-----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, J4uoZuiUBaMTGJp6WU9QDT9l9dA/Lf8Vrnp8GernMOU8KBSQDUBHjVMceoiGv7T0 owZm9aFhd0n49v1aHOCfNA== 0000711642-00-000046.txt : 20000328 0000711642-00-000046.hdr.sgml : 20000328 ACCESSION NUMBER: 0000711642-00-000046 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 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-K SEC ACT: SEC FILE NUMBER: 000-14194 FILM NUMBER: 578871 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-K 1 YEAR END REPORT March 27, 2000 United States Securities and Exchange Commission Washington, D.C. 20549 RE: VMS National Properties Joint Venture Form 10-K File No. 0-14194 To Whom it May Concern: The accompanying Form 10-K for the year ended December 31, 1999 describes a change in the method of accounting to capitalize exterior painting and major landscaping, which would have been expensed under the old policy. The Partnership believes that this accounting principle change is preferable because it provides a better matching of expenses with the related benefit of the expenditures and it is consistent with industry practice and the policies of the Corporate General Partner. Please do not hesitate to contact the undersigned with any questions or comments that you might have. Very truly yours, Stephen Waters Real Estate Controller FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] 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) Issuer's telephone number (864) 239-1000 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Units of Limited Partnership Interest (Title of class) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. State issuer's revenues for its most recent fiscal year. $28,658,000 State the aggregate market value of the voting partnership interests held by non-affiliates computed by reference to the price at which the partnership interests were sold, or the average bid and asked prices of such partnership interests, as of December 31, 1999. No market exists for the limited partnership interests of the Registrant, and, therefore, no aggregate market value can be determined. DOCUMENTS INCORPORATED BY REFERENCE NONE PART I Item 1. Description of Business VMS National Properties Joint Venture (the "Venture" or the "Registrant"), of which the general partners are VMS National Residential Portfolio I ("Portfolio I") and VMS National Residential Portfolio II ("Portfolio II"), was formed in September 1984. Portfolio I and Portfolio II are collectively referred to as the "Partnerships". The Partnerships are limited partnerships formed in September 1984, under the Uniform Limited Partnership Act of the State of Illinois. Effective December 12, 1997, the managing general partner of each of the Partnerships was transferred from VMS Realty Investment, Ltd. ("VMSRIL") (formerly VMS Realty Partners) to MAERIL, Inc. ("MAERIL" or the "Managing General Partner"), a wholly-owned subsidiary of MAE GP Corporation ("MAE GP") and an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was merged with Insignia Properties Trust ("IPT"), which was an affiliate of Insignia. Effective October 1, 1998 and February 26, 1999, Insignia and IPT were respectively merged into Apartment Investment and Management Company ("AIMCO"). Thus, the Managing General Partner is now a wholly-owned subsidiary of AIMCO. From the period October 26, 1984, through June 16, 1985, the Partnerships sold 912 Limited Partnership Interests at a price of $150,000 per Limited Partnership Interest for a total of $136,800,000. The Interests of each Partnership were offered in reliance upon exemptions from registration under the Securities Act of 1933, as amended (the "Act"), and Regulation D thereunder. The participation interest in the Venture of Portfolio I and Portfolio II is approximately 71% and 29%, respectively. See Note H to the combined Financial Statements for information as to capital contributions of partners. The Venture originally acquired 51 residential apartment complexes located throughout the United Sates. At December 31, 1999, 34 of the Venture's properties had been foreclosed and two had been sold. The Venture continues to own and operate the remaining 15 residential apartment complexes (see "Item 2. Description of Properties"). The Managing General Partner intends to maximize the operating results and, ultimately, the net realizable value of each of the Venture's properties in order to achieve the best possible return for the investors. Such results may best be achieved through property sales, refinancings, debt restructurings or relinquishment of the assets. The Venture intends to evaluate each of its holdings periodically to determine the most appropriate strategy for each of the assets. The Registrant has no employees. Management and administrative services are provided by the Managing General Partner and by agents retained by the Managing General Partner. In addition to day-to-day management of the properties' operations, affiliates of the Managing General Partner also provide real estate advisory and asset management services to the Venture. As advisor, such affiliates provide all partnership accounting and administrative services, investment management, and supervisory services over property management and leasing. The real estate business in which the Registrant is engaged is highly competitive. There are other residential properties within the market area of the Registrant's properties. The number and quality of competitive properties, including those which may be managed by an affiliate of the Managing General Partner, in such market area could have a material effect on the rental market for the apartments at the Registrant's properties and the rents that may be charged for such apartments. While the Managing General Partner and its affiliates own and/or control a significant number of apartment units in the United States such units represent an insignificant percentage of total apartment units in the United States and competition for the apartments is local. Both the income and expenses of operating the properties owned by the Registrant are subject to factors outside of the Registrant's control, such as changes in the supply and demand for similar properties resulting from various market conditions, increases in unemployment or population shifts, changes in the availability of permanent mortgage financing, changes in zoning laws, or changes in patterns or needs of users. In addition, there are risks inherent in owning and operating residential properties because such properties are susceptible to the impact of economic and other conditions outside of the control of the Registrant. There have been, and it is possible there may be other, Federal, state, and local legislation and regulations enacted relating to the protection of the environment. The Venture is unable to predict the extent, if any, to which such new legislation or regulations might occur and the degree to which such existing or new legislation or regulations might adversely affect the properties owned by the Venture. The Venture monitors its properties for evidence of pollutants, toxins and other dangerous substances, including the presence of asbestos. In certain cases environmental testing has been performed, which resulted in no material adverse conditions or liabilities. In no case has the Venture received notice that it is a potentially responsible party with respect to an environmental clean up site. As a result of financial difficulties, the Venture filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court in the Central District of California on February 22, 1991 (see "Note C" of the combined financial statements included in "Item 8. Financial Statements and Supplemental Data"). This voluntary filing encompassed the Venture's non-HUD properties only. In March 1993, the substance of the Venture's Plan of Reorganization (the "Plan") was approved by the Bankruptcy Court and a Confirmation Order was entered and the Plan became effective on September 30, 1993. 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. On December 29, 1997, the Venture refinanced the mortgages encumbering all of its remaining properties (see "Item 2. Description of Properties" for a further discussion). A further description of the Registrant's business is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in "Item 7" of this Form 10-K. Transfer of Control Pursuant to a series of transactions which closed on October 1, 1998, and February 26, 1999, Insignia and IPT merged into AIMCO, a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in the Managing General Partner. The Managing General Partner does not believe that this transaction has had or will have a material effect on the affairs and operations of the Venture. Segments Segment data for the years ended December 31, 1999, 1998, and 1997 is included in "Item 8. Financial Statements and Supplementary Data - Note K" and is an integral part of the Form 10-K. Item 2. Description of Properties The following table sets forth the Venture's remaining investment in properties: Date of Property (1) Purchase Use Buena Vista Apartments 10/26/84 Apartment Pasadena, CA 92 Units Casa de Monterey 10/26/84 Apartment Norwalk, CA 144 Units Crosswood Park 12/05/84 Apartment Citrus Heights, CA 180 Units Mountain View Apartments 10/26/84 Apartment San Dimas, CA 168 Units Pathfinders Village 10/26/84 Apartment Freemont, CA 246 Units Scotchollow 10/26/84 Apartment San Mateo, CA 418 Units The Bluffs 10/26/84 Apartment Milwaukee, OR 137 Units Vista Village Apartments 10/26/84 Apartment El Paso, TX 220 Units Chapelle Le Grande 12/05/84 Apartment Merrillville, IN 105 Units North Park Apartments 11/14/84 Apartment Evansville, IN 284 Units Shadowood Apartments 11/14/84 Apartment Monroe, LA 120 Units Towers of Westchester Park 10/26/84 Apartment College Park, MD 303 Units Terrace Gardens 10/26/84 Apartment Omaha, NE 126 Units Watergate Apartments 10/26/84 Apartment Little Rock, AR 140 Units Forest Ridge Apartments 10/26/84 Apartment Flagstaff, AZ 278 Units (1) All properties are fee ownership, each subject to a first and second mortgage. Schedule of Properties: Set forth below for each of the Registrant's properties is the gross carrying value, accumulated depreciation, depreciable life, method of depreciation and Federal tax basis.
Gross Carrying Accumulated Federal Property Value Depreciation Method Rate Tax Basis (in thousands) (in thousands) North Park Apartments $ 10,475 $ 6,516 SL/200% DBL 5-27.5 yrs $ 2,041 Chapelle Le Grande 4,855 2,971 SL/200% DBL 5-27.5 yrs 996 Terrace Gardens 6,188 3,538 SL/150% and 5-27.5 yrs 1,696 200% DBL Forest Ridge Apartments 8,875 5,277 SL/150% and 5-27.5 yrs 2,067 200% DBL Scotchollow 28,681 16,441 SL/150% DBL 5-27.5 yrs 7,567 Pathfinders Village 16,043 8,594 SL/200% DBL 5-27.5 yrs 5,913 Buena Vista Apartments 5,993 3,418 SL/200% DBL 5-27.5 yrs 1,468 Mountain View Apartments 10,847 5,759 SL/200% DBL 5-29 yrs 2,632 Crosswood Park 9,171 5,303 SL/150% DBL 5-29 yrs 3,095 Casa de Monterey 8,092 4,698 SL/200% DBL 5-27.5 yrs 2,015 The Bluffs 4,374 2,786 SL/200% DBL 5-27.5 yrs 728 Watergate Apartments 7,136 4,365 SL/200% DBL 5-27.5 yrs 1,521 Shadowood Apartments 4,336 2,728 SL 5-27.5 yrs 856 Vista Village Apartments 6,821 3,882 SL 5-27.5 yrs 1,685 Towers of Westchester Park 16,597 10,522 SL 5-27.5 yrs 3,056 $148,484 $86,798 $37,336
See "Note A" of the Notes to the Combined Financial Statements included in "Item 8" for a description of the Venture's depreciation policy and "Note M - Change in Accounting Principle". Schedule of Property Indebtedness The following table sets forth certain information relating to the loans encumbering the Registrant's properties.
Principal Principal Balance At Balance December 31, Interest Period Maturity Due At Property 1999 Rate Amortized Date Maturity (in thousands) (in thousands) North Park Apartments 1st mortgage $ 6,209 8.50% 25 years 01/08 $ 5,264 2nd mortgage 1,811 10.84% (A) 01/08 (A) Chapelle Le Grande 1st mortgage 3,184 8.50% 25 years 01/08 2,702 2nd mortgage 949 10.84% (A) 01/08 (A) Terrace Gardens 1st mortgage 4,405 8.50% 25 years 01/08 3,739 2nd mortgage 1,210 10.84% (A) 01/08 (A) Forest Ridge Apartments 1st mortgage 5,854 8.50% 25 years 01/08 4,968 2nd mortgage 1,644 10.84% (A) 01/08 (A) Scotchollow 1st mortgage 28,913 8.50% 25 years 01/08 24,533 2nd mortgage 8,058 10.84% (A) 01/08 (A) Pathfinders Village 1st mortgage 13,370 8.50% 25 years 01/08 11,336 2nd mortgage 3,868 10.84% (A) 01/08 (A) Buena Vista Apartments 1st mortgage 4,920 8.50% 25 years 01/08 4,171 2nd mortgage 1,299 10.84% (A) 01/08 (A) Mountain View Apartments 1st mortgage 7,108 8.50% 25 years 01/08 6,026 2nd mortgage 1,961 10.84% (A) 01/08 (A) Crosswood Park 1st mortgage 5,530 8.50% 25 years 01/08 4,688 2nd mortgage 1,309 10.84% (A) 01/08 (A) Casa de Monterey 1st mortgage 4,074 8.50% 25 years 01/08 3,454 2nd mortgage 1,178 10.84% (A) 01/08 (A) The Bluffs 1st mortgage 3,695 8.50% 25 years 01/08 3,135 2nd mortgage 1,044 10.84% (A) 01/08 (A) Watergate Apartments 1st mortgage 2,878 8.50% 25 years 01/08 2,440 2nd mortgage 799 10.84% (A) 01/08 (A) Shadowood Apartments 1st mortgage 2,236 8.50% 25 years 01/08 1,896 2nd mortgage 586 10.84% (A) 01/08 (A) Vista Village Apartments 1st mortgage 3,299 8.50% 25 years 01/08 2,797 2nd mortgage 938 10.84% (A) 01/08 (A) Towers of Westchester Park 1st mortgage 12,035 8.50% 25 years 01/08 10,203 2nd mortgage 3,447 10.84% (A) 01/08 (A) Totals $137,811 $91,352
(A) Payments based on excess monthly cash flow at each property, with any unpaid balance due at maturity. Pursuant to the Plan of Reorganization, the mortgages formerly held by the FDIC were modified effective September 30, 1993. The face value of the notes were restated to agreed valuation amounts. Under the terms of the modification, the lender may reinstate the full claim upon the default of any note. As a result, the Venture deferred recognition of a gain of $54,053,000, which was the difference between the note face amounts and the agreed valuation amounts of the modified debt. On December 29, 1997, the Venture refinanced the mortgages encumbering all of its remaining 15 properties. The refinancing resulted in each property being encumbered by new senior and junior loans. The senior loans each have an interest rate of 8.5% per annum and require monthly payments of principal and interest. The junior loans each have an interest rate of 10.84% per annum and the monthly payments are based on excess monthly cash flow for each property. All of the loans mature on January 1, 2008, and the senior loans include prepayment penalties if paid prior to January 1, 2007. The senior loans retained similar terms regarding note face amounts and agreed valuation amounts. These new loans were recorded at the agreed valuation amount of $110,000,000, which is less than the $152,225,000 face amount of the senior loans. If the Venture defaults on the new mortgage notes payable or is unable to pay the outstanding agreed valuation amounts upon maturity, then the note face amounts become due. Accordingly, the Venture deferred recognition of a gain of $42,225,000, which is the difference between the refinanced note face amounts and the agreed valuation amounts. All the loans are cross-collateralized but they are not cross-defaulted. As a result of the refinancing, the Venture recognized an extraordinary gain on extinguishment of debt of $10,303,000, of which $11,828,000 is the result of a decreased difference between the note face amounts and agreed valuation amounts for the refinanced mortgage notes as compared to the old indebtedness. This gain was partially offset by debt extinguishment costs of $41,000 and the write-off of discounts and loan costs on the old debt of $1,484,000. As more fully discussed in "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" AIMCO Properties, L.P. ("AIMCO LP"), which owns the Managing General Partner and which is a controlled affiliate of AIMCO, purchased (i) the junior loans on November 19, 1999, and (ii) a significant interest in the residual value of the properties on November 16, 1999. Rental Rates and Occupancy: The following table sets forth the average annual rental rates and occupancy for 1999 and 1998 for each property.
Average Annual Average Rental Rates Per Unit Occupancy Property 1999 1998 1999 1998 North Park Apartments $ 6,312 $ 6,072 95% 97% Chapelle Le Grande 8,277 8,231 92% 93% Terrace Gardens 9,268 9,057 97% 95% Forest Ridge Apartments 7,464 7,390 95% 89% Scotchollow 15,451 14,819 93% 95% Pathfinders Village 14,586 13,575 92% 90% Buena Vista Apartments 13,310 12,326 99% 99% Mountain View Apartments 11,213 10,567 98% 98% Crosswood Park 9,435 9,050 96% 96% Casa de Monterey 8,384 8,049 98% 95% The Bluffs 7,066 6,883 94% 96% Watergate Apartments 7,343 7,115 91% 90% Shadowood Apartments 6,548 6,349 95% 95% Vista Village Apartments 6,415 6,305 93% 95% Towers of Westchester Park 11,645 11,221 98% 97%
The Managing General Partner attributes the occupancy fluctuations at the properties to the following: an increase at Forest Ridge Apartments due to a stronger rental market and more aggressive marketing and an increase at Casa de Monterey due to an improvement in the curb appeal at the property in addition to improved market conditions. As noted under "Item 1. Description of Business", the real estate industry is highly competitive. All of the properties are subject to competition from other residential apartment complexes in the area. The Managing General Partner believes that all of the properties are adequately insured. Each property is an apartment complex which leases units for lease terms of one year or less. No residential tenant leases 10% or more of the available rental space. Real Estate Taxes and Rates: Real estate taxes and rates in 1999 for each property were as follows: 1999 1999 Taxes Rate (in thousands) North Park Apartments $149 9.42% Chapelle Le Grande 53 12.88% Terrace Gardens 82 2.17% Forest Ridge Apartments 88 10.00% Scotchollow 340 1.27% Pathfinders Village 215 1.43% Buena Vista Apartments 71 1.22% Mountain View Apartments 118 1.20% Crosswood Park 86 1.05% Casa de Monterey 63 1.24% The Bluffs 69 1.32% Watergate Apartments 54 6.39% Shadowood Apartments 32 12.52% Vista Village Apartments 107 2.95% Towers of Westchester Park 212 3.69% Capital Improvements: North Park Apartments: The Venture completed approximately $45,000 in capital expenditures at North Park Apartments as of December 31, 1999, consisting primarily of appliance and flooring replacements and air conditioning upgrades. These improvements were funded from cash flow and replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $85,200. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Chapelle Le Grande: The Venture completed approximately $53,000 in capital expenditures at Chapelle Le Grande as of December 31, 1999, consisting primarily of appliances and flooring replacements and air conditioning upgrades. These improvements were funded from cash flow. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $31,500. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Terrace Gardens: The Venture completed approximately $89,000 in capital expenditures at Terrace Gardens as of December 31, 1999, consisting primarily of appliance and flooring replacements, heating system upgrades and a roofing project. These improvements were funded from cash flow and replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $37,800. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Forest Ridge Apartments: The Venture completed approximately $96,000 in capital expenditures at Forest Ridge Apartments as of December 31, 1999, consisting primarily of appliance and flooring replacements and heating system upgrades. These improvements were funded from replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $83,400. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Scotchollow: The Venture completed approximately $241,000 in capital expenditures at Scotchollow as of December 31, 1999, consisting primarily of appliance and flooring replacements, major landscaping, heating system, golf cart purchase, balcony upgrades and roofing and parking lot projects. These improvements were funded from replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $125,400. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Pathfinders Village: The Venture completed approximately $306,000 in capital expenditures at Pathfinders Village as of December 31, 1999, consisting primarily of appliance and flooring replacements and major building improvements. These improvements were funded from cash flow and replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $73,800. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Buena Vista Apartments: The Venture completed approximately $109,000 in capital expenditures at Buena Vista Apartments as of December 31, 1999, consisting primarily of plumbing upgrades, water heaters and flooring replacements. These improvements were funded from cash flow. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $27,600. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Mountain View Apartments: The Venture completed approximately $52,000 in capital expenditures at Mountain View Apartments as of December 31, 1999, consisting primarily of flooring replacements, major landscaping and handicap accessible improvements. These improvements were funded from cash flow and replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $50,400. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Crosswood Park: The Venture completed approximately $108,000 in capital expenditures at Crosswood Park as of December 31, 1999, consisting primarily of appliances, office equipment, flooring replacements and balcony, plumbing and building improvements. These improvements were funded from cash flow. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $54,000. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Casa de Monterey: The Venture completed approximately $164,000 in capital expenditures at Casa de Monterey as of December 31, 1999, consisting primarily of appliance and flooring replacements, plumbing and building improvements. These improvements were funded from cash flow. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $43,200. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. The Bluffs: The Venture completed approximately $38,000 in capital expenditures at The Bluffs as of December 31, 1999, consisting primarily of appliances and flooring replacements. These improvements were funded from replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $41,100. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Watergate Apartments: The Venture completed approximately $66,000 in capital expenditures at Watergate Apartments as of December 31, 1999, consisting primarily of water heaters, air conditioning and flooring replacements and pool improvements. These improvements were funded from cash flow and replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $42,000. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Shadowood Apartments: The Venture completed approximately $43,000 in capital expenditures at Shadowood Apartments as of December 31, 1999, consisting primarily of appliances, air conditioning and flooring replacements. These improvements were funded from cash flow and replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $36,000. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Vista Village Apartments: The Venture completed approximately $159,000 in capital expenditures at Vista Village Apartments as of December 31, 1999, consisting primarily of appliances, air conditioning upgrades, exterior painting, and flooring replacements. These improvements were funded from replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The minimum amount to be budgeted is expected to be $300 per unit or $66,000. Additional improvements may be considered and will depend on the physical condition of the property as well as replacement reserves and anticipated cash flow generated by the property. Towers of Westchester Park: The Venture completed approximately $288,000 in capital expenditures at Towers of Westchester Park as of December 31, 1999, consisting primarily of appliances, equipment, heating, air conditioning, plumbing, flooring replacements and pool and structural improvements. These improvements were funded from cash flow and replacement reserves. The Venture is currently evaluating the capital improvement needs of the property for the upcoming year. The Venture, the holder of the junior loan encumbering the property (AIMCO LP) and the servicer of the senior loan encumbering the property agreed, on November 19, 1999, to a procedure to assess whether or not capital expenditures in addition to permitted capital expenditures of $300 per unit per year are needed at the property and the methodology for funding any such capital expenditures, in each case as more fully described in Item 7. This methodology has been applied to Towers of Westchester. The parties agreed that this property required repairs over the next year that are estimated to cost $920,000 and that these repairs would be funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the junior loans. In addition, on November 19, 1999, the parties agreed to a schedule of physical needs required at the property over the next ten years and agreed that the required capital expenditures funding on the property under the senior loan encumbering the property would be increased from $300 per unit per year to approximately $478 per unit per year, effective January 1, 2000. Accordingly the budget for 2000 is expected to be approximately $1,065,000. The Venture has budgeted a minimum of $300 per unit or $797,400 for all of the properties except Towers of Westchester which is the limit set by the second mortgage notes for funding of capital improvements. As the Venture identifies properties which require additional improvements discussions are held with the holders of both the first and second mortgage notes for approval to perform agreed upon capital improvements. Item 3. Legal Proceedings The Venture is unaware of any pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. Item 4. Submission of Matters to a Vote of Security Holders The unit holders of the Partnerships did not vote on any matter during the quarter ended December 31, 1999. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholders Matters From the period October 26, 1984, through June 16, 1985, Portfolio I and Portfolio II sold a total of 912 Limited Partnership Interests at a price of $150,000 per Limited Partnership Interest, for a total of $136,800,000. As of December 31, 1999, there were 795 holders of record of Portfolio I and 313 holders of record of Portfolio II, owning 644 and 267 units, respectively. As of December 31, 1998, there were 823 holders of record of Portfolio I and 332 holders of record of Portfolio II, owning a total of 644 and 267 units, respectively. No public trading market has developed for the Units, and it is not anticipated that such a market will develop in the future. During 1997, the number of Limited Partnership Units in Portfolio II decreased by 1 unit from 268 to 267 units due to a limited partner abandoning his/her unit. In abandoning his or her Limited Partnership Unit, a limited partner relinquishes all right, title and interest in the Partnership as of the date of abandonment. There were no cash distributions to the partners of either of the Partnerships for the years ended December 31, 1999, 1998, and 1997. In accordance with the respective Agreements of Limited Partnership, there are no material restrictions on the Partnership's ability to make cash distributions, future cash distributions are, however, subject to the order of distributions as stipulated by the Venture's Plan of Reorganization. Future cash distributions will depend on the levels of net cash generated from operations, the availability of cash reserves and the timing of debt maturities, refinancings, and/or property sales. The Partnership's distribution policy is reviewed on an annual basis. There can be no assurance, however, that the Partnership 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 its partners in 2000 or subsequent periods. See "Item 2. Description of Properties - Capital Improvements" for information relating to anticipated capital expenditures at the properties. During 1999, AIMCO, LP an affiliate of the Managing General Partner made a tender offer to purchase units of limited partnership interest in both Portfolio I and II. As a result of the tender offer, AIMCO and its affiliates currently own 21.25 units of limited partnership interest in Portfolio I representing 3.476% of the outstanding units and 19.50 units of limited partnership interest in Portfolio II representing 7.635% of the outstanding units. It is possible that AIMCO or its affiliates will make one or more additional offers to acquire additional limited partnership interests in the Partnerships for cash or in exchange for units in the operating partnership of AIMCO. Under the Partnership Agreements, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of their affiliation with the Managing General Partner. Item 6. Selected Financial Data (in thousands, except per interest data):
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Total revenues from rental operations $ 28,658 $ 27,956 $ 25,577 $ 25,001 $ 27,874 Extraordinary item-gain on extinguishment of debt $ -- $ -- $ 10,303 (B) $ 14,095 (A) $ 34,598 (A) Net (loss) income $ (6,402) $ (6,958) $ 606 $ 1,823 $ 15,626 Net (loss) income per limited partnership Portfolio I - 644 interests $ (6,842) $ (7,483) $ 654 $ 1,961 (A) $ 16,791 (A) Portfolio II - 267 $ (6,992) $ (7,493) $ 646 (C) $ 1,953 (A) $ 16,791 (A) interests Tax (loss) income $ (6,244) $ (6,792) $ (7,923) $ 3,188 $ 21,385 Tax (loss) income per limited partnership Portfolio I - 644 interests $ (6,717) $ (7,306) $ (8,514) $ 3,426 $ 23,448 Portfolio II - 267 $ (6,717) $ (7,306) $ (8,514)(C) $ 3,426 $ 23,448 interests Total assets $ 68,445 $ 71,937 $ 73,542 $ 76,779 $ 88,440 Mortgage loans and notes $179,468 $177,190 $172,904 $153,066 $158,733
A) During 1995 and 1996, respectively, five and two of the Ventures nonretained properties were foreclosed. As a result of these events, the Venture recognized extraordinary gains on the extinguishment of the related debt. As of December 31, 1996, all of the nonretained properties have been foreclosed. B) During 1997, all of the Ventures' properties were refinanced. As a result, the Venture recognized an extraordinary gain on the extinguishment of debt. C) During 1997, one Partnership interest was abandoned. In abandoning Partnership Units, a limited partner relinquishes all right, title and interest in the Partnership as of the date of abandonment. However, during the year of abandonment, the Limited Partner will still be allocated his or her share of the income or loss for that year. The above selected financial data should be read in conjunction with the combined financial statements and the related notes. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The matters discussed in this Form 10-K contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosure contained in this Form 10-K and the other filings with the Securities and Exchange Commission made by the Registrant from time to time. The discussion of the Registrant's business and results of operations, including forward-looking statements pertaining to such matter, does not take into account the effects of any changes to the Registrant's business and results of operation. Accordingly, actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. This item should be read in conjunction with the combined financial statements and other items contained elsewhere in this report. Results from Operations 1999 Compared with 1998 The Venture recorded a net loss for the twelve months ended December 31, 1999 of approximately $6,402,000 as compared to a net loss of $6,958,000 for the corresponding period in 1998. (See "Note J" of the financial statements for a reconciliation of these amounts to the Registrant's federal taxable income (loss)). The decrease in net loss is primarily attributable to an increase in total revenues. The increase in total revenues is due to an increase in rental income which is partially offset by the recording of a casualty gain for the twelve months ended December 31, 1998. No such gain was recorded for the twelve months ended December 31, 1999. Rental income increased mainly due to an increase in average annual rental rates at all fifteen of the Venture's investment properties along with occupancy increases at six of the properties, which more than offset the decreases at five other properties. A casualty gain of approximately $279,000 was recorded during the year ended December 31, 1998 in connection with a fire that damaged eight of the two hundred forty-six units at Pathfinder Village. Total expenses increased primarily due to an increase in depreciation, interest and property taxes, which more than offset the decrease in operating expenses and to a lesser extent the fact that no loss on disposal of property was recorded during the year ended December 31, 1999, as was for the year ended December 31, 1998. Interest expense increased due to an increase in the principal balance of outstanding notes payable. Property taxes increased due to an increase in property tax rates at Buena Vista Apartments, Crosswood Park, The Bluffs, Chapelle Le Grande, and Shadowood Apartments. Depreciation expense increased as the result of depreciation taken on property improvements and replacements placed into service for 1999. Operating expense decreased primarily due to a decrease in insurance expense at all of the Venture's investment properties as a result of a change in insurance carriers. Operating expense for 1998 included parking lot repairs at Scotchollow combined with exterior building improvements at Crosswood Park, North Park, Watergate, Pathfinder and Shadowood Apartments. In addition, all of the properties completed interior painting projects in 1998. The loss on disposal of property for the year ended December 31, 1998 resulted from the write-off of roofs that were not fully depreciated at the time of roof replacement projects at Chapelle Le Grande, Pathfinder, Casa de Monterey and Mountain View. No such loss was recorded during the twelve months ended December 31, 1999. General and administrative expense decreased for the year ended December 31, 1999 compared to the year ended December 31, 1998 primarily due to the payment of a trustee fee for the year ended December 31, 1998 in connection with the 1997 modification of the Venture's bankruptcy plan, which allowed the Senior and Junior Debts to be refinanced. Included in general and administrative expenses for the year ended December 31, 1999 and 1998 are reimbursements to the Managing General Partner allowed under the Partnership Agreement associated with its management of the Venture. Costs associated with the quarterly and annual communications with investors and regulatory agencies and the annual audit required by the Partnership Agreement are also included. Effective January 1, 1999, the Venture changed its method of accounting to capitalize the cost of exterior painting and major landscaping on a prospective basis. The Partnership believes that this accounting principle change is preferable because it provides a better matching of expenses with the related benefit of the expenditures and it is consistent with industry practice and the policies of the Managing General Partner. The effect of the change in 1999 was to decrease the net loss by approximately $66,000 ($71.00 per limited partnership interest for both Portfolio I and II). The cumulative effect, had this change been applied to prior periods, is not material. The accounting principle change will not have an effect on cash flow, funds available for distribution or fees payable to the Managing General Partner and affiliates. 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. 1998 Compared to 1997 The Venture recorded a net loss for the year ended December 31, 1998 of $6,958,000 as compared to net income of $606,000 for the year ended December 31, 1997. (See "Note J" of the financial statements for a reconciliation of these amounts to the Registrant's federal taxable income (loss)). The decrease in net income is primarily attributable to an extraordinary gain on extinguishment of debt related to the refinancing of the Venture's properties on December 29, 1997. Net loss before the extraordinary gain on extinguishment of debt was $6,958,000 and $9,697,000 for the years ended December 31, 1998 and 1997, respectively. The decrease in net loss before the extraordinary gain is primarily attributable to an increase in total revenues as well as a slight decrease in total expenses. The increase in total revenues is due primarily to an increase in rental income and to a lesser extent an increase in other income and the recognition of a casualty gain. Rental income increased mainly due to an increase in average annual rental rates at all fifteen of the Venture's investment properties. In addition, occupancy at eight of the investment properties increased for 1998; occupancy at three other properties remained the same while the four remaining properties experienced decreases. Other income increased primarily due to an increase in corporate units at Shadowood Apartments. The Venture also recorded a casualty gain of $279,000 in connection with a fire that damaged eight of the 246 units at Pathfinder Village. Total expenses decreased due to reductions in operating, general and administrative, interest and property tax expenses, which more than offset the increase in depreciation and the loss on disposal of property. Operating expenses decreased primarily due to landscaping expenses at Watergate Apartments and exterior building improvements at Terrace Gardens, Forest Ridge and Scotch Hollow in 1997. Also contributing to the reduction in operating expense was a decrease in insurance expense at all of the Venture's investment properties. Finally, the cost of contract garbage removal services decreased at Scotch Hollow and Pathfinder. The decrease in general and administrative expenses is primarily due to a decrease in asset management fees and reimbursements resulting from the revised Asset Management Agreement, which was effective January 1, 1998. Interest expense decreased due to the 1997 refinancing of the Ventures senior loans to a lower interest rate. The decrease in property taxes is primarily the result of reduced assessments at Casa de Monterey, Crosswood Park, Chapelle Le Grande and North Park. Depreciation expense increased as the result of depreciation taken on property improvements and replacements for 1998. The loss on disposal of property resulted from the write-off of roofs that were not fully depreciated when replaced at Chapelle Le Grande, Pathfinder Village, Mountain View Apartments and Casa de Monterey during 1998. Liquidity and Capital Resources At December 31, 1999, the Venture had cash and cash equivalents of approximately $2,004,000 as compared to approximately $931,000 at December 31, 1998. Cash and cash equivalents increased approximately $1,073,000 for the year ended December 31, 1999. The increase in cash and cash equivalents is the result of approximately $6,260,000 of cash provided by operating activities and was partially offset by approximately $3,345,000 of cash used in financing activities and approximately $1,842,000 of cash used in investing activities. Cash used in financing activities consisted of payments of principal made on the mortgages encumbering the Registrant's properties. Cash used in investing activities consisted primarily of property improvements and replacements and was slightly offset by net withdrawals from escrow accounts maintained by the mortgage lender. The Venture invests its working capital reserves in a money market account. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the properties to adequately maintain the physical assets and other operating needs of the Venture and to comply with Federal, state and local legal and regulatory requirements. The Venture has budgeted a minimum of $300 per unit or $797,400 for all of the properties except Towers of Westchester Park which is the limit set by the second mortgage notes for funding of capital improvements. The Venture, the holder of the junior loan encumbering the property (AIMCO LP) and the servicer of the senior loan encumbering the property agreed, on November 19, 1999, to a procedure to assess whether or not capital expenditures in addition to permitted capital expenditures of $300 per unit per year are needed at the property and the methodology for funding any such capital expenditures, in each case. This methodology has been applied to Towers of Westchester. The parties agreed that this property required repairs over the next year that are estimated to cost $920,000 and that these repairs would be funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the junior loans. In addition, on November 19, 1999, the parties agreed to a schedule of physical needs required at the property over the next ten years and agreed that the required capital expenditures funding on the property under the senior loan encumbering the property would be increased from $300 per unit per year to approximately $478 per unit per year, effective January 1, 2000. Accordingly the budget for 2000 is expected to be approximately $1,065,000 for Towers of Westchester Park. On December 29, 1997, the Venture refinanced the mortgages encumbering all of its remaining 15 properties. The refinancing resulted in each property being encumbered by new senior and junior loans. The senior loans all have an interest rate of 8.5% per annum and require monthly payment of principal and interest. The junior loans all have an interest rate of 10.84% per annum and the monthly payments are based on excess monthly cash flow for each property. All of the loans mature on January 1, 2008. The senior loans are recorded at the agreed valuation amount of $110,000,000, which is less than the $152,225,000 face amount of the senior loans. In accordance with the terms of the notes, if the related junior note is prepaid and the outstanding agreed valuation amount of the senior note is paid between January 1, 2007 and January 1, 2008, the notes will be discharged without further liability. All of the loans are cross-collateralized, but they are not cross-defaulted. As a result of the refinancing, the Venture recognized an extraordinary gain on extinguishment of debt of $10,303,000 during 1997. The extraordinary gain is the result of the recognition of $11,828,000 of the deferred gain on extinguishment of debt, which was reduced by debt extinguishment costs of $41,000 and the write-off of discounts and loan costs on the old debt of $1,484,000. The reduction in the deferred gain on extinguishment of debt results from the reduction of the difference between the aggregate note face amounts and the aggregate agreed valuation amounts. Under the terms of the old notes, the aggregate note face amounts exceeded the aggregate valuation amounts by $54,053,000. Under the terms of the new notes, the aggregate note face amounts exceed the aggregate agreed valuation amounts by $42,225,000. The Registrant's current assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Registrant. The Registrant's senior loans encumbering all of its properties total approximately $107,711,000 and are being amortized over 25 years, with a balloon payment of $91,352,000 due January 2008. The Registrant's junior loans, which also mature January 2008, total approximately $30,100,000 and require monthly payments based upon monthly excess cash flow for each property. AIMCO LP, which owns the Managing General Partner and which is a controlled affiliate of AIMCO, purchased (i) the junior loans on November 19, 1999, and (ii) a significant interest in the residual value of the properties on November 16, 1999. In connection with AIMCO LP's purchase of the junior loans, (i) the seller, which owned the senior loans on the properties until October 1998, acknowledged its prior consent to $1,749,286 of capital expenditures made on the properties in addition to those funded pursuant to the capital expenditure reserves for the senior and junior loans, which capital expenditures were funded out of cash flow that would otherwise have been used to pay debt services on the junior loans, and (ii) certain convenience as to the timeliness and completion of certain scheduled deferred maintenance items were waived. In addition, AIMCO LP, the Venture, and the servicer of the senior loans encumbering the properties (the "Servicer") agreed to a procedure to assess whether or not capital expenditures in addition to permitted capital expenditures of $300 per unit per year are needed at each property and the methodology for funding any such capital expenditures. Capital expenditures that are identified pursuant to these procedures likely will be funded out of cash flow from the properties that otherwise would be used to service the junior loans on the properties; longer term capital expenditures so identified likely will be funded through an increase in required capital expenditure reserve funding. Although the effect of such additional capital expenditures, and the funding therefore, cannot be determined with precision at this time, the Venture anticipates that the additional capital expenditures at the properties identified pursuant to the procedures described above, and the funding therefor, will significantly increase the period of time that it takes to amortize the junior loans, may cause the junior loans to negatively amortize for some period of time, and may result in balloon payments due on the junior loans at the end of the term. If the properties cannot be refinanced or sold at or before the end of such term for a sufficient amount, the Venture will risk losing such properties through foreclosure. There can be no assurance of the effect that such additional capital expenditures, and the funding therefor, will have on the operations of the properties, or whether the properties will be maintained in the future in an acceptable or marketable state of repair. There were no cash distributions to the partners of either of the Partnerships for the years ended December 31, 1999, 1998, and 1997. In accordance with the respective Agreements of Limited Partnership, there are no material restrictions on the Partnerships' ability to make cash distributions; future cash distributions are, however, subject to the order of distributions as stipulated by the Venture's Plan of Reorganization. The source of future distributions will depend upon the levels of net cash generated from operations, the availability of cash reserves, the timing of debt maturities, refinancings and/or property sales. The Partnerships' distribution policy is reviewed on an annual basis. There can be no assurance, however, that the Partnerships will generate sufficient funds from operations, after required capital expenditures and the order of distributions as stipulated by the Venture's Plan of Reorganization, to permit any distributions to partners in 2000 or subsequent periods. Tender Offer During 1999, AIMCO LP an affiliate of the Managing General Partner made a tender offer to purchase units of limited partnership interest in both Portfolio I and II. As a result of the tender offer, AIMCO and its affiliates currently own 21.25 units of limited partnership interest in Portfolio I representing 3.476% of the outstanding units and 19.50 units of limited partnership interest in Portfolio II representing 7.635% of the outstanding units. It is possible that AIMCO or its affiliates will make one or more additional offers to acquire additional limited partnership interests in the Partnerships for cash or in exchange for units in the operating partnership of AIMCO. Under the Partnership Agreements, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of their affiliation with the Managing General Partner. Year 2000 General Description The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. The Partnership is dependent upon the Managing General Partner and its affiliates for management and administrative services ("Managing Agent"). Any of the Managing Agent's computer programs or hardware that had date-sensitive software or embedded chips might have recognized a date using "00" as the year 1900 rather than the year 2000. This could have resulted 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. Computer Hardware, Software and Operating Equipment In 1999, the Managing Agent completed all phases of its Year 2000 program by completing the replacement and repair of any hardware or software system or operating equipment that was not yet Year 2000 compliant. The Managing Agent's hardware and software systems and its operating equipment are now Year 2000 compliant. To date, no material failure or erroneous results have occurred in the Managing Agent's computer applications related to the failure to reference the Year 2000. Third Parties To date, the Managing Agent is not aware of any significant supplier or subcontractor (external agent) or financial institution of the Partnership that has a Year 2000 issue that would have a material impact on the Partnership's results of operations, liquidity or capital resources. However, the Managing Agent has no means of ensuring or determining the Year 2000 compliance of external agents. At this time, the Managing Agent does not believe that a Year 2000 issue of any non-compliant external agent will have a material impact on the Partnership's financial position or results of operations. Costs The total cost of the Managing Agent's Year 2000 project was approximately $3.2 million and was funded from operating cash flows. Risks Associated with the Year 2000 The Managing Agent completed all necessary phases of its Year 2000 program in 1999, and did not experience system or equipment malfunctions related to a failure to reference the Year 2000. The Managing Agent or Partnership have not been materially adversely effected by disruptions in the economy generally resulting from the Year 2000 issue. At this time, the Managing Agent does not believe that the Partnership's businesses, results of operations or financial condition will be materially adversely effected by the Year 2000 issue. Contingency Plans Associated with the Year 2000 The Managing Agent has not had to implement contingency plans such as manual workarounds or selecting new relationships for its banking or elevator operation activities in order to avoid the Year 2000 issue. Item 7a. Market Risk Factors The Venture is exposed to market risks from adverse changes in interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Venture's cash and cash equivalents as well as interest paid on its indebtedness. As a policy, the Venture does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. The Venture is exposed to changes in interest rates primarily as a result of its borrowing activities used to maintain liquidity and fund business operations. To mitigate the impact of fluctuations in U.S. interest rates, the Venture maintains its debt as fixed rate in nature by borrowing on a long-term basis. Based on interest rates at December 31, 1999, a 1% increase or decrease in market interest rate would not have a material impact on the Venture. The following table summarizes the Venture's debt obligations at December 31, 1999. The interest rates represent the weighted-average rates. The fair value of the debt obligations approximated the recorded value as of December 31, 1999.
Long-term Debt Principal Weighted-average (in thousands) Interest Rate 2000 $ 1,125 8.50% 2001 1,419 8.50% 2002 1,553 8.50% 2003 1,692 8.50% 2004 1,825 8.50% Thereafter 130,197 9.04% $137,811
Item 8. Financial Statements and Supplementary Data LIST OF COMBINED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Combined Balance Sheets - Years ended December 31, 1999 and 1998 Combined Statements of Operations - Years ended December 31, 1999, 1998, and 1997 Combined Statements of Changes in Partners' Deficit - Years ended December 31, 1999, 1998, and 1997 Combined Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997 Notes to Combined Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners VMS National Residential Portfolio I and VMS National Residential Portfolio II We have audited the accompanying combined balance sheets of VMS National Residential Portfolio I (an Illinois Limited Partnership), and VMS National Residential Portfolio II (an Illinois Limited Partnership), and VMS National Properties (an Illinois Partnership) and Subpartnerships (collectively the "Venture") as of December 31, 1999 and 1998, and the related combined statements of operations, changes in partners' deficit and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Venture's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Partnership's management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of VMS National Residential Portfolio I, VMS National Residential Portfolio II and VMS National Properties and Subpartnerships at December 31, 1999 and 1998, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. As discussed in Note M to the financial statements, the Partnership changed its method of accounting to capitalize the cost of exterior painting and major landscaping effective January 1, 1999. /s/ ERNST & YOUNG LLP Greenville, South Carolina February 25, 2000 VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois limited partnerships) VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS COMBINED BALANCE SHEETS (in thousands)
December 31, December 31, 1999 1998 Assets: Cash and cash equivalents $ 2,004 $ 931 Receivables and deposits 1,863 2,163 Restricted escrows 2,581 2,596 Other assets 311 418 Investment properties: Land 13,404 13,404 Buildings and related personal property 135,080 133,223 Less accumulated depreciation (86,798) (80,798) 61,686 65,829 $ 68,445 $ 71,937 Liabilities and Partners' Deficit Liabilities Accounts payable $ 649 $ 405 Tenant security deposits liabilities 1,075 1,108 Accrued property taxes 598 1,047 Other liabilities 1,726 493 Accrued interest 713 1,076 Mortgage notes payable, including $30,101 due to an affiliate at December 31, 1999 (Note E) 137,811 139,732 Notes payable 41,657 37,458 Deferred gain on extinguishment of debt 42,225 42,225 Partners' Deficit (158,009) (151,607) $ 68,445 $ 71,937 See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois limited partnerships) VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS COMBINED STATEMENTS OF OPERATIONS (in thousands, except per interest data)
For The Years Ended December 31, 1999 1998 1997 Revenues: Rental income $ 27,503 $ 26,511 $ 24,507 Other income 1,155 1,166 1,070 Casualty gain -- 279 -- Total revenues 28,658 27,956 25,577 Expenses: Operating 8,428 8,832 9,192 Property management fees 1,160 1,122 1,013 General and administrative 636 785 953 Depreciation 6,000 5,696 5,465 Interest 17,029 16,600 16,924 Property taxes 1,807 1,691 1,727 Loss on disposal of property -- 188 -- Total expenses 35,060 34,914 35,274 Loss before extraordinary item (6,402) (6,958) (9,697) Extraordinary item - gain on extinguishment of debt -- -- 10,303 Net (loss) income $ (6,402) $ (6,958) $ 606 Net (loss) income allocated to general partners $ (128) $ (139) $ 12 Net (loss) income allocated to limited partners (6,274) (6,819) 594 $ (6,402) $ (6,958) $ 606 Net (loss) income per limited partnership interest: Loss before extraordinary item Portfolio I (644 interests) $ (6,842) $ (7,483) $(10,417) Portfolio II (1) $ (6,992) $ (7,493) $(10,425) Extraordinary item Portfolio I (644 interests) $ -- $ -- $ 11,071 Portfolio II (1) $ -- $ -- $ 11,071 Net (loss) income Portfolio I (644 interests) $ (6,842) $ (7,483) $ 654 Portfolio II (1) $ (6,992) $ (7,493) $ 646 (1) 267, 267 and 268 interests at December 31, 1999, 1998, and 1997, respectively. See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois limited partnerships) VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (in thousands)
VMS National Residential Portfolio I Limited Partners General Accumulated Subscription Partners Deficit Notes Total Total Partners' deficit at December 31, 1996 $(3,356) $ (98,353) $ (534) $ (98,887) $(102,243) Collections of subscription notes -- -- 23 23 23 Net income for the year Ended December 31, 1997 9 421 -- 421 430 Partner's 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 year ended December 31, 1998 (98) (4,819) -- (4,819) (4,917) Partners' deficit at December 31, 1998 (3,445) (102,751) (506) (103,257) (106,702) Net loss for the year ended December 31, 1999 (90) (4,406) -- (4,406) (4,496) Partners' deficit at December 31, 1999 $(3,535) $(107,157) $ (506) $(107,663) $(111,198)
See Accompanying Notes to Combined Financial Statements VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (Continued) (in thousands)
VMS National Residential Portfolio II Limited Partners General Accumulated Subscription Partners Deficit Notes Total Total Partners' deficit at December 31, 1996 $(1,404) $ (41,307) $ (342) $ (41,649) $ (43,053) Collections of subscription notes -- -- 7 7 7 Net income for the year Ended December 31, 1997 3 173 -- 173 176 Partner's 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 year ended December 31, 1998 (41) (2,000) -- (2,000) (2,041) Partners' deficit at December 31, 1998 (1,442) (43,134) (329) (43,463) (44,905) Net loss for the year ended December 31, 1999 (38) (1,868) -- (1,868) (1,906) Partners' deficit at December 31, 1999 $(1,480) $ (45,002) $ (329) $ (45,331) $ (46,811) Combined partners' deficit at December 31, 1999 $(5,015) $(152,159) $ (835) $(152,994) $(158,009)
See Accompanying Notes to Combined Financial Statements VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS (in thousands)
For The Years Ended December 31, 1999 1998 1997 Cash flows from operating activities: Net (loss) income $ (6,402) $ (6,958) $ 606 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Extraordinary gain on Extinguishment of debt -- -- (10,303) Depreciation 6,000 5,696 5,465 Amortization of mortgage discounts and loan costs 4,199 4,003 3,688 Loss on disposal of property -- 188 76 Casualty gain -- (279) -- Change in accounts: Receivables and deposits 300 (291) 670 Other assets 107 60 43 Accounts payable 244 36 67 Tenant security deposit liabilities (33) 3 25 Accrued interest 1,061 3,146 (11,948) Accrued property taxes (449) 442 113 Other liabilities 1,233 (501) 197 Net cash provided by (used in) operating activities 6,260 5,545 (11,301) Cash flows from investing activities: Property improvements and replacements (1,857) (3,216) (2,297) Net insurance proceeds from casualty -- 378 -- Net withdrawals from (deposits to) restricted escrows 15 (2,510) (20) Net cash used in investing activities $ (1,842) $ (5,348) $ (2,317) See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS (Continued) (in thousands)
For The Years Ended December 31, 1999 1998 1997 Cash flows from financing activities: Payments on mortgage notes payable $ (3,345) $ (1,787) $ (320) Repayment of mortgage notes payable -- -- (120,441) Proceeds from mortgage notes payable -- -- 139,449 Debt extinguishment costs -- -- (41) Payments received on subscription notes -- 11 30 Repayment of notes payable -- -- (4,000) Payments on advances from affiliates -- -- (337) Net cash (used in) provided by financing activities (3,345) (1,776) 14,340 Net increase (decrease) in cash and cash equivalents 1,073 (1,579) 722 Cash and cash equivalents at beginning of year 931 2,510 1,788 Cash and cash equivalents at end of year $ 2,004 $ 931 $ 2,510 Supplemental disclosure of cash flow information: Cash paid for interest $ 11,768 $ 9,461 $ 25,163 Supplemental non-cash disclosure of financing activities: Assignment of advance from affiliate to mortgage note holder $ -- $ -- $ 397 Accrued interest added to mortgage notes payable $ 1,424 $ 2,070 $ -- See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois Limited Partnerships) VMS NATIONAL PROPERTIES (an Illinois Partnership) AND SUBPARTNERSHIPS NOTES TO COMBINED FINANCIAL STATEMENTS December 31, 1999 Note A - Organization and Significant Accounting Policies Organization: VMS National Properties Joint Venture (the "Venture") was formed as a general partnership pursuant to the Uniform Partnership Act of the State of Illinois and a joint venture agreement (the "Venture Agreement") dated September 27, 1984, between VMS National Residential Portfolio I ("Portfolio I") and VMS National Residential Portfolio II ("Portfolio II") (collectively, the "Partnerships"). Effective December 12, 1997, the managing general partner of each of the Partnerships was transferred from VMS Realty Investment, Ltd. ("VMSRIL" or the "Former Managing General Partner") (formerly VMS Realty Partners) to MAERIL, Inc. ("MAERIL" or the "Managing General Partner"), a wholly-owned subsidiary of MAE GP Corporation ("MAE GP") and an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was merged with Insignia Properties Trust ("IPT"), which was an affiliate of Insignia. Effective October 1, 1998 and February 26, 1999, Insignia and IPT were respectively merged into Apartment Investment and Management Company ("AIMCO"). Thus the Managing General Partner is now a wholly-owned subsidiary of AIMCO. See "Note B - Transfer of Control." The directors and officers of the Managing General Partner also serve as executive officers of AIMCO. The Venture originally acquired 51 residential apartment properties located throughout the United States. Of these 51 properties, four were foreclosed prior to 1993. As more fully described in "Note C", the Venture filed for Chapter 11 bankruptcy protection on February 22, 1991. The Venture's Second Amended and Restated Plan of Reorganization (the "Plan") became effective on September 30, 1993. Pursuant to the Plan, 19 of the Venture's properties were foreclosed in 1993, four properties were foreclosed in 1994, five properties were foreclosed in 1995 and an additional two properties foreclosed in 1996. Also, the Venture sold two of the residential properties during 1996. The Venture continues to own and operate 15 of the residential apartment complexes it originally acquired. These properties are located in or near major urban areas in the United States. Pursuant to the terms of the Joint Venture Agreement for the Venture and the respective Partnership Agreements for Portfolio I and Portfolio II, the Managing General Partner will manage Portfolio I, Portfolio II, VMS National Properties and each of the Venture's operating properties. The Limited Partners do not participate in or control the management of their respective partnership, except that certain events must be approved by the Limited Partners. These events include: (1) voluntary dissolution of either Portfolio I or Portfolio II, and (2) amending substantive provisions of either Partnership Agreement. Basis of Accounting: The accompanying combined financial statements include the accounts of Portfolio I, Portfolio II, the Venture and Subpartnerships. Significant interpartnership accounts and transactions have been eliminated from these combined financial statements. Allocation of Income, Loss, and Distributions: The operating profits and losses of VMS National Properties and the Venture's properties are allocated to Portfolio I and Portfolio II on a pro-rata, cumulative basis using the ratio of their respective Limited Partnership Interests issued and outstanding. The operating profits and losses of Portfolio I and Portfolio II are allocated 98% to the respective Limited Partners and 2% to the respective general partners. Operating cash flow distributions for Portfolio I and Portfolio II will be made at the discretion of the Managing General Partner subject to the order of distribution indicated in the Plan and approved by the Bankruptcy Court. Such distributions will be allocated first to the respective Limited Partners in an amount equal to 12% per year (on a noncumulative basis) of their contributed capital; then, to the general partners, a subordinated incentive fee equal to 10.45% of remaining operating cash flow; and finally, of the balance to be distributed, 98% to the Limited Partners and 2% to the general partners. Distributions of proceeds arising from the sale or refinancing of the Venture's properties will be allocated to Portfolio I and Portfolio II in proportion to their respective Venture interests subject to the order of distribution indicated in the Plan and approved by Bankruptcy Court. Distributions by Portfolio I and Portfolio II will then be allocated as follows: (1) first to the Limited Partners in an amount equal to their aggregate capital contributions; (2) then to the general partners in an amount equal to their aggregate capital contributions; (3) then, among the Limited Partners, an amount equal to $62,000,000 multiplied by the respective percentage interest of Portfolio I or Portfolio II in the Venture; and (4) finally, of the balance, 76% to the Limited Partners and 24% to the general partners. In any event, there shall be allocated to the general partners not less than 1% of profits or losses. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Fair Value of Financial Instruments: Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments", as amended by SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value is defined in the SFAS as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Venture believes that the carrying amount of its financial instruments (except for long term debt) approximates their fair value due to the short term maturity of these instruments. The fair value of the Venture's long term debt, after discounting the scheduled loan payments to maturity, approximates its carrying balance. Cash and Cash Equivalents: Includes cash on hand in banks and money market accounts. At certain times, the amount of cash deposited at a bank may exceed the limit on insured deposits. Tenant Security Deposits: The Venture requires security deposits from lessees for the duration of the lease and such deposits are included in receivables and deposits. The security deposits are refunded when the tenant vacates, provided the tenant has not damaged its space, and is current on its rental payments. Investment Properties: Investment properties consist of fifteen apartment complexes and are stated at cost. Acquisition fees are capitalized as a cost of real estate. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. No adjustments for impairment of value were recorded in the years ended December 31, 1999, 1998 or 1997. Escrows: In connection with the December 1997 refinancing of the Venture's 15 remaining properties, a replacement escrow was required for each property. Each property was required to deposit an initial lump sum amount plus make monthly deposits over the term of the loan, which varies by property. These funds are to be used to cover replacement costs. The balance of the replacement reserves at December 31, 1999 is approximately $2,581,000, including interest. Depreciation: Depreciation is computed by the straight-line method over estimated useful lives ranging from 25 to 29 years for buildings and improvements and the 150% or 200% declining balance method for five to fifteen years for personal property. Effective January 1, 1999 the Venture changed its method of accounting to capitalize the costs of exterior painting and major landscaping (see "Note M"). Leases: The Venture generally leases apartment units for twelve-month terms or less. The Venture recognizes income as earned on its leases. In addition, the Managing General Partner's policy is to offer rental concessions during particularly slow months or in response to heavy competition from other similar complexes in the area. Concessions are charged against rental income as incurred. Segment Reporting: SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. See "Note K" for detailed disclosure of the Venture's segments. Advertising Costs: The Venture expenses the cost of advertising as incurred. Advertising costs of approximately $355,000, $335,000, and $334,000, are included in operating expense for the years ended December 31, 1999, 1998, and 1997, respectively. Income Taxes: Taxable income or loss of the Venture is reported in the income tax returns of its partners. Accordingly, no provision for income taxes is made in the financial statements of the Venture. Note B - Transfer of Control Pursuant to a series of transactions which closed on October 1, 1998, and February 26, 1999, Insignia and IPT merged into AIMCO, a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in the Managing General Partner. The Managing General Partner does not believe that this transaction has had or will have a material effect on the affairs and operations of the Venture. Note C - Petition for Relief under Chapter 11 and Plan of Reorganization On February 22, 1991, the Venture filed for Chapter 11 bankruptcy protection in the United States Bankruptcy court in the Central District of California. The initial filing included only the residential apartment complexes directly owned by the Venture (entities included in the filing herein after referred to collectively as the Debtor) and excluded the 10 Subpartnerships consisting of 10 residential apartment complexes encumbered by financing insured or held by the Department of Housing and Urban Development ("HUD"), and the investing limited partnerships Portfolio I and Portfolio II. Due to the partnership agreements existing between the Venture, Portfolio I and Portfolio II, which provide the Venture with exclusive rights to the limited partner investor contributions, the Venture's initial filing was amended to reflect the Venture's right to receive any excess limited partner investor contributions. The Venture's Plan was confirmed by the Bankruptcy Court in March 1993 and became effective on September 30, 1993 (the "Effective Date"). During 1997, the Plan was modified in order to allow the Venture to refinance the debt encumbering it's properties (see "Note D"). 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 (see "Note D"). (c) As it pertained to the existing BH junior mortgages on the retained properties, the FDIC reduced its claim on two of the properties to $300,000 per property evidenced by a non-interest bearing note scheduled to mature January 15, 2000, and left in place liens for the full amount of its claims at the petition date for all other retained properties. Interest on the former FDIC loans for these retained properties accrued at 10% per annum on the FDIC value (total property value per the FDIC's June 1992 valuations less the property's senior lien indebtedness) commencing as of the first day of the month of the Effective Date and monthly payments of interest only at 7% per annum on the FDIC value will commence with the first monthly payment due thereafter. (The retained property governed by a HUD Regulatory Agreement made payments of interest only following the approval by HUD of the Surplus Cash calculation.) On October 28, 1995, the FDIC sold all of the debt it held related to the retained properties to BlackRock Capital Finance, L.P. The debt amounts and terms were not modified. On December 29, 1997, all of the junior mortgages were refinanced (see "Note D"). (d) The Venture distributed the following amounts in conjunction with the terms of the Plan: (1) approximately $5,980,000 to satisfy unsecured prepetition creditor claims of the nonaffiliated note payable to Security Pacific National Bank, trade creditors, and property taxes on the retained properties; (2) approximately $1,056,000 to provide for allowed and unclassified administrative claims; and (3) approximately $5,960,000 to make capital improvements at the retained properties. This capital improvement reserve was exhausted during 1995. (e) The VMS/Stout Joint Venture (the "VMS/Stout Venture") was formed pursuant to an agreement dated August 18, 1984, which was amended and restated on October 4, 1984. VMS Realty Partners has a 50% interest and affiliates of the Seller (as defined below) have a 50% interest in the VMS/Stout Venture. The VMS/Stout Venture, the J.D. Stout Company ("Stout") and certain affiliates of Stout entered into a contract of sale dated August 18, 1984, which was amended on October 4, 1984. The contract provided for the sale by Stout and other owners (collectively the "Seller") of the 51 residential apartment complexes to the VMS/Stout Venture. The VMS/Stout Venture assigned its interest as purchaser to the Venture. During 1987, Stout assigned its interest in the VMS/Stout Joint Venture to ContiTrade Service Corporation ("ContiTrade"). On November 17, 1993, VMS Realty Partners assigned its interest in the VMS/Stout Joint Venture to the Partners Liquidating Trust (see "Note F"). The VMS/Stout Joint Venture was granted an allowed claim in the amount of $49,535,000 for the Assignment and Long-Term Loan Arrangement Notes payable to them by the Venture. Payments totaling $3,475,000 in conjunction with this allowed claim were made to the nonaffiliated members of the VMS/Stout Joint Venture on October 7, 1993. The Venture also executed a $4,000,000 promissory note dated September 1, 1993, to ContiTrade Services Corporation (the "ContiTrade Note") in connection with these allowed note claims. The ContiTrade Note represented a prioritization of payments to ContiTrade of the first $4,000,000 in repayments made under the existing Assignment and Long-Term Loan Arrangement Notes payable to the VMS/Stout Joint Venture, and did not represent an additional $4,000,000 claim payable to ContiTrade. In addition to prioritizing ContiTrade's receipt of the first $4,000,000 of repayments on the old notes, the ContiTrade Note provided for 5% non-compounding interest on the outstanding principal balance calculated daily on the basis of a 360 day year. The ContiTrade Note was secured by a Deed of Trust, Assignment of Rents and Security Agreement on each of the Venture's retained properties, and provided ContiTrade with other approval rights as to the ongoing operations of the Venture's retained properties. The ContiTrade Note, which was scheduled to mature January 15, 2000, was paid off on December 29, 1997 (see "Note D"). (f) The Venture entered into a Revised Restructured Amended and Restated Asset Management Agreement (the "Revised Asset Management Agreement") with Insignia. Effective October 1, 1993, Insignia took over the asset management of the Venture's retained properties and partnership functions for the Venture. The Revised Asset Management Agreement provided for an annual compensation of $500,000 to be paid to Insignia in equal monthly installments. In addition, Insignia received reimbursement for all accountable expenses incurred in connection with their services up to $200,000 per calendar year. These amounts are to be paid from the available operating cash flow of the Venture's retained complexes after the payment of operating expenses and priority reserve funding for insurance, real estate and personal property taxes and senior and junior mortgage payments. If insufficient operating cash flow exists after the funding of these items, the balance of asset management fees and reimbursements may be paid from available partnership cash sources. Additionally, the asset management fee payable will be reduced proportionately for each of the Venture's retained complexes which are sold or otherwise disposed of from time to time. Accordingly, the fee was reduced upon the disposition of Bellevue and Carlisle Square in 1996. Effective January 1, 1998, in relation to the refinancing of the senior-lien debt on December 29, 1997 (see "Note D"), the Venture and Managing General Partner agreed to amend the Asset Management Agreement to reduce the annual asset management fee payable to $300,000 per year and to reduce the annual reimbursement for accountable expenses to $100,000. Note D - Extraordinary Gain On Extinguishment Of Debt Pursuant to the Plan of Reorganization (see "Note C"), the mortgages formerly held by the FDIC were modified effective September 30, 1993. The face value of the notes were restated to agreed valuation amounts. Under the terms of the modification, the lender may reinstate the full claim upon the default of any note. As a result, the Venture deferred recognition of a gain of $54,053,000, which was the difference between the note face amounts and the agreed valuation amounts of the modified debt. On December 29, 1997, the Venture refinanced the mortgages encumbering all of its remaining 15 properties. The refinancing resulted in each property being encumbered by new senior and junior loans. The senior loans each have an interest rate of 8.5% per annum and require monthly payments of principal and interest. The junior loans each have an interest rate of 10.84% per annum and require monthly payments based on excess monthly cash flow, as defined, for each property. All of the loans mature on January 1, 2008, and the senior loans include prepayment penalties if paid prior to January 1, 2007. The senior loans retained similar terms regarding note face amounts and agreed valuation amounts. These new loans were recorded at the agreed valuation amount of $110,000,000, which was less than the $152,225,000 face amount of the senior loans. If the Venture defaults on the new mortgage notes payable or is unable to pay the outstanding agreed valuation amounts upon maturity, then the note face amounts become due. Accordingly, the Venture deferred recognition of a gain of $42,225,000, which is the difference between the refinanced note face amounts and the agreed valuation amounts. All the loans are cross-collateralized, but they are not cross-defaulted. In conjunction with the refinancing, the Venture paid the outstanding principal and accrued interest on the $4,000,000 ContiTrade Note (see "Note F"). As a result of the refinancing, the Venture recognized an extraordinary gain on extinguishment of debt of $10,303,000, of which $11,828,000 is the result of a decreased difference between the note face amounts and agreed valuation amounts for the refinanced mortgage notes as compared to the old indebtedness. This gain was partially offset by debt extinguishment costs of $41,000 and the write-off of discounts and loan costs on the old debt of $1,484,000. Note E - Mortgage Notes Payable
Principal Monthly Principal Balance At Payment Balance December 31, Including Interest Maturity Due At Property 1999 Interest Rate Date Maturity (in thousands) (in thousands) North Park Apartments 1st mortgage $ 6,209 $51 8.50% 01/08 $ 5,264 2nd mortgage 1,811 (A) 10.84% 01/08 (A) Chapelle Le Grande 1st mortgage 3,184 26 8.50% 01/08 2,702 2nd mortgage 949 (A) 10.84% 01/08 (A) Terrace Gardens 1st mortgage 4,405 36 8.50% 01/08 3,739 2nd mortgage 1,210 (A) 10.84% 01/08 (A) Forest Ridge Apartments 1st mortgage 5,854 48 8.50% 01/08 4,968 2nd mortgage 1,644 (A) 10.84% 01/08 (A) Scotchollow 1st mortgage 28,913 236 8.50% 01/08 24,533 2nd mortgage 8,058 (A) 10.84% 01/08 (A) Pathfinders Village 1st mortgage 13,370 109 8.50% 01/08 11,336 2nd mortgage 3,868 (A) 10.84% 01/08 (A) Buena Vista Apartments 1st mortgage 4,920 40 8.50% 01/08 4,171 2nd mortgage 1,299 (A) 10.84% 01/08 (A) Mountain View Apartments 1st mortgage 7,108 58 8.50% 01/08 6,026 2nd mortgage 1,961 (A) 10.84% 01/08 (A) Crosswood Park 1st mortgage 5,530 45 8.50% 01/08 4,688 2nd mortgage 1,309 (A) 10.84% 01/08 (A) Casa de Monterey 1st mortgage 4,074 33 8.50% 01/08 3,454 2nd mortgage 1,178 (A) 10.84% 01/08 (A) The Bluffs 1st mortgage 3,695 30 8.50% 01/08 3,135 2nd mortgage 1,044 (A) 10.84% 01/08 (A) Watergate Apartments 1st mortgage 2,878 23 8.50% 01/08 2,440 2nd mortgage 799 (A) 10.84% 01/08 (A) Shadowood Apartments 1st mortgage 2,236 18 8.50% 01/08 1,896 2nd mortgage 586 (A) 10.84% 01/08 (A) Vista Village Apartments 1st mortgage 3,299 27 8.50% 01/08 2,797 2nd mortgage 938 (A) 10.84% 01/08 (A) Towers of Westchester Park 1st mortgage 12,035 98 8.50% 01/08 10,203 2nd mortgage 3,447 (A) 10.84% 01/08 (A) Totals $137,811 $91,352
(A) Payments are based on excess monthly cash flow, as defined, with any unpaid balance due at maturity. On November 19, 1999, the Venture entered into an agreement with the holder of the first mortgage of Towers of Westchester Park to fund a repair reserve of $920,000 from available cash flow as defined. AIMCO Properties, LP ("AIMCO LP"), which owns the Managing General Partner and which is a controlled affiliate of AIMCO, purchased (i) the junior loans on November 19, 1999, and (ii) a significant interest in the residual value of the properties on November 16, 1999. Scheduled principal payments on mortgage loans payable subsequent to December 31, 1999 are as follows (in thousands): 2000 $ 1,125 2001 1,419 2002 1,553 2003 1,692 2004 1,825 Thereafter 130,197 $ 137,811 Note F - Notes Payable Assignment Note: The Venture executed a $29,000,000 purchase money subordinated note (the "Assignment Note") payable to the VMS/Stout Venture in exchange for the assignment by the VMS/Stout Venture of its interest in the contract of sale to the Venture. The Assignment Note is collateralized by the pledge from Portfolio I and Portfolio II of their respective interests in the Venture. On November 17, 1993, VMS Realty Partners assigned its 50% interest in the VMS/Stout Venture to the Partners Liquidating Trust which was established for the benefit of the former creditors of VMS Realty Partners and its affiliates. The stated rate of interest on the Assignment Note (prior to modification by the Plan) was 12% per annum (compounded semi-annually) with monthly payments of interest only at a rate of 6%. Monthly payments on this note were discontinued in May 1990, and the accrual of interest was discontinued after the February 22, 1991 petition filing date. Additionally, effective April 10, 1991, VMS Realty Partners waived its right to collect interest on its portion of the Assignment Note. Pursuant to the Plan, the allowed claim for the Assignment Note and related interest was $46,285,000; $3,475,000 of this amount was paid in October 1993, in accordance with the terms of the Plan. The Venture also executed a $4,000,000 promissory note payable dated September 1, 1993 to ContiTrade Services Corporation ("ContiTrade Note") with interest at 5% per annum. This note represented a prioritization of payment to ContiTrade and did not represent the assumption of any additional debt. The ContiTrade Note was to mature on January 15, 2000, and was collateralized by a Deed of Trust, Assignment of Rents and Security Agreement on each of the Venture's retained complexes. This note was paid with the December 29, 1997, refinancing (see "Note D"). The remaining $38,810,000 of the Assignment Note is non-interest bearing and is payable only after payment of debt of higher priority, including the senior and junior mortgage notes payable. Pursuant to SOP 90-7, the Assignment Note, the Long-Term Loan Arrangement Fee Note (as defined below) and related accrued interest were adjusted to the present value of amounts to be paid using an estimated current interest rate of 11.5%. At December 31, 1999, the carrying amount of the Assignment Note is $38,407,000, net of discount for imputed interest of $403,000. Interest expense is being recognized through the amortization of the discount which totaled approximately $4,199,000 and $4,003,000, and $3,618,000 in 1999, 1998, and 1997, respectively. Long-Term Loan Arrangement Fee Note: The Venture executed a $3,000,000 unsecured, nonrecourse promissory note, the "Long-Term Loan Arrangement Fee Note" payable to the VMS/Stout Venture as consideration for arranging long-term financing. The stated rate of interest on this note prior to modification by the Plan was 10% per annum, payable on a monthly basis. Monthly interest payments on this Note were discontinued in May 1990. Additionally, the accrual of interest on this Note was discontinued after the February 22, 1991 petition filing date. Pursuant to the Plan, the entire $3,250,000 balance, which included $250,000 in unpaid accrued interest that was rolled into principal, was granted as an allowed claim. None of this balance bears interest, and the balance is payable only after debt of a higher priority, including senior and junior mortgage loans. Note G - Transactions With Affiliated Parties The Venture has no employees and is dependent on the Managing General Partner and its affiliates for the management and administration of all Subpartnership activities. The Revised Asset Management Agreement, which was executed in conjunction with the Venture's Plan, provided for (i) certain payments to affiliates for real estate advisory services and asset management of the Venture's retained properties for an annual compensation of $500,000 and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Venture up to $200,000 per annum. Effective January 1, 1998, in relation to the refinancing of the Senior Debt on December 29, 1997, the Venture and Managing General Partner agreed to amend the Asset Management Agreement to reduce the annual asset management fee payable to $300,000 per year and to reduce the annual reimbursement for accountable expenses to $100,000. Asset management fees of approximately $300,000, $300,000 and $441,000 were paid to an affiliate of the Managing General Partner for the years ended December 31, 1999, 1998, and 1997, respectively. Affiliates of the Managing General Partner are entitled to receive a percentage of the gross receipts from all of the Registrant's properties as compensation for providing property management services. The Registrant paid to such affiliates approximately $1,160,000, $1,122,000 and $1,013,000 for the years ended December 31, 1999, 1998, and 1997, respectively. In addition, affiliates of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $100,000, $100,000 and $200,000 for the years ended December 31, 1999, 1998, and 1997 respectively. These expenses are included in general and administrative expenses. Included in investment properties and operating expenses of the Venture are construction oversight reimbursements, paid to an affiliate of the Managing General Partner, of approximately $16,000, $54,000, and $43,000 for the years ended December 31, 1999, 1998, and 1997, respectively. An affiliate of the Managing General Partner received bookkeeping reimbursements in the amount of approximately $142,000, $144,000 and $145,000 for the year ended December 31, 1999, 1998, and 1997, respectively. These expenses are included in general and administrative expenses. In connection with the Venture's Plan, the court approved the payment of certain fees and expense reimbursements due to the former managing general partner relating to the prepetition period. An unpaid balance of approximately $397,000 in management fees owing to the former managing general partner was assigned to MF VMS, L.L.C., the note holder for the senior and junior notes. This balance was paid during 1998. Prepetition property management fees were approved by the Bankruptcy Court for payment to a former affiliate. This allowed claim may be paid only from available Venture cash. At December 31, 1999, 1998, and 1997, the outstanding balance of $79,000 is included in other liabilities. Certain affiliates of the former general partners and the VMS/Stout Venture may be entitled to receive various fees upon disposition of the properties. These fees will be paid from the disposition proceeds and are subordinated to the distributions required by the Plan. There were no property dispositions for which proceeds were received during the years ended December 31, 1999, 1998, and 1997. AIMCO Properties, LP ("AIMCO LP"), which owns the Managing General Partner and which is a controlled affiliate of AIMCO, purchased (i) the junior loans on November 19, 1999, and (ii) a significant interest in the residual value of the properties on November 16, 1999. During 1999 AIMCO, LP an affiliate of the Managing General Partner made a tender offer to purchase units of limited partnership interest in both Portfolio I and II. As a result of the tender offer, AIMCO and its affiliates currently own 21.25 units of limited partnership interest in Portfolio I representing 3.476% of the outstanding units and 19.50 units of limited partnership interest in Portfolio II representing 7.635% of the outstanding units. It is possible that AIMCO or its affiliates will make one or more additional offers to acquire additional limited partnership interests in the Partnerships for cash or in exchange for units in the operating partnership of AIMCO. Under the Partnership Agreements, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of their affiliation with the Managing General Partner. Note H - Subscription Notes And Accrued Interest Receivable Portfolio I and Portfolio II executed promissory notes requiring cash contributions from the partners aggregating $136,800,000 to the capital of Portfolios I and II for 644 and 267 units, respectively. Of this amount, approximately $135,055,000 was contributed in cash through December 31, 1999, and $910,000 was deemed uncollectible and written-off prior to December 31, 1999. The following table represents the remaining Limited Partners' subscription notes principal balances and the related accrued interest receivable at December 31, 1999 (in thousands): Portfolio I Portfolio II Subscription notes receivable $ 506 $ 329 Accrued interest receivable 63 67 Allowance for uncollectible interest receivable (63) (67) Total subscription notes and accrued interest receivable $ 506 $ 329 All amounts outstanding at December 31, 1999, are considered past due and bear interest at the default rate of 18%. No interest will be recognized until collection is assured. Note I - Investment Properties and Accumulated Depreciation
Initial Cost (in thousands) Buildings and Costs Related Capitalized Provision to Personal Subsequent to Reduce to Description Encumbrances Land Property Acquisition Fair Value North Park Apartments $ 8,020 $ 557 $ 8,349 $ 1,569 $ -- Chapelle Le Grande 4,133 166 3,873 816 -- Terrace Gardens 5,615 433 4,517 1,238 -- Forest Ridge Apartments 7,498 701 6,930 1,244 -- Scotchollow 36,971 3,510 19,344 5,827 -- Pathfinders Village 17,238 3,040 11,698 2,555 (1,250) Buena Vista Apartments 6,219 893 4,538 562 -- Mountain View 9,069 1,289 8,490 1,068 -- Apartments Crosswood Park 6,839 611 8,597 1,963 (2,000) Casa De Monterey 5,252 869 6,136 1,087 -- The Bluffs 4,739 193 3,667 514 -- Watergate Apartments 3,677 263 5,625 1,248 -- Shadowood Apartments 2,822 209 3,393 734 -- Vista Village 4,237 568 5,209 1,044 -- Apartments Towers Of Westchester 15,482 529 13,491 2,577 -- Park TOTAL $137,811 $13,831 $ 113,857 $24,046 $(3,250)
Gross Amount At Which Carried At December 31, 1999 (in thousands) Buildings Accumu- Date Deprec- And Related lated Year of of iable Personal Reprec- Constru- Acquis- Life - Description Land Property Total iation ction ition Years North Park Apartments $ 557 $ 9,918 $ 10,475 $ 6,516 1968 11/14/84 5-27.5 Chapelle Le Grand 166 4,689 4,855 2,971 1972 12/05/84 5-27.5 Terrace Gardens 433 5,755 6,188 3,538 1973 10/26/84 5-27.5 Forest Ridge Apartments 701 8,174 8,875 5,277 1974 10/26/84 5-27.5 Scotchollow 3,510 25,171 28,681 16,441 1973 10/26/84 5-27.5 Pathfinders Village 2,753 13,290 16,043 8,594 1971 10/26/84 5-27.5 Bunea Vista Apartments 893 5,100 5,993 3,418 1972 10/26/84 5-27.5 Mountain View Apartments 1,289 9,558 10,847 5,759 1978 10/26/84 5-29 Crosswood Park 471 8,700 9,171 5,303 1977 12/05/84 5-29 Casa De Monterey 869 7,223 8,092 4,698 1970 10/26/84 5-27.5 The Bluffs 193 4,181 4,374 2,786 1968 10/26/84 5-27.5 Watergate Apartments 263 6,873 7,136 4,365 1972 10/26/84 5-27.5 Shadowood Apartments 209 4,127 4,336 2,728 1974 11/14/84 5-27.5 Vista Village Apartments 568 6,253 6,821 3,882 1971 10/26/84 5-27.5 Towers Of Westchester 529 16,068 16,597 10,522 1971 10/26/84 5-27.5 Park TOTAL $13,404 $135,080 $148,484 $86,798
The aggregate costs of the investment properties for Federal income tax purposes at December 31, 1999 and 1998, is approximately $165,944,000 and $164,090,000, respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 1999 and 1998, is approximately $128,608,000 and $121,859,000, respectively. Reconciliation of Investment Properties and Accumulated Depreciation:
1999 1998 1997 Investment Properties Balance at beginning of year $146,627 $144,007 $141,859 Property improvements and replacements 1,857 3,216 2,297 Dispositions of property -- (596) (149) Balance at end of Year $148,484 $146,627 $144,007 Accumulated Depreciation Balance at beginning of year $ 80,798 $ 75,411 $ 70,019 Additions charged to expense 6,000 5,696 5,465 Dispositions of property -- (309) (73) Balance at end of Year $ 86,798 $ 80,798 $ 75,411
Note J - Income Taxes The following is a reconciliation of reported net (loss) income per the financial statements to the Federal taxable loss to partners (in thousands):
1999 1998 1997 Net (loss) income as reported $ (6,402) $ (6,958) $ 606 Depreciation and amortization differences (749) (371) (260) Unearned income 812 66 181 Gain on refinancing -- -- (8,787) Casualty loss -- 161 -- Write-down of fixed assets -- 125 208 Other 95 185 129 Federal taxable loss $ (6,244) $ (6,792) $(7,923)
The following is a reconciliation between the Venture's reported amounts and Federal tax basis of net liabilities at December 31, 1999 (in thousands): Net liabilities as reported $(158,009) Land and buildings 17,460 Accumulated depreciation (41,810) Syndication costs 17,650 Deferred gain 42,225 Other deferred costs 9,601 Other (52,445) Notes payable 4,882 Subscription note receivable 1,842 Mortgage payable (47,727) Accrued interest 9,571 Net liabilities - Federal tax basis $(196,760) Note K - Segment Reporting Description of the types of products and services from which reportable segment derives its revenues: The Venture has one reportable segment: residential properties. The Venture's residential property segment consists of fifteen apartment complexes located in California (6 properties), Oregon (1 property), Texas (1 property), Indiana (2 properties), Louisiana (1 property), Maryland (1 property), Nebraska (1 property), Arkansas (1 property), and Arizona (1 property). The Venture rents apartment units to tenants for terms that are typically twelve months or less. Measurement of segment profit or loss: The Venture evaluates performance based on segment profit (loss) before depreciation. The accounting policies of the reportable segment are the same as those described in the summary of significant accounting policies. Factor's management used to identify the enterprise's reportable segment: The Venture's reportable segment consists of investment properties that offer similar products and services. Although each of the investment properties is managed separately, they have been aggregated into one segment as they provide services with similar types of products and customers. Segment information for the years ended December 31, 1999, 1998, and 1997 is shown in the tables below (in thousands). The "Other" column includes Venture administration related items and income and expense not allocated to the reportable segment. 1999 Residential Other Totals Rental income $27,503 $ -- $ 27,503 Other income 1,138 17 1,155 Interest expense 12,830 4,199 17,029 Depreciation 6,000 -- 6,000 General and administrative expense -- 636 636 Segment loss (1,454) (4,948) (6,402) Total assets 67,991 454 68,445 Capital expenditures 1,857 -- 1,857 1998 Residential Other Totals Rental income $26,511 $ -- $ 26,511 Other income 1,108 58 1,166 Interest expense 12,596 4,004 16,600 Depreciation 5,696 -- 5,696 General and administrative expense -- 785 785 Casualty gain 279 -- 279 Loss on disposal of assets (188) -- (188) Segment loss (2,227) (4,731) (6,958) Total assets 71,454 483 71,937 Capital expenditures 3,216 -- 3,216 1997 Residential Other Totals Rental income $ 24,507 $ -- $ 24,507 Other income 967 103 1,070 Interest expense 13,148 3,776 16,924 Depreciation 5,465 -- 5,465 General and administrative expense -- 953 953 Extraordinary item - gain on extinguishment of debt 10,303 -- 10,303 Segment profit (loss) 5,232 (4,626) 606 Total assets 71,961 1,581 73,542 Capital expenditures 2,297 -- 2,297 Note L - Legal Proceedings The Venture is unaware of any pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. Note M - Change in Accounting Principle Effective January 1, 1999, the Venture changed its method of accounting to capitalize the cost of exterior painting and major landscaping on a prospective basis. The Partnership believes that this accounting principle change is preferable because it provides a better matching of expenses with the related benefit of the expenditures and it is consistent with industry practice and the policies of the Managing General Partner. The effect of the change in 1999 was to decrease the net loss by approximately $66,000 ($71.00 per limited partnership interest for both Portfolio I and II). The cumulative effect, had this change been applied to prior periods, is not material. The accounting principle change will not have an effect on cash flow, funds available for distribution or fees payable to the Managing General Partner and affiliates. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The Partnerships have no officers or directors. The Managing General Partner manages substantially all of the affairs and has general responsibility in all matters affecting the business of the Venture. Effective December 12, 1997, the managing general partner of each of the Partnerships was transferred from VMS Realty Investment, Ltd. ("VMSRIL") (formerly VMS Realty Partners) to MAERIL, Inc. ("MAERIL" or the "Managing General Partner"), a wholly-owned subsidiary of MAE GP Corporation ("MAE GP") and an affiliate of Insignia Financial Group, Inc. ("Insignia"). Effective February 25, 1998, MAE GP was merged with Insignia Properties Trust ("IPT"), which is an affiliate of Insignia. Effective October 1, 1998 and February 26, 1999; Insignia and IPT were respectively merged into Apartment Investment and Management Company ("AIMCO"). Thus, the Managing General Partner is now a wholly-owned subsidiary of AIMCO. The names of the directors and executive officers of the Managing General Partner, their ages and the nature of all positions with the Managing General Partner presently held by them are set forth below. There are no family relationships between or among any officers or directors. Name Age Position Patrick J. Foye 42 Executive Vice President and Director Martha L. Long 40 Senior Vice President and Controller Patrick J. Foye has been Executive Vice President and Director of the Managing General Partner since October 1, 1998. Mr. Foye has served as Executive Vice President of AIMCO since May 1998. Prior to joining AIMCO, Mr. Foye was a partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998 and was Managing Partner of the firm's Brussels, Budapest and Moscow offices from 1992 through 1994. Mr. Foye is also Deputy Chairman of the Long Island Power Authority and serves as a member of the New York State Privatization Council. He received a B.A. from Fordham College and a J.D. from Fordham University Law School. Martha L. Long has been Senior Vice President and Controller of the Managing General Partner and AIMCO since October 1998, as a result of the acquisition of Insignia Financial Group, Inc. From June 1994 until January 1997, she was the Controller for Insignia, and was promoted to Senior Vice President - Finance and Controller in January 1997, retaining that title until October 1998. From 1988 to June 1994, Ms. Long was Senior Vice President and Controller for The First Savings Bank, FSB in Greenville, South Carolina. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Registrant under Rule 16a-3(e) during the Registrant's most recent fiscal year and Form 5 and amendments thereto furnished to the Registrant with respect to its most recent fiscal year, the Registrant is not aware of any director, officer, beneficial owner of more than ten percent of the units of limited partnership interest in the Registrant that failed to file on a timely basis, as disclosed in the above Forms, reports required by section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. Item 11. Executive Compensation No compensation or remuneration was paid by the Venture to any officer or director of the Managing General Partner. However, reimbursements and other payments have been made to the Venture's current and former managing general partners and their affiliates, as described in "Item 13. Certain Relationships and Related Transactions" below. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security ownership of certain beneficial owners. Except as noted below, no persons or entity owns of record or is known by the Venture to own beneficially more than 5% of the outstanding Interests of either of the Partnerships as of December 31, 1999. National Residential Portfolio II Entity Number of Units Percentage AIMCO Properties LP 19.5 7.635% (an affiliate of AIMCO) AIMCO Properties LP is indirectly ultimately controlled by AIMCO. Its business address is 2000 South Colorado Boulevard, Denver, Colorado. (b) Security ownership of management. No officers or directors of MAERIL or of Prudential-Bache Properties, Inc., the general partners of the Partnerships, own any Limited Partnership Interests in the Partnerships. No general partners, officers or directors of the general partners of the Venture possess the right to acquire a beneficial ownership of Interests of either of the Partnerships. (c) Change in control Pursuant to a series of transactions which closed on October 1, 1998, and February 26, 1999, Insignia and IPT merged into AIMCO, a publicly traded real estate investment trust, with AIMCO being the surviving corporation (the "Insignia Merger"). As a result, AIMCO acquired 100% ownership interest in the Managing General Partner. The Managing General Partner does not believe that this transaction will have a material effect on the affairs and operations of the Venture. Item 13. Certain Relationships and Related Transactions The Venture has no employees and is dependent on the Managing General Partner and its affiliates for the management and administration of all Subpartnership activities. The Revised Asset Management Agreement, which was executed in conjunction with the Venture's Plan, provided for (i) certain payments to affiliates for real estate advisory services and asset management of the Venture's retained properties for an annual compensation of $500,000 and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Venture up to $200,000 per annum. Effective January 1, 1998, in relation to the refinancing of the Senior Debt on December 29, 1997, the Venture and Managing General Partner agreed to amend the Asset Management Agreement to reduce the annual asset management fee payable to $300,000 per year and to reduce the annual reimbursement for accountable expenses to $100,000. Asset management fees of approximately $300,000, $300,000 and $441,000 were paid to an affiliate of the Managing General Partner for the years ended December 31, 1999, 1998, and 1997, respectively. Affiliates of the Managing General Partner are entitled to receive a percentage of the gross receipts from all of the Registrant's properties as compensation for providing property management services. The Registrant paid to such affiliates approximately $1,160,000, $1,122,000 and $1,013,000 for the years ended December 31, 1999, 1998, and 1997, respectively. In addition, affiliates of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $100,000, $100,000 and $200,000 for the years ended December 31, 1999, 1998, and 1997 respectively. These expenses are included in general and administrative expenses. Included in investment properties and operating expenses of the Venture are construction oversight reimbursements, paid to an affiliate of the Managing General Partner, of approximately $16,000, $54,000, and $43,000 for the years ended December 31, 1999, 1998, and 1997, respectively. An affiliate of the Managing General Partner received bookkeeping reimbursements in the amount of approximately $142,000, $144,000 and $145,000 for the year ended December 31, 1999, 1998, and 1997, respectively. These expenses are included in general and administrative expenses. In connection with the Venture's Plan, the court approved the payment of certain fees and expense reimbursements due to the former managing general partner relating to the prepetition period. An unpaid balance of approximately $397,000 in management fees owing to the former managing general partner was assigned to MF VMS, L.L.C., the note holder for the senior and junior notes. This balance was paid during 1998. Prepetition property management fees were approved by the Bankruptcy Court for payment to a former affiliate. This allowed claim may be paid only from available Venture cash. At December 31, 1999, 1998, and 1997, the outstanding balance of $79,000 is included in other liabilities. Certain affiliates of the former general partners and the VMS/Stout Venture may be entitled to receive various fees upon disposition of the properties. These fees will be paid from the disposition proceeds and are subordinated to the distributions required by the Plan. There were no property dispositions for which proceeds were received during the years ended December 31, 1999, 1998, and 1997. During 1999, AIMCO Properties, LP an affiliate of the Managing General Partner made a tender offer to purchase units of limited partnership interest in both Portfolio I and II. As a result of the tender offer, AIMCO and its affiliates currently own 21.25 units of limited partnership interest in Portfolio I representing 3.476% of the outstanding units and 19.50 units of limited partnership interest in Portfolio II representing 7.635% of the outstanding units. It is possible that AIMCO or its affiliates will make one or more additional offers to acquire additional limited partnership interests in the Partnerships for cash or in exchange for units in the operating partnership of AIMCO. Under the Partnership Agreements, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters. When voting on matters, AIMCO would in all likelihood vote the Units it acquired in a manner favorable to the interest of the Managing General Partner because of their affiliation with the Managing General Partner. AIMCO LP, which owns the Managing General Partner and which is a controlled affiliate of AIMCO, purchased (i) the junior loans on November 19, 1999, and (ii) a significant interest in the residual value of the properties on November 16, 1999. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following combined financial statements of the Registrant are included in Item 8: Combined Balance Sheets at December 31, 1999 and 1998. Combined Statements of Operations for the years ended December 31, 1999, 1998 and 1997. Combined Statements of Changes in Partners' Deficit for the years ended December 31, 1999, 1998 and 1997. Combined Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997. Notes to Combined Financial Statements Schedules are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein. The following items are incorporated: Part V - Amended Restated Certificate and Agreement of: Item 1(b)(i) Limited Partnership of VMS National Residential Portfolio I. Item 1(b)(ii)Limited Partnership of VMS National Residential Portfolio II. Item 1(b)(iii) Joint Venture Agreement between VMS National Residential Portfolio I and VMS National Residential Portfolio II. (b) Reports on Form 8-K: None filed during the quarter ended December 31, 1999. (c) Exhibits: See Exhibit Index SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VMS NATIONAL PROPERTIES JOINT VENTURE (Registrant) VMS National Residential Portfolio I By: MAERIL, Inc. Managing General Partner By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/Martha L. Long Martha L. Long Senior Vice President and Controller VMS National Residential Portfolio II By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/Martha L. Long Martha L. Long Senior Vice President and Controller Date: Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/Patrick J. Foye Date: Patrick J. Foye Executive Vice President and Director /s/Martha L. Long Date: Martha L. Long Senior Vice President and Controller EXHIBIT INDEX Exhibit No. Description 3 and 21 Portions of the Prospectus of the Partnership dated May 15, 1986 as supplemented by Supplement Numbers 1 through 7 dated December 18, 1986, February 11, 1987, March 31, 1987, August 19, 1987, January 4, 1988, April 18, 1988 and June 30, 1988 as filed with the Commission pursuant to Rule 424(b) and (c), as well as the Restated Limited Partnership Agreement set forth as Exhibit A to the Prospectus, are hereby incorporated by reference, specifically pages 15 - 21, 44 - 68, 76, 86 - 90, 106 - 108, A9 - A13, A16 - A20 and Supplements Numbers 1 and 2. 10.1 Stipulation Regarding Entry of Agreed Final Judgment of Foreclosure and Order Relieving Receiver of Obligation to Operate Subject Property - Kendall Mall is incorporated by reference to the Form 10-QSB dated June 30, 1995. 10.2 Form of Amended, Restated and Consolidated Senior Secured Promissory Note between the Venture and MF VMS, L.L.C. relating to each of the Venture's properties. 10.3 Form of Amended, Restated and Consolidated Junior Secured Promissory Note between the Venture and MF VMS, L.L.C. relating to each of the Venture's properties. 18 Independent Accountants' Preferability Report on Change in Accounting Principle. 27 Financial Data Schedule. Exhibit 18 February 7, 2000 Mr. Patrick J. Foye Executive Vice President and Director MAERIL, Inc. Managing General Partner of VMS National Residential Portfolio I and VMS National Residential Portfolio II 55 Beattie Place P.O. Box 1089 Greenville, South Carolina 29602 Dear Mr. Foye: Note M of Notes to the Combined Financial Statements of VMS National Residential Portfolio I, VMS National Residential Portfolio II, VMS National Properties and Subpartnerships (collectively the "Venture") included in its Form 10-K for the year ended December 31, 1999 describes a change in the method of accounting to capitalize exterior painting and major landscaping, which would have been expensed under the old policy. You have advised us that you believe that the change is to a preferable method in your circumstances because it provides a better matching of expenses with the related benefit of the expenditures and is consistent with policies currently being used by your industry and conforms to the policies of the Managing General Partner. There are no authoritative criteria for determining a preferable method based on the particular circumstances; however, we conclude that the change in the method of accounting for exterior painting and major landscaping is to an acceptable alternative method which, based on your business judgment to make this change for the reasons cited above, is preferable in your circumstances. Very truly yours, /s/ Ernst & Young LLP EX-27 2 YEAR END 10-KSB
5 This schedule contains summary financial information extracted from VMS National Properties Joint Venture 1999 Fourth Quarter 10-K and is qualified in its entirety by reference to such 10-K filing. 0000789089 PARTNERSHIP NAME 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 2,004 0 1,863 0 0 0 148,484 (86,798) 68,445 0 179,468 0 0 0 (158,009) 68,445 0 28,658 0 0 35,060 0 17,029 0 0 0 0 0 0 (6,402) 6,842 0 Registrant has an unclassified balance sheet. Multiplier is 1.
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