FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000 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: 333-52117
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 39-1965590
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
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
<PAGE> -i-
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 2000 Dec. 31, 1999
(unaudited)
--------------- ---------------
<S> <C> <C>
Assets
Cash $ 1,000 $ 1,000
--------------- ---------------
$ 1,000 $ 1,000
=============== ===============
Partners' Capital
General Partner $ 10 $ 10
Limited Partner 990 990
--------------- ---------------
$ 1,000 $ 1,000
=============== ===============
The accompanying notes are an integral part of the balance sheets.
</TABLE>
<PAGE> -1-
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO BALANCE SHEETS
MARCH 31, 2000
1. Organization
America First Real Estate Investment Partners, L.P. (the "Partnership") was
formed on June 18, 1999, under the Delaware Revised Uniform Limited
Partnership Act for the purpose of acquiring, holding, operating, selling and
otherwise dealing primarily with multifamily residential properties, including
the acquisition of debt and equity securities of entities engaged in similar
activities. The Partnership will facilitate the proposed merger of Capital
Source L.P. and Capital Source II L.P.-A (collectively referred to as the
"Capital Source Funds"). The Partnership intends to issue up to 7,765,772
units of assigned limited partnership interest to holders of Beneficial
Assignment Certificates (BACs) of the Capital Source Funds. The General
Partner of the Partnership is America First Capital Source I L.L.C. The
General Partner will hold a 1% interest in the Partnership. The Company has
not yet commenced operations.
2. Related Party Transactions
The Partnership will pay the General Partner an acquisition fee in connection
with the identification, evaluation and acquisition of new assets and the
financing thereof in an amount equal to 1.25% of the aggregate purchase price
paid by the Partnership for such new assets. The acquisition fee with respect
to an acquisition of a new asset will be payable at the time of the closing of
the acquisition. The Partnership will also pay the General Partner an
administrative fee in connection with the ongoing administration of the
business of the Partnership in an amount equal to 0.50%, per annum, of the sum
of (i) the fair market value on the merger date of the original assets that
are then still owned by the Partnership, plus, (ii) the purchase price paid by
the Partnership for new assets that are then held by the Partnership. The
first $100,000 of the administrative fee shall be payable each year, with the
balance payable only during years that funds from operations, as more fully
described in the Partnership's limited partnership agreement, calculated
before administrative fees, exceeds 7% of the unit holders' average capital
for that year. Such administrative fee will be paid on a monthly basis.
The Partnership may pay an affiliate of the General Partner a reasonable
property management fee in connection with the management of the Properties.
The property management fee paid with respect to any Property may not exceed
5% of the gross revenues of such Property (in the case of residential
property) or 6% of the gross revenues of such Property (in the case of
industrial or commercial property); provided, however, that the property
management fee shall not exceed an amount that would be charged by
unaffiliated parties rendering similar services in the same geographic
location and for comparable property.
The Partnership will reimburse the General Partner or its affiliates on a
monthly basis for the actual out-of-pocket costs of direct general and
administrative expenses.
<PAGE> -2-
AMERICA FIRST REAL ESTATE INVESTMENT PARTNERS, L.P.
NOTES TO BALANCE SHEETS
MARCH 31, 2000
3. Legal Proceedings
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999, by Alvin
M. Panzer and Sandra G. Panzer, against the Partnership, its general partner,
America First and various of their affiliates (including Capital Source L.P.,
Capital Source II L.P.-A, and their general partners (Capital Source L.P. and
Capital Source II L.P.-A are partnerships with general partners that are
affiliates of America First.) and Lehman Brothers, Inc. Alvin M. Panzer and
Sandra G. Panzer are two Beneficial Assignment Certificate (BAC) holders of
Capital Source L.P. and Capital Source II L.P.-A. The plaintiffs seek to have
the lawsuit certified as a class action on behalf of all BAC holders of
Capital Source L.P. and Capital Source II L.P.-A. The lawsuit alleges, among
other things, that a proposed merger transaction involving the Partnership,
Capital Source L.P. and Capital Source II L.P.-A is deficient and coercive,
that the defendants have breached the terms of Capital Source L.P.'s and
Capital Source II L.P.-A's partnership agreement and that the defendants have
acted in manners which violate their fiduciary duties to the BAC holders. In
this complaint, the plaintiffs sought to enjoin the proposed merger
transaction and seek to appoint an independent BAC holder representative to
investigate alternative transactions. The lawsuit also requests a judicial
dissolution of Capital Source L.P. and Capital Source II L.P.-A, an
accounting, and unspecified damages and costs.
The general partners of the Partnership, Capital Source L.P. and Capital
Source II L.P.-A determined not to pursue the merger transaction which was the
subject of the initial lawsuit and proposed an alternative transaction to BAC
holders. A prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about November 16,
1999. The plaintiffs amended their complaint on December 8, 1999, and again
on February 22, 2000. The second amended complaint challenges this current
prospectus/consent solicitation statement on grounds similar to those alleged
in the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
To resolve the lawsuit, the Partnership and the other defendants to the
lawsuit, on April 24, 2000, entered into a settlement agreement (the
Settlement) with the plaintiffs. The Settlement remains subject to approval
by the Court. In connection with the Settlement, if approved, Capital Source
L.P. and Capital Source II L.P.-A expect to submit a revised transaction to
BAC holders for approval. The complete terms of the Settlement, along with
the updated consent solicitation material describing the revised merger
transaction, will be filed with the Securities and Exchange Commission (the
SEC). As soon as it receives SEC clearance, Capital Source L.P. and Capital
Source II L.P.-A will deliver to BAC holders materials that fully describe the
settlement and revised transaction.
<PAGE> -3-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
As of March 31, 2000, the Partnership had not commenced operations. For
management's discussion and analysis of the financial condition and results of
operations of Capital Source L.P. (Cap Source) and Capital Source II L.P.-A
(Cap Source II) for the three months ended March 31, 2000, please refer to the
Form 10-Qs of Cap Source and Cap Source II for the quarter ended March 31,
2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of March 31, 2000, the Partnership had not yet commenced operations. For
quantitative and qualitative disclosure regarding market risk of the assets to
be acquired from Cap Source and Cap Source II as a result of the merger,
please refer to the Form 10-Qs of Cap Source and Cap Source II for the quarter
ended March 31, 2000.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999, by Alvin
M. Panzer and Sandra G. Panzer, against the Partnership, its general partner,
America First and various of their affiliates (including Capital Source L.P.,
Capital Source II L.P.-A, and their general partners (Capital Source L.P. and
Capital Source II L.P.-A are partnerships with general partners that are
affiliates of America First.) and Lehman Brothers, Inc. Alvin M. Panzer and
Sandra G. Panzer are two Beneficial Assignment Certificate (BAC) holders of
Capital Source L.P. and Capital Source II L.P.-A. The plaintiffs seek to have
the lawsuit certified as a class action on behalf of all BAC holders of
Capital Source L.P. and Capital Source II L.P.-A. The lawsuit alleges, among
other things, that a proposed merger transaction involving the Partnership,
Capital Source L.P. and Capital Source II L.P.-A is deficient and coercive,
that the defendants have breached the terms of Capital Source L.P.'s and
Capital Source II L.P.-A's partnership agreement and that the defendants have
acted in manners which violate their fiduciary duties to the BAC holders. In
this complaint, the plaintiffs sought to enjoin the proposed merger
transaction and seek to appoint an independent BAC holder representative to
investigate alternative transactions. The lawsuit also requests a judicial
dissolution of Capital Source L.P. and Capital Source II L.P.-A, an
accounting, and unspecified damages and costs.
The general partners of the Partnership, Capital Source L.P. and Capital
Source II L.P.-A determined not to pursue the merger transaction which was the
subject of the initial lawsuit and proposed an alternative transaction to BAC
holders. A prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about November 16,
1999. The plaintiffs amended their complaint on December 8, 1999, and again
on February 22, 2000. The second amended complaint challenges this current
prospectus/consent solicitation statement on grounds similar to those alleged
in the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
To resolve the lawsuit, the Partnership and the other defendants to the
lawsuit, on April 24, 2000, entered into a settlement agreement (the
Settlement) with the plaintiffs. The Settlement remains subject to approval
by the Court. In connection with the Settlement, if approved, Capital Source
L.P. and Capital Source II L.P.-A expect to submit a revised transaction to
BAC holders for approval. The complete terms of the Settlement, along with
the updated consent solicitation material describing the revised merger
transaction, will be filed with the Securities and Exchange Commission (the
SEC). As soon as it receives SEC clearance, Capital Source L.P. and Capital
Source II L.P.-A will deliver to BAC holders materials that fully describe the
settlement and revised transaction.
There are no other material pending legal proceedings to which the
Partnership is a party or to which any of its property is subject.
<PAGE> -4-
Item 6. Exhibits and Reports on Form 8-K.
(a). Exhibits.
The following exhibits are filed as required by this report.
Exhibit numbers refer to the paragraph numbers under Item 601
of Regulation S-K:
2(a) Agreement and Plan of Merger among the
Partnership and Cap Source and Cap Source II
(incorporated by reference to Appendix A to the
Prospectus included in Registration Statement on
Form S-4 (No. 333-52117) filed by the Registrant
on November 8, 1999).
4(a) Certificate of Limited Partnership of the Partnership
(incorporated by reference to Exhibit 3.01 to
Registration Statement on Form S-4 (No. 333-52117)
filed by Registrant on July 21, 1999).
4(b) Amended and Restated Agreement of Limited
Partnership of America First Real Estate Investment
Partners, L.P. (incorporated by reference to Exhibit
3.02 to the Registration Statement on
Form S-4 (No. 333-52117) filed by the Registrant on
July 21, 1999).
4(c) Form of Indenture between Partnership and U.S. Bank
Trust National Association, as trustee, (incorporated
by reference to Exhibit 4.02 to the Registration
Statement on Form S-4 (No. 333-52117) filed by the
Registrant on May 7, 1998).
4(d) Form of Unit Certificate of the Registrant
(incorporated by reference to Exhibit 4.03 to the
Registration Statement on Form S-4 (No. 333-52117)
filed by the Registrant on September 28, 1999).
4(e) Form of Variable Rate Junior Notes are included in
Exhibit 4.02 (incorporated by reference to Exhibit
4.04 to the Registration Statement on Form S-4
(No. 333-52117) filed by the Registrant on May 7,
1998).
10(a) Stipulation of Settlement.
IN THE CASE OF
ALVIN M. PANZER and
SANDRA G. PANZER
Plaintiffs,
v.
INSURED MORTGAGE EQUITIES, INC.,
INSURED MORTGAGE EQUITIES II
LP., AMERICA FIRST CAPITAL
SOURCE I, LLC., AMERICA FIRST
CAPITAL SOURCE II, LLC, AMERICA
FIRST COMPANIES, LLC, AMERICA
FIRST REAL ESTATE INVESTMENT
PARTNERS, L.P., LEHMAN
BROTHERS, INC., CAPITAL SOURCE
L.P., PAUL L. ABBOTT, and CAPITAL
SOURCE II, L.P.,
Defendants.
27. Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during
the last quarter of the period covered by this report.
<PAGE> -5-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AMERICA FIRST REAL ESTATE INVESTMENT
PARTNERS, L.P.
By America First Capital
Source I, L.L.C., General
Partner of the Registrant
By /s/ Michael Thesing
Michael Thesing,
Vice President and
Principal Financial Officer
Date: May 11, 2000
<PAGE> -6-
Exhibit 10(a)
Stipulation of Settlement
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
ALVIN M. PANZER and
SANDRA G. PANZER
Plaintiffs, C.A. No. 16929 NC
v.
STIPULATION OF
INSURED MORTGAGE EQUITIES, INC., SETTLEMENT
INSURED MORTGAGE EQUITIES II
LP., AMERICA FIRST CAPITAL
SOURCE I, LLC., AMERICA FIRST
CAPITAL SOURCE II, LLC, AMERICA
FIRST COMPANIES, LLC, AMERICA
FIRST REAL ESTATE INVESTMENT
PARTNERS, L.P., LEHMAN
BROTHERS, INC., CAPITAL SOURCE
L.P., PAUL L. ABBOTT, and CAPITAL
SOURCE II, L.P.,
Defendants.
WHEREAS:
A. Plaintiffs Alvin. M. Panzer and Sandra G. Panzer have brought this action
(the "Action") in the Delaware Court of Chancery (the "Court") on behalf of
themselves and the class of public holders of units of limited partnership
interests in Capital Source L.P. ("Capital Source I") and Capital Source II
L.P.-A ("Capital Source II") (collectively the "Partnerships"), against
defendants Insured Mortgage Equities, Inc., Insured Mortgage Equities II L.P.,
America First Capital Source I, L.L.C., America First Capital Source II
L.L.C., America First Companies LLC, America First Real Estate Investment
Partners, L.P., Lehman Brothers, Inc., Capital Source I, Paul Abbott, Capital
Source II, (collectively the "Defendants"). The general partners of Capital
Source I are Insured Mortgage Equities, Inc. and America First Capital Source
I L.L.C. The general partners of Capital Source II are Insured Mortgage
Equities II L.P. and America First Capital Source II L.L.C. The foregoing are
herein referred to collectively as the General Partners.
B. On or about May 7, 1998, the America First Defendants (defined below) filed
a preliminary Prospectus/Consent Solicitation Statement with the Securities
and Exchange Commission ("SEC") in connection with a proposed solicitation of
consents from the unitholders of the Partnerships, among other things, to
convert the Partnerships into a newly-formed corporation, America First Real
Estate Investment Company, Inc. On or about July 21, 1998, the America First
Defendants filed Amendment No. 1 to the Prospectus/Consent Solicitation
Statement, subject to completion. On or about November 3, 1998, the America
First Defendants filed Amendment No. 2 to the Prospectus/Consent Solicitation
Statement, subject to completion.
<PAGE> -7-
C. Plaintiffs filed the Action on February 3, 1999, seeking a decree of
dissolution under 6 Del. C. section 17-802, the appointment of a receiver to
wind-up the Partnerships' affairs and an accounting from the defendants. The
Action also asserted claims for breaches of fiduciary duties against the
General Partners, Lehman Brothers, America First Real Estate Investment
Company, Inc., America First Companies, LLC, and Paul L. Abbott (the "America
First Defendants"). The Action also asserted claims for breaches of the
agreements of limited partnership for the Partnerships (the "Partnership
Agreements") by the General Partners, and alleged that Lehman Brothers and the
America First Defendants caused and substantially assisted violations of the
Partnership Agreements. The Complaint as originally filed alleged that the
Partnerships were not meeting their objectives and should be dissolved and
liquidated, and that the General Partners were instead seeking improperly to
perpetuate the lives of the Partnerships by converting them into a new
corporation. The Complaint alleged that the General Partners had the ability
to direct the sale or liquidation of the apartment projects constituting the
assets of the subsidiary limited partnerships which hold the operating assets
of the Partnerships (the "Operating Partnerships") ten years after completion
of those projects, and that the ten year period had expired or was about to
expire for all of the Operating Partnerships. The Action as originally filed
also alleged that in May 1997, Lehman Brothers, as then-controlling parent of
the IME General Partners, improperly transferred ownership and control of the
IME General Partners to America First Companies, LLC. The Action alleged that
the transfer of ownership and control by Lehman Brothers was improperly
effected without an effective vote, consent or ratification by the unitholders
of the Partnerships as required under Delaware law and the Partnership
Agreements. The Complaint alleged that the transfer of control by Lehman
Brothers to the America First Defendants violated the Partnership Agreements
and the fiduciary duties of the General Partners, Lehman Brothers and Abbott,
then-managing director of Lehman Brothers and the General Partners.
D. During May 1999, the parties engaged in discussions regarding possible
settlement of the Action. While these discussions were pending, the parties
agreed to extend the Defendants' period of time to respond to the Complaint.
The discussions did not lead to any agreement to settle the litigation.
E. On June 16, 1999, plaintiffs Sandra G. Panzer and Alvin M. Panzer sent to
the General Partners a written request for access to certain Partnership
records. Plaintiffs requested (1) a current list of the full names and last
known home or business addresses of each partner and unitholder of the
Partnerships, set forth in alphabetical order ("Holder List"), and (2) copies
of all Partnership agreements of the Operating Partnerships ("Operating
Partnership Agreements"). In a letter dated June 23, 1999, plaintiffs'
request for access to the Holder List and Operating Partnerships Agreements
was denied by the Partnerships, stating that the plaintiffs lacked a proper
purpose and that the items were not required to be provided under the
Partnership Agreements or relevant law.
F. On July 12, 1999, plaintiffs Sandra G. Panzer and Alvin M. Panzer filed
separate actions, Civil Action Nos. 17292 and 17293 (the "Books and Records
Actions"), in the Court, seeking access to the Holder List and Operating
Partnership Agreements pursuant to 6 Del. C. section 17-305 and the
Partnership Agreements. The Books and Records Actions alleged that the
plaintiffs requested the Holder List and Operating Partnership Agreements to
analyze the issue of the Partnerships' control over the assets of the
Operating Partnerships in order value their investments and communicate with
other holders regarding the Action and the conduct of the General Partners and
their affiliates with respect to the Partnerships' assets.
G. On July 21, 1999, the General Partners announced a consent solicitation to
secure unitholders' approval of the conversion of the Partnerships into a new
limited partnership, America First Real Estate Investment Partners, L.P. (the
"Company").
<PAGE> -8-
H. On November 24, 1999, the America First Defendants mailed to unitholders of
record as of October 28, 1999 a Prospectus/Consent Solicitation Statement and
supplements thereto, and other materials (collectively the "Consent
Solicitation") which sought approval for, among other things, a merger of the
Partnerships with and into the Company (the "Merger"). In connection with the
Merger, the Company stated it would issue new securities to the unitholders of
the Partnerships in exchange for the assets of the Partnerships pro rata
according to an exchange value based upon the assets of the respective
Partnerships (the "Exchange Values"), and the Partnerships would cease to
exist. Unitholders could also elect to receive certain junior notes in
exchange for their units up to a maximum total amount of $20 million in
notes. The Merger requires the approval of a majority of the unitholders of
each Partnership.
I. On December 8, 1999, plaintiffs filed an Amended Class Action Complaint.
The Amended Class Action Complaint added allegations directed to the proposed
conversion of the Partnerships into a newly-formed limited partnership,
including that the America First Defendants had wrongfully expended over $2.5
million of Partnership funds in connection with the abandoned transaction.
The Amended Class Action Complaint also repeated the claims in the original
Complaint and substituted America First Real Estate Investment Partners L.P.
for America First Real Estate Investment Company, Inc. as a party defendant.
On January 7, 2000, the defendants moved to dismiss the Action on the grounds
that the Complaint failed to state a claim upon which relief can be granted
and that certain claims are barred by the Statute of Limitations.
J. On or about November 16, 1999, the parties to the Books and Records Actions
reached an agreement pursuant to which plaintiffs would be provided with the
Holder List. The parties did not, however, reach an agreement regarding the
plaintiffs' access to the Operating Partnership Agreements.
K. On December 13, 1999, plaintiffs mailed a letter to the unitholders
informing them, among other things, of the pendency of the Action and of
plaintiffs' intent to vote "no" in the ongoing consent solicitation and to
pursue the Action seeking a dissolution and winding up of the Partnerships if
the Merger was not approved by the unitholders. The plaintiffs also urged the
unitholders to vote "no" or revoke any previously submitted consents in favor
of the Merger. The December 13, 1999 letter also stated that plaintiffs would
seek to force the General Partners to honor revocations, notwithstanding the
instruction in the Consent Solicitation that unitholders may not withdraw or
revoke consents after the consent card is delivered to the proxy solicitor,
Kissel-Blake. On January 14, 2000, plaintiffs mailed a second letter to the
unitholders urging those who had not yet voted to vote "no", and those who had
voted "yes" to revoke their consents.
L. On February 4, 2000, the plaintiffs filed a motion for leave to amend the
complaint and a motion for certain declaratory and injunctive relief relating
to the right to revoke consents and the disclosures related thereto (the
"Motion For Relief"). The Second Amended Class Action Complaint, which was
the subject of the motion to amend, repeated the claims and allegations of the
Amended Class Action Complaint and added a claim for corrective disclosure and
injunctive relief directed to the right to revoke consents. The Second
Amended Class Action Complaint alleged that the instructions in the Consent
Solicitation that unitholders may not withdraw or revoke consents were
materially misleading, and that the General Partners' refusal to honor
revocations of consents was improper. On March 7, 2000, the defendants again
moved to dismiss the Action, this time on the grounds that the Complaint
failed to state a claim upon which relief can be granted, that certain claims
are barred by the Statute of Limitations and that certain other claims are
moot.
<PAGE> -9-
M. On February 10, 2000, the Court held a conference on plaintiffs' request to
be heard on the Motion For Relief prior to February 18, 2000, the then-current
expiration date of the Consent Solicitation. The Court granted plaintiffs'
request to be heard and scheduled a hearing for February 16, 2000. In part
due to these motions, the General Partners agreed to allow unitholders to
revoke consents. Plaintiffs thus withdrew their request to be heard on the
Motion For Relief prior to February 18, 2000. On February 18, 2000, the
Partnerships issued a press release announcing that the consent solicitation
would be extended and that unitholders had the right to revoke consents. In
February and March of 2000, counsel for the parties engaged in extensive
settlement negotiations. These negotiations culminated in this agreement to
settle this action, subject to Court approval, satisfactory completion by
Plaintiff's counsel of confirmatory discovery and subject to the approval of
the Merger by a majority of the unitholders of record as of October 28, 1999
of each Partnership. N. The Defendants, while continuing to deny all
allegations of wrongdoing or liability or damage to the purported class
whatsoever, and contending that they acted properly and lawfully at all times,
desire to settle and terminate the purported class's claims so as to put to
rest any and all claims that were or could have been asserted in this action
or arising out of matters set forth in the pleading, and to avoid the expense
and burdens of continued litigation without in any way acknowledging any fault
or liability.
NOW, THEREFORE, IT IS STIPULATED AND AGREED by and among Plaintiffs and
Defendants, as follows:
1. Certification of a Settlement Class
a. Solely for the purposes of this settlement, the parties stipulate and
agree (i) to certification of the Action as a class action on behalf of the
unitholders of the Partnerships who were holders of record as of October 28,
1999 (the "Class") pursuant to Rule 23(b)(2) of the Delaware Court of Chancery
Rules; (ii) that named plaintiffs Alvin M. Panzer and Sandra G. Panzer shall
act as representatives of the Class ("Representative Plaintiffs"); (iii) that
Plaintiffs' counsel, Chimicles & Tikellis LLP and Goodkind Labaton Rudoff &
Sucharow LLP shall act as Plaintiffs' Co-Lead Counsel, and that Plaintiffs'
other counsel shall be Milberg Weiss Bershad Hynes & Lerach, LLP; Wolf
Haldenstein Adler Freeman & Herz LLP; Girard & Green; Hanzman, Criden, Korge,
Hertzberg & Chaykin, P.A., (collectively, "Class Counsel"); and (iv) to a
finding that the Class is so numerous that joinder of all members thereof is
impracticable, that there are questions of law or fact common to the Class,
that the claims are typical of the claims of the Class, that the
representative plaintiffs will fairly and adequately represent the interests
of the Class, that the representative plaintiffs and Class Counsel will fairly
and adequately represent the interests of the Class; and that the defendants
have acted or refused to act on grounds generally applicable to the Class,
thereby making appropriate final injunctive relief with respect to the Class
as a whole.
b. The Class shall be composed of all holders of units (otherwise known as
Beneficial Assignment Certificates) in either of the Partnerships as of
October 28, 1999, the record date for voting on the proposed Merger.
c. In the event this Settlement Agreement is terminated, the certification of
the Class and appointment of the representative plaintiffs and Class Counsel
shall automatically be vacated, and the Action shall proceed as though the
Class had never been certified and the representative plaintiffs and Class
Counsel had never been appointed. This subparagraph shall survive the
termination of this Settlement Agreement.
2. Distributions to the Class
In full settlement and compromise of all claims against Defendants by
Plaintiffs and all members of the Class, and subject to the terms and
conditions of this Settlement Agreement, including Court approval of the
Settlement, satisfactory completion by Plaintiffs' counsel of confirmatory
discovery, and approval of the Merger by a majority of the unitholders of both
Partnerships on the revised terms provided for herein, Defendants, upon the
execution of this Stipulation of Settlement, will amend the existing Merger
proposal and distribute an amended Consent Solicitation or supplement to the
Consent Solicitation to the unitholders in connection therewith, to provide,
if and only if the unitholders approve the Merger as amended and the other
conditions of the Settlement are met:
<PAGE> -10-
a. First Post-Closing Distribution. The Company will, subject to the review
and approval of the National Association of Securities Dealers ("NASD"), make
a $6 million distribution to (i) the unitholders of the Company and (ii)
current unitholders of the Partnerships who subsequent to the Merger elect to
receive variable rate junior notes from the Company (the "Notes") instead of
units issued by the Company ("Noteholders"). These payments to Noteholders
will be made in partial payment of the Company's debt to them, pro rata based
upon the Exchange Values attributable to the Partnerships for purposes of the
Merger. These distributions shall be made as soon as practicable after the
Merger is effective, but in any event no later than the end of the first full
fiscal quarter subsequent to the effective date of the Merger. This
distribution will be in addition to the regular quarterly distributions to
unitholders that the Company intends to make beginning with the first full
fiscal quarter of operations following the completion of the Merger.
b. Second Post-Closing Distribution. As of the end of the first full fiscal
quarter of operations following the Merger, the Company will, subject to the
review and approval of the NASD, make a $5 million distribution to (i) the
unitholders, and to (ii) the Noteholders, pro rata based upon the Exchange
Values of the Company. This second post-closing distribution will be
inclusive of the regular quarterly distribution, but in no event shall the
total amount of this distribution be less than $5 million.
c. Unit Repurchase. Subject to the review and approval of the NASD, the
Company will publicly announce and commence a unit repurchase program under
which the Company shall purchase from unitholders up to $3.5 million in units
of the Company within the first full twelve months after the Merger is
effective. These repurchases will be made in compliance with all applicable
laws and regulations. If for any reason the Company does not purchase $3.5
million in units in the repurchase program during the first full twelve months
after the Merger is effective, at the end of the first twelve months, the
Company will make a further post-closing special distribution to the
unitholders. The amount of this distribution will be $3.5 million, less the
cost of the units purchased by the Company in the repurchase program during
the first twelve months after the Merger. This distribution will be in
addition to the regular quarterly distributions to unitholders that the
Company intends to make beginning with the first full fiscal quarter of
operations following the completion of the Merger.
d. Reservations of Rights. (i) The general partner of the Company, in its
sole discretion, subject to the terms of the Company's partnership agreement
and the fiduciary duties of the general partner of the Company, may change the
Company's distribution policy at any time, and any such change shall not
affect in any way this Stipulation of Settlement, so long as the Company makes
the distributions and/or unit repurchases required by 2(a), 2(b) and 2(c).
(ii) In connection with this transaction, the Company may, at its option, pay
cash instead of issuing Notes. If the Company elects to pay cash to investors
otherwise entitled to receive Notes, it will pay these investors an amount
equal to the principal amount of notes these investors would have received
plus interest accrued to the date of payment.
3. Release and Discharge of Claims
a. The Release. The Order and Final Judgment will provide, among other
things, that the Actions and any and all claims, rights, causes of action and
suits that have been or could have been asserted, either directly,
individually, representatively, derivatively or in any other capacity, by the
plaintiffs and any other members of the Class against the Defendants, or any
of their respective present or former directors, officers, agents, employees,
attorneys, financial advisers, commercial bank lenders, investment bankers,
representatives, associates, parents, subsidiaries, general or limited
partners, shareholders, limited partners, administrators, successors and
assigns (the "Released Parties"), whether under state or federal law, and
whether directly, representatively, or in any other capacity in connection
with, or that arise out of the subject matter of the Action (the "Released
Claims"), shall be fully, finally and forever compromised, settled, released,
discharged and dismissed with prejudice.
<PAGE> -11-
b. Covenant Not To Sue. The Class members and their attorneys, agents,
representatives, survivors, heirs, successors, assigns, executors and
administrators further covenant that they will refrain from commencing any
action, suit, or administrative proceeding, or prosecuting any pending action,
suit, arbitration or administrative proceeding, in law or in equity, against
the Released Parties, concerning the Released Claims. In the event that such
Class members or their attorneys, agents, representatives, survivors, heirs,
successors, assigns, executors, and administrators commence or continue any
such action, the Released Parties shall be entitled to seek an order from the
Court enjoining the continuation of such action, suit or proceeding.
c. Other Litigation. Simultaneous with the final approval of the Settlement,
the Class representatives, Alvin M. Panzer and Sandra G. Panzer, will also
agree to dismiss with prejudice the Books and Records Actions.
d. Effect of Releases. This Settlement Agreement may be pleaded as a full
and complete defense to any action, suit, or other proceeding that may be
instituted, prosecuted, or attempted with respect to any of the Released
Claims. The Settling Class Members and Defendants agree that any such
proceeding would cause irreparable injury to the party against whom it is
brought and that the Court or any court of competent jurisdiction may enter an
injunction restraining prosecution hereof. The Class Members and Defendants
further agree that this Settlement Agreement maybe pleaded as necessary for
the purpose of enforcing this Settlement Agreement.
4. Court Approval and Notice to the Class
a. Class Notice. The Company shall bear the cost of providing notice of the
settlement to the Class. The parties shall submit a form of scheduling order
to the Court for approval as soon as practicable upon expiration of the
Consent Solicitation as revised hereunder. The proposed Scheduling Order
which the parties shall seek from the Court shall: temporarily certify the
Class for settlement purposes under Delaware Court of Chancery Rule 23(b)(2)
pending a final hearing on the Settlement and plaintiffs' application for
attorneys' fees and costs; certify the plaintiffs as Class representatives and
Class Counsel as counsel for the Class; approve the form and manner of Notice
to the Class and direct dissemination of the Notice to unitholders; schedule a
hearing on the Settlement and plaintiffs' application for attorneys' fees and
costs to be held thirty days following the dissemination of the Notice or at
such other time as the Court orders; provide the time by which objections to
the Settlement or plaintiffs' application for attorneys' fees and costs must
be filed; and stay further proceedings in the Action other than proceedings in
connection with the Settlement pending final determination regarding the
Settlement by the Court.
b. Final Approval. If this Stipulation of Settlement (including any
modification thereto made with the consent of the parties as provided for
herein) shall be approved by the Court, the parties shall jointly request the
Court to enter Final Judgment:
i. certifying the Class and approving the settlement set forth in this
Stipulation of Settlement as fair, reasonable and adequate;
ii. dismissing the complaint in the Action on the merits as to all Defendants
with prejudice to plaintiffs and all members of the Class, and releasing the
Released Parties from the Released Claims.
iii. permanently barring and enjoining the institution or prosecution by any
of the plaintiffs or any other member of the Class, whether directly,
representatively, derivatively, or in any other capacity, or any action
asserting any Released Claims;
iv. decreeing that this Stipulation of Settlement and the settlement
contemplated by this Stipulation of Settlement (the "Settlement") provided for
herein are not an admission for any purpose by any of the parties in this
action of any wrongdoing, liability or damage whatsoever on the part of the
Defendants;
v. reserving jurisdiction by the Court over the consummation, implementation
and administration of the Settlement; and containing such other and further
provisions consistent with the terms of this Stipulation of Settlement to
which the parties may consent; and
vi. awarding attorneys' fees and costs as determined by the Court.
<PAGE> -12-
5. Conditions of Settlement
a. Sequence of Events. Immediately upon execution of this Stipulation of
Settlement, the parties shall file the Stipulation with the Court and commence
confirmatory discovery so that such discovery can be completed prior to the
expiration of the Consent Solicitation on the revised Merger and dissemination
of the Notice of Settlement and plaintiffs' application for attorneys' fees
and costs to the Class. As soon practical after the execution of this
Stipulation of Settlement, the Partnerships will present to the SEC and the
NASD an amended Prospectus/Consent Solicitation. The amended
Prospectus/Consent Solicitation shall include, among other things, a
description, agreeable to the parties, of the proposed Settlement, the claims
proposed to be released thereunder and the proposed application and sources of
payment of plaintiffs' attorneys' fees and costs. After approval by the SEC
and NASD, the amended or supplemented Prospectus/Consent Solicitation will be
distributed to unitholders. If the necessary majority of unitholders of each
Partnership approves the revised Merger, and if confirmatory discovery is
satisfactorily completed, the parties shall as soon as practicable submit a
proposal Scheduling Order to the Court, as discussed above.
b. Conditions of Settlement. In order for this Settlement to be valid and
binding, these conditions must be satisfied:
i. Completion by the plaintiffs of confirmatory discovery.
ii. Approval of the Revised Merger by a majority of the holders of each
Partnership.
iii. Approval of the Settlement by the Court.
c. Result of Failure to Satisfy Conditions. If these conditions are not
satisfied, or if the Settlement set forth in this Stipulation of Settlement
fails to become effective in accordance with its terms, or if the Final
Judgment is reversed, vacated or modified, the Settlement provided herein and
any actions to be taken in connection therewith (including the Notice of
Settlement, Hearing Order and Final Judgment to be entered) and all
negotiations, transactions and proceedings connected with it (i) shall be
without prejudice to the rights of any party, (ii) shall not be deemed or
construed as evidence or an admission by any party of any fact, matter or
thing, (iii) shall not be admissible in evidence or used for any purpose in
any other action or proceeding, and (iv) shall be void, invalid and without
effect.
6. No Admission
Acceptance of the terms of this Stipulation of Settlement and the
negotiations, papers and proceedings relating to this Stipulation of
Settlement and its terms are not and shall not be construed as evidence or an
admission by the Defendants of the validity of any of the claims made by the
Class or liability of the Defendants therefor or of any wrongdoing whatsoever
whether or not the Settlement is consummated. Neither this Stipulation of
Settlement nor any of its terms, or the negotiations or papers relating
thereto shall be offered or received in evidence in this or any other action
or proceeding or utilized in any manner whatsoever as an admission or
concession of liability or wrongdoing or lack thereof of any nature on the
part of the Defendants.
7. Implementation and Scheduling
a. Counterparts. This Stipulation of Settlement may be executed in one or
more counterparts. All executed counterparts and each of them shall be deemed
to be one and the same instrument, provided, that no party shall be bound
until all parties have executed this Stipulation of Settlement. The
undersigned counsel for the parties shall exchange among themselves original
signed counterparts and a complete set of original executed counterparts of
this Stipulation of Settlement shall be filed with the Court.
<PAGE> -13-
b. Attorneys' Fees. Plaintiffs' counsel intend to apply to the Court for,
and defendants will not object to, approval of $1.6 million in attorneys' fees
and expenses ("Fee Award"). The first $600,000 of such Fee Award will be paid
by the following defendants: Insured Mortgage Equities Inc., Insured Mortgage
Equities II, L.P., America First Capital Source I, LLC, America First Capital
Source II, LLC, Capital Source I, and Capital Source II (and shall not include
Partnership funds). The $600,000 shall be placed immediately upon the
execution of this stipulation into an interest bearing escrow account and
shall be paid to Plaintiffs' Co-Lead Counsel, together with accrued interest,
within five days after the expiration of any time to appeal or, if an appeal
is taken from the Court's entry of an order awarding fees, after the judgment
confirming the settlement has become final. The balance of such Fee Award
shall be paid equally from the following sources: five hundred thousand
dollars ($500,000) from the Company; and five hundred thousand dollars
($500,000) from the distributions of capital made to unitholders and
noteholders (paid proportionately based upon the amount of distributions to
unitholders and noteholders at the time of the distributions described in
paragraph 2 (a) and 2(b) herein).
c. Record Date. The record date for investors entitled to grant their
consents for this transaction will remain October 28, 1999, in order to permit
investors to change or revoke their consent. The Consent Solicitation shall
be extended for an additional 60 days following the declaration of
effectiveness (the "Declaration") by the Securities and Exchange Commission
with respect to the post-effective amendment to the Registration Statement
relating to the Merger. Class members will be permitted to revoke their
previously submitted written consents and/or revocations of consents.
d. Letter from Class Representatives. Plaintiffs shall send a letter to all
of the Unitholders of Capital Source I and Capital Source II informing them,
in text agreed to by the parties, of the amendments to the Merger resulting
from this Settlement Agreement and urging those unitholders to support the
settlement and vote in favor of the Merger, as amended. The letter shall be
mailed together with the amended Prospectus/Consent Solicitation to the
unitholders.
e. Governing Law. The rights and obligations of the parties to this
Stipulation of Settlement shall be construed and enforced with, and governed
by the laws of the State of Delaware, without regard to that state's choice of
law principles.
f. Entire Agreement. This Stipulation of Settlement constitutes the entire
agreement among the parties hereto and no representations, warranties or
inducements have been made to anyone concerning the Stipulation other than the
representations, warranties and covenants contained and memorialized in such
documents. Except as otherwise provided herein, each party shall bear its own
costs.
g. Non-severability. If any provision of the Stipulation of Settlement is
held to be illegal or invalid by a court of competent jurisdiction, the
remaining provisions of the Stipulation of Settlement are void, invalid and
ineffective.
h. Amendment. This Stipulation of Settlement may be amended or any of its
provisions waived only by a writing executed by or on behalf of all
signatories hereto.
<PAGE> -14-
IN WITNESS WHEREOF, this Stipulation and Settlement Agreement has been
executed this 24th day of April, 2000 by the undersigned counsel of record for
the Plaintiffs and Defendants.
CHIMICLES & TIKELLIS LP
_____________________________
Pamela S. Tikellis
Robert J. Kriner, Jr.
One Rodney Square
Wilmington, Delaware 19801
(302) 656-2500
Attorneys for Plaintiffs
SMITH, KATZENSTEIN & FURLOW LLP
__________________________________
David A. Jenkins
800 Delaware Avenue
Post Office Box 410
Wilmington, Delaware 19899
(302) 652-8400
Attorneys for Defendants
<PAGE> -15-
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