1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------------------- COMMISSION FILE NUMBER 1-13232 --------------------- APARTMENT INVESTMENT AND MANAGEMENT COMPANY (Exact name of registrant as specified in its charter) <TABLE> <S> <C> MARYLAND 84-1259577 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 1873 S. BELLAIRE STREET, SUITE 1700, 80222-4348 DENVER, COLORADO (Zip Code) (Address of principal executive offices) </TABLE> (303) 757-8101 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] --------------------- The number of shares of Class A Common Stock outstanding as of October 31, 1999: 66,762,742 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 APARTMENT INVESTMENT AND MANAGEMENT COMPANY FORM 10-Q INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998........................... 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1999 and 1998 (unaudited)........ 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 (unaudited)............... 5 Notes to Consolidated Financial Statements (unaudited)...... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 14 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........................................................ 22 PART II OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds................... 23 ITEM 6. Exhibits and Reports on Form 8-K............................ 23 Signatures............................................................. 25 </TABLE> 2
3 APARTMENT INVESTMENT AND MANAGEMENT COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) <S> <C> <C> Real estate, net of accumulated depreciation of $319,756 and $228,880.................................................... $2,757,218 $2,573,718 Property held for sale...................................... 4,146 27,304 Investments in unconsolidated real estate partnerships...... 1,065,922 945,035 Investments in unconsolidated subsidiaries.................. 46,781 62,244 Notes receivable from unconsolidated real estate partnerships.............................................. 105,925 103,979 Notes receivable from and advances to unconsolidated subsidiaries.............................................. 140,588 136,173 Cash and cash equivalents................................... 56,203 71,305 Restricted cash............................................. 54,098 55,826 Notes receivable............................................ 19,429 33,708 Other assets................................................ 256,858 258,993 ---------- ---------- Total assets...................................... $4,507,168 $4,268,285 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Secured notes payable....................................... $1,189,187 $ 843,791 Secured tax-exempt bond financing........................... 392,001 398,602 Unsecured short-term financing.............................. 111,700 310,300 Secured short-term financing................................ -- 108,022 ---------- ---------- Total indebtedness................................ 1,692,888 1,660,715 Accounts payable, accrued and other liabilities............. 142,532 208,300 Resident security deposits and prepaid rents................ 13,461 12,654 ---------- ---------- Total liabilities................................. 1,848,881 1,881,669 ---------- ---------- Commitments and contingencies............................... -- -- Company-obligated mandatory redeemable convertible preferred securities of a subsidiary trust.......................... 149,500 149,500 Minority interest in other entities......................... 78,750 185,705 Minority interest in operating partnership.................. 132,688 148,847 Stockholders' equity Preferred Stock........................................... 641,250 792,468 Class A Common Stock, $.01 par value, 475,937,500 shares and 484,027,500 shares authorized, 66,743,869 and 48,451,388 shares issued and outstanding, respectively........................................... 667 485 Additional paid-in capital................................ 1,888,613 1,246,962 Notes receivable on common stock purchases................ (50,967) (49,658) Distributions in excess of earnings....................... (182,214) (87,693) ---------- ---------- Total stockholders' equity........................ 2,297,349 1,902,564 ---------- ---------- Total liabilities and stockholders' equity........ $4,507,168 $4,268,285 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 3
4 APARTMENT INVESTMENT AND MANAGEMENT COMPANY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> RENTAL PROPERTY OPERATIONS: Rental and other property revenues...... $120,398 $104,436 $ 349,221 $ 265,700 Property operating expenses............. (48,366) (41,957) (136,631) (101,600) Owned property management expense....... (3,437) (3,033) (10,439) (7,746) Depreciation............................ (28,139) (25,503) (83,078) (59,792) -------- -------- --------- --------- Income from property operations......... 40,456 33,943 119,073 96,562 -------- -------- --------- --------- SERVICE COMPANY BUSINESS: Management fees and other income........ 10,280 4,406 26,372 13,968 Management and other expenses........... (14,595) (2,631) (25,883) (8,300) -------- -------- --------- --------- Income (loss) from service company business............................. (4,315) 1,775 489 5,668 -------- -------- --------- --------- General and administrative expenses..... (3,772) (3,341) (10,322) (7,444) Interest expense........................ (31,322) (21,978) (92,386) (56,756) Interest income......................... 18,445 6,894 40,387 18,244 Equity in earnings (losses) of unconsolidated real estate partnerships......................... 1,606 (396) 5,385 (5,078) Equity in earnings of unconsolidated subsidiaries......................... 416 2,804 1,829 8,413 Minority interest in other entities..... 2 (536) 98 (1,052) Amortization............................ (1,942) (1,677) (5,826) (5,071) -------- -------- --------- --------- Income from operations.................. 19,574 17,488 58,727 53,486 Gain on disposition of properties....... 315 257 330 2,783 -------- -------- --------- --------- Income before minority interest in operating partnership................ 19,889 17,745 59,057 56,269 Minority interest in operating partnership.......................... (402) (1,163) (2,497) (4,425) -------- -------- --------- --------- Net income.............................. $ 19,487 $ 16,582 $ 56,560 $ 51,844 ======== ======== ========= ========= Net income attributable to preferred stockholders......................... $ 14,636 $ 7,670 $ 42,249 $ 16,320 -------- -------- --------- --------- Net income attributable to common stockholders......................... $ 4,851 $ 8,912 $ 14,311 $ 35,524 ======== ======== ========= ========= Basic earnings per common share......... $ 0.08 $ 0.19 $ 0.23 $ 0.80 ======== ======== ========= ========= Diluted earnings per common share....... $ 0.07 $ 0.19 $ 0.23 $ 0.79 ======== ======== ========= ========= Weighted average common shares outstanding.......................... 64,370 47,062 61,054 44,562 ======== ======== ========= ========= Weighted average common shares and common share equivalents outstanding.......................... 65,451 47,403 62,472 44,765 ======== ======== ========= ========= Dividends paid per common share......... $ 0.625 $ 0.5625 $ 1.875 $ 1.125 ======== ======== ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 4
5 APARTMENT INVESTMENT AND MANAGEMENT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> FOR THE NINE MONTHS ENDED ----------------------------- SEPTEMBER 30, SEPTEMBER 30, 1999 1998 ------------- ------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income................................................ $ 56,560 $ 51,844 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 101,066 67,344 Gain on disposition of properties....................... (330) (2,783) Minority interest in operating partnership.............. 2,497 4,425 Minority interest in other entities..................... (98) 1,052 Equity in (earnings) losses of unconsolidated real estate partnerships.................................... (5,385) 5,078 Equity in earnings of unconsolidated subsidiaries....... (1,829) (8,413) Changes in operating assets and operating liabilities... 10,248 (67,722) --------- --------- Total adjustments................................... (106,169) (1,019) --------- --------- Net cash provided by operating activities........... 162,729 50,825 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of real estate................................... (88,742) (63,839) Additions to real estate.................................. (75,496) (49,864) Proceeds from sale of property held for sale.............. 44,084 19,627 Purchase of notes receivable, general and limited partnership interests and other assets.................. (124,607) (27,016) Purchase of/additions to notes receivable................. (44,718) (72,445) Proceeds from sale of notes receivable.................... 17,788 -- Proceeds from repayment of notes receivable............... 22,433 21,562 Cash received in connection with acquisitions............. 1,455 4,492 Cash paid for merger related costs........................ (17,949) -- Distributions received from investments in real estate partnerships............................................ 58,297 513 Distributions from (contributions to) investments in unconsolidated subsidiaries............................. 18,393 (13,032) Purchase of investments held for sale..................... -- (4,935) Redemption of common OP units............................. (516) --------- --------- Net cash used in investing activities............... (189,062) (185,453) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from secured notes payable borrowings............ 248,126 44,252 Principal repayments on secured notes payable............. (24,555) (56,262) Proceeds from secured tax-exempt bond financing........... 20,731 -- Principal repayments on secured tax-exempt bond financing............................................... (38,527) (1,436) Repayments on secured short-term financing................ (4,522) (30,693) Net borrowings (paydowns) on revolving credit facilities.............................................. (248,600) 33,237 Payment of loan costs, including proceeds and costs from interest rate hedge..................................... (13,360) (5,727) Proceeds from issuance of common and preferred stock, exercise of options/warrants............................ 291,188 253,239 Repurchase of Class A Common Stock........................ -- (10,972) Principal repayments received on notes due from officers on Class A Common Stock purchases....................... 4,444 8,084 Payment of common stock dividends......................... (113,371) (73,322) Payment of distributions to minority interest............. (27,285) (10,251) Payment of preferred stock dividends...................... (83,038) (10,916) Proceeds from issuance of High Performance Units.......... -- 1,988 --------- --------- Net cash provided by financing activities........... 11,231 141,221 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (15,102) 6,593 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 71,305 37,088 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 56,203 $ 43,681 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 5
6 APARTMENT INVESTMENT AND MANAGEMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) NOTE 1 -- ORGANIZATION Apartment Investment and Management Company, a Maryland corporation incorporated on January 10, 1994 ("AIMCO" and, together with its subsidiaries and other controlled entities, the "Company"), owns a majority of the ownership interests in AIMCO Properties, L.P., (the "AIMCO operating partnership") through its wholly owned subsidiaries, AIMCO-GP, Inc. and AIMCO-LP, Inc. The Company held an approximate 92% interest in the AIMCO operating partnership as of September 30, 1999. AIMCO-GP, Inc. is the sole general partner of the AIMCO operating partnership. At September 30, 1999, AIMCO had 66,743,869 shares of Class A Common Stock outstanding and the AIMCO operating partnership had 5,519,433 Partnership Common Units ("Common OP Units") outstanding (excluding units held by the Company), for a combined total of 72,263,302 shares and Common OP Units outstanding. As of September 30, 1999, AIMCO: - owned or controlled 65,546 units in 240 apartment properties; - held an equity interest in 167,165 units in 880 apartment properties; and - managed 130,107 units in 865 apartment properties for third party owners and affiliates. NOTE 2 -- BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of AIMCO, the AIMCO operating partnership, majority owned subsidiaries and controlled real estate limited partnerships. Interests held by limited partners in real estate partnerships controlled by the Company are reflected as minority interest in other entities. All significant intercompany balances and transactions have been eliminated in consolidation. The assets of property owning limited partnerships and limited liability companies owned or controlled by AIMCO or the AIMCO operating partnership are generally not available to pay creditors of AIMCO or the AIMCO operating partnership. The accompanying unaudited consolidated financial statements of the Company as of September 30, 1999 and for the three and nine months ended September 30, 1999 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The following notes to consolidated financial statements highlight significant changes to the notes included in the Annual Report on Form 10-K and present interim disclosures as required by the Securities and Exchange Commission. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and all such adjustments are of a recurring nature. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 1998. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. As of September 30, 1999 and 1998, respectively, Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") had no impact on the Company's net income or shareholders' equity. 6
7 APARTMENT INVESTMENT AND MANAGEMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- IPT MERGER As a result of its merger with Insignia Financial Group, Inc. on October 1, 1998, AIMCO acquired approximately 51% of the outstanding shares of beneficial interest of Insignia Properties Trust ("IPT"). On February 26, 1999, AIMCO acquired, through a merger, the remaining 49% of IPT. Pursuant to the merger, each of the outstanding shares of IPT that were not held by AIMCO were converted into the right to receive 0.3601 shares of Class A Common Stock for each share of IPT common stock, resulting in the issuance of approximately 4.3 million shares of Class A Common Stock (with a recorded value of approximately $158.8 million). NOTE 4 -- ACQUISITIONS During the nine months ended September 30, 1999, in addition to the IPT Merger (see Note 3), the Company purchased twelve apartment communities containing a total of 4,452 apartment units for a total purchase price of $166.7 million. <TABLE> <CAPTION> DATE ACQUIRED PROPERTY LOCATION NUMBER OF UNITS PURCHASE PRICE - ------------- -------- -------- --------------- -------------- <S> <C> <C> <C> <C> May 1999.................. Beach Lake Durham, NC 345 $ 15.0 million May 1999.................. Briarwood Fayetteville, NC 274 8.3 million May 1999.................. Hunters Creek Cincinnati, OH 146 4.4 million May 1999.................. Somerset Lakes Indianapolis, IN 360 23.5 million May 1999.................. Steeplechase Loveland, OH 272 11.0 million May 1999.................. Walden Village Clarkson, GA 372 13.4 million May 1999.................. Windgate Place Charlotte, NC 196 6.9 million May 1999.................. Woodfield Gardens Charlotte, NC 132 3.5 million May 1999.................. Lake Castleton Indianapolis, IN 1,265 34.6 million July 1999................. Marbella Miami, FL 504 19.4 million July 1999................. Bellavista Miami, FL 352 15.3 million August 1999............... Cameron Villas Orlando, FL 234 11.4 million ----- -------------- 4,452 $166.7 million ===== ============== </TABLE> NOTE 5 -- INTEREST INCOME RECOGNITION FOR NOTES RECEIVABLE The Company recognizes interest income earned from its investments in notes receivable based upon whether 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 by the Company at a discount and are carried at the acquisition amount using the cost recovery method ("discounted notes"). As of September 30, 1999, the Company held $193.1 million of par value notes, including accrued interest, for which management 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, 1999, totaled $4.2 million and $12.5 million, respectively. As of September 30, 1999, the Company held discounted notes, including accrued interest, with a carrying value of $57.0 million. The total face value plus accrued interest of these notes was $159.2 million. In general, interest income from the discounted notes is not recognized as it is earned because the timing and amounts of cash flows are not probable and estimable. Under the cost recovery method, the discounted notes are carried at the acquisition amount, less subsequent cash collections, until such time as collectibility is probable and the timing and amounts are 7
8 APARTMENT INVESTMENT AND MANAGEMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) estimable. Based upon closed or pending transactions (including sales activity), market conditions, and improved operations of the obligor, among other things, certain notes and the related discounts have been determined to be collectible. Accordingly, interest income that had previously been deferred and portions of the related discounts were recognized as interest income during the period. For the three and nine months ended September 30, 1999, the Company recognized deferred interest income and discounts of approximately $10.8 million ($0.17 per basic and diluted share) and $15.1 million ($0.25 per basic and $0.24 per diluted share), respectively. NOTE 6 -- 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 consolidated financial condition or results of operations of the Company and its subsidiaries taken as a whole. In connection with the Company's offers to purchase interests in limited partnerships that own properties, the Company and its affiliates are sometimes subject to legal actions, including allegations that such activities may involve breaches of fiduciary duties to the limited partners of such partnerships or violations of the relevant partnership agreements. The Company believes it complies with its fiduciary obligations and relevant partnership agreements, and does not expect such legal actions to have a material adverse effect on the consolidated financial condition or results of operations of the Company and its subsidiaries taken as a whole. Pending Investigations of HUD Management Arrangements In July 1999, NHP received a grand jury subpoena requesting documents relating to NHP's management of HUD-assisted or HUD-insured multi-family projects and NHP's operation of a group purchasing program created by NHP, known as Buyers Access. The subpoena relates to the same subject matter as subpoenas NHP received in October and December of 1997 from the HUD Inspector General. To date, neither the HUD Inspector General nor the grand jury has initiated any action against NHP or AIMCO or, to NHP's or AIMCO's knowledge, any owner of HUD property managed by NHP. AIMCO believes that NHP's operations and programs are in compliance, in all material respects, with all laws, rules and regulations relating to HUD-assisted or HUD-insured properties. AIMCO does not believe that the investigations will result in a material adverse impact on its operations. However, as with any similar investigation, there can be no assurance that these will not result in material fines, penalties or other costs. Environmental Various Federal, state and local laws subject property owners or operators to liability for the costs of removal or remediation of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. The presence of, or the failure to properly remediate, hazardous substances may adversely affect occupancy at contaminated apartment communities and our ability to sell or borrow against contaminated properties. In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous wastes on a property could result in personal injury or similar claims by private plaintiffs. Various laws also impose liability for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous or toxic substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of our properties, we could potentially be liable for 8
9 APARTMENT INVESTMENT AND MANAGEMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) environmental liabilities or costs associated with our properties or properties we may acquire or manage in the future. NOTE 7 -- DEBT In February 1999, the Company terminated its $50 million secured credit facility with Washington Mortgage Financial Group, Ltd. and repaid all outstanding borrowings with proceeds from new long-term, fully amortizing notes payable totaling $58.2 million secured by certain properties that previously secured the credit facility. During the nine months ended September 30, 1999, the Company closed $181.5 million of long-term fixed rate, fully amortizing notes payable with a weighted average interest rate of 6.9%. Each of the notes is individually secured by one of twenty-six properties with no cross-collateralization. The Company used the net proceeds totaling $176.3 million after transaction costs to repay existing debt. During the nine months ended September 30, 1999, the Company has also assumed $55.7 million of long-term fixed rate, fully amortizing notes payables with a weighted average interest rate of 7.8% in connection with the acquisition of properties. Each of the notes is individually secured by one of three properties with no cross-collateralization. In August 1999, the Company closed a $300 million revolving credit facility arranged by Bank of America, N.A. BankBoston, N.A. and First Union National Bank comprised of a total of nine lender participants. The obligations under the new credit facility are secured by certain non-real estate assets of the Company. The existing lines of credit were terminated. The credit facility is used for general corporate purposes and has a two-year term with two one-year extensions. The annual interest rate under the new credit facility is based on either LIBOR or a base rate which is the higher of Bank of America's reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. The margin ranges between 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, 1999 was 7.95%. The amount available under the credit facility at September 30, 1999 was $188.3 million. 9
10 APARTMENT INVESTMENT AND MANAGEMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- STOCKHOLDERS' EQUITY Preferred Stock At September 30, 1999 and December 31, 1998, the Company had the following classes of preferred stock outstanding: <TABLE> <CAPTION> 1999 1998 -------- -------- (IN THOUSANDS) <S> <C> <C> Class B Cumulative Convertible Preferred Stock, $.01 par value, 750,000 shares authorized, 750,000 and 750,000 shares issued and outstanding...................................... $ 75,000 $ 75,000 Class C Cumulative Preferred Stock, $.01 par value, 2,400,000 shares authorized, 2,400,000 and 2,400,000 shares issued and outstanding; dividends payable at 9.0%, per annum................................................. 60,000 60,000 Class D Cumulative Preferred Stock, $.01 par value, 4,200,000 shares authorized, 4,200,000 and 4,200,000 shares issued and outstanding; dividends payable at 8.75%, per annum................................................. 105,000 105,000 Class G Cumulative Preferred Stock, $.01 par value, 4,050,000 shares authorized, 4,050,000 and 4,050,000 shares issued and outstanding; dividends payable at 9.375%, per annum......................................... 101,250 101,250 Class H Cumulative Preferred Stock, $.01 par value, 2,000,000 shares authorized, 2,000,000 and 2,000,000 shares issued and outstanding; dividends payable at 9.5%, per annum................................................. 50,000 50,000 Class J Cumulative Convertible Preferred Stock, $.01 par value, 1,250,000 shares authorized, no and 1,000,000 shares issued and outstanding............................. -- 100,000 Class K Convertible Cumulative Preferred Stock, $.01 par value, 5,000,000 shares authorized, 5,000,000 and no shares issued and outstanding............................. 125,000 -- Class L Convertible Cumulative Preferred Stock, $.01 par value, 5,000,000 shares authorized, 5,000,000 and no shares issued and outstanding............................. 125,000 -- Class E Cumulative Convertible Preferred Stock, $.01 par value, 10,000,000 shares authorized, no and 8,423,658 shares issued and outstanding............................. -- 301,218 -------- -------- $641,250 $792,468 ======== ======== </TABLE> The Class E Preferred Stock was issued in connection with the Insignia Financial Group merger ("Insignia merger"). Holders of Class E Preferred Stock were entitled to receive the same cash dividends per share as holders of Class A Common Stock. In addition, on January 15, 1999, holders of Class E Preferred Stock received a special dividend in an aggregate amount of approximately $50 million. Concurrently with the payment of such special dividend, all outstanding shares of Class E Preferred Stock automatically converted into an equal number of shares of Class A Common Stock. On February 18, 1999, AIMCO issued 5,000,000 shares of newly created Class K Convertible Cumulative Preferred Stock, par value $.01 per share ("Class K Preferred Stock"), in a public offering. The net proceeds of $120.6 million were used to repay certain indebtedness and for working capital. For three years, holders of the Class K Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors, annual cash dividends in an amount per share equal to the greater of (i) $2.00 per year (equivalent to 8% of the liquidation preference), or (ii) the cash dividends payable on the number of shares of Class A 10
11 APARTMENT INVESTMENT AND MANAGEMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Common Stock into which a share of Class K Preferred Stock is convertible. Beginning with the third anniversary of the date of original issuance, holders of Class K Preferred Stock will be entitled to receive an amount per share equal to the greater of (i) $2.50 per year (equivalent to 10% of the liquidation preference), or (ii) the cash dividends payable on the number of Class A Common Stock into which a share of Class K Preferred is convertible. Upon any liquidation, dissolution or winding up of AIMCO, before payment or distributions by AIMCO shall be made to any holders of Class A Common Stock, the holders of the Class K Preferred Stock shall be entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. In May 1999, the Company notified the holders of the Class J Preferred Stock that the internal rate of return threshold had been met, and the Company exercised its right to convert all of the Class J Preferred Stock into 2.5 million shares of Class A Common Stock. In May 1999, AIMCO issued 5,000,000 shares of newly created Class L Convertible Cumulative Preferred Stock, par value $.01 per share ("Class L Preferred Stock"), in a private offering. The proceeds of $125.0 million were used to repay certain indebtedness and for working capital. For three years, the holder of the Class L Preferred Stock is entitled to receive, when, as and if declared by the Board of Directors, annual cash dividends in an amount per share equal to the greater of (i) $2.025 per year (equivalent to 8.1% of the liquidation preference), or (ii) the cash dividends payable on the number of shares of Class A Common Stock into which a share of Class L Preferred Stock is convertible. Beginning with the third anniversary of the date of original issuance, the holder of Class L Preferred Stock will be entitled to receive an amount per share equal to the greater of (i) $2.50 per year (equivalent to 10% of the liquidation preference), or (ii) the cash dividends payable on the number of shares of Class A Common Stock into which a share of Class L Preferred Stock is convertible. The Class L Preferred Stock is senior to the Class A Common Stock as to dividends and liquidation. Upon any liquidation, dissolution or winding up of the Company, before payments or distributions by the Company are made to any holders of Class A Common Stock, the holder of the Class L Preferred Stock is entitled to receive a liquidation preference of $25 per share, plus accumulated, accrued and unpaid dividends. Common Stock On September 15, 1999, AIMCO completed a direct placement of 1,382,580 shares of Class A Common Stock at a net price of $39.50 per share to five institutional investors who are existing shareholders. The net proceeds of approximately $54.6 million were used to repay outstanding indebtedness under the new credit facility. 11
12 APARTMENT INVESTMENT AND MANAGEMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9 -- 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 tables illustrate the calculation of basic and diluted earnings per share for the nine and three months ended September 30, 1999 and 1998 (in thousands, except per share data): <TABLE> <CAPTION> NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ------------------ ------------------ <S> <C> <C> NUMERATOR: Net income................................................ $ 56,560 $ 51,844 Preferred stock dividends................................. (42,249) (16,320) -------- -------- Numerator for basic and diluted earnings per share -- income attributable to common stockholders.... $ 14,311 $ 35,524 ======== ======== DENOMINATOR: Denominator for basic earnings per share -- weighted average number of shares of common stock outstanding... 61,054 44,562 Effect of dilutive securities: Dilutive potential common shares, options and warrants.... 1,418 203 -------- -------- Denominator for dilutive earnings per share............... 62,472 44,765 ======== ======== Basic earnings per common share: Operations............................................. $ 0.23 $ 0.74 Gain on disposition of properties...................... -- 0.06 -------- -------- Total............................................. $ 0.23 $ 0.80 ======== ======== Diluted earnings per common share: Operations............................................. $ 0.22 $ 0.73 Gain on disposition of properties...................... 0.01 0.06 -------- -------- Total............................................. $ 0.23 $ 0.79 ======== ======== </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ------------------ ------------------ <S> <C> <C> NUMERATOR: Net income.............................................. $ 19,487 $16,582 Preferred stock dividends............................... (14,636) (7,670) -------- ------- Numerator for basic and diluted earnings per share -- income attributable to common stockholders......................................... $ 4,851 $ 8,912 ======== ======= DENOMINATOR: Denominator for basic earnings per share -- weighted average number of shares of common stock outstanding.......................................... 64,370 47,062 Effect of dilutive securities: Dilutive potential common shares, options and warrants............................................. 1,081 341 -------- ------- Denominator for dilutive earnings per share............. 65,451 47,403 ======== ======= Basic earnings per common share: Operations........................................... $ 0.08 $ 0.18 Gain on disposition of properties.................... -- 0.01 -------- ------- Total........................................... $ 0.08 $ 0.19 ======== ======= Diluted earnings per common share: Operations........................................... $ 0.07 $ 0.18 Gain on disposition of properties.................... -- 0.01 -------- ------- Total........................................... $ 0.07 $ 0.19 ======== ======= </TABLE> 12
13 APARTMENT INVESTMENT AND MANAGEMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- INDUSTRY SEGMENTS The Company owns and operates multi-family apartment communities throughout the United States and Puerto Rico, which generate rental and other property-related income through the leasing of apartment units. The Company separately evaluates the performance of each of its apartment communities. However, because the apartment communities have similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single apartment communities segment. All segment disclosures are included in or can be derived from the Company's consolidated financial statements. All revenues are from external customers and no revenues are generated from transactions with other segments. There are no tenants who contributed 10% or more of the Company's total revenues during the three months ended September 30, 1999 or September 30, 1998. 13
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW As of September 30, 1999, the Company owned or managed 362,818 apartment units, comprised of 65,546 units in 240 apartment communities owned or controlled by the Company (the "Owned Properties"), 167,165 units in 880 apartment communities in which the Company has an equity interest (the "Equity Properties") and 130,107 units in 865 apartment communities which the Company manages for third parties and affiliates (the "Managed Properties" and together with the Owned Properties and the Equity Properties, the "AIMCO Properties"). The apartment communities are located in 48 states, the District of Columbia and Puerto Rico. The following discussion contains forward-looking statements that are subject to significant risks and uncertainties. There are several important factors that could cause actual results to differ materially from the results anticipated by the forward-looking statements contained in the following discussion. Such factors and risks include, but are not limited to: financing risks, including the risk that the Company's cash flow from operations may be insufficient to meet required payments of principal and interest on its debt; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; acquisition and development risks, including the failure of acquisitions to perform in accordance with projections; and possible environmental liabilities, including costs which may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by the Company. In addition, the Company's election to be subject to tax as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the financial statements and the notes thereto, as well as the risk factors described in documents the Company files from time to time with the Securities and Exchange Commission. RESULTS OF OPERATIONS Comparison of the Nine Months Ended September 30, 1999 to the Nine Months Ended September 30, 1998 Net Income The Company recognized net income of $56.6 million for the nine months ended September 30, 1999, compared to $51.8 million for the nine months ended September 30, 1998. The increase in net income of $4.8 million, or 9.3%, was primarily the result of the acquisition of Insignia Financial Group, Inc. ("Insignia"), Ambassador Apartments, Inc. ("Ambassador") and Insignia Properties Trust ("IPT"), and the purchase of thirty properties during 1998 and twelve properties during 1999. CONSOLIDATED RENTAL PROPERTY OPERATIONS Rental and other property revenues from the consolidated Owned Properties totaled $349.2 million for the nine months ended September 30, 1999, compared to $265.7 million for the nine months ended September 30, 1998, an increase of $83.5 million, or 31.4%. The increase in rental and other property revenues was primarily due to the acquisitions of Ambassador, Insignia and IPT, and the purchase of thirty properties during 1998 and twelve properties during 1999. Property operating expenses for the consolidated Owned Properties, consisting of on-site payroll costs, utilities (net of reimbursements received from tenants), contract services, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $136.6 million for the nine months ended September 30, 1999, compared to $101.6 million for the nine months ended September 30, 1998, an increase of $35.0 million or 34.4%. The increase in property operating expenses was primarily due to the acquisitions of Ambassador, Insignia and IPT, and the purchase of thirty properties during 1998 and twelve properties during 1999. 14
15 SERVICE COMPANY BUSINESS The Company's share of income from the service company business was $0.5 million for the nine months ended September 30, 1999, compared to $5.7 million for the nine months ended September 30, 1998. The decrease in service company business income of $5.2 million was primarily due to the acquisitions of Insignia and IPT and a change in the allocation of management contracts expense between the consolidated service company and the unconsolidated subsidiaries. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased from $7.4 million for the nine months ended September 30, 1998 to $10.3 million for the nine months ended September 30, 1999, a 39.2% increase. The increase of $2.9 million is primarily due to additional corporate costs and additional employee salaries associated with the merger with Ambassador in May 1998, the merger with Insignia in October 1998 and the merger with IPT in February 1999. In addition, due to the growth of the Company, several new departments have been added, including legal, tax and tender coordination, as well as increased levels of personnel in the accounting and finance departments. INTEREST EXPENSE Interest expense, which includes the amortization of deferred financing costs, totaled $92.4 million for the nine months ended September 30, 1999, compared to $56.8 million for the nine months ended September 30, 1998, an increase of $35.6 million, or 62.7%. The increase was primarily due to interest expense incurred in connection with the acquisitions of Ambassador, Insignia and IPT, and interest expense incurred in connection with 1998 and 1999 acquisitions. INTEREST INCOME Interest income totaled $40.4 million for the nine months ended September 30, 1999, compared to $18.2 million for the nine months ended September 30, 1998, an increase of $22.2 million. The Company holds investments in notes receivable which 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 by the Company at a discount and are carried at the acquisition amount using the cost recovery method ("discounted notes"). $15.1 million of the increase in interest income is due to the recognition of interest income that had previously been deferred and portions of the related discount for certain discounted notes. Based upon closed or pending transactions, market conditions, and improved operations of the obligor, the collectibility of such notes is now believed to be probable and the amounts and timing of collections are estimable. The remaining increase is primarily related to other interest earned on both the par value and discounted notes made by the Company to partnerships in which the Company acts as the general partner and interest earned on notes receivable acquired in the merger with Insignia and IPT. Comparison of the Three Months Ended September 30, 1999 to the Three Months Ended September 30, 1998 NET INCOME The Company recognized net income of $19.5 million for the three months ended September 30, 1999, compared to $16.6 million for the three months ended September 30, 1998. The increase in net income of $2.9 million, or 17.5%, was primarily the result of the acquisitions of Insignia, Ambassador, and IPT, and the purchase of thirty properties during 1998 and twelve properties during 1999. CONSOLIDATED RENTAL PROPERTY OPERATIONS Rental and other property revenues from the consolidated Owned Properties totaled $120.4 million for the three months ended September 30, 1999, compared to $104.4 million for the three months ended 15
16 September 30, 1998, an increase of $16.0 million, or 15.3%. The increase in rental and other property revenues was primarily due to the acquisitions of Insignia and IPT. Property operating expenses for the consolidated Owned Properties, consisting of on-site payroll costs, utilities (net of reimbursements received from tenants), contract services, turnover costs, repairs and maintenance, advertising and marketing, property taxes and insurance, totaled $48.4 million for the three months ended September 30, 1999, compared to $42.0 million for the three months ended September 30, 1998, an increase of $6.4 million or 15.2%. The increase in property operating expenses was primarily due to the acquisitions of Insignia and IPT. SERVICE COMPANY BUSINESS Loss from the service company business was $4.3 million for the three months ended September 30, 1999, compared to income of $1.8 million for the three months ended September 30, 1998. The decrease in service company business of $6.1 million was primarily due to the acquisitions of Insignia and IPT and a change in the allocation of management contracts expense between the consolidated service company and the unconsolidated subsidiaries. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased from $3.3 million for the three months ended September 30, 1998 to $3.8 million for the three months ended September 30, 1999, a 15.2% increase. The increase is primarily due to additional corporate costs and additional employee salaries associated with the merger with Ambassador in May 1998, the merger with Insignia in October 1998, and the merger with IPT in February 1999. In addition, due to the growth of the Company, several new departments have been added, including legal, tax and tender coordination, as well as increased levels of personnel in the accounting and finance departments. INTEREST EXPENSE Interest expense, which includes the amortization of deferred financing costs, totaled $31.3 million for the three months ended September 30, 1999, compared to $22.0 million for the three months ended September 30, 1998, an increase of $9.3 million, or 42.3%. The increase was primarily due to interest expense incurred in connection with the acquisitions of Ambassador, Insignia and IPT, and interest expense incurred in connection with 1998 and 1999 acquisitions. INTEREST INCOME Interest income totaled $18.4 million for the three months ended September 30, 1999, compared to $6.9 million for the three months ended September 30, 1998, an increase of $11.5 million. The Company holds investments in notes receivable which 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 by the Company at a discount and are carried at the acquisition amount using the cost recovery method ("discounted notes"). $10.8 million of the increase in interest income is due to the recognition of interest income that had previously been deferred and portions of the related discount for certain discounted notes. Based upon closed or pending transactions, market conditions, and improved operations of the obligor, the collectibility of such notes is now believed to be probable and the amounts and timing of collections are estimable. The remaining increase is primarily related to other interest earned on both the par value and discounted notes made by the Company to partnerships in which the Company acts as the general partner and interest earned on notes receivable acquired in the merger with Insignia and IPT. LIQUIDITY AND CAPITAL RESOURCES The Company expects to meet its short-term liquidity requirements, including property acquisitions, tender offers and refinancings of short-term debt with long-term, fixed rate, fully amortizing debt, secured or 16
17 unsecured short-term debt, the issuance of debt or equity securities in public offerings or private placements, and cash generated from operations. In August 1998, AIMCO and the AIMCO operating partnership filed a shelf registration statement with the Securities and Exchange Commission ("SEC") with respect to an aggregate of $1,268 million of debt and equity securities of AIMCO (of which $268 million was carried forward from AIMCO's 1997 shelf registration statement) and $500 million of debt securities of the AIMCO operating partnership. The registration statement was declared effective by the SEC on December 10, 1998. As of September 30, 1999, the Company had $1,088 million of securities available and the AIMCO operating partnership had $500 million of securities available from this registration statement. In August 1999, the Company closed a $300 million revolving credit facility arranged by Bank of America, N.A. BankBoston, N.A. and First Union National Bank comprised of a total of nine lender participants. The obligations under the new credit facility are secured by certain non-real estate assets of the Company. The existing lines of credit were terminated. The credit facility is used for general corporate purposes and has a two-year term with two one-year extensions. The annual interest rate under the new credit facility is based on either LIBOR or a base rate which is the higher of Bank of America's reference rate or 0.5% over the federal funds rate, plus, in either case, an applicable margin. The margin ranges between 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, 1999 was 7.95%. The amount available under the credit facility at September 30, 1999 was $188.3 million. On September 15, 1999, AIMCO completed a direct placement of 1,382,580 shares of Class A Common Stock at a net price of $39.50 per share to five institutional investors who are existing shareholders. The net proceeds of approximately $54.6 million were used to repay outstanding indebtedness under the new credit facility. At September 30, 1999, the Company had $56.2 million in cash and cash equivalents. In addition, the Company had $54.1 million of restricted cash, primarily consisting of reserves and impounds held by lenders for capital expenditures, property taxes and insurance. The Company's principal demands for liquidity include normal operating activities, payments of principal and interest on outstanding debt, capital improvements, acquisitions of or investments in properties, dividends paid to its stockholders and distributions paid to minority limited partners in the AIMCO operating partnership. The Company considers its cash provided by operating activities, and funds available under its credit facilities, to be adequate to meet short-term liquidity demands. The Company utilizes its revolving credit facility for general corporate purposes and to fund investments on an interim basis. From time to time, the Company has offered to acquire and, in the future, may offer to acquire the interests held by third party investors in certain limited partnerships for which the Company acts as general partner. Any such acquisitions will require funds to pay the cash purchase price for such interests. During the nine months ended September 30, 1999, the Company made separate offers to the limited partners of 484 partnerships to acquire their limited partnership interests. The Company purchased approximately $140.6 million (including transaction costs) of limited partnership interests. In connection with the settlement of certain litigation, the Company has undertaken to commence two rounds of tender offers relating to limited partnership interests in 49 partnerships. The Company is obligated to pay not more than $50 million in cash to purchase limited partnership interests in either round of tender offers. CAPITAL EXPENDITURES For the nine months ended September 30, 1999, the Company spent $30.2 million for Capital Replacements (expenditures for routine maintenance of a property), $9.9 million for Initial Capital Expenditures or "ICE" (expenditures at a property that have been identified, at the time the property is acquired, as expenditures to be incurred within one year of the acquisition), and $35.4 million for construction and capital enhancements (amenities that add a material new feature or revenue source at a property). These expenditures were funded by borrowings under the Company's primary credit facility, working capital reserves 17
18 and net cash provided by operating activities. During 1999, the Company will provide an allowance for capital replacements of $300 per apartment unit. ICE and capital enhancements will primarily be funded by cash from operating activities and borrowings under the Company's credit facility. FUNDS FROM OPERATIONS The Company measures its economic profitability based on funds from operations ("FFO"), less a reserve for Capital Replacements of $300 per apartment unit. The Company's management believes that FFO, less such a reserve, provides investors with an understanding of the Company's ability to incur and service debt and make capital expenditures. The Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income (loss), computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains and losses from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. The Company calculates FFO based on the NAREIT definition, as adjusted for the minority interest in the AIMCO operating partnership, amortization of goodwill, the non-cash deferred portion of the income tax provision for unconsolidated subsidiaries and less the payment of dividends on preferred stock. FFO should not be considered an alternative to net income or net cash flows from operating activities, as calculated in accordance with GAAP, as an indication of the Company's performance or as a measure of liquidity. FFO is not necessarily indicative of cash available to fund future cash needs. In addition, there can be no assurance that the Company's basis for computing FFO is comparable with that of other real estate investment trusts. For the three months and nine months ended September 30, 1999 and 1998, the Company's FFO was as follows (dollars in thousands): <TABLE> <CAPTION> THREE THREE MONTHS MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Income before minority interest in operating partnership............................................ $19,889 $17,745 $ 59,057 $ 56,269 Gain on disposition of properties.................... (315) (257) (330) (2,783) Real estate depreciation, net of minority interest... 27,152 24,477 79,565 56,900 Real estate depreciation related to unconsolidated entities........................................... 29,204 8,248 73,960 17,379 Amortization of goodwill............................. 2,455 2,350 7,366 7,077 Amortization of recoverable amount of management contracts.......................................... 11,330 1,113 32,126 4,201 Deferred taxes benefit............................... 1,305 1,843 3,102 6,134 Preferred stock dividends............................ (7,208) (6,285) (25,697) (12,296) TOPR's interest expense.............................. 2,429 -- 2,429 -- Preferred OP Unit distributions...................... -- -- (1,038) -- ------- ------- -------- -------- Funds From Operations (FFO).......................... $86,241 $49,234 $230,540 $132,881 ======= ======= ======== ======== Weighted average number of common shares, common share equivalents and common OP Units outstanding: Common share and common share equivalents.......... 77,691 49,866 70,159 47,248 Common OP Units.................................... 5,555 6,120 6,494 5,759 ------- ------- -------- -------- 83,246 55,986 76,653 53,007 ======= ======= ======== ======== </TABLE> For the nine months ended September 30, 1999 and 1998, net cash flows were as follows (dollars in thousands): <TABLE> <CAPTION> 1999 1998 --------- --------- <S> <C> <C> Cash flow provided by operating activities.................. $ 162,729 $ 50,825 Cash flow (used in) investing activities.................... (189,062) (185,453) Cash flow provided by financing activities.................. 11,231 141,221 </TABLE> 18
19 LITIGATION 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 consolidated financial condition or results of operations of the Company and its subsidiaries taken as a whole. In connection with the Company's offers to purchase interests in limited partnerships that own properties, the Company and its affiliates are sometimes subject to legal actions, including allegations that such activities may involve breaches of fiduciary duties to the limited partners of such partnerships or violations of the relevant partnership agreements. The Company believes it complies with its fiduciary obligations and relevant partnership agreements, and does not expect such legal actions to have a material adverse effect on the consolidated financial condition or results of operations of the Company and its subsidiaries taken as a whole. CONTINGENCIES Pending Investigations of HUD Management Arrangements In July 1999, NHP received a grand jury subpoena requesting documents relating to NHP's management of HUD-assisted or HUD-insured multi-family projects and NHP's operation of a group purchasing program created by NHP, known as Buyers Access. The subpoena relates to the same subject matter as subpoenas NHP received in October and December of 1997 from the HUD Inspector General. To date, neither the HUD Inspector General nor the grand jury has initiated any action against NHP or AIMCO or, to NHP's or AIMCO's knowledge, any owner of a HUD property managed by NHP. AIMCO believes that NHP's operation and program are in compliance, in all material respects, with all laws, rules and regulations relating to HUD-assisted or HUD-insured properties. AIMCO does not believe that the investigations will result in a material adverse impact on its operations. However, as with any similar investigation, there can be no assurance that these will not result in material fines, penalties or other costs. Environmental Various Federal, state and local laws subject property owners or operators to liability for the costs of removal or remediation of certain hazardous substances present on a property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances. The presence of, or the failure to properly remediate, hazardous substances may adversely affect occupancy at contaminated apartment communities and our ability to sell or borrow against contaminated properties. In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous wastes on a property could result in personal injury or similar claims by private plaintiffs. Various laws also impose liability for the cost of removal or remediation of hazardous substances at the disposal or treatment facility. Anyone who arranges for the disposal or treatment of hazardous or toxic substances is potentially liable under such laws. These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility. In connection with the ownership, operation and management of our properties, we could potentially be liable for environmental liabilities or costs associated with our properties or properties we may acquire or manage in the future. Year 2000 Readiness Disclosure GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, 19
20 among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Over the past two years, the Company has determined that it will be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or are not completed in time, the Year 2000 issue could have a material impact on the operations of the Company. The Company's plan to resolve Year 2000 issues involves four phases: assessment, remediation, testing, and implementation. To date, the Company has fully completed its assessment of all information systems that could be significantly affected by the Year 2000, and has begun the remediation, testing and implementation phases on both hardware and software systems. Assessments are continuing in regards to embedded systems. The status of each is detailed below. STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE FOR COMPLETION OF EACH REMAINING PHASE Computer Hardware During 1997 and 1998, AIMCO identified all of the computer systems at risk and formulated a plan to repair or replace each of the affected systems. During 1997, when the Company merged with NHP, the mainframe system used by NHP was Year 2000 compliant. In August 1998, the Year 2000 compliant system became fully functional for the entire Company. In October 1998, the Company merged with Insignia. In April 1999, the Company embarked on a data center consolidation project that unifies the Company's and Insignia's core financial systems under one Year 2000 compliant system. The completion date for this project is October 1999. In connection with the data center consolidation, PC-based network servers, routers and desktop PCs were analyzed for compliance. The Company has begun to replace each of the non-compliant network connections and desktop PCs and, as of September 30, 1999, had virtually completed this effort. The total cost to replace the PC-based network servers, routers and desktop PCs was expected to be approximately $1.5 million, of which $1.3 million has been incurred to date. Computer Software The Company utilizes a combination of off-the-shelf, commercially available software programs as well as custom-written programs that are designed to fit specific needs. Both of these types of programs were studied, and implementation plans written and executed with the intent of repairing or replacing any non- compliant software programs. In 1997, when the Company merged with NHP, the core financial system used by NHP was Year 2000 compliant. During 1998, the Company integrated all of its core financial systems to this compliant system for general ledger and financial reporting purposes. The data center consolidation project will also unify the core computer software applications of the Company and those acquired in the merger with Insignia. In 1997, the Company determined that the software used for property management and rent collection was not Year 2000 compliant. During 1998, the Company implemented a Year 2000 compliant system at each of its owned or managed properties, at a cost of $1.5 million. During 1998, the Company acquired 82 properties and acquired the Insignia multi-family business. Insignia owned or managed 1,100 properties. As properties are acquired, the Company converts the existing property management and rent collection systems to the Company's Year 2000 compliant systems. The estimated additional costs to convert such systems at all 20
21 recently acquired properties, including those acquired from Insignia, is $0.2 million, and the implementation and testing process was completed in June, 1999. The final software area is the office software and server operating systems. The Company has upgraded all non-compliant office software systems on each PC and has upgraded virtually all of the server operating systems. Operating Equipment The Company has operating equipment, primarily at the property sites, which is being evaluated for Year 2000 compliance. In September 1997, the Company began taking a census and inventory of embedded systems (including those devices that use time to control systems and machines at specific properties, for example, elevators, heating, ventilating and air conditioning systems, security and alarm systems, etc.). The Company has chosen to focus its attention mainly upon security systems, elevators, heating, ventilating and air conditioning systems, telephone systems and switches, and sprinkler systems. While this area is the most difficult to fully research adequately, management has not yet found any major non-compliance issues that put the Company at risk financially or operationally. A pre-assessment of the Company's properties has indicated no Year 2000 issues. A complete, formal assessment of all properties was completed in September 1999. Any operating equipment that is found non-compliant will be repaired or replaced. The total cost incurred, as of September 30, 1999 to replace or repair the operating equipment was approximately $0.1 million. The Company estimates the cost to replace or repair any remaining operating equipment is nominal. The assessment of operating equipment at each of our managed property sites was virtually completed as of September 30, 1999. The Company continues to have "awareness campaigns" throughout the organization designed to raise awareness and report any possible compliance issues regarding operating equipment within the enterprise. Nature and Level of Importance of Third Parties and Their Exposure to the Year 2000 The Company has banking relationships with three major financial institutions, all of which have designated their compliance as of September 30, 1999. The Company has updated data transmission standards with all of our financial institutions. The Company does not rely heavily on any single vendor for goods and services, and does not have significant suppliers and subcontractors who share information systems with the Company (external agents). To date, the Company is not aware of any external agent with a Year 2000 compliance issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 compliant. Management does not believe that the inability of external agents to complete their Year 2000 remediation process in a timely manner will have a material impact on the financial position or results of operations of the Company. However, the effect of non-compliance by external agents is not readily determinable. Costs to Address Year 2000 The total cost of the Company's Year 2000 project is estimated at $3.3 million and is being funded from operating cash flows. To date, the Company has incurred approximately $3.1 million ($0.8 million expensed and $2.3 million capitalized for new systems and equipment) related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $0.2 million is attributable to the purchase of new software and operating equipment, which will be capitalized. 21
22 Risks Associated with the Year 2000 Management believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not complete any additional phases, certain worst case scenarios could occur. The worst case scenarios include failure of operation of elevators, security and heating, ventilating and air conditioning systems that read incorrect dates and operate with incorrect schedules (e.g., elevators will operate on Monday as if it were Sunday). Although such an event would be annoying to residents, it is not business critical. In addition, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Company. The Company could be subject to litigation for, among other things, computer system failures, equipment shutdowns or a failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. Contingency Plans Associated with the Year 2000 The Company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds and selecting new relationships for such activities as banking relationships and elevator operating systems. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure relates to changes in interest rates. The Company is not subject to any foreign currency exchange rate risk or commodity price risk, or any other material market rate or price risks. The Company uses predominantly long-term, fixed-rate and self-amortizing non-recourse debt in order to avoid the refunding or repricing risks of short-term borrowings. The Company uses short-term debt financing and working capital primarily to fund acquisitions and generally expects to refinance such borrowings with proceeds from equity offerings or long term debt financings. The Company had $143.4 million of variable rate debt outstanding at September 30, 1999, which represents 8.5% of the Company's total outstanding debt. Based on this level of debt, an increase in interest rates of 1% would result in the Company's income and cash flows being reduced by $1.4 million on an annual basis. The estimated aggregate fair value of the Company's cash and cash equivalents, receivables, payables and short-term secured and unsecured debt as of September 30, 1999 is assumed to approximate their carrying value due to their relatively short terms. Management further believes that, after consideration of interest rate agreements, the fair market value of the Company's secured tax-exempt bond debt and secured long-term debt approximates their carrying value, based on market comparisons to similar types of debt instruments having similar maturities. 22
23 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS From time to time during the quarter, AIMCO issued shares of Class A Common Stock in exchange for Common OP Units tendered to the AIMCO operating partnership for redemption in accordance with the terms and provisions of the agreement of limited partnership of the AIMCO operating partnership. Such shares are issued based on an exchange ratio of one share for each Common OP Unit. The shares are issued in exchange for Common OP Units in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof. During the three months ended September 30, 1999, 39,546 shares of Class A Common Stock were issued in exchange for Common OP Units. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following exhibits are filed with this report(1): <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <C> <S> 3.1 -- Charter 3.2 -- Bylaws (Exhibit 3.2 to AIMCO's Quarterly Report on Form 10-Q/A for the quarterly period ending March 31, 1999 is incorporated herein by this reference) 10.1 -- Seventh Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of September 27, 1999 10.2 -- Credit Agreement (Secured Revolving Credit Facility), dated as of August 16, 1999, among AIMCO Properties, L.P., Bank of America, BankBoston, N.A., and First Union National Bank (Exhibit 10.1 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999, is incorporated herein by this reference) 10.3 -- Borrower Pledge Agreement, dated as of August 16, 1999, between AIMCO Properties, L.P. and Bank of America (Exhibit 10.2 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999 is incorporated herein by this reference) 10.4 -- Form of Committed Loan Note, issued by AIMCO Properties, L.P., to Bank of America, BankBoston, N.A., and First Union National Bank (Exhibit 10.3 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999, is incorporated herein by this reference) 10.5 -- Form of Swing Line Note, issued by AIMCO Properties, L.P. to Bank of America, BankBoston, N.A., and First Union National Bank (Exhibit 10.4 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999, is incorporated herein by this reference) 10.6 -- Form of Payment Guaranty, by Apartment Investment and Management Company, AIMCO/NHP Holdings, Inc., NHP A&R Services, Inc., and NHP Management Company (Exhibit 10.5 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999, is incorporated herein by this reference) 27.1 -- Financial Data Schedule 99.1 -- Agreement re: disclosure of long-term debt instruments </TABLE> - --------------- (1) Schedules and supplemental materials to the exhibits have been omitted but will be provided to the Securities and Exchange Commission upon request. 23
24 (b) Reports on Form 8-K Current Report on Form 8-K, dated August 16, 1999, relating to AIMCO Properties, L.P.'s entering into a new secured $300 million revolving credit facility with a syndicate of banks led by Bank of America, BankBoston, N.A., and First Union National Bank; Current Report on Form 8-K, dated September 15, 1999 relating to Apartment Investment and Management Company's sale of an aggregate of 1,382,580 shares of Class A Common Stock to five institutional investors for an aggregate of $54.6 million. 24
25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APARTMENT INVESTMENT AND MANAGEMENT COMPANY By: /s/ PAUL J. MCAULIFFE ---------------------------------- Paul J. McAuliffe Executive Vice President, Chief Financial Officer (duly authorized officer and principal financial officer) Date: November 15, 1999 25
26 EXHIBIT INDEX(1) <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <C> <S> 3.1 -- Charter 3.2 -- Bylaws (Exhibit 3.2 to AIMCO's Quarterly Report on Form 10-Q/A for the quarterly period ending March 31, 1999 is incorporated herein by this reference) 10.1 -- Seventh Amendment to the Third Amended and Restated Agreement of Limited Partnership of AIMCO Properties, L.P., dated as of September 27, 1999 10.2 -- Credit Agreement (Secured Revolving Credit Facility), dated as of August 16, 1999, among AIMCO Properties, L.P., Bank of America, BankBoston, N.A., and First Union National Bank (Exhibit 10.1 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999, is incorporated herein by this reference) 10.3 -- Borrower Pledge Agreement, dated as of August 16, 1999, between AIMCO Properties, L.P. and Bank of America (Exhibit 10.2 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999 is incorporated herein by this reference) 10.4 -- Form of Committed Loan Note, issued by AIMCO Properties, L.P., to Bank of America, BankBoston, N.A., and First Union National Bank (Exhibit 10.3 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999, is incorporated herein by this reference) 10.5 -- Form of Swing Line Note, issued by AIMCO Properties, L.P. to Bank of America, BankBoston, N.A., and First Union National Bank (Exhibit 10.4 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999, is incorporated herein by this reference) 10.6 -- Form of Payment Guaranty, by Apartment Investment and Management Company, AIMCO/NHP Holdings, Inc., NHP A&R Services, Inc., and NHP Management Company (Exhibit 10.5 to the Current Report on Form 8-K of Apartment Investment and Management Company, dated August 16, 1999, is incorporated herein by this reference) 27.1 -- Financial Data Schedule 99.1 -- Agreement re: disclosure of long-term debt instruments </TABLE> - --------------- (1) Schedules and supplemental materials to the exhibits have been omitted but will be provided to the Securities and Exchange Commission upon request.