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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 September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-24497
AIMCO PROPERTIES, L.P.
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(Exact name of registrant as specified in its charter)
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Delaware 84-1275621
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1873 S. Bellaire Street, Suite 1700, Denver, Colorado 80222-4348
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(Address of principal executive offices) (Zip Code)
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(303) 757-8101
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has 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 No X
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1
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AIMCO PROPERTIES, L.P.
FORM 10-Q
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flow for the Nine Months
Ended September 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 34
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2
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AIMCO PROPERTIES, L.P.
Consolidated Balance Sheets
As of September 30, 1998 and December 31, 1997
(In Thousands, Except Per Unit Data)
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SEPTEMBER 30, DECEMBER 31,
1998 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate, net of accumulated depreciation of $330,365 and $153,285 $ 2,355,122 $ 1,503,922
Property held for sale 42,212 6,284
Investments in and notes receivable from unconsolidated subsidiaries 127,082 84,459
Investments in and notes receivable from unconsolidated real estate
Partnerships 246,847 212,150
Cash and cash equivalents 43,681 37,088
Restricted cash 83,187 24,229
Accounts receivable 11,545 28,656
Deferred financing costs 21,835 12,793
Goodwill, net of accumulated amortization of $4,854 and $522 120,503 125,239
Other assets 69,935 65,690
----------- -----------
Total assets $ 3,121,949 $ 2,100,510
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Secured notes payable $ 774,676 $ 681,421
Secured tax-exempt bond financing 399,925 74,010
Unsecured short-term financing 50,800 --
Secured short-term financing 50,000 53,099
----------- -----------
Total indebtedness 1,275,401 808,530
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Accounts payable, accrued and other liabilities 131,799 88,170
Resident security deposits and prepaid rents 13,171 10,213
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Total liabilities 1,420,371 906,913
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Commitments and contingencies -- --
Minority interests 42,086 36,335
Redeemable Partnership Units 232,405 197,086
Partners' Capital
General and Special Limited Partner 1,039,525 827,280
Preferred Units 387,562 134,579
Accumulated other comprehensive losses -- (1,683)
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Total partners' capital 1,427,087 960,176
----------- -----------
Total liabilities and partners' capital $ 3,121,949 $ 2,100,510
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AIMCO PROPERTIES, L.P.
Consolidated Statements of Income
(In Thousands, Except Per Unit Data)
(Unaudited)
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FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
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SEPT. 30, 1998 SEPT. 30, 1997 SEPT. 30, 1998 SEPT. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
RENTAL PROPERTY OPERATIONS
Rental and other property revenues $ 104,436 $ 47,364 $ 265,700 $ 127,083
Property operating expenses (41,957) (19,577) (101,600) (50,737)
Owned property management expense (3,033) (1,610) (7,746) (4,344)
Depreciation (25,503) (8,802) (59,792) (23,848)
--------- -------- --------- ---------
Income from property operations 33,943 17,375 96,562 48,154
--------- -------- --------- ---------
SERVICE COMPANY BUSINESS
Management fees and other income 4,406 3,568 13,968 9,173
Management and other expenses (2,631) (2,386) (8,101) (5,029)
Corporate overhead allocation -- (147) (196) (441)
Other assets depreciation and amortization -- (75) (3) (236)
--------- -------- --------- ---------
Income from service company business 1,775 960 5,668 3,467
Minority interests in service company business -- 50 -- 48
--------- -------- --------- ---------
Company's share of income from service company
Business 1,775 1,010 5,668 3,515
--------- -------- --------- ---------
General and administrative expenses (3,341) (624) (7,444) (1,408)
Interest expense (21,978) (12,755) (56,756) (33,359)
Interest income 6,894 3,117 18,244 4,458
Minority interest in other partnerships (536) (212) (1,052) (777)
Equity in losses of unconsolidated partnerships (396) (84) (5,078) (463)
Equity in earnings of unconsolidated subsidiaries 2,804 542 8,413 456
Amortization of goodwill (1,677) (237) (5,071) (711)
--------- -------- --------- ---------
Income from operations 17,488 8,132 53,486 19,865
Extraordinary item - early extinguishment of debt -- -- -- (269)
Gain on disposition of properties 257 (169) 2,783 (169)
--------- -------- --------- ---------
Net income
$ 17,745 $ 7,963 $ 56,269 $ 19,427
--------- -------- --------- ---------
Net income attributable to Preferred $ 7,670 $ 835 $ 16,320 $ 835
========= ======== ========= =========
Unitholders
Net income attributable to OP Unitholders $ 10,075 $ 7,128 $ 39,949 $ 18,592
========= ======== ========= =========
Net income $ 17,745 $ 7,963 $ 56,269 $ 19,427
Other comprehensive income:
Net unrealized gains on investment in securities -- 1,175 -- 1,175
--------- -------- --------- ---------
Comprehensive income $ 17,745 $ 9,138 $ 56,269 $ 20,602
========= ======== ========= =========
Basic earnings per OP Unit $ 0.19 $ 0.25 $ 0.80 $ 0.77
========= ======== ========= =========
Diluted earnings per OP Unit $ 0.19 $ 0.25 $ 0.79 $ 0.77
========= ======== ========= =========
Weighted average OP Units outstanding 52,896 27,969 50,420 23,648
========= ======== ========= =========
Weighted average OP Units and OP Unit
equivalents outstanding 53,523 28,154 50,544 24,314
========= ======== ========= =========
Distributions paid per OP Unit $ 0.5625 $ 0.4625 $ 1.6875 $ 1.3875
========= ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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AIMCO PROPERTIES, L.P.
Consolidated Statements of Cash Flow
(In Thousands)
(Unaudited)
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FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 56,269 $ 19,427
--------- ---------
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 67,344 26,595
(Gain) loss on disposition of properties (2,783) 169
Minority interests 1,052 777
Equity in earnings of unconsolidated partnerships 5,078 463
Equity in earnings of unconsolidated subsidiaries (8,413) (456)
Extraordinary loss on early extinguishment of debt -- 269
Changes in operating assets and operating liabilities (67,722) 6,191
--------- ---------
Total adjustments (5,444) 34,008
--------- ---------
Net cash provided by operating activities 50,825 53,435
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate (63,839) (86,205)
Additions to real estate (47,878) (16,959)
Proceeds from sale of property held for sale 19,627 231
Additions to property held for sale (1,986) (139)
Purchase of general and limited partnership interests (27,016) (67,393)
Purchase of / additions to notes receivable (72,445) (39,918)
Proceeds from repayments of notes receivable 21,562 --
Distributions from investments in real estate partnerships
and unconsolidated subsidiaries 513 38,000
Cash received in connection with Ambassador Merger 4,492 --
Contribution to unconsolidated subsidiaries (13,032) --
Purchase of NHP common stock -- (121,437)
Purchase of investments held for sale (4,935) (19,881)
Purchase of office equipment and leasehold improvements -- (1,113)
Redemption of OP Units (516) --
--------- ---------
Net cash used in investing activities (185,453) (314,814)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from secured notes payable borrowings 44,252 94,111
Principal repayments on secured notes payable (56,262) (4,451)
Principal repayments on secured tax-exempt bond financing (1,436) (1,056)
Repayments on secured short-term financing (30,693) (258,922)
Net borrowings on the Company's revolving credit facilities 33,237 140,680
Payment of loan costs, net of proceeds from interest rate hedge (5,727) 1,346
Proceeds from issuance of OP Units and Preferred Units, net of
underwriting and offering costs 253,239 343,960
Repurchase of OP Units (10,972) --
Principal repayments received on notes due from officers on
OP Unit purchases 8,084 10,323
Payment of OP Unit distributions (73,322) (28,135)
Payment of distributions to limited partners (8,702) (3,872)
Payment of Preferred Unit distributions (10,916) --
Payment of distributions to OP Unitholders (1,549) --
Proceeds from issuance of High Performance Units 1,988 --
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Net cash provided by financing activities 141,221 293,984
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,593 32,605
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,088 13,170
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,681 $ 45,775
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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AIMCO PROPERTIES, L.P.
Consolidated Statements of Cash Flow
(In Thousands, Except Share and OP Unit Data)
1998 NON CASH INVESTING AND FINANCING ACTIVITIES
PURCHASE OF REAL ESTATE
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Secured notes payable assumed in connection with purchase of real estate $ 80,238
Real estate purchased in exchange of 867,751 Partnership Units ("OP Units") of AIMCO
Properties, L.P. (the "Partnership") 29,339
---------
$ 109,577
=========
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PURCHASE OF AMBASSADOR APARTMENTS, INC.
In May 1998, the Company acquired all of the common stock of Ambassador
Apartments, Inc. ("Ambassador"), par value $.01 per share, in exchange for
6,578,833 shares of AIMCO's Class A Common Stock, par value $.01 per share (the
"Class A Common Stock") with a recorded value of $251.3 million (see Note 3).
The aggregate purchase price consisted of the following:
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Real estate $ 713,596
Investment in real estate partnerships 2,290
Restricted cash 35,523
Accounts receivable 7,953
Deferred financing costs 4,359
Other assets 2,319
Secured notes payable 37,162
Secured tax-exempt bond financing 334,881
Unsecured short-term financing 31,550
Accounts payable, accrued and other liabilities 2,513
Resident security deposits and prepaid rents 8,898
Minority interests in other partnerships 5,752
Partners' Capital 251,274
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PROPERTY HELD FOR SALE
During the nine months ended September 30, 1998, the Company (as defined in Note
1) entered into sales agreements to sell four multifamily properties with a net
book value of $42,106. These assets were reclassified to property held for sale.
RECEIPT OF NOTES PAYABLE FROM OFFICERS
During the nine months ended September 30, 1998, the Company issued notes
receivable from officers for a total of $16,636 in connection with their
purchase of 406,072 shares of Class A Common Stock. The notes receivable were
contributed to the Partnership in exchange for 406,072 OP Units.
OTHER
During the nine months ended September 30, 1998, the Partnership issued an
additional 194,208 OP Units with a recorded value of $4,045 in connection with
the purchase of certain partnership interests.
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AIMCO PROPERTIES, L.P.
Consolidated Statements of Cash Flow
(Continued)
(In Thousands, Except Share and OP Unit Data)
During the nine months ended September 30, 1998, the Company obtained control of
real estate partnerships that became consolidated. The non-cash effects are as
follows:
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Real estate $ 22,089
Secured notes payable 4,679
Investment in and notes receivable from real estate partnerships 16,683
Accounts payable, accrued and other liabilities 727
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During the nine months ended September 30, 1998, AIMCO contributed certain
assets and liabilities to unconsolidated subsidiaries and unconsolidated
partnerships as follows:
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Investment in unconsolidated subsidiaries $ 34,300
Investment in unconsolidated partnerships 3,361
Restricted cash 552
Accounts receivable 13,972
Other assets 18,719
Accounts payable, accrued and other liabilities 62,011
</TABLE>
1997 NON CASH INVESTING AND FINANCING ACTIVITIES
PURCHASE OF REAL ESTATE
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Secured notes payable assumed in connection with purchase of real estate $ 63,446
Real estate purchased in exchange for 1,897,794 OP Units 55,906
---------
$ 119,352
=========
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PURCHASE OF 53.3% INTEREST IN NHP INCORPORATED
In May 1997, the Company acquired 2,866,071 shares of NHP Incorporated's ("NHP")
common stock in exchange for 2,142,857 shares of AIMCO'S Class A Common Stock
with a recorded value of $57,321. Subsequent to the purchase, the Company
contributed the NHP common stock to AIMCO/NHP Holdings, Inc. ("ANHI"), an
unconsolidated subsidiary formed in April 1997, in exchange for all of the
shares of ANHI's nonvoting preferred stock, representing a 95% economic interest
in ANHI.
Concurrently with this contribution, ANHI obtained a loan in the amount of
$72,600, and used the proceeds from the loan to purchase 3,630,002 additional
shares of NHP common stock. In August and September 1997, AIMCO purchased
5,717,000 shares of NHP common stock from ANHI for an aggregate purchase price
of $114,397, and purchased an additional 434,049 shares of NHP common stock from
third parties, pursuant to a stock purchase agreement. Upon the completion of
these transactions, AIMCO and ANHI owned a combined total of 6,930,122 shares of
NHP common stock, representing 53.3% of NHP's outstanding common stock as of
September 30, 1997.
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AIMCO PROPERTIES, L.P.
Consolidated Statements of Cash Flow
(Continued)
(In Thousands, Except Share and OP Unit Data)
PURCHASE OF GENERAL AND LIMITED PARTNERSHIP INTERESTS, CAPTIVE INSURANCE
SUBSIDIARY AND OTHER ASSETS
The historical cost of the assets and the liabilities assumed in connection with
the purchase of NHP Partners, Inc., NHP Partners Two Limited Partners and their
subsidiaries (the "NHP Real Estate Companies") were as follows:
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Real estate, net $ 174,545
Investment in real estate partnerships 89,526
Restricted cash 6,051
Accounts receivable 12,743
Other assets 3,347
Secured notes payable (140,270)
Accounts payable, accrued and other liabilities (50,153)
Accrued management contract liability (106,615)
Resident security deposits and prepaid rent (1,025)
</TABLE>
PROPERTY HELD FOR SALE
In the third quarter of 1997, the Company entered into contracts to sell five
apartment communities with a net book value of $19,100. These assets were
reclassified to property held for sale.
ISSUANCE OF NOTES RECEIVABLE DUE FROM OFFICERS
During the nine months ended September 30, 1997, the Company issued notes
receivable from officers for a total of $33,700 in connection with their
purchase of 1,125,000 shares of Class A Common Stock. The notes receivable were
contributed to the Partnership in exchange for 1,125,000 OP Units.
OTHER
During the nine months ended September 30, 1997, the Company reclassified $1,323
of other assets to real estate as a purchase price allocation adjustment. In
addition, the Company wrote off $4,065 of other assets allocable to limited
partners in partnerships controlled by the Company, to minority interests.
During the nine months ended September 30, 1997, the Partnership issued an
additional 198,218 OP Units with a recorded value of $6,653 in connection with
the purchase of certain partnership interests in 1996.
During the nine months ended September 30, 1997, the Company recorded unrealized
gains on investments held for sale of $1,175.
8
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AIMCO PROPERTIES, L.P.
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
NOTE 1 - ORGANIZATION
AIMCO Properties, L.P. (the " Partnership" and, together with AIMCO (as defined
below), consolidated entities and majority-owned subsidiaries, the "Company"), a
Delaware limited partnership, was formed on May 16, 1994 to conduct the business
of acquiring, developing, leasing and managing multi-family apartment
properties. Apartment Investment and Management Company, a Maryland corporation
("AIMCO"), is the General Partner (through its wholly owned subsidiary,
AIMCO-GP, Inc., a Delaware corporation) and Special Limited Partner (through its
wholly owned subsidiary, AIMCO-LP, Inc., a Delaware corporation), as defined in
the Third Amended and Restated Agreement of Limited Partnership of AIMCO
Properties, L.P., as amended (the "Agreement"), of the Partnership. In addition,
AIMCO is the holder of all Partnership Preferred Units ("Preferred Units")
outstanding in the Partnership. The Limited Partners of the Partnership are
individuals or entities that own limited partnership units in the Partnership
("OP Units"). After holding the OP Units for one year, the Limited Partners have
the right to redeem their OP Units for cash, subject to the prior right of AIMCO
to elect to acquire some or all of the OP Units tendered for redemption in
exchange for shares of Class A Common Stock, on a one-for-one ratio.
The Partnership, through its operating divisions and subsidiaries, was formed to
hold and conduct substantially all of AIMCO's operations and manages the daily
operations of AIMCO's business and assets. All employees are employees of the
Partnership; AIMCO has no employees.
According to the terms of the Agreement, the capital structure of the
Partnership, in terms of the OP Units owned by the General Partner, the Special
Limited Partner and the Preferred Units outstanding, is generally required to
replicate the capital structure of AIMCO, with the only difference being the
Partnership has additional OP Units outstanding which are owned by the Limited
Partners. Therefore, AIMCO is required to contribute to the Partnership all
proceeds from offerings of its Class A Common Stock, preferred stock, or any
other equity offerings. In addition, substantially all of AIMCO's assets must be
owned through the Partnership; therefore, AIMCO is generally required to
contribute to the Partnership all assets acquired. In exchange for the
contribution of offering proceeds or assets, AIMCO receives additional interests
in the Partnership with similar terms (i.e., if AIMCO contributes proceeds of a
preferred stock offering, AIMCO receives Preferred Units).
AIMCO frequently consummates transactions for the benefit of the Partnership.
For legal, tax or other business reasons, AIMCO may hold title or ownership of
certain assets until they can be transferred to the Partnership. However, the
Partnership has a controlling financial interest in all of AIMCO's assets in the
process of transfer to the Partnership.
At September 30, 1998, the Partnership had 54,143,507 OP Units outstanding,
750,000 Class B Preferred Units outstanding, 2,400,000 Class C Preferred Units
outstanding, 4,200,000 Class D Preferred Units outstanding, 4,050,000 Class G
Preferred Units outstanding, and 2,000,000 Class H Preferred Units outstanding.
As of September 30, 1998, the Partnership owned or controlled 57,561 units in
207 apartment properties (the "Owned Properties"), held an equity interest in
75,050 units in 481 apartment properties (the "Equity Properties") and managed
67,929 units in 355 apartment properties for third party owners and affiliates
(the "Managed Properties" and, together with the Owned Properties and Equity
Properties, the "AIMCO Properties"), bringing the total managed portfolio to
200,540 units in 1,043 apartment properties. The apartment properties are
located in 42 states, the District of Columbia and Puerto Rico.
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NOTE 2 - BASIS OF PRESENTATION
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Partnership and Partnership subsidiaries and limited partnerships in which the
Partnership has a controlling financial interest. Interests held by limited
partners in real estate partnerships controlled by the Partnership are reflected
as Minority Interests.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Investments in Unconsolidated Subsidiaries
The Partnership has investments in numerous subsidiaries. Investments in
entities in which the Partnership does not have control are accounted for under
the equity method. Under the equity method, the Partnership's pro-rata share of
the earnings or losses of the entity for the periods being presented is included
in equity in earnings from unconsolidated subsidiaries.
Investments in and Notes Receivable from Real Estate Partnerships
The Company owns general and limited partnership interests in numerous
partnerships that own multi-family apartment properties. Investments in real
estate partnerships in which the Company does not have control are accounted for
under the equity method. Under the equity method, the Company's pro-rata share
of the earnings or losses of the entity for the periods being presented is
included in equity in losses of unconsolidated partnerships.
Redeemable Partnership Units
The Partnership accounts for the outstanding common units not held by AIMCO as
redeemable partnership units. These units are classified outside of permanent
partners' capital in the accompanying balance sheet. The units are initially
recorded at their fair value and subsequently adjusted based on the fair value
at the balance sheet date as measured by the closing price of AIMCO's common
stock on that date by the total number of units outstanding.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), which provides guidance with respect to the calculation and presentation
of comprehensive income. Comprehensive income includes all transactions
affecting partners' capital, including the traditional measure of net income,
and excluding contributions from and distributions to OP Unitholders. Under SFAS
130, companies are required to present comprehensive income and its components
on the face of the income statement and as a component of partners' capital on
the face of the balance sheet. As required, the Partnership adopted SFAS 130 as
of January 1, 1998 and restated the components of partners' capital for prior
periods.
Interim Information
The accompanying unaudited consolidated financial statements of the Partnership
as of September 30, 1998 and for the three and nine months ended September 30,
1998 and 1997 have been prepared in accordance with generally accepted
accounting principles for interim financial information. 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
management, all adjustments considered necessary for a fair presentation have
been included and all such adjustments are of a recurring nature.
The consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 1997 included in the Registration Statement on Form 10/A. It should
be understood that accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. The results of operations for
the interim periods presented are not necessarily indicative of the results for
the entire year.
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Reclassification
Certain reclassifications have been made to prior period financial statements to
conform to the current period presentation.
NOTE 3 - REAL ESTATE
In May 1998, AIMCO acquired, through a merger, Ambassador Apartments, Inc.
("Ambassador"), resulting in the issuance of up to 6,578,833 shares of Class A
Common Stock. Ambassador owned 52 apartment communities with a total of 15,728
units located in Arizona, Colorado, Florida, Georgia, Illinois, Tennessee and
Texas, and managed one property containing 252 units for an unrelated third
party. AIMCO contributed the assets and liabilities of Ambassador to the
Partnership in exchange for 6,578,833 OP Units.
In addition to the merger with Ambassador, during the nine months ended
September 30, 1998, the Partnership purchased 19 apartment communities
containing 4,273 apartment units, as described below:
<TABLE>
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DATE NUMBER
ACQUIRED PROPERTY LOCATION OF UNITS
--------- ------------------ --------------------- ----------
<S> <C> <C> <C>
1/98 Crossings at Bell Amarillo, TX 160
2/98 Steeplechase Tyler, TX 484
3/98 Casa Anita Phoenix, AZ 224
3/98 San Marina Phoenix, AZ 399
3/98 Cobble Creek Tucson, AZ 301
3/98 Rio Cancion Tucson, AZ 379
3/98 Sundown Village Tucson, AZ 330
4/98 Arbor Station Montgomery, AL 264
4/98 Heather Ridge Arlington, TX 72
5/98 Landmark Albuquerque, NM 101
6/98 Citrus Grove Redlands, CA 198
6/98 Villa La Paz Sun City, CA 96
7/98 Sunset Village Oceanside,CA 114
7/98 Sunset Citrus Vista, CA 97
7/98 Rancho Escondido Escondido, CA 334
8/98 Atrium Plantation, FL 210
8/98 Colony Bradenton, FL 166
9/98 Fisherman's Landing Hillsborough County, FL 256
9/98 Sun Lake Brandon, FL 88
------
4,273
======
</TABLE>
The aggregate consideration paid by the Partnership of $886.1 million (including
Ambassador) consisted of $153.2 million in cash, 867,751 OP Units to limited
partners valued at $29.3 million, 6,578,833 OP Units to the Special Limited
Partners valued at $251.3 million and the assumption of $452.3 million of
secured long-term indebtedness. The cash portions of the acquisitions were
funded with borrowings under the Partnership's revolving credit facilities.
During the nine months ended September 30, 1998, the Partnership sold two
apartment communities containing an aggregate of 702 apartment units for
aggregate sales price of $18.3 million, less selling costs of $0.3 million. The
Partnership recognized aggregate gains of $3.4 million on the sales. The
Partnership used the cash proceeds to pay down a portion of the outstanding
balance on the BOA Credit Facility (as defined in Note 9) and to pay closing
costs.
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As of September 30, 1998, the Partnership's management has indicated its intent
to sell six properties. Accordingly, these properties have been reclassified
from real estate to property held for sale on the consolidated balance sheet.
NOTE 4 - INTEREST RATE LOCK AGREEMENTS
From time to time, the Partnership enters into interest rate lock agreements
with major investment banking firms, in anticipation of refinancing debt.
Interest rate lock agreements related to planned refinancing of identified
variable rate indebtedness are accounted for as anticipatory hedges. Upon the
refinancing of such indebtedness, any gain or loss associated with the
termination of the interest rate lock agreement is deferred and recognized over
the life of the refinanced indebtedness. In order for the interest rate lock to
qualify as an anticipatory hedge, the following criteria must be met: (a) the
refinance being hedged exposes the Partnership to interest rate risk; (b) the
interest rate lock is designated as a hedge; (c) the significant characteristics
and expected terms of the refinance are identified; and (d) it is probable that
the refinance will occur. The Partnership believes that all four of the above
qualifications have been met for interest rate lock agreements previously
entered into. In the event that any of the above qualifications are not met, the
interest rate lock agreement will not qualify as an anticipatory hedge, and any
gain or loss realized on the interest rate lock agreement will be recognized in
the current period's earnings.
NOTE 5 - COMMITMENTS
High Performance Units
In January 1998, the Partnership sold 15,000 Class I High Performance
Partnership Units (the "High Performance Units") to a partnership owned by
fourteen members of AIMCO's senior management, and to three of its independent
directors for $2.1 million in cash. The High Performance Units have nominal
value unless the total return of AIMCO's Class A Common Stock (defined as
dividend income plus share price appreciation), over the three year period
ending December 31, 2000, is at least 30% and exceeds the industry average, as
determined by a peer group index, by at least 15% (the "Total Return"). At the
conclusion of the three year period, if the Total Return of AIMCO's Class A
Common Stock satisfies these criteria, the holders of the High Performance Units
will receive distributions and allocations of income and loss from the
Partnership in the same amounts and at the same times as would holders of a
number of OP Units equal to the quotient obtained by dividing (i) the product of
(a) 15% of the amount by which the Total Return of AIMCO's Class A Common Stock
over the three year period exceeds the greater of 115% of a peer group index or
30% (such excess being the "Excess Return"), multiplied by (b) the weighted
average market value of the Partnership's outstanding OP Units, by (ii) the
market value of one share of Class A Common Stock at the end of the three year
period. The three-year measurement period will be shortened in the event of a
change of control of the Company. Unlike OP Units, the High Performance Units
are not redeemable or convertible into Class A Common Stock, unless a change of
control of the Company occurs. Because there is substantial uncertainty that the
High Performance Units will have more than nominal value due to the required
Total Return over the three-year term, the Partnership has not recorded any
value to the High Performance Units. If the measurement period had ended
September 30, 1998, the Excess Return would have been $16.5 million and the
value of the High Performance Units would have been $2.5 million, and such High
Performance Units would have had no dilutive effect on net income per unit.
12
<PAGE> 13
NOTE 6 - PARTNERS' CAPITAL
Issuance of Preferred Units
During 1998, AIMCO issued the following:
<TABLE>
<CAPTION>
NET OPTION OF ANNUAL LIQUIDATION
SHARES PROCEEDS REDEEM- DISTRIBUTION PREFERENCE
DATES ISSUED (MILLIONS) ABLE ON RATE RATE
--------- --------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Class D Feb., Feb.,
Preferred Stock 1998 4,200,000 $ 101.5 2003 $ 2.1875 $25 per unit
Class G Jul., Jul.,
Preferred Stock 1998 4,050,000 $ 98.0 2008 $ 2.34375 $25 per unit
Class H Aug., Aug.,
Preferred Stock 1998 2,000,000 $ 48.1 2003 $ 2.375 $25 per unit
</TABLE>
The proceeds were contributed by AIMCO to the Partnership and the Partnership
issued to AIMCO the same number of economically equivalent Class D, G and H
Preferred Units. On or after the above listed redemption dates, AIMCO may redeem
shares of Class D, G or H Preferred Stock, in whole or in part, at a cash
redemption price equal to 100% of the above listed Class D, G and H Liquidation
Preferences plus all accrued and unpaid distributions to the date fixed for
redemption. Upon any such redemption, an equivalent number of Class D, G and H
Preferred Units shall be redeemed.
During the nine months ended September 30, 1998, AIMCO sold 442,126 shares of
Class A Common Stock to certain members of AIMCO's management, at an average
price of $36.90 per share. In payment for the stock, such members of management
executed notes payable to AIMCO totaling $16.3 million, which bear interest at a
fixed rate of 7.0% per annum, payable quarterly, and are due in ten years. The
notes are secured by the stock purchased and are recourse as to 25% of the
original amount borrowed. The notes receivable were contributed by AIMCO to the
Partnership in exchange for 442,126 OP Units. During the nine months ended
September 30, 1998, the Partnership received payments on notes payable from
AIMCO's management of $8.1 million.
Warrants
On December 2, 1997, AIMCO issued warrants (the "Oxford Warrants") exercisable
to purchase up to an aggregate of 500,000 shares of Class A Common Stock at $41
per unit. The Oxford Warrants were issued to affiliates of Oxford Realty
Financial Group, Inc., a Maryland corporation ("Oxford"), in connection with the
amendment of certain agreements pursuant to which the Partnership manages
properties controlled by Oxford or its affiliates. The actual number of shares
of Class A Common Stock for which the Oxford Warrants will be exercisable is
based on certain performance criteria with respect to the Company's management
arrangement with Oxford for each of the five years ending December 31, 2001. The
Oxford Warrants are exercisable for six years after the determination of such
criteria for each of the five years. The Oxford Warrants were valued at $1.2
million using the "Black-Scholes" model, which was additional consideration paid
to acquire the property management contracts related to the properties
controlled by Oxford or its affiliates. The Oxford Warrants were issued in a
private transaction exempt from registration under the Securities Act pursuant
to Section 4(2).
Unit Repurchases
During the nine months ended September 30, 1998, the Partnership repurchased
299,600 OP Units from AIMCO and, in turn, AIMCO repurchased 299,600 shares of
Class A Common Stock on the open market for $11.0 million, or an average price
of $36.68 per share.
13
<PAGE> 14
NOTE 7 - EARNINGS PER OP UNIT
The following table illustrates the calculation of basic and diluted earnings
per OP Unit for the three and nine months ended September 30, 1998 and 1997 (in
thousands, except per unit data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997
------------------ ------------------
<S> <C> <C>
Numerator:
Net income $ 17,745 $ 7,963
Preferred unit distributions (7,670) (835)
---------- ----------
Numerator for basic and diluted earnings per OP Unit -
Income attributable to OP Unitholders $ 10,075 $ 7,128
========== ==========
Denominator:
Denominator for basic earnings per OP Unit - weighted
Average number of shares of OP Units outstanding 52,896 27,969
Effect of dilutive securities 627 185
---------- ----------
Denominator for dilutive earnings per OP Unit 53,523 28,154
========== ==========
Basic earnings per common OP Unit:
Operations $ 0.18 $ 0.26
Gain on disposition of properties 0.01 (0.01)
Extraordinary item -- --
---------- ----------
Total $ 0.19 $ 0.25
========== ==========
Diluted earnings per OP Unit:
Operations $ 0.18 $ 0.26
Gain on disposition of properties 0.01 (0.01)
Extraordinary item -- --
---------- ----------
Total $ 0.19 $ 0.25
========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997
----------------- -----------------
<S> <C> <C>
Numerator:
Net income $ 56,269 $ 19,427
Preferred Unit distributions (16,320) (835)
---------- ----------
Numerator for basic and diluted earnings per OP Unit
Income attributable to OP Unitholders $ 39,949 $ 18,592
========== ==========
Denominator:
Denominator for basic earnings per OP Unit - weighted
Average number of OP Units outstanding 50,420 23,648
Effect of dilutive securities 124 666
---------- ----------
Denominator for dilutive earnings per OP Unit 50,544 24,314
========== ==========
Basic earnings per OP Unit:
Operations $ 0.74 $ 0.79
Gain on disposition of properties 0.06 (0.01)
Extraordinary item -- (0.01)
---------- ----------
Total $ 0.80 $ 0.77
========== ==========
Diluted earnings per OP Unit:
Operations $ 0.73 $ 0.79
Gain on disposition of properties 0.06 (0.01)
Extraordinary item -- (0.01)
---------- ----------
Total $ 0.79 $ 0.77
========== ==========
</TABLE>
14
<PAGE> 15
NOTE 8 - PRO FORMA FINANCIAL STATEMENTS
During the nine months ended September 30, 1998, the Company purchased
Ambassador. During the nine months ended September 30, 1997, the Company
purchased the NHP Real Estate Companies and, through an unconsolidated
subsidiary, purchased a 53.3% interest in NHP Incorporated ("NHP"). The
following unaudited Pro Forma Consolidated Statements of Operations for the nine
months ended September 30, 1998 and 1997, have been prepared as if the above
described transactions had occurred at the beginning of the period being
reported on. The following Pro Forma Financial Information is based, in part, on
the following historical financial statements: (i) the unaudited financial data
of the Company for the nine months ended September 30, 1998 and 1997; (ii) the
unaudited Consolidated Financial Statements of Ambassador for the four months
ended April 30, 1998 and the nine months ended September 30, 1997; (iii) the
unaudited Consolidated Financial Statements of NHP for the nine months ended
September 30, 1997 (which have been restated to reflect NHP's subsidiary, WMF
Group Ltd., as a discontinued operation), and (iv) the unaudited Combined
Financial Statements of the NHP Real Estate Companies for the five months ended
May 31, 1997.
The pro forma financial statements are not necessarily indicative of what the
Company's results of operations would have been assuming the completion of the
described transactions at the beginning of the periods indicated, nor does it
purport to project the Company's results of operations for any future period.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Unit Data)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE FOR THS NINE
MONTHS ENDED MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997
-------------- --------------
<S> <C> <C>
Rental property operations $ 109,315 $ 74,988
Partnerships share of income from service
company business 5,668 1,999
Net income $ 59,942 $ 17,500
========= =========
Net income attributable to Preferred Unitholders $ 16,320 $ 835
========= =========
Net income attributable to OP Unitholders $ 43,622 $ 16,665
========= =========
Basic earnings per OP Unit $ 0.79 $ 0.53
========= =========
Diluted earnings per OP Unit $ 0.79 $ 0.53
========= =========
Weighted average OP Units outstanding 55,036 31,223
========= =========
Weighted average OP Units and OP Unit equivalents
Outstanding 55,250 31,889
========= =========
</TABLE>
15
<PAGE> 16
NOTE 9 - SUBSEQUENT EVENTS
Insignia Merger
On October 1, 1998, AIMCO, through a merger, acquired all of the multifamily
business of Insignia Financial Group, Inc., a Delaware corporation ("Insignia")
(the "Insignia Merger"). As merger consideration, AIMCO issued to former
Insignia stockholders 8.4 million shares of its Class E Cumulative Convertible
Preferred Stock (the "Class E Preferred Stock") and reserved an additional 0.5
million shares for options and warrants, in the aggregate. In addition,
approximately $531 million in outstanding debt and other liabilities of Insignia
and its subsidiaries became obligations of AIMCO and its subsidiaries. AIMCO
contributed the substantial majority of the assets and liabilities acquired in
the Insignia Merger to the Partnership in exchange for 8.4 million Class E
Preferred Units, which are the substantial economic equivalent of Class E
Preferred stock.
Holders of Class E Preferred Stock, which have the same rights as holders of
Class E Preferred Units, will be entitled to receive the same cash dividends per
share as holders of Class A Common Stock. In addition, holders of Class E
Preferred Stock, on the record date for payment to be set by AIMCO's board of
directors, will be entitled to receive a special distribution in an aggregate
amount of $50 million (the "Special Dividend"). After January 15, 1999, if any
portion of the Special Dividend or any other dividend has yet to be declared and
paid to the holders of Class E Preferred Stock, no dividends may be declared or
paid or set apart for payment by AIMCO on the Class A Common Stock.
On the close of business on the day on which the Special Dividend (or any
remaining unpaid portion thereof) is paid to the holders of the Class E
Preferred Stock, each share of Class E Preferred Stock will be automatically
converted into one share of Class A Common Stock without any action on the part
of AIMCO or the holders of such share of Class E Preferred Stock (the
"Conversion Date"). If AIMCO at any time following the consummation of the
Insignia Merger pays a dividend or makes a distribution, subdivides, combines,
reclassifies, issues rights, options or warrants or makes any other distribution
in securities in relation to its outstanding Class A Common Stock, then AIMCO
will contemporaneously do the same with respect to the Class E Preferred Stock.
In addition to the issuance of the Class E Preferred Stock, on October 1, 1998,
the Company entered into a $300 million senior unsecured interim term loan
agreement with an affiliate of Lehman Brothers, Inc. (the "Interim Term Loan
Agreement"). The term loan matures in one year and bears interest at a rate per
annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the
Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective
Rate in effect on such day plus 1/2 of 1%. The Company used the proceeds to
refinance existing indebtedness outstanding of Insignia at the time of the
merger.
IPT Merger Agreement
As a result of the Insignia Merger and contributions by AIMCO, the Partnership
currently owns approximately 30% of the outstanding units of partnership
interest of Insignia Properties, L.P., a Delaware limited partnership ("IPLP").
In addition, AIMCO owns approximately 51% of the outstanding shares of
beneficial interest of Insignia Properties Trust, a Maryland REIT ("IPT"). As of
September 30, 1998, IPLP primarily owns general and limited partnership
interests in real estate limited partnerships that own an aggregate of 339
Properties. AIMCO and IPT have entered into a merger agreement, dated as of
October 1, 1998 (the "IPT Merger Agreement"), pursuant to which IPT will merge
with AIMCO, or one of its subsidiaries (the "IPT Merger"). The IPT Merger is
expected to close in January 1999. As a result of the IPT Merger, AIMCO will
acquire the remaining approximately 70% interest in IPLP that is currently
owned by IPT. AIMCO will contribute the 70% interest in IPLP to the Partnership
in exchange for OP Units. Subsequent to the IPT Merger and contribution by
AIMCO, the Partnership will own 100% of IPLP.
Issuance of Units
In November 1998, AIMCO issued 1,000,000 shares of Class J Cumulative
Convertible Preferred Stock, par value $0.01 per share ("Class J Preferred
Stock") in a private placement for $100.0 million. AIMCO contributed the
proceeds to the Partnership in exchange for 1,000,000 Class J Cumulative
Convertible Preferred Units (the "Class J Preferred Units"). In addition, the
Partnership purchased 250,000 shares of Class J Preferred Stock from AIMCO in
16
<PAGE> 17
exchange for a note payable of $25 million and issued an additional 250,000
Class J Preferred units to AIMCO. The holders of Class J Preferred Stock shall
be entitled to receive, when and as declared by the AIMCO board of directors,
dividends equal to (i) 7% per annum of the per share Liquidation Preference for
the period beginning on and including the Issue Date and lasting until November
15, 1998; (ii) 8% per annum of the per share Liquidation Preference for the
period beginning on and including November 15, 1998 and lasting until November
15, 1999; (iii) 9% per annum of the per share Liquidation Preference for the
period beginning on and including November 15, 1999 and lasting until November
15, 2000; (iv) 9.5% per annum of the per share Liquidation Preference
thereafter. Such dividends shall be cumulative from the Issue Date, whether or
not in any Dividend Period or Periods such dividends shall be declared or there
shall be funds of the Company legally available for the payment of such
dividends. AIMCO may convert any or all of the Class J Preferred Stock into
Class A Common Stock at a conversion price of $40 (equivalent to a conversion
rate of 2.5 shares of Class A Common Stock for each share of Class J Preferred
Stock) (a) after November 6, 2002, if the market price of the Class A Common
Stock in the five most recent Trading Days is equal to or greater than $40 or;
(b) at any time on or prior to November 6, 2002, if the Internal Rate of Return
exceeds 12.5%.
Purchase of Properties:
Subsequent to September 30, 1998, the Partnership purchased one multifamily
property with a total of 219 units for total consideration of $8.1 million,
consisting of $8.1 million in cash. The multifamily property is located in
Arizona.
Distribution Declared
On October 22, 1998, the AIMCO-GP, Inc. board of directors and AIMCO, as the
General Partner, declared a cash distribution of $0.5625 per unit of OP Unit for
the quarter ended September 30, 1998, payable on November 13, 1998 to OP
Unitholders of record on November 6, 1998.
The AIMCO-GP, Inc. board of directors and AIMCO, as the General Partner, also
declared a cash distribution of $0.225 per unit on the Class E Preferred Units
for the period from October 1, 1998 through November 6, 1998, the record date
for the Class E Preferred Unit. The distribution was paid on November 13, 1998.
Revised Debt Agreement
On October 1, 1998, the Company amended and restated its credit agreement with
Bank of America National Trust and Savings Association ("Bank of America") and
BankBoston, N.A. The credit agreement was further amended on November 6, 1998
(the "First Amendment"). The credit agreement now provides a revolving credit
facility of up to $100 million, including a swing line of up to $30 million
(collectively with the First Amendment, the "BOA Credit Facility").
The Partnership is the borrower under the BOA Credit Facility, but all
obligations thereunder are guaranteed by AIMCO and certain subsidiaries. The
annual interest rate under the BOA Credit Facility is based on either LIBOR or a
base rate which is the higher of Bank of America's reference rate or 0.5% over
the federal funds rate, plus, in either case, an applicable margin. The margin
ranges between 1.25% and 2.0% in the case of LIBOR-based loans, and between
negative 0.25% and positive 0.5% in the case of base rate loans, depending upon
a ratio of the Company's consolidated unsecured indebtedness to the value of
certain unencumbered assets. The BOA Credit Facility matures on September 30,
1999 unless extended, at the discretion of the lenders. The BOA Credit Facility
provides for the conversion of the revolving facility into a three-year term
loan. The availability of funds to the Company under the BOA Credit Facility is
subject to certain borrowing base restrictions and other customary restrictions,
including compliance with financial and other covenants thereunder. The
financial covenants contained in the BOA Credit Facility require the Company to
maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, an
interest coverage ratio of 2.25 to 1.0 and a fixed charge coverage ratio of at
least 1.6 to 1.0 through December 31, 1998, 1.7 to 1.0 from January 1, 1999
through June 30, 1999, and 1.8 to 1.0 thereafter. In addition, the BOA Credit
Facility limits the Company from distributing more than 80% of its Funds From
Operations (as defined) (or such amounts as may be necessary for AIMCO to
maintain its status as a REIT) to holders of OP Units, imposes minimum net worth
requirements and provides other financial covenants related to certain
unencumbered assets.
17
<PAGE> 18
AIMCO PROPERTIES, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
As of September 30, 1998, the Company owned or controlled 57,561 units in 207
apartment properties (the "Owned Properties"), held an equal interest in 75,050
units in 481 apartment properties (the "Equity Properties") and managed 67,929
units in 355 apartment properties for third party owners and affiliates (the
"Managed Properties" and, together with the Owned Properties and Equity
Properties, the "AIMCO Properties"), bringing the total managed portfolio to
200,540 units in 1,043 apartment properties. The apartment communities are
located in 42 states, the District of Columbia and Puerto Rico.
The following discussion contains forward-looking statements that are subject to
significant risks and uncertainties. There are several important factors that
could cause actual results to differ materially from the results anticipated by
the forward-looking statements contained in the following discussion. Such
factors and risks include, but are not limited to: financing risks, including
the risk that the Partnership's cash flow from operations may be insufficient to
meet required payments of principal and interest on its debt; real estate risks,
including variations of real estate values and the general economic climate in
local markets and competition for tenants in such markets; acquisition and
development risks, including the failure of acquisitions to perform in
accordance with projections; and possible environmental liabilities, including
costs which may be incurred due to necessary remediation of contamination of
properties presently owned or previously owned by the Partnership. Readers
should carefully review the financial statements and the notes thereto, as well
as the risk factors described in documents the Partnership files from time to
time with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
NET INCOME
The Company recognized net income of $51.8 million for the nine months ended
September 30, 1998, compared to $16.8 million for the nine months ended
September 30, 1997. The increase in net income of $35.0 million, or 208%, was
primarily the result of a significant increase in the number of owned properties
and a significant increase in investments in unconsolidated subsidiaries and
real estate partnerships during 1997 (the "1997 Acquisitions"), and the
acquisition of Ambassador and the purchase of nineteen properties during the
first nine months of 1998 (the "1998 Acquisitions"). The increase in net income
was partially offset by the sale of five properties in 1997 (the "1997 Sold
Properties") and two properties in 1998 (the "1998 Sold Properties"), increased
real estate depreciation, increased goodwill amortization and increased interest
expense associated with indebtedness which was assumed or incurred in connection
with the acquisitions described above. These factors are discussed in more
detail in the following paragraphs.
RENTAL PROPERTY OPERATIONS
Rental and other property revenues from the Owned Properties totaled $265.7
million for the nine months ended September 30, 1998, compared to $127.1 million
for the nine months ended September 30, 1997, an increase of $138.6 million, or
109%. Rental and other property revenues consisted of the following (dollars in
thousands):
18
<PAGE> 19
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997
----------------- -----------------
<S> <C> <C>
"Same store" properties $ 105,076 $ 100,670
1997 Acquisitions 101,034 15,299
1998 Acquisitions 53,314 --
1997 Sold Properties -- 2,491
1998 Sold Properties 952 2,497
Properties in lease-up after the completion
of an expansion or renovation 5,324 6,126
--------- ---------
Total $ 265,700 $ 127,083
========= =========
</TABLE>
Property operating expenses, consisting of on-site payroll costs, utilities (net
of reimbursements received from tenants), contract services, turnover costs,
repairs and maintenance, advertising and marketing, property taxes and
insurance, totaled $101.6 million for the nine months ended September 30, 1998,
compared to $50.7 million for the nine months ended September 30, 1997, an
increase of $50.9 million or 100%. Operating expenses consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997
----------------- -----------------
<S> <C> <C>
"Same store" properties $ 43,359 $ 44,887
1997 Acquisitions 39,420 1,486
1998 Acquisitions 16,381 --
1997 Sold Properties -- 1,154
1998 Sold Properties 500 1,101
Properties in lease-up after the completion
of an expansion or renovation 1,940 2,109
--------- --------
Total $ 101,600 $ 50,737
========= ========
</TABLE>
Owned property management expenses, representing the costs of managing
the Owned Properties, totaled $7.7 million for the nine months ended
September 30, 1998, compared to $4.3 million for the nine months ended
September 30, 1997, an increase of $3.4 million, or 79%. The increase
resulted from the acquisition of properties in 1997 and 1998.
SERVICE COMPANY BUSINESS
The Company's share of income from the service company business was
$5.7 million for the nine months ended September 30, 1998, compared to
$3.5 million for the nine months ended September 30, 1997. The increase
in service company business income of $2.2 million was due to increased
management and other fees from the acquisition of partnership interests
and properties, and the acquisition of a captive insurance subsidiary
in connection with the acquisition of the NHP Real Estate Companies in
June 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $1.4 million for the
nine months ended September 30, 1997 to $7.4 million for the nine
months ended September 30, 1998, a 429% increase. The increase is
primarily due to additional corporate costs and additional employee
salaries associated with the purchase of NHP Real Estate Companies in
June 1997 and the merger with Ambassador in May 1998. In addition, due
to the growth of the Company, several new departments have been added
including legal, tax and tender coordination, as well as increased
levels of personnel in the accounting and finance departments.
19
<PAGE> 20
INTEREST EXPENSE
Interest expense, which includes the amortization of deferred financing costs,
totaled $56.8 million for the nine months ended September 30, 1998, compared to
$33.4 million for the nine months ended September 30, 1997, an increase of $23.4
million, or 70%. The increase consists of the following (dollars in thousands):
<TABLE>
<S> <C>
Interest expense on secured short-term and long-term
indebtedness incurred in connection with the 1997
Acquisitions $ 15,951
Interest expense on secured and unsecured short-term and
long-term indebtedness incurred in connection with the 1998
Acquisitions 7,073
Increase in interest expense on the Company's other
Indebtedness 373
--------
Total increase $ 23,397
========
</TABLE>
INTEREST INCOME
Interest income totaled $18.2 million for the nine months ended September 30,
1998, compared to $4.5 million for the nine months ended September 30, 1997. The
increase of $13.8 million is primarily due to interest earned on loans made by
the Company to partnerships in which the Company acts as the general partner.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
The Company recognized net income of $16.6 million for the three months ended
September 30, 1998, compared to $7.0 million for the three months ended
September 30, 1997. The increase in net income of $9.6 million, or 137%, was
primarily the result of the 1997 Acquisitions and the 1998 Acquisitions. The
increase in net income was partially offset by the 1997 Sold Properties and the
1998 Sold Properties, increased real estate depreciation, increased goodwill
amortization and increased interest expense associated with indebtedness which
was assumed or incurred in connection with the acquisitions described above.
These factors are discussed in more detail in the following paragraphs.
RENTAL PROPERTY OPERATIONS
Rental and other property revenues from the Owned Properties totaled $104.4
million for the three months ended September 30, 1998, compared to $47.4 million
for the three months ended September 30, 1997, an increase of $57.0 million, or
120%. Rental and other property revenues consisted of the following (dollars in
thousands):
20
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997
------------------ ------------------
<S> <C> <C>
"Same store" properties $ 35,302 $ 33,998
1997 Acquisitions 33,341 9,292
1998 Acquisitions 33,773 --
1997 Sold Properties -- 1,291
1998 Sold Properties 202 839
Properties in lease-up after the completion of an
expansion or renovation 1,818 1,944
-------- --------
Total $ 104,436 $ 47,364
======== ========
</TABLE>
Property operating expenses, consisting of on-site payroll costs, utilities (net
of reimbursements received from tenants), contract services, turnover costs,
repairs and maintenance, advertising and marketing, property taxes and
insurance, totaled $42.0 million for the three months ended September 30, 1998,
compared to $19.5 million for the three months ended September 30, 1997, an
increase of $22.5 million or 115%. Operating expenses consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997
------------------ ------------------
<S> <C> <C>
"Same store" properties $ 15,305 $ 15,824
1997 Acquisitions 13,979 2,043
1998 Acquisitions 11,842 --
1997 Sold Properties -- 602
1998 Sold Properties 126 401
Properties in lease-up after the completion of an
expansion or renovation 705 707
-------- --------
Total $ 41,957 $ 19,577
======== ========
</TABLE>
Owned property management expenses, representing the costs of managing the Owned
Properties, totaled $3.0 million for the three months ended September 30, 1998,
compared to $1.6 million for the three months ended September 30, 1997, an
increase of $1.4 million, or 88%. The increase resulted from the acquisition of
properties in 1997 and 1998.
SERVICE COMPANY BUSINESS
The Company's share of income from the service company business was $1.8 million
for the three months ended September 30, 1998, compared to $1.0 million for the
three months ended September 30, 1997. The increase in service company business
income of $0.8 million was due to increased management and other expenses from
the acquisition of partnership interests, and properties, and the acquisition of
a captive insurance subsidiary in connection with the acquisition of the NHP
Real Estate Companies in June 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $0.6 million for the three
months ended September 30, 1997 to $3.3 million for the three months ended
September 30, 1998, a 450% increase. The increase is primarily due to additional
corporate costs and additional employee salaries associated with the purchase of
NHP Real Estate Companies in June 1997 and the merger with Ambassador in May
1998. In addition, due to the growth of the Company, several new departments
have been added including legal, tax and tender coordination, as well as
increased levels of personnel in the accounting and finance departments.
21
<PAGE> 22
INTEREST EXPENSE
Interest expense, which includes the amortization of deferred financing costs,
totaled $22.0 million for the three months ended September 30, 1998, compared to
$12.8 million for the three months ended September 30, 1997, an increase of $9.2
million, or 72%. The increase consists of the following (dollars in thousands):
<TABLE>
<S> <C>
Interest expense on secured short-term and long-term
indebtedness incurred in connection with the 1997
Acquisitions $ 5,352
Interest expense on secured and unsecured short-term and
long-term indebtedness incurred in connection with the 1998
Acquisitions 3,593
Increase in interest expense on the Company's other
Indebtedness 278
-------
Total increase $ 9,223
=======
</TABLE>
INTEREST INCOME
Interest income totaled $6.9 million for the three months ended September 30,
1998, compared to $3.1 million for the three months ended September 30, 1997.
The increase of $3.8 million is primarily due to interest earned on loans made
by the Company to partnerships in which the Company acts as the general partner.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its short-term liquidity requirements, including
property acquisitions, tender offers, refinancing of short-term debt, funds
needed to purchase shares of Insignia under the Call Agreements, the merger with
IPT and funds needed for the Special Dividend, with long-term, fixed rate, fully
amortizing debt, secured or unsecured short-term indebtedness (including
indebtedness under the BOA Credit Facility, the WMF Credit Facility and the
Interim Term Loan Agreement), the issuance of debt securities, OP Units or
equity securities in public offerings or private placements, and cash generated
from operations. In April 1997, AIMCO filed a shelf registration statement with
the SEC that registered $1.0 billion of securities for sale on a delayed or
continuous basis. The shelf registration statement was declared effective in May
1997. As of September 30, 1998, the Company had issued common and preferred
stock thereunder and received gross proceeds of approximately $731.8 million.
At September 30, 1998, the Company had $43.7 million in cash and cash
equivalents. In addition, the Company had $83.2 million of restricted cash
primarily consisting of reserves and impounds held by lenders for capital
expenditures, property taxes and insurance. The Company's principal demands for
liquidity include normal operating activities, payments of principal and
interest on outstanding debt, capital improvements, acquisitions of or
investments in properties, and distributions paid to the partners. The Company
considers its cash provided by operating activities, and funds available under
its credit facilities, to be adequate to meet short-term liquidity demands. The
Company utilizes its revolving credit facilities for general corporate purposes
and to fund investments on an interim basis.
On October 1, 1998, the Company amended and restated its credit agreement with
Bank of America National Trust and Savings Association ("Bank of America") and
BankBoston, N.A. The credit agreement now provides a revolving credit facility
of up to $100 million, including a swing line of up to $30 million (the "BOA
Credit Facility"). The Company had outstanding borrowings under the BOA Credit
Facility of $50.8 million as of September 30, 1998 (See Note 9).
In February 1998, the Partnership, as borrower, and AIMCO and certain single
asset wholly owned subsidiaries of the Partnership (the "Owners"), as
guarantors, entered into a five-year, $50 million secured revolving credit
facility
22
<PAGE> 23
agreement (the "WMF Credit Facility") with Washington Mortgage Financial Group,
Ltd. ("Washington Mortgage"), which provides for the conversion of all or a
portion of such revolving credit facility to a term facility. The Company had
outstanding borrowings under the WMF Credit Facility of $50.0 million as of
September 30, 1998.
In October 1998, the Partnership and AIMCO entered into a $300 million Interim
Term Loan Agreement with an affiliate of Lehman Brothers, Inc. The term loan
matures in one year and bears interest at a rate per annum equal to the greatest
of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on
such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day
plus 1/2 of 1%. The Company is subject to certain customary restrictions,
including compliance with financial and other covenants thereunder. The Company
used the proceeds to refinance existing outstanding indebtedness of Insignia at
the time of the merger.
From time to time, the Company has offered to acquire and, in the future, may
offer to acquire the interests held by third party investors in certain limited
partnerships for which the Company acts as general partner. Any such
acquisitions will require funds to pay the purchase price for such interests.
Cash payments made in connection with such acquisitions totaled $27.0 million
for the nine months ended September 30, 1998.
In November 1998, the Company issued 1,000,000 shares of Class J Preferred Stock
in a private placement for $100.0 million. AIMCO contributed the proceeds to the
Partnership in exchange for 1,000,000 Class J Preferred Units. In addition, the
Partnership purchased 250,000 shares of Class J Preferred Stock from AIMCO in
exchange for a note payable of $25 million and issued an additional 250,000
Class J Preferred Units to AIMCO. The holders of Class J Preferred Stock shall
be entitled to receive, when and as declared by the AIMCO board of directors,
dividends equal to (i) 7% per annum of the per share Liquidation Preference for
the period beginning on and including the Issue Date and lasting until November
15, 1998; (ii) 8% per annum of the per share Liquidation Preference for the
period beginning on and including November 15, 1998 and lasting until November
15, 1999; (iii) 9% per annum of the per share Liquidation Preference for the
period beginning on and including November 15, 1999 and lasting until November
15, 2000; (iv) 9.5% per annum of the per share Liquidation Preference
thereafter. Such dividends shall be cumulative from the Issue Date, whether or
not in any Dividend Period or Periods such dividend shall be declared or there
shall be funds of the Company legally available for the payment of such
dividends. AIMCO may convert any or all of the Class J Preferred Stock into
Class A Common Stock at a conversion price of $40 (equivalent to a conversion
rate of 2.5 shares of Class A Common Stock for each share of Class J Preferred
Stock) (a) after November 6, 2002, if the market price of the Class A Common
Stock in the five most recent Trading Days is equal to or greater than $40 or;
(b) at any time on or prior to November 6, 2002, if the Internal Rate of Return
exceeds 12.5%.
CAPITAL EXPENDITURES
The Company expects to incur initial capital expenditures (spending to increase
a property's revenue potential including renovations, developments and
expansions) of approximately $71.4 million during the year ended December 31,
1998 on all Owned and Equity Properties. For the nine months ended September 30,
1998, the Company has spent $33.0 million for capital replacements and initial
capital expenditures. The Company reserves $300 per apartment unit per annum for
capital replacements, which totaled $10.9 million for the nine months ended
September 30, 1998. Initial capital expenditures and capital enhancements will
be funded with cash from operating activities and borrowings under the Company's
revolving credit facilities.
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<PAGE> 24
FUNDS FROM OPERATIONS
The Company measures its economic profitability based on Funds From Operations
("FFO"). The Company's management believes that FFO provides investors with an
understanding of the Company's ability to incur and service debt and make
capital expenditures. The Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT") defines FFO as net income (loss), computed
in accordance with generally accepted accounting principles ("GAAP"), excluding
gains and losses from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of financing
costs), and after adjustments for unconsolidated partnerships and joint
ventures. The Company calculates FFO in a manner consistent with the NAREIT
definition, which includes adjustments for amortization of management company
goodwill, the non-cash, deferred portion of the income tax provision for
unconsolidated subsidiaries and less the payment of distributions on Preferred
Units. FFO should not be considered as an alternative to net income or net cash
flows from operating activities, as calculated in accordance with GAAP, as an
indication of the Company's performance or as a measure of liquidity. FFO is not
necessarily indicative of cash available to fund future cash needs. In addition,
there can be no assurance that the Company's basis for computing FFO is
comparable with that of other real estate investment trusts.
THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
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<PAGE> 25
For the three and nine months ended September 30, 1998 and 1997, the Company's
FFO was as follows (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 1998 SEPT. 30, 1997 SEPT. 30, 1998 SEPT. 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 17,745 $ 7,963 $ 56,269 $ 19,427
Extraordinary item - early extinguishment of Debt -- -- -- 269
(Gain) losses on disposition of properties (257) 169 (2,783) 169
Real estate depreciation, net of minority
Interest in other partnerships 24,477 7,802 56,900 21,052
Amortization of goodwill 2,350 237 7,077 711
Equity in earnings of other partnerships:
Real estate depreciation 8,248 2,084 17,379 2,781
Equity in earnings of unconsolidated
Subsidiaries:
Real estate depreciation -- 1,426 -- 2,689
Deferred taxes 1,843 1,290 6,134 2,164
Amortization of recoverable amount of
Management contracts and goodwill 1,113 280 4,201 430
Preferred Unit distributions (6,285) -- (12,296) --
Funds From Operations (FFO) $ 49,234 $ 21,251 $ 132,881 $ 49,692
======== ======== ========= ========
Weighted average number of OP Units OP Unit
Equivalents, and Preferred Units
convertible to OP Units 55,986 29,679 53,007 24,347
======== ======== ========= ========
</TABLE>
For the nine months ended September 30, 1998 and 1997, net cash flows were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flow provided by operating activities $ 50,825 $ 53,435
Cash flow used in investing activities (185,453) (314,814)
Cash flow provided by financing activities 141,221 293,984
========== ==========
</TABLE>
CONTINGENCIES
HUD Approvals and Enforcement
A significant number of affordable units included in the AIMCO Properties are
subject to regulation by the U.S. Department of Housing and Urban Development
("HUD"). Under its regulations, HUD reserves the right approve the owner and the
manager of HUD-insured and HUD-assisted properties, as well as their
"principals" (e.g., general partners, stockholders with a 10% or greater
interest, officers and directors) in connection with the acquisition of a
property or the award of a management contract. This approval process is
commonly referred to as "2530 Clearance." HUD monitors the performance of
properties with HUD-insured mortgage loans. HUD also monitors compliance with
applicable regulations, and takes performance and compliance into account in
approving the acquisition and management of additional HUD-assisted properties.
In the event of instances of unsatisfactory performance or regulatory
violations, the HUD office with jurisdiction over the applicable property has
the authority to enter a "flag" into the computerized 2530 clearance system. If
one or more flags have been entered, a decision whether to grant 2530 clearance
is then subject to review by HUD's Multifamily Participation Review Committee in
Washington, D.C. (the "2530 Committee"). As a result of certain mortgage
defaults and unsatisfactory ratings received by NHP Incorporated (a company
acquired by AIMCO in December 1997) ("NHP") in years prior, HUD
25
<PAGE> 26
believes that the 2530 Committee must review any application for 2530 clearance
filed by the Company. As of September 30, 1998, one flag was in the 2530 system
with respect to the Company in connection with a subpoena received by NHP in
October 1997 from the Inspector General of HUD.
The Inspector General's subpoena requested documents relating to any arrangement
whereby NHP or any of its affiliates provides or has provided compensation to
owners of HUD multifamily projects in exchange for or in connection with
property management of a HUD project. The Company believes that other owners and
managers of HUD projects have received similar subpoenas. Documents relating to
certain of the Company's acquisitions of property management rights for HUD
projects, may be responsive to the subpoena. The Company is in the process of
complying with the subpoena and has provided certain documents to the Inspector
General, without conceding that they are responsive to the subpoena. The Company
believes that its operations are in compliance, in all material respects, with
all laws, rules and regulations relating to HUD-assisted or HUD-insured
properties. Effective February 13, 1998, counsel for the Company and the U.S.
Attorney for the Northern District of California entered into a tolling
agreement related to certain civil claims the government may have against the
Company. Although no action has been initiated against the Company or, to the
Company's knowledge, any owner of a HUD property managed by the Company, if any
such action is taken in the future, it could ultimately affect existing
arrangements with respect to HUD projects or otherwise have a material adverse
effect on the Company's results of operations.
HUD also has the authority to suspend or deny property owners and managers from
participation in HUD programs with respect to additional assistance within a
geographic region through imposition of a Limited Denial of Participation
("LDP") by any HUD office or nationwide for violations of HUD regulatory
requirements. In June 1997, the St. Louis HUD field office issued an LDP to NHP
as a result of a physical inspection and mortgage default at one property owned
and managed by NHP-related companies. Although the LDP expired by its terms in
June 1998, the Company entered into a settlement agreement with HUD which
includes aggregate payments to HUD of approximately $533,000 and resolution of
all issues involving four properties in the St. Louis metropolitan area. Because
an LDP is prospective, existing HUD agreements were not, and are not, affected.
The Company believes that the national office will continue to apply the
clearance process to large management portfolios such as the Company's with
discretion and flexibility. While there can be no assurance, the Company
believes that the unsatisfactory reviews and the mortgage defaults will not have
a material impact on its results of operations or financial condition. However,
on September 29, 1998, the 2530 Committee deferred action on three of the
Company's 2530 applications for up to 120 days pending receipt of further
information regarding the HUD Inspector General's inquiry with AIMCO regarding
past practices of NHP. If HUD were to disapprove the Company as property manager
for one or more affordable properties, the Company's ability to obtain property
management revenues from new affordable properties may be impaired.
Possible Environmental Liabilities
Under Federal, state and local environmental laws and regulations, a current or
previous owner or operator of real property may be required to investigate and
clean up a release of hazardous substances at such property, and may, under such
laws and common law, be held liable for property damage and other costs incurred
by third parties in connection with such releases. The liability under certain
of these laws has been interpreted to be joint and several unless the harm is
divisible or there is a reasonable basis for allocation of responsibility. The
failure to remediate the property properly may also adversely affect the owner's
ability to sell or rent the property or to borrow using the property as
collateral. In connection with its ownership, operation or management of the
AIMCO Properties, the Company could be potentially liable for environmental
liabilities or costs associated with its properties or properties it may in the
future acquire or manage.
Certain Federal, state and local laws and regulations govern the removal,
encapsulation or disturbance of asbestos-containing materials ("ACMs") when
those materials are in poor condition or in the event of building remodeling,
renovation or demolition; impose certain worker protection and notification
requirements and govern emissions of and exposure to asbestos fibers in the air.
These laws also impose liability for a release of ACMs and may enable third
parties to seek recovery from owners or operators of real properties for
personal injury associated with ACMs. In connection with the ownership,
operation or management of properties, the Company could be potentially liable
26
<PAGE> 27
for those costs. There are ACMs at certain of the Owned Properties, and there
may be ACMs at certain of the other AIMCO Properties. The Company has developed
and implemented operations and maintenance programs, as appropriate, that
establish operating procedures with respect to the ACMs at most of the Owned
Properties, and intends to develop and implement, as appropriate, such programs
at AIMCO Properties that do not have such programs.
Certain of the Company's Owned Properties, and some of the other AIMCO
Properties, are located on or near properties that contain or have contained
underground storage tanks or on which activities have occurred which could have
released hazardous substances into the soil or groundwater. There can be no
assurances that such hazardous substances have not been released or have not
migrated, or in the future will not be released or will not migrate, onto the
AIMCO Properties.
All of the Owned Properties were subject to Phase I or similar environmental
audits by independent environmental consultants prior to acquisition. The audits
did not reveal, nor is the Company aware of, any environmental liability
relating to such properties that would have a material adverse effect on the
Company's business, assets or results of operations. However, such audits
involve a number of judgments and it is possible that such audits did not reveal
all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. In addition, the Managed Properties
may not have been subject to Phase I or similar environmental audits by
independent environmental consultants. While the Company is not aware of any
environmental liability that it believes would have a material adverse effect on
its business, financial condition or results of operations relating to the
Managed Properties, for which audits are not available, there can be no
assurance that material environmental liabilities of which the Company is
unaware do not exist at such properties.
In October 1997, NHP received a letter ("the EPA Letter") from the U.S.
Department of Justice ("DOJ") which stated that the U.S. Environmental
Protections Agency ("EPA") has requested that the DOJ file a lawsuit against NHP
alleging, among other things, that NHP violated the Clean Air Act, the National
Recycling and Emissions Reduction Programs and associated regulations in
connection with the employment of certain unlicensed personnel, maintenance and
disposal of certain refrigerants, and record-keeping practices at two
properties. A settlement in principle between NHP and the EPA has been reached
whereby NHP agreed to pay a fine of less than $100,000, permit the EPA to audit
the maintenance records and technical staffing at 40 NHP properties and continue
to provide training to all maintenance workers with respect to the disposal of
refrigerants. A formal settlement agreement is expected to be executed in
December 1998. It is possible that the future EPA audits agreed to in the
settlement could result in additional allegations by EPA of violations at the
properties audited. However, based on the terms of the settlement in principle
with the EPA, the Company anticipates that the fines, if any, resulting from any
such violations will be nominal.
Uncertainties Regarding Status of Federal Subsidies
The Company owns and/or manages approximately 52,000 units that are subsidized
under Section 8 of the United States Housing Act of 1937, as amended ("Section
8"). These subsidies are generally provided pursuant to project-based Housing
Assistance Payment Contracts ("HAP Contracts") between HUD and the owners of the
properties or, with respect to a limited number of units managed by the Company,
pursuant to vouchers received by tenants. On October 27, 1997, the President of
the United States signed into law the Multifamily Assisted Housing Reform and
Affordability Act of 1997 (the "1997 Housing Act"). Under the 1997 Housing Act,
the mortgage financing and HAP Contracts of certain properties assisted under
Section 8, with rents above market levels and financed with HUD-insured mortgage
loans, will be restructured by reducing subsidized rents to market levels,
thereby reducing subsidy levels, and lowering required debt service payments as
needed to ensure financial viability at the reduced rents and subsidy levels.
The 1997 Housing Act retains project-based subsidies for most properties
(properties in rental markets with limited supply, properties serving the
elderly and certain other properties).
The 1997 Housing Act phases out project-based subsidies on selected properties
serving families not located in the rental markets with limited supply,
converting each such subsidy to a tenant-based subsidy. Under a tenant based
system, rent vouchers would be issued to qualified tenants who then could elect
to reside at a property of their choice, provided the tenant has the financial
ability to pay the difference between the selected property's monthly
27
<PAGE> 28
rent and the value of the voucher, which would be established based on HUD's
regulated fair market rent for the relevant geographical areas. The 1997 Housing
Act provides that properties will begin the restructuring process in Federal
fiscal year 1999 (beginning October 1, 1998), and that HUD will issue final
regulations implementing the 1997 Housing Act on or before October 27, 1998.
Congress has elected to renew HAP Contracts expiring before October 1, 1998 for
one-year terms, generally at existing rents, so long as the properties remain in
compliance with the HAP Contracts. While the Company does not expect the
provisions of the 1997 Housing Act to result in a significant number of tenants
relocating from properties managed by the Company, there can be no assurance
that the provisions will not significantly affect the Company's management
portfolio. Furthermore, there can be no assurance that other changes in Federal
housing subsidy will not occur. Any such changes could have an adverse effect on
the Company's property management revenues.
HIGH PERFORMANCE UNITS
In January 1998, the Partnership agreed to sell 15,000 Class I High Performance
Partnership Units (the "High Performance Units") to a partnership owned by
fourteen members of AIMCO's senior management, and to three of its independent
directors for $2.1 million in cash. The High Performance Units have nominal
value unless the total return of AIMCO's Class A Common Stock (defined as
dividend income plus share price appreciation), over the three year period
ending December 31, 2000, is at least 30% and exceeds the industry average, as
determined by a peer group index, by at least 15% (the "Total Return"). At the
conclusion of the three year period, if the Total Return of AIMCO's Class A
Common Stock satisfies these criteria, the holders of the High Performance Units
will receive distributions and allocations of income and loss from the
Partnership in the same amounts and at the same times as would holders of a
number of OP Units equal to the quotient obtained by dividing (i) the product of
(a) 15% of the amount by which the Total Return of AIMCO's Class A Common Stock
over the three year period exceeds the greater of 115% of a peer group index or
30% (such excess being the "Excess Return"), multiplied by (b) the weighted
average market value of the Partnership's outstanding OP Units, by (ii) the
market value of one share of Class A Common Stock at the end of the three year
period. The three-year measurement period will be shortened in the event of a
change of control of the Company. Unlike OP Units, the High Performance Units
are not redeemable or convertible into Class A Common Stock unless a change of
control of the Company occurs. Because there is substantial uncertainty that the
High Performance Units will have more than nominal value due to the required
Total Return over the three-year term, the Partnership has not recorded any
value to the High Performance Units. If the measurement period had ended
September 30, 1998, the Excess Return would have been $16.5 million and the
value of the High Performance Units would have been $2.5 million, and such High
Performance Units would have had no dilutive effect on net income per unit.
YEAR 2000 READINESS DISCLOSURE
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 digits to define the applicable year. Any of the
Company's 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.
Over the past twenty months, the Company 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
Company 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
Company.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all information systems that
28
<PAGE> 29
could be significantly affected by the Year 2000, and has begun the remediation,
testing and implementation phases on both hardware and software systems.
Assessments are continuing in regards to embedded systems. The status of each is
detailed below.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR
COMPLETION OF EACH REMAINING PHASE
Computer Hardware
During 1997, the Company identified all of the computer systems at risk and
formulated a plan to repair or replace each of the affected systems. The Company
has replaced its mainframe system, including the creation of new applications,
at a total cost of approximately $1.1 million. In August 1998, the Year-2000
compliant system became fully functional. In addition to the mainframe, PC-based
network servers and routers and desktop PCs were analyzed for compliance. The
Company has begun to replace each of the non-compliant network connections and
desktop PCs and, as of September 30, 1998, is approximately 85% complete with
this effort. The total cost to replace the PC-based network servers and routers
and desktop PCs is expected to be approximately $1.2 million, of which $886,000
has been incurred to date. The remaining network connections and desktop PCs are
expected to be upgraded to Year-2000 compliant systems by March 31, 1999.
Computer Software
As for software, the Company utilizes a combination of off-the-shelf
commercially available software programs as well as custom-written programs that
are designed to fit specific needs. Both of these types of programs were studied
and implementation plans written and executed with the intent of repairing or
replacing any non-compliant software programs.
In 1997, when the Company merged with NHP Incorporated, the core financial
system used by NHP was Year-2000 compliant. During 1998, the Company integrated
all of its core financial systems to this compliant system for general ledger
and financial reporting purposes. In 1997, the Company determined that the
software used for property management and rent collection was not Year-2000
compliant. During 1998, the Company has implemented a Year-2000 compliant system
at each of its property sites, including owned and managed, at a cost of
$700,000. Since then, the Company has acquired 75 properties and has also merged
with Insignia. Insignia owned or managed 140 properties. As properties are
acquired, the Company converts the existing property management and rent
collection systems to the Company's Year-2000 compliant systems. The estimated
additional costs to convert such systems at all recently acquired properties,
including those acquired in the merger with Insignia, is $200,000, and the
implementation and testing process is expected to be completed by March 31,
1999.
The final software area is the office software and server operating systems. The
Company has upgraded all non-compliant office software systems on each PC and
has upgraded 93% of the server operating systems. The remaining server operating
systems are planned to be upgraded to be Year-2000 compliant by December 1998.
Operating Equipment
The Company has operating equipment, primarily at the property sites, which
needed to be evaluated for Year-2000 compliance. In September 1997, the Company
began taking a census and inventorying embedded systems issues. At that time,
management chose to focus its attention mainly upon security systems, elevators,
heating-ventilation-air-conditioning systems (HVAC), telephone systems and
switches, and sprinkler systems. While this area is the most difficult to fully
research adequately, management has not yet found any major non-compliance
issues that put the Company at risk financially or operationally. We intend to
have a third-party conduct an audit of these systems and report their findings
by December 1998.
Any of the above operating equipment that has been found to be non-compliant to
date has been replaced or repaired. To date, these have consisted only of
security systems and phone systems. As of September 30, 1998, we have
29
<PAGE> 30
evaluated approximately 86% of the operating equipment for Year-2000 compliance.
The total cost incurred as of September 30, 1998 to replace or repair the
operating equipment was approximately $70,000. We estimate the cost to replace
or repair any remaining operating equipment is approximately $325,000, and we
expect to be completed by April 30th, 1999. We continue to have "awareness
campaigns" throughout the organization designed to raise awareness and report
any possible compliance issues regarding operating equipment within our
enterprise.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000
The Company is currently actively conducting surveys of its banking and vendor
relationships to assess risks regarding their Year-2000 readiness. The Company
has banking relationships with three major financial institutions, all of which
have indicated their compliance efforts will be complete before May 1999. The
Company has updated data transmission standards with two of the three financial
institutions. The Company's contingency plan in this regard is to move accounts
from any institution that cannot be certified 2000 compliant by June 1, 1999.
The Company does not rely heavily on any single vendor for goods and services
and does not have significant suppliers and subcontractors who share information
systems with the Company (external agents). To date, the Company is not aware of
any external agent with a Year 2000 issue that would materially impact the
Company's results of operations, liquidity, or capital resources. However, the
Company has no means of ensuring that external agents will be Year 2000 ready.
Management 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 Company.
However, the effect of non-compliance by external agents is not readily
determinable.
COSTS TO ADDRESS YEAR 2000
The total cost of the Year 2000 project is estimated at $3.4 million and is
being funded through operating cash flows. To date, the Company has incurred
approximately $2.8 million ($0.4 million expensed and $2.4 million capitalized
for new systems and equipment), related to all phases of the Year 2000 project.
Of the total remaining project costs, approximately $0.4 million is attributable
to the purchase of new software and operating equipment, which will be
capitalized. The remaining $0.2 million relates to repair of hardware and
software and will be expensed as incurred.
RISKS ASSOCIATED WITH THE YEAR 2000
Management believes it has an effective program in place to resolve the Year
2000 issue in a timely manner. As noted above, the Company has not yet completed
all necessary phases of the Year 2000 program. In the event that the Company
does not complete any additional phases, certain worst case scenarios could
occur. The worst case scenarios include elevators, security and HVAC systems
that read incorrect dates and operate with incorrect schedules (e.g., elevators
will operate on Monday as if it were Sunday). Although such a change is annoying
to residents, it is not business critical. In addition, disruptions in the
economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The Company could be subject to litigation for
computer systems failure, for example, equipment shutdown or failure to properly
date business records. The amount of potential liability and lost revenue cannot
be reasonably estimated at this time.
CONTINGENCY PLANS ASSOCIATED WITH THE YEAR 2000
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual workarounds and selecting new relationships for such activities
as banking relationships and elevator operating systems.
30
<PAGE> 31
INFLATION
Substantially all of the leases at the Company's apartment properties are for a
period of six months or less, allowing, at the time of renewal, for adjustments
in the rental rate and the opportunity to re-lease the apartment unit at the
prevailing market rate. The short-term nature of these leases generally serves
to minimize the risk to the Company of the adverse effect of inflation and the
Company does not believe that inflation has had a material adverse impact on its
revenues.
LITIGATION
In connection with the Company's offers to purchase interests in limited
partnerships that own properties, the Company and its affiliates are sometimes
subject to legal actions, including allegations that such activities may involve
breaches of fiduciary duties to the limited partners of such partnerships or
violations of the relevant partnership agreements. The Company believes it
complies with its fiduciary obligations and relevant partnership agreements, and
does not expect such legal actions to have a material adverse effect on the
consolidated financial condition or results of operations of the Company and its
subsidiaries taken as a whole. The Company may incur costs in connection with
the defense or settlement of such litigation, which could adversely affect the
Company's desire or ability to complete certain transactions and thereby have a
material adverse effect on the Company and its subsidiaries.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
31
<PAGE> 32
AIMCO PROPERTIES, L.P.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During 1998, AIMCO issued the following:
<TABLE>
<CAPTION>
NET OPT. ANNUAL LIQUIDATION
SHARES PROCEEDS REDEEM- DISTRIBUTION PREFERENCE
DATES ISSUED (MILLIONS) ABLE ON RATES RATE
----- ------ ---------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Class D Feb., Feb.,
Preferred Stock 1998 4,200,000 $ 101.5 2003 $ 2.1875 $25 per unit
Class G Jul., Jul.,
Preferred Stock 1998 4,050,000 $ 98.0 2008 $ 2.34375 $25 per unit
Class H Aug., Aug.,
Preferred Stock 1998 2,000,000 $ 48.1 2003 $ 2.375 $25 per unit
</TABLE>
The proceeds were contributed by AIMCO to the Partnership and the Partnership
issued to AIMCO the same number of economically equivalent Class D, G and H
Preferred Units. On or after the above listed redemption dates, AIMCO may redeem
shares of Class D, G or H Preferred Stock, in whole or in part, at a cash
redemption price equal to 100% of the above listed Class D, G and H Liquidation
Preferences plus all accrued and unpaid distributions to the date fixed for
redemption. Upon any such redemption, an equivalent number of Class D, G and H
Preferred Units shall be redeemed.
The Class G Preferred Units net proceeds of $98.0 million were used to repay
$83.0 million of outstanding indebtedness under the BOA Credit Facility, to fund
acquisitions and for general partnership purposes.
The Class H Preferred Units net (together with Class D Preferred Units and Class
G Preferred Units, "Class D, G and H Preferred Units"), proceeds of $48.1
million were used to repay indebtedness under the BOA Credit Facility.
The Class D, G and H Preferred Units (a) rank prior to OP Units and Class E
Preferred Units, and any other class or series of capital units of the
Partnership if the holders of the Classes D, G and H Preferred Units are to be
entitled to the receipt of distribution or of amounts distributable upon
liquidation, dissolution, and winding-up in preference or priority to the
holders of units of such class or series ("Class D, G and H Junior Units"), (b)
rank on parity with Class B Preferred Units, Class C Preferred Units, and Class
J Preferred Units and will rank on a parity with any other class or series of
capital unit of the Partnership if the holders of such class of units or series
and the Class D, G and H Preferred Units shall be entitled to the receipt of
distribution and of amounts distributable upon liquidation, dissolution or
winding up in proportion to their respective amounts of accrued and unpaid
distribution per unit or liquidation preferences, without preference or priority
one over the other ("Class D, G and H Parity Units") and (c) ranks junior to any
class or series of capital units of the Partnership if the holders of such class
or series shall be entitled to receipt of distributions or amounts distributable
upon liquidation, dissolution or winding up in preference or priority to the
holders of the Class D, G and H Preferred Units ("Class D, G and H Senior
Units").
32
<PAGE> 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with this report(1):
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of October 1, 1998, by and between Apartment
Investment and Management Company and Insignia Properties Trust (filed as Exhibit
2.1 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated
herein by reference)
10.1 Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of July 29, 1994, amended and restated as of October 1, 1998 (filed
as Exhibit 10.8 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1998 and incorporated herein by reference)
10.2 First Amendment to the Third Amended and Restated Agreement of Limited Partnership
of AIMCO Properties, L.P., dated as of November 6, 1998 (filed as Exhibit 10.9 to
AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1998 and incorporated herein by reference)
10.3 First Amended and Restated Contribution and Management Agreement, dated as of June
15, 1998, amended and restated as of October 1, 1998, by and between Apartment
Investment and Management Company and AIMCO Properties, L.P. (filed as Exhibit 10.2
to AIMCO Properties, L.P.'s Amendment No. 1 to Form 10, filed on October 16, 1998
and incorporated herein by reference)
10.4 Convertible Promissory Note, in the principal amount of $149,500,000 issued by AIMCO
Properties, L.P. to AIMCO-LP, Inc. (filed as Exhibit 10.3 to AIMCO Properties,
L.P.'s Amendment No. 1 to Form 10, filed on October 16, 1998 and incorporated herein
by reference)
10.5 Amended and Restated Credit Agreement (Unsecured Revolver-to-Term Facility), dated
as of October 1, 1998, by and among AIMCO Properties, L.P., Bank of America National
Trust and Savings Association and BankBoston, N.A. (filed as Exhibit 10.1 to AIMCO's
Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by
reference)
10.6 Promissory Note, dated as of October 1, 1998, in the principal amount of $65,000,000
issued by AIMCO Properties, L.P. to Bank of America National Trust and Savings
Association (filed as Exhibit 10.2 to AIMCO's Current Report on Form 8-K, dated
October 1, 1998 and incorporated herein by reference)
10.7 Promissory Note, dated as of October 1, 1998, in the principal amount of $35,000,000
issued by AIMCO Properties, L.P. to Bank of America National Trust and Savings
Association (filed as Exhibit 10.3 to AIMCO's Current Report on Form 8-K, dated
October 1, 1998 and incorporated herein by reference)
10.8 Swing Line Promissory Note, dated as of October 1, 1998, in the principal amount of
$30,000,000 issued by AIMCO Properties, L.P. to Bank of America National Trust and
Savings Association (filed as Exhibit 10.4 to AIMCO's Current Report on Form 8-K,
dated October 1, 1998 and incorporated herein by reference)
21.1 Subsidiaries of AIMCO Properties, L.P.(filed as Exhibit 21.1 to AIMCO Properties,
L.P.'s Form 10, filed on September 4, 1998 and incorporated herein by reference)
27.1 Financial Data Schedule
</TABLE>
(1) Schedules and supplemental materials to the exhibits have been omitted
but will be provided to the Securities and Exchange Commission upon
request.
(b) Reports on Form 8-K
None.
33
<PAGE> 34
AIMCO PROPERTIES, L.P.
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.
AIMCO PROPERTIES, L.P.
By: AIMCO-GP, Inc.
as General Partner
Date: December 2, 1998 /s/ Troy D. Butts
------------------------------------
Troy D. Butts
Senior Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
34
<PAGE> 35
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of October 1, 1998, by and between Apartment
Investment and Management Company and Insignia Properties Trust (filed as Exhibit
2.1 to AIMCO's Current Report on Form 8-K, dated October 1, 1998 and incorporated
herein by reference)
10.1 Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of July 29, 1994, amended and restated as of October 1, 1998 (filed
as Exhibit 10.8 to AIMCO's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1998 and incorporated herein by reference)
10.2 First Amendment to the Third Amended and Restated Agreement of Limited Partnership
of AIMCO Properties, L.P., dated as of November 6, 1998 (filed as Exhibit 10.9 to
AIMCO's Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1998 and incorporated herein by reference)
10.3 First Amended and Restated Contribution and Management Agreement, dated as of June
15, 1998, amended and restated as of October 1, 1998, by and between Apartment
Investment and Management Company and AIMCO Properties, L.P. (filed as Exhibit 10.2
to AIMCO Properties, L.P.'s Amendment No. 1 to Form 10, filed on October 16, 1998
and incorporated herein by reference)
10.4 Convertible Promissory Note, in the principal amount of $149,500,000 issued by AIMCO
Properties, L.P. to AIMCO-LP, Inc. (filed as Exhibit 10.3 to AIMCO Properties,
L.P.'s Amendment No. 1 to Form 10, filed on October 16, 1998 and incorporated herein
by reference)
10.5 Amended and Restated Credit Agreement (Unsecured Revolver-to-Term Facility), dated
as of October 1, 1998, by and among AIMCO Properties, L.P., Bank of America National
Trust and Savings Association and BankBoston, N.A. (filed as Exhibit 10.1 to AIMCO's
Current Report on Form 8-K, dated October 1, 1998 and incorporated herein by
reference)
10.6 Promissory Note, dated as of October 1, 1998, in the principal amount of $65,000,000
issued by AIMCO Properties, L.P. to Bank of America National Trust and Savings
Association (filed as Exhibit 10.2 to AIMCO's Current Report on Form 8-K, dated
October 1, 1998 and incorporated herein by reference)
10.7 Promissory Note, dated as of October 1, 1998, in the principal amount of $35,000,000
issued by AIMCO Properties, L.P. to Bank of America National Trust and Savings
Association (filed as Exhibit 10.3 to AIMCO's Current Report on Form 8-K, dated
October 1, 1998 and incorporated herein by reference)
10.8 Swing Line Promissory Note, dated as of October 1, 1998, in the principal amount of
$30,000,000 issued by AIMCO Properties, L.P. to Bank of America National Trust and
Savings Association (filed as Exhibit 10.4 to AIMCO's Current Report on Form 8-K,
dated October 1, 1998 and incorporated herein by reference)
21.1 Subsidiaries of AIMCO Properties, L.P.(filed as Exhibit 21.1 to AIMCO Properties,
L.P.'s Form 10, filed on September 4, 1998 and incorporated herein by reference)
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 43,681
<SECURITIES> 4,830
<RECEIVABLES> 11,545
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 138,413
<PP&E> 2,727,699
<DEPRECIATION> 330,365
<TOTAL-ASSETS> 3,121,949
<CURRENT-LIABILITIES> 131,799
<BONDS> 1,275,401
0
387,562
<COMMON> 1,039,526
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,121,949
<SALES> 0
<TOTAL-REVENUES> 279,668
<CGS> 0
<TOTAL-COSTS> 177,438
<OTHER-EXPENSES> 6,370
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,756
<INCOME-PRETAX> 56,269
<INCOME-TAX> 0
<INCOME-CONTINUING> 56,269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,269
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.79
</TABLE>
