FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 1998
[ ] 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 0-15647
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.)
One Insignia Financial Plaza, P.O. Box 1089
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
Issuer's telephone number
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
(in thousands, except unit data)
(Unaudited)
June 30, 1998
Assets
Cash and cash equivalents $ 2,351
Receivables and deposits, net of allowance
for doubtful accounts of $23 110
Restricted escrows 959
Other assets 81
Investment properties:
Leasehold interests $ 1,386
Buildings and related personal property 11,665
13,051
Less accumulated depreciation (6,533) 6,518
$10,019
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 2
Tenant security deposit liabilities 54
Other liabilities 136
Mortgage notes payable 9,011
Partners' Capital
General partner $ 6
Limited partners (25,186 units
issued and outstanding) 810 816
$10,019
See Accompanying Notes to Consolidated Financial Statements
b)
VMS INVESTORS FIRST-STAGED EQUITY L.P. II
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues:
Rental income $ 598 $ 583 $ 1,143 $1,158
Other income 34 35 57 65
Total revenues 632 618 1,200 1,223
Expenses:
Operating 133 174 323 374
General and administrative 33 42 62 87
Depreciation 129 128 256 254
Interest 209 199 417 401
Property taxes 21 24 44 47
Total expenses 525 567 1,102 1,163
Net income $ 107 $ 51 $ 98 $ 60
Net income allocated to
general partner (1%) $ 1 $ 1 $ 1 $ 1
Net income allocated to
limited partners (99%) 106 50 97 59
$ 107 $ 51 $ 98 $ 60
Net income per limited
partnership unit $4.21 $1.99 $ 3.85 $ 2.34
See Accompanying Notes to Consolidated Financial Statements
c)
VMS INVESTORS FIRST-STAGED EQUITY L.P. II
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(in thousands, except unit data)
(unaudited)
Limited
Partnership General Limited
Units Partner Partners Total
Original capital contributions 25,186 $ -- $ 25,186 $ 25,186
Partners' capital at
December 31, 1997 25,186 $ 5 $ 713 $ 718
Net income for the six months
ended June 30, 1998 -- 1 97 98
Partners' capital at
June 30, 1998 25,186 $ 6 $ 810 $ 816
See Accompanying Notes to Consolidated Financial Statements
d)
VMS INVESTORS FIRST-STAGED EQUITY L.P. II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
Cash flows from operating activities:
Net income $ 98 $ 60
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 256 254
Amortization of loan costs and lease commissions 14 9
Change in accounts:
Receivables and deposits (10) 108
Other assets (1) (9)
Accounts payable (14) 4
Accrued property taxes -- 6
Other liabilities (59) 26
Tenant security deposit liabilities 1 (7)
Net cash provided by operating activities 285 451
Cash flows from investing activities:
Property improvements and replacements (117) (24)
Net deposits to restricted escrows (387) --
Net cash used investing activities (504) (24)
Cash flows from financing activities:
Payments on mortgage notes payable (58) (61)
Distributions to partners -- (472)
Net cash used in financing activities (58) (533)
Net decrease in cash and cash equivalents (277) (106)
Cash and cash equivalents at beginning of period 2,628 2,888
Cash and cash equivalents at end of period $2,351 $2,782
Supplemental disclosure of cash flow information:
Cash paid for interest $ 406 $ 398
See Accompanying Notes to Consolidated Financial Statements
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 of VMS Investors
First-Staged Equity L.P. II (the "Partnership") 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 MAERIL, Inc. (the "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, 1998, are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998. 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,
1997.
Certain reclassifications have been made to the 1997 information to conform to
the 1998 presentation.
NOTE B - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
The Partnership has no employees and is dependent on the General Partner and its
affiliates for the management and administration of all partnership activities.
The General Partner is a wholly-owned subsidiary of Insignia Properties Trust
("IPT"), an affiliate of Insignia Financial Group, Inc. ("Insignia"). The
Partnership Agreement provides for certain payments to affiliates for services
and as reimbursement of certain expenses incurred by affiliates on behalf of the
Partnership. The following expenses were paid or accrued to the General Partner
and affiliates for the six months ended June 30, 1998 and 1997:
1998 1997
(in thousands)
Property management fees (included in operating
expenses) $ 64 $ 72
Reimbursement for services of affiliates (included
in general and administrative expenses and
investment property) 32 36
Included in reimbursement for services of affiliates was approximately $4,000 of
construction oversight reimbursements for the six months ended June 30, 1998.
On March 17, 1998, Insignia entered into an agreement to merge its national
residential property management operations, and its controlling interest in IPT,
with Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust. The closing, which is anticipated to happen in
September or October of 1998, is subject to customary conditions, including
government approvals and the approval of Insignia's shareholders. If the
closing occurs, AIMCO will then control the General Partner of the Partnership.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Partnership's investment properties consist of two commercial buildings.
The following table sets forth the average occupancy of the properties for the
six months ended June 30, 1998 and 1997:
Average Occupancy
1998 1997
Centinella I 67% 78%
Centinella II 91% 92%
The decrease in occupancy at Centinella I can be attributed to the neighborhood
in which this property is located. The property is a medical office building
located near the regional hospital. Several medical offices vacated the
property due to rumors that the hospital would be re-locating. The current plan
is to not re-locate the hospital. Leasing is slower than expected and there is a
possibility that the General Partner will not be successful in leasing the space
in the near future.
Although occupancy at Centinella II is relatively high at June 30, 1998, the
anchor tenant at Centinella II vacated their space during July of 1998, which
approximated 48,000 square feet or approximately 76% of the total leasable
square feet of the property. There is no guarantee that the General Partner
will be successful in re-leasing this space before year end. In the meantime,
until the space is re-leased, the General Partner will attempt to negotiate a
workout agreement with the lender. The outcome of these negotiations cannot be
predicted and the property does not have the funds with which to meet its near-
term debt service obligations. The mortgage debt encumbering both investment
properties is cross-collateralized, but not recourse to the Partnership. At
this time, the General Partner does not plan for Partnership funds to be used to
subsidize the debt service payment.
The Partnership realized net income of approximately $107,000 and $98,000 for
the three and six months ended June 30, 1998, compared to net income of
approximately $51,000 and $60,000 for the corresponding period of 1997. The
increase in net income for the six months ended June 30, 1998, as compared to
June 30, 1997, is due primarily to a decrease in total expenses but was
partially offset by a decrease in rental income. The decrease in expenses is
mainly due to a decrease in operating and general and administrative expenses,
but was partially offset by an increase in interest expense. General and
administrative expenses decreased for the six months ended June 30, 1998,
compared to the six months ended June 30, 1997, due to miscellaneous legal fees
incurred in 1997 related to modifications of the existing loans. As a result of
the decrease in occupancy at both investment properties, operating expenses
decreased primarily due to decreases in contract cleaning and utility expenses
at both investment properties. Interest expense increased for the six months
ended June 30, 1998, as a result of increases in the interest rates related to
the property mortgages. Interest rates during the first six months of 1998 were
slightly higher than during the first six months of 1997. Rental income
decreased for the six months ended June 30, 1998, as compared to the six months
ended June 30, 1997, primarily due to the reduced occupancy level at Centinella
I, as discussed above. For the three months ended June 30, 1998, as compared to
the three months ended June 30, 1997, rental income increased due to an increase
in tenant reimbursements.
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.
The Partnership had cash and cash equivalents of approximately $2,351,000 at
June 30, 1998, compared to cash and cash equivalents of approximately $2,782,000
at June 30, 1997. Cash and cash equivalents decreased approximately $277,000 and
$106,000 for the periods ended June 30, 1998 and 1997, respectively. Cash
provided by operating activities decreased for the period ended June 30, 1998,
as compared to June 30, 1997, due to a decrease in other liabilities and an
increase in receivables and deposits. The decrease in other liabilities is
mainly due to a decrease in the amounts due to tenants for reimbursement of
common area expenses for which they overpaid. Tenant receivables increased due
to the timing of the collection of monthly rents. Cash used in investing
activities increased due to an increase in property improvements and
replacements at both properties and an increase in deposits to restricted
escrows. Property improvements and replacements during the six months ended
June 30, 1997, were minimal. Improvements had been started during the first six
months of 1998 in an effort to attract new tenants to occupy vacant spaces, but
all plans are now on hold until negotiations with the lender to reach a workout
agreement are completed. Deposits to restricted escrows during the six months
ended June 30, 1998, resulted from the deposit of excess cash as required by the
mortgage notes. These proceeds are to be used to fund tenant improvements in
connection with the organization, renewal and modification of tenant leases and
for paying leasing commissions. Net cash used in financing activities decreased
due to a decrease in distributions to partners. In June 1997, a $472,000
distribution was made to the limited partners. No distributions have been made
during the first six months of 1998.
The Partnership's primary source of cash is from the operations of its
properties and from financing placed on such properties. Cash from these
sources is utilized for property operations, capital improvements, and/or
repayment of debt. 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 investment properties to adequately
maintain the physical assets and other operating needs of the Partnership.
Subsequent to June 30, 1998, Centinella II will not have the funds with which to
service its short-term debt obligations. The General Partner will attempt to
negotiate a potential workout agreement with the lender and does not anticipate
utilizing Partnership funds to subsidize the debt service. The mortgage
indebtedness of approximately $9,011,000 matures April 2001 and is amortized
over 25 years. At maturity, approximately $8,629,000 of balloon payments are
due. There were no cash distributions during the six months ended June 30,
1998. In June 1997, a $472,000 distribution was made to the limited partners.
Future cash distributions will depend on the levels of cash generated from
operations, property sales and the availability of cash reserves.
Year 2000
The Partnership is dependent upon the General Partner and Insignia for
management and administrative services. Insignia has completed an assessment
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter (the "Year 2000 Issue"). The project is estimated to be completed
not later than December 31, 1998, which is prior to any anticipated impact on
its operating systems. The General Partner believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the
Partnership.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform Act") and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performances or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements speak only as of the date
of this quarterly report. The Partnership expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Partnership's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
b) Reports on Form 8-K filed during the six months ended June 30, 1998:
None.
SIGNATURES
In accordance with Section 13 or 15(d) 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
By: MAERIL, Inc.
General Partner
By: /s/ Carroll D. Vinson
Carroll D. Vinson
President/Director
By: /s/ Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President/CAO
Date: August 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
VMS Investors First-Staged Equity L.P. II 1998 Second Quarter 10-QSB
and is qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
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<NAME> VMS INVESTORS FIRST-STAGED EQUITY L.P. II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,351
<SECURITIES> 0
<RECEIVABLES> 110
<ALLOWANCES> 23
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 13,051
<DEPRECIATION> (6,533)
<TOTAL-ASSETS> 10,019
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 9,011
0
0
<COMMON> 0
<OTHER-SE> 816
<TOTAL-LIABILITY-AND-EQUITY> 10,019
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<TOTAL-REVENUES> 1,200
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