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SCHEDULE 14C
(Rule 14c-101)
SCHEDULE 14C INFORMATION REQUIRED IN INFORMATION STATEMENT
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934 (Amendment No. 5)
Check the appropriate box:
[xx] Preliminary Information Statement
[ ] Definitive Information Statement
VMS National Properties Joint Venture
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Name of Registrant as Specified In its Charter)
Payment of Filing Fee (Check the appropriate box):
[xx] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
1) Title of each class of securities to which transaction
applies:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2) Aggregate number of securities to which transation applies:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3) Per unit price or other underlying value of transaction
computted pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4) Proposed maximum aggregate value of transaction:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5) Total fee paid:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form of Schedule and the date of its filing.
1) Amount Previously Paid: . . . . . . . . . . . . . . . . . . . . .
2) Form, Schedule or Registration Statement No. . . . . . . . . . . .
3) Filing Party: . . . . . . . . . . . . . . . . . . . . . . . . . .
4) Date Filed: . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PRELIMINARY COPY
September __, 1997
VMS NATIONAL PROPERTIES JOINT VENTURE
c/o VMS Realty Partners, L.P.
630 Dundee Road, Suite 220
Northbrook, Illinois 60062
INFORMATION STATEMENT
We are writing to advise you of a proposed amendment to the
partnership agreements of each of the two partnerships that comprise VMS
National Properties Joint Venture, an Illinois joint venture ("Venture"). The
amendment ("Amendment") discussed below relates to the terms on which general
partners of those two partnerships may withdraw as such. The Amendment will
permit (i) the contemplated withdrawal of the current general partners of such
partnerships and (ii) the contemplated admission as the general partner of each
such partnership of MAERIL, Inc., a Delaware corporation ("MAERIL"), an
affiliate of Metropolitan Asset Enhancement, L.P. ("MAE"), which is an
affiliate of Insignia Financial Group, Inc. ("Insignia"), a fully integrated
real estate organization.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
The Amendment is proposed pursuant to the terms of settlement
("Settlement Agreement") of the lawsuits consolidated under the caption In Re
VMS Limited Partnership Securities Litigation, in the United States District
Court for the Northern District of Illinois (the "Court"). The two
partnerships are VMS National Residential Portfolio I, an Illinois limited
partnership ("Partnership I"), and VMS National Residential Portfolio II, an
Illinois limited partnership ("Partnership II"). Partnership I and Partnership
II (hereinafter collectively referred to as the "Partnerships") are the general
partners of the Venture. The Amended and Restated Limited Partnership
Agreement of Partnership I ("Partnership Agreement I") and the Amended and
Restated Limited Partnership Agreement and Certificate of Limited Partnership
of Partnership II ("Partnership Agreement II") are collectively referred to as
the "Partnership Agreements". The general partners of Partnership I are VMS
Realty Investment, Ltd. ("VMSRIL") and Prudential-Bache Properties, Inc.,
("Prudential-Bache")(1) and the general partner of Partnership
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(1) Prudential-Bache has not passed upon, and is not responsible for, the
accuracy of the representations contained in this Information
Statement, except for information herein regarding Prudential-Bache,
including without limitation, the information contained in "Summary of
the Information Statement Recent Developments Affecting
Prudential-Bache".
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II is VMSRIL. The Venture was reorganized pursuant to a Bankruptcy Plan of
Reorganization (the "Plan") which became effective on September 30, 1993.
Information concerning the Plan was previously reported in the Venture's Report
on Form 10-Q for the Nine Months ended September 30, 1993 and Report on Form
10-K for the fiscal year ended December 31, 1993.
This Information Statement is being mailed to all limited partners of
record of each of the Partnerships as of ____________, 1997. No meeting of
limited partners of either Partnership will be held. It is contemplated that
the Amendment will be adopted by each of the Partnerships by consent twenty
(20) business days from the above date, such consent to be accomplished by the
exercise of irrevocable proxies previously given to the managing general
partner of each of the Partnerships by the limited partners pursuant to the
terms of the Settlement Agreement described below. Under the Settlement
Agreement, limited partners of Partnership I owning 98.45% of the limited
partnership interests of Partnership I and limited partners of Partnership II
owning 97.88% of the limited partnership interests of Partnership II granted
such irrevocable proxies to the managing general partner of their respective
Partnerships to approve the Amendment.
Pursuant to Section 18(b) of each of the Partnership Agreements, the
consent to an amendment by limited partners owning fifty-one percent (51%) or
more of the limited partnership interests of such Partnership is sufficient for
the adoption of an amendment to the Partnership Agreement of that Partnership.
Partnership I has issued a single class of limited partnership interests,
consisting of 644 Units of interest. Partnership II has issued a single class
of limited partnership interests, consisting of 268 Units of interest. No
person or "group" (as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) is the beneficial owner of five percent or
more of either of the Partnership's limited partnership interests, except that,
solely because of its shared voting power pursuant to the proxies given under
the Settlement Agreement, VMSRIL could be deemed to be the beneficial owner of
98.45% of the limited partnership interests in Partnership I and 97.88% of the
limited partnership interests in Partnership II.
Under applicable state law, no dissenter's rights (i.e., rights of
non-consenting security holders to exchange interests in the Partnerships for
payment of their fair value) are available to any limited partner of either
Partnership, regardless of whether such limited partner has consented to the
adoption of the Amendment.
The Venture will provide without charge to each person, including any
limited partners of the Partnerships, to whom a copy of this Information
Statement is delivered, upon the written or oral request of any such person, a
copy of any or all of the documents which are incorporated herein by reference,
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Requests should be directed to
Leslie Gesme, VMS Realty Partners, L.P., 630 Dundee Road, Suite 220,
Northbrook, Illinois 60062 (telephone (847) 714-9600).
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This information statement should be read carefully as it describes
certain substantial consequences of the Amendment including the following:
- MAERIL, upon becoming substitute general partner, will have the
authority, pursuant to the Settlement Agreement, to consent on behalf of a
substantial majority of the limited partners to transfers of the Venture assets
(including the sale of all or substantially all of the Venture's assets),
subject to review of an oversight committee. See "Settlement Agreement's
Relationship to the Partnerships -- Procedures for Disposition of Assets of
Settling Limited Partnerships."
- VMSRIL's resignation as general partner of the Partnerships and
Prudential-Bache's resignation as general partner of Partnership I will relieve
each of them of any liability for the obligations of the respective
Partnerships of which they are currently general partners, which obligations
are incurred subsequent to the date of its withdrawal.
- The substitution of MAERIL is part of a series of transactions
involving MAERIL's affiliates and VMSRIL and its affiliates pursuant to which
VMSRIL and its affiliates will receive, and have received, significant
compensation, including:
(a) cash compensation in excess of $6 million;
(b) $500,000 of indemnification against certain potential
claims;
(c) a covenant not to sue from a partnership affiliate of
MAERIL which was VMSRIL's principal creditor.
- The substitution will assist Insignia in performing its
obligations pursuant to an agreement regarding the refinancing of the Venture's
mortgage loans, in connection with which, if consummated, Insignia will receive
at least $1.1 million of consideration. See "The Insignia Transaction -- The
MF VMS Agreement."
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SUMMARY OF THE INFORMATION STATEMENT
The following summary is qualified by, and should be read in
conjunction with, the more detailed information appearing elsewhere herein.
Limited partners of the Partnerships are urged to read this Information
Statement in its entirety. The Glossary contains an index of all defined terms
used herein.
A. AMENDMENT TO PARTNERSHIP AGREEMENTS
Pursuant to the terms of the Settlement Agreement, an amendment to the
terms of each of the Partnership Agreements will be adopted, providing that a
general partner of such Partnership may withdraw as such without liability and
may substitute its own successor, all without the further consent of the
limited partners of such Partnership, provided that certain conditions are
satisfied.(2) The proposed Amendments will be adopted upon VMSRIL's exercise of
the proxies ("Proxies") granted to it by settling investors pursuant to the
terms of the Settlement Agreement (which proxies were granted for the express
purpose of, among other things, adopting the proposed amendment). See
"Amendment To Partnership Agreements."
B. WITHDRAWAL OF PRUDENTIAL-BACHE AND TERMINATION OF ITS
MINORITY GENERAL PARTNERSHIP INTEREST IN PARTNERSHIP I
Following the adoption of the proposed amendment, Prudential-Bache
will withdraw as a general partner of Partnership I and its general partnership
interest will terminate. Prudential-Bache will withdraw as minority general
partner of Partnership I pursuant to Section 2.02 of the Settlement Agreement.
Prudential-Bache will receive no compensation or other consideration due to its
withdrawal or the substitution of MAERIL as the general partner in place of
VMSRIL. Furthermore, upon withdrawal, Prudential-Bache will retain no legal or
beneficial interests in Partnership I. See "Amendment To Partnership
Agreements."
C. WITHDRAWAL OF VMSRIL AND SUBSTITUTION OF MAERIL
VMSRIL, Strategic Realty Advisers ("SRA") (an affiliate of VMSRIL),
certain other affiliates of VMSRIL (including VMS Realty Partners, L.P.),
Insignia and an Insignia affiliate executed a letter of intent (the "Insignia
Letter of Intent") dated November 16, 1993, contemplating, among other things,
that the general partners (including VMSRIL) of all VMS syndicated partnerships
other than those owning hotels (those that do not own hotels are referred
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(2) These conditions generally require that (i) the substitute partner
have experience in real estate management and be reasonably
capitalized to serve as general partner and (ii) the substitution not
result in the reclassification of the Partnership as an association
taxable as a corporation for federal income tax purposes.
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to as the "Syndicated Partnerships"), including the Partnerships, will withdraw
as general partners and be replaced by MAERIL. MAERIL is a single purpose
affiliate (a second tier wholly owned subsidiary) of MAE, a limited partnership
(a) in which Insignia owns a 19.13% limited partnership interest, (b) the
general partner of which is solely owned by Andrew L. Farkas, the Chairman and
Chief Executive Officer of Insignia and (c) in which Mr. Farkas individually
holds substantial additional interests.(3) After consummation of certain of
the transactions contemplated by the Insignia Letter of Intent, Insignia, MAE,
MAERIL, VMSRIL and the VMS Principal Entities(4) entered into a binding
agreement (the "Insignia Agreement") dated July 14, 1994 which terminated the
Insignia Letter of Intent, and restructured certain of the then unconsummated
transactions that had been contemplated by the Insignia Letter of Intent and
provided for certain other agreements of the parties. Pursuant to the Insignia
Agreement, MAERIL will become the substitute general partner of only the
Selected Syndicated Partnerships(5), including the Partnerships, rather than
all of the Syndicated Partnerships as originally contemplated in the Insignia
Letter of Intent.
The Insignia Letter of Intent also contemplated that each of the
Syndicated Partnerships, including the Partnerships, was to retain (subject to
certain limitations) an Insignia affiliate to provide all property and asset
management services to such Syndicated Partnerships.(6) The
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(3) Mr. Farkas is the sole stockholder of a corporation which is the
general partner of MAP IV, which holds a 64.5% limited partnership
interest in MAE; and owns the general partner in MAP V which holds a
9.5% limited partnership interest in MAE. He is also a stockholder in
Insignia, directly and through MAP IV, MAP V, and certain other
entities.
(4) "VMS Principal Entity" means each of VMSRP, Chicago Wheaton Partners,
VMS Realty Investors, VMS Financial Services, VMS Financial Guarantee
Limited Partnership and VMS Realty Guarantee Limited Partnership; "VMS
Principal Entities" means every VMS Principal Entity, collectively.
(5) "Selected Syndicated Partnerships" means, collectively, the
Partnerships, Boca Glades Associates, Ltd., Boca West Shopping Center
Associates, Ltd., Four Quarters Habitat Apartments Associates, Ltd.,
Hearthwood Associates, Investors First-Staged Equity, L.P., Kendall
Townhome Investors, Ltd., Lynnhaven Associates, Merrifields
Apartments, Mount Regis Associates II, Pasadena Office Park
Associates, Prudential-Bache VMS Realty Associates L.P. I, Scarlett
Oaks Apartment Associates, Ltd., VMS Investors First-Staged Equity
L.P. II, Woodhaven Associates and Yorktown Towers Associates.
(6) Most of the Syndicated Partnerships have retained Insignia or its
affiliates to provide property and asset management services.
However, pursuant to the Insignia Agreement, Insignia terminated its
and its affiliates' rights and obligations to provide management
services to the following Syndicated Partnerships: Fort Lauderdale
Office Park Associates, Garden City Plaza Associates, Ltd.,
Jacksonville/Windsong Apartments Associates, Natick Village Apartment
Associates, Oak Brook International Office Center Associates,
Ramblewood Associates, 1600 Arch Investors, Ltd., 1600 Arch Limited
Partnership, Valley View Associates, Valley View Associates II,
Village Green Apartment-Townhome Associates, Woodmere Associates, Ltd.
In addition, an Insignia affiliate will not provide management
services with respect to one property formerly owned by VMS Investors
First-Staged Equity LP II, which property was sold by such partnership
following foreclosure proceedings.
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Insignia Letter of Intent had contemplated that such Insignia affiliate would
retain SRA to assist it in the provision of such management services; however,
pursuant to the Insignia Agreement, SRA has been retained to assist in the
provision of management services only to the Venture (and will not be retained
to provide such services with respect to any of the other Syndicated
Partnerships). The ownership of VMSRIL is set forth on Annex I. SRA is wholly
owned by Joel A. Stone, who is the sole shareholder of one of the corporate
partners of VMSRIL. See "The Insignia Transactions."
By agreement dated June 13, 1997 (the "MF VMS Agreement"), Insignia
entered into an agreement with MF VMS, L.L.C. ("MF VMS") to cooperate with one
another for MF VMS to acquire and restructure all of the outstanding mortgage
indebtedness of the Venture and of Investors First-Staged Equity, L.P ("IFSE").
MF VMS already holds, by assignment, all of the outstanding mortgage
indebtedness of the Venture and IFSE, other than 13 first mortgage loans, with
an outstanding principal balance as of July 31, 1997 of approximately $33
million (of which 11 such loans with an outstanding principal balance as of
July 31, 1997 of approximately $20.5 million relate to the Venture).
Additionally, Insignia agreed, among other things, to use commercially
reasonable efforts to amend its property management agreements with respect to
the Venture's and IFSE's properties. Furthermore, Insignia will use
commercially reasonable efforts to cause the asset management agreement between
the Venture and an Insignia affiliate to be amended, and will seek to have the
Plan amended to the Venture to retain its properties and to permit consummation
of the transactions contemplated pursuant to the MF VMS Agreement. In
connection with these transactions, Insignia has received, and has the right to
receive, significant cash consideration from MF VMS. See "The Insignia
Transaction - The MF VMS Agreement."
The mortgage documents with respect to the Venture's properties
prohibit the substitution of MAERIL as general partner of the Partnerships
without the consent of the mortgage lenders. MF VMS has granted its consent
with respect to all of the debt of the Venture held by it. However, consents
from the holders of the eleven remaining senior mortgage loans have not been
actively been pursued by the Venture, although the Venture intends to seek the
consent of its remaining mortgage lenders prior to the consummation of the
substitution of MAERIL for VMSRIL as general partner of the Partnerships and
withdrawal of Prudential-Bache as a minority general partner of Partnership I.
However, the Partnerships intend to proceed with the withdrawal
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and substitution transactions whether or not it receives such consents, which
might give any non-consenting lenders a right to declare a default and attempt
to exercise their remedies, including foreclosing upon the mortgaged
properties.
D. SETTLEMENT AGREEMENT
The Settlement Agreement dismissed all settling defendants, including
the Partnerships and the Venture, from certain actions brought by and on behalf
of certain purchasers of limited partnership interests in approximately 100
VMS-sponsored syndicated limited partnerships ("Settling Limited
Partnerships"), including the Partnerships:
1. Release
The investors who participated in the Settlement Agreement ("Settling
Class Members") thereby released the settling defendants from any and all
claims which they might have against the settling defendants relating to the
Settling Limited Partnerships, as well as defenses to collection actions
related to notes given by Settling Class Members in connection with the
purchase of their interests in such partnership. See "Settlement Agreement,
the Plan and Their Relationship To The Partnerships."
2. Settlement Proceeds
An aggregate amount of $23,500,000 in cash was initially paid on
behalf of both the VMS-related settling defendants and the
Prudential-Bache-related settling defendants. (An additional $1,050,000 in
cash was initially paid on behalf of Settling Class Members related to Mutual
Benefit Financial Services Co. and MB Investment Properties, Inc.
(collectively, "Mutual Benefit Settling Defendants"), although none of these
proceeds were allocated to the Partnerships.) Additionally, upon the
disposition of assets owned by the Settling Limited Partnerships, VMSRIL and
certain of its affiliates have paid (net of certain deductions) a percentage of
certain payments they have received as a result of such dispositions
(including, without limitation, repayments of certain amounts loaned to the
Settling Limited Partnerships), into the settlement fund created for the
benefit of the Settling Class Members. In the future, a percentage of certain
amounts (without deductions) that would have been received by VMSRIL's
affiliates in the event of a disposition of assets owned by the Settling
Limited Partnerships will be paid to such settlement fund. Additional
consideration for the Settling Class Members has also been provided by the
settling defendants. See "Settlement Agreement, the Plan and Their
Relationship To The Partnerships - Terms of the Settlement Relating to the VMS
Settling Defendants; and - Terms of the Settlement Agreement Relating to the
Prudential-Bache Settling Defendants."
3. Allocation of Settlement Proceeds
The Partnerships are collectively allocated 10.78 percent of the net
settlement proceeds paid on behalf of the VMS-related settling defendants
(approximately 8.28 percent to Partnership I
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and approximately 2.50 percent to Partnership II) and 18.15 percent of the net
settlement proceeds paid on behalf of the Prudential-Bache-related settling
defendants (all of which is allocated to Partnership I). See "Settlement
Agreement, The Plan And Their Relationship To The Partnerships - Allocation of
Settlement Proceeds."
4. Procedures for Disposition of Assets of
Settling Limited Partnerships
In addition to empowering the managing general partner of each of the
active Settling Limited Partnerships to cause adoption of the Amendment, the
Proxies also grant each managing general partner the power to consent on behalf
of a Settling Investor who is a limited partner of such partnership to the
disposition of any or all of the assets of such partnership. Therefore, for
each Settling Limited Partnership, including the Partnerships, in which the
managing general partner holds proxies representing a sufficient percentage of
the limited partnership interests pursuant to the terms of such partnership's
partnership agreement, no further approval of the limited partners of such
partnership is required to dispose of any or all of its assets.
However, except as indicated below, all dispositions of assets owned
by Settling Limited Partnerships will be subject to review by an oversight
committee (the "Oversight Committee") consisting of counsel for the class of
Settling Class Members and any other person that such counsel shall designate.
The Oversight Committee has the right to challenge in court a proposed
disposition based on the inadequacy of the consideration being paid or other
business considerations deemed appropriate by the Oversight Committee. If the
Oversight Committee challenges a proposed disposition, it will not occur until
the Court rules on such challenge.
The Settlement Agreement provides that if a Settling Limited
Partnership is a debtor under the Bankruptcy Code, and the applicable United
States Bankruptcy Court has approved the sale or other disposition of real
property and/or other assets owned by that debtor, such approval shall
automatically constitute an irrevocable approval of such sale or other
disposition by the Oversight Committee. Since the Venture was in bankruptcy,
certain transfers pursuant to the Plan (including the abandonment of certain
properties to the lien holders thereon) were made in reliance upon approval of
the Bankruptcy Court rather than by the Oversight Committee. See "Settlement
Agreement, The Plan And Their Relationship To The Partnerships - Procedures for
Disposition of Assets of Settling Limited Partnerships." The Bankruptcy Court,
however, did not specifically approve any further asset dispositions, and thus,
Oversight Committee review of future asset dispositions by the Venture will be
necessary.
5. Effect On Fees, Distributions and Allocations
of Profits and Losses to General Partners
The Settlement Agreement does not increase the fees which a general
partner of a syndicated limited partnership was entitled to receive prior to
the Settlement Agreement. However, following VMSRIL's withdrawal from, and
transfer of its general partnership interests in, the Partnerships, partnership
distributions of profits and losses attributable to VMSRIL's general
partnership interests
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in the Partnerships will be received by MAERIL as the transferee of those
general partnership interests. See "Settlement Agreement, The Plan And Their
Relationship To The Partnerships - Effect on Fees, Distributions and
Allocations of Profits and Losses to General Partners of Settling Limited
Partnerships."
E. SUMMARY OF CONFLICTS OF INTEREST
The substitution of MAERIL is part of a series of transactions
involving MAERIL's affiliates and VMSRIL and its affiliates pursuant to which
VMSRIL and its affiliates will receive, and have received, significant
compensation, including:
(a) cash compensation in excess of $6 million;
(b) $500,000 of indemnification against certain potential claims;
and
(c) a covenant not to sue from a partnership affiliate of MAERIL
which was the principal creditor of VMSRIL. MAERIL's affiliate (ISLP) acquired
this debt (which aggregated $37,270,000 as of January 1, 1994) on November 16,
1993 from EAB (as defined below) for $1,100,000. Additionally, such
partnership purchased approximately $16,150,000 of VMSRP debt held by EAB for a
price of $400,000 and approximately $23,750,000 of VMSRP debt held by Marine
Midland for a price of $620,000. See "The Insignia Transactions."
Pursuant to the Partnership Agreements, absent the Proxies and the
Amendment, there would be certain substantial limitations on the authority of a
general partner to withdraw and substitute a new general partner. However, the
proxies and the Amendment effectively eliminate these limitations, permitting
the general partners to freely withdraw and substitute a new general partner so
long as the withdrawal conditions specified in the Settlement Agreement have
been satisfied. As a result, although any substitute general partner must meet
the withdrawal conditions, the existing general partner might be motivated in
the selection of a substitute general partner by factors other than the
successor's qualifications to serve as a substitute general partner, such as
the consideration to be received from such successor and the speed with which
the substitution of the successor can be accomplished. Additionally, in order
to facilitate its withdrawal, a general partner could cause the Venture to
confer benefits upon a successor and its affiliates which might not be in the
best interests of the Partnerships. See "Conflicts of Interest."
As a result of the transactions contemplated by the Insignia Agreement
and the Plan, MAERIL and its affiliates, rather than VMS Realty Partners, L.P.
("VMSRP") and its affiliates, may receive substantial benefits from the
proceeds of sales of the Venture's assets, which benefits would not be shared
with the Limited Partners of the Partnerships. Pursuant to the Insignia
Agreement, ISLP may acquire from the liquidating trusts created pursuant to the
CRA (as defined below) certain claims the liquidating trusts had previously
acquired from the VMS Principal Entities. These claims include the claims of
VMSRP and certain other affiliates of the Venture
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against the Venture (the "Transferred Claims"), which, pursuant to the Plan,
must be paid in full before any proceeds from property sales are distributed to
the Partnerships. MAERIL, as general partner of the Partnerships, would have
the ability to cause the Venture to raise funds to pay the claims currently
owned by the liquidating trusts by selling some or all of the Venture's
property, even though the proceeds might not be sufficient after payment of the
Transferred Claims to result in distributions to the Partnerships. MAERIL
could be motivated to sell properties quickly, or at a time when the market for
such properties is unfavorable, if selling such properties at such time would
produce a favorable return on ISLP's investment, despite the fact that such a
sale would yield no, or only a small, distribution to the Partnerships. See
"Settlement Agreement, The Plan And Their Relationship To The Partnerships -
Terms of the Settlement Relating to VMS Settling Defendants - Waiver of
Interest Under Assignment Notes and Wrap Notes and Treatment under the Plan."
Pursuant to the Insignia Agreement, SRA could have an interest in certain of
the funds received by ISLP with respect to such claims. See "The Insignia
Transactions - Compensation of VMSRIL Affiliate."
The Plan provides certain protections against such conflicts,
including a requirement that the Venture may only sell any or all of the 17
properties it will retain following final consummation of the Plan if, among
other things, such sales are for fair value to bona fide third parties not
affiliated with the Venture, its asset manager or certain others, including
SRA. In addition, Oversight Committee review will also provide some protection
from the effects of such conflicts. See "Conflicts Of Interest."
Nevertheless, the Plan will not protect the limited partners from the ability
of MAERIL to sell properties during unfavorable market conditions at a price
which is fair given the then prevailing market conditions.
F. ADVERSE EFFECTS ON LIMITED PARTNERS
AND BENEFITS TO RESIGNING GENERAL PARTNERS
A potentially adverse effect of the Amendment on the Limited Partners
is that Prudential-Bache will be able to withdraw as a general partner of
Partnership I, and VMSRIL will be able to withdraw as a general partner of both
of the Partnerships. Prudential-Bache's resignation as a general partner of
Partnership I will relieve it of any liability for the obligations of
Partnership I and the Venture incurred subsequent to the date of its withdrawal
as a general partner of Partnership I. VMSRIL's resignation as a general
partner of Partnerships will relieve it of any liability for the obligations of
the Partnerships and the Venture incurred subsequent to the date of its
withdrawal. However, despite their withdrawals, Prudential-Bache and VMSRIL
will remain liable for liabilities, if any, which arose prior to their
respective withdrawals; provided that Prudential-Bache and VMSRIL will not be
liable for any such liability if (i) they otherwise would not have been liable
for such liability had they not withdrawn or (ii) the assets of the respective
Partnerships are sufficient to satisfy such liability. Under the terms of the
Partnership Agreements, however, neither Prudential-Bache nor VMSRIL, in their
capacities as general partners of the respective Partnerships, would have an
obligation to make additional contributions to, or assume additional
liabilities of, the Partnerships. Additionally, Prudential-Bache and VMSRIL
have been released from certain claims pre-dating their respective
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withdrawals pursuant to the terms of the Settlement Agreement. See "Settlement
Agreement, The Plan And Their Relationship To The Partnerships." Furthermore,
as the substitute general partner in the Partnerships, MAERIL will be liable,
to the same extent VMSRIL and/or Prudential-Bache would have been, absent their
respective withdrawals, with respect to obligations of the Partnerships and the
Venture incurred following MAERIL's substitution as general partner.
MAERIL will receive VMSRIL's general partnership interests in the
Partnerships, and any distributions and fees attributable to such interests
after the date of the transfer of such general partnership interests. VMSRIL
and certain of its affiliates have received benefits pursuant to the Insignia
Letter of Intent, including a covenant not to sue given by ISLP, and have and,
in the future, will receive benefits pursuant to the Insignia Agreement; these
benefits include substitution of MAERIL for VMSRIL as general partner of the
Partnerships, retention of SRA to perform certain management services for the
Partnerships and certain other monetary benefits. See "The Insignia
Transactions." Prudential-Bache will not receive any compensation or other
consideration by reason of its withdrawal nor will it retain any legal or
beneficial interests in Partnership I following withdrawal.
Additionally, with the proxies granted in connection with the
Settlement Agreement, the managing general partner (MAERIL after its
substitution as such) can consent on behalf of each Settling Class Member to
any sale, lease, assignment, exchange or other transfer or conveyance of the
assets of the Venture, subject to review of the Oversight Committee and certain
restrictions pursuant to the Plan. See "Settlement Agreement, The Plan And
Their Relationship to the Partnerships - Procedures for Disposition of Assets
of Settling Limited Partnerships" and "The Insignia Transactions."
G. DEVELOPMENTS AFFECTING VMSRIL AND ITS AFFILIATES
As previously disclosed in the Venture's public filings, VMSRIL, the
Partnerships' managing general partner, and certain of its affiliates had
experienced severe liquidity problems. VMSRIL's liability to its principal
creditor, European American Bank ("EAB"), substantially exceeded the realizable
value of VMSRIL's assets. However, these problems have now been addressed by
the receipt by VMSRIL of a covenant not to sue from a partnership in which
Insignia is the general partner, which purchased VMSRIL's debt to its principal
creditor, as well as by the execution of certain creditor agreements described
below. See "The Insignia Transactions" and "Recent Developments Affecting VMS
Realty Partners And Its Affiliates."
H. RECENT DEVELOPMENTS AFFECTING PRUDENTIAL BACHE
In October 1993, an affiliate of Prudential-Bache, Prudential
Securities Incorporated ("PSI"), settled without admitting or denying the
allegations contained therein, civil and administrative proceedings, with the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc., and various state regulators (the "SEC Settlement"). These
proceedings concerned, among other things, the sale by PSI of limited
partnership interests, including interests in the Partnerships, during the
period 1980 through 1990.
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On or about October 18, 1993, a putative class action, captioned
Kinnes et al. v. Prudential Securities Group, Inc. et al. (CV-93-654), was
filed in the United States District Court for the District of Arizona,
purportedly on behalf of Investors in Partnership I, against Partnership I, PSI
and a number of other defendants. Plaintiffs alleged violation of the federal
Racketeer Influenced and Corrupt Organizations Act ("RICO") statutes, breach of
fiduciary duty, fraud and deceit, and negligence, and demanded an accounting.
Plaintiffs sought unspecified compensatory, punitive and treble damages, and
rescission, including costs and attorneys' fees, but the only relief sought
against Partnership I was an accounting. PSI and the other PSI-related
defendants filed a motion to dismiss on December 22, 1993.
By order of the Judicial Panel on Multi-district Litigation dated
April 14, 1994, the Kinnes case, together with a number of other actions not
involving Partnership I, was transferred to a single judge of the United States
District Court for the Southern District of New York and consolidated for
pretrial proceedings under the caption In re Prudential Securities Incorporated
Limited Partnerships Litigation (MDL Docket 1005).
On June 8, 1994, plaintiffs in the transferred cases filed a complaint
that consolidated the previously filed complaints and named as defendants,
among others, PSI and certain of its present and former employees. Partnership
I was not named as a defendant in the consolidated complaint, but the name of
Partnership I was listed as being among the limited partnerships at issue in
the case.
On August 9, 1995, PSI and other defendants entered into a Stipulation
and Agreement of Partial Compromise and Settlement with legal counsel
representing plaintiffs in the consolidated actions. The court preliminarily
approved the settlement agreement by order dated August 29, 1995 and, following
a hearing held November 17, 1995, found that the agreement was fair,
reasonable, adequate and in the best interests of the plaintiff class. The
court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including Partnership I, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount
due under the settlement agreement has been paid.
In an unrelated matter on October 27, 1994, PSI entered into
cooperation and deferred prosecution agreements (the "Agreements") with the
Office of the United States Attorney for the Southern District of New York (the
"U.S. Attorney"). The Agreements resolved a grand jury investigation that had
been conducted by the U.S. Attorney into PSI's sale during the 1980's of the
Prudential-Bache Energy Income Fund oil and gas limited partnerships (the
"Income Funds"). In connection with the Agreements, the U.S. Attorney filed a
complaint charging PSI with a criminal violation of the securities laws. In
its request for a deferred prosecution, PSI acknowledged to having made certain
misstatements in connection with the sale of the Income
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Funds. Pursuant to the Agreements, the U.S. Attorney will defer any
prosecution of the charge in the complaint for a period of three years,
provided that PSI complies with certain conditions during the three-year
period. These include conditions that PSI not violate any criminal laws; that
PSI contribute an additional $330 million to a pre-existing settlement fund;
that PSI cooperate with the government in any future inquiries; and that PSI
comply with various compliance-related provisions. If, at the end of the
three-year period, PSI has complied with the terms of the Agreements, the U.S.
Attorney will be barred from prosecuting PSI on the charges set forth in the
complaint. If, on the other hand, during the course of the three-year period,
PSI violates the terms of the Agreements, the U.S. Attorney can elect to pursue
such charge.
In addition to the foregoing, in the ordinary course of PSI's
business, it receives inquiries and document requests from various states and
regulatory authorities concerning the sales activities of certain of its
employees, some of which have in the past and may in the future relate to the
Settling Limited Partnerships.
AMENDMENT TO PARTNERSHIP AGREEMENTS
Attached as Exhibit A to this Information Statement is a copy of the
text of the Amendment. The Amendment, in the case of each of the Partnerships,
provides that notwithstanding any provisions to the contrary in the Partnership
Agreement of such Partnership or the private placement memoranda by which such
Partnership was syndicated in 1984 and 1985, each general partner of such
Partnership may
(i) withdraw, without liability for such withdrawal, from such
Partnership (whether by resignation or retirement or by the transfer,
sale, assignment, pledge, encumbrance or other disposition of such
general partner's general partnership interest in such Partnership) and
(ii) substitute one or more successor general partners,
without obtaining, with respect to both (i) and (ii) above, any further consent
of the limited partners of such Partnership, and without satisfying any other
conditions to the withdrawal and substitution of general partners other than
satisfaction of the Withdrawal Conditions.(7)
__________________________________
(7) The Amendment will amend each of the Partnership Agreements by adding
a provision that will override any other provisions of such
Partnership Agreement that would otherwise prohibit or restrict the
substitution of a new general partner despite satisfaction of the
Withdrawal Conditions. The provision of each of the Partnership
Agreements which is most directly overridden by the Amendment is
Section 20(a), which provides:
(a) Prohibited Withdrawal by a General Partner.
Subject to the provisions of Section 20(b), the General
Partners hereby covenant that they shall not take any action
which constitutes their Withdrawal (other than death,
disability or incompetency) from the Partnership. The
Partners agree that, subject to the foregoing, if, without
such prior consent, the General Partners take any such action,
the Limited Partners shall be entitled to receive from the
General Partners, as a partial measure of the damages
resulting from such Withdrawal (without limiting the right of
the Partnership or the Limited Partners to recover any other
damages incurred by it or them), the tax cost to the
Partnership and the Limited Partners of any reclassification
of the Partnership as an association taxable as a corporation
for Federal income tax purposes resulting therefrom and the
expenses (including reasonable attorneys' fees) of defending
against an attempted reclassification of the Partnership.
Notwithstanding adoption of the Amendment, Section 20(a) will remain
in effect with respect to any withdrawal by a general partner which
does not satisfy the Withdrawal Conditions.
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<PAGE> 15
"Satisfaction of the Withdrawal Conditions" shall be deemed to have occurred
with respect to the withdrawal of a general partner of a Partnership if such
general partner reasonably determines that (x) the proposed withdrawal will not
result in the reclassification of such Partnership as an association taxable as
a corporation for Federal income tax purposes; and (y) any proposed substitute
general partner has experience in real estate management and is reasonably
capitalized to carry out its duties and obligations as general partner.
Promptly after the Amendment satisfying the withdrawal conditions that allows
the withdrawal of the general partner and the substitution of a successor
general partner is effected, Prudential-Bache shall withdraw as minority
general partner without substitution of a successor minority general partner in
its place.
In addition to satisfaction of the Withdrawal Conditions, the Plan
requires receipt of the written consent of ContiTrade Service Corporation
("ContiTrade"), a creditor of the Venture, as a condition to any change in
control of the Venture or the Partnerships (unless the new controlling party is
an entity (a) in which Joel Stone owns a 51% equity interest and (b) is
controlled by Joel Stone and/or Scott Lager), which consent may not be
unreasonably withheld. By an order of the bankruptcy court entered on October
31, 1995, the transfer of the general partnership interests in the Partnerships
was approved, without the necessity of any further consent. However, the
Bankruptcy Court conditioned its order upon certain conditions, including that
(i) the transfer does not impair any rights of any of the Venture's Secured
Creditors or ContiTrade with respect to their claims, (ii) the transfer does
not affect the validity or priority of any liens of such parties or performance
of the Venture's obligations under the Plan, (iii) any subsequent transfers of
the general partnership interests in the Partnerships will require ContiTrade's
consent, which will not be unreasonably withheld, provided that no consent will
be required with respect to a transfer to
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an entity in which Mr. Farkas, his immediate family or Insignia owns or
controls (individually or collectively) at least 51% of the voting rights of
that entity. Certain other consents required pursuant to the terms of certain
agreements relating to the Venture's properties have been requested. See
footnote 15 and accompanying text.
It is contemplated that, after the effectiveness of the Amendment,
VMSRIL will withdraw as a general partner of both of the Partnerships by
transferring its general partnership interests to MAERIL and that
simultaneously therewith Prudential-Bache will withdraw as minority general
partner of Partnership I pursuant to Section 2.02 of the Settlement Agreement
thereby terminating its general partnership interest in Partnership I.
Satisfaction of the Withdrawal Conditions with respect to such withdrawals has
occurred, given that: (i) with respect to the Withdrawal Condition set forth
in clause (x) of the last sentence of the preceding paragraph VMSRIL has
reasonably determined that its respective contemplated withdrawals through the
assignment of its general partnership interests to MAERIL will not result in
the reclassification of the respective Partnerships as an association taxable
as a corporation for Federal income tax purposes and Prudential-Bache has
reasonably determined that its withdrawal is a minority general partner from
Partnership I will not result in the reclassification of Partnership I as an
association taxable as a corporation for Federal income tax purposes; and (ii)
with respect to the condition set forth in clause (y) of the last sentence of
the preceding paragraph based upon VMSRIL's conclusion that MAERIL has (a)
substantial experience in real estate management, and (b) a reasonable amount
of capital to carry out its duties and obligations as a general partner.
Although MAERIL had a stockholder's deficit of $184,000 as of June 30,
1997, this deficit is principally attributable to (i) amortization of the
difference between the carrying value and MAERIL's share of the partnership net
deficits of the partnerships in which it has become the general partner and
(ii) its equity interest in the losses recognized by such partnerships (many of
which result from obligations for which, because of their non-recourse nature
or incurrence prior to MAERIL becoming general partner, MAERIL is not directly
liable). Additionally as reflected in footnote 1 to MAERIL's balance sheet,
MAE and Insignia are parties to an agreement dated August 13, 1993 and
terminating April 15, 2018, pursuant to which Insignia has agreed to perform
all certain functions for MAE and each of its affiliates and controlled
subsidiaries, which includes MAERIL. Under this same agreement, MAE and its
affiliates (including MAERIL) engage Insignia to perform property and asset
management for partnerships in which they serve as general partner. See "The
Insignia Transaction -- Insignia, MAE and MAERIL". Based upon these factors,
VMSRIL has concluded that MAERIL has the wherewithal and access to the
necessary expertise to carry out its duties and obligations as general partner
of the Partnerships. See "The Insignia Transactions -- Insignia, MAE and
MAERIL", MAERIL's audited balance sheet, which is attached hereto as Exhibit F
and the letter from MAERIL to VMSRIL attached hereto as Exhibit G. Both
Exhibit F and Exhibit G are incorporated herein by reference in their entirety.
The Proxies, which will be used to approve the Amendments, were
granted pursuant to the terms of the Settlement Agreement. The Settlement
Agreement, as amended, was approved
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on July 2, 1991 by Judge Zagel of the United States District Court for the
Northern District of Illinois and permits the withdrawal of the general
partners of each of the Partnerships. Limited partners of Partnership I owning
98.45% of the limited partnership interests and limited partners of Partnership
II owning 97.88% of the limited partnership interests are Settling Class
Members that have granted, through the Settlement Agreement, irrevocable
proxies, containing the terms set forth in Exhibit B attached hereto,
consenting to the Amendment. Pursuant to Section 2.02 of the Settlement
Agreement, the managing general partner of each of the Partnerships is required
to vote the Proxies in favor of the Amendment. (The Settlement Agreement
contains similar provisions relating to each of the other Active Limited
Partnerships; a list of the Active Limited Partnerships is attached as Exhibit
C hereto.)
The Proxies also grant to the managing general partner of each of the
Partnerships the right of each of the limited partners of such Partnership who
is a Settling Class Member to consent or object to the disposition of the
assets of the Venture, as more fully described in "Settlement Agreement, The
Plan And Their Relationship To The Partnerships -- Procedures for Disposition
of Assets of Settling Limited Partnerships," below.
SETTLEMENT AGREEMENT, THE PLAN AND THEIR RELATIONSHIP TO THE PARTNERSHIPS
The Settlement Agreement resolved the claims asserted in thirty-eight
actions filed by investors in limited partnerships against VMSRP and certain
entities and individuals related to VMSRP which were consolidated for pretrial
and discovery purposes under the caption In Re VMS Limited Partnership
Securities Litigation, Case No. 90 C 2412 (U.S. District Court, N.D. Illinois)
("Consolidated Actions"). In connection with the negotiations of a class
action settlement, the "New Action" was filed in the Court on behalf of all
investors who purchased an interest in any of approximately 100
non-publicly-traded VMS-sponsored syndicated limited partnerships prior to
December 31, 1989.
The Settlement Agreement became effective on August 12, 1991. The
Court's July 2, 1991 order granting final approval of the Settlement Agreement
dismissed with prejudice all settling defendants, including the Partnerships
and the Venture, from all Consolidated Actions and dismissed the "New Action".
The settling defendants(8) included those defendants in the
__________________________________
(8) The settling defendants include: (i) Prudential Securities
Incorporated (including its predecessor Prudential-Bache Securities,
Inc.) and Prudential-Bache Properties, Inc. (collectively,
"Prudential-Bache Settling Defendants"), (ii) the Mutual Benefit
Settling Defendants, (iii) Industrial Indemnity Co. and Financial
Guaranty Associates, Inc. (collectively, "Industrial Indemnity
Settling Defendants"), (iv) the individuals and entities related to
VMS, including the Partnerships and the Venture, listed on Exhibit D
attached hereto (collectively, "VMS Settling Defendants") and (v)
Continental Casualty Company ("CNA Settling Defendants"). As used
herein, the term "Settling Defendants" means VMS Settling Defendants,
Prudential-Bache Settling Defendants,Mutual Benefit Settling
Defendants, Industrial Indemnity Settling Defendants and CNA Settling
Defendants.
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<PAGE> 18
Consolidated Actions that had reached a Settlement Agreement with the Settling
Class Members. The "Settling Class Members" are those eligible investors who
did not elect to be excluded from the Settlement Agreement.
As part of the Settlement Agreement and in exchange for the payments
and other consideration offered by the Settling Defendants (as more fully
described below), the Settling Class Members released the Partnerships, the
general partners of the Partnerships and certain of their respective affiliates
from any and all claims of all kinds, including, but not limited to, known and
unknown claims relating to any matters that were or might have been asserted in
the New Action, in any of the Consolidated Actions, in any action which was or
could have been commenced by any Industrial Indemnity Settling Defendant or a
Settling Limited Partnership against any of the Settling Class Members under
the terms of his Investor Note,(9) Partnership Amendment to Note,(10) or NRP
Forbearance Agreement,(11) in any court or forum whatsoever, which in any way
relate to the Settling Limited Partnerships, including but not limited to such
claims relating to the marketing, purchase or sale of interests in the Settling
Limited Partnerships (listed on Exhibit D hereto), the operation and management
of the Settling Limited Partnerships and/or the sale of real property or other
assets owned by the Settling Limited Partnerships, as well as releasing
defenses to collection actions related to Investor Notes. The release does not
cover any claims to enforce the terms of the Settlement Agreement.
The following summarizes the terms of the Settlement Agreement which,
in addition to the granting of the Proxies and the withdrawal of
Prudential-Bache and VMSRIL described above, may be material to the
Partnerships or the limited partners of each of the Partnerships who are
Settling Class Members. It further summarizes the effect of the Plan on the
Partnerships and its interaction with the Settlement Agreement.
__________________________________
(9) The term "Investor Note" means any note executed by a Settling Class
Member as consideration for the acquisition of any interest in a
Settling Limited Partnership.
(10) The term "Partnership Amendment to Note" means the agreement pursuant
to which such Settling Class Member (other than those who are limited
partners of the Partnerships and whose Investor Notes are bonded in
part by Industrial Indemnity) had the option of refinancing his
obligation to the Settling Limited Partnership under the Investor
Note.
(11) The term "NRP Forbearance Agreement" means the agreement pursuant to
which each Settling Class Member who is a limited partner of the
Partnerships and whose Investor Notes are bonded in part by Industrial
Indemnity Co. had the option of refinancing his obligation to the
Settling Limited Partnership under the Investor Note.
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<PAGE> 19
A. ALLOCATION OF SETTLEMENT PROCEEDS
On March 10, 1992, the law firms of Beigel & Sandler, Ltd. and Kohn,
Klein, Nast & Graf (collectively, "Class Counsel") presented to the Court a
proposed plan of distribution of the net settlement fund among the Settling
Class Members. The plan allocates a percentage of the net proceeds from the
VMS Settling Defendants, the Prudential-Bache Settling Defendants and the
Mutual Benefit Settling Defendants to each Settling Limited Partnership, except
as indicated below. Each Settling Limited Partnership's specific portion of
the net settlement fund is then allocated among the Settling Class Members who
purchased interests in that Settling Limited Partnership, based on their
respective ownership interests and whether they purchased their interests from
Prudential-Bache or Mutual Benefit. Pursuant to the terms of the Settlement
Agreement, the plan allocates the net proceeds from the Prudential-Bache
Settling Defendants and the Mutual Benefit Settling Defendants only to Settling
Class Members who purchased interests in Settling Limited Partnerships through
the Prudential-Bache Settling Defendants or the Mutual Benefit Settling
Defendants, respectively, and only as to those interests; the net proceeds from
the VMS Settling Defendants are allocated among all Settling Class Members.
The Partnerships are collectively allocated 10.78 percent of the net
settlement proceeds paid on behalf of the VMS Settling Defendants (to be
allocated approximately 8.28 percent to Partnership I and approximately 2.50
percent to Partnership II) and 18.15 percent of the net settlement proceeds
paid on behalf of the Prudential-Bache Settling Defendants. Since the
Prudential-Bache Settling Defendants sold interests in Partnership I, but not
in Partnership II, the foregoing net proceeds paid on behalf of the
Prudential-Bache Settling Defendants are allocated only to Partnership I.
Because the Mutual Benefit Settling Defendants did not sell any interests in
either Partnership, neither Partnership is allocated a percentage of the net
settlement proceeds paid on behalf of these defendants.
On March 23, 1992, the Court approved a form of notice to be mailed to
all Settling Class Members describing the plan of allocation proposed by Class
Counsel and informing them of their right to object to the proposed plan at a
hearing before the Court scheduled for May 18, 1992. At the hearing, the Court
heard argument by Class Counsel in favor of the proposed plan and objections
from certain Settling Class Members. By order dated May 21, 1992, the Court
overruled the objections and found the proposed plan to be fair, adequate and
reasonable.
Pursuant to the terms of the Settlement Agreement, none of the VMS
Settling Defendants, the Prudential-Bache Settling Defendants or the Mutual
Benefit Settling Defendants participated in or had any responsibility with
respect to the allocation process.
All initial distributions of settlement proceeds paid on behalf of the
VMS Settling Defendants, the Prudential-Bache Settling Defendants and the
Mutual Benefit Settling Defendants have been made. Additional distributions
may potentially be made if additional net settlement proceeds are received.
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To the extent a Settling Class Member owed past due or future payments
to either a Settling Limited Partnership under an Investor Note and/or
Industrial Indemnity Co. or Continental Casualty Company (because his Investor
Note was bonded in whole or in part by Industrial Indemnity Co. or Continental
Casualty Company), any cash distribution to which the Settling Class Member
would otherwise have been entitled from the settlement was paid instead to the
Settling Limited Partnership and/or surety to whom the payment is due. The
above is true whether or not the Settling Class Member elected to execute a
forbearance agreement and amendment to note. For Settling Class Members with
past due or future payments owed under an Investor Note who did not execute a
forbearance agreement and amendment to note, such payments were applied first
to unpaid interest, then to unpaid principal. For Settling Class Members who
did execute a forbearance agreement and amendment to note, such payments were
applied first to unpaid principal, then to unpaid interest. See "-- Amendment
of Investor Notes."
B. AMENDMENT OF INVESTOR NOTES
The Settling Limited Partnerships, including the Partnerships, to whom
Settling Class Members, including certain limited partners of the Partnerships,
owed past due or future payments under Investor Notes, offered those Settling
Class Members the option to make those payments on terms more favorable than
originally provided in the Investor Notes. The more favorable terms include a
revised repayment schedule, the reduction of penalty interest which had accrued
or would accrue on past due or future payments and an agreement to forbear
collection of such Investor Notes so long as such Settling Class Member
performs its payment obligations under the forbearance agreement. A Settling
Class Member may have been eligible to elect these more favorable terms even if
its Investor Note was bonded in whole or in part by a surety. Eligible
Settling Class Members who did not elect new terms for their Investor Notes
remain liable for all past due or future payments under the original terms of
their Investor Notes.
C. PROCEDURES FOR DISPOSITION OF ASSETS OF SETTLING
LIMITED PARTNERSHIPS
All sales and other dispositions of the real estate or other assets
owned by the Settling Limited Partnerships, including the Partnerships, will be
negotiated by and will be the responsibility of the respective managing general
partners of the Settling Limited Partnerships which own such real estate or
other assets.
In addition to the power to vote for the Amendment (and similar
amendments to the partnership agreements of other active Limited Partnerships),
the Proxies also grant to the managing general partner of each active Limited
Partnership an irrevocable power to consent on behalf of each Settling Class
Member that is a limited partner of such active Limited Partnership to any
sale, lease, assignment, exchange or other transfer or conveyance of any or all
of the real property and/or other assets owned by such Settling Limited
Partnership. Therefore, for those Settling Limited Partnerships, including the
Partnerships, in which the managing general partner has received Proxies
representing a sufficient percentage of the limited partnership interests
pursuant to the terms of the partnership agreement of such Settling Limited
Partnership, no further
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action and/or approval of the limited partners of such Settling Limited
Partnership is required to dispose of an asset of such Settling Limited
Partnership.
However, sales or dispositions of assets owned by Settling Limited
Partnerships will be subject to review by the Oversight Committee. The
Oversight Committee consists of Class Counsel and any other persons or
professionals Class Counsel shall designate. The Oversight Committee has the
right to petition the Court to challenge a proposed sale or disposition based
on the inadequacy of the consideration being paid or other business
considerations deemed appropriate by the Oversight Committee. In the event
such a petition is filed, the proposed sale or disposition will not be
consummated until the Court rules on the petition.(12) The Settlement Agreement
further provides, however, that if a Settling Limited Partnership (or a
partnership of which Settling Limited Partnerships are the general partners) is
a debtor under the Bankruptcy Code, and the applicable United States Bankruptcy
Court has approved the sale or other disposition of the real property and/or
other assets owned by that debtor, such approval shall automatically constitute
an irrevocable approval of such sale or other disposition by the Oversight
Committee.
Under the Settlement Agreement, the Oversight Committee's purpose is
to protect the interests of the Settling Class Members, which may, in some
circumstances, diverge from the interests of certain of the limited partners of
the Settling Limited Partnership in question. The Oversight Committee's
structure results in the limited partners of all the Settling Limited
Partnerships relying, as a replacement of their right to vote on certain sales
of property by their Settling Limited Partnership, on the Oversight Committee's
ability to judge the adequacy of
__________________________________
(12) To date, of approximately 20 proposed property dispositions submitted
to the Oversight Committee for approval, only two have been challenged
by a member of the Oversight Committee. A proposed sale of the
property owned by Lynnhaven Associates was challenged by Equity
Resources Group, a former member of the Oversight Committee as to only
those Settling Limited Partnerships in which it is a limited partner
(which includes Lynnhaven Associates but neither of the Partnerships).
Judge Zagel of the United States District Court for the Northern
District of Illinois approved the sale of the Lynnhaven property over
the objection of Equity Resources Group, in accordance with the terms
of the Settlement Agreement. Equity Resources Group then appealed
Judge Zagel's decision, and its appeal was dismissed by the United
States Court of Appeals for the Seventh Circuit. The Oversight
Committee also objected to a proposed transaction in which the mortgage
loan on two office buildings owned by Eaton Canyon Partners was to be
restructured. As a result of the objection, the restructuring was
abandoned and the properties were foreclosed. Two of the Ventures
properties were sold, and although the terms of such sales were
provided to the Oversight Committee for approval and review, it did not
choose to review either sale.
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<PAGE> 22
proposed transactions and its ability to demonstrate to the Court the
imprudence of those it deems unsatisfactory.
The members of the Oversight Committee are entitled to receive
compensation from the settlement fund established by the Settling Defendants
for the benefit of the Settling Class Members for the work which they perform
in their capacity as members of the Oversight Committee. The members of the
Oversight Committee must petition the Court in order to receive any such
compensation. As of July 15, 1995 (the most recent date as of which the
Venture has knowledge), members of the Oversight Committee had received
aggregate compensation of approximately $50,000.
The Plan contemplates that the Venture might sell one or more of the
17 properties retained by it following consummation of the Plan (and in fact
provides that the Venture and two of its principal creditors will agree upon a
method of liquidation of any remaining properties by January 15, 2000). The
Plan, however, imposes further limits on the ability of the Venture to dispose
of its assets. The Plan requires that any such sale may be consummated only if
such sale is for fair value to a bona fide third party not affiliated with (i)
the Venture, (ii) its asset manager (an Insignia affiliate), or (iii) any
entity that is directly or indirectly controlled by Joel Stone or Scott Lager,
or any entity in which Mr. Stone or Mr. Lager holds a direct or indirect equity
interest of 10% or more (which would include SRA, VMSRIL and VMSRP).
Furthermore, pursuant to the Plan, proceeds from the sale of any property are
to be applied to the repayment of certain claims of the FDIC and of VMSRP, VMS
Realty Management and other affiliates of the Venture (including Stout), which
claims are to be paid in full prior to any distributions to the Venture.
In accordance with the terms of the Plan, the Venture has abandoned 26
of the 43 properties it owned as of September 30, 1993 (the date of the Plan's
effectiveness) to the Federal Deposit Insurance Corporation, which held liens
on such properties. The last of these 26 properties were foreclosed upon by
the Federal Deposit Insurance Corporation on May 13, 1996. Pursuant to the
Settlement Agreement, the abandonment of such properties did not, and will not,
require Oversight Committee review (and no such review was sought), as such
transfers were explicitly approved by the Bankruptcy Court pursuant to its
confirmation of the Plan. However, the Plan does not specifically approve any
further asset sales, and thus Oversight Committee review will be necessary
prior to the Venture's disposition of any of its remaining properties.
The Partnership Agreements of each of the Partnerships require limited
partner approval for the sale of all or substantially all of the assets of the
Venture but not for sales of individual properties. Although sales of all or
substantially all of the assets of the Venture may be approved by use of the
Proxies, the Oversight Committee will review such sales pursuant to the
Settlement Agreement unless they are approved by the Bankruptcy Court. In
addition, the Plan precludes transfers which do not meet the requirements
discussed above. Therefore, the sale of assets by the Venture will receive a
level of review and meet certain standards, which, but for the
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Settlement Agreement and the Plan, would not normally have been applicable.
Additionally, VMSRIL, as the managing general partner of each of the
Partnerships, intends to make sales in a manner consistent with its fiduciary
duty, and MAERIL, upon becoming the sole general partner of the Partnerships,
will have such fiduciary duties, as well.
The Venture did sell two of the 17 retained properties, Carlisle
Square Apartments (which had a net book value of $2,247,000) and Bellevue
Towers Apartments (which had a net book value of $1,541,000), to unaffiliated
parties on April 19, 1996 and April 30, 1996. The Venture received approximate
net proceeds of $2,291,000 from the sale of Carlisle Square and $1,556,000 from
the sale of Bellevue Towers Apartments. Although the Oversight Committee was
informed the basic terms of both of these sales, it did not choose to review
either sale. Currently, the Venture is not a party to any other contract for
sale or letter of intent regarding the disposition of any material asset, nor
is it in the process of negotiating such a disposition.
Other than the Plan's provision that the Venture and its two principal
creditors agree upon a method of liquidation by January 15, 2000, the Venture
is not a party to any contract the sale or letter of intent regarding the
disposition of all or substantially all of the Venture's assets. However, if
at any time in the future, the Partnerships seek approval of the disposition of
all or substantially all of the Venture's assets through the exercise of the
Proxies, the Venture will issue an information statement notifying all limited
partners of the Partnerships of such proposed disposition and the terms
thereof. Any such sale, because it would not have been previously approved by
the Bankruptcy Court, would require Oversight Committee review, and would also
have to meet the requirements specified in the Plan discussed above.
Pursuant to the MF VMS Agreement, Insignia has agreed to, among other
things seek an amendment to the Plan to permit the Venture to regain its
properties for the term of the mortgage debt restructured in accordance with
the MF VMS Agreement. If successful, this would delay the ultimate liquidation
of the Venture beyond January 15, 2000. See "The Insignia Transaction -- The
MF VMS Agreement."
Asset dispositions may result in adverse consequences to certain of
the limited partners of each of the Partnerships as a result of tax recapture
(i.e., recognition of taxable gain without an accompanying cash distribution).
However, limited partners of each of the Partnerships could also experience tax
recapture in the event of a foreclosure of property of the Venture or the
giving of a deed in lieu of foreclosure.
D. EFFECT ON FEES, DISTRIBUTIONS AND ALLOCATIONS OF
PROFITS AND LOSSES TO GENERAL PARTNERS OF SETTLING
LIMITED PARTNERSHIPS
The Settlement Agreement provides for certain actions to be taken
which will affect the fees and expenses which a general partner of a Settling
Limited Partnership or its affiliates are entitled to receive. A withdrawn
general partner will cease to receive partnership distributions of profits and
losses, as will be the case (i) upon Prudential-Bache's withdrawal as a general
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<PAGE> 24
partner of Partnership I pursuant to terms of the Settlement Agreement and
termination of its interest, and (ii) upon VMSRIL's withdrawal as a general
partner of the Partnerships following the transfer of its interests as such to
MAERIL. Thereafter, MAERIL will receive partnership distributions attributable
to VMSRIL's general partnership interests. Additionally, certain of the
Prudential-Bache Settling Defendants were parties to certain agreements to
provide services, including, without limitation, general consulting services,
to certain of the Settling Limited Partnerships, as well as to the Venture. No
payments have been made to the Prudential-Bache Settling Defendants under these
agreements since July, 1989; pursuant to the Settlement Agreement or otherwise
these agreements have been terminated and, accordingly, no further payments are
due thereunder to such Prudential-Bache Settling Defendants. Neither the
Partnerships nor the Venture have entered into any new agreements relating to
the same subject matter as those terminated since such services are either no
longer required in conducting the business of the Partnerships or the Venture
or are being fulfilled by the Partnerships or the Venture themselves.
Finally, pursuant to the terms of the Partnership Agreements, the
general partners of each of the Partnerships may receive reimbursement from
such Partnership for expenses which they incur on behalf of such Partnership in
connection with the implementation of the Settlement Agreement, which expenses
might not have otherwise been incurred. VMSRIL does not expect that such
expenses for which it will seek reimbursement from the Partnership will exceed
$20,000. However, Prudential-Bache, which is a general partner in Partnership
I, but not Partnership II, has advised Partnership I that it will not seek such
reimbursement.
E. TERMS OF THE SETTLEMENT RELATING TO THE VMS SETTLING
DEFENDANTS
1. Initial Cash Payment
$3,500,000 in cash has been paid on behalf of the VMS Settling
Defendants (all of which are set forth in Exhibit E attached hereto) into the
Escrow (as defined below) for the benefit of the Settling Class Members.
2. Additional Cash Payments
Upon the sale or other disposition of certain real estate or other
assets owned by the Settling Limited Partnerships enumerated in Exhibit D, a
percentage of the Entity Payments(13) resulting therefrom will be paid into an
escrow for the benefit of Settling Class Members ("Escrow"). As of July 15,
1995, (the most recent date as of which the Venture has knowledge)
approximately $1,000,000 had been paid into the Escrow. Payments that would
have been Entity
__________________________________
(13) Entity Payments are generally sums paid to VMSRIL or a VMS Principal
Entity by Settling Limited Partnerships as fees, repayments of
obligations or for other purposes. See the Glossary for a more
complete definition.
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<PAGE> 25
Payments if received by VMSRIL as general partner of the Partnerships, but that
are received by MAERIL when it replaces VMSRIL as general partner, will result
in an obligation of MAERIL to make the same percentage payment into the Escrow
that VMSRIL would have made.(14)
Settling Class Members will receive 15% of the first $90,000,000 of
such Entity Payments and 20% of any such amounts over $90,000,000, until such
time as the indebtedness of certain VMS Settling Defendants is paid off in full
and all claims which creditors could bring related to the indebtedness are
either released or satisfied. After such time, the Settling Class Members will
receive 50% of any such cash distributions. However, based upon the current
condition of the applicable real estate markets, there is no assurance as to
the amount that may be realized from the disposition of assets owned by the
Settling Limited Partnerships (or a partnership of which Settling Limited
Partnerships are the general partners, including the Venture), and there is
therefore no assurance as to the amount ultimately payable to the Escrow for
the benefit of the Settling Class Members (see also " - Terms of the Settlement
Relating to the Prudential- Bache Settling Defendants.")
The Settlement Agreement did not limit the rights of Settling Class
Members to receive cash proceeds to which they would be entitled under the
terms of the limited partnership agreements of the Settling Limited
Partnerships, including cash proceeds upon the sale or other disposition of the
assets of the applicable Settling Limited Partnership. The portion of the
Entity Payments described above which have been and will be deposited into the
Escrow for the benefit of the Settling Class Members is cash which, in the
absence of the Settlement Agreement, would have been distributed to certain VMS
Principal Entities or VMSRIL. Absent the Settlement Agreement, this cash would
not be distributed to any Settling Limited Partnership or any limited partners
of a Settling Limited Partnership.
3. Waiver of Interest under Assignment Notes and
Wrap Notes and Treatment under the Plan
The VMS Principal Entities and VMSRIL have waived their right to
collect interest accruing from April 10, 1991 on certain assignment notes and
wrap notes. Such interest would have been payable upon the sale or disposition
of the real estate or other assets securing such assignment notes or wrap
notes, except to the extent that the accrued interest is necessary to satisfy
any indebtedness secured by assignment notes or to satisfy a senior debt
"wrapped" by a
__________________________________
(14) Payments that would have been Entity Payments if received by the VMS
Principal Entities that are received by the liquidating trusts
pursuant to the Fifth Amendment to the VMS Creditor Repayment
Agreement ("CRA") will result in an obligation of those liquidating
trusts to make the same percentage payments into the Escrow that such
VMS Principal Entities would have made. See "Recent Developments
Affecting VMS Realty Partners, L.P. And Its Affiliates."
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<PAGE> 26
wrap note which the VMS Principal Entities are obligated to pay. Most of the
assignment notes and wrap notes have been assigned to the liquidating trusts
established pursuant to the Fifth Amendment to the CRA. See "Recent
Developments Affecting VMS Realty Partners And Its Affiliates."
VMSRP, a general partner of VMS/Stout Joint Venture ("Stout"), has
waived its right to collect its portion of the interest due on an assignment
note, dated October 26, 1984 ("Assignment Note"), from the Venture. The
Assignment Note is in the principal amount of $29,000,000 and bears interest at
the rate of 12% per annum.
Notwithstanding this waiver, pursuant to the Plan, Stout's claim with
respect to the Assignment Note, as well as certain other obligations of the
Venture to Stout, was allowed in the amount of $49,534,819 (the "Allowed
Claim"). The right to distributions on account of the Allowed Claim was
divided among ContiTrade and the partners in Stout pursuant to the terms of an
agreement between the Stout partners, ContiTrade and certain others which was
reflected in the terms of the Plan. ContiTrade previously had acquired James
Stout's partnership interest in Stout and a limited beneficial interest in the
proceeds from VMSRP's partnership interest in Stout.
Payments totalling $3,475,000 with respect to the Allowed Claim were
made to ContiTrade and certain other persons on October 7, 1993. Additionally,
the Venture issued, with respect to this claim, a $4,000,000 secured note to
ContiTrade payable exclusively from the operations of the Venture and/or the
proceeds from any sales or refinancing of the properties. The remainder of
Stout's claim is also to be paid from the proceeds of operations or sales of
assets. Such proceeds are to be divided among three pools established with
respect to the interests of VMSRP, Prudential-Bache and the other partners in
Stout as follows: (i) 46.875% to the VMSRP Pool; (ii) 6.25% to the
Prudential-Bache Pool and (iii) 46.875% to the other partners' Pool. The
proceeds allocated to the VMSRP Pool will be distributed as follow: (i) the
first $300,000 to ContiTrade, (ii) the next $9,700,000 to VMSRP and (iii) all
additional amounts, 73% to VMSRP and 27% to Contitrade. All of the proceeds
allocated to the Prudential-Bache Pool will be distributed to VMSRP. VMSRP
will also receive a distribution of 90% of the funds allocated to the other
partners' Pool, with the remaining 10% being distributed to ContiTrade.
VMSRP's rights to distributions of proceeds from the VMSRP Pool, the
Prudential-Bache Pool and the other partners' Pool on account of the Stout
claim are held by liquidating trusts established pursuant to the Fifth
Amendment to the CRA, the assets of which may be purchased by ISLP, pursuant to
the Insignia Agreement. See "Conflicts of Interest - Ability to Control Timing
of Benefits to General Partner" and "Recent Developments Affecting VMS Realty
Partners And Its Affiliates."
4. Waiver Of 1990 Recapture
The Partnerships did not reduce the percentage of the profits
allocated to Settling Class Members who are or were limited partners of either
of the Partnerships and who failed to make
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<PAGE> 27
Investor Note payments due in 1990. In 1991, the Partnerships did not issue
IRS Form 1065 Schedule K-1's reflecting deemed distributions or income to those
Settling Class Members as a result of any such reduction, provided such
Settling Class Members satisfied their payment obligations to the Partnership
of which they are or were a limited partner, whether under the original terms
of the Investor Notes or the NRP Forbearance Agreement, as the case may be.
F. TERMS OF THE SETTLEMENT RELATING TO THE
PRUDENTIAL-BACHE SETTLING DEFENDANTS
1. Cash Payment
$20,000,000 in cash has been paid on behalf of the Prudential-Bache
Settling Defendants into the Escrow for the benefit of the Settling Class
Members who purchased their interest in a Settling Limited Partnership through
a Prudential-Bache Settling Defendant, including certain of the limited
partners of Partnership I.
2. Assignment of Rights in Assignment Notes
The Prudential-Bache Settling Defendants have assigned, for the
benefit of the Settling Class Members, all of their interest in assignment
notes owed to certain VMS Settling Defendants by certain Settling Limited
Partnerships (or partnerships of which Settling Limited Partnerships are the
general partners, including the Venture), whether such interest was obtained
through an assignment from a VMS Settling Defendant or otherwise. The value
ultimately realized for the interest in the assignment notes depends upon the
amount of proceeds generated by the sale of the real estate or other assets
securing the assignment notes. The face amount of the Prudential-Bache
Settling Defendants' interest in those assignment notes was approximately $10.6
million as of March 31, 1991, none of which had been realized as of [December
31, 1996]. However, given the current state of the real estate market, the
current net realizable value of such interest in the assignment notes is
estimated to be substantially lower than their face amount.
3. Assignment of Limited Partnership Interests
The Prudential-Bache Settling Defendants have assigned to an escrow
fund, for the benefit of the Settling Class Members, all of their interests as
a limited partner in each of the following Settling Limited Partnerships: 850
Third Avenue Limited Partnership; Boca Raton Hotel & Club Limited Partnership;
Candlewood Square Apartments Associates, Ltd.; North Palm Beach Shopping Center
Associates, Ltd.; The Shoreham Hotel Limited Partnership; and Trails Shopping
Center Associates, Ltd. The Prudential-Bache Settling Defendants also
transferred to the Settling Class Members their interests as a limited partner
in LaJolla Village Professional Center Associates, Ltd. which is currently a
debtor in a bankruptcy proceeding under the Bankruptcy Code and Oak Brook
International Office Associates, which was subsequently dissolved.
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<PAGE> 28
THE INSIGNIA TRANSACTIONS
A. SUBSTITUTION OF MAERIL AND RETENTION OF INSIGNIA
AFFILIATE AS MANAGER
During the summer of 1993, EAB introduced VMSRIL to Insignia. EAB and
Insignia had been engaged in discussions concerning the possible acquisition by
an Insignia subsidiary of VMSRIL's debt to EAB. Subsequently, Insignia began
negotiating with VMSRIL concerning a possible transaction. As a result of
these negotiations, VMSRIL and various of its affiliates, SRA, Insignia and a
limited partnership ("ISLP")(15) agreed to the terms of the Insignia Letter of
Intent, which contemplated, among other things, that VMSRIL and certain of its
affiliates serving as general partners of the Syndicated Partnerships,
including the Partnerships, would withdraw as such and be replaced by MAERIL, a
single purpose affiliate of MAE. The Insignia Agreement modified the
intentions of the parties as expressed in the Insignia Letter of Intent to
provide that MAERIL would become the new general partner of only the Selected
Syndicated Partnerships, including the Partnerships. Adoption of the Amendment
by the Partnerships will permit this substitution, because the Withdrawal
Conditions have been satisfied in connection therewith. See "Amendment To
Partnership Agreements."
Pursuant to the terms of the Venture's secured loan obligations with
respect to each of the Venture's properties, the substitution of MAERIL as
general partner of the Partnerships also requires lender consent. MF VMS has
granted its consent with respect to all of the debt of the Venture held by it.
However, consents from the holders of the eleven remaining senior mortgage
loans have not been actively been pursued by the Venture, although the Venture
intends to seek such consents prior to the proposed withdrawal and
substitutions transactions. However, the Venture intends to proceed with such
transactions regardless of whether such consents are obtained, in which case it
is possible that one or more of such lenders might seek to declare a default
and attempt to foreclose on their respective collateral if the transfer of
general partnership interests to MAERIL were to proceed without such lender's
express consent.
Furthermore, pursuant to the Insignia Letter of Intent, many of the
Syndicated Partnerships retained (to the extent permitted under applicable
mortgages and other governing documents) an Insignia affiliate to provide all
property and asset management services to such Syndicated Partnership for the
maximum term permitted under the partnership agreement or other governing
documents of such Syndicated Partnership.(16) In particular, Insignia, SRA, and
the Partnerships has become the asset manager of all of the apartment complexes
owned by the Venture throughout the country, for a fee to Insignia of $500,000
per year plus reimbursement of expenses of up to
__________________________________
(15) An MAE affiliate is the sole general partner in ISLP, and an Insignia
affiliate holds the sole limited partnership interest.
(16) See footnote 6 and the associated text.
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<PAGE> 29
$200,000 per year. The management fee is to be pro rated downward, in the
event of any dispositions of proprieties by the Venture. Accordingly,
following the disposition of Carlisle Square Apartments and Bellevue Tower
Apartments, the asset management fee was reduced to $461,000 per annum (subject
to further pro ration in connection with future dispositions if any). Insignia
has retained SRA to assist it in providing such asset management services to
the Venture. See " - Consideration to VMSRIL Affiliate." Insignia and its
affiliates have received expense reimbursements of $200,000 in each of 1994,
1995 and 1996. As a matter of comparison, the Bankruptcy Court allowed claims
of a VMSRIL affiliate for $400,000 for asset management services for January
1993 through September 1993 (i.e., the date of the Venture's emergence from
bankruptcy and on which Insignia assumed responsibility as the Venture's asset
manager).
The Venture has also entered into agreements pursuant to which it has
retained another subsidiary of Insignia to perform property management services
(the "Property Management Services Agreements") As consideration for its
performance of property management services pursuant to the Property Management
Services Agreement, the Insignia affiliate currently receives a fee of 4% of
collected revenues on each property. These fees totaled $1,211,319 in 1994,
$1,116,509 in 1995 and $993,555 in 1996. As a matter of comparison, the
Venture's property management services prior to the effectiveness of the
Property Management Services Agreements were performed by three different
entities, none of which are affiliated with VMSRIL or Insignia. Harbour Realty
Advisors, Inc. ("Harbour") provided property management services with respect
to the Venture's non-HUD retained properties. For such services, Harbour
received a fee of 4.0% of the rents actually collected per month on such
properties. Republic Management Services, Inc. ("Republic") or FPI Management,
Inc. ("FPI") managed all of the Venture's other properties. Republic received
a management fee of 4% of effective gross income with respect to the properties
it managed. The management agreements with FPI provided for management fee
payments of 3.5% to 4.0% of effective gross income with respect to the
properties it managed.
As required, the Venture obtained the consent of the FDIC, ContiTrade
and HUD to its entry into the Property Management Services Agreements.
ContiTrade's consent (the "CT Consent"), however, was conditioned upon an
agreement by Insignia that no payment, compensation or thing of value will be
conveyed by Insignia to any VMSRP Related Entity,(17) including SRA, in
connection with the payment of the property management fee by the Venture.
Pursuant to the CT Consent, although Insignia is not permitted to pay SRA a
percentage of the property management fees it earns with respect to the
Venture's property as was contemplated by the Insignia Letter of Intent,
Insignia was permitted to perform its other obligations under the Insignia
Letter of Intent; furthermore, Insignia is authorized to pay SRA compensation
for property management services actually performed by SRA in a reasonable
amount for such
__________________________________
(17) "VMSRP Related Entity" means VMSRP, any affiliate of VMSRP, Mr. Joel
Stone, Mr. Scott Lager and any entity directly or indirectly
controlled by Messrs. Stone and Lager.
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<PAGE> 30
services based upon what an unrelated third-party in the market place would
receive for rendering similar services. See "- Consideration to VMSRIL
Affiliate."
The MF VMS Agreement contemplates that Insignia will use commercially
reasonable efforts to cause each of the property management agreements and
asset management agreement related to the Venture's properties to be amended,
upon consummation of the Securitization. The asset management agreement would
be amended to (i) reduce the aggregate service fee payable to $25,00 per month,
payable in arrears, subject to increase or decrease based upon changes in the
consumer price index and decrease in the event of any asset dispositions and
(ii) fix the reimbursement amount at $132,000 per year (rather than a variable
amount up to actual expenses incurred), with $66,000 thereof being deferred
without interest until the original scheduled mature of the New Senior Loan and
subordinated to the repayment of the New Senior Loan. Amendments are also to
be made to the IFSE related property management agreements and asset management
agreements. The deferred payment will be senior to the New Junior Loans and if
the deferred amount is not paid within 90 days of the original scheduled
maturity of the New Senior Loan, MF VMS will be obligated to pay to Insignia
the unpaid amount thereof, but only to the extent it received sufficient prior
payments (including both principal and interest) on the New Junior Loan, and
shall be subrogated to Insignia's claim against the Partnership (or its
subpartnership). The property management agreements will be amended, if
necessary, to provide (i) for a monthly management fee not in excess of 4% of
rents actually collected and (ii) that no fees be payable for bookkeeping
expenses. To the extent that any such amendments require amendment of the
Plan, Insignia has agreed to use commercially reasonable efforts to cause the
Venture to seek such amendments of the Plan. See "-- The MF VMS Agreement."
B. INSIGNIA, MAE AND MAERIL
Insignia is a publicly held fully integrated real estate service
organization performing property management, asset management, investor
services, partnership administration, mortgage banking, and real estate
investment banking services for various ownership entities, including
approximately 900 limited partnerships having approximately 340,000 limited
partners. Based upon published industry surveys, Insignia is the largest
manager of multifamily residential properties in the United States and is a
significant manager of commercial property. Insignia commenced operations in
December 1990 and since then has grown to provide property and/or asset
management services (as of January 1, 1997) for properties which include
approximately 265,000 residential units and approximately 130,000,000 square
feet of commercial space, located in over 500 cities in 48 states.
A primary method of growth of Insignia has been by acquiring, directly
or through related entities (principally MAE), controlling positions in general
partners of real estate limited partnerships. Many of the sellers of such
assets, and in some cases the partnerships which own the properties, were
financially distressed, but the partnerships own properties that Insignia in
most cases believes to be fundamentally sound. Following each acquisition,
Insignia takes steps to enhance the value and stability of the acquired
properties, including a thorough analysis of each
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<PAGE> 31
property's operations, develops a detailed marketing strategy, and, when
appropriate, develops a program for restructuring its indebtedness. Insignia
or MAE has, where consistent with its fiduciary obligations to the property
owner, caused the controlled entity to retain Insignia to provide property
management and other services for the property, and will continue to do so in
the future.
Insignia also provides services to non-affiliated entities. Insignia
currently provides services to institutional clients including large insurance
companies, such as John Hancock Mutual Life Insurance Co., Mutual of New York,
Metropolitan Life Insurance Company, and The Prudential Insurance Company of
America; banks, such as Bank of America and First Nationwide Bank; government
or quasi-government agencies, such as the Federal Home Loan Mortgage
Corporation (known as Freddie Mac) and the Resolution Trust Corporation; and
other institutional investors and lenders. As of June 30, 1997, the average
duration of Insignia's tenure (including that of its acquired predecessors) as
manager for owners of unaffiliated properties under agreements with terms of
two years or less was approximately six years for residential properties and
three years for commercial properties.
Insignia's services include property management, providing all of the
day-to-day services necessary to operate a property, whether residential or
commercial; asset management, including long-term financial planning, capital
improvements, and development and execution of refinancings and dispositions;
maintenance and construction services; marketing and advertising; investor
reporting and accounting, including preparation of quarterly reports and annual
K-1 tax reporting forms for limited partners as well as regular reporting under
the Securities Exchange Act of 1934 where applicable; investment banking,
including assistance in workouts and restructurings, mergers and acquisitions,
and debt and equity securitization; and mortgage banking and real estate
brokerage. This integrated organization allows "one stop shopping" for
substantially all of the services necessary to operate a property and the
related partnership successfully, for both controlled entities and unaffiliated
owners.
Insignia's senior residential property management personnel have an
average of over 15 years of experience in property management with a broad
range of types of properties throughout the United States. Many of Insignia's
most experienced managers joined Insignia in connection with some of Insignia's
acquisitions. Insignia believes that its management expertise and
state-of-the-art computer and communications systems allow it to offer its
customized services efficiently and at a cost to Insignia which permits it to
be competitive with other real estate management service companies.
Insignia and its affiliates have acquired control of or management
rights to 32 significant portfolios of properties since 1990.
Insignia was incorporated in Delaware in July 1990. Insignia's
principal executive offices are located at One Insignia Financial Plaza, P.O.
Box 1089, Greenville, South Carolina 29602, telephone number (864) 239-1000.
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<PAGE> 32
MAE was formed to be the principal vehicle for acquiring interests in
real property that would be managed or serviced by Insignia. MAE, directly or
through subsidiaries, holds general partnership interests in approximately 500
partnerships, all of which have retained Insignia as manager for all or certain
aspects of their operations. MAE has no other material assets and has no
material cash flow. MAE has various liabilities associated with prior
acquisitions, certain of which have been guaranteed or are joint obligations
with Insignia or one or more of its subsidiaries. MAE and Insignia have
entered into an agreement governing the structuring of future acquisitions.
Insignia holds a 19.13% limited partnership interest in MAE. Andrew
L. Farkas, the Chairman of the Board and Chief Executive Officer of Insignia,
owns the general partner of MAE, which has a 1% partnership interest. In
addition, a 3% limited partnership interest in MAE is owned by five officers
and one employee of Insignia. In addition Mr. Farkas is a sole stockholder of
the general partner of Metropolitan Acquisition Partners IV, L.P. ("MAP IV"),
which holds a 64.5% limited partnership interest in MAE; the general partner of
MAP IV is generally entitled to receive 50% of all distributions made by MAP
IV, and Mr. Farkas holds an indirect 5.0% limited partnership interest in MAP
IV. Mr. Farkas is also the sole stockholder of the general partner of
Metropolitan Acquisition Partners V, L.P. ("MAP V"), which holds a 9.5% limited
partnership interest in MAE; the general partner of MAP V is generally entitled
to receive 30% of all distributions made by MAP V. MAP IV and MAP V,
respectively, own 13.6% and 4.7% of the equity of Insignia. Mr. Farkas also
has other ownership interests in Insignia. Although the general partner may
not assign its interest in MAE without the consent of holders of a majority in
interest of the limited partners' interests, there are no restrictions on Mr.
Farkas's ability to sell such general partner. Insignia may not transfer its
limited partnership interest in MAE without the consent of the general partner
of MAE. The general partner has complete authority over the management of MAE
and its assets, provided that, except in connection with acquisitions, the
general partner may not cause MAE to sell all or a substantial portion of its
assets without the consent of holders of a majority in interest of the limited
partners' interests. The limited partners, including Insignia, have no other
rights with regard to the business or operations of MAE.
MAERIL is a Delaware corporation, formed in March 1994 for the purpose
of serving as general partner of the Partnerships and certain of the other
Syndicated Partnerships. MAE GP Corporation is the sole stockholder of MAERIL
and MAE is the sole stockholder of MAE GP Corporation. As of June 30, 1997,
MAERIL had cash assets of $128,103 against total liabilities (including losses
in excess of investments in partnerships) of $211,675 yielding a negative net
worth of approximately $83,572. Additionally, MAE and Insignia are parties to
an agreement dated August 13, 1993 and terminating April 15, 2018, pursuant to
which Insignia has agreed to perform certain services and each of its
affiliates and controlled subsidiaries, including MAERIL. Insignia and/or its
affiliates are reimbursed for expenses incurred in performing such
administrative functions. As disclosed above (See "-- Substitution of MAERIL
and Retention of Insignia Affiliate as Manager."), an Insignia affiliate
received reimbursements from the Venture of $200,000 in each of 1994, 1995 and
1996 in connection with the performance of such
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<PAGE> 33
administrative services on behalf of the Partnerships and/or the Venture.
Under this same agreement, MAE and its affiliates engage Insignia to perform
property and asset management for partnerships in which they serve as general
partner. In addition, on a case by case basis, Insignia or an affiliate may be
retained to perform certain special services, for which it is to receive to be
negotiated "Incentive Management Fees" and "Transaction Fees". No such special
services have been, or are currently anticipated to be, provided by Insignia or
its affiliates in connection with the Venture. An audited balance sheet for
MAERIL, as of June 30, 1997 is attached hereto as Exhibit F and incorporated
herein by reference. See also the letter from MAERIL to VMSRIL attached hereto
and made a part hereof as Exhibit G.
The names, ages and certain biographical information regarding
MAERIL's sole director and each of its executive officers is listed below:
Caroll D. Vinson is 56 years old and has served as the sole director
and President of MAERIL since August, 1994. Prior to that time, Mr. Vinson
engaged in various other investment and consulting activities. From 1991 to
1993, Mr. Vinson was employed by Insignia in various capacities including
Managing Director - President during 1991. From 1986 to 1990, Mr. Vinson was
President and Director of U.S. Shelter Corporation, a real estate services
company, which sold substantially all of its assets to Insignia in December
1990.
William H. Jarrard, Jr. is 50 years old and has served as a Vice
President of MAERIL since March 1994. Mr. Jarrard has been Managing Director
- - Partnership Administration of Insignia since January 1991. Mr. Jarrard was
employed by U.S. Shelter in a similar capacity for three years prior to his
joining Insignia.
Robert D. Long, Jr. is 30 years old and has been Chief Accounting
Officer and Controller of MAERIL since March 1994. Mr. Long joined Insignia in
December 1991.
John K. Lines is 37 years old and has been Secretary of MAERIL since
July 1994 and General Counsel of Insignia since June 1994. From May 1993 to
June 1994, Mr. Lines was employed as Assistant General Counsel and Vice
President of Ocwen Financial Corporation in West Palm Beach, Florida. From
October 1991 until April 1993, Mr. Lines was employed as Senior Attorney of
Banc One Corporation in Columbus, Ohio.
C. PURCHASE OF EAB AND CREDITOR ASSETS AND GRANTING
OF COVENANTS NOT TO SUE
Pursuant to the Insignia Letter of Intent, ISLP purchased for
an aggregate price paid to EAB of $1,100,000 the EAB Debt (which had an
outstanding principal and interest balance as of such purchase of approximately
$37.2 million), constituting all of the debt of VMSRIL and of VMSRP to VMSRIL's
single major creditor, EAB. Subsequently, VMSRIL conveyed to ISLP, in a
transfer in lieu of foreclosure, all of the assets (the "EAB Assets") securing
the EAB Debt. The EAB Assets constituted all of the assets owned by VMSRIL
other than its rights to act as
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general partner of the Syndicated Partnerships in which it is a general
partner. In connection with this conveyance, ISLP has covenanted (i) not to
sue VMSRIL with respect to the EAB Debt, (ii) to look exclusively to the EAB
Assets for payment of the EAB Debt and (iii) to repay (but only out of the
proceeds realized from the EAB Assets acquired by ISLP) loans made to VMSRIL,
of which approximately $845,000 was outstanding as of November 16, 1993, the
date of the Insignia Letter of Intent (including principal and unpaid
interest). These loans, which were made to VMSRIL in 1992 by certain of its
principals to provide VMSRIL sufficient funds to permit it to meet its
obligations under the VMSRIL Agreement (as defined below), were repaid in full
by ISLP as of December 31, 1996. See "Recent Developments Affecting VMS Realty
Partners, L.P. And Its Affiliates." Upon exercise of an option granted SRA
pursuant to the Insignia Letter of Intent, SRA acquired from Insignia, without
payment of separate consideration, all of the EAB assets relating to VMS
Syndicated Partnerships(18) that own hotels. Furthermore, the Insignia
Agreement contemplates (as did the Insignia Letter of Intent) that ISLP may
seek to purchase certain assets (the "Creditor Assets") conveyed to creditors
of VMSRP pursuant to the Fifth Amendment to the CRA. Following such purchase,
ISLP will (i) covenant not to sue VMSRP with respect to debts associated with
the Creditor Assets and (ii) agree to look exclusively to the beneficial
interest of the applicable creditor in the Creditor Assets for payment of such
debts. See "Recent Developments Affecting VMS Realty Partners, L.P. And Its
Affiliates" and "Conflicts Of Interest."
D. INDEMNITIES GRANTED BY INSIGNIA
Pursuant to the Insignia Letter of Intent, Insignia granted an
indemnity to each of the individual partners of each of the VMS Principal
Entities and/or VMSRIL and each of their respective partners (the "Indemnified
Partners") with respect to the Syndicated Partnerships, including the
Partnerships. Insignia agreed to indemnify the Indemnified Partners for up to
$500,000 of claims of creditors in connection with (i) consummation of the
transactions contemplated by the Insignia Letter of Intent, (ii) the
Indemnified Partners' roles as general partners of, and service providers to,
the Syndicated Partnerships, and (iii) the EAB and Creditor Assets. Payments
with respect to this indemnification obligation will be made solely from a cash
reserve (the "Reserve") established by Insignia. The Reserve was initially
funded with $333,333 and, pursuant to the Insignia Agreement, was funded with
an additional $166,667 after the substitution of MAERIL for VMSRIL or such
affiliate with respect to 60% of the Selected Syndicated Partnerships. In the
event that the entire Reserve is not applied to the payment of Insignia
indemnity obligations, all of the remaining funds in the Reserve will be paid
over to SRA.
Pursuant to the Insignia Agreement, Insignia also will indemnify the
Indemnified Partners
__________________________________
(18) "VMS Syndicated Partnerships" means those partnerships, including the
Syndicated Partnerships, of which VMSRIL, one of the VMS Principal
Entities, or an affiliate thereof is the managing general partner (or
a general partner of a general partner) and as to which limited
partnership interests were sold to investors through syndications.
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against all claims ("Covered Losses") in connection with (i) actions taken by
MAERIL, as general partner of the Selected Syndicated Partnerships, (ii)
actions taken by MAERIL or its affiliates in connection with prospective work
outs of Selected Syndicated Partnership debts or other efforts to raise capital
for the Selected Syndicated Partnerships and (iii) actions taken by Insignia,
MAE or any of their affiliates with respect to the EAB and Creditor Assets.
The Reserve may not be used to pay Insignia's obligations with respect to this
indemnity. Pursuant to the Insignia Agreement, Insignia's obligation to make
such indemnity payments will be reduced by an amount equal to 50% of the
Aggregate Payments (as defined in the next section) actually received by SRA
from time to time pursuant to the Insignia Agreement (such reduction being
subject to adjustment upon receipt of any additional such payments).
E. CONSIDERATION TO VMSRIL AFFILIATE
The Insignia Letter of Intent provided for certain business
relationships between Insignia (and its affiliates) and SRA, which is an
affiliate of VMSRIL by reason of its 100% ownership by one of VMSRIL's
principals.
Pursuant to the Insignia Letter of Intent, SRA was to perform certain
services (the "Services") for Insignia and its affiliates including:
(i) assisting Insignia and its affiliates in minimizing their
indemnity obligation under the Letter of Intent;
(ii) maximizing the return on ISLP's investment in the EAB and
Creditor Assets; and
(iii) assisting (a) Insignia or its affiliates in connection with
the management and asset management of properties owned by the
Syndicated Partnerships and (b) MAERIL or its affiliates in
fulfillment of their obligations as substitute general
partners.
As discussed below, SRA's provision of the Services was terminated except for
its provision of assistance to an Insignia affiliate in its provision of asset
management services to the Venture.
For its provision of the Services, SRA was to receive a variety of
forms of compensation, including a right to acquire a 48.5% limited partnership
interest in ISLP for nominal consideration. SRA exercised this right on May
24, 1994 but, pursuant to the Insignia Agreement, subsequently revoked such
exercise, and relinquished such right. Prior to its exercise of this right,
SRA also received the right to 48.5% of all amounts realized from the EAB
Assets and the other assets purchased by ISLP pursuant to the Insignia Letter
of Intent, net of certain specified deductions; such right to receive such
payments was relinquished, however, following SRA's revocation of the exercise
of its acquisition right. The payments to SRA prior to its exercise of its
acquisition right totalled $17,135. As further consideration, to the extent
Insignia
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became the property manager or asset manager for Syndicated Partnerships and
retained SRA to assist it, Insignia was to pay SRA the SRA Management Fee
consisting of (a) 28% of the management and asset management fees paid to
Insignia affiliates by the Syndicated Partnerships, including the Partnerships
and (b) 28% of all net income received by MAERIL (including all fees and
distributions) as a result of its acting as general partner of the Syndicated
Partnerships. With certain exceptions, the obligations of Insignia pursuant to
the Insignia Letter of Intent were to be secured.
Although Insignia and MAE desired to have MAERIL substituted as the
general partner of the Selected Syndicated Partnerships, Insignia, MAE and ISLP
determined that they did not require SRA's management and related services on a
long term basis as they believed that they could more efficiently and
effectively perform their respective obligations to the selected Syndicated
Partnerships on their own and without the necessity of coordinating with SRA.
Accordingly, the Insignia Agreement effects, among other things, a buyout by
Insignia of SRA's rights to provide the Services and to receive the
compensation therefore discussed above. Pursuant to the Insignia Agreement,
SRA's right to provide the Services was terminated, except that SRA is required
to assist Insignia in performing asset management services for the Venture and
the Partnerships (but none of the other Syndicated Partnerships). Furthermore,
Insignia and SRA acknowledged that they no longer contemplate seeking to
maintain any future or ongoing mutual business relationships (although such
relationships had been contemplated by the Insignia Letter of Intent).
Additionally, SRA relinquished any rights to further fees or obligations
pursuant to the Insignia Letter of Intent or on account of services it has
provided or will provide, but in lieu thereof has received or will receive the
following:
(a) $500,000 on closing;
(b) $100,000 on both of the first and second
anniversaries of closing;
(c) $226,250 each calendar quarter for 6 years commencing
in the calendar quarter beginning in July of 1994;
(d) 28% of all fees and other payments received by (i)
Insignia or its affiliates for the provision of
management services to Boca West Center Associates,
Ltd. and (ii) MAERIL in its capacity of substitute
general partner of such Syndicated Partnership or
otherwise related to such Syndicated Partnership;
(e) the first $1.2 million of all net proceeds ("Net
Proceeds") in excess of the Calculation Amount(19)
derived by Insignia or ISLP from the sale of Creditor
Assets and EAB Assets; and
__________________________________
(19) The Calculation Amount is equal to (x) $3.4 million plus (y) the
aggregate cost of each of the Creditor Assets acquired by ISLP
(including interest at a rate of 4% over Citibank's base rate from the
date of acquisition of each of the respective Creditor Assets) plus
(z) the sum of any amounts previously received by Insignia in
repayment of its loan to ISLP to acquire the EAB Assets and the
Creditor Assets, or by ISLP as proceeds of the sale, refinancing or
disposition of any EAB Assets or Creditor Assets, which Insignia or
ISLP has been required to disgorge by reason of a valid claim thereto
asserted by an unaffiliated third party.
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(f) 50% of Net Proceeds in excess of the sum of (i) the
Calculation Amount plus (ii) $1.2 million.
The payments pursuant to clauses (a), (b), (e) and (f) of this paragraph are
referred to herein as the "Aggregate Payments." All of the obligations
specified in clauses (a) through (f) will be secured by a security interest in
Insignia's 48.5% limited partnership interest in ISLP and Insignia's economic
rights (but not obligations) pursuant to each of the property and asset
management agreements between Insignia or its affiliates and the Syndicated
Partnerships. In order to further secure payment of such obligations, Insignia
and MAERIL agreed that at such time and from time to time as MAERIL becomes
substitute general partners of a Selected Syndicated Partnership, at the
election of SRA either (i) Insignia and/or its affiliates owning 100% of the
stock of MAERIL shall pledge such stock to SRA or (ii) MAERIL shall pledge to
SRA 100% of its economic rights and entitlements of every kind and nature (but
not obligations) as general partner of each of the Selected Syndicated
Partnerships, including, but not limited to, rights to general partner
distributions and fees.
In addition, pursuant to the Insignia Agreement, Insignia and its
affiliates granted SRA a right of first refusal with respect to any proposed
future sale by Insignia of EAB Assets and Creditor Assets to which Insignia or
ISLP takes title by foreclosure, deed-in-lieu of foreclosure or otherwise.
The consideration to be received by SRA pursuant to the Insignia
Agreement, however, is limited by the terms of the Plan and the CT Consent.
The Plan, as modified by subsequent orders(20), provides that subject to the
exceptions set forth in the next two sentences, none of Insignia, its
affiliates, any VMSRP Related Party, any person who is a partner in or in
control of Insignia, nor any affiliate of any of the foregoing, may receive,
directly or indirectly, any
__________________________________
(20) The Plan was modified by the Order Re Documents to Be Delivered under
Second Amended and Restated Plan of Reorganization and Approving
Modification of Plan (the "Modification Order"), which was entered by
the Bankruptcy Court on October 6, 1993. The Modification Order
incorporates by reference the Revised Restructured Amended and
Restated Asset Management Agreement with Insignia Financial Group,
Inc. (the "Insignia Asset Management Agreement"), by and between the
Venture and Insignia.
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payments or other compensation relating to the Venture or its business except
with respect to asset management functions or payments on account of the Stout
Claim pursuant to the Plan and VMSRP's prefiling and administrative claims
against the Venture. The Plan further provides that no VMSRP Related Party is
to receive compensation for services related to the Venture without the prior
written consent of ContiTrade. However, the Plan does permit Insignia or any
wholly-owned subsidiary of Insignia to receive property management fees for
management of the Venture's properties by Insignia or its subsidiary if
Insignia or such subsidiary is approved pursuant to the Plan as a property
manager and actually becomes a property manager of one or more of the Venture's
properties. In addition, the Plan expressly authorizes Insignia to pay to
VMSRP not more than 28% of Insignia's asset management fee and 28% of any fees
Insignia receives for the provision of property management services to the
Venture. In light of the foregoing restrictions and to permit SRA to provide
property management services to Insignia with respect to the Venture's
properties, SRA obtained ContiTrade's consent, pursuant to the CT Consent, to
receive market rate compensation for property management services actually
performed by SRA, and/or such other compensation to which ContiTrade in the
future may consent. See " -Substitution of MAERIL and Retention of Insignia
Affiliate as Manager."
F. THE MF VMS AGREEMENT
On June 13, 1997, Insignia entered into the MF VMS Agreement with MF
VMS, pursuant to which the parties agreed to cooperate with one another for MF
VMS to acquire and restructure all of the outstanding mortgage indebtedness of
the Venture and of IFSE. MF VMS already holds, by assignment, all of the
outstanding mortgage indebtedness of the Venture and IFSE other than 13 first
mortgage loans, with an outstanding principal balance as of July 31, 1997 of
approximately $33 million (of which 11 such loans with an outstanding principal
balance as of July 31, 1997 of approximately $20.5 million relates the
Venture).
Pursuant to the MF VMS Agreement, it is anticipated that all such
mortgage debt would be restructured into two tranches: (a) one or more senior
loans (with a term of approximately 10 years) which would be secured by first
liens on all of the properties of the Venture and IFSE (the "New Senior Loan"),
which loan is to be securitized (the "Securitization"); and (b) one or more
junior loans for the remaining principal amount which would be secured by a
second priority mortgage lien on such properties (the "New Junior Loans").
Insignia has agreed to seek an amendment of the Plan to permit the Venture to
retain its properties at least until the end of the term of the New Senior Loan
and the New Junior Loans.
Insignia has also agreed to cooperate, and cause the Partnership and
its property manager (an affiliate of Insignia) to cooperate with MF VMS to
create capital and operating budgets consistent with prudent property
management standards, to seek to reduce and stabilize capital expenditures and
other operating expenses for the property. Insignia also will cooperate with
MF VMS in connection with certain environmental due diligence regarding the
properties and the preparation and assembly of financial, leasing and other
property information for delivery to rating agencies.
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The MF VMS Agreement contemplates that Insignia will use commercially
reasonable efforts to cause each of the property management agreements and
asset management agreement related to the Venture's properties to be amended,
upon consummation of the Securitization. The asset management agreement would
be amended to (i) reduce the aggregate service fee payable to $25,00 per month,
payable in arrears, subject to increase or decrease based upon changes in the
consumer price index and decrease in the event of any asset dispositions and
(ii) fix the reimbursement amount at $132,000 per year (rather than a variable
amount up to actual expenses incurred), with $66,000 thereof being deferred
without interest until the original scheduled maturity of the New Senior Loan
and subordinated to the repayment of the New Senior Loan. The deferred payment
will be senior to the New Junior Loans and if the deferred amount is not paid
within 90 days of the original scheduled maturity of the New Senior Loan, MF
VMS will be obligated to pay to Insignia the unpaid amount thereof, but only to
the extent it received sufficient prior payments (including both principal and
interest) on the New Junior Loans, and shall be subrogated to Insignia's claim
against the Partnership (or its subpartnership). The property management
agreement will be amended, if necessary, to provide (i) for a monthly
management fee not in excess of 4% of rents actually collected and (ii) that no
fees be payable for bookkeeping expenses. To the extent that any such
amendments require amendment of the Plan, Insignia has agreed to use
commercially reasonable efforts to cause the Venture to seek such amendments of
the Plan. Amendments are also to be made to the IFSE related property
management agreements.
In consideration for its undertakings pursuant to the MF VMS
Agreement, MF VMS (and not the Venture or the Partnerships) will pay Insignia a
fee of $1 million if and when the objectives of the MF VMS Agreement are
successfully achieved. In addition, MF VMS has engaged Insignia to perform
underwriting services in connection with the Securitization for which MF VMS
paid Insignia $25,000 upon entering into the MF VMS Agreement. MF VMS has also
agreed to pay Insignia in respect of those underwriting services: (i) $50,000
upon the preparation and delivery of materials to a rating agency in connection
with the New Senior Loan, and (ii) $25,000 following the closing of the
Securitization. MF VMS has also agreed to reimburse Insignia (and its
affiliates, including the Venture and the Partnerships) for the reasonable
out-of-pocket expenses (including legal fees and expenses) incurred by Insignia
and its affiliates in working to consummate the transactions contemplated by
the MF VMS Agreement.
CONFLICTS OF INTEREST
A. VMSRIL'S SELECTION OF SUCCESSOR
The ability of VMSRIL to select its own successor, pursuant to the
Amendment, removes a safeguard against an inherent conflict of interest between
VMSRIL and the applicable Partnership. Prior to the Amendment, both of the
Partnership Agreements contained substantial restrictions, which in most cases
would prohibit withdrawal of a general partner. The Amendment, however,
permits withdrawal by general partners on terms and conditions not as
restrictive as those in the Partnership Agreements. Thus, notwithstanding the
fact that a successor must satisfy the withdrawal conditions (and be consented
to by ContiTrade), VMSRIL might be
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motivated in its selection of a substitute general partner by factors other
than the successor's qualifications to serve as a substitute general partner,
such as the consideration to be paid to VMSRIL in consideration for its
interest or the speed within which a substitution could be effected. A
successor general partner so chosen may not be able to adequately fulfill its
obligations to the applicable Partnership, and could cause a decline in the
financial performance of the Venture and/or the applicable Partnership's
assets.
Pursuant to the Insignia Letter of Intent, ISLP granted VMSRIL a
covenant not to sue with respect to the EAB Debt (which has been acquired by
ISLP). In addition, VMSRIL's affiliate, SRA, is receiving significant
consideration pursuant to the Insignia Agreement. Because this consideration
results, in part, from VMSRIL's agreement to substitute MAERIL as general
partner of the Selected Syndicated Partnerships, including the Partnerships, it
creates a conflict of interest for VMSRIL. See "The Insignia Transactions -
Purchase of EAB and Creditor Assets and Granting of Covenants not to Sue; and -
Compensation to VMSRIL Affiliate." Prudential-Bache, minority general partner
of Partnerships withdrawal pursuant to Section 2.02 of the Settlement Agreement
will not receive any consideration in connection with the transactions pursuant
to the Insignia Letter of Intent and the Insignia Agreement.
However, with respect to the Venture, the Plan limits compensation
which VMSRIL and its affiliates may receive in connection with a transaction
involving a change in the Partnerships' general partners. The Plan (as
modified) provides that no VMSRP Related Entity nor any affiliate of a VMSRP
Related Entity may directly or indirectly receive any compensation or other
payments, from or relating to the Venture or any business activity related
directly to the Venture except with respect to asset management functions,
payments on account of Stout's claim, or payments of up to 28% of any fees
Insignia receives for property management services to the Venture for
assistance, advice and consultation provided to Insignia. The CT Consent
further limits the compensation which VMSRIL and its affiliates may receive
with respect to the Venture. See "Insignia Transactions - Substitution of
MAERIL and Retention of Insignia Affiliate as Manager."
Additionally, in order to expedite its withdrawal from the applicable
Partnership, VMSRIL could cause the Venture to confer certain benefits upon a
potential successor general partner or its affiliates, as an inducement to such
potential successor to become a substitute general partner. Pursuant to the
Insignia Letter of Intent, many of the Syndicated Partnerships, including the
Partnerships, retained affiliates of Insignia to provide property and asset
management services for a fee. See "The Insignia Transactions - Substitution
of MAERIL and Retention of Insignia Affiliates as Manager." Although such
retention is part of a series of transactions pursuant to which, among other
things, VMSRIL and its affiliates, which serve as general partners of Selected
Syndicated Partnerships, will withdraw as such, substituting MAERIL as general
partner, VMSRIL believes that because of Insignia's expertise and resources and
the terms of such retention that such retention of an Insignia affiliate to
provide property and asset management services is in the best interests of the
Venture and the compensation to be paid the Insignia affiliates for their
provision of services is comparable to the compensation received by the
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Venture's prior asset and property managers. See "The Insignia Transactions -
Substitution of MAERIL and Retention of Insignia's Affiliate as Manager." It
should also be noted that even had Insignia affiliates not been previously
retained to provide such managerial services, once MAERIL became general
partner of the Selected Syndicated Partnerships, it would have had the ability
to so retain an Insignia affiliate.
B. ABILITY TO CONTROL TIMING OF BENEFITS TO GENERAL
PARTNER
As the sole general partner of each of the Partnerships after the
Amendment and the withdrawal of Prudential- Bache and VMSRIL, MAERIL will be
entitled to certain fees and distributions upon the disposition of assets of
the Venture, and SRA would receive the SRA Management Fee as part of its
compensation for the Services. See "The Insignia Transactions - Substitution
of MAERIL and Retention of Insignia Affiliate as Manager; and - Compensation of
VMSRIL Affiliate."
Pursuant to the Fifth Amendment, various notes under which certain of
the Syndicated Partnerships are obligors (including the Stout Note), were
transferred by the VMS Principal Entities (and not VMSRIL) to one or more of
the liquidating trusts under the CRA (the "Transferred Notes"). The remainder
of VMSRP's right to distributions with respect to the entire Stout Claim
pursuant to the Plan (in addition to the Stout Note) also was transferred to
such liquidating trusts. See "Settlement Agreement, The Plan And Their
Relationship To The Partnerships - Terms of the Settlement Relating to VMS
Settling Defendants - Waiver of Interest under Assignment Notes and Wrap Notes
and Treatment under the Plan." The trusts were formed for the benefit of the
Creditors and are unaffiliated with VMSRIL and/or any VMS Principal Entity.
The transfer of such notes and claims to the trusts eliminated the interests of
the VMS Principal Entities therein, which was adverse to the obligors on the
notes and claims, including the Partnerships.
However, the Insignia Agreement contemplates that ISLP, an affiliate
of MAERIL, may purchase from the liquidating trusts some or all of the assets
transferred to such trusts. In addition, certain obligations of the Syndicated
Partnerships to repay advances made to them by their respective general
partners ("Partner Advances"), which were previously secured by collateral
assigned by such parties to EAB, have been transferred to ISLP as part of the
transfer to it of the EAB Assets. SRA, an affiliate of VMSRIL, also has an
interest in the receipt of such payments pursuant to the Insignia Agreement.
See "The Insignia Transactions." VMSRIL and, upon its substitution as general
partner, MAERIL have a conflict of interest as a result of ISLP's acquisition
of the Partner Advances, and will have further conflicts of interest in the
event of ISLP's acquisition of the Transferred Notes. Such conflicts arise
because the interests of VMSRIL's and MAERIL's respective affiliates in the
collection of such obligations are adverse to the interests of the partnerships
that are bound by such obligations. The Syndicated Partnerships, including the
Venture, will not have sufficient funds to repay such obligations, claims and
the Transferred Notes of the Syndicated Partnerships, including the Venture, if
they do not sell some of their assets. Nevertheless, a number of factors,
including market conditions,
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could influence a general partner's decision with respect to when and if it
should sell a particular asset.
Specifically, with respect to the Venture, the portion of the Stout
claim currently held by the liquidating trusts is to be paid solely from
proceeds of sales, refinancings or operations of the Venture's properties. In
addition, certain claims of VMSRP, VMS Realty Management, Inc. and other
affiliates of the Venture (the "Other Entity Claims") are to be paid over time,
in cash, principally from the proceeds from sales, refinancing or operations of
the properties. Thus, payment of the Stout Claim and the Other Entity Claims
may depend upon sales and/or refinancings of the Venture's properties, as the
Venture's properties, historically, have not generated sufficient cash flows to
fully fund all operating expenses and to meet all obligations.
As the general partner of the Selected Syndicated Partnerships,
including the Venture, MAERIL, ISLP's affiliate, will be able to accelerate
ISLP's receipt of such fees, distributions and debt repayment by accelerating
asset dispositions, since Proxies from limited partners from each of the
Partnerships approving such asset dispositions were given under the Settlement
Agreement. However, MAERIL, upon becoming the general partner of the
Partnerships, will have fiduciary duties to the Partnerships with respect to
any such sales. Additionally, given current market conditions and the
obligations with respect to the Venture and its properties which are senior in
priority to those which ISLP may acquire, the value of the Venture's properties
would have to increase substantially or favorable restructurings accomplished
before ISLP would receive any significant benefits from sales of the Venture's
properties.
INTERESTED PERSONS
VMSRIL owns a 1.99% interest and a 2% interest in the profits and
losses of Partnership I and Partnership II, respectively, while
Prudential-Bache owns a .01% interest in the profits and losses of Partnership
I. It is contemplated that Prudential-Bache's interest will terminate upon
withdrawal, and all of VMSRIL's interests will be transferred to MAERIL which
will then become the sole general partner of both partnerships. In addition,
as discussed under "The Insignia Transactions", VMSRIL and certain of its
affiliates have received benefits pursuant to the Insignia Letter of Intent,
including a covenant not to sue given by ISLP, and have and, in the future,
will receive benefits pursuant to the Insignia Agreement; these benefits
include substitution of MAERIL for VMSRIL as general partner of the
Partnerships, retention of SRA to perform certain management services for the
Partnerships and certain other monetary benefits.
Neither VMSRIL nor Prudential-Bache has any interest in the adoption
of the Amendment other than the interests described above, the matters
discussed under the heading "Conflicts of Interest", and the following. VMSRIL
and Prudential-Bache each will be fulfilling its respective obligations under
the Settlement Agreement. VMSRIL will have fulfilled its obligation to vote
the Proxies and facilitate the withdrawal of Prudential-Bache, and
Prudential-Bache will have withdrawn from Partnership I pursuant to the terms
of the Settlement Agreement and will have
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relieved itself from any liability for the obligations of Partnership I and the
Venture incurred subsequent to the date of its withdrawal as minority general
partner of Partnership I. VMSRIL's withdrawal as general partner of the
Partnerships upon the terms specified in the Insignia Agreement will relieve
VMSRIL from any liability for the obligations of the Partnerships and the
Venture incurred subsequent to the date of such withdrawal. See "The Insignia
Transactions -- Indemnities Granted by Insignia." However, neither
Prudential-Bache nor VMSRIL has any obligation under the terms of either of the
Partnership Agreements to make additional contributions to, or assume
additional liabilities of, either of the Partnerships.
Upon MAERIL's substitution as general partner of the Partnerships,
MAERIL will be liable with respect to obligations of the Partnerships and the
Venture incurred after such substitution to the same extent as VMSRIL and
Prudential-Bache would have been had they not withdrawn. Furthermore, even
subsequent to their respective withdrawals as general partners,
Prudential-Bache and VMSRIL will remain liable, jointly and severally, for
those existing obligations of Partnership I, and VMSRIL will remain liable for
those existing obligations of Partnership II (including in each case those
related to the Venture) incurred prior to the date of their respective
withdrawals, to the extent that (i) the assets of either or both of the
Partnerships, as the case may be, are inadequate to respond to those
obligations and (ii) Prudential-Bache and/or VMSRIL would have been otherwise
liable with respect to such obligations had it not withdrawn as a general
partner. Prudential-Bache and VMSRIL have been released from certain claims
pre-dating their respective withdrawals pursuant to the terms of the Settlement
Agreement. See "Settlement Agreement, the Plan and Their Relationship To The
Partnerships."
All associates of either VMSRIL or Prudential-Bache having an interest
in either of them have, through and as a result of that interest, an interest
in the withdrawal of Prudential-Bache from Partnership I, the withdrawal of
VMSRIL from the Partnerships, and VMSRIL's assignment of each of its respective
partnership interests to MAERIL. VMSRIL and certain of its affiliates,
including SRA and the Indemnified Partners, have an additional interest in the
Amendment as it will permit consummation of certain of the transactions
contemplated by the Insignia Agreement.
DEVELOPMENTS AFFECTING VMSRIL AND ITS AFFILIATES
As previously reported in the Registrants' quarterly and annual
reports, VMSRIL, and certain of its affiliates had experienced severe liquidity
problems. Because of VMSRP's inability to resolve the liquidity problems
affecting it and its affiliates, VMSRP had generally suspended making payments
relating to operating assets of it and its affiliates, other than payments
generally necessary to maintain the operation of such assets of it and its
affiliates, and changed the business of VMSRP and its affiliates, eliminating
the acquisition and development of real estate assets. However, VMSRIL, and
each of the other affiliates that serve as general partners of VMS Syndicated
Partnerships continued, and are continuing, to perform their responsibilities
as general partners.
In response to the above-described liquidity problems, on March 25,
1992, VMSRIL, the
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managing general partner of the Partnerships, and an affiliate of (i.e., under
common control with) the VMS Principal Entities, entered into an agreement (the
"VMSRIL Agreement") with its single major creditor, European American Bank, and
one of its affiliates, EURAM (collectively "EAB"), which held a lien on all of
VMSRIL's assets.
The VMSRIL Agreement provided that for a 12-month period VMSRIL was
prohibited from engaging in business activities or operations unrelated to the
orderly liquidation of its existing assets, which liquidation was to be
conducted consistent with its duties as the managing general partner of VMS
Syndicated Partnerships. Notwithstanding the foregoing, the VMSRIL Agreement
provided that VMSRIL was not prohibited from engaging in any activities with
respect to VMS Syndicated Partnerships, including, but not limited to, the
continuation of the VMS Syndicated Partnerships' business operations.
Under the VMSRIL Agreement, in order to facilitate VMSRIL's operation
of its assets in a manner intended to preserve and, if possible, enhance the
value of such assets prior to their disposition, EAB granted VMSRIL a
moratorium on enforcement of all indebtedness owed to EAB by VMSRIL. EAB
agreed that, during the one year term of the VMSRIL Agreement (assuming no
default by VMSRIL in the performance of its obligations under the VMSRIL
Agreement), EAB would not take any action which would materially adversely
affect the interests of VMSRIL, including, without limitation, demanding
payment of indebtedness and filing a petition to institute an involuntary
bankruptcy proceeding against VMSRIL.
Also in response to the above-described liquidity problems, on March
31, 1992, the VMS Principal Entities entered into the CRA with a number of
parties including substantially all of the unsecured and undersecured creditors
(other than trade creditors) of the VMS Principal Entities and certain of the
unsecured or undersecured creditors (other than trade creditors) of their
affiliates (collectively, the "Creditors"). Although VMSRIL is a party to the
CRA, it is generally not considered a VMS Principal Entity thereunder.
The CRA was intended to achieve a purpose comparable to that described
above for the VMSRIL Agreement. In consideration of the benefits received by
the Creditors under the CRA, the Creditors granted the VMS Principal Entities a
moratorium similar to that contained in the VMSRIL Agreement.
During the respective terms of, and under certain circumstances
specified in, the VMSRIL Agreement and the CRA, VMSRP and certain of its
affiliates, including VMSRIL, were required to pay certain sums derived from
their operations and asset dispositions to be applied to their restructured
debts; these sums were paid by VMSRP and its affiliates, including VMSRIL, as
and when required under the terms of those agreements.
Effective November 17, 1993, the VMS Principal Entities entered into
the Fifth Amendment to the CRA, dated as of October 25, 1993, pursuant to which
each VMS Principal Entity (and not VMSRIL) has transferred certain of its
assets in lieu of foreclosure (other than
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<PAGE> 45
general partnership interests in VMS Syndicated Partnerships and assets that
the Creditors chose not to acquire, based on their view of the value of such
assets and concerns about possible liability associated with them) to separate
trusts beneficially owned by the Creditors of each of the respective
transferring VMS Principal Entities, subject to the liens of the applicable
Creditors, in consideration of, among other things, the granting of covenants
not to sue by the respective Creditors (and their successors and assigns) with
respect to each of the VMS Principal Entities' liability for the indebtedness
owed such Creditors. Such transactions have amicably concluded the debtor
creditor relationship between the VMS Principal Entities and the Creditors.
Pursuant to the CRA and the Fifth Amendment thereto, and as an
inducement to the VMS Principal Entities to engage in the deed in lieu
transactions described above, substantial cash consideration, at the direction
of the VMS Principal Entities, was paid by the Creditors to SRA for future
services to be performed by SRA for benefit of the VMS Principal Entities.
During the summer of 1993, EAB introduced VMSRIL to Insignia, which
was engaged in discussions with EAB concerning the possible acquisition by an
Insignia subsidiary of VMSRIL's debt to EAB and the assets securing that debt,
and the granting by that Insignia subsidiary of a covenant not to sue VMSRIL.
This transaction has now occurred, effectively resolving VMSRIL's financial
difficulties with its single major creditor.
Subsequently, Insignia entered into negotiations with VMSRIL that have
resulted in the execution of the Insignia Letter of Intent and thereafter, the
Insignia Agreement. See "The Insignia Transactions."
* * *
The plaintiffs in the Dubelko Lawsuit, previously reported in
Item 2 of Part I of the Venture's Report on Form 10-Q for the nine months ended
September 30, 1992, and Item 1 of Part I of the Venture's Report on Form 10-K
for the year ended December 31, 1992, alleged that because of VMSRIL's past
financial difficulties it had withdrawn as the general partner of a VMS
syndicated partnership pursuant to the terms of that partnership's partnership
agreement, which partnership agreement is similar to the partnership agreements
of the Partnerships. Effective January, 1993, the Dubelko Lawsuit was settled
and, pursuant to such settlement, the plaintiffs withdrew their allegations.
Additionally, in a Chapter 11 case involving Frenchman's Reef Beach Associates
("Frenchman's"), another VMS syndicated partnership, Case No. 93B 18572 (Bankr.
N.D. Ill.), the Frenchman's Reef Protection Committee (an unofficial Committee
purporting to represent certain limited partners in Frenchman's) filed an
objection to the plan and disclosure statement filed by Frenchman's which
objection disputed VMSRIL's status as the general partner of Frenchman's,
relying upon an argument substantially similar to that advanced in the Dubelko
Lawsuit. Notwithstanding this objection, Frenchman's bankruptcy plan was
confirmed in November of 1994 by the bankruptcy court and became effective in
December of
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<PAGE> 46
1994. VMSRIL believes, after consultation with its counsel, that VMSRIL has
meritorious defenses to claims such as the Dubelko Lawsuit and the Frenchman's
objection, and that the resolution of VMSRIL's financial difficulties discussed
above affords additional strength to such defenses.
* * *
The Office of the Inspector General ("OIG") for the Department of
Housing and Urban Development ("HUD") completed an audit of the books and
records of seven HUD projects which VMS Realty Management, Inc. managed from
1987 to 1991, the years which were the subject of the OIG audit. The OIG
concluded that VMS Realty Management, Inc. did not comply with the terms and
conditions for the HUD Regulatory Agreements and applicable HUD regulations and
instructions relating to the financial and general management practices for six
of the seven HUD projects reviewed. Specifically, the OIG audit concluded that
such partnerships inappropriately disbursed $6,366,180 from the projects' funds
for partnership expenses from 1987 to 1991 when the projects were in a
non-surplus cash position or lacked adequate surplus cash for the payments, as
the term "surplus cash" is defined pursuant to the HUD Regulatory Agreements.
Approximately $736,000 of the $6,366,180 which the OIG has concluded to have
been inappropriately disbursed in payment of partnership obligations related to
two HUD projects in which the Venture is a partner ($603,000 with respect to
Crosswood Park and $133,000 with respect to Venetian Bridges Grand Canal I).
These inappropriate disbursements included payments for second mortgages, asset
management fees, notes payable and other partnership expenses.
Based on the HUD audit and further investigations, the United States
Attorneys' Office for the Northern District of Illinois advised VMS Realty
Management, Inc. and such partnerships that it was considering filing an action
with respect to the purported improprieties. In response, VMS Realty
Management, Inc. and such partnerships commenced settlement negotiations with
HUD and the U.S. Attorneys' office. A cash settlement was reached with HUD for
Ramblewood Associates, the owner of one of such HUD projects resulting in a
payment to HUD in excess of $200,000. Then on December 9, 1996, a settlement
was reached with respect to the other five projects found not to be in
compliance by HUD. Pursuant to this settlement, the VMS related parties to the
settlement agreement paid an aggregate amount of $550,000 to the government,
$101,866 of which was paid from available funds of Venetian Bridges Grand Canal
I (a HUD project of one of the Venture's subpartnership). The balance was paid
by entities other than the Venture and its subpartnership.
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<PAGE> 47
INFORMATION INCORPORATED BY REFERENCE
The following documents are incorporated by reference herein their
entirety:
(a) Registrant's Form 10-K for the year ended December
31, 1996;
(b) Registrant's Form 10-Q for the quarterly period ended
March 31, 1997; and
(c) Registrant's Form 10-Q for the quarterly period ended
June 30, 1997.
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<PAGE> 48
GLOSSARY
"Entity Payments" means sums paid to a VMS Principal Entity or VMSRIL
(i) pursuant to the terms of an assignment note or wrap note; (ii) pursuant to
the provisions of the partnership agreement of a Settling Limited Partnership
providing for the distribution to the general partners of such Settling Limited
Partnership of a portion of the net proceeds of a sale or other disposition of
real property and/or other assets owned by such Settling Limited Partnership;
(iii) as repayment of amounts loaned to a Settling Limited Partnership,
including interest thereon, by a VMS Principal Entity, in its capacity as a
general partner of such Settling Limited Partnership, on the terms set forth in
the limited partnership agreement and/or private placement memorandum of such
Settling Limited Partnership; (iv) as a fee upon the sale of any project owned
by either a Settling Limited Partnership or a joint venture in which such
Settling Limited Partnership is a partner, pursuant to the terms of either the
limited partnership agreement or private placement memorandum of such Settling
Limited Partnership; the amounts referred to in this clause (iv) include, but
are not limited to, (a) fees payable for advice rendered by the VMS Principal
Entity as to the timing and terms of the sale of any project and (b) incentive
payments payable due to the gross proceeds derived from the sale of a project
exceeding certain financial thresholds set forth in the private placement
memorandum of such Settling Limited Partnership; provided, however, that Entity
Payments shall not include any amounts due or payable to a VMS Principal Entity
as a Management Fee.
"Management Fee" means any and all amounts payable to any VMS
Principal Entity or VMSRIL in its capacity as manager or asset manager of a
project owned by either a Settling Limited Partnership or a joint venture in
which a Settling Limited Partnership is a partner, for its services as manager
or asset manager of such project, as such fees are payable pursuant to the
terms set forth in the private placement memorandum of such Settling Limited
Partnership.
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<PAGE> 49
Index of Defined Terms
<TABLE>
<CAPTION>
Term Page Number
- ---- -----------
<S> <C>
Aggregate Payments 36
Allowed Claim 25
Amendment 1
Assignment Note 25
Class Counsel 18
Consolidated Actions 16
ContiTrade 14
Court 1
Covered Losses 34
Creditors 44
Creditor Assets 33
CT Consent 28
EAB 11
EAB Assets 33
Escrow 23
FPI 28
Frenchman's 45
Harbour 28
HUD 45
IFSE 6
Indemnified Partners 33
Insignia 1
Insignia Agreement 5
Insignia Letter of Intent 4
ISLP 27
MAERIL 1
MAE 1
MAP IV 31
MAP V 31
MF VMS 6
MF VMS Agreement 6
Mutual Benefit Settling Defendants 7
New Junior Loans 38
New Senior Loans 37
OIG 45
Other Entity Claims 41
Oversight Committee 8
Partner Advances 41
Partnership I 1
Partnership II 1
</TABLE>
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<PAGE> 50
Index of Defined Terms Continued
<TABLE>
<S> <C>
Partnership Agreement I 1
Partnership Agreement II 1
Partnership Agreements 1
Partnerships 1
Plan 2
Property Management Services Agreement 28
Proxies 4
Prudential-Bache 1
PSI 11
Republic 28
Reserve 34
SEC Settlement 12
Securitization 38
Services 34
Settlement Agreement 1
Settling Class Members 7
Settling Limited Partnerships 7
SRA 4
Stout 25
Syndicated Partnerships 4
Transferred Notes 40
Transferred Claims 10
Venture 1
VMSRIL 1
VMSRIL Agreement 43
VMSRP 9
</TABLE>
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<PAGE> 51
ANNEX I
Partners in VMSRIL
<TABLE>
<CAPTION>
Entity Interest
- ------ --------
<S> <C>
Azel Realty Corporation 25.875% general partner
an Illinois corporation ("ARC")
PRM Realty Corporation 35.625% general partner
an Illinois corporation ("PRM")
JAS Realty Corporation 9.750% general partner
an Illinois corporation ("JAS")
Residential Equities, Ltd. 1.875% general partner
an Illinois corporation ("REL")
Brewster Realty, Inc. 1.875% general partner
a Delaware corporation ("BRI")
XCC Investment Corporation 25.00% limited partner
</TABLE>
Stockholders of General Partners
<TABLE>
<CAPTION>
Entity Stockholder % of Stock Held
- ------ ----------- ---------------
<S> <C> <C>
ARC Robert D. Van Kampen 100%
PRM Peter R. Morris 100%
JAS Joel A. Stone 100%
RES Peter R. Morris 100%
BRI Robert D. Van Kampen 80%
Joel A. Stone 20%
</TABLE>
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<PAGE> 52
EXHIBIT A
THIS AMENDMENT to the Amended and Restated Limited Partnership Agreement
and Certificate of Limited Partnership (the "Agreement") of [VMS National
Residential Portfolio I][VMS National Residential Portfolio II] (the
"Partnership") is executed on the ____ day of __________, 1997. Except as
otherwise indicated, all capitalized terms used herein have the meaning
ascribed to such terms in the Agreement.
WHEREAS, pursuant to the terms of Section 20(a) of the Agreement, the
General Partners generally are prohibited from taking any action which would
constitute their Withdrawal from the Partnership;
WHEREAS, the Partnership desires to grant the General Partners the right
to freely Withdraw from the Partnership without liability, subject only to
Satisfaction of the Withdrawal Conditions (as such term is defined below); and
WHEREAS, Limited Partners representing 98.83% of the Limited Partnership
Interests, directly or by proxy granted to the Managing General Partner either
(i) pursuant to the terms of that certain Stipulation of Settlement of New
Action and Partial Settlement of Consolidated Actions approved by order of
Judge Zagel dated July 2, 1991, as amended (the "Settlement Agreement") or (ii)
otherwise, consent to the grant of a right of Withdrawal to the General
Partners.
NOW, THEREFORE, the Partners hereby amend the Agreement by inserting the
following as a new Section 23:
23. Permitted Withdrawal by a General Partner.
(a) Notwithstanding anything contained in this Agreement and
Certificate to the contrary, a General Partner may, without the consent
of any Limited Partners, but subject solely (except in the case of
death, disability or incompetency) to the Satisfaction of the Withdrawal
Conditions, (1) Withdraw from the Partnership at any time without
incurring any liability to the Partnership for such Withdrawal;
provided, however, that the foregoing shall not release any such
withdrawing General Partner from any liability of such General Partner
arising, or relating to any matter existing, prior to its date of
Withdrawal, and (2) substitute for itself one or more successor General
Partners. "Satisfaction of the Withdrawal Conditions" shall be deemed
to have occurred if the General Partner shall have reasonably determined
that (x) the proposed Withdrawal will not result in the reclassification
of the Partnership as an association taxable as a corporation for
Federal income tax purposes and (y) any proposed substitute General
Partner has experience in real estate management and is reasonably
capitalized to carry out its duties and obligations as a General
Partner.
(b) In the event that the Minority General Partner shall
Withdraw from the Partnership and shall transfer its interest to the
Managing General Partner, then all references to the Minority General
Partner in this Agreement and Certificate shall be deleted.
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<PAGE> 53
EXHIBIT B
IRREVOCABLE PROXY AND POWER OF ATTORNEY
Each settling Class member who is a current limited partner of any of
the Active Limited Partnerships identified by footnote 3 on Exhibit A will be
deemed to grant to each managing general partner of each such Active Limited
Partnership, acting singly, the irrevocable proxy and power of attorney
specified below and will irrevocably constitute and appoint them, with full
power of substitution and resubstitution, as his, her or its attorney-in-fact
with full power and authority to act in his, her or its name on his, her or its
behalf with respect to:
(a) Voting in favor of, or consenting to, any sale, lease,
assignment, exchange or other transfer or conveyance of the real
property and/or other assets owned by such Active Limited Partnership,
including, but not limited to, any conveyance of all or substantially
all of the assets of such Active Limited Partnership; and
(b) Voting in favor of an amendment to the partnership
agreement of such Active Limited Partnership, which, notwithstanding any
provisions to the contrary in the applicable partnership agreement or
prospectus, permits each general partner of such Active Limited
Partnership to (i) withdraw, without liability for such withdrawal, from
the Active Limited Partnership (whether by resignation or retirement or
by the transfer, sale, assignment, pledge, encumbrance or other
disposition of such general partner's general partnership interest in
such Active Limited Partnership) and (ii) substitute one or more
successor general partners without obtaining, with respect to both (i)
or (ii) above, any further consent of the limited partners of the Active
Limited Partnership, and without satisfying any other conditions to the
withdrawal and substitution of general partners other than Satisfaction
of the Withdrawal Conditions. As used herein, "Satisfaction of the
Withdrawal Conditions" shall be deemed to have occurred if the general
partner reasonably determines that (x) the proposed withdrawal will not
result in the reclassification of the Active Limited Partnership as an
association taxable as a corporation for Federal income tax purposes;
and (y) any proposed substitute general partner has experience in real
estate management and is reasonably capitalized to carry out its duties
and obligations as general partner.
(c) The proxy and power of attorney hereby granted by each
limited partner of each Active Limited Partnership:
(i) is a proxy and power of attorney coupled with
an interest, is irrevocable and shall survive the death or
incapacity of such limited partner, shall revoke all prior
proxies granted by such limited partner and shall survive for
the life of the Active Limited Partnership; and
(ii) shall be valid and binding upon, and inure to
the benefit of, the successors, assigns, personal
representatives, estates, heirs and legatees of each such
limited partner and each managing general partner of such Active
Limited Partnership.
(d) No settling Class member who is a limited partner of
the Active Limited Partnerships shall grant a proxy or power of attorney
to any person which conflicts with the proxy and power of attorney
granted herein and any attempt to do so shall be void.
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<PAGE> 54
EXHIBIT C
ACTIVE LIMITED PARTNERSHIPS
11 Broadway Associates Limited Partnership I
11 Broadway Associates Limited Partnership II
11 Broadway Associates Limited Partnership III
1600 Arch Investors, Ltd.
1600 Arch Limited Partnership
18th & Market Street Hotel Limited Partnership
850 Third Avenue Limited Partnership
Boca Glades Associates
Boca Raton Hotel & Club Limited Partnership
Boca West Shopping Center Associates
Boulder/Arapahoe Mall Associates, Ltd.
C.H. Equity Associates
Candlewood Square Apartments Associates, Ltd.
Chicago Resort Hotels and Conference Centers Limited
Partnership I
Chicago Resort Hotels and Conference Centers Limited
Partnership II
Coral Gables Financial Center Associates, Ltd.
Coral Gables Hi-Rise Office Associates, Ltd.
Davies Pacific Center Limited Partnership
East/Southeast Hotel Associates, Ltd.
East/West Coast Mall Associates, Ltd.
Forest Glen Townhome Associates, Ltd.
Forest Glen Townhome Associates II, Ltd.
Four Quarters Habitat Apartments
Frenchman's Reef Beach Associates
Ft. Lauderdale Office Park Associates, Ltd.
Garden City Plaza Associates, Ltd.
Gulfstream Mall Associates, Ltd.
Harbour House Investors, Ltd.
Harbour House Partners, Ltd.
Hearthwood Associates
Hickory Point Townhome Associates
Investors First-Staged Equity L.P.
Jacksonville/Windsong Apartments Associates, Ltd.
Kendall Townhome Investors, Ltd.
Key Biscayne Beach Hotel Associates Ltd.
LaJolla Village Professional Center Associates
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<PAGE> 55
LaSalle/Market Streets Associates, Ltd.
Lodge West Townhome Associates
Lynnhaven Associates
Merrifields Associates
Mount Regis Associates II
Nashville House Office Center Associates
North Palm Beach Shopping Center Associates, Ltd.
Northern California Shopping Center Associates, a Limited
Partnership
Oak Brook International Office Center Associates
Oceanside and Shenandoah Hotel Associates
Oceanview/Virginia Beach Hotel Associates
One Hundred Gold Street Limited Partnership
Orlando-Spanish Trace Associates, Ltd.
Park Centre Associates
Pasadena Office Park Associates
Pennsylvania Building Limited Partnership, The
Potomac/Waterview Associates
Prudential-Bache/VMS Realty Associates L.P. I
Prudential-Bache/VMS Realty Associates L.P. II
Raleigh/Spring Forest Apartments Associates
Raleigh/Spring Forest Investors
Ramblewood Associates
Scarlett Oaks Apartments Associates, Ltd.
Shadowood Associates
Shoreham Hotel Limited Partnership, The
Spring Brook Village Apartment Associates, Ltd.
Thornwood Townhomes & Apartments Associates
Toronto Park Hotel Limited Partnership
Trails Shopping Center Associates, Ltd.
Turnberry Wells Townhome Associates
Tyson's Pike Seven Plaza Associates
Village Green Apartment-Townhome Associates
VMS Canadian Hotel Partnership
VMS Investors First-Staged Equity L.P. II
VMS National Hotel Portfolio I
VMS National Hotel Portfolio II
VMS National Residential Portfolio I
VMS National Residential Portfolio II
VMS Resort Retirement Living Associates, L.P. I
VMS Resort Retirement Living Associates, L.P. II
VMS/Tower Place Limited Partnership
Waterview Colonial Manor Associates
Woodhaven Associates
Woodmere Associates, Ltd.
Yorktown Towers Associates
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<PAGE> 56
EXHIBIT D
SETTLING LIMITED PARTNERSHIPS
11 Broadway Associates Limited Partnership I
11 Broadway Associates Limited Partnership II
11 Broadway Associates Limited Partnership III
1600 Arch Investors, Ltd.
1600 Arch Limited Partnership
18th & Market Street Hotel Limited Partnership
850 Third Avenue Limited Partnership
Albuquerque/San Pedro Office Park Associates
Arlington/Woodcreek Associates
Boca Glades Associates
Boca Raton Hotel & Club Limited Partnership
Boca West Shopping Center Associates
Boulder/Arapahoe Mall Associates, Ltd.
C.H. Equity Associates
Candlewood Square Apartments Associates, Ltd.
Chicago Resort Hotels and Conference Centers Limited
Partnership I
Chicago Resort Hotels and Conference Centers Limited
Partnership II
Coral Gables Financial Center Associates, Ltd.
Coral Gables Hi-Rise Office Associates, Ltd.
Dallas Timber Ridge Associates
Davies Pacific Center Limited Partnership
Denver/Hi-Tech Executive Center Associates
East/Southeast Hotel Associates, Ltd.
East/West Coast Mall Associates, Ltd.
Embassy Associates
Forest Glen Townhome Associates, Ltd.
Forest Glen Townhome Associates II, Ltd.
Forest Hills Townhome Associates
Forestwood Associates
Fort Worth/Gates of Spain Associates, Ltd.
Four Quarters Habitat Apartments
Frenchman's Reef Beach Associates
Ft. Lauderdale Office Park Associates, Ltd.
Garden City Plaza Associates, Ltd.
Gulfstream Mall Associates, Ltd.
Harbour House Investors, Ltd.
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<PAGE> 57
Harbour House Partners, Ltd.
Hearthwood Associates
Hickory Point Townhome Associates
Investors First-Staged Equity L.P.
Jacksonville/Windsong Apartments Associates, Ltd.
Kendall Townhome Investors, Ltd.
Key Biscayne Beach Hotel Associates, Ltd.
LaJolla Village Professional Center Associates
Lake Magdalene Arms Apartment Associates, Ltd.
LaSalle/Market Streets Associates, Ltd.
Lodge West Townhome Associates
Lynnhaven Associates
Merrifields Associates
Mount Regis Associates II
Nashville House Office Center Associates
Nob Hill Townhome-Apartment Associates
North Palm Beach Shopping Center Associates, Ltd.
Northern California Shopping Center Associates, a Limited
Partnership
Oak Brook International Office Center Associates
Oceanside and Shenandoah Hotel Associates
Oceanview/Virginia Beach Hotel Associates
One Hundred Gold Street Limited Partnership
Orlando-Spanish Trace Associates, Ltd.
Park Centre Associates
Pasadena Office Park Associates
Pennsylvania Building Limited Partnership, The
Potomac/Waterview Associates
Prudential-Bache/VMS Realty Associates L.P. I
Prudential-Bache/VMS Realty Associates L.P. II
Raleigh/Spring Forest Apartments Associates
Raleigh/Spring Forest Investors
Ramblewood Associates
Regency Square Townhomes and Apartments Associates, Ltd.
Scarlett Oaks Apartments Associates, Ltd.
Shadowood Associates
Shoreham Hotel Limited Partnership, The
Spring Brook Village Apartment Associates, Ltd.
Springs of Country Woods Apartment Associates, Ltd.
Thornwood Townhomes & Apartments Associates
Toronto Park Hotel Limited Partnership
Trails Shopping Center Associates, Ltd.
Turnberry Wells Townhome Associates
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<PAGE> 58
Tyson's Pike Seven Plaza Associates
Village Green Apartment-Townhome Associates
Virginia Beach Hotel Associates
VMS Canadian Hotel Partnership
VMS Investors First-Staged Equity L.P. II
VMS National Hotel Portfolio I
VMS National Hotel Portfolio II
VMS National Residential Portfolio I
VMS National Residential Portfolio II
VMS Resort Retirement Living Associates, L.P. I
VMS Resort Retirement Living Associates, L.P. II
VMS/Tower Place Limited Partnership
Waterview Colonial Manor Associates
West Palm/Forum III Associates, Ltd.
Woodhaven Associates
Woodmere Associates, Ltd.
Yorktown Towers Associates
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<PAGE> 59
EXHIBIT E
VMS SETTLING DEFENDANTS
Boca-CWP Partners
Brewster Corp.
Brewster Realty, Inc.
(formerly known as VanKampen Stone, Inc.)
Chicago Wheaton Partners
Congregate Living Partnership
Green, Richard
Harbour House Assoc.
Hayes, David
Hoekstra, Allan W.
Howard, Melvin
Indian Lakes/Nordic Hills L.P.
LaJolla Office Associates
Merritt, John C.
Morris, Peter R.
Morris/Stone Assoc.
Park, Jeffrey J.
PRM-Garden City Assoc.
Residential Equities, Ltd.
Resort Retirement Properties Associates
Robbins, James
Seeland, Allen
Sveen, Richard
Sonnenschein Nath & Rosenthal
(formerly known as Sonnenschein Carlin Nath & Rosenthal)
Springs Management Company
Stone, Joel A.
VanKampen Merritt, Inc.
VanKampen/Morris/Stone, Inc.
VanKampen, Robert D.
VanKampen Stone, Inc.
VKM&S Enterprises, Inc.
VKM&S-Garden City Associates
VMS Broadway Associates
VMS East Bay Associates
VMS Financial Guarantee L.P.
VMS Hotel Mortgage, Inc.
VMS Institutional Capital Corp. 1984-2
VMS Mortgage Co.
VMS Mortgage Co. II
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<PAGE> 60
VMS Mortgage Co. IV
VMA National Hotel Partners
VMS National Properties
VMS Realty, Inc.
VMS Realty Investment, Ltd.
VMS Realty Investors
VMS Realty Management, Inc.
VMS Realty Partners
VMS Securities Inc.
VMS Staged Equity II, Inc.
VMS Wall Street Associates Limited Partnership (11 Broadway)
Xerox Corporation
Xerox Credit Corporation
Xerox Financial Services, Inc.
XCC Investment Corporation
11 Broadway Associates Limited Partnership I
11 Broadway Associates Limited Partnership II
11 Broadway Associates Limited Partnership III
1600 Arch Investors, Ltd.
1600 Arch Limited Partnership
18th & Market Street Hotel Limited Partnership
850 Third Avenue Limited Partnership
Albuquerque/San Pedro Office Park Associates
Arlington/Woodcreek Associates
Boca Glades Associates
Boca Raton Hotel & Club Limited Partnership
Boca West Shopping Center Associates, Ltd.
Boulder/Arapahoe Mall Associates, Ltd.
C.H. Equity Associates
Candlewood Square Apartments Associates, Ltd.
Chicago Resort Hotels and Conference Centers Limited
Partnership I
Chicago Resort Hotels and Conference Centers Limited
Partnership II
Coral Gables Financial Center Associates, Ltd.
Coral Gables Hi-Rise Office Associates, Ltd.
Dallas Timber Ridge Associates
Davies Pacific Center Limited Partnership
Denver/Hi-Tech Executive Center Associates
East/Southeast Hotel Associates, Ltd.
East/West Coast Mall Associates, Ltd.
Embassy Associates
Forest Glen Townhome Associates, Ltd.
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<PAGE> 61
Forest Glen Townhome Associates II, Ltd.
Forest Hills Townhome Associates
Forestwood Associates
Fort Worth/Gates of Spain Associates, Ltd.
Four Quarters Habitat Apartments
Frenchman's Reef Beach Associates
Ft. Lauderdale Office Park Associates, Ltd.
Garden City Plaza Associates, Ltd.
Gulfstream Mall Associates, Ltd.
Harbour House Investors, Ltd.
Harbour House Partners, Ltd.
Hearthwood Associates
Hickory Point Townhome Associates
Investors First-Staged Equity L.P.
Jacksonville/Windsong Apartments Associates, Ltd.
Kendall Townhome Investors, Ltd.
Key Biscayne Beach Hotel Associates, Ltd.
LaJolla Village Professional Center Associates
Lake Magdalene Arms Apartment Associates, Ltd.
LaSalle/Market Streets Associates, Ltd.
Lodge West Townhome Associates
Lynnhaven Associates
Merrifields Associates
Mount Regis Associates II
Nashville House Office Center Associates
Nob Hill Townhome-Apartment Associates
North Palm Beach Shopping Center Associates, Ltd.
Northern California Shopping Center Associates, a Limited
Partnership
Oak Brook International Office Center Associates
Oceanside and Shenandoah Hotel Associates
Oceanview/Virginia Beach Hotel Associates
One Hundred Gold Street Limited Partnership
Orlando-Spanish Trace Associates, Ltd.
Park Centre Associates
Pasadena Office Park Associates
Pennsylvania Building Limited Partnership, The
Potomac/Waterview Associates
Prudential-Bache/VMS Realty Associates L.P. I
Prudential-Bache/VMS Realty Associates L.P. II
Raleigh/Spring Forest Apartments Associates
Raleigh/Spring Forest Investors
Ramblewood Associates
-3-
<PAGE> 62
Regency Square Townhomes and Apartments Associates, Ltd.
Scarlett Oaks Apartments Associates, Ltd.
Shadowood Associates
Shoreham Hotel Limited Partnership, The
Spring Brook Village Apartment Associates, Ltd.
Springs of Country Woods Apartment Associates, Ltd.
Thornwood Townhomes & Apartments Associates
Toronto Park Hotel Limited Partnership
Trails Shopping Center Associates, Ltd.
Turnberry Wells Townhome Associates
Tyson's Pike Seven Plaza Associates
Village Green Apartment-Townhome Associates
Virginia Beach Hotel Associates
VMS Canadian Hotel Partnership
VMS Investors First-Staged Equity L.P. II
VMS National Hotel Portfolio I
VMS National Hotel Portfolio II
VMS National Residential Portfolio I
VMS National Residential Portfolio II
VMS Resort Retirement Living Associates, L.P. I
VMS Resort Retirement Living Associates, L.P. II
VMS/Tower Place Limited Partnership
Waterview Colonial Manor Associates
West Palm/Forum III Associates, Ltd.
Woodhaven Associates
Woodmere Associates, Ltd.
Yorktown Tower Associates
-4-
<PAGE> 63
EXHIBIT F
BALANCE SHEET
MAERIL, INC.
JUNE 30, 1997
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 64
MAERIL, Inc.
Balance Sheet
June 30, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................1
Balance Sheet.........................................................2
Notes to Balance Sheet................................................3
</TABLE>
<PAGE> 65
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Independent Auditors
To the Stockholders
MAERIL, Inc.
We have audited the accompanying balance sheet of MAERIL, Inc. as of June 30,
1997. This balance sheet is the responsibility of the Company's management.
Our responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of MAERIL, Inc. at June 30, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
August 5, 1997
1
<PAGE> 66
MAERIL, Inc.
Balance Sheet
June 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Cash $128,103
--------
Total assets $128,103
========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Payable to affiliates $ 22,346
Losses in excess of investment in partnerships 189,329
--------
Total liabilities 211,675
Stockholder's deficiency:
Common stock, $1 par value; 100 shares authorized
and outstanding $ 100
Additional paid-in capital 99,900
Deficit (183,572) (83,572)
-------------------
Total liabilities and stockholder's deficiency $128,103
========
</TABLE>
See accompanying notes.
2
<PAGE> 67
MAERIL, Inc.
Notes to Balance Sheet
June 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
MAERIL, Inc. ("the Company") is a wholly owned subsidiary of MAE GP
Corporation, which is wholly-owned by Metropolitan Asset Enhancement, L.P.
("MAE"). The Company was incorporated as a Delaware corporation on March 23,
1994 and was formed to become the general partner of certain real estate
related limited partnerships.
An agreement exists between MAE and Insignia Financial Group, Inc.
("Insignia"), dated August 13, 1993 and terminating April 15, 2018, which
causes Insignia, through its employees, to perform certain functions for MAE
and each of its affiliates and controlled subsidiaries. Pursuant to this
agreement, Insignia will perform these responsibilities on behalf of the
Company and shall receive for the performance of such services "Incentive
Management Fees" and "Transaction Fees" (as defined).
PRINCIPLES OF CONSOLIDATION
The balance sheet includes all of the accounts of the Company and its
100%-owned subsidiary, GP Services XI, Inc. All significant intercompany
balances have been eliminated.
USE OF ESTIMATES
The preparation of a balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the statement and accompanying notes.
Actual results could differ from those estimates.
CASH
Periodically the amount of cash on deposit in federally insured institutions
exceeds the limit on insured deposits. The carrying amount of cash
approximates fair value.
3
<PAGE> 68
MAERIL, Inc.
Notes to Balance Sheet (continued)
2. INVESTMENT IN GENERAL PARTNERSHIP INTERESTS
At June 30, 1997, the following eight general partnerships' interest were owned
by the Company. Each of these general partnership interests were transferred
to the Company during the previous three years.
<TABLE>
<S> <C>
Boca Glades Associates Ltd. 1%
Boca West Shopping Center Associates, Ltd. 2%
Four Quarters Habitat Apartments Associates, Ltd. 2%
Investors First-Staged Equity L.P. II 1%
Kendall Townhome Investors, Ltd. 1%
Merrifields Associates 1%
Woodhaven Associates 1%
Yorktown Towers Associates 1%
</TABLE>
Kendall Townhome Investors, Ltd.'s only asset is its 24.7% equity interest in
Four Quarters Habitat Apartments Associates, Ltd. Merrifields Associates' only
asset was sold in June 1997 and the Partnership is to be terminated on or
before December 31, 1997. The properties held by Boca Glades Associates Ltd.
are currently being marketed for sale. No loss on the sale of these properties
is expected.
The general partnership interests have been acquired by MAERIL generally at no
out-of-pocket cost, as Insignia has funded all acquisition costs in return for
the management rights for properties owned by partnerships in which MAERIL or
an affiliate is the general partner.
Investments in real estate partnerships are accounted for under the equity
method. Under the equity method, MAERIL records a liability for its
proportionate share of the investee's income or loss in the income statement
and records cash distributions received as a reduction of its investments. At
June 30, 1997, MAERIL has recorded a liability of approximately $189,000
related to its share of equity in losses in the partnerships, which includes
the amortization of MAERIL's costs in excess ($343,000) of its proportionate
share of the investees assets at the dates of acquisition. The costs in excess
are being amortized over ten years, which is the estimated composite life of
the investees.
4
<PAGE> 69
MAERIL, Inc.
Notes to Balance Sheet (continued)
2. INVESTMENT IN GENERAL PARTNERSHIP INTERESTS (CONTINUED)
A general partner of a limited partnership may become obligated to fund certain
losses of the limited partnership once the capital of the limited partnership
is depleted. There can be no assurance that MAERIL will have the necessary
resources to fund such losses. Generally, the limited partnerships are
financed with non-recourse mortgages for which the general partner is not
responsible should the partnerships default on such mortgages. In addition,
recourse obligations of the underlying partnerships existing prior to the date
of MAERILOs becoming general partner are generally not the responsibility of
MAERIL. However, MAERIL is contingently liable for other recourse obligations
of the partnerships, consisting primarily of trade payables and other accruals.
Management does not expect this contingency to have a material adverse effect
on MAERIL's financial condition.
Total assets, liabilities and deficits of these partnerships as of June 30,
1997 were approximately $35,027,000, $64,157,000 and $29,130,000, respectively.
3. INCOME TAXES
The Company accounts for income taxes under the liability method as required by
FASB Statement No. 109, "Accounting for Income Taxes". The Company will file
its return as part of a consolidated group with MAE GP Corporation. The
provision for income taxes is determined on a separate company basis. The
Company has incurred losses since inception and therefore no provision for
income taxes has been recorded. Deferred income taxes reflect the net effects
of temporary differences between the carrying amounts of assets and liabilities
used for income tax purposes.
Temporary differences arise from book and tax differences in accounting for the
equity in losses of the partnerships. Significant components of the CompanyOs
deferred tax assets and liabilities as of June 30, 1997 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward $76,000
Valuation allowance for deferred tax assets (76,000)
-------
Net deferred tax assets $ 0
=======
Deferred tax liabilities $ 0
=======
</TABLE>
5
<PAGE> 70
MAERIL, Inc.
Notes to Balance Sheet (continued)
4. ENVIRONMENTAL LIABILITIES
Under various Federal and state environmental laws and regulations, a current
or previous owner or operator of real estate may be required to investigate and
clean up certain hazardous or toxic substances or petroleum product released at
the property, and may be held liable to a governmental entity or to third
parties for property damage and for investigation and cleanup costs incurred by
such parties in connection with contamination. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for
damages and costs it incurs in connection with the contamination. The owner or
operator of a site may be liable under common law to third parties for damages
and injuries resulting from environmental contamination emanating from the
site. There can be no assurance that MAERIL, any of its affiliates, or any
assets owned or controlled by MAERIL or any of its affiliates currently are in
compliance with all of such laws and regulations, or that MAERIL or its
affiliates will not become subject to liabilities that arise in whole or in
part out of any such laws, rules or regulations. Management is not currently
aware of any environmental liabilities which are expected to have a material
adverse effect on MAERIL's financial condition.
6
<PAGE> 71
[LOGO OF ERNST & YOUNG LLP]
<PAGE> 72
EXHIBIT G
MAERIL, INC.
----------------------------------------------
ONE INSIGNIA FINANCIAL PLAZA - P.O. BOX 1089
GREENVILLE, SOUTH CAROLINA 29602
PHONE: (864) 239-1000
FACSIMILE: (864) 239-1558
August 21, 1997
VIA FACSIMILE AND
U.S. POSTAL SERVICE
Mr. Thomas A. Gatti
VMS Realty Investments, Ltd.
630 Dundee Road, Suite 220
Northbrook, IL 60062
Dear Tom:
As you know, MAERIL, Inc. ("MAERIL") was formed to become the general partner
of certain real estate related limited partnerships. Over the past three
years, the general partner interests of thirteen VMS partnerships have been
transferred from VMSRIL and related VMS entities to MAERIL, at no cost to
MAERIL. There is a stockholder's deficit of $84,000 at June 30, 1997, which is
comprised of $100,000 in capital and a deficit of $184,000. The deficit is the
result of recording its equity interests in the losses of these partnerships.
MAERIL has $128,000 in cash at June 30, 1997.
In accordance with generally accepted accounting principles, the investments in
general partner interests are recorded on the books using the equity method of
accounting. The initial investments in the general partner interests at the
date of substitution were recorded at zero; however, the value of the
investment in the general partner interests is recorded at an amount less than
zero (a liability) to the extent of MAERIL's proportionate share of the
partnerships' net deficits. This initial difference between the carrying value
(-0-) and MAERIL's share of the partnerships' net deficits of $343,000 is being
amortized over ten years, which is the estimated life of the on-going
partnerships. Amortization recorded through June 30, 1997, is $86,000. MAERIL
has also recorded $103,000 for its equity interests in the losses of the
partnerships since it became the general partner. The total liability recorded
by MAERIL for its share of equity in losses in the partnerships at June 30,
1997, is $189,000.
A general partner of a limited partnership may become obligated to fund certain
losses of the limited partnership once the capital of the limited partnership
is depleted. Generally, the limited partnerships are financed with
non-recourse mortgages for which the general partner is not responsible should
the partnerships default on such mortgages. In addition, recourse
obligations of the underlying partnerships existing prior to the date of MAERIL
becoming general partner are not the responsibility of MAERIL. However, MAERIL
is contingently liable for other recourse obligations of the partnerships,
consisting primarily of trade payables and other accruals. We do not expect
this contingency to have a material adverse effect on MAERIL's financial
condition.
In addition, we believe that MAERIL has the wherewithal and access to the
necessary expertise to function as the general partner of the registrants due
to its relationship with Insignia Financial Group, Inc. ("Insignia").
Insignia and Metropolitan Asset Enhancement, L.P. ("MAE"), an affiliate of
MAERIL, are parties to an agreement dated August 13, 1993, and terminating
April 14, 2018, pursuant to which Insignia has agreed to perform all certain
functions for MAE and each of its affiliates and controlled subsidiaries,
including MAERIL. Under this same agreement, MAE and its affiliates, including
MAERIL, engage Insignia to perform property and asset management functions for
the partnerships in which they serve as the general partner.
<PAGE> 73
Mr. Thomas A. Gatti
August 21, 1997
Page Two
Given the above factors, we believe that MAERIL's deficit will in no way hinder
or prevent it from executing its fiduciary duties as the general partner of the
registrant.
Yours truly,
/s/ Robert D. Long, Jr.
Robert D. Long, Jr.
Vice President
cc: Mike Downing, Ernst & Young LLP
