-----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, DjfIlCxRn2Lp+fz2YmWKxKxoqWTYwXSvSmd7dpEzoQyRJk6LBdvmY5KHxrMuylFX Amk5/ged5SRbnMjO+7HMqw== 0000711642-01-500162.txt : 20010815 0000711642-01-500162.hdr.sgml : 20010815 ACCESSION NUMBER: 0000711642-01-500162 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VMS NATIONAL PROPERTIES JOINT VENTURE CENTRAL INDEX KEY: 0000789089 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 363311347 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14194 FILM NUMBER: 1712483 BUSINESS ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 BUSINESS PHONE: 3037578101 MAIL ADDRESS: STREET 1: 1873 SOUTH BELLAIRE STREET STREET 2: 17TH FLOOR CITY: DENVER STATE: CO ZIP: 80222 10-Q 1 vms.txt VMS FORM 10-Q--QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to _________ Commission file number 0-14194 VMS NATIONAL PROPERTIES JOINT VENTURE (Exact name of registrant as specified in its charter) Illinois 36-3311347 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Beattie Place, PO Box 1089 Greenville, South Carolina 29602 (Address of principal executive offices) (864) 239-1000 (Issuer's telephone number) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS a) VMS NATIONAL PROPERTIES JOINT VENTURE COMBINED BALANCE SHEETS (in thousands)
June 30, December 31, 2001 2000 (Unaudited) (Note) Assets: Cash and cash equivalents $ 1,780 $ 2,153 Receivables and deposits 1,849 1,743 Restricted escrows 2,631 4,279 Other assets 374 329 Investment properties: Land 13,404 13,404 Buildings and related personal property 142,819 139,698 156,223 153,102 Less accumulated depreciation (95,816) (92,727) 60,407 60,375 $ 67,041 $ 68,879 Liabilities and Partners' Deficit Liabilities Accounts payable $ 984 $ 1,245 Tenant security deposit liabilities 1,100 1,111 Accrued property taxes 508 521 Other liabilities 1,203 958 Accrued interest 1,034 1,071 Mortgage notes payable, including $29,416 and $31,276 due to an affiliate at June 30, 2001 and December 31, 2000, respectively 135,158 137,732 Mortgage participation liability 1,887 -- Notes payable 42,060 42,060 Deferred gain on extinguishment of debt 42,225 42,225 Partners' Deficit (159,118) (158,044) $ 67,041 $ 68,879 Note: The combined balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. See Accompanying Notes to Combined Financial Statements
b) VMS NATIONAL PROPERTIES JOINT VENTURE COMBINED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per unit data)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 Revenues: Rental income $ 7,949 $ 7,287 $15,762 $14,469 Other income 476 389 898 668 Casualty gain 24 -- 24 -- Total revenues 8,449 7,676 16,684 15,137 Expenses: Operating 2,309 2,105 4,714 4,112 Property management fee 339 304 665 604 General and administrative 165 155 313 299 Depreciation 1,575 1,521 3,101 3,024 Interest 5,003 3,156 8,101 6,706 Property taxes 442 423 864 877 Total expenses 9,833 7,664 17,758 15,622 Net (loss) income $(1,384) $ 12 $(1,074) $ (485) Net (loss) income allocated to general partners (2%) $ (27) $ -- $ (21) $ (10) Net (loss) income allocated to limited partners (98%) (1,357) 12 (1,053) (475) $(1,384) $ 12 $(1,074) $ (485) Net (loss) income per limited partnership interest: Portfolio I (644 interests issued and outstanding) $(1,489) $ 13 $(1,155) $ (522) Portfolio II (267 interests issued and outstanding) $(1,490) $ 15 $(1,157) $ (521) See Accompanying Notes to Combined Financial Statements
c) VMS NATIONAL PROPERTIES JOINT VENTURE COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (Unaudited) (in thousands)
VMS National Residential Portfolio I Limited Partners General Accumulated Subscription Partners Deficit Notes Total Total Partners' deficit at December 31, 1999 $(3,535) $(107,157) $ (506) $(107,663) $(111,198) Collections of subscription notes -- -- 4 4 4 Net loss for the six months ended June 30, 2000 (7) (336) -- (336) (343) Partners' deficit at June 30, 2000 $(3,542) $(107,493) $ (502) $(107,995) $(111,537) VMS National Residential Portfolio II Limited Partners General Accumulated Subscription Partners Deficit Notes Total Total Partners' deficit at December 31, 1999 $(1,480) $ (45,002) $ (329) $ (45,331) $ (46,811) Collections of subscription notes -- -- 1 1 1 Net loss for the six months ended June 30, 2000 (3) (139) -- (139) (142) Partners' deficit at June 30, 2000 $(1,483) $ (45,141) $ (328) $ (45,469) $ (46,952) Combined total $(5,025) $(152,634) $ (830) $(153,464) $(158,489) See Accompanying Notes to Combined Financial Statements
VMS NATIONAL PROPERTIES JOINT VENTURE COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (CONTINUED) (Unaudited) (in thousands)
VMS National Residential Portfolio I Limited Partners Limited General Accumulated Subscription Partners' Partners Deficit Notes Total Total Partners' deficit at December 31, 2000 $(3,536) $(107,184) $ (502) $(107,686) $(111,222) Net loss for the six months ended June 30, 2001 (15) (744) -- (744) (759) Partners' deficit at June 30, 2001 $(3,551) $(107,928) $ (502) $(108,430) $(111,981) VMS National Residential Portfolio II Limited Partners Limited General Accumulated Subscription Partners' Partners Deficit Notes Total Total Partners' deficit at December 31, 2000 $(1,480) $ (45,014) $ (328) $ (45,342) $ (46,822) Net loss for the six months ended June 30, 2001 (6) (309) -- (309) (315) Partners' deficit at June 30, 2001 $(1,486) $ (45,323) $ (328) $ (45,651) $ (47,137) Combined total $(5,037) $(153,251) $ (830) $(154,081) $(159,118) See Accompanying Notes to Combined Financial Statements
d) VMS NATIONAL PROPERTIES JOINT VENTURE COMBINED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six Months Ended June 30, 2001 2000 Cash flows from operating activities: Net loss $(1,074) $ (485) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 3,101 3,024 Amortization of discounts 1,887 403 Casualty gain (24) -- Change in accounts: Receivables and deposits (106) (21) Other assets (45) 42 Accounts payable 238 16 Tenant security deposit liabilities (11) (14) Accrued property taxes (13) (34) Accrued interest 618 1,262 Other liabilities 245 (1,241) Net cash provided by operating activities 4,816 2,952 Cash flows from investing activities: Property improvements and replacements (3,639) (1,203) Net withdrawals from (deposits to) restricted escrows 1,648 (846) Net insurance proceeds 31 -- Net cash used in investing activities (1,960) (2,049) Cash flows from financing activities: Payments on mortgage notes payable (3,229) (1,990) Payments received on subscription notes -- 5 Net cash used in financing activities (3,229) (1,985) Net decrease in cash and cash equivalents (373) (1,082) Cash and cash equivalents at beginning of period 2,153 2,004 Cash and cash equivalents at end of period $ 1,780 $ 922 Supplemental disclosure of cash flow information: Cash paid for interest $ 5,590 $ 5,309 Supplemental disclosure of non-cash activity: Accrued interest added to mortgage notes payable $ 655 $ 938 Mortgage participation liability and debt discount $36,518 $ -- Included in property improvements and replacements for the six months ended June 30, 2001 are approximately $499,000 of improvements which were included in accounts payable at December 31, 2000. See Accompanying Notes to Combined Financial Statements
e) VMS NATIONAL PROPERTIES JOINT VENTURE NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) Note A - Basis of Presentation The accompanying unaudited combined financial statements of VMS National Properties Joint Venture (the "Venture" or "Registrant") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of MAERIL, Inc. ("MAERIL" or the "Managing General Partner"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2001, are not necessarily indicative of the results which may be expected for the year ending December 31, 2001. For further information, refer to the combined financial statements and footnotes thereto included in the Venture's Annual Report on Form 10-K for the year ended December 31, 2000. The Managing General Partner is a wholly owned subsidiary of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust. Basis of Accounting The accompanying combined financial statements include the accounts of VMS National Residential Portfolio I ("Portfolio I"), VMS National Residential Portfolio II ("Portfolio II") and the Venture. Significant interpartnership accounts and transactions have been eliminated from these combined financial statements. Segment Reporting Statement of Financial Accounting Standards ("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 required that those enterprises report selected information about operating segments in interim financial reports. It also established standards for related disclosures about products and services, geographic areas, and major customers. As defined in SFAS No. 131, the Partnership has only one reportable segment. The Managing General Partner believes that segment-based disclosures will not result in a more meaningful presentation than the combined financial statements as currently presented. Reclassifications Certain of the 2000 balances have been reclassified to conform to the 2001 presentation. Note B - Petition For Relief Under Chapter 11 and Plan of Reorganization On February 22, 1991, the Venture filed for Chapter 11 bankruptcy protection in the United States Bankruptcy court in the Central District of California. The initial filing included only the residential apartment complexes directly owned by the Venture (entities included in the filing are 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 June 30, 1993 (the "Effective Date"). During 1997, the Plan was modified in order to allow the Venture to refinance the debt encumbering its properties. The bankruptcy plan was closed by the Bankruptcy Court on April 29, 1998. The Primary aspects of the Venture's Plan of Reorganization included the following: (a) The Venture retained 17 properties from the existing portfolio (the "retained properties"), and abandoned title of the remaining properties (the "non-retained properties") to the Federal Deposit Insurance Corporation (the "FDIC"). The retained properties consisted of one HUD property and sixteen non-HUD properties. Two of the seventeen retained properties were sold during the second quarter of 1996. All of the non-retained properties were foreclosed upon as of December 31, 1996. (b) The Venture restructured the existing senior-lien debt obligations on the retained properties (except for one of the retained properties which had a first mortgage lien insured by HUD and two of the retained properties which had senior liens formerly payable to the FDIC, as successor to Beverly Hills Mortgage Corporation ("BH")) to provide for an interest rate of 8.75% per annum effective as of the first day of the month of the Effective Date with payments based on a 30 year amortization commencing on the first monthly payment due thereafter with a maturity of January 15, 2000. The senior lien collateralized by HUD on one of the retained properties was not modified, and the senior liens formerly held by the FDIC were modified to accrue at 9% per annum effective as of the first day of the month of the Effective Date with monthly payments of interest only made at 7% per annum commencing with the first monthly payments due thereafter on the FDIC value, as defined in "c" below. All of the senior-lien debt (the "Senior Debt") was refinanced on December 29, 1997. (c) As it pertained to the existing BH junior mortgages on the retained properties, the FDIC reduced its claim on two of the properties to $300,000 per property evidenced by a non-interest bearing note scheduled to mature January 15, 2001, 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 commencing 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 (the "Junior Debt") were refinanced. (d) The Venture distributed the following amounts in conjunction with the terms of the Plan: (1) approximately $5,980,000 to satisfy unsecured prepetition creditor claims of the nonaffiliated note payable to Security Pacific National Bank, trade creditors, and property taxes on the retained properties; (2) approximately $1,056,000 to provide for allowed and unclassified administrative claims; and (3) approximately $5,960,000 to make capital improvements at the retained properties. This capital improvement reserve was exhausted during 1995. (e) The VMS/Stout Joint Venture (the "VMS/Stout Venture") was formed pursuant to an agreement dated August 18, 1984, which was amended and restated on October 4, 1984. VMS Realty Partners has a 50% interest and affiliates of the Seller (as defined below) have a 50% interest in the VMS/Stout Venture. The VMS/Stout Venture, the J.D. Stout Company ("Stout") and certain affiliates of Stout entered into a contract of sale dated August 18, 1984, which was amended on October 4, 1984. The contract provided for the sale by Stout and other owners (collectively the "Seller") of the 51 residential apartment complexes to the VMS/Stout Venture. The VMS/Stout Venture assigned its interest as purchaser to the Venture. During 1987, Stout assigned its interest in the VMS/Stout Joint Venture to ContiTrade Service Corporation ("ContiTrade"). On November 17, 1993, VMS Realty Partners assigned its interest in the VMS/Stout Joint Venture to the Partners Liquidating Trust. The VMS/Stout Joint Venture was granted an allowed claim in the amount of $49,535,000 for the Assignment and Long-Term Loan Arrangement Notes payable to them by the Venture. Payments totaling $3,475,000 in conjunction with this allowed claim were made to the nonaffiliated members of the VMS/Stout Joint Venture on October 7, 1993. The Venture also executed a $4,000,000 promissory note dated September 1, 1993, to ContiTrade Service Corporation (the "ContiTrade Note") in connection with these allowed note claims. The ContiTrade Note represents a prioritization of payments to ContiTrade of the first $4,000,000 in repayments made under the existing Assignment and Long-Term Arrangement Notes payable to the VMS/Stout Joint Venture, and does not represent an additional $4,000,000 claim payable to ContiTrade. In addition to prioritizing ContiTrade's receipt of the first $4,000,000 of repayments on the old notes, the ContiTrade Note provides for 5% non-compounding interest on the outstanding principal balance calculated daily on the basis of a 360 day year. The ContiTrade Note was secured by a Deed of Trust, Assignment of Rents and Security Agreement on each of the Venture's retained properties, and provided ContiTrade with other approval rights as to the ongoing operations of the Venture's retained properties. The ContiTrade Note, which was scheduled to mature January 15, 2001, was paid off on December 29, 1997. (f) The Venture entered into a Revised Restructured Amended and Restated Asset Management Agreement (the "Revised Asset Management Agreement") with Insignia Financial Group ("Insignia"). Effective October 1, 1993, Insignia took over the asset management of the Venture's retained properties and partnership functions for the Venture. The rights provided to Insignia were transferred to AIMCO upon the merger of these entities in October 1998. The Revised Asset Management Agreement provided for an annual compensation of $500,000 to be paid to AIMCO in equal monthly installments. In addition, AIMCO received reimbursement for all accountable expense incurred in connection with its 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 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 C - 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 the Venture's 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 $300,000 and (ii) reimbursement of certain expenses incurred by affiliates on behalf of the Venture up to $100,000 per annum. 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 $665,000 and $604,000 for the six months ended June 30, 2001 and 2000, respectively. These fees are included in operating expenses. Asset management fees of approximately $150,000 were paid to affiliates of the Managing General Partner for both of the six months ended June 30, 2001 and 2000. These fees are included in general and administrative expenses. In addition, affiliates of the Managing General Partner received reimbursement of accountable administrative expenses amounting to approximately $59,000 and $50,000 for the six month periods ended June 30, 2001 and 2000, respectively. These expenses are included in general and administrative expenses. An affiliate of the Managing General Partner received bookkeeping reimbursements in the amount of approximately $62,000 and $70,000 for six months ended June 30, 2001 and 2000, respectively. These expenses are included in operating expense. 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 June 30, 2001 and December 31, 2000, the outstanding balance of approximately $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 six months ended June 30, 2001 or 2000. As a result of tender offers, AIMCO and its affiliates currently own 39.75 units of limited partnership interest in Portfolio I representing 6.17% of the outstanding limited partnership interests, along with the 2% general partner interest for a combined ownership in Portfolio I of 8.17%. AIMCO and its affiliates currently own 31.5 units of limited partnership interest in Portfolio II representing 11.80% of the outstanding limited partnership interests, along with the 2% general partner interest for a combined ownership in Portfolio II of 13.80%. The Venture is owned 70.69% by Portfolio I and 29.31% by Portfolio II which results in AIMCO and its affiliates currently owning 9.82% of the Venture. 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, which would include without limitation, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. 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 its affiliation with the Managing General Partner. Note D - Mortgage Notes Refinanced On December 29, 1997, the Venture refinanced the mortgages encumbering all of its remaining 15 properties. The refinancing resulted in each property being encumbered by new senior and Junior Debt. The Senior Debt has an interest rate of 8.5% per annum and requires monthly payments of principal and interest. The Junior Debt has have an interest rate of 10.84% per annum and require monthly payments based on excess monthly cash flow for each property. Per the Junior Debt agreements, excess monthly cash flow is defined as revenue generated from operation of a property less (1) operating expenses of the property, (2) the debt service payment for the Senior Debt, (3) the tax and insurance reserve deposit and (4) replacement reserve deposit. Pursuant to agreements signed for each of the Venture's investment properties with the holder of the Senior Debt, the properties' excess monthly cash flows are first to be used to fund repair reserves. Once that reserve is fully funded, the excess monthly cash flow will be used as payment towards the Junior Debt. As of June 30, 2001, these reserves were fully funded and the excess monthly cash flow is now used as payment toward the Junior Debt. All of the loans mature on January 1, 2008, and the Senior Debt include prepayment penalties if paid prior to January 1, 2007. The Senior Debt 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 Debt. 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. The Junior Debt was recorded at its face amount at the time of the refinancing and is being accounted for under the terms of its note agreements. 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. Therefore, a default by one property under the terms of its loan agreement does not in and of itself create a default under all of the Senior and Junior Debt agreements. However, if the proceeds upon the sale or refinancing of any property are insufficient to fully repay the outstanding senior and Junior Debt related to that property, any deficiency is to be satisfied from the sale or refinancing of the remaining properties. In conjunction with the refinancing, the Venture paid the outstanding principal and accrued interest on the $4,000,000 ContiTrade Note (see "Note E"). Note E - 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. 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 June 30, 2001, the carrying amount of the Assignment Note is $38,810,000. Interest expense was recognized through the amortization of the discount over the estimated term of the note which became fully amortized as of January 2000. 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 added to the 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 Debt. Note F - Participating Mortgage Note AIMCO Properties LP, which owns the Managing General Partner and which is a controlled affiliate of AIMCO, purchased (i) the Junior Debt on November 19, 1999; (ii) a significant interest in the residual value of the properties on November 16, 1999, and (iii) a significant interest in the Bankruptcy Claims (as defined below) effective January 1, 2001. These transactions occurred between AIMCO LP and an unrelated third party and thus had no effect on the combined financial statements of the Venture. Residual value is defined as the amount remaining from a sale of the Venture's investment properties or refinancing of the mortgages encumbering such investment properties after payment of selling or refinancing costs and repayment of the senior and Junior Debt, plus accrued interest on each. The Venture retains an amount equal to $13,500,000 plus accrued interest at 10% compounded monthly (the "Partnership Advance Account") from the proceeds. Interest began accruing on the Partnership Advance Account in 1993. Any proceeds remaining after the Partnership Advance Account is fully funded are split equally (the "50/50 Split") between the Venture and an affiliate of the Managing General Partner. The Venture must repay the Assignment Note, the Long-term Loan Arrangement Fee Note and other pre-petition claims (collectively the "Bankruptcy Claims") which collectively total approximately $42,139,000 from the Partnership Advance Account and its share of the 50/50 Split. Any amounts remaining in the Partnership Advance Account after payment of the Bankruptcy Claims are split 75% to the Venture and 25% to an affiliate of the Managing General Partner. The Venture has recorded the estimated fair value of the participation feature as a liability and a debt discount of approximately $36,518,000. During the six months ended June 30, 2001, the Venture amortized approximately $1,887,000 of the debt discount which is included in interest expense. The fair value of the participation feature was calculated based upon information currently available to the Managing General Partner and depends largely upon the fair value of the collateral properties. These fair values were determined using the net operating income of the properties capitalized at a rate deemed reasonable for the type of property adjusted for market conditions, the physical condition of the property and other factors. The Managing General Partner evaluates the fair value of the participation feature on a semi-annual basis or as circumstances dictate that it should be analyzed. Note G - Casualty Gain During the six months ended June 30, 2001, a net casualty gain of approximately $24,000 was recorded at Watergate Apartments. The casualty gain related to damage caused by an ice storm in December 2000. The gain was a result of the receipt of net insurance proceeds of approximately $31,000 offset by approximately $7,000 of undepreciated fixed assets being written off. Note H - Legal Proceedings The Venture is not aware of any pending or outstanding litigation that is not of a routine nature arising in the ordinary course of business. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The matters discussed in this Form 10-Q contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosures contained in this Form 10-Q and the other filings with the Securities and Exchange Commission made by the Registrant from time to time. The discussion of the Registrant's business and results of operations, including forward-looking statements pertaining to such matters, does not take into account the effects of any changes to the Registrant's business and results of operation. Accordingly, actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. Average occupancy rates for the six months ended June 30, 2001 and 2000, for all of the Venture's properties are as follows: Average Occupancy Property 2001 2000 North Park Apartments Evansville, IN 89% 91% Chapelle Le Grande Merrillville, IN 93% 95% Terrace Gardens Omaha, NE 94% 94% Forest Ridge Apartments Flagstaff, AZ 98% 96% Scotchollow San Mateo, CA 97% 99% Pathfinder Fremont, CA 97% 98% Buena Vista Apartments Pasadena, CA 94% 97% Mountain View Apartments San Dimas, CA 97% 97% Crosswood Park Citrus Heights, CA 96% 95% Casa de Monterey Norwalk, CA 95% 98% The Bluffs Milwaukie, OR 92% 94% Watergate Apartments Little Rock, AR 94% 91% Shadowood Apartments Monroe, LA 96% 93% Vista Village Apartments El Paso, TX 88% 90% The Towers of Westchester Park College Park, MD 98% 97% The Managing General Partner attributes the occupancy fluctuations at the properties to the following: a decrease at Buena Vista Apartments due to market competition and a decrease in Corporate rentals; a decrease at Casa De Monterrey due to move outs for first time home buyers and market competition; an increase at Watergate Apartments due to hiring of a knowledgeable and experienced staff; and an increase at Shadowood Apartments due to the completion of an external rehabilitation project. Results of Operations The Venture recorded a net loss for the six months ended June 30, 2001 of approximately $1,074,000 as compared to a net loss of approximately $485,000 for the corresponding period in 2000. For the three months ended June 30, 2001, the Venture recorded a net loss of approximately $1,384,000 as compared to net income of approximately $12,000 for the corresponding period in 2000. The decrease in net income was due to an increase in total expenses partially offset by an increase in total revenues. Total expenses increased due to an increase in interest, operating, depreciation expenses and property management fees. The increase in interest expense for both periods is due to the amortization of the debt discount related to the mortgage participation liability. The liability was recorded during 2001 as a result of improved operations and cash flows due to extensive rehabilitation projects at the properties which have resulted in a significant increase in the estimated fair value of the properties. The increase in operating expenses is due to an increase in natural gas rates at all of the Venture's properties and an increase in insurance expense at fourteen of the fifteen properties. Depreciation expense increased due to property improvements and replacements placed into service during the past twelve months. The property management fees increased due to increased rental income at all of the investment properties. Included in general and administrative expenses for the three and six months ended June 30, 2001 and 2000 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. The increase in total revenues was due to an increase in rental and other income and a casualty gain at Watergate Apartments discussed below. Rental income increased due to increases in rental rates at all of the Venture's properties which more than offset a slight decrease in occupancy overall at the Venture's investment properties. Other income increased due to an increase in tenant reimbursements and fees and interest income. During the six months ended June 30, 2001, a net casualty gain of approximately $24,000 was recorded at Watergate Apartments. The casualty gain related to damage caused by an ice storm in December 2000. The gain was a result of the receipt of net insurance proceeds of approximately $31,000 offset by approximately $7,000 of undepreciated fixed assets being written off. As part of the ongoing business plan of the Venture, the Managing General Partner monitors the rental market environment of each of its investment properties to assess the feasibility of increasing rents, maintaining or increasing occupancy levels and protecting the Venture from increases in expenses. As part of this plan, the Managing General Partner attempts to protect the Venture from the burden of inflation-related increases in expenses by increasing rents and maintaining a high overall occupancy level. However, due to changing market conditions, which can result in the use of rental concessions and rental reductions to offset softening market conditions, there is no guarantee that the Managing General Partner will be able to sustain such a plan. Liquidity and Capital Resources At June 30, 2001, the Venture had cash and cash equivalents of approximately $1,780,000 as compared to approximately $922,000 at June 30, 2000. Cash and cash equivalents decreased approximately $373,000 for the six months ended June 30, 2001, from December 31, 2000. The decrease in cash and cash equivalents is a result of approximately $3,229,000 and $1,960,000 of cash used in financing and investing activities, respectively, which was partially offset by approximately $4,816,000 of cash provided by operating activities. Cash used in financing activities consisted of principal payments on the mortgages encumbering the Venture's investment properties. Cash used in investing activities consisted of property improvements and replacements partially offset by net withdrawals from restricted escrow accounts maintained by the mortgage lender and insurance proceeds from a casualty at Watergate Apartments. The sufficiency of existing liquid assets to meet future liquidity and capital expenditure requirements is directly related to the level of capital expenditures required at the properties to adequately maintain the physical assets and other operating needs of the Venture and to comply with Federal, state and local legal and regulatory requirements. Capital improvements planned for each of the Venture's properties are detailed below. The Venture is restricted to annual capital improvements of $300 per unit for all of the properties, which is the limit set by the Junior Debt for funding of capital improvements. The Venture, the holder of the Junior Debt encumbering the properties and the servicer of the Senior Debt encumbering the properties have agreed to a procedure to assess whether or not capital expenditures, in addition to those permitted under the $300 per unit limit, are needed at the properties and the methodology for funding any such capital expenditures. The parties agreed upon the required capital expenditures and that these costs would be funded out of the cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. As of June 30, 2001, funds to pay for these expenditures have been set aside and the Venture has resumed making monthly payments on the Junior Debt to the extent of monthly excess cash flow. North Park Apartments: The methodology discussed above for funding the required capital expenditures has been applied to North Park Apartments. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $150,000, of which approximately $121,000 ($31,000 during 2001) has been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $211,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $138,000 in capital expenditures, including the aforementioned capital expenditures, at North Park Apartments during the six months ended June 30, 2001, consisting primarily of structural improvements, floor coverings, parking lot and electrical improvements and major landscaping. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Chapelle Le Grande: The methodology discussed above for funding the required capital expenditures has been applied to Chapelle Le Grande. The parties agreed that this property required capital expenditures which cost approximately $118,000 all of which have been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $43,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $53,000 in budgeted and unbudgeted capital expenditures, including the aforementioned capital expenditures, at Chapelle Le Grande during the six months ended June 30, 2001, consisting primarily of roof replacements, structural improvements, heating and air conditioning upgrades and floor covering replacements. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Terrace Gardens: The methodology discussed above for funding the required capital expenditures has been applied to Terrace Gardens. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $433,000, of which approximately $5,000 (all during 2001) has been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $418,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $75,000 in capital expenditures, including the aforementioned capital expenditures, at Terrace Gardens during the six months ended June 30, 2001, consisting primarily of floor coverings, plumbing upgrades, structural improvements and a water submetering project. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Forest Ridge Apartments: The methodology discussed above for funding the required capital expenditures has been applied to Forest Ridge Apartments. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $296,000, of which approximately $290,000 ($25,000 during 2001) has been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $97,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $64,000 in capital expenditures, including the aforementioned capital expenditures, at Forest Ridge Apartments during the six months ended June 30, 2001, consisting primarily of floor coverings, major landscaping, office equipment and appliances. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Scotchollow: The methodology discussed above for funding the required capital expenditures has been applied to Scotchollow. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $759,000, of which approximately $467,000 ($2,000 during 2001) has been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $619,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $358,000 in capital expenditures, including the aforementioned capital expenditures, at Scotchollow during the six months ended June 30, 2001, consisting primarily of parking lot improvements, floor coverings, plumbing, major structural and other upgrades. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Pathfinders Village: The methodology discussed above for funding the required capital expenditures has been applied to Pathfinders Village. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $1,369,000, of which approximately $1,220,000 ($970,000 during 2001) has been completed as of June 30, 2001. These costs were to be funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $568,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $938,000 in budgeted and unbudgeted capital expenditures, including the aforementioned capital expenditures, at Pathfinders Village during the six months ended June 30, 2001, consisting primarily of major structural improvements, floor coverings, major landscaping, roofing and other enhancements. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Buena Vista Apartments: The methodology discussed above for funding the required capital expenditures has been applied to Buena Vista Apartments. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $239,000, approximately $6,000 (all during 2001) of which were completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $107,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $65,000 in capital expenditures, including the aforementioned capital expenditures, at Buena Vista Apartments during the six months ended June 30, 2001, consisting primarily of major structural improvements, appliances, recreational facilities and floor coverings. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Mountain View Apartments: The methodology discussed above for funding the required capital expenditures has been applied to Mountain View Apartments. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $234,000, of which approximately $181,000 ($113,000 during 2001) has been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $55,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $124,000 in budgeted and unbudgeted capital expenditures, including the aforementioned capital expenditures, at Mountain View Apartments during the six months ended June 30, 2001, consisting primarily of floor coverings and structural and pool improvements. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Crosswood Park: The methodology discussed above for funding the required capital expenditures has been applied to Crosswood Park. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $301,000, of which approximately $231,000 ($9,000 during 2001) has been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $300,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $372,000 in budgeted and unbudgeted capital expenditures, including the aforementioned capital expenditures, at Crosswood Park during the six months ended June 30, 2001, consisting primarily of structural improvements, floor coverings, appliances and other enhancements. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Casa de Monterey: The methodology discussed above for funding the required capital expenditures has been applied to Casa de Monterey. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $378,000, of which approximately $314,000 ($151,000 during 2001) has been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $99,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $285,000 in budgeted and unbudgeted capital expenditures, including the aforementioned capital expenditures, at Casa de Monterey during the six months ended June 30, 2001, consisting primarily of floor coverings, cabinets, appliances and structural improvements. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. The Bluffs: The methodology discussed above for funding the required capital expenditures has been applied to The Bluffs. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $52,000, none of which were completed as of June 30, 2001. These costs are to be funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $83,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $34,000 in capital expenditures at The Bluffs during the six months ended June 30, 2001, consisting primarily of parking area improvements, floor coverings and structural enhancements. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Watergate Apartments: The methodology discussed above for funding the required capital expenditures has been applied to Watergate Apartments. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $186,000, of which $4,000 were completed as of June 30, 2001 (all during 2001). These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $132,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $51,000 in capital expenditures, including the aforementioned capital expenditures, at Watergate Apartments during the six months ended June 30, 2001, consisting primarily of structural improvements, plumbing fixtures, air conditioning upgrades and floor coverings. These improvements were funded from operating cash flow, replacement reserves and insurance proceeds. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Shadowood Apartments: The methodology discussed above for funding the required capital expenditures has been applied to Shadowood Apartments. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $151,000, of which approximately $148,000 (none during 2001) has been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $115,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $141,000 in capital expenditures at Shadowood Apartments during the six months ended June 30, 2001, consisting primarily of parking lot improvements, structural upgrades, plumbing improvements and floor coverings. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Vista Village Apartments: The methodology discussed above for funding the required capital expenditures has been applied to Vista Village Apartments. The parties agreed that this property required capital expenditures which have a revised completion date of September 30, 2001 and which are estimated to cost approximately $264,000, of which approximately $240,000 ($149,000 during 2001) has been completed as of June 30, 2001. These costs were funded out of cash flows from the properties that otherwise would be utilized to pay debt service on the Junior Debt. In addition, approximately $304,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $285,000 in capital expenditures, including the aforementioned capital expenditures, at Vista Village Apartments during the six months ended June 30, 2001, consisting primarily of major landscaping, parking lot improvements, air conditioning upgrades, floor coverings, appliances and other enhancements. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. Towers of Westchester Park: The methodology discussed above for funding the required capital expenditures has been applied to Towers of Westchester Park. The parties agreed that this property required capital expenditures during 2000 which were estimated to cost approximately $920,000, all of which have been completed. These costs were funded out of cash flows from the properties that otherwise would have been utilized to pay debt service on the Junior Debt. In addition, approximately $89,000 is budgeted for capital improvements for the year ending December 31, 2001. The Venture completed approximately $156,000 in capital expenditures at Towers of Westchester Park during the six months ended June 30, 2001, consisting primarily of heating and air conditioning upgrades, recreational facility improvements, floor coverings and plumbing fixtures. These improvements were funded from operating cash flow and replacement reserves. Additional improvements may be considered and will depend on the physical condition of the property as well as debt restrictions, replacement reserves and anticipated cash flow generated by the property. The Registrant's current assets are thought to be sufficient for any near-term needs (exclusive of capital improvements) of the Registrant. The Senior Debt encumbering all of the properties totals approximately $105,742,000 and is being amortized over 25 years, with a balloon payment of $91,352,000 due January 2008. Not including the debt discount relating to the mortgage participation liability, the Junior Debt, which also matures January 2008, totals approximately $29,416,000 and requires monthly payments based upon monthly excess cash flow for each property. The Assignment Note and Long-Term Arrangement Fee Notes totaling approximately $42,060,000 are non-interest bearing and are subordinate to the Senior and Junior Debt. AIMCO Properties LP, which owns the Managing General Partner and which is a controlled affiliate of AIMCO, purchased (i) the Junior Debt on November 19, 1999, and (ii) a significant interest in the residual value of the properties on November 16, 1999. These transactions occurred between AIMCO LP and an unrelated third party and thus had no effect on the combined financial statements of the Venture. Residual value is defined as the amount remaining from a sale of the Venture's investment properties or refinancing of the mortgages encumbering such investment properties after payment of selling or refinancing costs and repayment of the senior and Junior Debt, plus accrued interest on each. The Venture retains an amount equal to $13,500,000 plus accrued interest at 10% compounded monthly (the "Partnership Advance Account") from the proceeds. Interest began accruing on the Partnership Advance Account in 1993. Any proceeds remaining after the Partnership Advance Account is fully funded are split equally (the "50/50 Split") between the Venture and an affiliate of the Managing General Partner. The Venture must repay the Assignment Note, the Long-term Loan Arrangement Fee Note and other pre-petition claims (collectively the "Bankruptcy Claims") which collectively total approximately $42,139,000 from the Partnership Advance Account and its share of the 50/50 Split. Any amounts remaining in the Partnership Advance Account after payment of the Bankruptcy Claims are split 75% to the Venture and 25% to an affiliate of the Managing General Partner. The Venture has recorded the estimated fair value of the participation feature as a liability and a debt discount of approximately $36,518,000. During the six months ended June 30, 2001, the Venture amortized approximately $1,887,000 of the debt discount which is included in interest expense. The fair value of the participation feature was calculated based upon information currently available to the Managing General Partner and depends largely upon the fair value of the collateral properties. These fair values were determined using the net operating income of the properties capitalized at a rate deemed reasonable for the type of property adjusted for market conditions, the physical condition of the property and other factors. The Managing General Partner evaluates the fair value of the participation feature on a semi-annual basis or as circumstances dictate that it should be analyzed. There were no cash distributions to the partners of either of the Partnerships for the six months ended June 30, 2001 and 2000. In accordance with the respective Agreements of Limited Partnership, there are no material restrictions on the Partnerships' ability to make cash distributions. Future cash distributions are subject to the order of distributions as stipulated by Venture's Plan of Reorganization. The source of future distributions will depend upon the levels of net cash generated from operations, the availability of cash reserves, and timing of debt maturities, refinancings and/or property sales. The Partnerships' distribution policies are reviewed on a quarterly basis. There can be no assurance that the Partnerships will generate sufficient funds from operations, after required capital expenditures and the order of distributions as stipulated by the Venture's Plan of Reorganization, to permit any distributions to partners during the remainder of 2001 or subsequent periods. As a result of tender offers, AIMCO and its affiliates currently own 39.75 units of limited partnership interest in Portfolio I representing 6.17% of the outstanding limited partnership interests, along with the 2% general partner interest for a combined ownership in Portfolio I of 8.17%. AIMCO and its affiliates currently own 31.5 units of limited partnership interest in Portfolio II representing 11.80% of the outstanding limited partnership interests, along with the 2% general partner interest for a combined ownership in Portfolio II of 13.80%. The Venture is owned 70.69% by Portfolio I and 29.31% by Portfolio II which results in AIMCO and its affiliates currently owning 9.82% of the Venture. 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, which would include without limitation, voting on certain amendments to the Partnership Agreement and voting to remove the Managing General Partner. 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 its affiliation with the Managing General Partner. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Venture is exposed to market risks from adverse changes in interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Venture's cash and cash equivalents as well as interest paid on its indebtedness. As a policy, the Venture does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. The Venture is exposed to changes in interest rates primarily as a result of its borrowing activities used to maintain liquidity and fund business operations. To mitigate the impact of fluctuations in U.S. interest rates, the Venture maintains its debt as fixed rate in nature by borrowing on a long-term basis. Based on interest rates at June 30, 2001, a 100 basis point increase or decrease in market interest rate would not have a material impact on the Venture's Senior or Junior Debt. The Managing General Partner considers estimation of the fair value for the Assignment and Long-Term Arrangement Fee Notes Payable to be impracticable as there is currently no market in which the Venture could obtain similar financing. The following table summarizes the Venture's Senior and Junior Debt obligations at June 30, 2001. The interest rates represent the weighted-average rates. The fair value of the debt obligations approximated the recorded value as of June 30, 2001. Long-term Debt Principal Weighted-average (in thousands) Interest Rate 2001 $ 721 8.50% 2002 1,565 8.50% 2003 1,705 8.50% 2004 1,832 8.50% 2005 2,022 8.50% Thereafter 127,313 9.07% $135,158 As principal payments for the Junior Debt are based upon monthly cash flow, all principal is assumed to be repaid at maturity. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: Exhibit 11, Calculation of Net Loss Per Investor. b) Reports on Form 8-K: None filed during the quarter ended June 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VMS NATIONAL PROPERTIES JOINT VENTURE (Registrant) VMS National Residential Portfolio I By: MAERIL, Inc. Managing General Partner By: /s/Patrick J. Foye Patrick J. Foye Executive Vice President By: /s/Martha L. Long Martha L. Long Senior Vice President and Controller VMS National Residential Portfolio II 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 Date: Exhibit 11 VMS NATIONAL PROPERTIES JOINT VENTURE CALCULATION OF NET LOSS PER INVESTOR (in thousands, except unit data) For the Six Months Ended June 30, 2001 2000 VMS National Properties net loss $(1,074) $ (484) Portfolio I net loss -- (1) Portfolio II net loss -- -- Combined net loss $(1,074) $ (485) Portfolio I allocation: 70.69% $ (759) $ (342) Portfolio I net loss -- (1) $ (759) $ (343) Net loss to general partner (2%) $ (15) $ (7) Net loss to limited partners (98%) $ (744) $ (336) Number of Limited Partner units 644 644 Net loss per limited partnership interest $(1,155) $ (522) Portfolio II allocation: 29.31% $ (315) $ (142) Net loss to general partner (2%) $ (6) $ (3) Net loss to limited partners (98%) $ (309) $ (139) Number of Limited Partner units 267 267 Net loss per limited partnership interest $(1,157) $ (521) -----END PRIVACY-ENHANCED MESSAGE-----