SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
Commission File Number 1-13232
Apartment Investment and Management Company
(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 October 31, 2002: 93,649,333
TABLE OF CONTENTS
APARTMENT INVESTMENT AND MANAGEMENT COMPANY
FORM 10-Q
INDEX
1
CONSOLIDATED BALANCE SHEETS(In Thousands, Except Share Data)
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME(In Thousands, Except Per Share Data)(Unaudited)
3
CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)(Unaudited)
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2002(Unaudited)
NOTE 1 — Organization
Apartment Investment and Management Company (“AIMCO”), a Maryland corporation incorporated on January 10, 1994, 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. AIMCO held approximately an 88% interest in the AIMCO Operating Partnership as of September 30, 2002. AIMCO-GP, Inc. is the sole general partner of the AIMCO Operating Partnership. Except where the context otherwise requires, “Company” refers to AIMCO, the AIMCO Operating Partnership and AIMCO’s consolidated corporate subsidiaries and consolidated real estate partnerships.
As of September 30, 2002, the Company:
At September 30, 2002, 93,195,129 shares of AIMCO’s Class A Common Stock (the “Common Stock”) were outstanding. Interests in the AIMCO Operating Partnership that are held by limited partners other than the Company are referred to as “OP Units.” Holders of common OP Units may redeem such units for cash or, at the Company’s option, Common Stock. At September 30, 2002, the AIMCO Operating Partnership had 12,446,817 common OP Units and equivalents outstanding. At September 30, 2002, a combined total of 105,641,946 shares of Common Stock and OP Units were outstanding (excluding preferred OP Units).
NOTE 2 — Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the statements and notes thereto included in the AIMCO annual report on Form 10-K for the year ended December 31, 2001. Certain 2001 financial statement amounts have been reclassified to conform to the 2002 presentation, including certain eliminations of self-charged income, as well as the treatment of discontinued operations.
The accompanying consolidated financial statements include the accounts of AIMCO, the AIMCO Operating Partnership, majority owned corporate subsidiaries and consolidated real estate partnerships. As used herein, and except where the context otherwise requires, “partnership” refers to a limited partnership or a limited liability company and “partner” refers to a limited partner in a limited partnership or a member in a limited liability company. All significant intercompany balances and transactions have been eliminated in consolidation. The assets
5
of consolidated real estate partnerships owned or controlled by AIMCO or the AIMCO Operating Partnership generally are not available to pay creditors of AIMCO or the AIMCO Operating Partnership.
Interests held in consolidated real estate partnerships by limited partners other than the Company are reflected as minority interest in consolidated real estate partnerships. Minority interest in real estate partnerships represents the minority partners’ share of the underlying net assets of the Company’s consolidated real estate partnerships. When these consolidated real estate partnerships make cash distributions in excess of net income, the Company, as the majority partner, records a charge equal to the minority partners’ excess of distributions over net income, even though the Company does not suffer any economic effect, cost or risk. This charge is classified in the consolidated statements of income as distributions to minority partners in excess of income. Losses are allocated to minority partners until such time as such losses exceed the minority interest basis, in which case, the Company recognizes 100% of the losses in operating earnings, even though the Company does not suffer any economic effect, cost or risk. With regard to such consolidated real estate partnerships, approximately $0.8 million in non-cash depreciation losses related to the minority interest ownership were charged to operations for the three and nine months ended September 30, 2002, respectively, and no losses were charged to operations for the three and nine months ended September 30, 2001, respectively.
NOTE 3 — Notes Receivable from Unconsolidated Real Estate Partnerships
The following table summarizes the Company’s notes receivable from unconsolidated real estate partnerships at September 30, 2002 and 2001 (in thousands):
The Company recognizes interest income earned from its investments in notes receivable when the collectibility of such amounts is both probable and estimable. The notes receivable were either extended by the Company and are carried at the face amount plus accrued interest (“par value notes”) or were made by predecessors whose positions have been acquired at a discount (“discounted notes”).
As of September 30, 2002 and 2001, the Company held, primarily through its consolidated corporate subsidiaries, $115.3 million and $128.9 million, respectively, of par value notes receivable from unconsolidated real estate partnerships, including accrued interest, for which the Company believes the collectibility of such amounts is both probable and estimable. As such, interest income from the par value notes is generally recognized as it is earned. Interest income from such notes for the three and nine months ended September 30, 2002 totaled $7.3 million and $24.2 million, respectively, and for the three and nine months ended September 30, 2001 totaled $8.1 million and $22.8 million, respectively.
As of September 30, 2002 and 2001, the Company held discounted notes, including accrued interest, with a carrying value of $132.2 million and $128.5 million, respectively. The total face value plus accrued interest of these notes was $221.7 million and $289.3 million at September 30, 2002 and 2001, respectively.
Under the cost recovery method, the discounted notes are carried at the acquisition amount, less subsequent cash collections, until such time as collectibility of principal and interest is probable and the timing and amounts are estimable. Based upon closed or pending transactions (which include sales, refinancing, foreclosures and rights offering activities), the Company has determined that certain notes are collectible for amounts greater than their carrying value. Accordingly, the Company is amortizing, as interest income, on a prospective basis over the estimated remaining life of the loans, the difference between the carrying value of the discounted notes and the estimated collectible value. For the three and nine months ended September 30, 2002, the Company recognized deferred interest income and discounts of approximately $3.8 million ($0.04 per basic and diluted share) and $19.3 million ($0.20 per basic and diluted share), respectively, and for the three and nine months ended September 30, 2001, the Company recognized deferred interest income and discounts of approximately $3.1 million ($0.04 per basic and diluted share) and $5.7 million ($0.07 per basic and diluted share), respectively. These amounts are net of allocated expenses of $0.2 million and $0.8 million for the three and nine months ended September 30, 2002,
6
respectively, and none and $2.2 million for the three and nine months ended September 30, 2001, respectively. The notes receivable generally are realizable through collection of cash or obtaining ownership of the property.
The Company continues to assess the collectibility or impairment of each note on a periodic basis. During the three and nine months ended September 30, 2002, the Company identified and recorded provisions for losses on notes receivable of $1.7 million and $4.8 million, respectively. The Company will continue to monitor and assess these notes, and expects to identify both recoveries and impairments, but does not expect any net impairments to have a material adverse affect on its consolidated financial condition or results of operations taken as a whole.
NOTE 4 — Commitments and Contingencies
Legal
The Company is a party to various legal actions resulting from its operating activities. These actions are routine litigation and administrative proceedings arising in the ordinary course of business, some of which are covered by liability insurance, and none of which are expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.
Limited Partnerships
In connection with the Company’s acquisitions of interests in real estate partnerships, it is sometimes subject to legal actions, including allegations that such activities may involve breaches of fiduciary duties to the limited partners of such real estate partnerships or violations of the relevant partnership agreements.
The Company may incur costs in connection with the defense or settlement of such litigation. The Company believes it complies with its fiduciary obligations and relevant partnership agreements. Although the outcome of any litigation is uncertain, the Company does not expect any such legal actions to have a material adverse affect on the Company’s consolidated financial condition or results of operations taken as a whole.
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 remedy, hazardous substances may adversely affect occupancy at affected apartment communities and the ability to sell or finance affected 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 claims by private plaintiffs for personal injury, disease, disability or other infirmities. 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 properties, the Company could potentially be liable for environmental liabilities or costs associated with its properties or properties it acquires or manages in the future.
There have been recent reports of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold in residential units. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Company has been named as a defendant in lawsuits that have alleged personal injury as a result of the presence of mold. Prior to March 31, 2002, the Company generally was insured against claims arising from the presence of mold due to water intrusion. However, since March 31, 2002, certain of the Company’s insurance carriers have excluded from insurance coverage property damage loss claims arising from the presence of mold, although the Company does retain some limited coverage for catastrophic property damage due to mold. In addition, certain of the Company’s insurance carriers do provide some coverage for personal injury claims, which coverage generally expires on December 31, 2002.
The Company has implemented protocols and procedures to prevent or eliminate mold from its properties and believes that its measures will eliminate, or at least minimize, the effects that mold could have on its residents. To date, the Company has not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. Because the law regarding mold is unsettled and subject to change, however, the Company can
7
make no assurance that liabilities resulting from the presence of or exposure to mold will not have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.
Other Legal Matters
In December 2001, AIMCO and certain of its affiliated partnerships that own properties voluntarily entered into an agreement with the U.S. Environmental Protection Agency (“EPA”) and the U.S. Department of Housing and Urban Development (“HUD”) pursuant to which AIMCO agreed to pay a fine of $130,000, conduct lead-based paint inspections and other testing, if necessary, on properties initially built prior to 1978, and re-issue lead-based paint disclosures to residents of such properties that have not been certified as lead-base paint free. In return, neither AIMCO nor its properties will be subject to any additional fines for inadequate disclosures prior to the execution of the agreement. The cost of the settlement, inspections and remediations incurred to date had been reserved for at the time the Company acquired the NHP Incorporated and Insignia Financial Group, Inc. portfolios. Any remaining costs are not expected to be material.
On January 30, 2002, AIMCO and four of its affiliated partnerships were named as defendants in a lawsuit brought by the City Attorney for the City and County of San Francisco in the Superior Court, County of San Francisco. The City Attorney asserts that the defendants have violated certain state and local residential housing codes, and engaged in unlawful business practices and unfair competition, in connection with four properties owned and operated by the affiliated partnerships. The City Attorney asserts civil penalties from $500 to $1,000 per day for each affected unit, as well as other statutory and equitable relief. The Company has engaged in preliminary discussions with the City Attorney to resolve the lawsuit. In the event it is unable to resolve the lawsuit, the Company believes it has meritorious defenses to assert and it will vigorously defend itself. The matter has been set for trial on July 7, 2003. Although the outcome of any litigation is uncertain, the Company does not believe that the ultimate outcome will have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.
National Program Services, Inc. and Vito Gruppuso (collectively “NPS”) are insurance agents who in 2000 sold to the Company property insurance issued by National Union Fire Insurance Company of Pittsburgh, PA (“National Union”). The financial failure of NPS resulted in defaults in June 2002 under two agreements by which NPS indemnified the Company from losses relating to the matters described below. As a result of such defaults, the Company faces the risk of impairment of a $16.7 million insurance-related receivable as well as a contingent liability of $5.7 million. The Company’s receivable arose from the improper and premature cancellation by National Union of its property insurance coverage in April 2001. The Company had paid to National Union amounts in excess of $10 million in prepaid premiums for property insurance coverage that was to continue through at least April 2002. In addition, the Company has a $6.7 million receivable from NPS to reimburse it for payments on a premium finance agreement, proceeds of which were to pay premiums to National Union. The Company holds two $5 million surety bonds issued by Lumberman’s Mutual Insurance Company to secure the NPS indemnities. In addition, the Company has pending litigation in the U.S. District Court for the District of Colorado against National Union, First Capital Group, a New York based insurance wholesaler, NPS and other agents of National Union, for a refund of at least $10 million of the prepaid premium plus other damages resulting from the cancellation of the coverage. The cancellation of the property insurance coverage in 2001 has no effect on the Company’s present property insurance coverage or on coverage that existed through April 2001.
With respect to the contingent liability arising from the NPS defaults, in July 2002 the Company received a demand for payment of $5.7 million from Cananwill, Inc., a premium funding company, allegedly due for premium payments made to National Union. The Company believes it has meritorious defenses to assert, and it will vigorously defend itself in the event Cananwill commences any litigation. In the event of litigation and an adverse determination, the Company will seek reimbursement of any loss from the bonds securing the NPS indemnification agreements as well as from all third parties responsible for the misapplication of its payments.
Although the outcome of any claim or matter in litigation is uncertain, the Company does not believe that it will incur any material loss in connection with the receivable or that the ultimate outcome of these separate but related matters will have a material adverse effect on the Company’s consolidated financial condition or results of operations taken as a whole.
8
NOTE 5 — Stockholders’ Equity
Preferred Stock
On March 19, 2002, AIMCO announced that on April 18, 2002 it would redeem for Common Stock all 5,000,000 outstanding shares of its Class K Convertible Cumulative Preferred Stock, par value $0.01 per share (the “Class K Preferred Stock”) at a redemption price of $27.2125 per share of Class K Preferred Stock. The redemption price was payable in shares of Common Stock at a price of $45.7835 per share, or the issuance of 0.5944 shares of Common Stock for each share of Class K Preferred Stock redeemed. Subsequent to this announcement, the holders of all 5,000,000 shares of Class K Preferred Stock converted such shares into approximately 2,972,000 shares of Common Stock.
On March 25, 2002, AIMCO sold 1,000,000 shares of Class R Cumulative Preferred Stock, par value $0.01 per share (the “Class R Preferred Stock”) in a registered public offering, and on April 11, 2002, AIMCO sold an additional 1,000,000 shares of Class R Preferred Stock in a registered public offering. The total net proceeds from both of these offerings of approximately $50 million were used to repay short-term indebtedness. Holders of the Class R Preferred Stock are entitled to receive dividends in an annual amount of $2.50, or 10% of the $25 per share liquidation preference. These dividends are cumulative from the date of original issuance and are payable quarterly each year. Class R Preferred Stock is senior to Common Stock as to dividends and liquidation. Upon any liquidation, dissolution or winding up of AIMCO, before payments of distributions by AIMCO are made to any holders of Common Stock, the holders of Class R Preferred Stock are entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. Each share of Class R Preferred Stock is redeemable beginning July 20, 2006 at the option of AIMCO, at a price equal to the liquidation preference of $25 per share, plus all accrued and unpaid dividends, if any, to the date fixed for redemption.
On May 6, 2002, the holder of 2,500,000 shares of AIMCO Class L Convertible Cumulative Preferred Stock, par value $0.01 per share (the “Class L Preferred Stock”), with a face value of $62.5 million, converted such shares into 1,344,664 shares of Common Stock. Following this conversion, as of September 30, 2002, 2,500,000 shares of Class L Preferred Stock remained outstanding.
On July 29, 2002, AIMCO announced that on August 28, 2002, it would redeem all outstanding shares of its Class B Convertible Cumulative Preferred Stock, par value $0.01 per share (the “Class B Preferred Stock”) for cash equal to the liquidation preference of $100 per share, plus accrued and unpaid dividends through the redemption date of $1.73545 per share. On August 20, 2002, the holder of all 419,471 shares of Class B Preferred Stock converted such shares into 1,377,573 shares of Common Stock.
Common Stock
On June 5, 2002, AIMCO completed the sale of 8,000,000 shares of Common Stock in an underwritten public offering at a net price of $46.17 per share. The net proceeds of approximately $369 million were used to repay outstanding short-term indebtedness under the Company’s credit facility and the term loan that was used to finance the Company’s acquisition of Casden Properties, Inc. (“Casden”), in March 2002, which included the merger of Casden into the Company (the “Casden Merger”).
In August and September of 2002, the holders of mandatorily redeemable convertible preferred securities (“TOPRS”) converted approximately $5.3 million of TOPRS into approximately 107,000 shares of Common Stock. The TOPRS were assumed by AIMCO in October 1998 in connection with its merger with Insignia Financial Group, Inc. The TOPRS have a conversion price of $49.61 per share, which, based on a liquidation amount of $50 per security, results in the issuance of 1.0079 shares of Common Stock for each TOPRS converted.
During the three and nine months ended September 30, 2002, approximately 169,000 and 441,000 shares of Common Stock, respectively, were issued in exchange for common OP Units tendered for redemption.
9
NOTE 6 — 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. The following table illustrates the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2002 and 2001 (in thousands, except per share data):
Convertible preferred shares/units that could be converted into 10,814 and 17,352 weighted average shares of Common Stock for the three months ended September 30, 2002 and 2001, respectively, and 13,147 and 16,538 weighted average shares of Common Stock for the nine months ended September 30, 2002 and 2001, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
10
NOTE 7 — Industry Segments
The Company has two reportable segments: real estate (owning and operating apartments); and investment management business (providing, to third parties and affiliates, services relating to the apartment business). The Company owns and operates multifamily apartment communities throughout the United States and Puerto Rico that generate 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 its apartment communities has similar economic characteristics, the apartment communities have been aggregated into a single apartment communities, or real estate, segment. The Company considers disclosure of different components of the multifamily housing business to be useful. All real estate revenues are from external customers and no revenues are generated from transactions with other segments. A significant portion of the revenues earned in the investment management business are from transactions with affiliates in the real estate segment.
No single tenant or related group of tenants contributed 10% or more of total revenues during the three and nine months ended September 30, 2002 or 2001. The Company also manages apartment properties and provides other services for third parties and affiliates through its investment management business segment. As disclosed, a significant portion of the revenues of the investment management business is from affiliates.
A performance measure the Company uses for each segment is its contribution to free cash flow (“Free Cash Flow” or “FCF”). The Company defines Free Cash Flow as net operating income less the capital spending required to maintain and improve the related assets. Free Cash Flow measures profitability prior to the cost of capital. Other performance measures the Company uses include funds from operations, adjusted funds from operations and earnings before structural depreciation. The Company deducts Capital Replacement spending to arrive at Free Cash Flow and adjusted funds from operations. In addition, beginning in the second quarter of 2002, the Company began deducting Capital Enhancement spending as well as Capital Replacement spending. This additional deduction is reflected on a prospective basis.
The following tables present the contribution (separated between consolidated and unconsolidated activity) to the Company’s Free Cash Flow for the three and nine months ended September 30, 2002 and 2001, from these segments, and a reconciliation of Free Cash Flow to funds from operations, funds from operations less actual spending for Capital Replacements and Capital Enhancements, and net income (in thousands, except equivalent units (ownership effected) and monthly rents):
11
FREE CASH FLOW FROM BUSINESS COMPONENTSFor the Three Months Ended September 30, 2002 and 2001(in thousands, except unit data)
12
FREE CASH FLOW FROM BUSINESS COMPONENTSFor the Three Months Ended September 30, 2002 and 2001(in thousands, except per share data)
13
FREE CASH FLOW FROM BUSINESS COMPONENTSFor the Nine Months Ended September 30, 2002 and 2001(in thousands, except unit data)
14
FREE CASH FLOW FROM BUSINESS COMPONENTSFor the Nine Months Ended September 30, 2002 and 2001(in thousands, except per share data)
15
16
Reconciliation of FCF, EBSD, FFO and AFFO to Net Income (in thousands):
17
ASSETS (in thousands):
NOTE 8 — Dilutive Securities
On April 26, 2002, AIMCO stockholders approved the sale by the AIMCO Operating Partnership of 5,000 of its Class V High Performance Partnership Units (the “Class V Units”) to a limited liability company owned by a limited number of AIMCO employees for an aggregate offering price of $1.1 million. The Class V Units have identical characteristics to the Class IV Units sold in 2001, except for the dilutive impact limit, which was reduced from 1.5% to 1.0%, and a different three-year measurement period. The valuation period of the Class V Units began on January 1, 2002 and will end on December 31, 2004.
In June 2001, AIMCO stockholders approved the sale by the AIMCO Operating Partnership of an aggregate of 15,000 of its Class II, III, and IV High Performance Partnership Units (the “Class II Units,” “Class III Units” and “Class IV Units,” respectively, and together with the “Class V Units,” the “High Performance Units”) to three limited liability companies owned by a limited number of AIMCO employees for an aggregate offering price of $4.9 million. The valuation periods for the Class III Units and Class IV Units end December 31, 2002 and 2003, respectively.
At September 30, 2002, the Company did not meet the required measurement benchmarks for Class III Units, Class IV Units or Class V Units, and therefore, the Company has not recorded any value to the High Performance Units in the consolidated financial statements as of September 30, 2002, and such High Performance Units have had no dilutive effect. The table below illustrates the calculation of the value of High Performance Units at September 30, 2002 (in thousands):
18
Loans Related to High Performance Units
From time to time, the Company has made loans to certain employees who were offered the opportunity to invest in High Performance Units through a limited liability company owned by a limited number of AIMCO employees. These loans were provided to facilitate broader participation among eligible employees. Each loan is a full recourse loan repayable pursuant to an installment payment or a payroll deduction plan. Installment loans are secured by a pledge of AIMCO securities owned by the employee that had a value greater than or equal to the amount of the loan at the date the loan was made. Subsequent to June 30, 2002, but consistent with past practice and as contemplated prior to the effectiveness of the Sarbanes-Oxley Act of 2002, in connection with the sale of Class V Units, the Company loaned approximately $326,000 to certain employees. No such loans were made to Terry Considine, the Company’s Chairman and Chief Executive Officer, or to Peter Kompaniez, the Company’s Vice Chairman and President. The following table sets forth certain information with respect to these loans as of September 30, 2002. The employees named below are executive officers of AIMCO; non-executive officers who received loans are grouped in the “other employees” category. In order to comply with the Sarbanes-Oxley Act of 2002, the Company will no longer provide loans to executive officers and will not make any material modification to any existing loans to executive officers.
AIMCO has additional dilutive securities, which include options, warrants, convertible preferred securities and convertible debt securities. The following table presents the total number of shares of Common Stock that would be outstanding if all dilutive securities were converted or exercised (not all of which are included in the fully diluted share count) as of September 30, 2002:
NOTE 9 — Transfers of Financial Assets
In 2001, the Company sold tax-exempt bond receivables acquired in connection with its acquisition of Oxford Tax Exempt Fund and retained a residual interest in the sold bonds. The fair value of the retained residual interests was estimated based on the present value of future expected cash flows of the bonds, which are derived from the underlying properties’ operations. During the second quarter of 2002, in connection with the sale of certain assets
19
(see Note 10), as well as additional proceeds received from the refinancing of the tax-exempt bonds of the underlying properties, the Company’s retained residual interests aggregating approximately $23 million were collected.
NOTE 10 — Discontinued Operations and Assets Held for Sale
In October 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). SFAS 144 establishes criteria beyond that previously specified in Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (“SFAS 121”), to determine when a long-lived asset is classified as held for sale, and it provides a single accounting model for the disposal of long-lived assets. SFAS 144 was effective beginning January 1, 2002. Due to the adoption of SFAS 144, the Company now reports as discontinued operations assets held for sale (as defined by SFAS 144) and assets sold in the current period. All results of these discontinued operations, less applicable income taxes, are included in a separate component of income on the consolidated statements of income under the heading, “discontinued operations.” This change has resulted in certain reclassifications of 2001 financial statement amounts.
The components of income (loss) from operations related to discontinued operations for the three and nine months ended September 30, 2002 and the three and nine months ended September 30, 2001 are shown below. These include the results of operations through the date of each respective sale for sold properties and a full period of operations for those assets held for sale for the three and nine months ended September 30, 2002 and a full period of operations for the three and nine months ended September 30, 2001 (dollars in thousands):
The Company is currently marketing for sale certain real estate properties that are inconsistent with its long-term investment strategies (as determined by management from time to time). As of September 30, 2002, the Company classified as assets held for sale four properties with an aggregate of 929 units. Other properties, both consolidated and unconsolidated, are being marketed for sale but are not accounted for as assets held for sale as they do not meet the criteria under SFAS 144.
The Company incurred net loss on disposals of approximately $9.2 million, offset by casualty gains of $1.2 million on various properties, for the three months ended September 30, 2002. Of this total, $3.6 million related to impairment losses on assets held for sale or sold in the third quarter of 2002, and $5.6 million in loss resulted from additional write-off of basis related to the sale of certain senior living facilities, which were deemed non-strategic assets and sold in the second quarter of 2002.
Included in discontinued operations, as part of the net loss from the disposition of properties in the nine months ended September 30, 2002, the Company recorded income of approximately $18.8 million. This adjustment resulted from the Company’s historical estimation process in determining the carrying value of assets sold. The recognition of this amount in the current period is considered to be a change in estimate associated with the historical estimated gain or loss on the sale of these properties. The amount of the change in estimate was identified based upon better
20
insight to information in connection with the finalization of the recording of the purchase price accounting (to appropriate entities), of past acquisitions. The recognition of this change in estimate resulted in an increase in basic earnings per share of $0.20 for the nine months ended September 30, 2002 and an increase in diluted earnings per share of $0.19 for the nine months ended September 30, 2002.
NOTE 11 — Recent Accounting Developments
In July 2001, the FASB issued Statement of Financial Accounting Standard No. 141, Business Combinations (“SFAS 141”) and Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 141 requires the Company to reflect intangible assets apart from goodwill and supercedes previous guidance related to business combinations. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. The adoption of SFAS 141 did not have a material effect on the Company’s consolidated financial position or results of operations taken as a whole. SFAS 142 eliminates amortization of goodwill and indefinite lived intangible assets and requires the Company to perform impairment tests at least annually on all goodwill and other indefinite lived intangible assets. The Company adopted the requirements of SFAS 142 beginning January 1, 2002, and has completed the transitional goodwill impairment test required by SFAS 142 and did not identify any impairments.
The adoption of the non-amortization provision of SFAS 142 affected net income and earnings per share for the three and nine months ended September 30, 2002, and would have affected net income and earnings per share for the three and nine months ended September 30, 2001, as shown below (in thousands, except per share amounts):
In April 2002, the FASB issued Statement of Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). SFAS 145 rescinds Statement of Financial Accounting Standard No. 4 (“SFAS 4”), which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Historically, the Company has deducted these costs as ordinary interest expense. Statement of Financial Accounting Standard No. 64 amended SFAS 4, and is no longer necessary because SFAS 4 has been rescinded. Statement of Financial Accounting Standard No. 44 and the amended sections of Statement of Financial Accounting Standard No. 13 are not applicable to the Company and therefore have no effect on the Company’s financial statements. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early application encouraged. The adoption of SFAS 145 will likely not have a material effect on the Company’s consolidated financial condition or results of operations taken as whole because the Company has previously deducted the described costs.
21
NOTE 12 — Casden Merger
On March 11, 2002, the Company completed the acquisition of Casden pursuant to an Agreement and Plan of Merger dated as of December 3, 2001, by and among AIMCO, Casden and XYZ Holdings LLC. The acquisition of Casden included the merger of Casden into AIMCO, and the merger of a subsidiary of AIMCO into another REIT affiliated with Casden. The $1.1 billion acquisition is comprised of the following:
In addition, as part of the Casden Merger, AIMCO has committed to do the following:
AIMCO paid $1.1 billion, which included an earnout of $15 million as a result of property performance for the period ended December 31, 2001. The Company issued 3.508 million shares of Common Stock and 882,784 common OP Units (valued at $164.9 million and $41.5 million, respectively, based on $47 per share/unit), paid approximately $198 million in cash and assumed responsibility for existing mortgage indebtedness of approximately $673 million. The Company also incurred approximately $15 million in transaction costs comprised of professional fees, which included legal, accounting, tax and acquisition due diligence. This transaction was accounted for as a purchase, and as a result, the results of operations were included in the consolidated statements of income from the date of acquisition. The current allocation of the purchase price of Casden is based upon preliminary estimates and is subject to final resolution of certain contingent liabilities and other evaluations of fair value.
In connection with the Casden Merger, the Company borrowed $287 million from Lehman Commercial Paper Inc. and other participating lenders, pursuant to a term loan (the “Casden Loan”) to pay the cash required to complete the Casden Merger. A portion of the Casden Loan was repaid in June 2002 with proceeds from the Company’s public offering of Common Stock. The outstanding balance on the Casden Loan was $145 million at September 30, 2002.
NOTE 13 — New England Properties Acquisition
On August 29, 2002, the Company completed the acquisition of certain New England area properties (the “New England Properties Acquisition”) pursuant to a definitive agreement dated as of August 12, 2002, by and among the AIMCO Operating Partnership, Thomas J. Flatley and others. In this acquisition, the Company acquired 11 conventional garden and mid-rise apartment properties located primarily in the greater Boston, Massachusetts area. These properties include 4,323 units located on approximately 553 acres in the aggregate. The total cost of the acquisition included a purchase price of $500 million for the properties, $2.5 million in transaction costs and $34.2 million of initial capital expenditures (of which $28 million will be spent to complete a kitchen and bath program that the prior owner initiated and $6.2 million will be spent to address other identified property needs). The acquisition was funded through a combination of non-recourse property debt of $308.7 million in long-term, fixed rate, fully amortizing notes with an average interest rate of 5.69%; and $200 million from the Company’s
22
credit facility. The Company expects to repay the facility with operating cash flow and proceeds from property sales. The Company accounted for this transaction as a purchase, and as a result, the results of operations were included in the consolidated statements of income from the date of acquisition. The current allocation of the purchase price of the New England Properties Acquisition is based upon preliminary estimates and is subject to final resolution of certain contingent liabilities and other evaluations of fair value.
In connection with the New England Properties Acquisition, the Company entered into an exchange agreement with a third party intermediary on 10 of the 11 properties. This agreement is for a maximum term of 180 days and will allow the Company to pursue favorable tax treatment on other Company properties sold within this period. During this 180-day period, the third party intermediary is the legal owner, although the Company retains all of the economic benefits and risks associated with these properties and has indemnified the third party intermediary. Not later than the expiration of the 180-day period, the Company will take legal ownership of these properties.
23
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements in certain circumstances. Certain information included in this Report contains or may contain information that is forward-looking, including, without limitation, statements regarding the effect of acquisitions, our future financial performance and the effect of government regulations. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks and factors including, without limitation: national and local economic conditions; the general level of interest rates; the terms of governmental regulations that affect us and interpretations of those regulations; the competitive environment in which we operate; financing risks, including the risk that our cash flows 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 that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us. In addition, our current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code and depends on our ability to meet the various requirements imposed by the Internal Revenue Code, through actual operating results, distribution levels and diversity of stock ownership. Readers should carefully review our financial statements and the notes thereto, as well as the risk factors described in the documents we file from time to time with the Securities and Exchange Commission. As used herein and except as the context otherwise requires, “we,” “our,” “us” and the “Company” refer to AIMCO, the AIMCO Operating Partnership and AIMCO’s consolidated corporate subsidiaries and consolidated real estate partnerships, collectively.
We are a real estate investment trust with headquarters in Denver, Colorado and 19 regional operating centers around the United States, holding a geographically diversified portfolio of apartment communities. Our apartment communities are located in 47 states, the District of Columbia and Puerto Rico.
As of September 30, 2002, we owned or managed 326,870 apartment units in 1,830 apartment properties comprised of:
In the three months ended September 30, 2002, we:
24
In the nine months ended September 30, 2002, we:
See further discussion on the items above for the three and nine months ended September 30, 2002, under the headings “Results of Operations” and “Liquidity and Capital Resources.”
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. We believe that the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Impairment of Long-Lived Assets
We record at cost, less accumulated depreciation, real estate and other long-lived assets unless considered impaired. If events or circumstances indicate that the carrying amount of a property may be impaired, we will make an assessment of its recoverability by estimating the undiscounted future cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, we would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property.
Real property investments are subject to varying degrees of risk. Several factors may adversely affect the economic performance and value of our real estate investments. These factors include changes in the national, regional and local economic climates; local conditions, such as an oversupply of multifamily properties or a reduction in the demand for our multifamily properties; competition from single family alternatives and other multifamily property owners; changes in market rental rates; physical deterioration, and economic obsolescence. Any adverse changes in these factors could cause impairment in our assets, including real estate, investments in unconsolidated real estate partnerships, notes receivable from unconsolidated real estate partnerships, and the retained residual interest in financial assets.
25
Notes Receivable and Interest Income Recognition
We recognize interest income earned from our investments in notes receivable when the collectibility of such amounts is both probable and estimable. The notes receivable were either extended by us and are carried at the face amount plus accrued interest (“par value notes”) or were made by predecessors whose positions we acquired at a discount (“discounted notes”).
We continue to assess the collectibility or impairment of each note on a periodic basis. Under the cost recovery method, we carry the discounted notes at the acquisition amount, less subsequent cash collections, until such time as collectibility of principal and interest is probable and the timing and amounts are estimable. Based upon closed or pending transactions (which include sales, refinancing, foreclosures and rights offering activities), we have determined that certain notes are collectible for amounts greater than their carrying value. Accordingly, we are amortizing, as interest income, on a prospective basis over the estimated remaining life of the loans, the difference between the carrying value of the discounted notes and the estimated collectible value.
Allowance for Losses on Notes Receivable
We are required to estimate the collectibility of notes receivable. Management’s judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each borrower. Allowances are based on management’s opinion of an amount that is adequate to absorb losses in the existing portfolio. The allowance for losses on notes receivable is established through a provision for loss based on management’s evaluation of the risk inherent in the notes receivable portfolio, the composition of the portfolio, specific impaired notes receivable and current economic conditions. Such evaluation, which includes a review of notes receivable on which full collectibility may not be reasonably assured, considers among other matters, full realizable value or the fair value of the underlying collateral, economic conditions, historical loss experience, management’s estimate of probable credit losses and other factors that warrant recognition in providing for an adequate allowance for losses on notes receivable. During the three and nine months ended September 30, 2002, we identified and recorded $1.7 million and $4.8 million, respectively, in losses on notes receivable. We will continue to monitor and assess these notes and expect to identify both recoveries and impairments, but do not expect any net impairments to have a material adverse effect on our consolidated financial condition or results of operations taken as a whole. Changes in required reserves may occur in the future due to changes in the market environment.
Capitalized Costs
We capitalize direct and indirect costs (including salaries, interest, real estate taxes and other costs) in connection with redevelopment, initial capital expenditure, capital enhancement and capital replacement spending. Indirect costs that do not relate to the above activities, including general and administrative expenses, are charged to expense as incurred. Management uses its professional judgment in determining whether such costs meet the criteria for immediate expense or capitalization. The amounts capitalized depend on the volume, timing and costs of such activities. As a result, changes in costs and activities may have a significant effect on our results of operations and cash flows if the costs being capitalized are not proportionately increased or reduced, as the case may be. See further discussion under the heading “Capital Expenditures.”
Intangible Assets
We have intangible assets related to goodwill and other acquired intangibles. In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 eliminates amortization of goodwill and indefinite lived intangible assets and requires us to perform impairment tests at least annually on all goodwill and other indefinite lived intangible assets. We adopted the requirements of SFAS 142 beginning January 1, 2002. We have completed the transitional goodwill impairment test required by SFAS 142 and did not identify any impairments. The determination of the estimated useful lives of these intangible assets and whether or not these assets are impaired involves significant judgments and the determination of the fair value of our reporting units. Inherent in such fair value determinations are indicators of impairment and market valuations, and assumptions about our strategic plans with regard to our operations. Changes in strategy or market conditions could significantly affect these judgments and require adjustments to recorded asset balances.
26
Income Taxes
We currently have deferred tax assets, which are subject to periodic recoverability assessments. Realization of our deferred tax assets depends principally on our achievement of projected future taxable income. Our judgments regarding future profitability may change due to future market conditions, our ability to continue to successfully execute our business plan and other factors. These changes, if any, may require possible material adjustments to these deferred income tax asset balances.
Legal Contingencies
We are currently involved in certain legal proceedings. We do not believe these proceedings will have a material adverse effect on our consolidated financial condition or results of operations taken as a whole. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in assumptions or the effectiveness of strategies related to, or unfavorable outcomes or settlements of, these proceedings.
Insurance
A portion of our insurance for workers’ compensation and property casualty is self-insured. A third-party administrator is used to process all such claims. Our reserves associated with the exposure to these self-insured liabilities are reviewed by management for adequacy at the end of each reporting period. In addition, on an annual basis, these reserves are reviewed by a third party to confirm their reasonableness.
Transfers of Financial Assets
Gains and losses from sales of financial assets are recognized in the consolidated statements of income when we relinquish control of the transferred financial assets in accordance with Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FAS Statement No. 125 and other related pronouncements. The gain or loss on the sale of financial assets depends in part on the previous carrying amount of the assets involved in the transfer, allocated between the assets sold and the retained residual interests based upon their respective fair values at the date of sale.
We recognize at fair value any interests in the transferred assets and any liabilities incurred in connection with the sale of financial assets in our consolidated statements of financial condition. Subsequently, changes in the fair value of such interests are recognized in the consolidated statements of income. The use of different estimates or assumptions could produce different financial results.
Stock Option Compensation
Currently, we account for our stock option compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which results in no compensation expense for options issued with an exercise price equal to or exceeding the market value of our Common Stock on the date of the grant, instead of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), which would result in compensation expense being recorded based on the fair value of the stock option compensation issued. Effective January 1, 2003, we will account for stock option compensation in accordance with SFAS 123 and expense all new stock option grants. We have not yet determined the effect of this change due to uncertainty in the number of shares subject to, and the value of, future option grants.
27
Results of Operations
Comparison of the Three Months Ended September 30, 2002 to the Three Months Ended September 30, 2001
Net Income
We recognized net income of $46.3 million for the three months ended September 30, 2002, compared with $26.1 million for the three months ended September 30, 2001. The following paragraphs discuss our results of operations in detail.
Consolidated Rental Property Operations
Consolidated rental and other property revenues from our consolidated properties totaled $367.0 million for the three months ended September 30, 2002, compared with $315.0 million for the three months ended September 30, 2001, an increase of $52.0 million, or 16.5%. This increase in consolidated rental and other property revenues was principally a result of the following:
Consolidated property operating expenses for our consolidated properties, consisting of on-site payroll costs, utilities (net of reimbursements received from residents), contract services, property management fees, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $153.1 million for the three months ended September 30, 2002, compared with $119.1 million for the three months ended September 30, 2001, an increase of $34.0 million or 28.5%. This increase in property operating expenses was principally a result of the following:
28
Consolidated Investment Management Business
Income from the consolidated investment management business, which is primarily earned from unconsolidated real estate partnerships in which we are the general partner, was $2.2 million for the three months ended September 30, 2002, compared to $11.0 million for the three months ended September 30, 2001, a decrease of $8.8 million or 80.0%. This decrease in income from the consolidated investment management business was principally a result of the following:
Consolidated General and Administrative Expenses
Consolidated general and administrative expenses of $4.4 million for the three months ended September 30, 2002 remained consistent with the $4.3 million of such expenses for the three months ended September 30, 2001.
Consolidated Provision for Losses on Notes Receivable
Consolidated provision for losses on notes receivable was $1.7 million for the three months ended September 30, 2002, compared to no such provision for losses for the three months ended September 30, 2001. We continue to monitor loans made to affiliated partnerships, of which we are typically the general partner, and assess the collectibility of each note on a periodic basis. During the third quarter of 2002, we identified and recorded $1.7 million in impairments. We will continue to monitor and assess these notes and expect to identify both recoveries and impairments, but do not expect any net impairments to have a material adverse effect on our consolidated financial position or results of operations taken as a whole.
29
Consolidated Depreciation of Rental Property
Consolidated depreciation of rental property decreased $5.2 million to $73.4 million for the three months ended September 30, 2002, compared to $78.6 million for the three months ended September 30, 2001. This decrease was a result of the following:
Consolidated Interest Expense
Consolidated interest expense, which includes the amortization of deferred financing costs, totaled $81.1 million for the three months ended September 30, 2002, compared with $78.8 million for the three months ended September 30, 2001, an increase of $2.3 million, or 2.9%. The increase was a result of the following:
Consolidated Interest and Other Income
Consolidated interest and other income decreased $2.7 million, or 18.0%, to $12.3 million for the three months ended September 30, 2002, compared with $15.0 million for the three months ended September 30, 2001. This decrease was principally a result of the following:
30
Equity in Earnings (Losses) of Unconsolidated Real Estate Partnerships
Equity in losses of unconsolidated real estate partnerships totaled $0.3 million for the three months ended September 30, 2002, compared to $4.9 million for the three months ended September 30, 2001, a decrease of $4.6 million. This decrease was principally due to the change in estimate of useful lives of assets completed by us in 2001, which resulted in lower depreciation expense. See the previous discussion on the change in estimate of useful lives of assets under the heading “Consolidated Depreciation of Rental Property.”
Minority Interest in Consolidated Real Estate Partnerships
Minority interest in consolidated real estate partnerships totaled $1.9 million for the three months ended September 30, 2002, compared to $8.2 million for the three months ended September 30, 2001, a decrease of $6.3 million. This decrease is a result of our purchase of additional interests in consolidated real estate partnerships and a reduction in net income, thereby reducing the minority interest allocation.
Distributions to Minority Partners in Excess of Income
Distributions to minority partners in excess of income was $4.3 million for the three months ended September 30, 2002 compared to $19.2 million for the three months ended September 30, 2001, a decrease of $14.9 million. When real estate partnerships consolidated in our financial statements make cash distributions in excess of net income, generally accepted accounting principles require us, as the majority partner, to record a charge equal to the minority partners’ excess of distribution over net income, even though we do not suffer any economic effect, cost or risk. This decrease was due to a reduced level of distributions being made by the consolidated real estate partnerships as a result of lower refinancing and sales activity.
Discontinued Operations
Discontinued operations was a loss of $8.1 million for the three months ended September 30, 2002, compared to income of $1.3 million for the three months ended September 30, 2001, a change of $9.4 million. This change was primarily related to a net loss on disposals of $9.2 million offset by gains of $1.2 million for the three months ended September 30, 2002 compared to a net gain of $2.8 million for the three months ended September 30, 2001, a net change of $10.8 million. We incurred $3.6 million of impairment losses from certain assets held for sale or sold in the third quarter of 2002, $1.2 million in casualty gains from various properties and $5.6 million in loss resulting from additional write-off of basis relating to the sale of certain senior living facilities in the second quarter of 2002. As a result of the adoption of SFAS 144, effective January 1, 2002, we now report assets held for sale (as defined by SFAS 144) and assets sold in the current period as discontinued operations. In both periods, the properties sold, as well as the properties held for sale, were considered by management to be inconsistent with our long-term investment strategy.
31
Comparison of the Nine Months Ended September 30, 2002 to the Nine Months Ended September 30, 2001
We recognized net income of $162.4 million for the nine months ended September 30, 2002, compared with $70.6 million for the nine months ended September 30, 2001. The following paragraphs discuss our results of operations in detail.
Consolidated rental and other property revenues from our consolidated properties totaled $1,052.9 million for the nine months ended September 30, 2002, compared with $943.5 million for the nine months ended September 30, 2001, an increase of $109.4 million, or 11.6%. This increase in consolidated rental and other property revenues was principally a result of the following:
Consolidated property operating expenses for our consolidated properties, consisting of on-site payroll costs, utilities (net of reimbursements received from residents), contract services, property management fees, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $424.9 million for the nine months ended September 30, 2002, compared with $360.8 million for the nine months ended September 30, 2001, an increase of $64.1 million or 17.8%. This increase in property operating expenses was principally a result of the following:
32
Income from the consolidated investment management business, which is primarily earned from unconsolidated real estate partnerships for which we are the general partner, was $17.9 million for the nine months ended September 30, 2002, compared to $25.1 million for the nine months ended September 30, 2001, a decrease of $7.2 million or 28.7%. This decrease in income from the consolidated investment management business was a result of the following:
Consolidated general and administrative expenses of $12.4 million for the nine months ended September 30, 2002 remained consistent with the $12.9 million of such expenses for the nine months ended September 30, 2001.
33
Consolidated Other Expenses
Consolidated other expenses were $5.0 million for the nine months ended September 30, 2002 compared to none for the nine months ended September 30, 2001. These expenses included the following:
Consolidated provision for losses on notes receivable was $4.8 million for the nine months ended September 30, 2002, compared to no such provision for losses for the nine months ended September 30, 2001. We continue to monitor loans made to affiliated partnerships, of which we are typically the general partner, and assess the collectibility of each note on a periodic basis. During the nine months ended September 30, 2002, we identified and recorded $4.8 million in impairments. We will continue to monitor and assess these notes and expect to identify both recoveries and impairments, but do not expect any net impairments to have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.
Consolidated depreciation of rental property decreased $50.4 million to $212.9 million for the nine months ended September 30, 2002, compared to $263.3 million for the nine months ended September 30, 2001. This decrease was a result of the following:
34
Consolidated interest expense, which includes the amortization of deferred financing costs, totaled $249.1 million for the nine months ended September 30, 2002, compared with $241.2 million for the nine months ended September 30, 2001, an increase of $7.9 million, or 3.3%. The increase was principally a result of the following:
Consolidated interest and other income increased $6.6 million, or 14.0%, to $53.6 million for the nine months ended September 30, 2002, compared with $47.0 million for the nine months ended September 30, 2001. This increase was principally a result of the following:
35
Equity in earnings of unconsolidated real estate partnerships totaled $2.4 million for the nine months ended September 30, 2002, compared with a loss of $14.1 million for the nine months ended September 30, 2001, a change of $16.5 million. This change was principally due to the change in estimate of useful lives of assets completed by us in 2001, which resulted in lower depreciation expense. See the previous discussion on the change in estimate of useful lives of assets under the heading “Consolidated Depreciation of Rental Property.”
Minority interest in consolidated real estate partnerships totaled $6.1 million for the nine months ended September 30, 2002, compared to $19.0 million for the nine months ended September 30, 2001, a decrease of $12.9 million. This decrease is a result of our purchase of additional interests in consolidated real estate partnerships and a reduction in net income, thereby reducing the minority interest allocation.
Distributions to minority partners in excess of income decreased $14.7 million to $15.3 million for the nine months ended September 30, 2002, compared to $30.0 million for the nine months ended September 30, 2001. When real estate partnerships consolidated in our financial statements make cash distributions in excess of net income, generally accepted accounting principles require us, as the majority partner, to record a charge equal to the minority partners’ excess of distribution over net income, even though we do not suffer any economic effect, cost or risk. This decrease was due to a reduced level of distributions being made by the consolidated real estate partnerships as a result of lower refinancing and sales activity.
Discontinued operations was a loss of $10.3 million for the nine months ended September 30, 2002, compared to income of $3.9 million for the nine months ended September 30, 2001, a change of $14.2 million. This change was primarily related to a net loss on disposals of $10.0 million for the nine months ended September 30, 2002 compared to a net gain of $4.4 million for the nine months ended September 30, 2001, a net change of $14.4 million. We incurred net losses from the sale of certain assets of approximately $28.8 million, principally from the sale of certain senior living facilities, which we deemed non-strategic assets. This loss was partially offset, as discussed below, for a net loss on disposals of $10.0 million. As a result of the adoption of SFAS 144, effective January 1, 2002, we now report assets held for sale (as defined by SFAS 144) and assets sold in the current period, as discontinued operations. In both periods the properties sold, as well as the properties held for sale, were considered by management to be inconsistent with our long-term investment strategy.
Included in discontinued operations, as part of the net loss from the disposition of properties in the nine months ended September 30, 2002, we recorded income of approximately $18.8 million. This $18.8 million adjustment resulted from our historical estimation process in determining the carrying value of assets sold. The recognition of this amount in the current period is considered to be a change in estimate associated with the historical estimated gain or loss on the sale of these properties. The amount of the change in estimate was identified based upon better insight to information in connection with the finalization of the recording of the purchase price accounting (to appropriate entities), of past acquisitions. The recognition of this change in estimate resulted in an increase in basic earnings per share of $0.20 for the nine months ended September 30, 2002 and an increase in diluted earnings per share of $0.19 for the nine months ended September 30, 2002.
36
Conventional Same Store Property Operating Results
We define “same store” properties as conventional apartment properties in which our ownership interest exceeds 10% and operations are stabilized for over one year in the comparable periods of 2002 and 2001. “Total portfolio” includes same store properties plus conventional acquisition and redevelopment properties. The following table summarizes the unaudited conventional rental property operations on a “same store” and a “total portfolio” basis (dollars in thousands):
Same store net operating income decreased $6.4 million, or 3.6%, for the three months ended September 30, 2002 compared to the three months ended September 30, 2001. Revenues decreased $4.3 million, or 1.5%, primarily due to lower average rent (down $7 per unit), lower occupancy (down 0.7%), and increased bad debt; all of which were offset by an increase in ancillary income. Expenses increased by $2.0 million, or 1.8%, primarily due to $2.6 million in higher repairs and maintenance and turnover costs related to focused efforts on property attractiveness prior to and during the high turnover season as well as increased property taxes. Same store expenses for both periods presented above are net of capitalized costs and the 2002 period includes a $0.7 million net decrease in expense related to leasing commissions. The above same store net operating results represent 87.8% and 83.6% of total Free Cash Flow for the three months ended September 30, 2002 and 2001, respectively.
Same store net operating income decreased $4.6 million, or 0.8%, for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. Revenues had a slight increase of $1.5 million, or 0.18%, due to higher average rent (up $2 per unit), offset by lower occupancy (down 0.6%). Expenses increased by $6.1 million, or 1.9%, primarily due to $5.7 million of higher repairs and maintenance and turnover costs related to focused efforts on property attractiveness prior to and during the high turnover season, increased insurance expense of $2.9 million as the cost of property hazard insurance coverage rose in March of 2002 as well as increased property taxes. These increases were offset by reductions in other categories. Same store expenses for both periods presented above are net of capitalized costs and the 2002 period includes a $1.7 million net decrease in expense related to leasing commissions. The above same store net operating results represent 88.0% and 88.0% of total Free Cash Flow for the nine months ended September 30, 2002 and 2001, respectively.
37
Funds From Operations
For the three and nine months ended September 30, 2002 and 2001, our Funds From Operations or FFO, as defined in Note 7 to the consolidated financial statements, on a fully diluted basis were as follows (dollars in thousands):
38
Liquidity and Capital Resources
At September 30, 2002, we had $87.5 million in cash and cash equivalents. In addition, we had $201.3 million of restricted cash ($70 million of which was acquired in the Casden Merger), primarily consisting of reserves and impounds held by lenders for capital replacements, property taxes and insurance. Our principal demands for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital improvements, acquisitions of and investments in properties, dividends paid to stockholders and distributions paid to limited partners. We consider our cash provided by operating activities to be adequate to meet short-term liquidity demands. In the event that there continues to be an economic downturn or the national economy continues to deteriorate and the cash provided by operating activities is no longer adequate, we have additional means, such as short-term borrowing availability, to help us meet our short-term liquidity demands. We use our revolving credit facility for general corporate purposes and to fund investments on an interim basis.
We expect to meet our long-term liquidity requirements, such as debt maturities and property acquisitions, through long-term borrowings, both secured and unsecured, the issuance of debt or equity securities (including OP Units) and cash generated from operations.
For the nine months ended September 30, 2002 and 2001, net cash flows were as follows (dollars in thousands):
Investment and Disposition Activities
On March 11, 2002 we completed the Casden Merger. In this merger we acquired 4,975 conventional apartment units located in Southern California and 11,207 affordable apartment units located in 25 states. We also acquired National Partnership Investments Corporation (“NAPICO”), a subsidiary of Casden, which, as general partner of numerous limited partnerships, has interests in more than 400 properties with more than 41,000 units. We paid $1.1 billion, which included an earnout of $15 million as a result of property performance for the period ended December 31, 2001. To fund this acquisition we issued 3.508 million shares of Common Stock and 882,784 common OP Units (valued at $164.9 million and $41.5 million, respectively, based on $47 per share/unit), paid approximately $198 million in cash and assumed responsibility for existing mortgage indebtedness of approximately $673 million. We also incurred approximately $15 million in transaction costs comprised of professional fees, which included legal, accounting, tax and acquisition due diligence.
On August 29, 2002, we completed the New England Properties Acquisition. In this acquisition, we acquired 11 conventional garden and mid-rise apartment properties primarily located in the greater Boston area. The 11 properties include 4,323 units on approximately 553 acres in the aggregate. The total cost of the acquisition included a purchase price of $500 million for the properties, $2.5 million in transaction costs and $34.2 million of initial capital expenditures (of which $28 million will be spent to complete a kitchen and bath program that the prior owner initiated and $6.2 million will be spent to address other identified property needs). Initial funding for the acquisition was a combination of non-recourse property debt of $308.7 million in long-term, fixed rate, fully amortizing notes with an average interest rate of 5.69%; and the remaining $200 million was from our credit facility. We expect to repay the borrowings on the credit facility with operating cash flows and proceeds from property sales.
From time to time, we have offered to acquire and, in the future, may offer to acquire the interests held by third party investors in certain partnerships for which we act as general partner. Any such acquisitions will require funds to pay the cash purchase price for such interests. During the nine months ended September 30, 2002, we made separate offers to the limited partners of 297 partnerships to acquire their limited partnership interests, and purchased limited partnership interests for an aggregate of approximately $25.1 million, of which $24.4 million was in cash and the remainder in OP Units. This compares to separate offers to the limited partners of 238 partnerships to acquire their limited partnership interests, and the purchase of approximately $148.5 million of limited partnership interests during the nine months ended September 30, 2001. Although the reason for this decline is uncertain, we believe three primary factors contributed to this decline: improved real estate partnership results (including cash distributions to partners at increasing levels); the relative attractiveness of investments in real estate as compared to other investment
39
opportunities; and greater sensitivity on the part of investors to tax liabilities related to such sales in the current volatile investment marketplace.
We are currently marketing for sale certain real estate properties that are inconsistent with our long-term investment strategies (as determined by management from time to time). The table below shows our dispositions during the nine months ended September 30, 2002:
Mortgage Financing
During the nine months ended September 30, 2002, we refinanced or closed 64 mortgage loans generating $723.6 million of total proceeds at a weighted average interest rate of 4.31%, of which approximately $629.1 million related to consolidated properties. Each note and bond is non-recourse and individually secured by one of 64 properties with no cross-collateralization. After repayment of existing debt and payment of transaction costs totaling $659.5 million, our share of the total $64.1 million in net proceeds was $56.1 million (these mortgage loans do not include the $308.7 million in mortgage loans related to the New England Properties Acquisition), which was used to repay existing debt and for working capital. Further details on these mortgage loans are shown in the table below:
Credit Facility and Term Loan
On March 11, 2002, we amended and restated our revolving credit facility as necessitated by the execution of the Casden Loan, in order to conform certain provisions of the loans. The commitment remains $400 million, and there are ten lender participants in the facility’s syndicate. The obligations under the amended and restated credit facility are secured by a first priority pledge of certain of our non-real estate assets and a second priority pledge of the equity owned by AIMCO and certain subsidiaries of AIMCO in other subsidiaries of AIMCO. Borrowings under the amended and restated credit facility are available for general corporate purposes. The amended and restated credit facility matures in July 2004 and can be extended once at our option, for a term of one year. The annual interest rate under the credit facility is based either on LIBOR or a base rate which is the higher of Bank of America, N.A.’s reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. From March 11, 2002 through the later of June 30, 2004 or the date on which the Casden Loan is paid in full, the margin ranges between 2.05% and 2.55%, in the case of LIBOR-based loans, and between 0.55% and 1.05%, in the case of base rate loans, based upon a fixed charge coverage ratio. The weighted average interest rate at September 30, 2002
40
was 4.35% and the outstanding balance was $275 million. The amount available under the credit facility at September 30, 2002 was $125 million.
On March 11, 2002, we borrowed $287 million from Lehman Commercial Paper Inc. and other participating lenders, pursuant to a term loan to pay the cash required to complete the Casden Merger. The borrowers under the Casden Loan are AIMCO, the AIMCO Operating Partnership and NHP Management Company, and certain of our subsidiaries guarantee all obligations thereunder. The obligations under the Casden Loan are secured by a first priority pledge of the equity owned by AIMCO and certain subsidiaries of AIMCO in other subsidiaries of AIMCO and a second priority pledge of certain non-real estate assets of ours. The annual interest rate under the Casden Loan is based either on LIBOR or a base rate that is the higher of Lehman Commercial Paper Inc.’s reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. On June 12, 2002, we and our lenders amended the Casden Loan to reduce the margin to 2.55% in the case of LIBOR-based loans and 1.55% in the case of base rate loans. The margin may increase to 2.80% in the case of LIBOR-based loans and 1.80% in the case of base rate loans if the rating of AIMCO’s or the AIMCO Operating Partnership’s senior unsecured debt is downgraded, AIMCO’s or the AIMCO Operating Partnership’s corporate credit rating is downgraded or the rating, if any, of the Casden Loan is downgraded. The Casden Loan matures in March 2004 and can be extended once at our option, for a term of one year. The Casden Loan imposes minimum net worth requirements and provides other financial covenants related to certain of AIMCO’s assets and obligations. These borrowings are expected to be repaid with internal operating cash flow, proceeds from property sales or proceeds from equity issuances. The weighted average interest rate at September 30, 2002 was 4.32% and the balance outstanding was $145 million. All $97 million of the required first year principal amortization has been paid.
The financial covenants contained in the amended and restated revolving credit facility and the Casden Loan require us to maintain a ratio of debt to gross asset value of no more than 0.55 to 1.0, and an interest coverage ratio of 2.25 to 1.0. In addition, the amended and restated revolving credit facility and the Casden Loan limit us from distributing more than 80% of our Funds From Operations (or such amounts as may be necessary for us to maintain our status as a REIT). On August 5, 2002, we and our lenders amended the amended and restated revolving credit facility and the Casden Loan, to accommodate expected changes in FFO, AFFO, conversions of convertible securities and property sales. The amendment reduced the fixed charge coverage ratio requirement from 1.70 to 1.0 to 1.60 to 1.0 effective for the quarter ending June 30, 2002 through the quarter ended June 30, 2003, 1.65 to 1.0 through the quarter ending December 31, 2003 and 1.70 to 1.0 thereafter.
Equity Transactions
On March 25, 2002, we completed the sale of 1,000,000 shares of Class R Preferred Stock, par value $0.01 per share in a registered public offering. The total net proceeds of approximately $25 million were used to repay short-term indebtedness.
On April 11, 2002, we completed the sale of 1,000,000 shares of Class R Preferred Stock, par value $0.01 per share in a registered public offering. The total net proceeds of approximately $25 million were used to repay short-term indebtedness.
On June 5, 2002, we completed the sale of 8,000,000 shares of Common Stock in a registered public offering at a net price of $46.17 per share. The total net proceeds of approximately $369 million were used to repay outstanding indebtedness on our revolving credit facility and the Casden Loan.
Our Board of Directors has, from time to time, authorized us to repurchase shares of Common Stock and our preferred stock. Currently, we are authorized to repurchase up to a total of approximately 1.9 million shares, of which up to 1.9 million shares may be Common Stock and up to 1.7 million shares may be preferred stock. While we have no current plans to repurchase Common Stock or our preferred stock, these repurchases may be made from time to time in the open market or in privately negotiated transactions, subject to applicable law. During the nine months ended September 30, 2002, we repurchased no shares of Common Stock or preferred stock.
We distributed 68.5% of FFO and 83.4% of AFFO to holders of Common Stock for the nine months ended September 30, 2002. Our Board of Directors’ policy has been to increase the dividend annually in an amount equal to one-half of the projected increase in AFFO (which is FFO, adjusted for Capital Replacement spending) subject to minimum distribution requirements necessary for us to maintain our REIT status. For the nine months ended September 30, 2002, AFFO now includes a deduction for Capital Enhancements, a discretionary spending item, as
41
well as a deduction for Capital Replacements. Our Board of Directors will consider the discretionary nature of Capital Enhancement spending in its consideration of AFFO as it relates to our dividend policy.
Capital Expenditures
For the nine months ended September 30, 2002, we spent a total of $61.0 million and $6.2 million, respectively on Capital Replacements (expenditures required to maintain the related asset) and Capital Enhancements (expenditures that add a new feature or revenue source at a property).
Capital Replacements spending has increased for two primary reasons: a general increase in spending to maintain our assets; and an increase in capitalized costs. In addition to Capital Replacements, we monitor Capital Enhancements, which we distinguish from Capital Replacements. Capital Enhancements are costs incurred to add additional rental square footage, a new building or a new revenue producing feature. For example, replacement of existing kitchen appliances is a Capital Replacement, however, if the same replacements are done in connection with an extensive remodeling project then they are characterized as a Capital Enhancement. Because the distinction between Capital Replacements and Capital Enhancements is not consistently applied across real estate investment trusts and because there is a risk of partial substitution between Capital Replacements and Capital Enhancements, we will monitor and report both Capital Replacements and Capital Enhancements and will deduct both in our calculation of AFFO.
The table below details our actual spending on Capital Replacements and Capital Enhancements on a per unit and total dollar basis for the nine months ending September 30, 2002 and reconciles it to our nine month Consolidated Statement of Cash Flows (dollars in thousands):
In addition, we capitalized approximately $5.6 million of our share of indirect costs related to these activities for the nine months ended September 30, 2002, increasing our share of Capital Replacement ($65.3 million) and Capital Enhancement ($7.5 million) spending to $72.8 million. We funded these expenditures with cash provided by operating activities, working capital reserves, and borrowings under our credit facility.
42
For the nine months ended September 30, 2002, we spent a total of $136.7 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, which in this period relates primarily to the properties acquired in the Casden Merger) and redevelopment (expenditures that substantially upgrade the property). The following table reconciles our share of those expenditures to our nine-month Consolidated Statement of Cash Flows (in millions):
In addition, we capitalized approximately $13.0 million of our share of direct and indirect costs related to these activities for the nine months ended September 30, 2002, increasing our share of ICE and redevelopment spending to $149.7 million. We funded these expenditures with cash provided by operating activities, working capital reserves, and borrowings under our credit facility.
We continue to refine our methodology and process for identifying and capitalizing certain indirect costs, and as a result, reduced the rate at which such costs are capitalized by approximately $4.0 million in the nine months ended September 30, 2002 compared to the same period in 2001 due to the refinement of management’s estimates based on the initial results of a detailed time reporting system to capture such activities.
43
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposure relates to changes in interest rates. We are not subject to any foreign currency exchange rate risk or to any significant commodity price risk, or any other material market rate or price risks. We use predominantly long-term, fixed-rate and self-amortizing non-recourse debt in order to avoid the refunding and repricing risks of short-term borrowings. We use short-term debt financing and working capital primarily to fund acquisitions and generally expect to refinance such borrowings with cash from operating activities, property sales proceeds or long-term debt financings.
We had $1,291.3 million of variable rate debt outstanding at September 30, 2002, which represented 21.9% of our total outstanding debt. Of the total variable debt, the major components were floating rate tax-exempt bond financing ($790.7 million), floating rate secured notes ($80.6 million), the Casden Loan ($145.0 million), and the credit facility ($275.0 million). Based on this level of debt, an increase in interest rates of 1% would result in our income and cash flows being reduced by $12.9 million on an annual basis. Historically, changes in tax-exempt interest rates have been at a ratio less than 1:1 with changes in taxable interest rates. Variable rate tax-exempt bond financing is benchmarked against the Bond Market Association Municipal Swap Index (the “BMA Index”). Since 1981, the BMA Index has averaged 54.5% of the 10-year Treasury Yield. Therefore, if this relationship continues and based on this level of debt, a Treasury Yield increase of 1% would result in our income and cash flows being reduced by $9.3 million on an annual basis.
The estimated aggregate fair value of our cash and cash equivalents, receivables, payables and short-term secured and unsecured debt as of September 30, 2002 approximates their carrying value due to their relatively short term nature. Management further believes that, after consideration of interest rate agreements, the fair market value of our 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.
ITEM 4. Controls and Procedures
Our principal executive officer and principal financial officer have within 90 days of the filing date of this quarterly report, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) and have determined that such disclosure controls and procedures are adequate. There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls since the date of evaluation. We do not believe any significant deficiencies or material weaknesses exist in our internal controls. Accordingly, no corrective actions have been taken.
44
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On January 30, 2002, AIMCO and four of our affiliated partnerships were named as defendants in a lawsuit brought by the City Attorney for the City and County of San Francisco in the Superior Court, County of San Francisco. The City Attorney asserts that the defendants have violated certain state and local residential housing codes, and engaged in unlawful business practices and unfair competition, in connection with four properties owned and operated by the affiliated partnerships. The City Attorney asserts civil penalties from $500 to $1,000 per day for each affected unit, as well as other statutory and equitable relief. We have engaged in preliminary discussions with the City Attorney to resolve the lawsuit. In the event we are unable to resolve the lawsuit, we believe we have meritorious defenses to assert and will vigorously defend ourself. The matter has been set for trial on July 7, 2003. Although the outcome of any litigation is uncertain, we do not believe that the ultimate outcome will have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.
National Program Services, Inc. and Vito Gruppuso (collectively “NPS”) are insurance agents who in 2000 sold to AIMCO and its affiliates property insurance issued by National Union Fire Insurance Company of Pittsburgh, PA (“National Union”). The financial failure of NPS resulted in defaults in June 2002 under two agreements by which NPS indemnified AIMCO from losses relating to the matters described below. As a result of such defaults, we face the risk of impairment of a $16.7 million insurance-related receivable as well as a contingent liability of $5.7 million. Our receivable arose from the improper and premature cancellation by National Union of our property insurance coverage in April 2001. We had paid to National Union amounts in excess of $10 million in prepaid premiums for property insurance coverage that was to continue through at least April 2002. In addition, we have a $6.7 million receivable from NPS to reimburse us for payments on a premium finance agreement, proceeds of which were to pay premiums to National Union. We hold two $5 million surety bonds issued by Lumberman’s Mutual Insurance Company to secure the NPS indemnities. In addition, we have pending litigation in the U.S. District Court for the District of Colorado against National Union, First Capital Group, a New York based insurance wholesaler, NPS and other agents of National Union, for a refund of at least $10 million of the prepaid premium plus other damages resulting from the cancellation of the coverage. The cancellation of the property insurance coverage in 2001 has no effect on our present property insurance coverage or on coverage that existed through April 2001.
With respect to the contingent liability arising from the NPS defaults, in July 2002 we received a demand for payment of $5.7 million from Cananwill, Inc., a premium funding company, allegedly due for premium payments made to National Union. We believe we have meritorious defenses to assert, and we will vigorously defend ourself in the event Cananwill commences any litigation. In the event of litigation and an adverse determination, we will seek reimbursement of any loss from the bonds securing the NPS indemnification agreements as well as from all third parties responsible for the misapplication of our payments.
Although the outcome of any claim or matter in litigation is uncertain, we do not believe that we will incur any material loss in connection with the receivable or that the ultimate outcome of these separate but related matters will have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.
There have been recent reports of lawsuits against owners and managers of multifamily properties asserting claims of personal injury and property damage caused by the presence of mold in residential units. Some of these lawsuits have resulted in substantial monetary judgments or settlements. We have been named as a defendant in suits that have alleged the presence of mold. Prior to March 31, 2002, we were insured against claims arising from the presence of mold due to water intrusion. However, since March 31, 2002, certain of our insurance carriers have excluded from insurance coverage property damage loss claims arising from the presence of mold although certain of our insurance carriers do provide some coverage for personal injury claims. We have implemented protocols and procedures to prevent or eliminate mold from our properties and believe that our measures will eliminate, or at least minimize, the effects that mold could have on our residents. To date, we have not incurred any material costs or liabilities relating to claims of mold exposure or to abate mold conditions. Because the law regarding mold is unsettled and subject to change, however, we can make no assurance that liabilities resulting from the presence of or exposure to mold will not have a material adverse effect on our consolidated financial condition or results of operations taken as a whole.
45
ITEM 2. Changes in Securities and Use of Proceeds
From time to time during the quarter, we issued shares of 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. During the three months ended September 30, 2002, approximately 169,000 shares of Class A Common Stock were issued in exchange for common OP Units in these transactions.
In August and September of 2002, the holders of mandatorily redeemable convertible preferred securities (“TOPRS”) converted approximately $5.3 million of TOPRS into approximately 107,000 shares of Common Stock. The TOPRS were assumed by AIMCO in October 1998 in connection with our merger with Insignia Financial Group, Inc. The TOPRS have a conversion price of $49.61 per share, which, based on a liquidation amount of $50 per security, results in the issuance of 1.0079 shares of Common Stock for each TOPRS converted.
All of the foregoing issuances were made in private placement transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
46
ITEM 6. Exhibits and Reports on Form 8-K
47
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.
Date: November 4, 2002
48
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Terry Considine, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Apartment Investment and Management Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
49
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Paul J. McAuliffe, certify that:
50
EXHIBIT INDEX(1)