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 September 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.)
55 Beattie Place, 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)
September 30, 1998
Assets
Cash and cash equivalents $ 2,294
Receivables and deposits, net of allowance
for doubtful accounts of $23 168
Restricted escrows 959
Other assets 67
Investment properties:
Leasehold interests $ 1,386
Buildings and related personal property 11,789
13,175
Less accumulated depreciation (6,666) 6,509
$ 9,997
Liabilities and Partners' Capital
Liabilities
Accounts payable $ 66
Tenant security deposit liabilities 61
Other liabilities 292
Mortgage notes payable 9,001
Partners' Capital
General partner $ 4
Limited partners (25,186 units
issued and outstanding) 573 577
$ 9,997
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 Nine months Ended
September 30, September 30,
1998 1997 1998 1997
Revenues:
Rental income $ 271 $ 506 $1,414 $1,664
Other income 24 35 81 100
Total revenues 295 541 1,495 1,764
Expenses:
Operating 177 224 500 598
General and administrative 43 40 105 127
Depreciation 133 129 389 383
Interest 205 202 622 603
Property taxes (19) 15 25 62
Bad debt recovery, net (5) (62) (5) (62)
Total expenses 534 548 1,636 1,711
Net (loss) income $ (239) $ (7) $ (141) $ 53
Net (loss) income allocated to
general partner (1%) $ (2) $ -- $ (1) $ 1
Net (loss) income allocated to
limited partners (99%) (237) (7) (140) 52
$ (239) $ (7) $ (141) $ 53
Net (loss) income per limited
partnership unit $(9.41) $ (.28) $(5.56) $ 2.06
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)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partner Partners Total
<S> <C> <C> <C> <C>
Original capital contributions 25,186 $ -- $ 25,186 $ 25,186
Partners' capital at
December 31, 1997 25,186 $ 5 $ 713 $ 718
Net loss for the nine months
ended September 30, 1998 -- (1) (140) (141)
Partners' capital at
September 30, 1998 25,186 $ 4 $ 573 $ 577
<FN>
See Accompanying Notes to Consolidated Financial Statements
</FN>
</TABLE>
d)
VMS INVESTORS FIRST-STAGED EQUITY L.P. II
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net (loss) income $ (141) $ 53
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation 389 383
Amortization of loan costs and lease commissions 21 14
Bad debt recovery, net (5) (62)
Change in accounts:
Receivables and deposits (63) 168
Other assets 6 (11)
Accounts payable 50 13
Accrued property taxes -- 22
Other liabilities 97 49
Tenant security deposit liabilities 8 (12)
Net cash provided by operating activities 362 617
Cash flows from investing activities:
Property improvements and replacements (241) (27)
Net deposits to restricted escrows (387) --
Net cash used investing activities (628) (27)
Cash flows from financing activities:
Payments on mortgage notes payable (68) (88)
Distribution to partners -- (500)
Net cash used in financing activities (68) (588)
Net (decrease) increase in cash and cash equivalents (334) 2
Cash and cash equivalents at beginning of period 2,628 2,888
Cash and cash equivalents at end of period $2,294 $2,890
Supplemental disclosure of cash flow information:
Cash paid for interest $ 473 $ 598
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 nine month
periods ended September 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Partnership include its 99% limited
partnership interests in Centinella GP, L.P., VMS 1985-253, LP. and VMS 1985-
254, LP. The Partnership may remove the General Partner of Centinella GP, L.P.,
VMS 1985-253, LP. and VMS 1985-254, LP; therefore, the partnerships are deemed
controlled and therefore, consolidated by the Partnership. All significant
interpartnership balances have been eliminated.
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 Partnership's 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 nine months ended
September 30, 1998 and 1997:
1998 1997
(in thousands)
Property management fees (included in operating
expenses) $ 80 $110
Reimbursement for services of affiliates (included
in general and administrative expenses and
investment property) 54 61
Included in reimbursement for services of affiliates was approximately $4,000 of
construction oversight reimbursements as well as approximately $9,000 in lease
commissions for the nine months ended September 30, 1998.
NOTE C - DEFAULT ON MORTGAGE NOTES PAYABLE
On August 1, 1998, the Partnership defaulted on its first mortgage notes on
Centinella I and Centinella II. The General Partner is attempting to negotiate a
workout agreement with the lender. However, the outcome of these negotiations
cannot be predicted and the Partnership does not have sufficient cash flow to
meet its near-term debt service obligations. If the General Partner is
unsuccessful in negotiating a workout agreement and the properties cannot be
sold for a sufficient amount, the Partnership will risk losing such properties
to foreclosure. The mortgage notes encumbering the investment properties are
cross-collateralized and cross-defaulted, but not recourse to the Partnership.
The General Partner does not plan for Partnership funds to be used to subsidize
the debt service payments.
NOTE D - TRANSFER OF CONTROL - SUBSEQUENT EVENT
On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and
into Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust, with AIMCO being the surviving corporation (the
"Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control
of the General Partner. In addition, AIMCO also acquired approximately 51% of
the outstanding common shares of beneficial interest of Insignia Properties
Trust ("IPT"), the sole shareholder of the General Partner. Also, effective
October 1, 1998 IPT and AIMCO entered into an Agreement and plan of Merger
pursuant to which IPT is to be merged with and into AIMCO or a subsidiary of
AIMCO (the "IPT Merger"). The IPT Merger requires the approval of the holders
of a majority of the outstanding IPT Shares. AIMCO has agreed to vote all of the
IPT Shares owned by it in favor of the IPT Merger and has granted an irrevocable
limited proxy to unaffiliated representatives of IPT to vote the IPT Shares
acquired by AIMCO and its subsidiaries in favor of the IPT Merger. As a result
of AIMCO's ownership and its agreement, the vote of no other holder of IPT is
required to approve the merger. The General Partner does not believe that this
transaction will have a material effect on the affairs and operations 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
nine months ended September 30, 1998 and 1997:
Average Occupancy
1998 1997
Centinella I 66% 75%
Centinella II 67% 92%
The decrease in occupancy at Centinella I can be attributed to the specific
market niche in which this property is located. The property is a medical
office building located near the regional hospital. Late in 1997, several
medical offices vacated the property due to rumors that the hospital would be
re-locating. However, the hospital relocation did not occur. Leasing has been
slower than expected and there is a possibility that the Partnership will not be
successful in leasing the space in the near future.
The decrease in occupancy at Centinella II at September 30, 1998 is directly
related to the anchor tenant at Centinella II vacating its space during July of
1998. This primary tenant represented approximately 48,000 square feet or
approximately 76% of the total leasable square feet of the property. There can
be no assurance that the Partnership will be successful in re-leasing this space
before year end. As the result of the tenant vacating its space, the property
is 20% occupied as of September 30, 1998.
On August 1, 1998, the Partnership defaulted on its first mortgage notes on
Centinella I and Centinella II. The General Partner is attempting to negotiate a
workout agreement with the lender. However, the outcome of these negotiations
cannot be predicted and the Partnership does not have sufficient cash flow to
meet its near-term debt service obligations. If the General Partner is
unsuccessful in negotiating a workout agreement and the properties cannot be
sold for a sufficient amount, the Partnership will risk losing such properties
to foreclosure. The mortgage notes encumbering the investment properties are
cross-collateralized and cross-defaulted, but not recourse to the Partnership.
The General Partner does not plan for Partnership funds to be used to subsidize
the debt service payments.
The Partnership realized a net loss of approximately $239,000 and $141,000 for
the three and nine months ended September 30, 1998 compared to a net loss of
approximately $7,000 and net income of approximately $53,000 for the
corresponding period in 1997. The decrease in net income for the nine months
ended September 30, 1998, as compared to September 30, 1997, is due primarily to
a decrease in total revenues which more than offset a decrease in expenses. The
decrease in rental revenue, other income and operating expense is directly
related to the significant decreases in occupancy at both properties for the
nine months ended September 30, 1998. The decrease in operating expense for the
nine months ended September 30, 1998 is also due to reduced utility costs,
contract maintenance services and land lease expense. In addition, Centinella
II received a refund in 1998 for overpayment of prior year property taxes for
approximately $41,000, resulting in a decrease in property tax expense in 1998.
The decrease in net income for the three months ended September 30, 1998 over
the same period in 1997 is primarily attributable to the anchor tenant vacating
its premises at Centinella II in July 1998. Rental income decreased
approximately $285,000 at this property during the three-month period ended
September 30, 1998 over the same period in the prior year. In addition, bad
debt recoveries at Centinella I decreased during the three months ended
September 30, 1998. Operating expense also decreased at both properties during
the three months ended September 30, 1998 mainly due to the reduction in land
lease expense. Lease payments on the land are not required to be paid when
occupancy drops below a certain level at the properties.
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 $2,294,000 at
September 30, 1998, compared to cash and cash equivalents of approximately
$2,890,000 at September 30, 1997. Cash and cash equivalents decreased
approximately $334,000 and increased approximately $2,000 for the periods ended
September 30, 1998 and 1997, respectively. Cash provided by operating activities
decreased for the period ended September 30, 1998, due to the decrease in net
income as discussed above and as a result of an increase in receivables and
deposits. Tenant receivables increased due to the timing of the collection of
monthly rents. Deposits to tax and insurance escrows increased due to a refund
of prior year property taxes received in September 1998. 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 nine months ended
September 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 nine
months ended September 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. During the
nine months ended September 30, 1997, a $500,000 distribution was made to the
limited partners. No distributions have been made during the first nine 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 and to
comply with federal, state and local legal and regulatory requirements. On
August 1, 1998, the Partnership defaulted on its first mortgage notes on
Centinella I and Centinella II. The General Partner is attempting to negotiate a
workout agreement with the lender. However, the outcome of these negotiations
cannot be predicted and the Partnership does not have sufficient cash flow to
meet its near-term debt service obligations. If the General Partner is
unsuccessful in negotiating a workout agreement and the properties cannot be
sold for a sufficient amount, the Partnership will risk losing such properties
to foreclosure. The mortgage notes encumbering the investment properties are
cross-collateralized and cross-defaulted, but are not recourse to the
Partnership. The mortgage indebtedness of approximately $9,001,000 is
amortized over 25 years with a balloon payment of approximately $8,629,000 due
April, 2001. There were no cash distributions during the nine months ended
September 30, 1998. During the first nine months of 1997, a $500,000
distribution was made to the limited partners. Future cash distributions will
depend on the levels of net cash generated from operations, refinancings,
property sales and the availability of cash reserves. The Partnership's
distribution policy will be reviewed on a quarterly basis. There can be no
assurance, however, that the Partnership will generate sufficient funds from
operations to permit distributions to its partners in 1998 or subsequent
periods.
Transfer of Control; Subsequent Event
On October 1, 1998, Insignia Financial Group, Inc. completed its merger with and
into Apartment Investment and Management Company ("AIMCO"), a publicly traded
real estate investment trust, with AIMCO being the surviving corporation (the
"Insignia Merger"). As a result of the Insignia Merger, AIMCO acquired control
of the General Partner. In addition, AIMCO also acquired approximately 51% of
the outstanding common shares of beneficial interest of Insignia Properties
Trust ("IPT"), the sole shareholder of the General Partner. Also, effective
October 1, 1998 IPT and AIMCO entered into an Agreement and plan of Merger
pursuant to which IPT is to be merged with and into AIMCO or a subsidiary of
AIMCO (the "IPT Merger"). The IPT Merger requires the approval of the holders
of a majority of the outstanding IPT Shares. AIMCO has agreed to vote all of the
IPT Shares owned by it in favor of the IPT Merger and has granted an irrevocable
limited proxy to unaffiliated representatives of IPT to vote the IPT Shares
acquired by AIMCO and its subsidiaries in favor of the IPT Merger. As a result
of AIMCO's ownership and its agreement, the vote of no other holder of IPT is
required to approve the merger. The General Partner does not believe that this
transaction will have a material effect on the affairs and operations of the
Partnership.
Year 2000
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Partnership is
dependent upon the General Partner and its affiliates for management and
administrative services ("Managing Agent"). Any computer programs or hardware
that have date-sensitive software or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Managing Agent has determined that it will be required to modify or replace
significant portions of its software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. The Managing Agent
presently believes that with modifications or replacements of existing software
and certain hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Managing
Agent and the Partnership.
Status of Progress in Becoming Year 2000 Compliant
The Managing Agent's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Managing Agent has fully completed its assessment of all information systems
that could be significantly affected by the Year 2000, and has begun the
remediation, testing and implementation phase on both hardware and software
systems. Assessments are continuing in regards to embedded systems in operating
equipment. The Managing Agent anticipates having all phases complete by June 1,
1999.
In addition to the areas the Partnership is relying on the Managing Agent to
verify compliance with, the Partnership has certain operating equipment,
primarily at the property sites, which needed to be evaluated for Year 2000
compliance. The focus of the General Partner was to the security systems,
elevators, heating-ventilation-air-conditioning systems, telephone systems and
switches, and sprinkler systems. The General Partner is currently engaged in the
identification of all non-compliant operational systems, and is in the process
of estimating the costs associated with any potential modifications or
replacements needed to such systems in order for them to be Year 2000 compliant.
It is not expected that such costs would have a material adverse affect upon
the operations of the Partnership.
Risk Associated with the Year 2000
The General Partner believes that the Managing Agent has an effective program in
place to resolve the Year 2000 issue in a timely manner and has appropriate
contingency plans in place for critical applications that could affect the
Partnership's operations. To date, the General Partner is not aware of any
external agent with a Year 2000 issue that would materially impact the
Partnership's results of operations, liquidity or capital resources. However,
the General Partner has no means of ensuring that external agents will be Year
2000 compliant. The General Partner does not believe that the inability of
external agents to complete their Year 2000 resolution process in a timely
manner will have a material impact on the financial position or results of
operations of the Partnership. However, the effect of non-compliance by
external agents is not readily determinable.
Other
Certain items discussed in this quarterly report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (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 nine months ended September 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/Patrick Foye
Patrick Foye
Executive Vice President
By: /s/ Timothy R. Garrick
Timothy R. Garrick
Vice President - Accounting
(Duly Authorized Officer)
Date: November 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
VMS Investors First-Staged Equity L.P. II 1998 Third Quarter 10-QSB
and is qualified in its entirety by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000790882
<NAME> VMS INVESTORS FIRST-STAGED EQUITY L.P. II
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,294
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 13,175
<DEPRECIATION> 6,666
<TOTAL-ASSETS> 9,997
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 9,001
0
0
<COMMON> 0
<OTHER-SE> 577
<TOTAL-LIABILITY-AND-EQUITY> 9,997
<SALES> 0
<TOTAL-REVENUES> 1,495
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,636
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 622
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141)
<EPS-PRIMARY> (5.56)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
