10-Q 1 sec10q2q.txt SECOND QUARTERLY INTERIM REPORT 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2001 Commission file number 0-13693 VININGS INVESTMENT PROPERTIES TRUST (Exact name of registrant as specified in charter) Massachusetts 13-6850434 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2839 Paces Ferry Road, Suite 1170, Atlanta, GA 30339 ---------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 984-9500 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 outstanding as of August 7, 2001 was 1,100,487. VININGS INVESTMENT PROPERTIES TRUST AND SUBSIDIARIES INDEX OF FINANCIAL INFORMATION PART I FINANCIAL INFORMATION PAGE ---- Item 1 Financial Statements Consolidated Balance Sheets (unaudited) as of June 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2001 and 2000 4 Consolidated Statement of Shareholders' Equity (unaudited) for the six months ended June 30, 2001 5 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3 Quantitative and Qualitative Disclosures About Market Risk 21 PART II OTHER INFORMATION/SIGNATURE Item 1 Legal Proceedings 23 Item 2 Changes in Securities and Use of Proceeds 23 Item 3 Defaults upon Senior Securities 23 Item 4 Submission of matters to a vote of Security Holders 23 Item 5 Other Information 23 Item 6 Exhibits and Reports on Form 8-K 23 Signature 24 VININGS INVESTMENT PROPERTIES TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited)

VININGS INVESTMENT PROPERTIES TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

VININGS INVESTMENT PROPERTIES TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the six months ended June 30, 2001 (unaudited)

VININGS INVESTMENT PROPERTIES TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

VININGS INVESTMENT PROPERTIES TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (unaudited) NOTE 1 - BUSINESS AND ORGANIZATION ---------------------------------- Vinings Investment Properties Trust ("Vinings" or the "Trust") was organized on December 7, 1984 as a mortgage real estate investment trust ("REIT") whose original plan was to liquidate within approximately ten years. On February 28, 1996, Vinings Investment Properties, Inc. completed a tender offer to acquire control of the Trust in order to rebuild Vinings' assets by expanding into the multifamily real estate markets through the acquisition of garden style apartment communities that are leased primarily to middle-income residents. Effective July 1, 2000, Vinings no longer qualifies as a REIT for federal income tax purposes and will be taxed as a corporation (See Note 2). Vinings currently conducts all of its operations through Vinings Investment Properties, L.P., a Delaware limited partnership (the "Operating Partnership"). As of June 30, 2001, the Trust was the sole 1% general partner and a 91.81% limited partner in the Operating Partnership, controlling 81.16% of the common partnership interests and 100% of the preferred partnership interests (See Note 5). Vinings currently owns, through wholly-owned subsidiaries, ten apartment communities totaling 1,520 units and a 75,000 square foot, single story business park. In addition, Vinings holds a 20% interest in and is the general partner of an unconsolidated joint venture, which owns through subsidiary partnerships five additional apartment communities totaling 968 units (See Note 4). At June 30, 2001, the average occupancy of Vinings' portfolio, excluding the Joint Venture Properties, (as hereinafter defined in Note 4,) was 87%. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --------------------------------------------------- Basis of Presentation --------------------- The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying consolidated financial statements of Vinings include the consolidated accounts of the Trust and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Vinings accounts for its investment in the unconsolidated joint venture using the equity method of accounting. The term "Vinings" or "Trust" hereinafter refers to Vinings Investment Properties Trust and its subsidiaries, including the Operating Partnership. The minority interests of the common unitholders in the Operating Partnership (the "Common Units") reflected on the accompanying balance sheets are calculated based on the common unitholders' minority interest ownership percentage (17.84% as of June 30, 2001) multiplied by the Operating Partnership's net assets. The Preferred Units, (as hereinafter defined in Note 5,) were exchanged for an equivalent number of Preferred Shares, (as hereinafter defined in Note 5,) effective April 1, 2000 and are reflected on the accompanying balance sheet as the cash contributed plus the accrued liquidation preference of $0.21 per Preferred Share ($417,529 at June 30, 2001). The minority interests of the common unitholders in the income or loss of the Operating Partnership on the accompanying statements of operations is calculated based on the weighted average minority interest ownership percentage multiplied by income (loss) before minority interests after subtracting income allocated to the preferred partnership interests. The minority interests of the preferred unitholders on the statement of operations for the six months ended June 30, 2000 ($336,758) represents the accrued preferred 11% return on the Preferred Units and the accrued pro rata liquidation preference of $0.21 per Preferred Unit. Income Taxes ------------ Prior to June 30, 2000, Vinings had elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). As a result, Vinings was generally not subject to federal income taxation on that portion of its income that qualified as REIT taxable income to the extent that Vinings distributed at least 95% of its taxable income to its shareholders and satisfied certain other requirements. Effective July 1, 2000, Vinings no longer qualifies as a REIT for federal income tax purposes and will be taxed as a corporation. The Trust, however, is not currently generating taxable income and, accordingly, no provisions for federal income taxes and deferred income taxes have been included in the accompanying consolidated financial statements. Cash and Cash Equivalents ------------------------- Vinings considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted Cash --------------- Restricted cash consists of real estate tax, insurance, replacement reserve and repair escrows held by mortgagees, most of which are funded monthly from property operations and released solely for the purpose for which they were established. Restricted cash also includes security deposits collected and held on behalf of the residents and tenants. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Assets ------------------ Real estate assets are stated at depreciated cost less reductions for impairment, if any. In identifying potential impairment, management considers such factors as declines in a property's operating performance or market value, a change in use, or adverse changes in general market conditions. In determining whether an asset is impaired, management estimates the future cash flows expected to be generated from the asset's use and its eventual disposition. If the sum of these estimated future cash flows on an undiscounted basis is less than the asset's carrying cost, the asset is written down to its fair value. In management's opinion, there has been no impairment of Vinings' real estate assets as of June 30, 2001. Ordinary repairs and maintenance are expensed as incurred. Major improvements and replacements are capitalized and depreciated over their estimated useful lives when they extend the useful life, increase capacity or improve efficiency of the related asset. Depreciation is computed on a straight-line basis over the useful lives of the real estate assets (buildings and improvements, 5-40 years; furniture, fixtures and equipment, 3-10 years; and tenant improvements, generally over the life of the related lease). Revenue Recognition ------------------- All leases are classified as operating leases and rental income is recognized when earned, which materially approximates revenue recognition on a straight-line basis. Deferred Financing Costs and Amortization ----------------------------------------- Deferred financing costs include fees and costs incurred to obtain financing and are capitalized and amortized over the term of the related debt. Net Loss Per Share ------------------ The following is a reconciliation of net loss available to the common shareholders and the weighted average shares used in Vinings' basic and diluted net loss per share computations:

Common Units in the Operating Partnership held by the minority unitholders and Preferred Shares of the Trust are redeemable for common shares of beneficial interest of the Trust ("Common Shares") on a one-for-one basis, or for cash, at the option of the Trust. For the three and the six months ended June 30, 2000 and 2001, options to purchase 103,500 shares and 99,750 shares, respectively, were excluded as the impact of such options was antidilutive. For the three and six months ended June 30, 2001 and for the three months ended June 30, 2000, Preferred Shares totaling 1,988,235 were excluded as the impact of such Preferred Shares was antidilutive. For the six months ended June 30, 2002, Preferred Units totaling 1,988,235 were excluded as the impact of such Preferred Units was antidilutive. Recent Accounting Pronouncement ------------------------------- On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133, as amended by FAS 137, "Deferral of the Effective Date of FAS 133," is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is the type of hedge transaction. The adoption of FAS 133 did not have a significant effect on the Company's results of operations or its financial position. On December 3, 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB 101 was required to be implemented in the fourth fiscal quarter of 2000. SAB 101 did not have a significant effect on the Company's results of operations or its financial position. Reclassifications ----------------- Certain 2000 financial statement amounts may have been reclassified to conform to the current year presentation. NOTE 3 - REAL ESTATE ASSETS --------------------------- On May 1, 1999, Vinings, through its subsidiaries, acquired thirteen multifamily communities totaling 1,064 units (collectively, the "Portfolio Properties") from seventeen limited partnerships and limited liability companies. Eight of the Portfolio Properties (the "Mississippi Properties") were purchased through subsidiary partnerships of the Operating Partnership. The remaining five Portfolio Properties were purchased through a joint venture structure. (See Note 4.) In addition, Vinings, through subsidiary partnerships of the Operating Partnership, owns two additional multifamily communities in the metropolitan Atlanta area with 456 units for a total of 1,520 units in ten communities, as well as a 75,000 square foot business center. All of the multifamily communities are encumbered by fixed rate mortgage financing and the business center is security for the Trust's line of credit. NOTE 4 - INVESTMENT IN UNCONSOLIDATED JOINT VENTURE --------------------------------------------------- On May 1, 1999, Vinings purchased, through a joint venture structure, five apartment communities, totaling 968 units (the "Joint Venture Properties"). The Joint Venture Properties were purchased by nine individual partnerships in each of which Vinings Holdings, Inc., a wholly owned subsidiary of the Trust, owns a .1% general partnership interest and Vinings/CMS Master Partnership, L.P., a Delaware limited partnership (the "Joint Venture"), owns a 99.9% limited partnership interest. The Operating Partnership has a .1% general partner interest and a 19.98% limited partner interest in the Joint Venture, for which it paid $1,705,100. The remaining limited partnership interests in the Joint Venture are held by an unaffiliated third party. Vinings accounts for its investment in the Joint Venture using the equity method of accounting. The following is a summary of the results of operations of the Joint Venture and Vinings' share of the equity in the loss from the Joint Venture for the three months and six months ended June 30, 2001:

The following summarizes the balance sheet of the Joint Venture as of June 30, 2001: Real estates assets, net of accumulated depreciation $44,203,409 Cash and other assets 1,241,837 ------------- Total assets $45,445,246 ============= Mortgage notes payable $38,818,437 Other liabilities 892,608 ------------- Total liabilities 39,711,045 ------------- Capital - Vinings 1,146,920 Capital - Other 4,587,281 ------------- Total capital 5,734,201 ------------- Total liabilities and capital $45,445,246 =============

Mortgage notes payable held by the Joint Venture are non-recourse fixed rate notes secured by the individual properties. All of the notes except one are insured by the U.S. Department of Housing and Urban Development ("HUD") and, therefore, distributions from the properties are subject to "surplus cash" as defined by HUD. The maturity dates of the notes payable range from June 2007 to November 2037 and interest rates range from 8.00% to 8.75% per annum. NOTE 5 - SHAREHOLDERS' EQUITY AND PREFERRED PARTNERSHIP INTERESTS ----------------------------------------------------------------- On April 29, 1999, the Operating Partnership offered, in a private transaction pursuant to a Securities Purchase Agreement (the "Purchase Agreement"), Series A Convertible Preferred Partnership interests (the "Preferred Units"). A total of 1,988,235 Preferred Units were issued for an aggregate purchase price of $8,450,000. The Operating Partnership used the proceeds of the sale of the Preferred Units to pay the cash consideration for the Operating Partnership's interests in the property partnerships that acquired the Mississippi Properties, and its interest in the Joint Venture. (See Notes 3 and 4.) Effective April 1, 2000, 100% of the 1,988,235 Preferred Units were exchanged for an equivalent number of Series A Convertible Preferred Shares of the Trust (the "Preferred Shares") having substantially the same rights, preferences and privileges as the Preferred Units. The holders of Preferred Shares are entitled to receive cumulative preferential cash distributions at the per annum rate of $0.4675 per Preferred Share. Upon the occurrence of certain triggering events, the holders of Preferred Shares are entitled to receive, in addition to an amount equal to any accumulated and unpaid distributions on such holder's Preferred Shares, a liquidation preference of $4.46 per Preferred Share. Under certain circumstances, the holders of Preferred Shares may convert any part or all of such Preferred Shares into Common Shares. In lieu of converting Preferred Shares into Common Shares, the Trust, in its sole discretion, may satisfy its conversion obligations through certain cash payments, as further set forth in the Certificate of Designation relating to the terms of the Preferred Shares and the Declaration of Trust. Generally, the holders of Preferred Shares do not have the right to vote on any matter on which any of the holders of Common Shares may vote. The holders of Preferred Shares do, however, have the right to vote as a separate class of shareholders on certain transactions including, without limitation, certain authorizations and issuances of preferred shares designated as ranking senior to the Preferred Shares, certain amendments to the Declaration of Trust, and certain sales or other dispositions of assets of the Trust or the Operating Partnership, certain mergers or consolidations of the Trust or the Operating Partnership, and transactions that result in the liquidation of the Trust or the Operating Partnership. As of June 30, 2001, a total of 1,988,235 Preferred Shares were outstanding. In addition, as of June 30, 2001 a total of $417,529 had been accrued as a liquidation preference on the Preferred Shares. On May 14, 2001, the Board of Trustees of Vinings announced that it had approved a proposal to effect a 1-for-1000 reverse share split of both its Common Shares and Preferred Shares. If the reverse share split is ratified by the Trust's shareholders and becomes effective, each holder of Common Shares who, as a result of the reverse share split, would otherwise receive a fraction of a Common Share will be entitled to receive an amount of cash in lieu thereof based upon a pre-split price per common share of $3.20. Fractional Preferred Shares would be issued as a result of the reverse share split. If ratified by the Trust's shareholders, the reverse share split should reduce the number of registered common shareholders below 300, which would provide Vinings the option to cease public registration of its Common Shares. The reverse share split is structured as a "going private" transaction within the meaning of Rule 13e-3 under the Securities Exchange Act of 1934 because it is intended to, and, if completed, will likely result in the termination of Vinings' reporting requirements under the Exchange Act. Vinings' shareholders will be asked to vote on the reverse share split, certain amendments to the terms of the Preferred Shares and the election of Trustees at the 2001 Annual Meeting of Shareholders to be held on September 14, 2001. For a discussion of the proposals to be considered at the 2001 Annual Meeting, please read Vinings' definitive Proxy Statement and Schedule 13E-3, each of which were filed with the SEC on August 7, 2001. NOTE 6 - NOTES PAYABLE ---------------------- Mortgage Notes Payable ---------------------- Mortgage notes payable were secured by the following apartment communities at June 30, 2001 and December 31, 2000, as follows: Fixed interest rate Balance as of: Balance as of: Maturity as of 6/30/01 6/30/01 12/31/00 ---------- -------------- -------------- -------------- Cottonwood 10/01/2036 8.875% $ 4,657,283 $ 4,666,546 Delta Bluff 08/01/2036 9.25 % 6,171,135 6,182,456 Foxgate I 06/01/2037 8.50 % 6,559,609 6,573,142 Hampton House 08/01/2037 8.50 % 5,137,980 5,148,819 Heritage Place 10/01/2036 8.75 % 3,123,429 3,129,845 Northwood 06/01/2034 8.75 % 4,450,314 4,461,640 River Pointe 01/01/2037 8.625% 5,946,025 5,958,353 Trace Ridge 07/01/2036 8.50 % 5,296,011 5,307,867 The Thicket 07/01/2003 9.04 % 7,095,906 7,132,347 Windrush 07/01/2011 6.99 % 8,080,000 6,181,194 ------------------- -------------- ------------- Total $56,517,692 $54,742,209 ------------------- ============== =============

On June 1, 2001 Vinings refinanced the existing mortgage loan on Windrush Apartments. The original principal amount of the new mortgage loan is $8,080,000, with a fixed interest rate of 6.99% per annum. Monthly payments of principal and interest are $53,702 and the loan matures on June 1, 2011. After paying in full the balance due on the mortgage loan in effect prior to the refinancing and all costs associated with the new mortgage loan, approximately $1,600,000 in excess proceeds from the refinancing was used to reduce Vinings' revolving line of credit. All of the notes except The Thicket and Windrush are insured by HUD and, therefore, distributions from the properties are subject to "surplus cash" as defined by HUD. Scheduled maturities of the mortgage notes payable as of June 30, 2001 are as follows: 2001 $ 164,482 2002 352,104 2003 7,269,892 2004 317,269 2005 346,127 Thereafter 48,067,818 ------------- Total $56,517,692 ============= Line of Credit -------------- On April 27, 1999 Vinings obtained a line of credit in the amount of $2,000,000 from a financial institution. The line of credit is secured by Peachtree Business Center. Interest is payable monthly at one percent over prime as announced by the bank from time to time. At June 30, 2001, the interest rate on the line of credit was 7.75% per annum. The principal balance of the line of credit as of June 30, 2001 and December 31, 2000 was $150,000 and $1,864,990, respectively. The line of credit matured on April 30, 2001 and was renewed until March 15, 2002. NOTE 7 - RELATED PARTY TRANSACTIONS ----------------------------------- Vinings has entered into management agreements with VIP Management, LLC ("VIP"), an affiliate of the officers, who are also Trustees of Vinings, to provide property management services for a fee equal to 3.5% of gross revenues, plus a fee for data processing on all of the multifamily communities and 5% of gross revenues on the business center. In addition, effective July 1, 2000, VIP has administered the Trust for an advisory fee equal to 1 1/2% of gross revenues, including the revenues from the Joint Venture Properties. The advisory fee is in lieu of reimbursing VIP for all overhead, salaries and other indirect costs attributable to the Trust's operations, which were paid prior to July 1, 2000. The following table reflects payments made to VIP: Three months ended Six months ended June 30, June 30, ---------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- ---------- Vinings ------- Management fees $100,206 $105,720 $201,003 $209,006 Data processing fees 16,416 16,416 32,832 32,832 Overhead reimbursements - 94,298 - 189,219 Advisory fee 64,745 - 129,751 - --------- --------- --------- --------- Total $181,367 $216,434 $363,586 $431,057 ========= ========= ========= ========= Joint Venture ------------- Management fees $ 32,376 $ 35,913 $ 64,522 $ 71,340 Data processing fees 14,520 14,520 29,040 29,040 --------- --------- --------- --------- Total $ 46,896 $ 50,433 $ 93,562 $100,380 ========= ========= ========= ========= Effective March 1, 2000, 628,927 Common Shares of Vinings were purchased in a privately negotiated transaction by the officers of Vinings, an affiliate of the officers and an affiliate of one of the Trustees of Vinings from a limited number of shareholders, which included three of the Trustees and certain of their affiliates (the "Stock Transaction"). In connection with the Stock Transaction, the three selling Trustees -- James D. Ross, Martin H. Petersen and Gilbert H. Watts, Jr. -- resigned from the Board of Trustees. Of the 628,927 Common Shares purchased, Mr. Anzo acquired control of 547,982 shares. A portion of the consideration for Mr. Anzo's shares was a Promissory Note executed by Mr. Anzo in favor of Watts Agent, L.P. dated March 1, 2000 in the amount of $1,285,000, which is secured by a pledge of 566,966 of Mr. Anzo's Common Shares, evidenced by the Margin Stock Pledge Agreement and the Amendment to the Margin Stock Pledge Agreement both dated as of March 1, 2000 and which have been filed as exhibits to Mr. Anzo's Amendment No. 4 to Schedule 13D filed on May 2, 2000 and the Schedule 13E-3 filed jointly by Mr. Anzo and Vinings on August 7, 2001. In September 2000, Gilbert H. Watts, Jr., Watts Agent, L.P. and certain of their affiliates initiated a lawsuit against Mr. Anzo and certain other defendants in the Superior Court of Fulton County, Georgia alleging, among other claims, that Mr. Anzo breached the terms of the Promissory Note and the Margin Stock Pledge Agreement by failing to timely deliver all of the pledged Common Shares to Watts Agent, L.P. and failing to deliver certain financial statements. The Trust is not a party to the lawsuit. The plaintiffs are seeking monetary damages against Mr. Anzo consisting of the accelerated payment of the principal balance of the Promissory Note, accrued interest, attorneys fees and other costs. Because Mr. Anzo's Common Shares of the Trust continue to secure his obligations under the Promissory Note, if the plaintiffs are successful on this default claim and Mr. Anzo fails to pay the secured debt, then the plaintiffs may force a sale of the pledged shares. Such a forced sale would result in a change of control of the Trust. Mr. Anzo believes the complaint is without merit and is vigorously defending against the suit. On March 15, 2000, the Board of Trustees voted to waive the ownership limitations in Vinings' Declaration of Trust with respect to shareholders acquiring shares in the Stock Transaction, as well as with respect to certain holders of Preferred Shares. NOTE 8 - DISTRIBUTIONS ---------------------- Vinings did not declare or pay any dividends on its Common Shares during the three and six months ended June 30, 2000 or 2001. Effective April 1, 2000, Vinings exchanged all of the Preferred Units for Preferred Shares. (See Note 5). The holders of Preferred Shares are entitled to receive cumulative preferential cash dividends at the per annum rate of $0.4675 per Preferred Share. For the six months ended June 30, 2001, Vinings paid dividends totaling $464,750 to Preferred Shareholders. NOTE 9 - LEASING ACTIVITY ------------------------- The following is a schedule of future minimum rents due under operating leases at Peachtree that have initial or remaining noncancellable lease terms in excess of one year as of June 30, 2001: 2001 $281,984 2002 336,087 2003 142,367 2004 35,997 ---------- Total $796,435 ========== One tenant generated 48% of Peachtree's revenues for the period ended June 30, 2001. The same tenant accounts for 40% of the future minimum lease payments. NOTE 10 - CONTINGENCIES ----------------------- Vinings is, from time to time, subject to various claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of these matters will not have a material adverse effect on the financial position or results of operations of Vinings. NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION -------------------------------------------- Vinings paid interest of $2,440,043 and $2,465,771 for the six months ended June 30, 2001 and 2000, respectively. NOTE 12 - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -------------------------------------------------------------- Based on interest rates and other pertinent information available to Vinings as of June 30, 2001 and December 31, 2000, the Trust estimates that the carrying value of cash and cash equivalents, the mortgage notes payable, the line of credit, and other liabilities approximate their fair values when compared to instruments of similar types, terms and maturity. Disclosure about fair value of financial instruments is based on pertinent information available to management as of June 30, 2001 and December 31, 2000. Although management is not aware of any factors that would significantly affect its estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since June 30, 2001. NOTE 13 - 1997 STOCK OPTION AND INCENTIVE PLAN ---------------------------------------------- Vinings' 1997 Stock Option and Incentive Plan (the "Plan") provides incentives to officers, employees, Trustees, and other key persons including the grant of share options, share appreciation rights, restricted and unrestricted share awards, performance share awards, and dividend equivalent rights. Under the Plan, the maximum number of shares that may be reserved and available for issuance is 10% of the total number of outstanding shares at any time plus 10% of the number of partnership units in the Operating Partnership outstanding at any time that are subject to redemption rights. As of June 30, 2001, the total number of shares authorized for issuance under the Plan was 132,305. Options granted under the Plan expire ten years from the date of grant. During 1998 and 1997, Vinings granted non-qualified share options to the officers, Trustees and certain key persons. The options vested in full after one year from the date of the grant. A total of 25,000 outstanding options were granted in 1997, which have an exercise price of $5.00 per share as compared to a fair value of $4.56 per share on the date of the grant. Of the outstanding options granted in 1998, 73,250 have an exercise price of $4.00 per share as compared to a fair value of $3.63 on the date of the grant and 1,500 have an exercise price of $4.75 per share, which was equal to the fair value on the date of grant. There were no options granted during 1999, 2000 or 2001. On July 1, 1998, Vinings awarded 20,000 shares of restricted common stock to the officers and certain trustees (the "Restricted Stock"), representing a total value of $80,000 (based on the fair market value of a share of the Trust on the award date) which was reflected in compensation expense and shareholders' equity in 1998. The Restricted Stock was awarded as compensation for services to the Trust provided by such officers and Trustees as well as by The Vinings Group. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------- Forward-looking Statements -------------------------- This Form 10-Q, including the notes to Vinings' consolidated financial statements, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include discussions of expectations concerning future operations, profitability, liquidity and capital resources and the expected effects on Vinings and its shareholders if the reverse share split is implemented. You can identify these forward-looking statements by our use of the words "expects," "estimates," "believes," "plans," "anticipates" or similar expressions. Vinings' actual results could differ materially from those expressed or implied by the forward-looking statements as a result of known and unknown risks, uncertainties and other factors. Factors that might cause such a difference include the following: uncertainties as to the outcome of the proposed reverse share split; uncertainties as to the cost savings to be realized after ceasing public registration of the Common Shares; limited marketability of the securities after ceasing public registration of the Common Shares; the inability of Vinings to identify properties for acquisition; the inability of Vinings to continue to acquire properties in the future; the less than satisfactory performance of any property that might be acquired by Vinings; the inability to access the capital markets in order to fund Vinings' growth and expansion strategy; the cyclical nature of the real estate market generally and in Georgia, Mississippi and the surrounding southeastern states in particular; the national economic climate; the local economic climate in Georgia, Mississippi and the surrounding southeastern states; the local real estate conditions and competition in Georgia, Mississippi and the surrounding southeastern states; and the ability of Vinings to generate sufficient cash flow to pay the entire preferred distribution. There can be no assurance that, as a result of the foregoing factors, Vinings' growth and expansion strategy will be successful or that the business and operations of Vinings will not be adversely affected thereby. Vinings notes, however, that the safe harbor for forward-looking statements provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 is not available for forward-looking statements made in connection with the reverse share split proposal because that proposal is a "going private transaction" under the rules issued under those acts. OVERVIEW -------- Vinings Investment Properties Trust ("Vinings" or the "Trust") was organized on December 7, 1984 as a mortgage real estate investment trust ("REIT") whose original plan was to liquidate within approximately ten years. On February 28, 1996, Vinings Investment Properties, Inc. completed a tender offer to acquire control of the Trust in order to rebuild Vinings' assets by expanding into the multifamily real estate markets through the acquisition of garden style apartment communities that are leased to middle-income residents. Effective July 1, 2000 Vinings no longer qualifies as a REIT for federal income tax purposes and will be taxed as a corporation. (See Note 2 to Vinings' June 30, 2001 consolidated financial statements.) Vinings currently conducts all of its operations through Vinings Investment Properties, L.P., a Delaware limited partnership (the "Operating Partnership"). As of June 30, 2001, the Trust was the sole 1% general partner and a 91.81% limited partner in the Operating Partnership, controlling 81.16% of the common partnership interests and 100% of the preferred partnership interests (See Note 5 to Vinings' June 30, 2001 consolidated financial statements.) The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements of Vinings and the notes thereto. RESULTS OF OPERATIONS --------------------- Rental and other property revenues decreased $200,413 or 7%, from $2,972,445 for the three months ended June 30, 2000 to $2,772,032 for the same period in 2001, and $244,012 or 4%, from $5,839,211 for the six months ended June 30, 2000 to $5,595,199 for the same period in 2001. This decrease is due to a change in market conditions in several locations, which has resulted in a decrease in occupancy and revenues at a number of properties. Other income decreased $5,406 or 36%, from $14,811 for the three months ended June 30, 2000 to $9,405 for the same period in 2001, and $3,169 or 11%, from $27,431 for the six months ended June 30, 2000 to $24,262 for the same period in 2001. Other income is attributable to interest earned on cash balances and the decrease is due to falling interest rates. Property operating and maintenance expense increased $58,877 or 5%, from $1,104,805 for the three months ended June 30, 2000 to $1,163,682 for the same period in 2001, and $124,706 or 6%, from $2,208,146 for the six months ended June 30, 2000 to $2,332,852 for the same period in 2001. This is due primarily to the following: (1) increased utilities expense at a number of properties; (2) increased marketing and advertising expense due to the increase in vacancies; (3) increased maintenance and repairs at Windrush, one of the Trust's older communities, and Foxgate, a community with higher apartment turnover costs due to a student resident profile; (4) increased property and liability insurance for the entire portfolio; and (5) increased real estate taxes as the result of a reassessment of property values in Long Beach, Mississippi. Depreciation and amortization increased by $11,205, or 2%, from $564,535 for the three months ended June 30, 2000 to $575,740 for the same period in 2001, and $19,374 or 2% from $1,127,943 for the six months ended June 30, 2000 to $1,147,317 for the same period in 2001, due to depreciation on additional capital expenditures. Amortization of deferred financing costs decreased by $2,418, or 16%, from $15,163 for the three months ended June 30, 2000 to $12,745 for the same period in 2001, and $8,478 or 26% from $32,699 for the six months ended June 30, 2000 to $24,221 for the same period in 2001, due to additional costs associated with the line of credit in 1999, which were amortized through April 2000. Interest expense increased $11,944, or 0.9%, from $1,293,920 for the three months ended June 30, 2000 to $1,305,864 for the same period in 2001, and $8,439 or 0.3% from $2,583,155 for the six months ended June 30, 2000 to $2,591,594 for the same period in 2001. This increase is due primarily to prepayment fees in connection with refinancing the Windrush mortgage note totaling $31,742, which was partially offset by a decrease in interest on the line of credit totaling $14,162 and $11,259, respectively, for the three months and the six months ended June 30, 2001. General and administrative expense increased $80,181, or 45%, from $178,115 for the three months ended June 30, 2000 to $258,296 for the same period in 2001, and $19,211 or 5%, from $365,927 for the six months ended June 30, 2000 to $385,138 for the same period in 2001. For the three months ended June 30, 2001, this increase consists of professional fees incurred primarily in connection with the proposed reverse share split totaling $125,173, which is offset by a decrease in overhead allocations and advisory fees paid to VIP totaling $29,553 and office expense totaling $17,464. The increase for the six months ended June 30, 2001 consists of professional fees incurred primarily in connection with the proposed reverse share split totaling $114,722, which is offset by a decrease in overhead allocation and advisory fees paid to VIP totaling $59,468 and office expense totaling $32,190. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Net cash provided by operating activities increased $334,196, from $4,189 for the six months ended June 30, 2000 to $338,385 for the same period in 2001. Of this increase, approximately $200,000 is due to a decrease in restricted cash balances and approximately $128,000 is due to the conversion of Preferred Units to Preferred Shares on April 1, 2000. As a result of the conversion, the distributions paid to holders of Preferred Shares for the six months ended June 30, 2001 are reflected on the Statements of Cash Flows as a financing activity, whereas the income allocated to and the distributions made to the holders of Preferred Units for the six months ended June 30, 2000 are reflected on the Statements of Cash Flows as an operating activity. Net cash used in investing activities increased $89,615 from $104,453 for the six months ended June 30, 2000 to $194,068 for the same period in 2001. This increase is due to additional capital expenditures made in the first six months of 2001 offset by a $10,000 distribution from the Joint Venture during the first six months of 2000. Net cash used by financing activities increased $594,025, from $32,910 for the six months ended June 30, 2000 to $626,935 for the same period in 2001. This increase is due primarily to: (1) the conversion of the Preferred Units to Preferred Shares and distributions paid on those shares totaling $464,750 for the six months ended June 30, 2001; (2) deferred financing costs primarily attributable to the refinancing of the Windrush mortgage note totaling $183,816 for the six months ended June 30, 2001 as compared to $20,000 paid in connection with the line of credit for the same period in 2000; (3) loan prepayment costs paid in connection with the early payoff of the Windrush mortgage note totaling $31,742 for the six months ended June 30, 2001; (4) payments made to reduce the line of credit totaling $1,714,990 for the six months ended June 30, 2001 as opposed to borrowings from the line of credit totaling $150,000 for the six months ended June 30, 2000; and (5) the redemption of minority interests of unitholders in the Operating Partnership totaling $7,112. These payments were offset by excess loan proceeds from the refinancing of the Windrush mortgage note totaling $1,943,486 for the six months ended June 30, 2001. The cash held by Vinings at June 30, 2001, plus the cash flow from Vinings' assets, is expected to provide sources of liquidity to allow Vinings to meet current operating obligations excluding the distributions on the Preferred Shares. While Vinings has been able to pay currently the preferred distributions, Vinings may not have sufficient cash flow from operations to make future distributions on the Preferred Shares without drawing on its line of credit. This is due to a decline in revenues due to market conditions at several locations and the less than anticipated distributions from the Joint Venture. However, Vinings has refinanced the existing mortgage loan on one of its apartment communities and paid down the line of credit leaving sufficient borrowing capacity for the foreseeable future. For more information regarding the Trust's line of credit, see Note 6 to Vinings' June 30, 2001 Consolidated Financial Statements. There can be no assurance, however, that sufficient cash flow will be generated from the Trust's operations to meet future obligations. In addition, management continues to explore financing alternatives as well as continues its efforts to increase revenues and decrease its general and administrative expenses. PROPOSED REVERSE SHARE SPLIT ---------------------------- On May 14, 2001, the Board of Trustees of Vinings announced that it had approved a proposal to effect a 1-for-1000 reverse share split of both its Common Shares and Preferred Shares. If the reverse share split is ratified by the Trust's shareholders and becomes effective, each holder of Common Shares who, as a result of the reverse share split, would otherwise receive a fraction of a Common Share will be entitled to receive an amount of cash in lieu thereof based upon a pre-split price per Common Share of $3.20. Fractional Preferred Shares would be issued as a result of the reverse share split. If ratified by the Trust's shareholders, the reverse share split should reduce the number of registered common shareholders below 300, which would provide Vinings the option to cease public registration of its Common Shares. The reverse share split is structured as a "going private" transaction within the meaning of Rule 13e-3 under the Securities Exchange Act of 1934 because it is intended to, and, if completed, will likely result in the termination of Vinings' reporting requirements under the Exchange Act. Vinings expects that this will enable the Trust to reduce its administrative overhead expenses. Vinings' shareholders will be asked to vote on the reverse share split, certain amendments to the terms of the Preferred Shares and the election of Trustees at the 2001 Annual Meeting of Shareholders to be held September 14, 2001. For a discussion of the proposals to be considered at the 2001 Annual Meeting, please read Vinings' definitive Proxy Statement and Schedule 13E-3, each of which were filed with the SEC on August 7, 2001. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------- Vinings is exposed to market risk from changes in interest rates, which may adversely affect its financial position, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, Vinings manages exposures through its regular operating and financing activities. Vinings does not use financial instruments for trading or other speculative purposes. Vinings is exposed to interest rate risk primarily through its borrowing activities, which are described in Note 6 to Vinings' June 30, 2001 Consolidated Financial Statements. All of Vinings' borrowings are under fixed borrowings are under fixed rate instruments, except the line of credit, which is at prime plus 1% per annum. However, Vinings has determined that there is no material market risk exposure to its consolidated financial position, results of operations or cash flows due to changes in interest rates because of the fixed rate nature of its long-term debt. The following table presents principal reductions and related weighted average interest rates by year of expected maturity for Vinings' debt obligations as of June 30, 2001 and should be read in conjunction with Vinings' Annual Report on Form 10-K for the fiscal year ended December 31, 2000, which was filed with the SEC:

PART II OTHER INFORMATION ----------------- Item 1. Legal Proceedings -------------------------- Not Applicable Item 2. Changes in Securities and Use of Proceeds -------------------------------------------------- Not Applicable Item 3. Defaults Upon Senior Securities ---------------------------------------- Not Applicable Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ Not Applicable Item 5. Other Information -------------------------- Not Applicable Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) Exhibits 3.1 Third Amended and Restated Declaration of Trust of Vinings effective July 1, 1999 (incorporated by reference to Exhibit 3.1 to Vinings' Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 0-13693). 3.2 Certificate of Designation Classifying and designating a series of Preferred Shares as Series A Convertible Preferred Shares of the Trust (incorporated by reference to Exhibit 3.3 to Vinings' Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 0-13693). 3.3 Amended and Restated Bylaws of the Trust (incorporated by reference to Exhibit 3.2 to Vinings' Registration Statement on Form S-11, File No. 2-94776). 3.4 Amendment dated June 4, 2001 to Amended and Restated Bylaws of the Trust (filed herewith). (b) Reports on Form 8-K None 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. Vinings Investment Properties Trust By: /s/ Stephanie A. Reed --------------------------------- Stephanie A. Reed Vice President and Treasurer Dated: August 13, 2001

VININGS INVESTMENT PROPERTIES TRUST/GA 10-Q