limit set by the junior notes for funding of
capital improvements. As the Venture identifies properties which require
additional improvements discussions are held with the holders of both the senior
and junior mortgage notes for approval to perform agreed upon capital
improvements.
The Registrant's assets are thought to be sufficient for any near-term needs
(exclusive of capital improvements) of the Registrant. The senior debt
encumbering all of the properties totals approximately $102,980,000 and is being
amortized over 25 years, with a balloon payment of $93,243,000 due January 2008.
Not including the debt discount relating to the mortgage participation
liability, the junior debt, which also matures January 2008, totals
approximately $23,809,000 and requires monthly payments based upon monthly
excess cash flow for each property. The Assignment Note and Long-Term
Arrangement Fee Notes totaling approximately $42,060,000 are non-interest
bearing and are subordinate to the senior and junior debt and are only payable
from the proceeds of the sale or refinancing of the properties.
There were no cash distributions to the partners of either of the Partnerships
for the three months ended March 31, 2003 and 2002. In accordance with the
respective Agreements of Limited Partnership, there are no material restrictions
on the Partnerships' ability to make cash distributions. Future cash
distributions are subject to the order of distributions as stipulated by the
Venture's Plan of Reorganization. The source of future distributions will depend
upon the levels of net cash generated from operations, the availability of cash
reserves, and timing of debt maturities, refinancings and/or property sales. The
Partnerships' distribution policies are reviewed on a quarterly basis. There can
be no assurance that the Partnerships will generate sufficient funds from
operations, after required capital expenditures and the order of distributions
as stipulated by the Venture's Plan of Reorganization, to permit any
distributions to partners during the remainder of 2003 or subsequent periods.
Other
As a result of tender offers, AIMCO and its affiliates currently own 118.50
units of limited partnership interest in Portfolio I representing 18.40% of the
outstanding limited partnership interests, along with the 2% general partner
interest for a combined ownership in Portfolio I of 20.40%. AIMCO and its
affiliates currently own 64.42 units of limited partnership interest in
Portfolio II representing 24.13% of the outstanding limited partnership
interests, along with the 2% general partner interest for a combined ownership
in Portfolio II of 26.13%. The Venture is owned 70.69% by Portfolio I and 29.31%
by Portfolio II which results in AIMCO and its affiliates currently owning
22.08% of the Venture. It is possible that AIMCO or its affiliates will make one
or more additional offers to acquire additional units of limited partnership
interest in the Venture in exchange for cash or a combination of cash and units
in the operating partnership of AIMCO either through private purchases or tender
offers. Under the Partnership Agreements, unitholders holding a majority of the
Units are entitled to take action with respect to a variety of matters, which
would include without limitation, voting on certain amendments to the
Partnership Agreement and voting to remove the Managing General Partner.
Although the Managing General Partner owes fiduciary duties to the limited
partners of the Venture, the Managing General Partner also owes fiduciary duties
to AIMCO as its sole stockholder. As a result, the duties of the Managing
General Partner, as managing general partner, to the Venture and its limited
partners may come into conflict with the duties of the Managing General Partner
to AIMCO, as its sole stockholder.
Critical Accounting Policies and Estimates
The combined financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the Venture to
make estimates and assumptions. The Venture believes that of its significant
accounting policies, the following may involve a higher degree of judgment and
complexity.
Impairment of Long-Lived Assets
Investment properties are recorded at cost, less accumulated depreciation,
unless considered impaired. If events or circumstances indicate that the
carrying amount of a property may be impaired, the Venture will make an
assessment of its recoverability by estimating the undiscounted future cash
flows, excluding interest charges, of the property. If the carrying amount
exceeds the aggregate future cash flows, the Venture would recognize an
impairment loss to the extent the carrying amount exceeds the fair value of the
property.
Real property investments are subject to varying degrees of risk. Several
factors may adversely affect the economic performance and value of the Venture's
investment properties. These factors include changes in the national, regional
and local economic climate; local conditions, such as an oversupply of
multifamily properties; competition from other available multifamily property
owners and changes in market rental rates. Any adverse changes in these factors
could cause an impairment in the Venture's assets.
Revenue Recognition
The Venture generally leases apartment units for twelve-month terms or less.
Rental income attributable to leases is recognized monthly as it is earned and
the Venture fully reserves all balances outstanding over thirty days. The
Venture will offer rental concessions during particularly slow months or in
response to heavy competition from other similar complexes in the area.
Concessions are charged to income as incurred.
Participating Mortgage Note
The Venture has a participating mortgage note which requires it to record the
estimated fair value of the participation feature as a liability and a debt
discount. The fair value of the participation feature is calculated based upon
information currently available to the Managing General Partner and depends
largely upon the fair value of the collateral properties. These fair values are
determined using the net operating income of the properties capitalized at a
rate deemed reasonable for the type of property adjusted for market conditions,
physical condition of the property and other factors. The Managing General
Partner evaluates the fair value of the participation feature on an annual basis
or as circumstances dictate that it should be analyzed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Venture is exposed to market risks from adverse changes in interest rates.
In this regard, changes in U.S. interest rates affect the interest earned on the
Venture's cash and cash equivalents as well as interest paid on its
indebtedness. As a policy, the Venture does not engage in speculative or
leveraged transactions, nor does it hold or issue financial instruments for
trading purposes. The Venture is exposed to changes in interest rates primarily
as a result of its borrowing activities used to maintain liquidity and fund
business operations. To mitigate the impact of fluctuations in U.S. interest
rates, the Venture maintains its debt as fixed rate in nature by borrowing on a
long-term basis except for advances made from an affiliate of the Managing
General Partner. These advances bear interest at the prime rate plus three basis
points. Based on interest rates at March 31, 2003, an increase or decrease of
100 basis points in market interest rates would not have a material impact on
the Venture.
The following table summarizes the Venture's debt obligations at March 31, 2003.
The interest rates represent the weighted-average rates. The fair value of the
Venture's first mortgages, after discounting the scheduled loan payments to
maturity, is approximately $111,013,000 at March 31, 2003. However, the Venture
is precluded from refinancing the first mortgage until January 2007. The
Managing General Partner believes that it is not appropriate to use the
Venture's incremental borrowing rate for the second mortgages, as there is
currently no market in which the Venture could obtain similar financing.
Therefore, the Managing General Partner considers estimation of fair value to be
impracticable for this indebtedness.
Long-term Debt
Principal Weighted-average
(in thousands) Interest Rate
2003 $ 1,228 8.50%
2004 1,832 8.50%
2005 2,022 8.50%
2006 2,201 8.50%
2007 2,403 8.50%
Thereafter 117,103 8.98%
$126,789
As principal payments for the junior loans are based upon monthly cash flow, all
principal is assumed to be repaid at maturity.
ITEM 4. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of the Managing
General Partner, who are the equivalent of the Venture's principal executive
officer and principal financial officer, respectively, have, within 90 days of
the filing date of this quarterly report, evaluated the effectiveness of the
Venture's disclosure controls and procedures (as defined in Exchange Act Rules
13a-14(c) and 15d-14(c)) and have determined that such disclosure controls and
procedures are adequate. There have been no significant changes in the Venture's
internal controls or in other factors that could significantly affect the
Venture's internal controls since the date of evaluation. The Venture does not
believe any significant deficiencies or material weaknesses exist in the
Venture's internal controls. Accordingly, no corrective actions have been taken.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 3(a), VMS National Properties Joint Venture Agreement
(Exhibit 3 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002, is incorporated herein by
reference).
Exhibit 3(b), Amended and Restated Limited Partnership
Agreement and Certificate of Limited Partnership of VMS
National Properties Portfolio I (Exhibit 3 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
2002, is incorporated herein by reference).
Exhibit 3(c), Amended and Restated Limited Partnership
Agreement and Certificate of Limited Partnership of VMS
National Properties Portfolio II (Exhibit 3 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002, is incorporated herein by reference).
Exhibit 11, Calculation of Net Loss Per Investor.
Exhibit 99, Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b) Reports on Form 8-K:
None filed during the quarter ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VMS NATIONAL PROPERTIES JOINT VENTURE
(Registrant)
VMS National Residential Portfolio I
By: MAERIL, Inc.
Managing General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Thomas C. Novosel
Thomas C. Novosel
Senior Vice President
and Chief Accounting Officer
VMS National Residential Portfolio II
By: MAERIL, Inc.
Managing General Partner
By: /s/Patrick J. Foye
Patrick J. Foye
Executive Vice President
By: /s/Thomas C. Novosel
Thomas C. Novosel
Senior Vice President
and Chief Accounting Officer
Date: May 14, 2003
CERTIFICATION
I, Patrick J. Foye, certify that:
1. I have reviewed this quarterly report on Form 10-Q of VMS National Properties
Joint Venture;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/Patrick J. Foye
Patrick J. Foye
Executive Vice President of MAERIL, Inc.,
equivalent of the chief executive officer of
the Venture
CERTIFICATION
I, Paul J. McAuliffe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of VMS National Properties
Joint Venture;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/Paul J. McAuliffe
Paul J. McAuliffe
Executive Vice President and Chief Financial
Officer of MAERIL, Inc., equivalent of the
chief financial officer of the Venture
Exhibit 11
VMS NATIONAL PROPERTIES JOINT VENTURE
CALCULATION OF NET LOSS PER INVESTOR
(in thousands, except per unit data)
For the Three Months
Ended March 31,
2003 2002
VMS National Properties net loss $(1,820) $(1,396)
Portfolio I net loss -- --
Portfolio II net loss -- --
Combined net loss $(1,820) $(1,396)
Portfolio I allocation:
70.69% VMS National Properties net loss $(1,287) $ (987)
100.00% Portfolio I net loss -- --
$(1,287) $ (987)
Net loss to general partner (2%) $ (26) $ (20)
Net loss to limited partners (98%) $(1,261) $ (967)
Number of Limited Partner units 644 644
Net loss per limited partnership interest $(1,958) $(1,502)
Portfolio II allocation:
29.31% VMS National Properties net loss $ (533) $ (409)
100.00% Portfolio II net loss -- --
$ (533) $ (409)
Net loss to general partner (2%) $ (11) $ (8)
Net loss to limited partners (98%) $ (522) $ (401)
Number of Limited Partner units 267 267
Net loss per limited partnership interest $(1,955) $(1,502)
Exhibit 99
Certification of CEO and CFO
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of VMS National Properties
Joint Venture (the "Venture"), for the quarterly period ended March 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Patrick J. Foye, as the equivalent of the chief executive officer of
the Venture, and Paul J. McAuliffe, as the equivalent of the chief financial
officer of the Venture, each hereby certifies, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Venture.
/s/Patrick J. Foye
Name: Patrick J. Foye
Date: May 14, 2003
/s/Paul J. McAuliffe
Name: Paul J. McAuliffe
Date: May 14, 2003
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Venture for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.