-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TWsyDkCYdMrGxuK3u8yhp5HZwVqeeImc20onSFj9sEJrd1+JUbiIHAF2GAOQ08VG Zz9QHZUUmfHc1NssokYj9A== 0000310303-98-000033.txt : 19981118 0000310303-98-000033.hdr.sgml : 19981118 ACCESSION NUMBER: 0000310303-98-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VMS NATIONAL PROPERTIES JOINT VENTURE CENTRAL INDEX KEY: 0000789089 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 363311347 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14194 FILM NUMBER: 98752555 BUSINESS ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 10-Q 1 FORM 10-Q--QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 September 30, 1998 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 (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, P. O. Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (ZIP code) (864) 239-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) 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) September 30, December 31, 1998 1997 (Unaudited) (Note) Assets: Cash and cash equivalents $ 1,040 $ 2,510 Receivables and deposits 1,913 1,872 Restricted escrows 2,434 86 Other assets 414 478 Investment properties: Land 13,404 13,404 Buildings and personal property 132,445 130,603 Less accumulated depreciation (79,336) (75,411) 66,513 68,596 $ 72,314 $ 73,542 Liabilities and Partners' Deficit Liabilities Accounts payable $ 463 $ 369 Tenant security deposit liabilities 1,139 1,105 Accrued property taxes 866 605 Other liabilities 482 994 Accrued interest 1,063 -- Mortgage notes payable 139,647 139,449 Notes payable 36,454 33,455 Deferred gain on extinguishment of debt 42,225 42,225 Partners' Deficit (150,025) (144,660) $ 72,314 $ 73,542 Note: The balance sheet at December 31, 1997, 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 b) 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 (Unaudited) (in thousands, except per interest data) Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Revenues: Rental income $ 6,691 $ 6,172 $19,755 $18,145 Other income 332 325 882 831 Casualty gain 7 -- 230 -- Total revenues 7,030 6,497 20,867 18,976 Expenses: Operating 2,598 2,711 7,519 7,419 General and administrative 184 287 532 749 Depreciation 1,456 1,377 4,234 4,056 Interest 4,243 4,236 12,509 12,493 Property taxes 456 459 1,261 1,298 Loss on disposal of property 62 11 188 19 Total expenses 8,999 9,081 26,243 26,034 Net loss $(1,969) $(2,584) $(5,376) $(7,058) Net loss allocated to general partners (2%) $ (40) $ (52) $ (108) $ (141) Net loss allocated to limited partners (98%) (1,929) (2,532) (5,268) (6,917) $(1,969) $(2,584) $(5,376) $(7,058) Net loss per limited partnership interest: Portfolio I (644 interests issued and outstanding) $(2,117) $(2,776) $(5,780) $(7,587) Portfolio II (267 and 268 interests issued and outstanding in 1998 and 1997, respectively) $(2,120) $(2,776) $(5,790) $(7,578) See Accompanying Notes to Combined Financial Statements c) 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 (Unaudited) (in thousands)
VMS National Residential Portfolio I General Accumulated Subscription Partners Deficit Notes Total Total Partners' deficit at December 31, 1997 $ (3,347) $ (97,932) $ (511) $ (98,443) $(101,790) Collections of subscription notes -- -- 5 5 5 Net loss for the nine months ended September 30, 1998 (76) (3,722) -- (3,722) (3,798) Partner's deficit at September 30, 1998 $ (3,423) $(101,654) $ (506) $(102,160) $(105,583)
VMS National Residential Portfolio II Limited Partners General Accumulated Subscription Partners Deficit Notes Total Total Partners' deficit at December 31, 1997 $(1,401) $ (41,134) $ (335) $ (41,469) $ (42,870) Collections of subscription Notes -- -- 6 6 6 Net loss for the nine months ended September 30, 1998 (32) (1,546) -- (1,546) $ (1,578) Partner's deficit at September 30, 1998 $(1,433) $ (42,680) $ (329) $ (43,009) $ (44,442) Combined total $(4,856) $(144,334) $ (835) $(145,169) $(150,025) See Accompanying Notes to Combined Financial Statements
d) 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 (Unaudited) (in thousands) Nine Months Ended September 30, 1998 1997 Cash flows from operating activities: Net loss $ (5,376) $ (7,058) Adjustments to reconcile net loss to net Cash provided by operating activities: Depreciation 4,234 4,056 Amortization of discounts 2,999 2,726 Loss on disposal of property 188 19 Casualty gain (230) -- Change in accounts: Receivables and deposits (41) (1,027) Other assets 64 (123) Accounts payable 94 109 Tenant security deposit liabilities 34 30 Accrued property taxes 261 304 Accrued interest 2,619 2,454 Other liabilities (512) 167 Net cash provided by operating activities 4,334 1,657 Cash flows from investing activities: Property improvements and replacements (2,438) (1,307) Net deposits to restricted escrows (2,348) (15) Net insurance proceeds 329 -- Net cash used in investing activities (4,457) (1,322) Cash flows from financing activities: Payments on mortgage notes payable (1,358) (237) Payments on advances from affiliates -- (244) Payments received on subscription notes 11 22 Net cash used in financing activities (1,347) (459) Net decrease in cash and cash equivalents (1,470) (124) Cash and cash equivalents at beginning of period 2,510 1,788 Cash and cash equivalents at end of period $ 1,040 $ 1,664 Supplemental disclosure of cash flow information: Cash paid for interest $ 6,619 $ 7,297 Supplemental disclosure of non-cash activity: Accrued interest added to mortgage notes payable $ 1,556 $ -- 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 SUBPARTNERS NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited combined financial statements of VMS National Properties (the "Venture") 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 and nine months ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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 fiscal year ended December 31, 1997. Certain reclassifications have been made to the 1997 information to conform to the 1998 presentation. NOTE B - 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 its properties. 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. (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. (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. (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. 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 represents 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 does 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 provides 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. NOTE C - MORTGAGE NOTES REFINANCED 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 based on a 25 year amortization period. Balloon payments of approximately $91,352,000 will be due at maturity (January 1, 2008). The junior loans, which aggregate approximately $29,449,000, 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. The difference between the accrued amount of the stated rate and the actual payment is transferred to the outstanding principal. 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 for the previous indebtedness regarding note face amounts and agreed valuation amounts. These new 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. 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. At September 30, 1998, the outstanding balance of the senior and junior notes was approximately $109,243,000 and $30,404,000, respectively. 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 partnership activities. Effective December 12, 1997, MAERIL became the Managing General Partner of VMS National Residential Portfolio I and VMS National Residential Portfolio II (the VMS "Partnerships"). Effective February 25, 1998, MAERIL became a wholly-owned subsidiary of Insignia Properties Trust ("IPT") (see "Note E" below). Effective January 1, 1998, the Venture and the Managing General Partner agreed to amend the Asset Management Agreement to reduce the annual service fee payable to an affiliate of the Managing General Partner to $300,000 per year, and to reduce the annual out of pocket cost reimbursements to $100,000. These costs are paid throughout the year and are included in general and administrative expenses. In addition, bookkeeping reimbursements in the amount of approximately $108,000 and property management fees in the amount of approximately $838,000 (both included in operating expenses) were paid to an affiliate of the Managing General Partner during the nine months ended September 30, 1998. NOTE E - TRANSFER OF CONTROL; SUBSEQUENT EVENT On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and into Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control of the Managing General Partner. In addition, AIMCO also acquired approximately 51% of the outstanding common shares of beneficial interest of IPT. Also, effective October 1, 1998, IPT and AIMCO entered into an Agreement and plan of Merger pursuant to which IPT is to be merged with and into AIMCO or a subsidiary of AIMCO (the "IPT Merger"). The IPT Merger requires the approval of the holders of a majority of the outstanding IPT Shares. AIMCO has agreed to vote all of the IPT Shares owned by it in favor of the IPT Merger and has granted an irrevocable limited proxy to unaffiliated representatives of IPT to vote the IPT Shares acquired by AIMCO and its subsidiaries in favor of the IPT Merger. As a result of AIMCO's ownership and its agreement, the vote of no other holder of IPT is required to approve the merger. The Managing General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Venture. ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average occupancy rates for the nine months ended September 30, 1998 and 1997, for the Venture's properties are as follows: Average Occupancy Property 1998 1997 Buena Vista Apartments Pasadena, CA 99% 99% Casa de Monterey Norwalk, CA 95% 94% Crosswood Park Citrus Heights, CA 95% 96% Mt. View Apartments San Dimas, CA 98% 98% Pathfinder Village Fremont, CA 91% 96% Scotchollow San Mateo, CA 95% 98% The Bluffs Milwaukie, OR 96% 95% Vista Village Apartments El Paso, TX 95% 92% Chapelle Le Grande Merrillville, IN 93% 97% North Park Apartments Evansville, IN 97% 96% Shadowood Apartments Monroe, LA 95% 92% The Towers of Westchester Park College Park, MD 97% 93% Terrace Gardens Omaha, NE 95% 94% Watergate Apartments Little Rock, AR 90% 94% Forest Ridge Apartments Flagstaff, AZ 89% 79% 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 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. The Venture realized a net loss of approximately $5,376,000 for the nine months ended September 30, 1998, compared to a net loss of approximately $7,058,000 for the corresponding period of 1997. For the three months ended September 30, 1998, the Venture realized a net loss of approximately $1,969,000 compared to a net loss of approximately $2,584,000 for the three months ended September 30, 1997. The decrease in net loss for the three and nine month periods ended September 30, 1998 is primarily attributable to increased rental income due to increased rental rates at all of the Venture's properties. Other income also increased during the nine months ended September 30, 1998 primarily due to an increase in lease cancellation fees and cleaning and damage fees at Scotchollow Apartments due to early moveouts of first time homebuyers and reimbursements for legal refinancing expense incurred in a prior year. Additionally, the Venture recorded a casualty gain in connection with a fire that damaged eight of the 246 units at Pathfinder Village. Also contributing to the decrease in net loss was a decrease in general and administrative expenses primarily due to a decrease in asset management fees and reimbursements resulting from the revised Asset Management Agreement, which was effective January 1, 1998. Partially offsetting the increase in revenues and the decrease in general and administrative expenses during the nine months ended September 30, 1998 was an increase in operating expenses and an increase in loss on disposal of property. Operating expenses for the nine months ended September 30, 1998 increased primarily due to increased utilities at Forest Ridge, Pathfinder Village, and Vista Village. For the three months ended September 30, 1998, operating expenses decreased primarily due to a decrease in repair and maintenance expenses. 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 the nine months ended of September 30, 1998. These losses were greater than a similar loss on disposal of property at Terrace Gardens and Crosswood Park during the corresponding period of 1997. Included in operating expense for the nine months ended September 30, 1998, is approximately $400,000 in major repairs and maintenance comprised primarily of exterior building repairs, exterior painting, and landscaping. Included in operating expense for the nine months ended September 30, 1997, is approximately $448,000 in major repairs and maintenance comprised primarily of landscaping, parking lot repairs and exterior building repairs, largely related to work at Watergate Apartments. 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 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. At September 30, 1998, the Venture had cash and cash equivalents of approximately $1,040,000 compared to approximately $1,664,000 at September 30, 1997. The net decrease in cash and cash equivalents for the nine months ended September 30, 1998, was approximately $1,470,000 compared to a net decrease of approximately $124,000 for the corresponding period in 1997. Net cash provided by operating activities increased during the nine months ended September 30, 1998, primarily due to a decrease in net loss, as discussed above, and a decrease in net cash used in receivables and deposits resulting from a decrease in tax and insurance escrows and operating reserves. Net cash used in investing activities increased primarily due to an increase in property improvements and replacements and an increase in net deposits to restricted escrows as required by the December 1997 refinancing. Net cash used in financing activities increased due to an increase of payments on the junior loans resulting from an increase in excess cash flow at several of the Venture's investment properties. 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 based on a 25 year amortization period. Balloon payments of approximately $91,352,000 will be due at maturity (January 1, 2008). The junior loans, which aggregate approximately $29,449,000, 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. The difference between the accrued amount of the stated rate and the actual payment is transferred to the outstanding principal. 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 as the previous indebtedness regarding note face amounts and agreed valuation amounts. These new 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. 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. At September 30, 1998, the outstanding balance of the senior and junior notes was approximately $109,243,000 and $30,404,000, respectively. 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 various properties to adequately maintain the physical assets and other operating needs of the Venture. Such assets are currently thought to be sufficient for any near-term needs of the Venture. The Managing General Partner is currently assessing the need for capital improvements at each of the Venture's properties. To the extent that additional capital improvements are required, the Venture's distributable cash flow, if any, may be adversely effected. No cash distributions were made by the Venture during the nine months ended September 30, 1998, or during the nine months ended September 30, 1997. Future cash distributions are subject to the order of distributions stipulated by the Venture's Plan of Reorganization. The source of future cash distributions is dependent upon cash generated by the Venture's properties and the cash generated through the sale or refinancing of those properties. There can be no assurance, however, that the Venture will generate sufficient funds from operations to permit distributions to its partners in 1998 or subsequent periods. Transfer of Control; Subsequent Event On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and into Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control of the Managing General Partner. In addition, AIMCO also acquired approximately 51% of the outstanding common shares of beneficial interest of Insignia Properties Trust ("IPT"), the sole shareholder of the Managing General Partner. Also, effective October 1, 1998 IPT and AIMCO entered into an Agreement and plan of Merger pursuant to which IPT is to be merged with and into AIMCO or a subsidiary of AIMCO (the "IPT Merger"). The IPT Merger requires the approval of the holders of a majority of the outstanding IPT Shares. AIMCO has agreed to vote all of the IPT Shares owned by it in favor of the IPT Merger and has granted an irrevocable limited proxy to unaffiliated representatives of IPT to vote the IPT Shares acquired by AIMCO and its subsidiaries in favor of the IPT Merger. As a result of AIMCO's ownership and its agreement, the vote of no other holder of IPT is required to approve the merger. The Managing General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Venture. Year 2000 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 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 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. 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 are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Managing Agent and the Partnership. Status of Progress in Becoming Year 2000 Compliant The Managing Agent's plan to resolve the Year 2000 Issue involves the following four phases: assessment, remediation, testing and implementation. To date, the Managing Agent has fully completed its assessment of all information systems that could be significantly affected by the Year 2000, and has begun the remediation, testing and implementation phase on both hardware and software systems. Assessments are continuing in regards to embedded systems in operating equipment. The Managing Agent anticipates having all phases complete by June 1, 1999. In addition to the areas the Venture is relying on the Managing Agent to verify compliance with, the Venture has certain operating equipment, primarily at the property sites, which needed to be evaluated for Year 2000 compliance. The focus of the Managing General Partner was to the security systems, elevators, heating-ventilation-air-conditioning systems, telephone systems and switches, and sprinkler systems. The Managing General Partner is currently engaged in the identification of all non-compliant operational systems, and is in the process of estimating the costs associated with any potential modifications or replacements needed to such systems in order for them to be Year 2000 compliant. It is not expected that such costs would have a material adverse affect upon the operations of the Venture. Risk Associated with the Year 2000 The Managing General Partner believes that the Managing Agent has an effective program in place to resolve the Year 2000 issue in a timely manner and has appropriate contingency plans in place for critical applications that could affect the Partnership's operations. To date, the Managing General Partner is not aware of any external agent with a Year 2000 issue that would materially impact the Partnership's results of operations, liquidity or capital resources. However, the Managing General Partner has no means of ensuring that external agents will be Year 2000 compliant. The Managing General Partner does not believe that the inability of external agents to complete their Year 2000 resolution process in a timely manner will have a material impact on the financial position or results of operations of the Partnership. However, the effect of non-compliance by external agents is not readily determinable. Other Certain items discussed in this quarterly report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Venture to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such forward-looking statements speak only as of the date of this quarterly report. The Venture expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained herein to reflect any change in the Venture's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 27, Financial Data Schedule, is filed as an exhibit to this report. b) Reports on Form 8-K: None filed during the quarter ended September 30, 1998. 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. Its Managing General Partner Date: November 16, 1998 By: /s/Patrick Foye Patrick Foye Executive Vice President Date: November 16, 1998 By: /s/Timothy R. Garrick Timothy R. Garrick Vice President - Accounting (Duly Authorized Officer) VMS National Residential Portfolio II By: MAERIL, Inc. Its Managing General Partner Date: November 16, 1998 By: /s/Patrick Foye Patrick Foye Executive Vice President Date: November 16, 1998 By: /s/Timothy R. Garrick Timothy R. Garrick Vice President - Accounting (Duly Authorized Officer) EX-27 2
5 This schedule contains summary financial information extracted from VMS National Properties 1998 Third Quarter 10-Q and is qualified in its entirety by reference to such 10-Q filing. 0000789089 VMS NATIONAL PROPERTIES 1,000 9-MOS DEC-31-1998 SEP-30-1998 1,040 0 0 0 0 0 145,849 79,336 72,314 0 196,101 0 0 0 (150,025) 72,314 0 20,867 0 0 26,243 0 12,509 0 0 0 0 0 0 (5,376) (5,780) 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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