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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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COMMISSION FILE NUMBER 1-13232
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
(Exact name of registrant as specified in its charter)
MARYLAND 84-1259577
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1873 S. BELLAIRE STREET, SUITE 1700, DENVER, 80222-4348
COLORADO (Zip Code)
(Address of principal executive offices)
(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 [ ]
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The number of shares of Class A Common Stock outstanding as of April 30,
1999: 62,045,886
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
FORM 10-Q
INDEX
PAGE
----
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................... 23
ITEM 6. Exhibits and Reports on Form 8-K............................ 24
Signatures........................................................... 25
1
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
Real estate, net of accumulated depreciation of $261,228 and
$228,880.................................................. $2,591,249 $2,573,718
Property held for sale...................................... 26,794 27,304
Investments in unconsolidated real estate partnerships...... 998,917 945,035
Investments in unconsolidated subsidiaries.................. 79,501 84,417
Notes receivable from unconsolidated real estate
partnerships.............................................. 104,844 103,979
Notes receivable from unconsolidated subsidiaries........... 115,386 114,000
Cash and cash equivalents................................... 38,561 71,305
Restricted cash............................................. 55,265 55,826
Notes receivable............................................ 22,241 33,708
Goodwill.................................................... 126,716 128,658
Other assets................................................ 132,273 130,335
---------- ----------
Total assets................................................ $4,291,747 $4,268,285
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Secured notes payable....................................... $1,081,235 $ 843,791
Secured tax-exempt bond financing........................... 403,360 398,602
Unsecured short-term financing.............................. 124,300 310,300
Secured short-term financing................................ -- 108,022
---------- ----------
Total indebtedness................................ 1,608,895 1,660,715
---------- ----------
Accounts payable, accrued and other liabilities............. 146,322 208,300
Resident security deposits and prepaid rents................ 13,404 12,654
---------- ----------
Total liabilities................................. 1,768,621 1,881,669
---------- ----------
Commitments and contingencies............................... -- --
Company-obligated mandatory redeemable convertible preferred
securities of a subsidiary trust.......................... 149,500 149,500
Minority interest in other entities......................... 83,413 185,705
Minority interest in operating partnership.................. 137,600 148,847
Stockholders' equity
Preferred Stock........................................... 616,250 792,468
Class A Common Stock, $.01 par value, 478,277,500 shares
and 484,027,500 shares authorized, 61,657,687 and
48,451,388 shares issued and outstanding,
respectively........................................... 617 485
Additional paid-in capital................................ 1,709,527 1,246,962
Notes receivable on common stock purchases................ (52,121) (49,658)
Distributions in excess of earnings....................... (121,660) (87,693)
---------- ----------
Total stockholders' equity........................ 2,152,613 1,902,564
---------- ----------
Total liabilities and stockholders' equity.................. $4,291,747 $4,268,285
========== ==========
See accompanying notes to consolidated financial statements.
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4
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------------
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
RENTAL PROPERTY OPERATIONS
Rental and other property revenues.......................... $112,586 $ 71,336
Property operating expenses................................. (43,170) (26,309)
Owned property management expense........................... (3,502) (2,132)
Depreciation................................................ (27,112) (13,977)
-------- --------
Income from property operations............................. 38,802 28,918
-------- --------
SERVICE COMPANY BUSINESS
Management fees and other income............................ 8,556 4,821
Management and other expenses............................... (8,902) (1,961)
Corporate overhead allocation............................... -- (151)
-------- --------
Income (loss) from service company business................. (346) 2,709
-------- --------
General and administrative expenses......................... (3,690) (1,974)
Interest expense............................................ (31,330) (15,441)
Interest income............................................. 10,367 6,076
Equity in earnings of unconsolidated subsidiaries........... 2,372 4,068
Equity in earnings (losses) of unconsolidated real estate
partnerships.............................................. 816 (653)
Minority interest in other entities......................... 111 (582)
Amortization of goodwill.................................... (1,942) (1,717)
-------- --------
Income from operations...................................... 15,160 21,404
Gain on disposition of properties........................... 15 2,526
-------- --------
Income before minority interest in operating partnership.... 15,175 23,930
Minority interest in operating partnership.................. (1,219) (2,288)
-------- --------
Net income.................................................. 13,956 21,642
Net income attributable to preferred stockholders........... 13,620 3,681
-------- --------
Net income attributable to common stockholders.............. $ 336 $ 17,961
======== ========
COMPREHENSIVE INCOME
Net income.................................................. $ 13,956 $ 21,642
Other comprehensive income:
Net unrealized loss on investment in securities........... -- (160)
-------- --------
Comprehensive income........................................ $ 13,956 $ 21,482
======== ========
Basic earnings per common share............................. $ 0.01 $ 0.44
======== ========
Diluted earnings per common share........................... $ 0.01 $ 0.43
======== ========
Weighted average common shares outstanding.................. 56,468 41,128
======== ========
Weighted average common shares and common share equivalents
outstanding............................................... 58,412 41,310
======== ========
Dividends paid per common share............................. $ 0.6250 $ 0.5625
======== ========
See accompanying notes to consolidated financial statements.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
-------------------------------
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 13,956 $ 21,642
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 33,381 15,872
Gain on disposition of properties....................... (15) (2,526)
Minority interest in operating partnership.............. 1,219 2,288
Minority interests in other entities.................... (111) (582)
Equity in (earnings) losses of unconsolidated real
estate partnerships.................................... (816) 653
Equity in earnings of unconsolidated subsidiaries....... (2,372) (4,068)
Changes in operating assets and operating liabilities... 19,180 (23,618)
--------- --------
Total adjustments 50,466 (11,981)
--------- --------
Net cash provided by operating activities.......... 64,422 9,661
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate................................... -- (6,804)
Additions to real estate.................................. (19,562) (7,942)
Proceeds from sale of property............................ 3,845 11,477
Additions to property held for sale....................... (146) (1,874)
Purchase of limited partnerships interests................ (18,201) (5,790)
Purchase of/additions to notes receivable from
unconsolidated real estate partnerships................. (8,966) (36,092)
Proceeds from repayment of notes receivable from
unconsolidated real estate partnerships................. 6,444 --
Purchase of notes receivable.............................. (6,350) --
Proceeds from sale of notes receivable.................... 17,788 --
Cash paid for merger related costs........................ (54,907) --
Distributions from investments in unconsolidated real
estate partnerships..................................... 17,860 --
--------- --------
Net cash used in investing activities.............. (62,195) (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....................................... (236,000) 7,400
Payment of loan costs, net of proceeds from interest rate
hedge................................................... (5,697) (2,041)
Proceeds from issuances of Class A Common Stock........... -- 9,636
Proceeds from issuances of Preferred Stock................ 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 Class A common stock........................ -- (5,982)
Payment of common stock dividends......................... (35,141) (23,248)
Payment of distributions to minority interest in AIMCO
operating partnership................................... (4,365) (2,928)
Payment of distributions to minority interest in other
entities................................................ (7,710) --
Payment of preferred stock dividends...................... (12,800) (1,385)
--------- --------
Net cash (used in) provided by financing
activities....................................... (34,971) 36,224
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (32,744) (1,140)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 71,305 37,088
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 38,561 $ 35,948
========= ========
See accompanying notes to consolidated financial statements.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS EXCEPT SHARE AND OPERATING PARTNERSHIP UNIT DATA)
(UNAUDITED)
1999 1998
------- -------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid................................ $32,292 $14,848
1999 NON-CASH INVESTING AND FINANCING ACTIVITIES
Redemption of Operating Units
During the three months ended March 31, 1999, 322,801 operating partnership
units with a recorded value of $7,747 were redeemed in exchange for an equal
number of shares of Class A Common Stock.
Notes Receivable from Officers
From time to time, the Company makes loans to its officers to finance their
purchases of shares of Class A Common Stock from the company. During the three
months ended March 31, 1999, the company sold to certain officers 125,070 shares
of Class A Common Stock for an aggregate price of $4.7 million. In payment for
such shares, the officers executed notes payable to the company bearing interest
at 7.0% per annum, payable quarterly, and due in 2009. The loans are 25%
recourse to the officers.
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:
Real estate.............................................. $ 16,627
Secured notes payable.................................... (15,489)
Other assets and liabilities............................. (1,138)
Merger with Insignia Properties Trust
On February 26, 1999, Insignia Properties Trust was merged into the
company. Approximately 4.3 million shares of Class A Common Stock (with a
recorded value of approximately $158.8 million) were issued in connection with
the merger. The non-cash effect of the merger is as follows:
Real Estate............................................. $ 10,382
Investment in unconsolidated real estate partnerships... 40,850
Other assets............................................ 700
Accounts payable, accrued and other liabilities......... 1,131
Minority interest....................................... 109,395
Common stock and additional paid in capital............. 158,796
Conversion of Class E Preferred Stock
On January 15, 1999, all outstanding shares of Class E Cumulative
Convertible Preferred Stock (with an aggregate liquidation preference of
approximately $301.2 million) were converted into approximately 8.4 million
shares of Class A Common Stock in accordance with the terms of the Class E
Cumulative Convertible Preferred Stock.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS EXCEPT SHARE AND OPERATING PARTNERSHIP UNIT DATA) -- (CONTINUED)
(UNAUDITED)
1998 NON-CASH INVESTING AND FINANCING ACTIVITIES
Purchase of Real Estate
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
=======
Redemption of Operating Partnership Units
During the three months ended March 31, 1998, 167,445 operating partnership
units with a recorded value of $3,184 were redeemed in exchange for an equal
number of shares of Class A Common Stock.
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
From time to time, the company makes loans to its officers to finance their
purchases of shares of Class A Common Stock from the company. During the three
months ended March 31, 1998, the company sold to certain officers 336,030 shares
of Class A Common Stock for an aggregate price of $12.3 million. In payment for
such shares, the officers executed notes payable to the company bearing interest
at 7.0%, per annum, payable quarterly, and due in 2008. The loans are 25%
recourse to the officers.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE 1 -- ORGANIZATION
Apartment Investment and Management Company, a Maryland corporation
incorporated on January 10, 1994 ("AIMCO" and, together with its subsidiaries
and other controlled entities, the "Company"), owns a majority of the ownership
interests in AIMCO Properties, L.P., (the "AIMCO operating partnership") through
its wholly owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP, Inc. The Company
held an approximate 91% interest in the AIMCO operating partnership as of March
31, 1999. AIMCO-GP, Inc. is the sole general partner of the AIMCO operating
partnership.
At March 31, 1999, AIMCO had 61,657,687 shares of Class A Common Stock
outstanding and the AIMCO operating partnership had 5,961,904 Partnership Common
Units ("Common OP Units") outstanding (excluding units held by the Company), for
a combined total of 67,619,591 shares and Common OP Units outstanding.
As of March 31, 1999, AIMCO:
- 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.
NOTE 2 -- BASIS OF PRESENTATION
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
AIMCO, the AIMCO operating partnership, majority owned subsidiaries and
controlled real estate limited partnerships. Interests held by limited partners
in real estate partnerships controlled by the Company are reflected as minority
interest in other entities. 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 AIMCO or the AIMCO operating partnership are generally not
available to pay creditors or secure the obligations of AIMCO or the AIMCO
operating partnership.
After payment of distributions to holders of partnership preferred units
("Preferred OP Units" and together with Common OP Units, "OP Units"), the AIMCO
operating partnership's remaining income is allocated to holders of Common OP
Units based on the weighted average number of Common OP Units outstanding during
the period. The AIMCO operating partnership records the issuance of Common OP
Units and the assets acquired in purchase transactions based on the market price
of the Company's Class A Common Stock at the date of execution of the purchase
contract. The holders of the Common OP Units receive distributions, prorated
from the date of admittance, in an amount equivalent to the dividends paid to
holders of Class A Common Stock.
After holding the Common OP Units for one year, the limited partners
generally have the right to redeem their Common OP Units for cash.
Notwithstanding that right, the AIMCO operating partnership may elect to acquire
some or all of the Common OP Units tendered for redemption in exchange for
shares of Class A Common Stock in lieu of cash.
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.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 any 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.
Earnings per Share
Earnings per share is calculated based on the weighted average number of
shares of common stock, common stock equivalents and dilutive convertible
securities outstanding during the period.
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).
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- COMMITMENTS
High Performance Units
In January 1998, AIMCO's operating partnership sold an aggregate of 15,000
of its Class I High Performance Partnership Units (the "High Performance Units")
to a joint venture formed 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 Company'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 the Company's Total Return satisfies
these criteria, the holders of the High Performance Units will receive
distributions and allocations of income and loss from the AIMCO operating
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 the Company'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 Company's outstanding Class A Common Stock and
Common 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 Common 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
Company has not recorded any value to the High Performance Units. If the
measurement period would have 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
share.
NOTE 5 -- DEBT
In February 1999, the Company 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.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- STOCKHOLDERS' EQUITY
Preferred Stock
At March 31, 1999 and December 31, 1998, the Company had the following
classes of preferred stock outstanding:
1999 1998
-------- --------
(IN THOUSANDS)
-------------------
Class B Cumulative Convertible Preferred Stock, $.01 par
value, 750,000 shares authorized, 750,000 and 750,000
shares issued and outstanding............................. $ 75,000 $ 75,000
Class C Cumulative Preferred Stock, $.01 par value,
2,760,000 shares authorized, 2,400,000 and 2,400,000
shares issued and outstanding; dividends payable at 9.0%,
per annum................................................. 60,000 60,000
Class D Cumulative Preferred Stock, $.01 par value,
4,600,000 shares authorized, 4,200,000 and 4,200,000
shares issued and outstanding; dividends payable at 8.75%,
per annum................................................. 105,000 105,000
Class G Cumulative Preferred Stock, $.01 par value,
4,050,000 shares authorized, 4,050,000 and 4,050,000
shares issued and outstanding; dividends payable at
9.375%, per annum......................................... 101,250 101,250
Class H Cumulative Preferred Stock, $.01 par value,
2,300,000 shares authorized, 2,000,000 and 2,000,000
shares issued and outstanding; dividends payable at 9.5%,
per annum................................................. 50,000 50,000
Class J Cumulative Convertible Preferred Stock, $.01 par
value, 2,000,000 shares authorized, 1,000,000 and
1,000,000 shares issued and outstanding................... 100,000 100,000
Class K Convertible Cumulative Preferred Stock, $.01 par
value, 5,750,000 shares authorized, 5,000,000 and no
shares issued and outstanding; dividends payable at 8%,
per annum................................................. 125,000 --
Class E Cumulative Convertible Preferred Stock, $.01 par
value, 10,000,000 shares authorized, no and 8,423,658
shares issued and outstanding............................. -- 301,218
-------- --------
$616,250 $792,468
======== ========
All classes of preferred stock, except the Class E Cumulative Convertible
Preferred Stock (the "Class E Preferred Stock"), are on equal parity and are
senior to the Class E Preferred Stock, the Class A Common Stock. The Class E
Preferred Stock was senior to the Class A Common Stock. None of the classes of
preferred stock have the right to vote, generally, for the election of
directors.
Holders of the Class B Cumulative Convertible Preferred Stock (the "Class B
Preferred Stock") are entitled to receive, when, as and if declared by the Board
of Directors, quarterly cash dividends per share equal to the greater of
$1.78125 or the cash dividends declared on the number of shares of Class A
Common Stock into which one share of Class B Preferred Stock is convertible.
Each share of Class B Preferred Stock is convertible at the option of the
holder, beginning August 1998, into 3.28407 shares of Class A Common Stock,
subject to certain anti-dilution adjustments.
Holders of Class J Cumulative Convertible Preferred Stock (the "Class J
Preferred Stock") are entitled to receive cash dividends at the rate of 7% per
annum of the $100 liquidation preference (equivalent to $7 per annum per share)
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 share) for the period beginning on
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 share)
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 share) thereafter.
The Company may convert any or all of the Class J Preferred Stock into
Class A Common Stock at a conversion rate of 2.5 shares of Class A Common Stock
for each share of Class J Preferred Stock (plus payment of accumulated and
unpaid dividends on the converted shares) (a) on or after November 6, 2002, if
the market price of the 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 on such shares 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
used to repay certain indebtedness and for working capital. For three years,
holders of the Class K Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors, annual cash dividends in an amount per share
equal to the greater of (i) $2.00 per year (equivalent to 8% of the liquidation
preference), or (ii) the cash dividends payable on the number of shares of Class
A Common Stock into which a share of Class K Preferred Stock is convertible.
Beginning with the third anniversary of the date of original issuance, holders
of Class K Preferred Stock will be entitled to receive an amount per share equal
to the greater of (i) $2.50 per year (equivalent to 10% of the liquidation
preference), or (ii) the cash dividends payable on the number of Class A Common
Stock into which a share of Class K Preferred is convertible. Upon any
liquidation, dissolution or winding up of AIMCO, before payment or distributions
by AIMCO shall be made to any holders of Class A Common Stock, the holders of
the Class K Preferred Stock shall be entitled to receive a liquidation
preference of $25 per share, plus accumulated, accrued and unpaid dividends.
The Class E Preferred Stock was issued in connection with the Insignia
Financial Group merger ("Insignia merger"). Holders of Class E Preferred Stock
were entitled to receive the same cash dividends per share as holders of Class A
Common Stock. In addition, on January 15, 1999, holders of Class E Preferred
Stock received a special dividend in an aggregate amount of approximately $50
million. Concurrently with the payment of such special dividend, all outstanding
shares of Class E Preferred Stock automatically converted into an equal number
of shares of Class A Common Stock.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- EARNINGS PER SHARE
The following table illustrates the calculation of basic and diluted
earnings per share for the three months ended March 31, 1999 and 1998 (in
thousands, except per share data):
1999 1998
-------- -------
NUMERATOR:
Net income.................................................. $ 13,956 $21,642
Preferred stock dividends................................... (13,620) (3,681)
-------- -------
Numerator for basic and diluted earnings per share -- income
attributable to common stockholders....................... $ 336 $17,961
======== =======
DENOMINATOR:
Denominator for basic earnings per share -- weighted average
number of shares of common stock outstanding.............. 56,468 41,128
Effect of dilutive securities:
Class E Preferred Stock................................... 1,310 --
Employee stock options.................................... 329 182
Warrants.................................................. 305 --
-------- -------
Dilutive potential common shares.......................... 1,944 182
-------- -------
Denominator for dilutive earnings per share................. 58,412 41,310
======== =======
Basic earnings per common share:
Operations................................................ $ 0.01 $ 0.38
Gain on disposition of properties......................... -- 0.06
-------- -------
Total............................................. $ 0.01 $ 0.44
======== =======
Diluted earnings per common share:
Operations................................................ $ 0.01 $ 0.37
Gain on disposition of properties......................... -- 0.06
-------- -------
Total............................................. $ 0.01 $ 0.43
======== =======
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
Company'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 Company's total revenues during the three months ended March 31,
1999 and March 31, 1998.
NOTE 9 -- SUBSEQUENT EVENTS
Acquisitions
On April 20, 1999, AIMCO 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 approxi-
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mately $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 Stock
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 Class A Common Stock.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
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.
In addition, the Company's continued qualification as a REIT involves the
application of highly technical and complex provisions of the Internal Revenue
Code. 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 $14.0 million for the three months
ended March 31, 1999, compared to $21.6 million for the three months ended March
31, 1998. The decrease in net income of $7.6 million, or 35%, 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. 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.
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CONSOLIDATED RENTAL PROPERTY OPERATIONS
Rental and other property revenues from the consolidated Owned Properties
totaled $112.6 million for the three months ended March 31, 1999, compared to
$71.3 million for the three months ended March 31, 1998, an increase of $41.3
million, or 57.9%. Rental and other property revenues for the consolidated Owned
Properties consisted of the following (dollars in thousands):
1999 1998
-------- -------
"Same store" properties..................................... $ 67,928 $67,472
1998 Acquisitions........................................... 41,958 326
1999 Acquisitions........................................... 604 --
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............................................. $112,586 $71,336
======== =======
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 $43.2 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 $16.9 million or 64.3%. Operating
expenses for the consolidated Owned Properties consisted of the following
(dollars in thousands):
1999 1998
------- -------
"Same store" properties..................................... $26,508 $25,043
1998 Acquisitions........................................... 16,023 164
1999 Acquisitions........................................... 241 --
1998 Sold Properties........................................ -- 111
1999 Sold Properties........................................ 9 8
Properties in lease-up after the completion of an expansion
or renovation............................................. 389 983
------- -------
Total............................................. $43,170 $26,309
======= =======
SERVICE COMPANY BUSINESS
The Company's share of income (loss) from the service company business was
$(0.3) 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 $3.0 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 $3.7 million for the three months ended
March 31, 1999, an 85% increase. The increase is primarily due to additional
corporate costs and additional employee salaries associated with the merger with
Ambassador in May 1998 and the merger with Insignia in October 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.
INTEREST EXPENSE
Interest expense, which includes the amortization of deferred financing
costs, totaled $31.3 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 $15.9
million, or 103.2%. The increase was primarily due to interest expense incurred
in connection with the acquisition of interests in Ambassador and Insignia and
interest expense incurred in connection with 1998 acquisitions.
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INTEREST INCOME
Interest income totaled $10.4 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 $4.3 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 securities, OP Units or equity securities in
public offerings or private placements, and cash generated from operations.
In August 1998, AIMCO and the AIMCO operating 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 AIMCO operating 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
AIMCO operating 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, dividends paid to its stockholders and distributions
paid to minority limited partners in the AIMCO operating partnership. 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 Company 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 made separate
offers to the limited partners of 106 partnerships owning 326 properties to
acquire their limited partnership interests. The Company paid approximately
$18.2 million in cash, (including transaction costs), to acquire limited
partnership interests pursuant to the offers.
On February 18, 1999, the Company 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 used to repay certain
indebtedness and for working capital. For three years, holders of the Class K
Preferred Stock are entitled to receive, when, as and if declared by the Board
of Directors, annual cash
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dividends in an amount per share equal to the greater of (i) $2.00 per year
(equivalent to 8% of the liquidation preference), or (ii) the cash dividends
payable on the number of shares of Class A Common Stock into which a share of
Class K Preferred Stock is convertible. Beginning with the third anniversary of
the date of original issuance, holders of Class K Preferred Stock will be
entitled to receive an amount per share equal to the greater of (i) $2.50 per
year (equivalent to 10% of the liquidation preference), or (ii) the cash
dividends payable on the number of Class A Common Stock into which a share of
Class K Preferred is convertible. The Class K Preferred Stock is senior to the
Class A Common Stock as to dividends and liquidation. Upon any liquidation,
dissolution or winding up of AIMCO, before payment or distributions by AIMCO may
be made to any holders of Class A Common Stock, the holders of the Class K
Preferred Stock are entitled to receive a liquidation preference of $25 per
share, plus accumulated, accrued and unpaid dividends.
CAPITAL EXPENDITURES
For the quarter ended March 31, 1999, the Company spent $8.7 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 the minority interest in the AIMCO
operating partnership, amortization of goodwill, the non-cash deferred portion
of the income tax provision for unconsolidated subsidiaries and less the payment
of dividends on preferred stock. FFO should not be considered 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.
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For the three months ended March 31, 1999 and 1998, the Company's FFO was
as follows (dollars in thousands):
1999 1998
-------- -------
OPERATING ACTIVITIES
Income before minority interest in operating partnership.... $ 15,175 $23,930
Gain on disposition of properties........................... (15) (2,526)
Real estate depreciation, net of minority interest.......... 25,700 12,779
Real estate depreciation related to unconsolidated
entities.................................................. 21,115 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 stock dividends................................... (10,347) (2,364)
Preferred OP Unit distribution.............................. (858) --
-------- -------
Funds From Operations (FFO)................................. $ 66,225 $39,087
======== =======
Weighted average number of common shares, common share
equivalents and OP Units outstanding:
Common stock and common stock equivalents................. 58,412 41,310
Preferred stock convertible into common stock............. 2,463 2,463
OP Units.................................................. 8,308 5,296
-------- -------
69,183 49,069
======== =======
For the three months ended March 31, 1999 and 1998, net cash flows were as
follows (dollars in thousands):
1999 1998
-------- --------
Cash flow provided by operating activities.................. $ 64,422 $ 9,661
Cash flow used in investing activities...................... (62,195) (47,025)
Cash flow (used in) provided by financing activities........ (34,971) 36,224
CONTINGENCIES
HUD Approvals and Enforcement
A significant number of apartment units owned or managed by AIMCO 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 AIMCO, and NHP Incorporated (together "NHP") in
years prior to their acquisition in December 1997 by AIMCO, HUD believes that
the 2530 Committee must review any application for 2530 Clearance filed by
AIMCO. In December 1998 and thereafter, AIMCO
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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. AIMCO believes that other owners and managers of HUD projects
have received similar subpoenas. Documents provided by AIMCO to the HUD
Inspector General relating to certain NHP acquisitions of property management
rights for HUD projects may be responsive to the subpoena. AIMCO 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 AIMCO or, to AIMCO's knowledge, any owner of a
HUD property managed by AIMCO, if any such action is taken in the future, it
could ultimately affect existing arrangements with respect to HUD projects,
affect AIMCO's ability to receive 2530 Clearances or otherwise have a material
adverse effect on AIMCO's results of operations.
AIMCO believes that the 2530 Committee will continue to apply the 2530
Clearance process to large management portfolios such as AIMCO's with discretion
and flexibility. If HUD were to disapprove AIMCO as property manager for one or
more affordable properties, AIMCO'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, AIMCO's operating partnership sold an aggregate of 15,000
of its Class I High Performance Partnership Units (the "High Performance Units")
to a joint venture formed 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 Company'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 the Company's Total Return satisfies
these criteria, the holders of the High Performance Units will receive
distributions and allocations of income and loss from the AIMCO operating
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 the Company'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 Company's outstanding Class A Common Stock and
Common 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 Common OP
Units, the High
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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 Company has not
recorded any value to the High Performance Units. If the measurement period
would have 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 share.
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, AIMCO identified all of the computer systems at risk
and formulated a plan to repair or replace each of the affected systems. During
1997, when AIMCO 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. AIMCO 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
AIMCO 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.
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In 1997, when AIMCO merged with NHP, the core financial system used by NHP
was Year 2000 compliant. During 1998, AIMCO integrated all of its core financial
systems to this compliant system for general ledger and financial reporting
purposes.
In 1997, AIMCO determined that the software used for property management
and rent collection was not Year 2000 compliant. During 1998, AIMCO implemented
a Year 2000 compliant system at each of its owned or managed properties, at a
cost of $1.4 million. During 1998, AIMCO acquired 82 properties and acquired the
Insignia multi-family business. Insignia owned or managed 1,100 properties. As
properties are acquired, AIMCO converts the existing property management and
rent collection systems to AIMCO'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. AIMCO 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
AIMCO has operating equipment, primarily at the property sites, which
needed to be evaluated for Year 2000 compliance. In September 1997, AIMCO 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 AIMCO at risk financially or operationally. AIMCO
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,
AIMCO 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. AIMCO estimates the cost to
replace or repair any remaining operating equipment is approximately $325,000,
and AIMCO expects to be completed by June 30, 1999.
AIMCO 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
AIMCO continues to conduct surveys of its banking and other vendor
relationships to assess risks regarding their Year 2000 readiness. AIMCO has
banking relationships with three major financial institutions, all of which have
indicated their compliance efforts will be complete before May 1999. AIMCO has
updated data transmission standards with two of the three financial
institutions. AIMCO'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
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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
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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.
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
used to repay certain indebtedness and for working capital. For three years,
holders of the Class K Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors, annual cash dividends in an amount per share
equal to the greater of (i) $2.00 per year (equivalent to 8% of the liquidation
preference), or (ii) the cash dividends payable on the number of shares of Class
A Common Stock into which a share of Class K Preferred Stock is convertible.
Beginning with the third anniversary of the date of original issuance, holders
of Class K Preferred Stock will be entitled to receive an amount per share equal
to the greater of (i) $2.50 per year (equivalent to 10% of the liquidation
preference), or (ii) the cash dividends payable on the number of Class A Common
Stock into which a share of Class K Preferred is convertible. The Class K
Preferred Stock is senior to the Class A Common Stock as to dividends and
liquidation. Upon any liquidation, dissolution or winding up of AIMCO, before
payment or distributions by AIMCO shall be made to any holders of Class A Common
Stock, the holders of the Class K Preferred Stock shall be entitled to receive a
liquidation preference of $25 per share, plus accumulated, accrued and unpaid
dividends.
From time to time during the quarter, AIMCO issued shares of Class A Common
Stock in exchange for Common OP Units tendered to the AIMCO operating
partnership for redemption in accordance with the terms and provisions of the
agreement of limited partnership of the AIMCO operating partnership. Such shares
are issued based on an exchange ratio of one share for each Common OP Unit. The
shares are issued in exchange for Common OP Units in private transactions exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to Section 4(2) thereof. During the three months ended March 31,
1999, 322,801 shares of Class A Common Stock were issued in exchange for Common
OP Units.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with this report (1):
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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)
3.1 -- Charter (Exhibit 3.1 to AIMCO's Annual Report on Form
10-K for the fiscal year 1998, is incorporated herein by
this reference)
3.2 -- Bylaws
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
AIMCO's Annual Report on Form 10-K 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
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
27.1 -- Financial Data Schedule
99.1 -- Agreement re: disclosure of long-term debt instruments
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(1) Schedules and supplemental materials to the exhibits have been omitted but
will be provided to the Securities Exchange Commission upon request.
(b) Reports on Form 8-K
During the quarter for which this report is filed, the Company filed its
Current Report on Form 8-K, dated January 21, 1999, relating to an increase in
Apartment Investment and Management Company's measure of economic profitability
and other financial indicators in the year ended 1998; its Current Report on
Form 8-K, dated January 22, 1999, relating to Apartment Investment and
Management Company's filing of a registration statement in connection with the
proposed merger of Insignia Properties Trust with and into Apartment Investment
and Management Company; its Current Report on Form 8-K, dated February 5, 1999,
relating to certain financial statements of an acquired business and pro forma
financial information; 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; Amendment No. 4 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; its Current Report on
Form 8-K, dated February 18, 1999, relating to the sale of 5,000,000 shares of
Class K Convertible Cumulative Preferred Stock of Apartment Investment and
Management Company; and its Current Report on Form 8-K, dated February 26, 1999,
relating to the merger of Insignia Properties Trust with and into Apartment
Investment and Management Company.
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APARTMENT INVESTMENT AND MANAGEMENT COMPANY
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.
APARTMENT INVESTMENT AND
MANAGEMENT COMPANY
By: /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
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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)
3.1 -- Charter (Exhibit 3.1 to AIMCO's Annual Report on Form
10-K for the fiscal year 1998, is incorporated herein by
this reference)
3.2 -- Bylaws
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
AIMCO's Annual Report on Form 10-K 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
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
27.1 -- Financial Data Schedule
99.1 -- Agreement re: disclosure of long-term debt instruments
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(1) Schedules and supplemental materials to the exhibits have been omitted but
will be provided to the Securities Exchange Commission upon request.