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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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------------
COMMISSION FILE NUMBER 0-24497
---------------------
AIMCO PROPERTIES, L.P.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1275621
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1873 S. BELLAIRE STREET, SUITE 1700,
DENVER, COLORADO 80222-4348
(Address of principal executive offices) (Zip Code)
</TABLE>
(303) 757-8101
(Registrant's telephone number, including area code)
NOT APPLICABLE
(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 [X] No [ ]
The number of Partnership Common Units outstanding as of April 30, 1999:
67,648,677
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AIMCO PROPERTIES, L.P.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998....................................... 2
Consolidated Statements of Income for the Three Months Ended
March 31, 1999 and 1998 (unaudited)......................... 3
Consolidated Statements of Cash Flow for the Three Months
Ended March 31, 1999 and 1998 (unaudited)................... 4
Notes to Consolidated Financial Statements (unaudited)...... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 24
Item 6. Exhibits and Reports on Form 8-K............................ 24
Signatures............................................................... 26
</TABLE>
1
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AIMCO PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate, net of accumulated depreciation of $260,723 and
$228,155.................................................. $2,591,753 $2,515,710
Property held for sale...................................... 26,794 27,304
Investments in unconsolidated subsidiaries.................. 79,504 84,417
Investments in unconsolidated real estate partnerships...... 984,548 615,206
Notes receivable from unconsolidated real estate
partnerships.............................................. 104,844 103,979
Notes receivable from unconsolidated subsidiaries........... 115,386 114,000
IPLP exchange and assumption receivable..................... -- 346,352
Cash and cash equivalents................................... 38,561 52,832
Restricted cash............................................. 55,265 53,703
Notes receivable............................................ 22,241 --
Goodwill.................................................... 126,716 128,658
Other assets................................................ 146,319 144,603
---------- ----------
Total assets................................................ $4,291,931 $4,186,764
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Secured notes payable....................................... $1,081,235 $ 819,331
Secured tax-exempt bond financing........................... 403,360 394,077
Unsecured short-term financing.............................. 124,300 280,300
Secured short-term financing................................ -- 108,022
---------- ----------
Total indebtedness................................ 1,608,895 1,601,730
---------- ----------
Accounts payable, accrued and other liabilities............. 146,879 195,296
Resident security deposits and prepaid rents................ 13,404 12,654
---------- ----------
Total liabilities................................. 1,769,178 1,809,680
---------- ----------
Commitments and contingencies............................... --
Partnership-obligated mandatory redeemable convertible
preferred securities of a subsidiary trust................ 149,500 149,500
Minority interest........................................... 84,008 74,249
Partners' capital
Preferred Units........................................... 625,628 642,120
General Partner and Special Limited Partner............... 1,471,998 1,036,002
Limited Partners.......................................... 216,119 500,213
---------- ----------
2,313,745 2,178,335
Less: Investment in AIMCO Preferred Stock................... 24,500 25,000
---------- ----------
Total partners' capital........................... 2,289,245 2,153,335
---------- ----------
Total liabilities and partners' capital..................... $4,291,931 $4,186,764
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
RENTAL PROPERTY OPERATIONS
Rental and other property revenues.......................... $110,552 $ 71,336
Property operating expenses................................. (42,436) (26,309)
Owned property management expense........................... (3,395) (2,132)
Depreciation................................................ (26,616) (13,977)
-------- --------
Income from property operations............................. 38,105 28,918
-------- --------
SERVICE COMPANY BUSINESS
Management fees and other income............................ 7,978 4,821
Management and other expenses............................... (8,902) (1,961)
Partnership overhead allocation............................. -- (151)
-------- --------
Income (loss) from service company business................. (924) 2,709
-------- --------
General and administrative expenses......................... (2,594) (1,974)
Interest expense............................................ (30,360) (15,441)
Interest income............................................. 9,828 6,076
Equity in earnings of unconsolidated subsidiaries........... 2,790 4,068
Equity in earnings (losses) of unconsolidated real estate
partnerships.............................................. 2,695 (653)
Loss from IPLP exchange and assumption...................... (684) --
Minority interest........................................... (2,065) (582)
Amortization of goodwill.................................... (1,942) (1,717)
-------- --------
Income from operations...................................... 14,849 21,404
Gain on disposition of properties........................... 15 2,526
-------- --------
Net income.................................................. 14,864 23,930
Net income attributable to preferred unitholders............ 12,942 3,681
-------- --------
Net income attributable to common unitholders............... $ 1,922 $ 20,249
======== ========
COMPREHENSIVE INCOME
Net income.................................................. $ 14,864 $ 23,930
Other comprehensive income:
Net unrealized loss on investment in securities........... -- (160)
-------- --------
Comprehensive income........................................ $ 14,864 $ 23,770
======== ========
Basic earnings per common unit.............................. $ 0.03 $ 0.44
======== ========
Diluted earnings per common unit............................ $ 0.03 $ 0.43
======== ========
Weighted average common units outstanding................... 64,923 46,424
======== ========
Weighted average common units and common unit equivalents
outstanding............................................... 66,149 46,606
======== ========
Dividends paid per common unit.............................. $ 0.625 $ 0.5625
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 14,864 $ 23,930
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 32,885 15,872
Gain on disposition of properties....................... (15) (2,526)
Minority interest....................................... 2,065 (582)
Equity in (earnings) losses of unconsolidated real
estate partnerships.................................... (2,695) 653
Equity in earnings of unconsolidated subsidiaries....... (2,790) (2,798)
Loss from IPLP exchange and assumption.................. 684 --
Changes in operating assets and operating liabilities... 20,547 (24,888)
--------- --------
Total adjustments................................... 50,681 (14,269)
--------- --------
Net cash provided by operating activities........... 65,545 9,661
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate................................... -- (6,804)
Additions to real estate.................................. (19,465) (7,942)
Proceeds from sale of property............................ 965 11,477
Additions to property held for sale....................... (146) (1,874)
Purchase of limited partnerships interests................ (4,721) (5,790)
Advances to unconsolidated partnerships................... (8,966) (36,092)
Proceeds from repayment of notes receivable............... 6,444 --
Cash received in connection with acquisitions............. 22,677 --
Cash paid for merger related costs........................ (54,907) --
Distributions from investments in unconsolidated real
estate partnerships, IPLP exchange and assumption, and
investment in AIMCO preferred stock..................... 32,452 --
--------- --------
Net cash used in investing activities............... (25,667) (47,025)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from secured notes payable borrowings............ 175,963 --
Principal repayments on secured notes payable............. (32,686) (31,756)
Proceeds from secured tax-exempt bond financing........... 7,500 --
Principal repayments on secured tax-exempt bond
financing............................................... (1,172) (450)
Repayments on secured short-term financing................ -- (19,099)
Net borrowings (repayments) on the Company's revolving
credit facilities....................................... (251,000) 7,400
Payment of loan costs, net of proceeds from interest rate
hedge................................................... (5,697) (2,041)
Proceeds from issuances of common units................... -- 9,636
Proceeds from issuances of preferred units................ 114,095 100,294
Proceeds from exercises of employee stock options and
warrants................................................ 812 --
Principal repayments received on notes due from officers
on Class A Common Stock purchases....................... 2,230 5,783
Repurchase of common units................................ -- (5,982)
Payment of distributions to General Partner and Special
Limited Partner......................................... (35,141) (23,248)
Payment of distributions to Limited Partners.............. (8,857) (2,928)
Payment of distributions to minority interest............. (6,896) --
Payment of preferred unit distributions................... (13,300) (1,385)
--------- --------
Net cash provided (used) by financing activities.... (54,149) 36,224
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (14,271) (1,140)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 52,832 37,088
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 38,561 $ 35,948
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS EXCEPT SHARE AND OPERATING PARTNERSHIP UNIT DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid................................ $31,126 $14,848
------- -------
</TABLE>
1999 NON CASH INVESTING AND FINANCING ACTIVITIES
Notes receivable from Officers
During the three months ended March 31, 1999, the Company received notes
receivable from officers of AIMCO for a total of $4.7 million in connection with
the sale of approximately 125,000 shares of Class A Common Stock. The notes
receivable were contributed by AIMCO to the partnership in exchange for
approximately 125,000 operating partnership units.
Consolidation of Properties
During the three months ended March 31, 1999, the acquisition of additional
ownership interests by the company resulted in ownership levels increasing for
one previously unconsolidated property such that the company achieved control.
Accordingly, the company began consolidating the property. The non-cash effect
of this consolidation is as follows:
<TABLE>
<S> <C>
Real estate............................................... $ 16,627
Secured notes payable..................................... (15,489)
Other assets and liabilities.............................. (1,138)
</TABLE>
Merger with Insignia Properties Trust
On February 26, 1999, Insignia Properties Trust was merged into the
partnership. Approximately 8.9 million operating partnership units (with a
recorded value of approximately $327.5 million) were issued in connection with
the merger. The non-cash effect of the merger is as follows:
<TABLE>
<S> <C>
Real Estate............................................... $ 65,616
Investment in unconsolidated real estate partnerships..... 255,631
Notes receivable.......................................... 22,283
Other assets.............................................. 36,916
Secured notes payable..................................... 24,448
Secured tax exempt bond financing......................... 4,525
Unsecured short-term financing............................ 45,000
Accounts payable, accrued and other liabilities........... 4,251
Resident security deposits and prepaid rents.............. 628
Minority interest......................................... 3,229
Common stock and additional paid in capital............... 327,499
</TABLE>
Conversion of Class E Preferred Units
On January 15, 1999, all outstanding Class E Cumulative Convertible
Preferred Units (with an aggregate liquidation preference of approximately
$132.5 million) were converted into approximately 3.8 million operating
partnership units in accordance with the terms of the Class E Cumulative
Convertible Preferred Units.
5
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AIMCO PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW -- (CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND OPERATING PARTNERSHIP UNIT DATA)
(UNAUDITED)
1998 NON CASH INVESTING AND FINANCING ACTIVITIES
Purchase of Real Estate
<TABLE>
<S> <C>
Secured notes payable assumed in connection with purchase
of real estate........................................... $46,971
Issuance of 499,506 operating partnership units in
connection with the purchase of real estate.............. 16,423
Delayed issuance of 166,503 operating partnership units in
connection with the purchase of real estate.............. 5,474
-------
$68,868
=======
</TABLE>
Property Held for Sale
During the three months ended March 31, 1998, the company entered into
sales agreements to sell two multifamily properties with a net book value of
$27.3 million. These assets were reclassified to property held for sale.
Notes Receivable from Officers
During the three months ended March 31, 1998, the Company received notes
receivable from officers of AIMCO for a total of $12.3 million in connection
with the sale of approximately 336,000 shares of Class A Common Stock. The notes
receivable were contributed by AIMCO to the partnership in exchange for
approximately 336,000 operating partnership units.
6
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AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE 1 -- ORGANIZATION
AIMCO Properties, L.P., a Delaware limited partnership (together with its
subsidiaries and other controlled entities, the "Partnership" (and together with
entities in which the Partnership has a controlling financial interest, the
"Company")), was formed on May 16, 1994 to conduct the business of acquiring,
developing, leasing, and managing multi-family apartment communities. The
Partnership's securities include Partnership Common Units ("Common OP Units"),
Partnership Preferred Units ("Preferred Units", together with Common OP Units,
the "OP Units"), and High Performance Units (see Note 7). Apartment and
Investment Management Company ("AIMCO") is the owner of the General Partner and
Special Limited Partner, as defined in the Third Amended and Restated Agreement
of Limited Partnership of AIMCO Properties, L.P. (the "Partnership Agreement"),
of the Partnership. The General Partner and Special Limited Partner hold Common
OP Units of the Partnership. In addition, AIMCO is the primary holder of all
Preferred Units outstanding in the Partnership. The Limited Partners of the
Partnership are individuals or entities that own Common OP Units other than
AIMCO. After holding the Common OP Units for one year, the Limited Partners have
the right to redeem their Common OP Units for cash, subject to the prior right
of the Partnership to elect to acquire some or all of the Common OP Units
tendered for redemption for cash or in exchange for shares of AIMCO 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 of the
Company are employees of the Partnership; AIMCO has no employees.
According to the terms of the Partnership Agreement, the capital structure
of the Partnership, in terms of the Common OP Units owned by the General
Partner, the Special Limited Partner and the Preferred Units outstanding, is
required to mirror the capital structure of AIMCO, with the only difference
being that the Partnership has additional Common OP Units outstanding which are
owned by the Limited Partners. Therefore, AIMCO is required to contribute to the
Partnership all proceeds from offerings of the AIMCO 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.
Based on apartment unit data complied by the National Multi Housing
Council, we believe that, as of March 31, 1999, the Company was the largest
owner and manager of multifamily apartment properties in the United States. As
of March 31, 1999, the Company owned or managed 373,409 apartment units in 2,071
properties located in 49 states, the District of Columbia and Puerto Rico, as
follows:
- owned or controlled 63,069 units in 240 apartment properties;
- held an equity interest in 168,817 units in 891 apartment properties; and
- managed 141,523 units in 940 apartment properties for third party owners
and affiliates.
The Company manages apartment properties for third parties and affiliates
through unconsolidated subsidiaries referred to as the "management companies."
7
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AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 1999 the Partnership had 67,619,591 Common OP Units
outstanding and 19,650,000 Preferred Units outstanding.
NOTE 2 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Partnership and subsidiaries and limited partnerships in which the
Partnership has a controlling financial interest. Pursuant to a Management and
Contribution Agreement between the Partnership and AIMCO, the Partnership has
acquired, in exchange for interests in the Partnership, the economic benefits of
subsidiaries of AIMCO in which the Partnership does not have an interest, and
AIMCO has granted the Partnership a right of first refusal to acquire such
subsidiaries' assets for no additional consideration. Pursuant to the agreement,
AIMCO has also granted the Partnership certain rights with respect to assets of
such subsidiaries. Interests held by limited partners in real estate
partnerships controlled by the Company are reflected as minority interests.
All significant intercompany balances and transactions have been eliminated
in consolidation. The assets of property-owning limited partnerships and limited
liability companies owned or controlled by the Company are generally not
available to pay creditors or secure the obligations of the Company.
Investments in Unconsolidated Subsidiaries
The Company has investments in numerous subsidiaries. Investments in
entities 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 earnings (losses) from unconsolidated subsidiaries.
Investments in Unconsolidated 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 earnings (losses) from unconsolidated real estate
partnerships.
Notes Receivable from Unconsolidated Subsidiaries and Real Estate Partnerships
Notes receivable from unconsolidated subsidiaries and real estate
partnerships are recorded at original basis, net of allowance for impairment.
The company recognizes interest income on notes receivable as earned, in
accordance with the terms of the notes. Interest income is not recorded on
individual notes receivable if management believes the interest is not
collectible.
Limited Partners
The common OP Units held by Limited Partners 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 Class A Common
Stock on that date.
Earnings per Common OP Unit
Earnings per Common OP Unit is calculated based on the weighted average
number of Common OP Units, Common OP equivalents and dilutive convertible
securities outstanding during the period. Diluted earnings per Common OP Unit is
based upon the weighted average number of Common OP Units outstanding during the
period and includes the effect of potential issuances of additional Common OP
Units if stock options and warrants were exercised or converted into Class A
Common Stock of AIMCO.
8
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AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interim Information
The accompanying unaudited consolidated financial statements of the Company
as of March 31, 1999 and for the three months ended March 31, 1999 and 1998 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 included in the
Annual Report on Form 10-K for the year ended December 31, 1998. 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.
Reclassification
Certain reclassifications have been made to prior period financial
statements to conform to the current period presentation.
NOTE 3 -- IPT MERGER
As a result of its merger with Insignia Financial Group, Inc. on October 1,
1998, AIMCO acquired approximately 51% of the outstanding shares of beneficial
interest of Insignia Properties Trust ("IPT"). On February 26, 1999, AIMCO
acquired, through a merger, the remaining 49% of IPT. Pursuant to the merger,
each of the outstanding shares of IPT that were not held by AIMCO were converted
into the right to receive 0.3601 shares of Class A Common Stock for each share
of IPT common stock, resulting in the issuance of approximately 4.3 million
shares of Class A Common Stock (with a recorded value of approximately $158.8
million). Concurrently with the IPT merger, all the assets and liabilities of
IPT were contributed by AIMCO to the Partnership in exchange for approximately
8.9 million Common OP Units (valued at approximately $318.2 million). Also in
connection with the IPT merger, the IPLP Exchange and Assumption was unwound and
the approximately 10.2 million Common OP Units issued in connection with the
IPLP Exchange and Assumption were canceled.
NOTE 4 -- DEBT
In February 1999, the Partnership terminated its $50 million secured credit
facility with Washington Mortgage Financial Group, Ltd. and repaid all
outstanding borrowings with proceeds from new long-term, fully amortizing notes
payable totaling $58.2 million secured by certain properties that previously
secured the credit facility.
In February and March 1999, the Company incurred in the aggregate $125.4
million of long-term, fixed rate, fully amortizing notes payable secured by 20
properties in separate loan transactions. The Company used $8.2 million of the
net proceeds from the financings to refinance existing notes payable, and $117.2
million of net proceeds from the financings to repay debt under the interim loan
agreement with Lehman Brothers Inc. As of March 31, 1999, the balance
outstanding under the interim loan agreement was $21 million, under the credit
facility was $58.3 million, and under the IPT credit agreement was $45 million.
The amount available under the credit facility at March 31, 1999 was $40.5
million.
9
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AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PARTNERS' CAPITAL
Preferred Units
All classes of Preferred Units, except the Class E Cumulative Convertible
Preferred Units (the "Class E Preferred Units"), are on equal parity and are
senior to the Class E Preferred Units and OP Units. The Class E Preferred Units
are senior to the OP Units. None of the classes of Preferred Units have any
voting rights, except the right to approve certain changes to the Partnership
Agreement that would adversely affect holders of such class of units.
Holders of the Class B Cumulative Convertible Preferred Units (the "Class B
Preferred Units") are entitled to receive, when, as and if declared by the
General Partner, quarterly cash distributions per share equal to the greater of
$1.78125 or the cash distributions declared on the number of OP Units into which
one Class B Preferred Unit is convertible. Each Class B Preferred Unit is
convertible at the option of the holder, beginning August 1998, into 3.28407 OP
Units, subject to certain anti-dilution adjustments.
Holders of Class C, D, G and H Preferred Units are entitled to receive,
when, as and if declared by the Board of Directors of the General Partner,
distributions at the following rates per annum:
<TABLE>
<S> <C>
Class C Cumulative Preferred Units.......................... 9.000%
Class D Cumulative Preferred Units.......................... 8.750%
Class G Cumulative Preferred Units.......................... 9.375%
Class H Cumulative Preferred Units.......................... 9.500%
</TABLE>
Holders of Class J Cumulative Convertible Preferred Units (the "Class J
Preferred Units") are entitled to receive cash distributions at the rate of 7%
per annum of the $100 liquidation preference (equivalent to $7 per annum per
unit) for the period beginning on November 6, 1998 and lasting until November
15, 1998, 8% per annum of the $100 liquidation preference (equivalent to $8 per
annum per unit) for the period beginning on and including November 15, 1998 and
lasting until November 15, 1999, 9% per annum of the $100 liquidation preference
(equivalent to $9 per annum per unit) for the period beginning on and including
November 15, 1999 and lasting until November 15, 2000, and 9 1/2% per annum of
the $100 liquidation preference (equivalent to $9.50 per annum per unit)
thereafter.
The Company may convert any or all of the Class J Preferred Units into OP
units at a conversion rate of 2.5 OP Units for each Class J Preferred Unit, plus
unpaid distributions accrued on the units redeemed (a) on or after November 6,
2002, if the market price of the AIMCO Class A Common Stock in the five most
recent trading days, as defined, 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, as
defined, exceeds 12.5%.
On February 18, 1999, AIMCO issued 5,000,000 shares of newly created Class
K Convertible Cumulative Preferred Stock, par value $.01 per share ("Class K
Preferred Stock") in a public offering. The net proceeds of $120.6 million were
contributed by AIMCO to the Partnership in exchange for 5,000,000 Class K
Preferred Units and were used to repay certain indebtedness and for working
capital. For three years, holders of the Class K Preferred Stock (which mirror
those of the Class K Preferred Units) are entitled to receive, when, as and if
declared by the Board of Directors and AIMCO, as General Partner, annual cash
distributions in an amount per unit equal to the greater of (i) $2.00 per year
(equivalent to 8% of the liquidation preference), or (ii) the cash distributions
payable on the number of OP Units into which a Class K Preferred Unit is
convertible. Beginning with the third anniversary of the date of original
issuance, holders of Class K Preferred Units will be entitled to receive an
amount per Class K Preferred Unit equal to the greater of (i) $2.50 per year
(equivalent to 10% of the liquidation preference), or (ii) the cash
distributions payable on the number of OP Units into which a Class K Preferred
Unit is convertible. The Class K Preferred Units are senior to the OP Units as
to distributions and liquidation. Upon any liquidation, dissolution or winding
up of AIMCO, before payment or dividends by AIMCO shall be made to any holders
of AIMCO Class A
10
<PAGE> 12
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock, the holders of the Class K Preferred Stock and the Class K
Preferred Units shall be entitled to receive a liquidation preference of $25 per
share/unit, plus accumulated, accrued and unpaid distributions.
In connection with the acquisition of Calhoun Beach Club, the Company
issued 90,000 Preferred Units, with an initial liquidation value of $9.0
million. Holders of these Preferred Units are entitled to receive, when and as
declared by the General Partner, cash distributions at the rate of 8% per annum.
After December 30, 1999, a holder of these Preferred Units may redeem these
Preferred Units, at the option of the Company, for cash or shares of AIMCO Class
A Common Stock.
The Class E Preferred Units were issued in connection with the merger with
Insignia Financial Group, Inc. Holders of Class E Preferred Units were entitled
to receive the same cash distributions per unit as holders of Common OP Units.
In addition, on January 15, 1999, holders of Class E Preferred Units received a
special dividend in an aggregate amount of approximately $50 million, and all
outstanding Class E Preferred Units automatically converted into an equal number
of OP Units.
Common OP Units
Common OP Units are redeemable by Common OP Unitholders (other than the
General Partner and Special Limited Partner) at their option, subject to certain
restrictions, on the basis of one Common OP Unit for either one share of AIMCO
Class A Common Stock or cash equal to the fair value of a share of AIMCO Class A
Common Stock at the time of redemption. The Company has the option to deliver
shares of AIMCO Class A Common Stock in exchange for all or any portion of the
cash requested. When a Limited Partner redeems an Common OP Unit for AIMCO Class
A Common Stock, Limited Partner's capital is reduced and the Special Limited
Partners' capital is increased. Common OP Units held by AIMCO are not
redeemable.
11
<PAGE> 13
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- EARNINGS PER COMMON OP UNITS
The following table illustrates the calculation of basic and diluted
earnings per Common OP Unit for the three months ended March 31, 1999 and 1998
(in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Numerator:
Net income................................................ $14,864 $23,930
Preferred unit distributions.............................. (12,942) (3,681)
------- -------
Numerator for basic and diluted earnings per common unit --
Income attributable to common unitholders................. $ 1,922 $20,249
======= =======
Denominator:
Denominator for basic earnings per common unit -- weighted
average number of common units outstanding............. 64,923 46,424
Effect of dilutive securities:
Class E Preferred Units................................ 592 --
Employee options....................................... 329 182
Warrants............................................... 305 --
------- -------
Dilutive potential common units........................ 1,226 182
------- -------
Denominator for dilutive earnings per common unit........... 66,149 46,606
======= =======
Basic earnings per common unit:
Operations................................................ $ 0.03 $ 0.38
Gain on disposition of properties......................... -- 0.06
------- -------
Total............................................. $ 0.03 $ 0.44
======= =======
Diluted earnings per common unit:
Operations................................................ $ 0.03 $ 0.37
Gain on dispositions of properties........................ -- 0.06
------- -------
Total............................................. $ 0.03 $ 0.43
======= =======
</TABLE>
NOTE 7 -- TRANSACTIONS WITH AFFILIATES
In January 1998, the Partnership sold an aggregate of 15,000 of its Class I
High Performance Units (the "High Performance Units") to a joint venture formed
by fourteen members of AIMCO's senior management, and to three of AIMCO's
independent directors for $2.1 million in cash. The High Performance Units have
nominal value unless AIMCO's total return, 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 AIMCO's Total Return 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 Common OP Units equal to the quotient obtained by
dividing (i) the product of (a) 15% of the amount by which AIMCO's cumulative
Total Return 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 outstanding AIMCO Class A Common Stock
and Common OP Units, by (ii) the market value of one share of AIMCO 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 AIMCO. Unlike
Common OP Units, the High Performance Units are not redeemable or convertible
into AIMCO Class A Common Stock unless a change of control of AIMCO occurs.
Because there is substantial uncertainty that the High Performance Units will
have more than nominal value due to the required Total
12
<PAGE> 14
AIMCO PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Return over the three year term, the Company has not recorded any value to the
High Performance Units in excess of to the cash received upon their issuance
(recorded as Limited Partners' capital). If the measurement period had ended
March 31, 1999, the Excess Return would have been $0 and the value of the High
Performance Units would have been $0, and such High Performance Units would have
had no dilutive effect on net income per Common OP Unit.
NOTE 8 -- INDUSTRY SEGMENTS
The Company owns and operates multi-family apartment communities throughout
the United States and Puerto Rico which generated rental and other property
related income through the leasing of apartment units to a diverse base of
tenants. The Company separately evaluates the performance of each of its
apartment communities. However, because each of the apartment communities have
similar economic characteristics, facilities, services and tenants, the
apartment communities have been aggregated into a single apartment communities
segment. All segment disclosures are included in or can be derived from the
Partnership's consolidated financial statements.
All revenues are from external customers and no revenues are generated from
transactions with other segments. There are no tenants which contributed 10% or
more of the Partnership's total revenues during the three months ended March 31,
1999 and March 31, 1998.
NOTE 9 -- SUBSEQUENT EVENTS
Acquisitions
On April 20, 1999, the Company announced its definitive agreement to
acquire 2,105 units in 8 garden-style apartment communities from First Union
Real Estate Investment Trust for an aggregate price of approximately $86 million
and additional transaction costs of approximately $0.5 million. The Company
acquired seven of these apartment communities on May 12, 1999, and expects to
acquire the remaining apartment community in May 1999.
Conversion of Preferred Units
On May 12, 1999, the Company notified the holders of the Class J Preferred
Stock that the internal rate of return threshold had been met, and the Company
exercised its right to convert all of the Class J Preferred Stock into 2.5
million shares of AIMCO Class A Common Stock. Concurrently, 1.25 million Class J
Preferred Units will be converted into 3.125 million Common OP Units.
13
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
As of March 31, 1999, the Company owned or managed 373,409 apartment units,
comprised of 63,069 units in 240 apartment communities owned or controlled by
the Company (the "Owned Properties"), 168,817 units in 891 apartment communities
in which the Company has an equity interest (the "Equity Properties") and
141,523 units in 940 apartment communities which the Company manages for third
parties and affiliates (the "Managed Properties" and together with the Owned
Properties and the Equity Properties, the "AIMCO Properties"). The apartment
communities are located in 49 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 Company'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 Company.
Readers should carefully review the financial statements and the notes thereto,
as well as the risk factors described in documents the Company files from time
to time with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1999 to the Three Months Ended
March 31, 1998
Net Income
The Company recognized net income of $14.9 million for the three months
ended March 31, 1999, compared to $23.9 million for the three months ended March
31, 1998. The decrease in net income of $9.0 million, or 37.7%, was primarily
the result of a significant increase in the non-cash expenses (i.e.,
depreciation of real property and amortization of management contracts) and
general and administrative expenses associated with the acquisition of Insignia
Financial Group, Inc. ("Insignia"), Ambassador Apartments, Inc. ("Ambassador")
and the purchase of thirty properties (the "1998 Acquisitions") during 1998 and
the acquisition of Insignia Properties Trust ("IPT") during 1999. The decrease
in net income was also attributable to the increased interest expense associated
with indebtedness which was assumed or incurred in connection with the
acquisitions described above, a decrease in income from the service company
business, the sale of five properties in 1998 (the "1998 Sold Properties") and
one property in 1999 (the "1999 Sold Property"). These factors are discussed in
more detail in the following paragraphs.
CONSOLIDATED RENTAL PROPERTY OPERATIONS
Rental and other property revenues from the consolidated Owned Properties
totaled $110.6 million for the three months ended March 31, 1999, compared to
$71.3 million for the three months ended March 31,
14
<PAGE> 16
1998, an increase of $39.3 million, or 55.1%. Rental and other property revenues
for the consolidated Owned Properties consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
"Same store" properties..................................... $ 67,928 $67,472
1998 Acquisitions........................................... 38,921 326
1999 Acquisitions........................................... 1,607 --
1998 Sold Properties........................................ -- 99
1999 Sold Properties........................................ 25 24
Properties in lease-up after the completion of an expansion
or renovation............................................. 2,071 3,415
-------- -------
Total............................................. $110,552 $71,336
======== =======
</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, from the consolidated Owned Properties totaled $42.4 million for the
three months ended March 31, 1999, compared to $26.3 million for the three
months ended March 31, 1998, an increase of $16.1 million or 61.2%. Operating
expenses for the consolidated Owned Properties consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
"Same store" properties..................................... $26,508 $25,043
1998 Acquisitions........................................... 14,786 164
1999 Acquisitions........................................... 744 --
1998 Sold Properties........................................ -- 111
1999 Sold Properties........................................ 9 8
Properties in lease-up after the completion of an expansion
or renovation............................................. 389 983
------- -------
Total............................................. $42,436 $26,309
======= =======
</TABLE>
SERVICE COMPANY BUSINESS
The Company's share of income (loss) from the service company business was
$(0.9) million for the three months ended March 31, 1999, compared to $2.7
million for the three months ended March 31, 1998. The decrease in service
company business income of $3.6 million was primarily due to a decrease in fees
for services provided by the Company to real estate partnerships for customary
services.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from $2.0 million for the
three months ended March 31, 1998 to $2.6 million for the three months ended
March 31, 1999, a 30% increase. The increase is primarily due to additional
corporate costs and additional employee salaries associated with the merger with
Ambassador in May 1998, the merger with Insignia in October 1998 and the merger
with IPT in February 1999. 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.
INTEREST EXPENSE
Interest expense, which includes the amortization of deferred financing
costs, totaled $30.4 million for the three months ended March 31, 1999, compared
to $15.4 million for the three months ended March 31, 1998, an increase of $15.0
million, or 97.4%. The increase was primarily due to interest expense incurred
in connection with the acquisition of interests in Ambassador, Insignia and IPT
and interest expense incurred in connection with 1998 acquisitions.
15
<PAGE> 17
INTEREST INCOME
Interest income totaled $9.8 million for the three months ended March 31,
1999, compared to $6.1 million for the three months ended March 31, 1998. The
increase of $3.7 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
with long-term, fixed rate, fully amortizing debt, secured or unsecured
short-term indebtedness (including indebtedness under the Company's credit
facilities), the issuance of debt or equity securities (including OP Units) in
public offerings or private placements, and cash generated from operations.
In August 1998, AIMCO and the Partnership filed a shelf registration
statement with the Securities and Exchange Commission ("SEC") with respect to an
aggregate of $1,268 million of debt and equity securities of AIMCO (of which
$268 million was carried forward from AIMCO's 1997 shelf registration statement)
and $500 million of debt securities of the Partnership. The registration
statement was declared effective by the SEC on December 10, 1998. As of March
31, 1999, the Company had $1,143 million available and the Partnership had $500
million available from this registration statement.
At March 31, 1999, the Company had $38.6 million in cash and cash
equivalents. In addition, the Company had $55.3 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 its unitholders. 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.
In February 1999, the Partnership terminated its $50 million secured credit
facility with Washington Mortgage Financial Group, Ltd. and repaid all
outstanding borrowings with proceeds from new long-term, fully amortizing notes
payable totaling $58.2 million secured by certain properties that previously
secured the credit facility.
In February and March 1999, the Company incurred in the aggregate $125.4
million of long-term, fixed rate, fully amortizing notes payable secured by 20
properties in separate loan transactions. The Company used $8.2 million of the
net proceeds from the financings to refinance existing notes payable, and $117.2
million of net proceeds from the financings to repay debt under the interim loan
agreement with Lehman Brothers Inc. As of March 31, 1999, the balance
outstanding under the interim loan agreement was $21 million, under the credit
facility was $58.3 million, and under the IPT credit agreement was $45 million.
The amount available under the credit facility at March 31, 1999 was $40.5
million.
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 cash purchase price for such
interests. During the quarter ended March 31, 1999, the Company paid
approximately $4.7 million in cash, including transaction costs, to acquire
limited partnership interests pursuant to the offers.
On February 18, 1999, AIMCO issued 5,000,000 shares of newly created Class
K Convertible Cumulative Preferred Stock, par value $.01 per share in a public
offering. The net proceeds of $120.6 million were contributed by AIMCO to the
Partnership in exchange for 5,000,000 Class K Preferred Units and were used to
repay certain indebtedness and for working capital. For three years, holders of
the Class K Preferred Stock (which mirror those of the Class K Preferred Units)
are entitled to receive, when, as and if declared by the Board of Directors and
AIMCO, as General Partner, annual cash distributions in an amount per unit equal
to the greater of (i) $2.00 per year (equivalent to 8% of the liquidation
preference), or (ii) the cash
16
<PAGE> 18
distributions payable on the number of Common OP Units into which a Class K
Preferred Unit is convertible. Beginning with the third anniversary of the date
of original issuance, holders of Class K Preferred Units will be entitled to
receive an amount per Class K Preferred Unit equal to the greater of (i) $2.50
per year (equivalent to 10% of the liquidation preference), or (ii) the cash
distributions payable on the number of Common OP Units into which a Class K
Preferred Unit is convertible. The Class K Preferred Units are senior to the
Common OP Units as to distributions and liquidation. Upon any liquidation,
dissolution or winding up of AIMCO, before payment or dividends by AIMCO shall
be made to any holders of AIMCO Class A Common Stock, the holders of the Class K
Preferred Stock and the Class K Preferred Units shall be entitled to receive a
liquidation preference of $25 per share/unit, plus accumulated, accrued and
unpaid distributions.
CAPITAL EXPENDITURES
For the quarter ended March 31, 1999, the Company spent $8.6 million for
Capital Replacements (expenditures for routine maintenance of a property), $0.9
million for Initial Capital Expenditures or "ICE" (expenditures at a property
that have been identified, at the time the property is acquired, as expenditures
to be incurred within one year of the acquisition), and $10.0 million for
construction and capital enhancements (amenities that add a material new feature
or revenue source at a property). These expenditures were funded by borrowings
under the Company's primary credit facility, working capital reserves and net
cash provided by operating activities. During 1999, the Company will provide an
allowance for capital replacements of $300 per apartment unit. ICE and capital
enhancements will primarily be funded by cash from operating activities and
borrowings under the Company's primary credit facility.
FUNDS FROM OPERATIONS
The Company measures its economic profitability based on Funds From
Operations ("FFO"), less a reserve for Capital Replacements of $300 per
apartment unit. The Company's management believes that FFO, less such a reserve,
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 based
on the NAREIT definition, as adjusted for amortization of 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.
17
<PAGE> 19
For the three months ended March 31, 1999 and 1998, the Company's FFO was
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $14,864 $23,930
Gain on disposition of properties........................... (15) (2,526)
Real estate depreciation, net of minority interest.......... 25,095 12,779
Real estate depreciation related to unconsolidated
entities.................................................. 21,105 3,191
Amortization of goodwill.................................... 2,602 2,389
Amortization of recoverable amount of management
contracts................................................. 10,397 1,379
Deferred taxes.............................................. 2,456 309
Preferred OP Unit distributions............................. (11,205) (2,364)
------- -------
Funds From Operations (FFO)................................. $65,299 $39,087
======= =======
Weighted average number of Common OP Units and Common OP
Unit equivalents outstanding:
Common OP Units........................................... 64,923 46,424
Common OP Unit equivalents................................ 634 182
Preferred Units convertible into Common OP Units.......... 3,055 2,463
------- -------
68,612 49,069
======= =======
</TABLE>
For the three months ended March 31, 1999 and 1998, net cash flows were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flow provided by operating activities.................. $ 65,545 $ 9,661
Cash flow used in investing activities...................... (25,667) (47,025)
Cash flow (used in) provided by financing activities........ (54,149) 36,224
</TABLE>
CONTINGENCIES
HUD Approvals and Enforcement
A significant number of apartment units owned or managed by the Company are
subject to regulation by the U.S. Department of Housing and Urban Development
("HUD"). Under its regulations, HUD reserves the right to 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, participation in HUD programs 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 of management of HUD-assisted
properties. In the event of instances of unsatisfactory performance or
regulatory violations, the HUD office with jurisdiction over a 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 Multi-family Participation Review Committee in
Washington, D.C. (the "2530 Committee"). 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 by any HUD office or nationwide for
violations of HUD regulatory requirements. As a result of certain mortgage
defaults and unsatisfactory ratings received by NHP Management Company, an
unconsolidated subsidiary of the Company, and NHP Incorporated (together "NHP")
in years prior to their acquisition in December 1997 by the Company, HUD
believes that the 2530 Committee must review any application for 2530 Clearance
filed by the Company. In December
18
<PAGE> 20
1998 and thereafter, the Company received approval of numerous 2530 applications
and had no unresolved flags in the 2530 system as of March 31, 1999.
NHP has received subpoenas from the HUD Inspector General requesting
documents relating to any arrangement whereby NHP or any of its affiliates
provides or has provided compensation to owners of HUD multi-family projects in
exchange for or in connection with property management of a HUD project, and
related matters. The Company believes that other owners and managers of HUD
projects have received similar subpoenas. Documents provided by the Company to
the HUD Inspector General relating to certain NHP acquisitions of property
management rights for HUD projects may be 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. 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, affect the Company's
ability to receive 2530 Clearances or otherwise have a material adverse effect
on the Company's results of operations.
The Company believes that the 2530 Committee will continue to apply the
2530 Clearance process to large management portfolios such as the Company's with
discretion and flexibility. 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 additional properties subject to HUD
regulation, would be impaired.
Environmental
Various Federal, state and local laws subject property owners or operators
to liability for the costs of removal or remediation of certain hazardous
substances present on a property. Such laws often impose liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of the hazardous substances. The presence of, or the failure to properly
remediate, hazardous substances may adversely affect occupancy at contaminated
apartment communities and our ability to sell or borrow against contaminated
properties. In addition to the costs associated with investigation and
remediation actions brought by governmental agencies, the presence of hazardous
wastes on a property could result in personal injury or similar claims by
private plaintiffs. Various laws also impose liability for the cost of removal
or remediation of hazardous substances at the disposal or treatment facility.
Anyone who arranges for the disposal or treatment of hazardous or toxic
substances is potentially liable under such laws. These laws often impose
liability whether or not the person arranging for the disposal ever owned or
operated the disposal facility. In connection with the ownership, operation and
management of our properties, we could potentially be liable for environmental
liabilities or costs associated with our properties or properties we may acquire
or manage in the future.
HIGH PERFORMANCE UNITS
In January 1998, the Partnership sold an aggregate of 15,000 of its Class I
High Performance Units (the "High Performance Units") to a joint venture formed
by fourteen members of AIMCO's senior management, and to three of AIMCO's
independent directors for $2.1 million in cash. The High Performance Units have
nominal value unless AIMCO's total return, 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 AIMCO's Total Return 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 Common OP Units equal to the quotient obtained by
dividing the product of (i)(a) 15% of the amount by which AIMCO's cumulative
Total Return 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 outstanding AIMCO Class A Common Stock
and Common OP Units, by (ii) the market value of one share of AIMCO 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 AIMCO. Unlike
Common OP Units, the High Performance Units are not redeemable or convertible
into
19
<PAGE> 21
AIMCO Class A Common Stock unless a change of control of AIMCO 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 Company has not recorded any value to the High Performance Units in excess
of to the cash received upon their issuance (recorded as Limited Partners'
capital). If the measurement period had ended March 31, 1999, the Excess Return
would have been $0 and the value of the High Performance Units would have been
$0, and such High Performance Units would have had no dilutive effect on net
income per Common OP 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 two years, 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 in time, the Year 2000 issue could have a material impact on the
operations of the Company.
The Company's plan to resolve Year 2000 issues involves four phases:
assessment, remediation, testing, and implementation. To date, the Company has
fully completed its assessment of all information systems that could be
significantly affected by the Year 2000, and has begun the remediation, testing
and implementation 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 and 1998, the Company identified all of the computer systems at
risk and formulated a plan to repair or replace each of the affected systems.
During 1997, when the Company merged with NHP, the mainframe system used by NHP
was Year 2000 compliant. In August 1998, the Year 2000 compliant system became
fully functional for the entire Company.
In addition to the mainframe, PC-based network servers, 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 March 31, 1999, had
completed approximately 85% of this effort.
The total cost to replace the PC-based network servers, routers and desktop
PCs is expected to be approximately $1.5 million, of which $1.3 million has been
incurred to date. The remaining network connections and desktop PCs are expected
to be upgraded to Year 2000 compliant systems by June 30, 1999.
Computer 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.
20
<PAGE> 22
In 1997, when the Company merged with NHP, 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 implemented a Year 2000 compliant system at each of its owned or managed
properties, at a cost of $1.4 million. During 1998, the Company acquired 82
properties and acquired the Insignia multi-family business. Insignia owned or
managed 1,100 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 from Insignia, is
$200,000, and the implementation and testing process is expected to be completed
by June 30, 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 80% of the server operating systems. The remaining
server operating systems are planned to be upgraded to be Year 2000 compliant by
June 30, 1999.
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 inventory of embedded systems (including those devices
that use time to control systems and machines at specific properties, for
example, elevators, heating, ventilating and air conditioning systems, security
and alarm systems, etc.)
The Company has chosen to focus its attention mainly upon security systems,
elevators, heating, ventilating and air conditioning systems, 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. The
Company intends to have a third-party conduct an audit of these systems and
report their findings by June 30, 1999.
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 March 31, 1999, the
Company has evaluated approximately 86% of the operating equipment for Year 2000
compliance.
The total cost incurred as of March 31, 1999 to replace or repair the
operating equipment was approximately $70,000. The Company estimates the cost to
replace or repair any remaining operating equipment is approximately $325,000,
and the Company expects to be completed by June 30, 1999.
The Company continues to have "awareness campaigns" throughout the
organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within the enterprise.
Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000
The Company continues to conduct surveys of its banking and other 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 Year 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 compliance 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 compliant.
Management does not believe that the inability of external agents to
complete their Year 2000 remediation process in a timely manner will have a
material impact on the financial position or results of
21
<PAGE> 23
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 $3.5 million and is
being funded from operating cash flows. To date, the Company has incurred
approximately $2.8 million ($0.6 million expensed and $2.2 million capitalized
for new systems and equipment) related to all phases of the Year 2000 project.
Of the total remaining project costs, approximately $0.5 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 heating,
ventilating and air conditioning 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 would be annoying to residents, it is not
business critical.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also adversely affect the Company. The Company could be subject to
litigation for, among other things, computer system failures, equipment
shutdowns or a 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.
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.
The Company's primary market risk exposure relates to changes in interest
rates. The Company is not subject to any foreign currency exchange rate risk or
commodity price risk, or any other material market rate
22
<PAGE> 24
or price risks. The Company uses predominantly long-term, fixed-rate and
self-amortizing non-recourse debt in order to avoid the refunding or repricing
risks of short-term borrowings. The Company uses short-term debt financing and
working capital primarily to fund acquisitions and generally expects to
refinance such borrowings with proceeds from equity offerings or long term debt
financings.
The Company had $209.6 million of variable rate debt outstanding at March
31, 1999, which represents 13.0% of the Company's total outstanding debt. Based
on this level of debt, an increase in interest rates of 1% would result in the
Company's income and cash flows being reduced by $2.1 million on an annual
basis.
From time to time, the Company enters into interest rate lock agreements to
obtain what the Company considers advantageous pricing for future anticipated
debt issuances.
The estimated aggregate fair value of the Company's cash and cash
equivalents, receivables, payables and short-term secured and unsecured debt as
of March 31, 1999 is assumed to approximate their carrying value due to their
relatively short terms. Management further believes that, after consideration of
interest rate agreements, the fair market value of the Company's secured
tax-exempt bond debt and secured long-term debt approximates their carrying
value, based on market comparisons to similar types of debt instruments having
similar maturities.
23
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 18, 1999, AIMCO issued 5,000,000 shares of newly created Class
K Convertible Cumulative Preferred Stock, par value $.01 per share ("Class K
Preferred Stock") in a public offering. The net proceeds of $120.6 million were
contributed by AIMCO to the Partnership in exchange for 5,000,000 Class K
Preferred Units and were used to repay certain indebtedness and for working
capital. For three years, holders of the Class K Preferred Stock (which mirror
those of the Class K Preferred Units) are entitled to receive, when, as and if
declared by the Board of Directors and AIMCO, as General Partner, annual cash
distributions in an amount per unit equal to the greater of (i) $2.00 per year
(equivalent to 8% of the liquidation preference), or (ii) the cash distributions
payable on the number of Common OP Units into which a Class K Preferred Unit is
convertible. Beginning with the third anniversary of the date of original
issuance, holders of Class K Preferred Units will be entitled to receive an
amount per Class K Preferred Unit equal to the greater of (i) $2.50 per year
(equivalent to 10% of the liquidation preference), or (ii) the cash
distributions payable on the number of Common OP Units into which a Class K
Preferred Units are convertible. The Class K Preferred Units are senior to the
Common OP Units as to distributions and liquidation. Upon any liquidation,
dissolution or winding up of AIMCO, before payment or dividends by AIMCO shall
be made to any holders of AIMCO Class A Common Stock, the holders of the Class K
Preferred Stock and the Class K Preferred Units shall be entitled to receive a
liquidation preference of $25 per share/unit, plus accumulated, accrued and
unpaid distributions.
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
------- -----------
<C> <S>
2.1 -- Second Amended and Restated Agreement and Plan of Merger,
dated as of January 22, 1999, by and between Apartment
Investment and Management Company and Insignia Properties
Trust (Exhibit 2.2 to the Current Report on Form 8-K of
Insignia Properties Trust, dated February 11, 1999, is
incorporated herein by this reference)
10.1 -- Third Amendment to the Third Amended and Restated
Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of February 18, 1999 (Exhibit 10.12 to the
Annual Report on Form 10-K of Apartment Investment and
Management Company for the fiscal year 1998, is
incorporated herein by this reference)
10.2 -- Fourth Amendment to the Third Amended and Restated
Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of March 25, 1999 (Exhibit 10.2 to the
Quarterly Report on Form 10-Q of Apartment Investment and
Management Company for the period ending March 31, 1999,
is incorporated herein by this reference)
10.3 -- Fifth Amendment to the Third Amended and Restated
Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of March 26, 1999 (Exhibit 10.3 to the
Quarterly Report on Form 10-Q of Apartment Investment and
Management Company for the period ending March 31, 1999,
is incorporated herein by this reference)
27.1 -- Financial Data Schedule
99.1 -- Agreement re: disclosure of long-term debt instruments
</TABLE>
- ---------------
(1) Schedules and supplemental materials to the exhibits have been omitted but
will be provided to the Securities Exchange Commission upon request.
24
<PAGE> 26
(b) Reports on Form 8-K
During the quarter for which this report is filed, the Partnership filed
its Current Report on Form 8-K, dated February 5, 1999 relating to certain pro
forma financial information; Amendment No. 3 on February 11, 1999 to its Current
Report on Form 8-K, dated November 2, 1998, relating to the Company's
acquisition of certain multifamily residential properties and related interests;
and Amendment No. 1 on February 11, 1999 to its Current Report on Form 8-K,
dated December 21, 1998, relating to the Company's acquiring certain real estate
interests from Calhoun Beach Associates II Limited Partnership.
25
<PAGE> 27
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.
/s/ TROY D. BUTTS
------------------------------------
Troy D. Butts
Senior Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
Date: May 14, 1999
26
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Second Amended and Restated Agreement and Plan of Merger,
dated as of January 22, 1999, by and between Apartment
Investment and Management Company and Insignia Properties
Trust (Exhibit 2.2 to the Current Report on Form 8-K of
Insignia Properties Trust, dated February 11, 1999, is
incorporated herein by this reference)
10.1 -- Third Amendment to the Third Amended and Restated
Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of February 18, 1999 (Exhibit 10.12 to the
Annual Report on Form 10-K of Apartment Investment and
Management Company for the fiscal year 1998, is
incorporated herein by this reference)
10.2 -- Fourth Amendment to the Third Amended and Restated
Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of March 25, 1999 (Exhibit 10.2 to the
Quarterly Report on Form 10-Q of Apartment Investment and
Management Company for the period ending March 31, 1999,
is incorporated herein by this reference)
10.3 -- Fifth Amendment to the Third Amended and Restated
Agreement of Limited Partnership of AIMCO Properties,
L.P., dated as of March 26, 1999 (Exhibit 10.3 to the
Quarterly Report on Form 10-Q of Apartment Investment and
Management Company for the period ending March 31, 1999,
is incorporated herein by this reference)
27.1 -- Financial Data Schedule
99.1 -- Agreement re: disclosure of long-term debt instruments
</TABLE>
- ---------------
(1) Schedules and supplemental materials to the exhibits have been omitted but
will be provided to the Securities Exchange Commission upon request.
<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 Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 93,826
<SECURITIES> 0
<RECEIVABLES> 22,241
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,852,476
<DEPRECIATION> (260,723)
<TOTAL-ASSETS> 4,291,931
<CURRENT-LIABILITIES> 0
<BONDS> 1,608,895
149,500
625,628
<COMMON> 0
<OTHER-SE> 1,663,617
<TOTAL-LIABILITY-AND-EQUITY> 4,291,931
<SALES> 118,530
<TOTAL-REVENUES> 128,358
<CGS> 81,349
<TOTAL-COSTS> 85,885
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,360
<INCOME-PRETAX> 14,864
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,864
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,864
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
<PAGE> 1
EXHIBIT 99.1
Agreement Regarding Disclosure of Long-Term Debt Instruments
In reliance upon Item 601(b)(4)(iii)(A), of Regulation S-K, AIMCO
Properties, L.P., a Delaware limited partnership (the "Partnership") has not
filed as an exhibit to its Quarterly Report on Form 10-Q for the quarterly
period ending March 31, 1999, any instrument with respect to long-term debt not
being registered where the total amount of securities authorized thereunder does
not exceed 10 percent of the total assets of the Partnership and its
subsidiaries on a consolidated basis. Pursuant to Item 601(b)(4)(iii)(A), of
Regulation S-K, the Partnership hereby agrees to furnish a copy of any such
agreement to the Securities Exchange Commission upon request.
AIMCO PROPERTIES, L.P.
By: AIMCO-GP, INC.
By: /s/ PETER KOMPANIEZ
--------------------------
Peter Kompaniez
President
