FORM 10-QSB.--QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Quarterly or Transitional Report
(As last amended by 34-32231, eff. 6/3/93.)
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the transition period.........to.........
Commission file number 0-15647
VMS INVESTORS FIRST-STAGED EQUITY L.P. II
(Exact name of small business issuer as specified in its charter)
Delaware 36-3375342
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8700 West Bryn Mawr
Chicago, Illinois 60631
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (312) 399-8700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 INVESTORS FIRST-STAGED EQUITY L.P. II
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1995
<S> <C> <C>
Assets
Cash:
Unrestricted $ 2,469,034
Restricted-tenant security deposits 65,139
Accounts receivable, net allowance for
doubtful accounts of $44,841 107,424
Note receivable 50,000
Escrows for taxes 70,177
Other assets 82,184
Investment properties:
Leasehold interests $ 1,385,874
Buildings and improvements 10,475,110
Personal property 970,590
12,831,574
Less accumulated depreciation (5,130,648) 7,700,926
$10,544,884
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 32,299
Tenant security deposits 65,139
Other liabilities 130,701
Deferred gain 50,000
Mortgage notes payable 9,334,412
Partners' Capital
General partners $ 2,513
Limited partners (25,186 units
issued and outstanding) 929,820 932,333
$10,544,884
</TABLE>
[FN]
See Accompanying Notes to Consolidated Financial Statements
b) VMS INVESTORS FIRST-STAGED EQUITY L.P. II
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Rental income $612,840 $571,687 $1,767,553 $2,539,890
Other income 16,393 21,305 55,240 33,300
Total revenues 629,233 592,992 1,822,793 2,573,190
Expenses:
Operating 103,301 136,266 289,991 526,916
General and administrative 42,022 29,304 181,901 182,232
Property management fees 17,009 38,513 90,057 120,978
Maintenance 48,104 55,989 143,465 245,801
Depreciation 127,939 127,775 383,818 549,534
Amortization 7,724 7,701 21,477 22,561
Interest 170,468 219,396 536,880 1,054,233
Property taxes 25,083 22,497 66,640 150,603
Tenant reimbursements (2,930) (11,660) (30,766) (36,914)
Total expenses 538,720 625,781 1,683,463 2,815,944
Gain on sale of properties 50,000 29,428 107,357 29,428
Income (loss) before
extraordinary item 140,513 (3,361) 246,687 (213,326)
Extraordinary item-gain on
extinguishment of debt -- 1,768 -- 7,323,849
Net income (loss) $140,513 $ (1,593) $ 246,687 $7,110,523
Net income (loss) allocated
to general partners $ 1,405 $ (19) $ 2,467 $ 164,077
Net income (loss) allocated
to limited partners 139,108 (1,574) 244,220 6,946,446
$140,513 $ (1,593) $ 246,687 $7,110,523
Net income (loss) per
limited partnership unit:
Net income (loss) before
extraordinary item $ 5.52 $ (0.13) $ 9.70 $ (8.39)
Extraordinary item -- .07 -- 287.88
Net income (loss) per
limited partnership unit $ 5.52 $ (.06) $ 9.70 $ 279.50
</TABLE>
[FN]
See Accompanying Notes to Consolidated Financial Statements
c) VMS INVESTORS FIRST-STAGED EQUITY L.P. II
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(Unaudited)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partners Partners Total
<S> <C> <C> <C> <C>
Partners' capital at
December 31, 1994 25,186 $ 46 $ 685,600 $ 685,646
Net income for the nine months
ended September 30, 1995 -- 2,467 244,220 246,687
Partners' capital at
September 30, 1995 25,186 $ 2,513 $ 929,820 $ 932,333
</TABLE>
[FN]
See Accompanying Notes to Consolidated Financial Statements
d) VMS INVESTORS FIRST-STAGED EQUITY L.P. II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
<S> <C> <c.
Cash flows from operating activities:
Net income $ 246,687 $ 7,110,523
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 383,818 549,534
Amortization of loan fees and other costs 36,056 53,742
Extraordinary gain from the extinguishment
of debt -- (7,323,849)
Gain on sale of properties (107,357) (29,428)
Change in accounts:
Restricted cash 2,614 (68,180)
Accounts receivable 56,089 (34,956)
Escrows for taxes (45,174) (106,751)
Other assets (10,953) (2,735)
Accounts payable (933) 8,110
Accrued taxes 26,568 67,491
Tenant security deposit liabilities (2,614) (19,707)
Other liabilities (23,506) 275,954
Net cash provided by operating activities 561,295 479,748
Cash flows from investing activities:
Property improvements and replacements -- (12,971)
Proceeds received from notes receivable 107,357 22,071
Net cash provided by investing
activities 107,357 9,100
Cash flows from financing activities:
Payments on mortgage notes payable (95,014) (114,632)
Cash relinquished to lenders -- (388,580)
Net cash used in financing activities (95,014) (503,212)
Net increase (decrease) in cash 573,638 (14,364)
Cash at beginning of period 1,895,396 1,815,291
Cash at end of period $2,469,034 $ 1,800,927
Supplemental disclosure of cash flow information:
Cash paid for interest $ 544,337 $ 1,095,023
</TABLE>
[FN]
See Accompanying Notes to Consolidated Financial Statements
VMS INVESTORS FIRST-STAGED EQUITY L.P. II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
Foreclosure
In March of 1994, the Partnership lost Kendall Mall, located in Dade County,
Florida, through foreclosure to the holder of the second mortgage (See Note B of
the Notes to Consolidated Financial Statements). In connection with this
transaction, the following accounts were adjusted by the following non-cash
amounts noted:
Relinquishment of cash $ (388,580)
Accounts receivable (189,658)
Escrow deposits for taxes and insurance (177,215)
Other assets (34,187)
Investment properties (18,890,910)
Accumulated depreciation 7,678,412
Accounts payable and other liabilities 425,435
Tenant security deposits 69,313
Advances due to affiliates of the
general partner 1,004
Mortgage payable and accrued interest 18,830,235
Aggregate gain on transaction (7,323,849)
Notes Receivable
During 1995, the note receivable related to the sale of Richmond Holiday Inn was
modified (See Note C of the Notes to the Consolidated Financial Statements.) As
a result of this transaction, the note receivable and related deferred gain were
reduced by $239,921 to reflect the actual settlement amount of the note
receivable.
e) VMS INVESTORS FIRST-STAGED EQUITY L.P. II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. 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 the General Partner, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months ended
September 30, 1995, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1995. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Partnership's annual report on Form 10-KSB for the year ended December 31, 1994.
Certain reclassifications have been made to the 1994 information to conform
to the 1995 presentation.
Note B - Foreclosure of Kendall Mall
Mortgage notes and accrued interest payable of Kendall Mall consisted of a
first mortgage in the principal amount of $2,976,405, with an interest rate of
8.5%, which matured in August 1993; a second mortgage in the principal amount of
$10,894,365, with an interest rate of 14% maturing in February 1994; and accrued
mortgage interest of $4,959,465.
The second mortgage lender on Kendall Mall began foreclosure proceedings in
1992 and exercised its rights under the assignment of rents provision of the
second mortgage agreement. The first mortgage note matured in August 1993.
The Partnership was unable to repay all amounts due on the note, and the first
mortgage lender declared the loan in default. A final judgment of foreclosure
was issued in February and the property was sold at public auction on March 16,
1994.
Note C - Notes Receivable
In 1992, a contract was executed for the sale of the Chester Holiday Inn and
the Richmond Holiday Inn for a combined price of $10,745,000. In conjunction
with this sale, the buyer delivered to the Partnership two interest bearing
promissory notes in the principal amounts of $405,000 and $697,627. The
$405,000 note was collected in 1993. The $697,627 promissory note was
renegotiated on May 1, 1994, to require monthly payments of $7,357 with
additional payments made quarterly based upon available cash flow. Also, the
note was reduced to $441,420 with an equivalent reduction in the deferred gain
and the maturity was extended to July 1999. This note is collateralized by a
second mortgage on the Richmond Holiday Inn and a personal guarantee of the
buyer.
Note C - Notes Receivable - continued
The Partnership has agreed to further modify the terms of the note to assign the
note to the guarantor upon the payment of $150,000 in $50,000 increments on or
before May,August and November 15, 1995. This assignment effectively forgives
the remaining note balance of $389,921 upon payment of $150,000. The
Partnership has collected the two scheduled payments for May and August.
Accordingly, the Partnership has reduced the note receivable and related
deferred gain to $50,000 (representing the remaining amount to be collected) at
September 30, 1995.
As a result of collections on the Richmond note, the Partnership recognized a
gain of $107,357 through the nine months ending September 30, 1995. The
remaining deferred gain of $50,000 will be recognized as the note is collected.
Note D - Transactions with Affiliates and Related Parties
The Partnership has no employees and is dependent on the General Partner or
its affiliates for the management and administration of all partnership
activities. The General Partner or its affiliates may be reimbursed for direct
expenses relating to the Partnership's administration and other costs paid on
behalf of the Partnership. The General Partner or its affiliates received
$9,568 and $28,293 in the nine months ended September 30, 1995 and 1994,
respectively, as reimbursement for such advances and out-of-pocket expenses.
Pursuant to an agreement dated July 14, 1994, a transaction is pending in
which the current General Partner would be replaced by MAERIL, Inc., an
affiliate of Insignia Financial Group, Inc. ("Insignia"). The substitution of
MAERIL, Inc. as the General Partner is expected, but there is no assurance
that the transaction will be consummated.
The Partnership has engaged affiliates of Insignia to provide day-to-day
management of the Partnership's properties under an agreement which provides for
fees equal to 6% of revenues on each property. An affiliate of Insignia has
provided partnership administration and management services for the Partnership
since March 1, 1994. Reimbursements for direct expenses relating to these
services totalled approximately $102,006 at September 30, 1995 and $101,315 at
September 30, 1994. For the period from January 1, through July 14, 1994,
Insignia assigned a portion of its fees to an affiliate of the General Partner.
Payments to this affiliate under this assignment were approximately $9,477
during the nine months ending September 30, 1994.
Note E - Legal Proceedings
Certain affiliates of the General Partner and certain officers and directors
of such affiliates are parties to certain pending legal proceedings. The
adverse outcome of any one or more legal proceedings against an affiliate of the
General Partner which provides financial support or services to the Partnership
could have a materially adverse effect on the present and future operations of
the Partnership. However, the inclusion of this discussion is not intended as a
representation by the Partnership that any particular proceeding is material.
There can be no assurance as to the outcome of any of these legal proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Partnership's investment properties consist of two commercial buildings.
The following table sets forth the average occupancy of these properties for
the nine months ended September 30, 1995 and 1994:
Average
Occupancy
1995 1994
Centinella Valley Medical Building I 73% 74%
Centinella Valley Medical Building II 100% 100%
The Partnership had net income of $246,687 for the nine months ended
September 30, 1995, as compared to net income of $7,110,523 for the nine months
ended September 30,1994. The net income reported at September 30, 1994, was
primarily the result of an extraordinary gain on extinguishment of debt related
to the foreclosure of Kendall Mall (see Note B of the Notes to Consolidated
Financial Statements). The Partnership had net income of $140,513 for the three
month period ended September 30, 1995, as compared to a net loss of $1,593 for
the corresponding period in 1994. Rental revenues decreased for the nine months
ended September 30, 1995, as compared to the same period in 1994 due primarily
to the foreclosure of Kendall Mall in March of 1994. Other income increased
for the nine month period ended September 30, 1995, due to higher interest
income as a result of higher cash balances.
Operating expenses, property management fees, maintenance expenses,
depreciation, interest, and property taxes decreased for the nine month period
ending September 30, 1995, as compared to the nine month period ending September
30, 1994, primarily as a result of the foreclosure of Kendall Mall.
Additionally, operating expenses decreased at the remaining investment
properties for the three and nine month periods ending September 30, 1995, as a
result of reduced utility expense and other miscellaneous operating costs.
Interest expense further decreased for the three and nine months ended September
30, 1995, resulting from mortgage interest rates decreasing from approximately
9% to 7% effective April 1995. Maintenance expense decreased at the remaining
investment properties for the nine month period ending September 30, 1995, due
to reductions in common area maintenance expenses in combination with a
reduction in contract trash removal at Centinella II. Property taxes decreased
as a result of fewer properties and reduced tax bills for the 1995 year.
Property management fees decreased at Centinella I and Centinella II for the
three and nine month periods ended September 30, 1995, as fees are a percentage
of revenues.
The gain on sale of properties for the three and nine month periods ending
September 30, 1995, relates to promissory note collections associated with the
sale of Richmond Holiday Inn (see Note C of the Notes to the Consolidated
Financial Statements).
As part of the ongoing business plan of the Partnership, the 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 Partnership from increases in expense. As part of
this plan, the General Partner attempts to protect the Partnership 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
General Partner will be able to sustain such a plan.
Liquidity and Capital Resources
The Partnership held unrestricted cash of $2,469,034 at September 30, 1995,
compared to unrestricted cash of $1,800,927 at September 30, 1994. Cash
provided by operating activities increased primarily due to increased
collections of accounts receivable and reduced deposits to tax escrows. Cash
provided by investing activities increased due to collections on the note
receivable. Cash used in financing activities decreased as a result of
decreased mortgage payments due to the settlement of the debt upon the
foreclosure of Kendall Mall. The cash relinquished to lenders in 1994 also
related to the foreclosure of Kendall Mall.
In 1992, a contract was executed for the sale of the Chester Holiday Inn and
the Richmond Holiday Inn for a combined price of $10,745,000. In conjunction
with this sale, the buyer delivered to the Partnership two interest bearing
promissory notes in the principal amounts of $405,000 and $697,627. The
$405,000 promissory note was collected in 1993. The $697,627 promissory note
was renegotiated on May 1, 1994, to require monthly payments of $7,357 with
additional payments made quarterly based upon available cash flow. Also, the
note was reduced to $441,420 with an equivalent reduction in the deferred gain
and the maturity was extended to July 1999. This note is collateralized by a
second mortgage on the Richmond Holiday Inn and a personal guarantee of the
buyer. The Partnership has agreed to further modify the terms of the note to
assign the note to the guarantor upon the payment of $150,000 in $50,000
increments on or before May, August and November 15, 1995. This assignment
effectively forgives the remaining note balance of $389,921 upon payment of
$150,000. The Partnership has collected the two scheduled payments for May and
August. Accordingly, the Partnership has reduced the note receivable and
related deferred gain to $50,000 (representing the remaining amount to be
collected) at September 30, 1995.
As a result of collections on the Richmond note, the Partnership realized a
gain of $107,357 through the nine months ending September 30, 1995. The
remaining deferred gain of $50,000 is being recognized as the note is
collected.
The immediate source of future liquidity is expected to result from cash flow
of the commercial properties and the collection of the remaining $50,000 due
under the restructured promissory note from the sale of the Richmond Holiday
Inn. Distributions to Limited Partners in the short-term are likely to be
deferred until such time as the General Partner determines that available cash
will not be needed to fund future costs. The mortgage indebtedness of $9,334,412
has balloon payments of $9,301,130 due April 1,1996. Refinancing of the debt is
being discussed with a new lender, however, the negotiations have not been
finalized. A single tenant occupies 47,816 square feet of Centinella II
(approximately 76% of the leasable space) under a lease expiring in January of
1996. Renewal discussions are ongoing, but no lease agreement has been reached
and there is no assurance that these discussions will be successful. Failure
to re-lease this space would impair the Partnership's ability to refinance the
debt. In the long term, sources of liquidity and cash distributions to the
Limited Partners may include cash generated from the Partnership's properties
and the sale or refinancing of these properties.
Developments - VMS Realty Partners and Affiliates
There have been no material developments or changes from the Recent
Developments-VMS Realty Partners and Affiliates disclosed in Part I, Item 2 of
the Partnership's report on Form 10-QSB for the quarter ended June 30, 1995.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no new developments or changes from Part II, Item 1 of the
Partnership's report on Form 10-QSB for the quarter ended June 30, 1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Partnership did not submit any matter to a vote of its holders of Limited
Partnership Interests during the period ended September 30, 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
b) Reports on Form 8-K:
None filed during the quarter ended September 30, 1995.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
VMS INVESTORS FIRST-STAGED EQUITY L.P. II
(Registrant)
By: VMS Realty Investment II,
General Partner
Date: November 6, 1995 By: /s/ Joel A. Stone
Joel A. Stone
President
Date: November 6, 1995 By: /s/ Thomas A. Gatti
Thomas A. Gatti, Senior Vice-President
and Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from VMS Investors
First-Staged Equity L.P. II 1995 Third Quarter 10-QSB and is qualified in its
entirety by reference to such 10-QSB.
</LEGEND>
<CIK> 0000790882
<NAME> INVESTORS FIRST-STAGED EQUITY L.P. II
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,469,034
<SECURITIES> 0
<RECEIVABLES> 157,424
<ALLOWANCES> 44,841
<INVENTORY> 0
<CURRENT-ASSETS> 2,843,958
<PP&E> 12,831,574
<DEPRECIATION> 5,130,648
<TOTAL-ASSETS> 10,544,884
<CURRENT-LIABILITIES> 278,139
<BONDS> 9,334,412
<COMMON> 0
0
0
<OTHER-SE> 932,333
<TOTAL-LIABILITY-AND-EQUITY> 10,544,884
<SALES> 0
<TOTAL-REVENUES> 1,822,793
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,683,463
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 536,880
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 246,687
<EPS-PRIMARY> 9.70
<EPS-DILUTED> 0
</TABLE>
