UNITED STATES 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, 1997 -------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ___________________ to _____________________ Commission File Number 1-13232 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, Colorado 80222-4348 - --------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (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 shares of Class A Common Stock outstanding as of April 30, 1997: 17,597,768 The number of shares of Class B Common Stock outstanding as of April 30, 1997: 325,000
APARTMENT INVESTMENT AND MANAGEMENT COMPANY FORM 10-Q INDEX <TABLE> PART I. FINANCIAL INFORMATION PAGE ---- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 3 Consolidated Statements of Income for the Three Months Ended March 31, 1997 and 1996 (unaudited) 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 21 </TABLE>
PART I. FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS. APARTMENT INVESTMENT AND MANAGEMENT COMPANY CONSOLIDATED BALANCE SHEETS (In thousands, except share data) <TABLE> March 31, December 31, 1997 1996 ----------- ------------ (Unaudited) <S> <C> <C> ASSETS REAL ESTATE - net of accumulated depreciation of $127,532 and $120,077 $742,399 $745,145 CASH AND CASH EQUIVALENTS 11,531 13,170 RESTRICTED CASH 10,423 15,831 ACCOUNTS RECEIVABLE 5,313 4,344 DEFERRED FINANCING COSTS 10,576 11,053 OTHER ASSETS 35,987 45,270 -------- -------- $816,229 $834,813 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY SECURED NOTES PAYABLE $240,935 $242,110 SECURED SHORT-TERM FINANCING 140,487 192,039 SECURED TAX-EXEMPT BOND FINANCING 75,151 75,497 UNSECURED SHORT-TERM FINANCING - 12,500 ACCOUNTS PAYABLE, ACCRUED AND OTHER LIABILITIES 14,248 16,299 RESIDENT SECURITY DEPOSITS AND PREPAID RENTS 4,623 4,316 -------- -------- 475,444 542,761 -------- -------- COMMITMENTS AND CONTINGENCIES - - MINORITY INTERESTS IN OTHER PARTNERSHIPS 9,893 10,386 MINORITY INTEREST IN OPERATING PARTNERSHIP 50,045 58,777 STOCKHOLDERS' EQUITY Class A Common Stock, $.01 par value, 150,000,000 shares authorized, 17,587,036 and 14,980,441 shares issued and outstanding 176 150 Class B Common Stock, $.01 par value, 425,000 shares authorized, 325,000 shares issued and outstanding 3 3 Non-voting preferred stock, $0.01 par value, 10,000,000 authorized, none issued or outstanding - - Additional paid-in capital 297,322 236,791 Accumulated deficit (16,654) (14,055) -------- -------- 280,847 222,889 -------- -------- $816,229 $834,813 -------- -------- -------- -------- </TABLE> See accompanying notes to consolidated financial statements.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Data) (Unaudited) <TABLE> Three Months Ended Three Months Ended March 31, 1997 March 31, 1996 ------------------ ------------------ (Restated) <S> <C> <C> RENTAL PROPERTY OPERATIONS Rental and other property revenues $ 38,040 $ 22,451 Property operating expenses (14,456) (8,702) Owned property management expense (1,321) (662) ------------ ------------ Income from property operations before depreciation 22,263 13,087 Depreciation (7,455) (4,470) ------------ ------------ Income from rental property operations 14,808 8,617 ------------ ------------ SERVICE COMPANY BUSINESS Management fees and other income 2,444 1,848 Management and other expenses (1,420) (1,260) Corporate overhead allocation (147) (149) Management company goodwill amortization (237) (114) Depreciation and amortization (88) (48) ------------ ------------ 552 277 Minority interests in service company business (1) 14 ------------ ------------ Company's share of income from service company business 551 291 ------------ ------------ GENERAL AND ADMINISTRATIVE EXPENSES (351) (323) INTEREST EXPENSE (9,452) (5,395) INTEREST INCOME 507 114 MINORITY INTERESTS IN OTHER PARTNERSHIPS (369) - ------------ ------------ INCOME BEFORE MINORITY INTEREST IN OPERATING PARTNERSHIP AND EXTRAORDINARY ITEM 5,694 3,304 MINORITY INTEREST IN OPERATING PARTNERSHIP (841) (494) ------------ ------------ INCOME BEFORE EXTRAORDINARY ITEM 4,853 2,810 EXTRAORDINARY ITEM-EARLY EXTINGUISHMENT OF DEBT, NET OF MINORITY INTEREST (269) - ------------ ------------ NET INCOME $ 4,584 $ 2,810 ------------ ------------ ------------ ------------ NET INCOME PER COMMON SHARE AND COMMON SHARE: EQUIVALENT: Income before extraordinary item $ 0.29 $ 0.24 Extraordinary item (0.01) - ------------ ------------ Net income $ 0.28 $ 0.24 ------------ ------------ ------------ ------------ DIVIDENDS PAID PER COMMON SHARE $ 0.46 $ 0.43 ------------ ------------ ------------ ------------ WEIGHTED AVERAGE SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING 16,586 11,860 ------------ ------------ ------------ ------------ </TABLE> See accompanying notes to consolidated financial statements.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOW (In Thousands) (Unaudited) <TABLE> Three Months Three Months Ended Ended March 31, March 31, 1997 1996 -------- -------- (Restated) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 4,584 $ 2,810 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,405 4,632 Minority interest in Operating Partnership 841 494 Minority interests in other partnerships 369 - Changes in operating assets, (increase) decrease in: Restricted cash 5,408 (249) Accounts receivable (969) (443) Accounts receivable from affiliates - 205 Other assets 9,082 (52) Changes in operating liabilities, increase (decrease) in: Accounts payable, accrued and other liabilities (2,051) (752) Resident security deposits and prepaid rents 307 124 -------- -------- Total adjustments 21,392 3,959 -------- -------- Net cash provided by operating activities 25,976 6,769 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of real estate (628) (6,711) Capital replacements (986) (827) Initial capital expenditures (973) (261) Construction in progress and capital enhancements (2,122) (1,437) Purchase of office equipment and leasehold improvements (294) (114) -------- -------- Net cash used in investing activities (5,003) (9,350) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of Class A Common Stock, net of underwriting and offering costs 51,463 (51) Principal repayments on secured short-term financing (30,752) - Principal repayments on unsecured short-term financing (12,500) - Net (paydowns) borrowings on Credit Facility (20,800) 8,500 Principal paydowns on secured notes payable (1,175) (926) Proceeds from secured notes payable borrowings - 56 Principal paydowns on secured tax-exempt bond financing (346) - Payment of loan costs (148) (118) Payment of common stock dividends (7,183) (5,037) Payment of distributions to minority interest in Operating Partnership (1,171) (824) -------- -------- Net cash (used in) provided by financing activities (22,612) 1,600 -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,639) (981) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,170 2,379 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,531 $ 1,398 -------- -------- -------- -------- </TABLE> See accompanying notes to consolidated financial statements.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY Consolidated Statements of Cash Flow (In Thousands Except Share and Operating Partnership Unit Data) NON CASH INVESTING AND FINANCING ACTIVITIES REDEMPTION OF OP UNITS During the three months ended March 31, 1997, 543,794 Operating Partnership units with a recorded value of $8,431 were redeemed in exchange for an equal number of shares of Class A Common Stock. PURCHASE OF REAL ESTATE In January 1996, the Company assumed $18,920 of notes payable secured by first and second deeds of trust and issued 82,703 Operating Partnership units with a recorded value of $1,530 in connection with the purchase of real estate.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY Notes to Consolidated Financial Statements March 31, 1997 (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") acts as sole general partner of AIMCO Properties, L.P. (the "Operating Partnership"), through AIMCO-GP, Inc. and AIMCO-LP, Inc., wholly-owned subsidiaries which hold all of the Company's general and limited partnership interests in and majority ownership of the Operating Partnership. At March 31, 1997, the Company had 17,587,036 shares of Class A Common Stock outstanding and the Operating Partnership had 2,858,046 Operating Partnership units ("OP Units") outstanding, for a combined total of 20,445,082 shares and OP Units. The Company held an 86% interest in the Operating Partnership as of March 31, 1997. At March 31, 1997, the Company owned or controlled 23,764 apartment units in 94 properties and managed an additional 17,731 apartment units in 131 properties for third party owners and affiliates, bringing the total managed portfolio to 41,495 apartment units in 225 properties located in the sunbelt regions of the United States. NOTE 2 - BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of AIMCO, the 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 Interests in Other Partnerships. The accompanying unaudited consolidated financial statements of the Company as of March 31, 1997 and for the three months ended March 31, 1997 and 1996 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, 1996. 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.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY Notes to Consolidated Financial Statements (continued) NOTE 2 - BASIS OF PRESENTATION (CONTINUED) In the second quarter of 1996, the Company adopted Emerging Issues Task Force (EITF) Number 95-6 "Accounting by a Real Estate Investment Trust for an Investment in a Service Corporation". The Company reports the operations of the service company business on a consolidated basis after the adoption of EITF 95-6. Prior to the issuance of EITF 95-6, the Company reported the service company business on the equity method. The adoption of EITF 95-6 has no impact on net income, but does increase third party and affiliate management and other income, management and other expenses, amortization of management company goodwill and depreciation of non- real estate assets. The Company has restated the statement of income and statement of cash flows for the three months ended March 31, 1996 to reflect the retroactive application of the change. NOTE 3 - OTHER ASSETS In March 1997, certain executive officers of the Company (or entities controlled by them) repaid $11.4 million of their $16.9 million in notes payable to the Company executed for the purchase in 1996 of 814,500 shares of Class A Common Stock by these executive officers. NOTE 4 - SECURED SHORT-TERM FINANCING In February 1997, the Company repaid floating rate indebtedness of $25,615,000 and borrowings on the variable rate revolving credit facility with Bank of America (the "Credit Facility") of $8,500,000 with proceeds from a public offering of shares of Class A Common Stock (see Note 6). In addition, the Company used $5,074,000 of restricted cash which was held in escrow at December 31, 1996 to repay indebtedness assumed in connection with the acquisition of the Chesapeake Apartments in December 1996. In March 1997, the Company paid down the Credit Facility by $12,300,000 with funds received in connection with the repayment of notes due to the Company (see Note 3). In March 1997, the Company entered into an interest rate swap agreement having a notional principal amount of $100,000,000, in anticipation of financing certain floating rate indebtedness, which will be incurred upon the completion of upcoming real estate acquisitions, on a long term basis in the third quarter of 1997. The interest rate swap agreement matures on September 25, 1997 and fixed the twelve year treasury rate at 6.94%. Based on the fair value at March 31, 1997, the Company had a liability of approximately $89,000. NOTE 5 - UNSECURED SHORT-TERM FINANCING The Company repaid in full $12,500,000 incurred in connection with the purchase in 1996 of interests in limited partnerships with proceeds from a public offering completed in February 1997 of shares of Class A Common Stock (see Note 6).
APARTMENT INVESTMENT AND MANAGEMENT COMPANY Notes to Consolidated Financial Statements (continued) NOTE 6 - COMPLETION OF PUBLIC OFFERING In February 1997, the Company completed a public offering of 2,015,000 shares of Class A Common Stock (including 15,000 shares subject to the underwriter's overallotment option) at a public offering price of $26.75 per share. The net proceeds of approximately $51 million were used to repay a portion of the Company's indebtedness incurred in acquisitions completed in November and December 1996 (see Notes 4, 5). NOTE 7 - EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") which specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Management believes that adoption of SFAS 128 will not have a material effect on earnings per share of the Company. NOTE 8 - NHP ACQUISITION Pursuant to a Letter Agreement executed on February 19, 1997, AIMCO entered into an Agreement and Plan of Merger, dated as of April 21, 1997 (the "Merger Agreement"), with NHP Incorporated, a Delaware Corporation ("NHP"), and AIMCO/NHP Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of AIMCO ("Merger Sub"), pursuant to which Merger Sub will be merged with and into NHP (the "Merger"). In the Merger, holders of common stock, par value $.01 per share ("NHP Common Stock"), of NHP may elect to receive, for each share, either (i) 0.74766 shares of AIMCO Class A Common Stock, or (ii) a combination of 0.37383 shares of AIMCO Common Stock and $10 in cash. NHP has indicated that, as of March 7, 1997, 12,652,439 shares of NHP Common Stock were issued and outstanding (excluding options). The Merger Agreement also provides for NHP to distribute rights ("Rights") to its stockholders that will entitle them to receive shares of NHP Financial Services, Ltd.; a Delaware corporation ("NHP Financial"), NHP's commercial mortgage banking subsidiary, upon the effectiveness of the Merger or on December 1, 1997 if the Merger has not yet occurred. The Merger is conditioned on, among other things, the approval of the stockholders of AIMCO and NHP (excluding AIMCO) and certain governmental approvals. Pursuant to the Letter Agreement executed on February 19, 1997, AIMCO entered into a Stock Purchase Agreement, dated as of April 16, 1997 (the "Stock Purchase Agreement"), with Demeter Holdings Corporation, a Massachusetts corporation ("Demeter"), an affiliate of Harvard Private Capital Group, Inc., and Capricorn Investors, L.P., a Delaware limited partnership ("Capricorn"), providing for AIMCO to acquire approximately 6.9 million shares of NHP Common Stock from Demeter and Capricorn. On May 5, 1997, pursuant to the Stock Purchase Agreement, the Company acquired approximately 6.5 million shares of NHP Common Stock for an aggregate purchase price of $132.6 million, consisting of $72.6 million in cash and approximately 2.1 million shares of AIMCO Class A Common Stock. The Company is also obligated to deliver to the sellers the shares of NHP Financial that the Company will receive in respect of such shares of NHP Common Stock (or, under certain circumstances, $3.05 in cash per
APARTMENT INVESTMENT AND MANAGEMENT COMPANY Notes to Consolidated Financial Statements (continued) NOTE 8 - NHP ACQUISITION (CONTINUED) share of NHP Common Stock acquired). The cash payment of the purchase price was financed with short term, floating rate indebtedness incurred by a subsidiary and guaranteed by AIMCO. The shares of NHP Common Stock acquired by the Company represent approximately 51% of the outstanding shares of NHP Common Stock. The Stock Purchase Agreement also provides for the purchase by the Company of an additional, approximately 430,000 shares of NHP Common Stock. AIMCO is continuing to negotiate the terms of a definitive agreement with Demeter, Capricorn, Phemus Corporation, a Massachusetts corporation and an affiliate of Demeter, and J. Roderick Heller, President and Chief Executive Officer of NHP, relating to the acquisition of certain entities formerly owned by NHP that own direct and indirect interests in partnerships that own conventional and affordable multifamily apartment properties managed primarily by NHP, along with a captive insurance subsidiary and certain related assets (collectively, the "NHP Real Estate Companies"). In connection with the Merger Agreement, NHP has agreed to waive its right of first refusal to purchase the NHP Real Estate Companies, effective May 3, 1997, provided that such an agreement is entered into on satisfactory terms no later that May 31, 1997. NOTE 9 - SUBSEQUENT EVENTS PURCHASE OF THE BAY CLUB APARTMENTS In April 1997, the Company purchased The Bay Club in Aventura ("Bay Club"), a 702-unit luxury high rise apartment community located in Aventura, Florida and 3.5 acres of vacant land adjacent to Bay Club. The purchase price is $71 million, which includes the assumption of $49 million of existing mortgage indebtedness that bears interest at approximately 8.0% per annum and matures in November 2001. The purchase price includes estimated closing costs and approximately $0.3 million for initial capital expenditures at the property. COMPLETION OF REFINANCING In April 1997, 23 partnerships controlled by the Company borrowed an aggregate of $108 million from an institutional lender on a fully amortizing, fixed rate basis with a term of 20 years. The loans have a weighted average effective interest rate of 7.6% per year. The loans are secured by 27 multifamily apartment properties owned by such partnerships. The net proceeds of the borrowings, and $29 million from additional borrowings under the Company's Credit Facility, were used to repay approximately $137 million of secured, short term debt. In March and April 1997, the two interest rate swap agreements entered into in 1996, each having a notional principal amount of $50 million, matured resulting in a gain totaling $3.4 million. This gain will be deferred and amortized over the life of the $108 million indebtedness as a reduction to interest expense. DIVIDEND DECLARED On April 23, 1997, the Board of Directors declared a cash dividend of $0.4625 per share of Class A Common Stock for the quarter ended March 31, 1997, payable on May 15, 1997 to stockholders of record on May 8, 1997.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY Notes to Consolidated Financial Statements (continued) NOTE 9 - SUBSEQUENT EVENTS (CONTINUED) SALE OF COMMON STOCK In May 1997, AIMCO sold 1.9 million shares of AIMCO Class A Common Stock at a price of $28.00 per share in a public offering. The net proceeds of approximately $52 million were used to repay the indebtedness then outstanding under the Company's Credit Facility. In May 1997, AIMCO sold 400,000 shares of AIMCO Class A Common Stock at $27.50 per share in a public offering. The net proceeds of $11 million were used to provide working capital. SHELF REGISTRATION In April 1997, the Company filed with the Securities and Exchange Commission (the "SEC") a "Shelf" Registration Statement to register for sale on a delayed or continuous basis up to $1 billion of debt and equity securities. The SEC has not yet declared the Registration Statement effective.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company is a real estate investment trust with headquarters in Denver, Colorado which holds a geographically diversified portfolio of apartments, primarily serving the middle market. As of March 31, 1997, the Company owned or controlled 23,764 apartment units in 94 multifamily apartment properties (the "Owned Properties"). In addition to its Owned Properties, the Company managed 17,731 apartment units in 131 properties for third parties and affiliates, bringing the total managed portfolio to 41,495 apartment units in 225 multifamily apartment properties located in the sunbelt regions of the United States. 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; 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 failure of such 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 real estate investment trust 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 the other 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, 1997 TO THE THREE MONTHS ENDED MARCH 31, 1996 The Company recognized net income of $4,584,000 for the three months ended March 31, 1997 compared to $2,810,000 for the three months ended March 31, 1996. The increase in net income of $1,774,000, or 63.1% was primarily the result of the acquisition of forty-one Owned Properties in 1996 offset by the sale of four properties sold in August 1996. The increase in net income is partially offset by increased interest expense associated with indebtedness which was assumed or incurred in connection with the acquisition of the Owned Properties in 1996. These factors are discussed in more detail in the following paragraphs.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RENTAL PROPERTY OPERATIONS Rental and other property revenues from the Company's Owned Properties totaled $38,040,000 for the three months ended March 31, 1997 consisting of $21,001,000 for the 51 "same store" properties, $16,015,000 for the properties acquired in 1996 and $1,024,000 for two properties in lease up after completion of an expansion or renovation. Rental and other revenue for the 51 "same store" properties increased from $20,157,000 for the three months ended March 31, 1996 to $21,001,000 for the three months ended March 31, 1997, an increase of $844,000 or 4.2%. Average monthly rent per occupied unit for these 51 properties at March 31, 1997 and 1996 was $563 and $541, respectively, an increase of 4.1%. Weighted average physical occupancy for the 51 properties increased from 93.8% at March 31, 1996 to 94.5% at March 31, 1997, an 0.7% increase. Operating expenses, consisting of on-site payroll costs, utilities (net of reimbursements received from tenants), contract services, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $14,456,000 for the three months ended March 31, 1997, consisting of $7,623,000 for the 51 "same store" properties, $6,431,000 for the 42 properties acquired in 1996 and $402,000 for the two properties in lease up. Operating expenses for the 51 properties totaled $7,623,000 for the three months ended March 31, 1997, compared to $7,626,000 for the same period in 1996, reflecting a $3,000 decrease in 1997. Owned property management expenses, representing the costs of managing the Company's Owned Properties, totaled $1,321,000 for the three months ended March 31, 1997, consisting of $559,000 for the 51 "same store" properties, $731,000 for the properties purchased in 1996 and $31,000 for the properties in lease up. Owned property management expenses for the 51 properties totaled $559,000 for three months ended March 31, 1977, compared to $571,000 for the same period in 1996, reflecting a decrease of $12,000 in 1997. SERVICE COMPANY BUSINESS The Company's share of income from the service company business was $551,000 for the three months ended March 31, 1997 compared to $291,000 for the three months ended March 31, 1996. The increase is due to the acquisition by the Company of property management businesses in August and November 1996 offset by decreased commercial asset management revenues attributable to fewer assets under management and increased payroll costs.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INTEREST EXPENSE Interest expense totaled $9,452,000 for the three months ended March 31, 1997 compared to $5,395,000 for the three months ended March 31, 1996. Interest expense, which includes amortization of deferred financing costs, for the three months ended March 31, 1997 increased by $4,057,000, or 75.2% from the three months ended March 31, 1996. The increase primarily consists of: (i) $3,153,000 of interest on secured short-term and long-term indebtedness incurred by partnerships in which the Company acquired a controlling interest in November and December 1996, (ii) $332,000 of increased interest due to increased borrowings outstanding under the Credit Facility resulting from the acquisitions completed in November and December 1996, (iii) $431,000 of interest expense on secured and unsecured, short-term indebtedness incurred in connection with other acquisitions in 1996, and (iv) $102,000 of increased interest on unsecured short-term indebtedness incurred in connection with the purchase of limited partnership interests in December 1996. During the three months ended March 31, 1997, the Company capitalized interest expense of $231,000 as a result of increased construction and renovation activities compared to $136,000 of interest expense which was capitalized during the three months ended March 31, 1996. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1997, the Company had $11,531,000 in cash and cash equivalents and $10,423,000 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 Operating Partnership. The Company considers its cash provided by operating activities to be adequate to meet short-term liquidity demands. The Company utilizes the Credit Facility for general corporate purposes and to fund investments on an interim basis. In January 1997, the interest rate on the Credit Facility was reduced to LIBOR plus 1.45%. The Credit Facility matures in August 1998 and subject to certain customary conditions, the outstanding balance may be converted to a three year term loan. At March 31, 1997, $24,000,000 was borrowed under the Credit Facility. During the three months ended March 31, 1997, the Company repaid $25.6 million of secured short-term indebtedness, $12.5 million of unsecured short-term indebtedness and $20.8 of the outstanding balance under the Credit Facility with proceeds from a public offering of AIMCO Class A Common Stock in February 1997 and funds received in connection with the repayment of notes due to the Company from certain executives officers of the Company (or entities controlled by them) related to their purchase of common stock of the Company. In April 1997, 23 partnerships controlled by the Company borrowed an aggregate of $108 million from an institutional lender on a fully amortizing, fixed rate basis with a term of 20 years. The loans have a weighted average effective interest rate of 7.6% per year. The loans are secured by 27 multifamily apartment properties owned by such partnerships. The net proceeds of the borrowings, and $29 million from additional borrowings under the Company's Credit Facility, were used to repay approximately $137 million of secured, short term debt.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In May 1997, AIMCO sold 1.9 million shares of AIMCO Class A Common Stock at a public offering price of $28.00 per share. The net proceeds of approximately $52 million were used to repay indebtedness outstanding under the Company's Credit Facility. In addition, AIMCO sold 400,000 shares of AIMCO Class A Common Stock at $27.50 per share in a public offering. The net proceeds of $11 million were used to provide working capital. In May 1997, the Company acquired approximately 51% of the outstanding shares of NHP Incorporated ("NHP") from Demeter Holdings Corporation ("Demeter"), an affiliate of Harvard Private Capital Group, Inc. and Capricorn Investors, L.P. ("Capricorn") for an aggregate purchase price of $132.6 million. The purchase price consisted of $72.6 million in cash and the issuance of approximately 2.14 million shares of AIMCO Class A Common Stock at $28 per share. The cash portion of the purchase price was financed with a floating rate, short term loan bearing interest at LIBOR plus 2.5%. The proposed Merger with NHP will require the Company to pay up to $65 million in cash as consideration to NHP stockholders, and will require the Company to repay $72.6 million of indebtedness incurred to finance the purchase of shares of NHP Common Stock in May 1997. In addition, the proposed acquisition of the NHP Real Estate Companies would involve a cash consideration of up to $55 million. The Company expects to meet its long-term liquidity requirements, including the proposed Merger with NHP and the proposed acquisition of the NHP Real Estate Companies, as well as property acquisitions and refinancing of short-term debt with long-term, fixed rate, fully amortizing debt, secured or unsecured, the issuance of debt securities, units of limited partnership in the Operating Partnership ("OP Units") or equity securities and cash generated from operations. In April 1997, the Company filed a "Shelf" Registration Statement with the Securities and Exchange Commission with respect to an aggregate of $1 billion of debt and equity securities. The SEC has not yet declared the Registration Statement effective. No additional amounts remain available under the $200 million shelf registration statement filed with the SEC in October 1995. As of March 31, 1997, the Company had outstanding indebtedness totaling $456.6 million including $240.9 million of secured long-term financing, $116.5 in secured short-term financing, $75.2 million of secured tax-exempt bonds and $24 million outstanding under its Credit Facility. The Company's outstanding debt is secured by substantially all of the Company's Owned Properties. At March 31, 1997 the weighted average interest rate on the Company's long-term secured tax- exempt financing and secured notes payable was 8.0% with a weighted average maturity of 11 years. The weighted average interest rate on the Company's secured short-term financing was 7.7%. CAPITAL EXPENDITURES For the three months ended March 31, 1997, the Company spent $986,000 for capital replacements and $973,000 for initial capital expenditures. In addition, in the three months ended March 31, 1997, the Company spent $2.1 million in costs related to renovation of an Owned Property. These expenditures were funded by borrowings under the Credit Facility, working capital reserves and net cash provided by operating activities. The Company provides an allowance for capital replacements of $300 per apartment unit per annum or $1,533,000 for the quarter ended March 31, 1997. Therefore, a reserve for unspent capital replacements of $547,000 was provided for the quarter ended March 31, 1997. A reserve of $586,000 remained from the year ended December 31, 1996 bringing the total reserve to carry forward to future periods to $1,133,000. The Company expects to incur initial capital expenditures and capital enhancements of approximately $19 million during the year ended December 31, 1997. Initial capital expenditures and capital enhancements will be funded by cash from operating activities and borrowings under the Credit Facility.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CASH EARNED FOR SHAREHOLDERS AND FUNDS FROM OPERATIONS The Company measures its economic profitability based on Funds From Operations ("FFO") less a minimum annual provision for capital replacements of $300 per apartment unit, which the Company defines as Cash Earned For Shareholders ("CEFS"). FFO represents income before minority interest and gain on sale of real estate based on generally accepted accounting principles plus real estate depreciation and amortization of management company goodwill less any preferred stock dividend payments. FFO computations conform to the National Association of Real Estate Investment Trusts' ("NAREIT") definition, adjusted to add back amortization of management company goodwill and deduct payment of dividends on preferred stock. FFO and CEFS do not represent cash generated from operating activities in accordance with generally accepted accounting principles and therefore should not be considered an alternative to net income as an indication of the Company's performance or to net cash flows from operating activities as determined by generally accepted accounting principles as a measure of liquidity and is not necessarily indicative of cash available to fund future cash needs. For the three months ended March 31, 1997 and 1996, FFO and CEFS were as follows (amounts in thousands): <TABLE> THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, 1997 MARCH 31, 1996 -------------- -------------- <S> <C> <C> Income before gain on disposition of property and minority interest in Operating Partnership $ 5,694 $ 3,304 Owned properties depreciation 6,581 4,470 Amortization of management company goodwill 237 114 ------- ------- Funds From Operations (FFO) 12,512 7,888 Capital Replacements (1,533) (1,120) ------- ------- Cash Earned For Shareholders (CEFS) $10,979 $ 6,768 ------- ------- ------- ------- Weighted average common shares, common share equivalents and OP Units outstanding 19,626 13,940 ------- ------- ------- ------- </TABLE>
APARTMENT INVESTMENT AND MANAGEMENT COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONTINGENCIES Certain of the Company's Owned Properties are, and some of the Managed Properties may be, located on or near properties that have contained underground storage tanks or on which activities have occurred which could have released hazardous substances into the soil or groundwater. There can be no assurances that such hazardous substances have not been released or have not migrated, or in the future will not be released or will not migrate onto the properties. In addition, the Company's Montecito property in Austin, Texas, is located adjacent to, and may be partially on, land that was used as a landfill. Low levels of methane and other landfill gas have been detected at Montecito. The remediation of the landfill gas is now substantially complete. The environmental authorities have preliminarily approved the methane gas remediation efforts. Final approval of the site and the remediation process is contingent upon the results of continued methane gas monitors to confirm the effectiveness of the remediation efforts. Should further actionable levels of methane gas be detected, a proposed contingent plan of passive methane gas venting may be implemented. The Company believes the costs of such further limited action, if any, will not be material. Testing has also been conducted on Montecito to determine whether, and to what extent, groundwater has been impacted. Test reports have indicated that the groundwater is not contaminated at actionable levels. 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.
APARTMENT INVESTMENT AND MANAGEMENT COMPANY ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its annual meeting of stockholders on April 24, 1997. At the meeting, the stockholders approved the four proposals set forth below: 1. Proposal to elect six directors, for a term of one year each, until the next annual meeting of stockholders and until their successors are elected and qualify: Votes Votes For Withheld --- -------- Terry Considine 14,067,058 104,303 Richard S. Ellwood 14,067,058 104,303 Peter K. Kompaniez 14,067,058 104,303 J. Landis Martin 14,067,058 104,303 Thomas L. Rhodes 14,067,058 104,303 John D. Smith 14,067,058 104,303 2. Proposal to ratify the selection of Ernst & Young LLP, to serve as independent auditors for the Company for the calendar year ending December 31, 1997: Votes Votes Broker For Against Abstentions Non Votes --- ------- ----------- --------- 14,081,325 29,858 60,178 0 3. Proposal to approve the Apartment Investment and Management Company 1997 Stock Award and Incentive Plan: Votes Votes Broker For Against Abstentions Non Votes --- ------- ----------- --------- 7,521,212 1,767,313 148,935 0 4. Proposal to approve and ratify (i) the Amended and Restated Apartment Investment and Management Company Non-Qualified Stock Option Plan, and (ii) the issuance and sale of 515,500 shares of AIMCO Class A Common Stock to certain of the Company's executive officers: Votes Votes Broker For Against Abstentions Non Votes --- ------- ----------- --------- 8,421,824 826,523 189,114 0
APARTMENT INVESTMENT AND MANAGEMENT COMPANY PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The following exhibits are filed with this report: Exhibit Number Description - ------- ----------- 2.1 Agreement and Plan of Merger, dated as of April 21, 1997, by and among Apartment Investment and Management Company, AIMCO/NHP ACQUISITION CORP. and NHP Incorporated (incorporated by reference from the Company's report on Form 8-K, dated April 16, 1997, filed on April 24, 1997). 2.2 Stock Purchase Agreement, dated as of April 16, 1997, by and among Apartment Investment and Management Company, Demeter Holdings Corporation and Capricorn Investors, L.P. (incorporated by reference from the Company's report on Form 8-K, dated April 16, 1997, filed on April 24, 1997). 10.1 Credit Agreement, dated as of May 5, 1997, by and among AIMCO/NHP Holdings, Inc., the lenders from time to time party thereto, Bank of America National Trust and Savings Association, as one of the Lenders, Smith Barney Mortgage Capital Group, Inc., as one of the Lenders, and Bank of America National Trust and Savings Association, as Agent. 10.2 Promissory Note, dated as of May 5, 1997, by AIMCO/NHP Holdings, Inc., in favor of Smith Barney Mortgage Capital Group, Inc. 10.3 Promissory Note, dated as of May 5, 1997, by AIMCO/NHP Holdings, Inc., in favor of Bank of America National Trust and Savings Association. 10.4 Payment Guaranty, dated as of May 5, 1997, by the Company and AIMCO Properties, L.P., in favor of Bank of America National Trust and Savings Association, as the agent. 10.5 Pledge Agreement, dated as of May 5, 1997, by AIMCO Properties, L.P. and Terry Considine and Peter K. Kompaniez and the Bank of America National Trust and Savings Association, as Agent, for Bank of America National Trust and Savings Association and Smith Barney Mortgage Capital Group, Inc. 10.6 Amended and Restated Credit Agreement (Secured Revolver-to-Term Facility), dated as of May 5, 1997, by and among AIMCO Properties, L.P., the lenders from time to time party thereto, Bank of America National Trust and Savings Association, as one of the Lenders and as the Issuing Lender, and Bank of America National Trust and Savings Association, as Agent. 10.7 Promissory Note, dated as of May 5, 1997, by AIMCO Properties, L.P., in favor of Bank of America National Trust and Savings Association. 2
10.8 Payment Guaranty, dated as of May 5, 1997, by the Company, AIMCO-LP, Inc., AIMCO-GP, Inc., AIMCO Holdings QRS, Inc., AIMCO Somerset, Inc. and AIMCO/OTC QRS, Inc. in favor of Bank of America National Trust and Savings Association, as the agent. 10.9 Amended and Restated Credit Agreement (Bridge Loan Facility), dated as of May 5, 1997, by and among AIMCO Properties, L.P., the lenders from time to time party thereto, Bank of America National Trust and Savings Association, as one of the Lenders, and Bank of America National Trust and Savings Association, as Agent. 10.10 Promissory Note, dated as of May 5, 1997, by AIMCO Properties, L.P., in favor of Bank of America National Trust and Savings Association. 27.1 Financial Data Schedule (b) Reports on Form 8-K During the quarter for which this report is filed, the Company filed the following Reports on Form 8-K: (1) Current Report on Form 8-K, dated December 19, 1996, relating to sale of Chesapeake Apartments; acquisition of Bay West Apartments and Dolphins Landing Apartments; borrowings from NationsBank of Texas, N.A.; stock sales pursuant to the Company's management stock acquisition plan; certain pro forma financial information; and including the Historical Summary of Gross Income and Direct Operating Expenses of Villa Ladera Apartment for the year ended December 31, 1995. (2) Current Report on Form 8-K, dated February 19, 1997, relating to a letter agreement which involves the acquisition of an interest in NHP Incorporated, interests in certain entities managed by NHP Incorporated, a 50% interest in one joint venture and a 25% interest in another joint venture with the Sellers, as well as the merger of NHP Incorporated with the Company or one of its subsidiaries. 3
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. REGISTRANT: APARTMENT INVESTMENT AND MANAGEMENT COMPANY Date: May 14, 1997 /s/ Leeann Morein ----------------- Leeann Morein Senior Vice President and Chief Financial Officer (duly authorized officer and principal financial officer) /s/ Patricia K. Heath --------------------- Patricia K. Heath Vice President and Chief Accounting Officer (principal accounting officer)