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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the annual period ended December 31, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File Number 0-14956
VMS National Hotel Partners
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(Exact name of registrant as specified in its charter)
Illinois 36-3370590
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
630 Dundee Road, Suite 220, Northbrook, Illinois 60062
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(Address of principal executive offices) (Zip Code)
(847)714-9600
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
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TABLE OF CONTENTS
Page
PART I
Item 1 Business 3-5
Item 2 Properties 5
Item 3 Legal Proceedings 6-8
Item 4 Submission of Matters to a Vote
of Security Holders 8
PART II
Item 5 Market for the Partnerships' Limited Partnership
Interests and Related Security Holder Matters 9
Item 6 Selected Financial Data 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
Item 8 Financial Statements and Supplementary Data 14
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
PART III
Item 10 Directors and Executive Officers 15-18
Item 11 Executive Compensation 18
Item 12 Security Ownership of Certain Beneficial
Owners and Management 18
Item 13 Certain Relationships and Related Transactions 19
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 20
SIGNATURES 21
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PART I
Item 1 Business
General
VMS National Hotel Portfolio I ("Partnership I") and VMS National Hotel
Portfolio II ("Partnership II") are limited partnerships formed November 1,
1985 under the Uniform Limited Partnership Act of the state of Illinois.
Collectively, Partnership I and Partnership II are referred to as the
"Partnerships".
The Partnerships were formed to purchase a combined 99.9% interest in VMS
National Hotel Partners (the "Operating Partnership"), an Illinois general
Partnership formed in October, 1985. The term of the Operating Partnership
shall continue until December 31, 2035 unless sooner terminated; the term of
each of the Partnerships shall continue until December 31, 2035 unless sooner
terminated. The Operating Partnership was formed to acquire, own, operate and
dispose of up to 28 separate Holiday Inn hotels throughout the United States
(collectively, the "Hotels"). Only 24 hotels were purchased; no further
purchases of hotels will be made by the Operating Partnership. The Operating
Partnership conveyed ownership interest in certain of the Hotels to separate
partnerships so that each owns and operates a separate Hotel (collectively, the
"Sub-Partnerships") (as used herein, the term "Operating Partnership "
includes the Sub-Partnerships where the context requires). The general
partners of the Operating Partnership, in addition to the Partnerships, are VMS
Realty Investment, Ltd., an Illinois limited partnership and VMS Realty, Inc.,
an Illinois corporation (all of the capital stock of which is owned by VMS
Realty Partners). The Operating Partnership is the Managing General Partner of
each of the Sub-Partnerships and has at least a 99% general partnership
interest in each such Sub-Partnerships. Various other affiliates of the
Managing General Partner are minority general partners of, and own the
remaining general partnership interests in each such Sub-Partnerships. During
1995, 1994, 1993 and 1992, nine (one in 1995, two in 1994, two in 1993 and four
in 1992) of the hotels were sold. On May 10, 1996, the Operating Partnership
and affiliated sub-partnerships filed petitions for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court for the
Northern District of Illinois. This filing excludes Partnership I and
Partnership II. Pursuant to the Plan of Reorganization, the deeds to the
remaining hotels were transferred to the senior lender on September 26, 1996 in
consideration for the cancellation of the senior indebtedness (the "Transfer").
For further information relating to the Transfer and the financing arrangements
of the properties, see Notes 1 and 5 to the combined financial statements.
The Managing General Partner of each of the Partnerships is VMS Realty
Investment, Ltd., an Illinois limited partnership (the "Managing General
Partner"). Effective January 1, 1987 Morris/Stone Associates assigned its
ownership in the Partnerships to VMS Realty Investment, Ltd. Prudential-Bache
Properties, Inc. is also a general partner of Partnership I (the "Minority
General Partner").
As described in Section 4 of the Amended and Restated Agreement of General
Partnership of VMS National Hotel Partners, dated November 1, 1985 (the
"Operating Partnership Agreement"), the Operating Partnership was formed to
engage in no business other than the ownership, operation, lease and sale of
all the Hotels which it had already purchased. Section 15 of the Operating
Partnership Agreement provides that upon the sale of all or substantially all
of the assets of the Operating Partnership, the Operating Partnership will be
dissolved. Proceeds received by the Operating Partnership from the sale or
refinancing of any or all of the Hotels shall be distributed to Partnership I
and Partnership II in accordance with the participating interest of each such
partnership in the Operating Partnership; none of such proceeds will be
reinvested by the Operating Partnership in additional Hotels or other assets.
Collectively, the limited partnership interests of the Partnerships are
referred to as the "Units". Partnership I offered and sold 514 Units of
limited partnership interests at a price of $150,000 per limited partnership
interest. The 514 Units represent total equity of $77,100,000 sold through
Prudential-Bache Securities, Inc. In 1985, Partnership II offered and sold 135
Units of limited
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Item 1 Business (continued)
partnership interests at a price of $150,000 per limited partnership interest.
The 135 Units represent total equity of $20,250,000 sold through VMS
Securities, Inc., an affiliate of the Managing General Partner of each of the
Partnerships. Since the Operating Partnership had originally intended to
purchase 28 Hotels and only 24 Hotels were purchased, each Limited Partner was
rebated $15,000 per Unit, payable over 5 years, reflecting the reduced total
purchase price of all Hotels purchased by the Operating Partnership.
Each of the Partnerships used the net offering proceeds of their respective
offerings to make required contributions to the Operating Partnership and pay
for offering, financing and acquisition costs and commissions and the Managing
General Partner's fees. The participation interests in the Operating
Partnership of Partnership I and Partnership II are approximately 79.12% and
20.78%, respectively.
The Partnerships have no employees. All hotel workers were employed by the
management company, American General Hospitality, Inc. The Partnerships are
not parties to any collective bargaining agreements.
Recent Developments - Partnerships
During 1994, the Partnerships sold two hotels (the Jackson Inn and the Detroit
Clarion Inn) as well as a gas station attached to the Milwaukee South Holiday
Inn. As a result of these sales, the Partnerships received a total of
$123,200, and a total of $2,052,768 in principal was repaid on the senior debt.
In connection with the sales, the Partnerships recorded a $3,970,666 provision
for loss on property and improvements in 1993 and a loss on sale of property
and improvements of $5,941,286 in 1994. In addition, during 1994 the Operating
Partnership received $1,490,273 as payment in full of the principal balance of
a note receivable sale of the Seattle Crowne Plaza which was not previously
recognized by the Operating Partnership. The Operating Partnership also,
received $292,990 accrued interest related to the note receivable. Of the
total proceeds received, the Operating Partnership retained $57,413 which was
applied towards repayment of closing costs and $1,725,850 was repaid on the
principal of the first mortgage. The principal portion of the note receivable
has been recorded as a reduction of the 1994 loss on sale of property and
improvements.
During 1995, the Partnerships sold the Milwaukee West Quality Inn. As a result
of this sale, the Partnerships received $36,000 towards repayment of the
Closing Payment and $1,582,967 in principal was repaid on the senior debt. In
connection with this sale, the Partnerships recorded a provision for loss on
property and improvements of $886,000 in 1994 and a loss on sale of property
and improvements of $510,012 in 1995.
An additional hotel has been under contract for sale since the first quarter of
1995. This hotel has been classified as property and improvements held for
sale at December 31, 1995 and 1994, and the Partnership recognized a loss of
$2,452,000 at December 31, 1994 representing the excess carrying value of this
hotel over its estimated sales price.
On August 13, 1993, the Operating Partnership filed for Chapter 11 bankruptcy
protection in the United States Bankruptcy Court for the Central District of
California. The initial filing included only the 18 hotels directly owned by
the Operating Partnership at that date and excluded Portfolio I and Portfolio
II.
On May 6, 1994, VMS National Hotel Partners settled in the United States
Bankruptcy Court, Northern District of Illinois, the case with Associated
Business Telephone Systems. The settlement of this case benefitted the Plan of
Reorganization and the management negotiations with the mortgage holders.
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Item 1 Business (continued)
Recent Developments - Partnerships (continued)
On May 9, 1994, the United States Bankruptcy Court, Northern District of
Illinois, confirmed the Plan of Reorganization (the "Plan") subject to the
final negotiations of the Second Amended and Restated Note Purchase and Loan
Agreement and certain other events. On July 27, 1994, the Second Amended and
Restated Note Purchase and Loan Agreement of the Plan of Reorganization ("Loan
Agreement") was consummated and the remaining terms of the Plan were finalized
on August 11, 1994. Under the Plan, the Debtors (VMS National Hotel Partners)
are to sell properties in accordance with the provisions as set forth in the
Loan Agreement.
The Plan contemplated that certain of the Operating Partnership properties may
be sold by May 1996, and the remaining properties are to be sold by November
1996. Pursuant to the Plan, certain of the Operating Partnership properties
may be sold only if certain sales prices set forth in the Plan and Loan
Agreement are obtained.
On May 10, 1996, the Operating Partnership and affiliated sub-partnerships
filed petitions for relief under Chapter 11 of the federal bankruptcy laws in
the United States Bankruptcy Court for the Northern District of Illinois. This
filing excludes Partnership I and Partnership II. Pursuant to the Plan of
Reorganization, the deeds to the remaining hotels were transferred to the
senior lender on September 26, 1996 in consideration for the cancellation of
the senior indebtedness.
As a result of the Transfer, the Operating Partnership recognized an
extraordinary gain of $214,542,473 for financial reporting purposes, which
represents the excess of the remaining senior debt, related accrued interest,
other operating liabilities and net cash received by the Operating Partnership
of $810,160 (in conjunction with this transfer, the Operating Partnership
received amounts in lieu of sales advisory fees totaling $1,025,000 from the
senior lender, net of $214,840 of operating cash transferred to the senior
lender), over the carrying value of the property and improvements and operating
assets transferred. In addition, the Operating Partnership recognized an
extraordinary gain of $47,013,597 from the cancellation of the junior mortgage
indebtedness pursuant to the Plan of Reorganization.
The combined financial statements of the Operating Partnership reflect the
financial reporting guidance prescribed by the AICPA Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code", which was adopted by the Operating Partnership for the periods from
January 1, 1994 to August 11, 1994 and from May 10, 1996 to September 26, 1996.
Items of income or expense that were realized or incurred as a result of the
reorganization are included in the Combined Statement of Operations as
reorganization items. During 1996 and 1994 $410,000 and $2,504,215
respectively, were paid for professional, consulting and other fees for the
administration of Chapter 11 proceedings.
Item 2 Properties
During 1995, 1994, 1993 and 1992, a total of nine of the original portfolio of
twenty-four hotels were sold and on May 10, 1996, the Operating Partnership and
affiliated sub-partnerships filed petitions for relief under Chapter 11 of the
federal bankruptcy laws in the United States Bankruptcy Court for the Northern
District of Illinois. This filing excludes Partnership I and Partnership II.
Pursuant to the Plan of Reorganization, the deeds to the remaining hotels were
transferred to the senior lender on September 26, 1996 in consideration for the
cancellation of the senior indebtedness. For further information related to
these sales and the Transfer, see Item 1. Business.
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Item 3 Legal Proceedings
As disclosed in the prior reports on Form 10-Q or Form 10-K ("Prior Public
Filings"), the Partnerships including the General Partners, VMS Realty Partners
L.P., certain officers and directors of VMS Realty Partners L.P., and certain
other affiliates of the Partnerships are parties to certain pending legal
proceedings (other than litigation matters covered by insurance policies). The
adverse outcome of certain of the legal proceedings disclosed in this Report
and the Prior Public Filings could have a materially adverse effect on the
present and future operations of the Partnerships.
Summarized below are certain developments in legal proceedings filed against
VMS Realty Partners, now known as VMS Realty Partners L.P. and its affiliates
which were disclosed in the Prior Public Filings. The inclusion in this Report
of any legal proceeding or developments in any legal proceeding is not intended
as a representation by the Partnership that such particular proceeding is
material. For those actions summarized below in which the plaintiffs are
seeking damages, the amount of damages being sought is an amount to be proven
at trial unless otherwise specified. There can be no assurance as to the
outcome of any of the legal proceedings summarized in this Report or in Prior
Public Filings.
A. VMS Limited Partnership Litigation
1. Settlement of Consolidated Class Actions
Forty-three actions were filed by investors in various limited partnerships
against VMS Realty Partners, now known as VMS Realty Partners, L.P. and
certain entities and individuals related to VMS Realty Partners, now known as
VMS Realty Partners, L.P.. Also named were certain selling agents, surety
companies, appraisers, accountants, attorneys, and other parties that were
involved in the syndication, sale, and management of the limited partnership
interests and properties. Thirty-eight of these actions (i.e., all of the
actions filed in federal court) were consolidated for pretrial and discovery
purposes in the United States District Court for the Northern District of
Illinois under the caption In Re VMS Limited Partnership Securities Litigation,
No. 90 C 2412 (Judge James B. Zagel) (the "Consolidated Actions"). In
addition, for settlement purposes, one action (the "New Action") was filed on
behalf of all investors in approximately 100 non-publicly-traded VMS-sponsored
syndicated limited partnerships against those defendants in the Consolidated
Actions that had reached a Settlement Agreement with the class. The nature of
these actions was described in the Prior Public Filings.
After a final fairness hearing, on July 2, 1991 the United States District
Court gave final approval to the Settlement Agreement. The order dismissed
with prejudice all settling defendants from all of the Consolidated Actions and
dismissed the New Action in full. No appeals were filed and the Settlement
became effective on August 12, 1991. The terms of the Settlement Agreement
were described in the Prior Public Filings.
Subsequent to the effective date of the Settlement Agreement, the respective
general partner of the various VMS sponsored syndicated limited partnerships
has filed collection actions against the limited partners who remain in default
in the payment of their installment promissory notes which were given to the
limited partnership in consideration for the limited partner's partnership
interest.
2. CIGNA Claims
One of the non-settling defendants, CIGNA Securities, Inc. ("CIGNA"), has
asserted claims against VMS Realty Partners, now known as VMS Realty Partners,
L.P. and its affiliated entities for contribution and indemnification in cases
in which CIGNA is a defendant.
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Item 3 Legal Proceedings (continued)
CIGNA subsequently entered into a class-action settlement agreement with a
class of investors in the consolidated actions who had purchased their interest
from CIGNA. As previously reported, on May 19, 1993, CIGNA and VMS executed a
mutual release, effective when the CIGNA class-action settlement is effective.
The CIGNA class action settlement is now effective and, pursuant to the terms
of the mutual release, CIGNA settling parties released the VMS released persons
of and from all claims and liabilities relating to or arising out of the
released claims in the VMS class-action settlement, including contractual
claims for indemnification. In exchange, the VMS settling parties released the
CIGNA released persons of and from all claims and liabilities relating to or
arising out of the released claims in the VMS class-action settlement,
including contractual claims for indemnification. However, the settling
parties expressly reserved all common law and contractual claims for
contribution and/or indemnification arising out of or relating to claims
brought by investors who opted out of both the VMS and CIGNA settlements,
except to the extent such claims are barred by; (1) Section 4.02(A) of the VMS
settlement agreement and the court's July 15, 1991 order approving the VMS
class-action settlement agreement, or (2) Section 4.2(A) of the CIGNA
class-action settlement agreement and any court order approving the CIGNA
settlement agreement. In addition, now that the CIGNA class-action settlement
agreement is effective, CIGNA's claims pending in the consolidated actions have
been dismissed, except the Corkery action which is brought by opt-outs from
both settlement agreements.
Paul J. Corkery; Ronnie Rone; Max C. Jordan; F.J. Vollmer; Paula Boedeker;
Norbert Braeuer; Dales Y. Foster; Billy J. Harris; Bob White; Gordon Flesch;
Travis Barton, Jr.; Satish A. Dhaget; Varsha S. Dhaget; Alan J. Young; Dennis
J. Cavanaugh; F. Jim Slater; Lois W. Rosebrook, Trustee; Sundaram V. Ramanan;
Chitraleka Ramanan; Jeffrey A. Matz; Charles C. Voorhis III; Gerald C. Miller;
Prince George's Orthopedic Associates, P.A.; John A. Martinez; Tom Rubattino;
Susan Rubattino; Harold W. Stark and William C. Riedesel v. VMS Realty
Partners; United States Fidelity and Guaranty Company; CIGNA Securities, Inc.;
Boettcher & Company, Inc.; and A.G. Edwards & Sons, Inc., CA. No. Ca 4-90 087-E
(U.S. District Court, N.D. Texas), filed February 5, 1990, removed to 90 C
3841, United States District Court for Northern District of Illinois, Eastern
Division. CIGNA filed a Counterclaim against plaintiffs, Cross-Claims against
VMS Realty Partners and A.G. Edwards & Sons, Inc., and a Third-Party Complaint
against LaSalle/Market Streets Associates, Ltd., Chicago Wheaton Partners,
Peter Morris, Joel Stone, Robert Van Kampen, Residential Equities, Ltd., Van
Kampen Stone, Inc., VMS Realty Management, Inc., VMS Realty, Inc., and VMS
Mortgage Co. in this action. On December 21, 1995, the court dismissed
Plaintiff's action against the VMS entities and CIGNA Securities, Inc.
B. Other Litigation
NAHOP Partners, L.P. and VMS National Hotel Partners v. G.B. Pacific, Inc.
Counterclaim: G.B. Pacific, Inc. v. VMS National Hotel Partners, an Illinois
general partnership, VMS Realty, Inc., an Illinois corporation, and NAHOP
Partners Limited Partnership, a Delaware limited partnership. Case Number
Adversary 96A01746 to 96B12185 (U.S. Bankruptcy Court for the Northern District
of Illinois, Eastern Division). VMS National Hotel Partners and G.B. Pacific,
Inc. (the "Parties") entered into a Purchase and Sales Agreement dated December
21, 1993 for the Holiday Inn Van Nuys ("Sales Contract"). In November, 1995,
the Parties entered into a First Amendment to the Purchase and Sales Agreement.
VMS National Hotel Partners and G.B. Pacific, Inc. did not obtain an order
approving the Sales Contract in VMS National Hotel Partners' first bankruptcy
proceeding (case number 93B17061). VMS National Hotel Partners and NAHOP
Partners, L.P. seek a declaratory judgment declaring the Sales Contract between
VMS National Hotel Partners and G. B. Pacific, Inc. terminated prior to
September 27, 1996, the date the Holiday Inn Van Nuys was transferred to NAHOP
Partners, L.P. G.B. Pacific, Inc. filed counterclaims for specific performance
of assumed contract and actual breach of assumed contract.
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Item 3 Legal Proceedings (continued)
Michigan Department of Transportation v. VMS Michigan-Detroit Hotel Limited
Partnership, an Illinois limited partnership, Holiday Inns, Inc., a Tennessee
corporation, Security Pacific National Bank, VMS Short Term Income Trust, a
Massachusetts business trust, MellonBank, NA, VMS Hotel Mortgage, Inc., an
Illinois corp., Bank of Montreal, Holiday Inn Detroit-Metro Airport, Romulus
Chamber of Commerce, VMS Hotel Investment Trust, ABTS Investment Corporation,
and NEC America, Inc., Case No. 93-304774 CC (State of Michigan, Circuit Court
for the County of Wayne). Pursuant to 1980 PA 87, as amended, plaintiff is
specifically authorized and empowered to secure fee simple or lesser estates in
real property for highway purposes. This complaint was filed for the
acquisition of a portion of property owned by VMS Michigan-Detroit Hotel
Limited Partnership. Plaintiff made a good faith written offer to purchase the
property and the defendants have not accepted such offer. The Michigan
Department of Transportation took the portion of the property in exchange for
$120,155.00. This action is in the process of being dismissed.
Item 4 Submission of Matters to a Vote of Security Holders
The Partnerships did not submit any matter to a vote of its holders of units
during the fourth quarter of 1996.
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PART II
Item 5 Market for the Partnerships' Limited Partnership Interests and Security
Holder Matters
(a & b) Market Information and Holders
As of December 31, 1996, there were 893 Limited Partners in the
Partnerships. There is not a public market for, nor is it anticipated that
there will be a public market for Units. Upon request, the Managing
General Partner may attempt to assist a Limited Partner desiring to
transfer his Unit(s) and may utilize the services of broker-dealers
in this regard. The price to be paid for the units as well as the
commission to be received by any broker-dealer will be subject to
negotiation by the Limited Partner. The Managing General Partner will not
redeem or repurchase the Units, nor will it facilitate the matching of
potential buyers and sellers of Units.
Pursuant to the terms of the Limited Partnership Agreements, there are
restrictions on the ability of the Limited Partners to transfer their
Units. In all cases, the Managing General Partner must consent to any
transfer.
(c) Cash Distributions
No distributions were made in 1996, 1995 or 1994.
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Item 6 Selected Financial Data
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1996 1995 1994 1993 1992
------------- ------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues from hotel operations $ 62,840,511 $ 80,044,055 $ 80,488,134 $ 82,517,939 $ 116,879,416
============= ============= =============== =============== =============
Loss before provision for loss on property
and improvements held for sale, loss
recognized on sale of property and
improvements, and extraordinary
gain from extinguishment of debt $ (4,113,652) $ (59,759,067) $ (33,807,610) $ (25,393,094) $ (31,396,860)
============= ============= =============== =============== =============
Loss on above per Limited Partnership
unit outstanding during the year (649
units) $ (6,269) $ (91,066) $ (51,519) $ (38,696) $ (47,845)
============= ============= =============== =============== =============
Net Income (loss) $ 257,442,418 $ (60,269,079) $ (41,596,624) $ 36,177,306 $ (60,731,927)
============= ============= =============== =============== =============
Net Income (loss) per Limited Partnership
Unit outstanding during the year
(649 for all years) $ 392,316 $ (91,843) $ (63,388) $ 55,130 $ (92,548)
============= ============= =============== =============== =============
Tax Income (loss) $ 265,139,919 $ (19,474,658) $ (36,788,023) $ (42,205,267) $ (22,133,328)
============= ============= =============== =============== =============
Tax Income (loss) per Limited Partnership
Unit outstanding during the year (649
for all years) $ 404,123 $ (29,677) $ (55,929) $ (64,243) $ (33,728)
============= ============= =============== =============== =============
Total assets $ 877,063 $ 112,886,616 $ 161,411,760 $ 185,195,237 $ 209,868,525
============= ============= =============== =============== =============
Mortgage loans and notes payable $ --- $ 261,170,960 $ 262,753,927 $ 266,532,545 $ 323,108,848
============= ============= =============== =============== =============
</TABLE>
The above selected financial data should be read in conjunction with the
combined financial statements and the related notes.
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Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
The Partnerships' main sources of funds were the operations or dispositions of
its hotel properties. These properties, in the aggregate, had been incurring
deficits after debt service payments due to an inability to reach rental rates
and occupancies originally projected. In addition to affecting the
Partnerships' ability to meet debt service payments, these deficits have
contributed to an overall decrease in value of the Operating Partnership's
properties.
As discussed more fully below, the Partnerships have restructured of the debt
service requirements of its properties. On March 1, 1990, the Partnerships
suspended debt service payments required by the terms of the first and third
mortgage notes; on December 1, 1990 the Partnership suspended debt service
payments on the second mortgage notes, which, prior to that time had been
limited to the extent of cash flow.
As previously reported, as of November 14, 1991, an agreement was reached with
the first and second mortgage note holders and Holiday Inns, Inc. as managing
agent to restructure the first and second mortgage debt. In connection with
the restructure, the Partnerships paid $5,000,000 (the "Closing Payment") to
partially pay down the principal of the $279,000,000 first mortgage.
Additionally, the first mortgage ("Senior Debt") documents were modified as
follows:
(i) through December 31, 1992, interest at the rate of 10% was paid only to
the extent of available cash flow, with payment of the shortfall being deferred
until December 31, 1992 and thereafter being paid out of available cash flow
after the payment of interest on the Senior Debt at the rate of 10%;
(ii) the sale of certain hotels free and clear of the lien of the Senior Debt
was permitted under certain conditions, including a minimum aggregate price
with the proceeds thereof being generally distributed first, in 1992 a total of
$2,023,000 to Holiday Inns, Inc. in complete satisfaction of a $4,046,000
working capital advance made by HII to the Partnerships, second, to the
Partnerships repayment of the Closing Payment, and third, in repayment of the
Senior Debt, with amounts owing with respect to the Scheduled Hotels but not
fully repaid at the time of the sale remaining outstanding and collateralized
by the remaining Hotels; and
(iii) events of default under the Senior Debt documents included the failure
to (x) generate available cash flow for 1992 of at least 5% of the Senior Debt
principal amount, and (y) sell ten scheduled hotels by December 31, 1992. The
Partnerships were unable to meet the above requirements to avoid the events of
default. During 1995 and 1994, the Partnerships made cash flow payments
(representing interest) of $7,500,000 and $5,500,000, respectively. The
Managing General Partner of the Partnerships had been negotiating with the
first mortgage noteholders to attempt to further restructure the terms of the
mortgage loan agreements. These negotiations resulted in the consummation of
the Second Amended and Restated Note Purchase and Loan Agreement on July 27,
1994.
On May 10, 1996, the Operating Partnership and affiliated sub-partnerships
filed petitions for relief under Chapter 11 of the federal bankruptcy laws in
the United States Bankruptcy Court for the Northern District of Illinois. This
filing excludes Partnership I and Partnership II. Pursuant to the Plan of
Reorganization, the deeds to the remaining hotels were transferred to the
senior lender on September 26, 1996 in consideration for the cancellation of
the senior indebtedness.
In 1991, the second mortgage documents were modified to (I) permit the sale of
hotels free and clear of any obligations under the management agreement, (ii)
waive interest accrued from December 31, 1989 through November 14, 1991, and
(iii) provide for payment of interest at 12%, but only to the extent of
available cash flow after the payment of all interest and principal due on the
first mortgage, with any shortfall being waived.
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<PAGE> 12
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
As discussed above, the Partnerships were permitted under the debt
restructuring agreement to sell certain hotels; using the proceeds as outlined
in the agreement. During 1995, 1994, 1993, and 1992, the Partnerships sold
nine such hotels (Milwaukee West Quality Inn was sold in 1995, Jackson Inn and
Detroit Clarion were sold in 1994, Warren Inn and Stamford Crowne Plaza were
sold in 1993 and Troy Holiday Inn, San Francisco Golden Gateway, Elmhurst
Holiday Inn and Seattle Crowne Plaza were sold in 1992) to unaffiliated third
parties. As a result of these sales, HII received a total of $225,382 in 1993
and $988,419 in 1992 towards repayment of its working capital advance, the
Partnerships received a total of $36,000 in 1995, $123,200 in 1994, $205,364 in
1993 and $1,562,761 in 1992 towards repayment of the Closing Payment and a
total of $1,582,967 in 1995, $2,052,768 in 1994, $3,377,263 in 1993 and
$45,855,461 in 1992 in principal was repaid on the Senior Debt.
During 1994, the Partnerships received the principal and accrued interest
receivable from a note receivable which related to the 1992 sale of the Seattle
Crowne Plaza in the amount of $1,490,273 and $292,990, respectively. The
principal portion collected has been recognized as a reduction of the 1994 loss
on sale of property and improvements. The Partnerships received $57,413 of the
proceeds for repayment of the closing costs and $1,725,850 in principal was
repaid on the senior debt.
As shown on the Combined Statement of Cash Flows, cash and cash equivalents
decreased $5,332,256 from December 31, 1995 to December 31, 1996 and decreased
$3,660,487 from December 31, 1994 to December 31, 1995. The decrease from
1995 to 1996 is a combination of cash used in operating activities of
$4,286,185; cash used in investing activities of $1,094,448 and cash provided
by financing activities of $48,377. The decrease from 1994 to 1995 is a
combination of cash provided by operating activities of $2,146,704; cash used
in investing activities of $4,546,076; and cash used in financing activities of
$1,261,115.
Cash used in operating and reorganization activities in 1996 was primarily
attributable to the loss before extraordinary item for the year and decrease in
accrued interest payable, offset by a decrease in prepaid expenses and an
increase in accounts payable and accrued expenses. The use of cash in
investing activities in 1996 was primarily attributable to capital improvements
offset by net proceeds from the Transfer. Cash provided by financing
activities was primarily attributable partners' capital contributions.
Cash provided by operating activities in 1995 was attributed to the decrease in
accounts payable offset by the increase in accrued interest payable and
adjustments for depreciation and loss on sale of property and improvements and
to the net loss for the year. The use of cash in investing activities in 1995
was primarily attributable to capital improvements which offset net proceeds
from the hotel sale. The use of cash in financing activities in 1995 was
primarily attributable to debt service payments offset by partners' capital
contributions.
Cash used in operating and reorganization activities in 1994 was primarily
attributed to the net loss for the year and the decrease in accounts payable
and accrued expenses, offset by the increase in accrued interest payable and
the adjustments for depreciation and loss on sale of property and improvements
and provision for loss on property and improvements held for sale. The use of
cash in investing activities in 1994 was primarily attributed to capital
improvements which offset net proceeds from hotel sales and note receivable.
The use of cash in financing activities in 1994 was primarily attributable to
debt service payments offset by partners' capital contributions.
Portfolio Performance Review
The Hotels' results have been at levels below those originally forecasted.
This variance from forecast is partially due to the sale of the hotels, but has
also primarily resulted from a significant increase in the supply of competing
rooms in the markets in which these Hotels are located since the Partnerships'
purchase of the hotels from Holiday Inns, Inc. The scope of the competition
has
-12-
<PAGE> 13
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
gone substantially beyond that which the independently conducted feasibility
studies performed in 1985 envisioned. This increased competition has resulted
in lower than anticipated occupancy and room rates at a number of the Hotels,
including the Crowne Plaza, and a consequent reduction in net operating income
before debt service.
Additionally, the Partnerships' business and the fulfillment of their
investment objectives are, to a significant extent, dependent upon the business
activities, financial condition and management expertise of VMS Realty Partners
and its affiliates. Thus, in order to avoid adverse impacts on the
Partnerships, VMS Realty Partners must have financial resources sufficient to
meet its needs. At the present time, VMS Realty Partners, like many real
estate development companies nationwide, experienced liquidity problems.
Results of Operations
For the years ended December 31, 1996 and 1995, the Operating Partnership owned
and operated 15 hotels (excluding one hotel sold in the third quarter of 1995)
located in 8 states throughout the continental United States. However, overall
revenues and expenses of the Partnerships decreased in 1996 due to the Transfer
on September 26, 1996. The Operating Partnership had previously owned and
operated 24 Holiday Inn Hotels in 11 states.
This analysis compares the results of operations for the years ended December
31, 1996, 1995, and 1994. Total 1996 operating revenues for the Hotels
decreased due to the Transfer. However, total hotel revenues for 1996 exceeded
revenues for the same period during 1995 by 1.9% due to higher hotel
occupancies and average daily rates. The average occupancy for the portfolio
during 1996 increased 1.9% as compared to 1995. Additionally, several hotels
in the chronically sluggish Los Angeles area generated higher revenues, due to
an improvement in the local economy. Total 1995 operating revenues for the
Hotels decreased less than 1% from total 1994 revenues. The decrease from 1994
to 1995 is attributable to the hotel sales, offset by an increase in average
daily room rates. The average daily room rate in 1996 was $62.68 versus a rate
of $59.35 in 1995 and $55.99 in 1994.
Overall daily room rates increased in 1996 and 1995 primarily as a result of
the implementation of the Encore/Hiro Software; a revenue maximizing package
which analyzes the inventory of rooms and the term of stay of hotel guests.
In addition, over the last three years, moderate economic growth and limited
new construction of full-service, mid-scale hotels have created a relationship
where the rate of growth in demand for hotel rooms has exceeded the rate of
growth in supply, driving up the price of hotel occupancy and related room
revenues.
Total 1996 direct costs and expenses for the Hotels decreased due to the
Transfer. However, direct costs and expenses associated with the Hotels for
1996 decreased by 1.5% relative to the same period in 1995 due to the sale of
one hotel in 1995. These costs and expenses were significantly lower as a
percentage of revenues due to higher average daily rates and greater operating
efficiencies due to downsizing. Consistent with the decreases in operating
revenue in 1995, the direct costs and expenses related to the operations of the
hotels also decreased.
Unallocated expenses, exclusive of mortgage interest expense and the provision
to reflect impairment in the value of property and improvements, related to
hotel operations decreased by 20% in 1996 as compared with the same time period
in 1995. This decrease has four components. First, due to the Transfer.
Second, due to the adoption of FASB Statement No. 121 as of January 1, 1996
resulting in no depreciation expense being recorded for 1996. Third, the
Partnerships received $366,240 in business interruption insurance proceeds in
1996, which is shown as a reduction of administrative and general expense.
Finally, approximately $450,000 included in administration and general expense
during 1995 incurred for real estate tax analysis, appraisals and other
consulting services were not incurred for the same time period in 1996.
Unallocated expenses decreased by 2.6% from 1994 to 1995 primarily attributed
to the sale of hotels previously discussed. Administrative and general
expenses increased in 1995 due to increases in labor costs,
-13-
<PAGE> 14
Item 7 Management s Discussion and Analysis of Financial Condition and
Results of Operation (continued)
bad debt write-offs, and credit card fees; in addition, management fees
increased in 1996 and 1995 due to higher revenues. Property operations and
maintenance decreased in 1995 and 1994 due to significant cost cutting by the
property manager. Depreciation expense decreased in 1995 due to components of
the properties' improvements being fully depreciated and the sale of the hotels
previously discussed. In 1995, the Partnership recorded a provision to reflect
impairment in the value of property and improvements of $38.2 million being
charged to unallocated expenses.
Mortgage interest expense decreased from 1995 to 1996 due to the Transfer.
However, mortgage interest expense recorded in 1996 was comparable for the same
period of time in 1995. Mortgage interest expense decreased from 1994 to 1995
due to $5,741,314 of 1993 contractual interest being recorded in 1994 in
accordance with SOP 90-7.
Partnership revenues decreased in 1996 and 1995 due to a large increase in
fiscal year 1994 primarily due to the interest income received in 1994 from the
collection of the note receivable related to the 1992 sale of the Seattle
Crowne Plaza.
General Partners fees decreased from 1996 to 1995 due to the decrease in hotel
revenues from the Transfer. General Partners fees increased from 1995 to 1994
due to an increase in the fee of .75% during 1994. These fees are based on
gross revenues.
In 1996, the Partnerships recorded an extraordinary gain of $261.6 million for
extinguishment of debt related to the Transfer. No similar gains were recorded
in 1995 or 1994.
INFLATION
Inflation had no significant impact for years ended December 31, 1996, 1995 and
1994 and is not anticipated to have a significant impact on the hotel
operations in the foreseeable future. Furthermore, inflation generally does
not affect the contractually fixed long-term financing under which the hotels
were purchased. Continued inflation should allow for increased values of the
hotels over time as revenues and replacement costs continue to increase.
Item 8 Financial Statements and Supplementary Data
See Index to Combined Financial Statements and Financial Statement Schedule on
Page F-1 of Form 10-K. The supplementary financial information prescribed by
Item 302 of Regulation S-K is not applicable.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no reported changes in accountants or disagreements on any
matter of accounting principles or practices or financial statement disclosure.
-14-
<PAGE> 15
PART III
Item 10 Directors and Executive Officers of the Registrant
(a, b, c, d & e) The General Partners of the Partnerships are:
VMS Realty Investment, Ltd., an Illinois General Partnership, the Managing
General Partner of the Partnerships.
Prudential-Bache Properties, Inc., a Delaware Corporation, the Minority General
Partner of NHP I.
VMS Realty Investment, Ltd. is a limited partnership owned by Azel Realty
Corporation (100% owned by Robert D. Van Kampen), PRM Realty Corporation (100%
owned by Peter R. Morris), JAS Realty Corporation (100% owned by Joel A.
Stone), Brewster Realty Inc. (which is controlled by Messrs. Van Kampen and
Stone) and Residential Equities, Ltd. (which is 100% owned by Peter R. Morris)
and XCC Investment Corporation (a Delaware Corporation).
VMS Realty Partners ("VMS"), an affiliate of the General Partner, assisted the
Managing General Partner in the management and control of the Venture's affairs
through November 17, 1993, and Strategic Realty Advisors, Inc. ("SRA"), also an
affiliate of the General Partner, replaced VMS in assisting the Managing
General Partner effective November 18, 1993. VMS Realty Partners is an
Illinois general partnership whose partners are Van Kampen/Morris/Stone, Inc.
(100% owned by Robert D. Van Kampen, Peter R. Morris and Joel A. Stone),
Residential Equities, Ltd. (100% owned by Mr. Morris), XCC Investment
Corporation (a subsidiary of Xerox Credit Corporation) and Brewster Realty,
Inc. (100% owned by Messrs. Van Kampen and Stone). A substantial number of the
officers of VMS are also officers of entities affiliated with VMS. The
principal executive officers of VMS are the following:
Joel A. Stone President and Chief Executive Officer and
Member of the Executive Committee
Peter R. Morris Member of the Executive Committee
Robert D. Van Kampen Member of the Executive Committee
Stuart Ross Member of the Executive Committee
The principal executive officers of SRA are the following:
Joel A. Stone President and Chief Executive Officer
Richard A. Berman Senior Vice President/Secretary
Thomas A. Gatti Senior Vice President
-15-
<PAGE> 16
Item 10 Directors and Executive Officers of the Registrant (continued)
JOEL A. STONE, age 52, is President and Chief Executive Officer of Strategic
Realty Advisors, Inc., since November 1993. From the inception in 1981 of VMS
Realty Partners, he held the positions of President and then Chief Executive
Officer. Mr. Stone began his career as an Internal Revenue Agent and worked as
a certified public accountant and an attorney specializing in taxation and real
estate law. In 1972, Mr. Stone co-founded the certified public accounting firm
formerly known as Moss, Stone and Gurdak. In 1979, Mr. Stone joined the Van
Kampen group of companies, a privately held business engaged in investment
banking and in real estate activities. He served as Senior Vice President of
Van Kampen Merritt, Inc. until its sale to Xerox Corporation in 1984. An
alumnus of DePaul University, Mr. Stone earned a Bachelor of Science degree in
Accounting in 1966 and a Juris Doctorate in 1970. Mr. Stone is a member of the
Illinois Bar and a certified public accountant.
PETER R. MORRIS, age 47, is a member of the Executive Committee of VMS, and is
one of the three individuals owning the entities that own VMS. From July 1970
to June 1973, Mr. Morris was employed by Continental Wingate Company, Inc., a
firm engaged in the development of inner city housing projects, in the
capacities of Vice President/Finance, Director/Consulting Division and
Executive Assistant to the President. He has published a book and numerous
articles relating to real estate development and syndication. Mr. Morris has
been involved in the real estate and finance business with Messrs. Van Kampen
and Stone since 1977. He received a Bachelor of Arts degree (summa cum laude)
from Princeton University in 1971 and a Juris Doctorate (cum laude) from
Harvard Law School in 1975.
ROBERT D. VAN KAMPEN, age 58, is a member of the Executive Committee of VMS and
is one of the three individuals owning the entities that own VMS. Mr. Van
Kampen has been involved in various facets of the municipal and corporate bond
business for over 20 years. In 1967, he co-founded the company now known as
Van Kampen Merritt, Inc., which specializes in municipal bonds and acts as a
sponsor of unit investment trusts. The firm was sold to Xerox Corporation in
January 1984. Mr. Van Kampen is a general partner of Van Kampen Enterprises.
Mr. Van Kampen received his Bachelor of Science degree from Wheaton College in
1960.
STUART ROSS, age 60, is a member of the Executive Committee of VMS. He is an
executive vice president of Xerox Corporation and chairman and chief executive
officer of Xerox Financial Services, Inc., a wholly owned subsidiary. Mr. Ross
joined Xerox in 1966 and has held a series of financial management positions.
he assumed his current position in May 1990. Prior to Xerox, Mr. Ross was a
financial representative for The Macmillan Publishing Company from 1963 to
1966, and a public accountant for Harris, Kerr, Forster & Company from 1958 to
1963. Mr. Ross is a director of Crum and Forster, Inc. and Ekco Group, Inc.,
and a trustee of the State University of New York at Purchase. He received a
bachelor of science degree in accounting from New York University in 1958 and a
master of business administrative degree from the City College of New York in
1966. Mr. Ross is a certified public accountant.
RICHARD A. BERMAN, age 45, is a Senior Vice President and General Counsel of
Strategic Realty Advisors, Inc. From 1986 through 1993, Mr. Berman was
employed by VMS Realty Partners and was First Vice President and Corporate
Counsel. Prior to joining VMS Realty Partners, Mr. Berman was a partner in
the law firm of Gottlieb and Schwartz with his practice concentrated in
corporate and real estate law. He received a Juris Doctorate from Northwestern
University School of Law (Cum laude, 1976) and a Bachelor of Arts degree from
the University of Illinois (high honors, 1973). Mr. Berman is a member of the
Illinois Bar.
THOMAS A. GATTI, age 40, is a Senior Vice President - Partnership Accounting of
Strategic Realty Advisors, Inc., effective November 18, 1993. Prior to this
time, Mr. Gatti was First Vice President - Partnership Accounting with VMS
Realty Partners, where he was employed since January, 1982. Prior to joining
VMS Realty Partners, he was with Coopers & Lybrand. Mr. Gatti received a
Bachelor of Science in Accounting from DePaul University in 1978. Mr. Gatti is
a Certified Public Accountant.
-16-
<PAGE> 17
Item 10 Directors and Executive Officers of the Registrant (continued)
Prudential-Bache Properties, Inc.
Prudential-Bache Properties, Inc. (PBP), pursuant to the Partnership Agreement,
does not participate in or exercise control over the affairs of the
Partnership.
The directors and officers of PBP are as follows:
Thomas F. Lynch, III President, Chief Executive Officer,
Chairman of the Board of Directors,
and Director
Barbara J. Brooks Vice President - Finance and Chief
Financial Officer
Eugene D. Burak Vice President and Chief Accounting
Officer
Chester A. Piskorowski Senior Vice President
Frank W. Giordano Director
Nathalie P. Maio Director
THOMAS F. LYNCH, III, age 38, is the President, Chief Executive Officer,
Chairman of the Board of Directors and Director of PBP. He is a Senior Vice
President of Prudential Securities Incorporated ("PSI"), an affiliate of PBP.
Mr. Lynch also serves in various capacities for other affiliated companies.
Mr. Lynch joined PSI in November 1989.
BARBARA J. BROOKS, age 48, is the Vice President-Finance and Chief Financial
Officer of PBP. She is a Senior Vice President of PSI. Ms. Brooks also
serves in various capacities for other affiliated companies. She has held
several positions within PSI since 1983. Ms. Brooks is a certified public
accountant.
EUGENE D. BURAK, age 51, is a Vice President of PBP. He is a First Vice
President of PSI. Prior to joining PSI in September 1995, he was a management
consultant for three years and was with Equitable Capital Management
Corporation from March 1990 to May 1992. Mr. Burak is a certified public
accountant.
CHESTER A. PISKOROWSKI, age 53, is a Senior Vice President of PBP. He is a
Senior Vice President of PSI and is the Senior Manager of the Specialty Finance
Asset Management area. Mr. Piskorowski has held several positions within PSI
since April 1972. Mr. Piskorowski is a member of the New York and Federal
Bars.
FRANK W. GIORDANO, age 54, is a Director of PBP. He is a Senior Vice President
of PSI and an Executive Vice President and General Counsel of Prudential Mutual
Fund Management LLC, an affiliate of PSI. Mr. Giordano also serves in various
capacities for other affiliated companies. He has been with PSI since July
1967.
NATHALIE P. MAIO, age 46, is a Director of PBP. She is a Senior Vice President
and Deputy General Counsel of PSI and supervises non-litigation legal work for
PSI. She joined PSI's Law Department in 1983; presently, she also serves in
various capacities for other affiliated companies.
There are no family relationships among any of the foregoing directors or
officers. All of the foregoing officers and/or directors have indefinite
terms.
-17-
<PAGE> 18
(f) Legal Proceedings
See Item 3, Legal proceedings, for a discussion of legal proceedings during the
past five years which may be material to an evaluation of the ability or
integrity of any of the aforementioned directors or officers and VMS Realty
Partners and its affiliates.
Item 11 Executive Compensation
(a,b,c,d,e,f,g and h)
Neither the General Partners nor the Partnerships pay the officers of the
General Partners any current or any proposed compensation in such capacities.
In addition, the Partnerships have not given and do not propose to give any
options, warrants or rights, including Partnership interests to any such
persons. No long-term incentive plan exists with any such persons resulting
from his/her resignation, retirement or any other termination. Therefore,
tables relating to these topics have been omitted.
For information concerning fees paid or payable to the Managing General Partner
or an affiliate thereof, see Item 13. Certain Relationships and Related
Transactions.
(j) The Partnerships did not have a Compensation Committee in 1995 and 1994 and
do not currently have such a committee. During the 1995 and 1994 fiscal
years, no current or former officer or employee of the General Partners or
their subsidiaries participated in deliberations regarding the General
Partners' compensation as it relates to the Partnerships.
Item 12 Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners.
No person owns of record or is known by the Managing General Partner to own
beneficially more than 5% of the outstanding Units of either of the
Partnerships as of December 31, 1995. Partnership I and Partnership II
have a 79.12% and 20.78% participation interest, respectively, in the
Operating Partnership.
(b) Security ownership of management.
No partners of VMS Realty Investment, Ltd., VMS Realty Partners, VMS
Securities, Inc. or Prudential-Bache Properties, Inc., own any Units in the
Partnerships.
No general partners, officers or directors of the General Partners of the
Operating Partnership or the Partnerships possess the right to acquire a
beneficial ownership of Units of either of the Partnerships.
(c) Changes in Control
The Registrant is not aware of any arrangements the operation of which may
result in a change of control.
-18-
<PAGE> 19
Item 13 Certain Relationships and Related Transactions
The Partnerships are entitled to engage in various transactions involving
affiliates of the General Partners of the Partnerships, including the
following:
VMS Realty Partners served as asset manager and rendered services in connection
with monitoring the activities of the property manager, American General
Hospitality, Inc. ("AGHI"), including a review of the Annual Plan for the
Hotels and the compliance of the property manager with the terms of the AGHI
Management Agreement and the Annual Plan. For these services, the asset
manager received a fee equal to 1% of gross revenues of the Hotels plus an
additional .75% payable only if sufficient cash flow was available to make such
payment. Asset management fees paid in 1996, 1995 and 1994 totaled $1,205,176,
$1,403,491 and $1,422,345, respectively, with an additional $105,485 remaining
unpaid at December 31, 1995.
An annual salary fee of $50,000 is to be paid to the Managing General Partner
of the Partnerships for overseeing the management of the Partnerships'
operations. The salary fees for 1996, 1995 and 1994 were paid in the
respective years.
An affiliate of the Managing General Partner earns interest on a long-term
assignment note which it received in consideration for the assignment and
transfer of an agreement it entered into for the purchase of the Hotels from an
unaffiliated third party. Pursuant to the Settlement Agreement reached in the
matter entitled In re VMS Partnership Securities Litigation (Case No. 90 C
2412), this note ceased to bear interest after April 10, 1991. The long-term
assignment note was canceled as part of the Transfer. No payments with respect
to the long-term assignment note were made in 1996, 1995 or 1994.
The Operating Partnership reimburses the Managing General Partner and its
affiliates for all reasonable costs and expenses incurred by them on behalf of
the applicable Partnerships including, without limitation, costs incurred by
said parties in performing certain activities, including salaries (plus an
allocable portion of overhead billed on an hourly basis), organization costs,
loan placement costs, travel and communication expenses of staff members
engaged in such activities. The amount paid to the Managing General Partner
and its affiliates for these services and costs in 1996, 1995 and 1994 totaled
$251,292, $267,744 and $556,865, respectively, with an additional $1,919 and
$8,872 remaining unpaid at December 31, 1996 and 1995, respectively.
The Operating Partnership acquired its ownership interest in the Hotels from an
affiliate which, in turn, had acquired its ownership interest from Holiday
Inns, Inc. For further information, see Note 1 to the Combined Financial
Statements.
Reference is made to Note 7 to the Combined Financial Statements for other
amounts paid to related parties.
-19-
<PAGE> 20
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1)(2) The Combined Financial Statements and Financial Statement
Schedule listed in the accompanying Index to Combined
Financial Statements and Schedule on page F-1 are filed as a
part of this report.
(3) The following exhibits are filed as part of this report:
(I) Agreement of Limited Partnership of VMS National Hotel
Portfolio I; (this exhibit is incorporated by
reference to the Form 10 dated September 5, 1986.)
(ii) Agreement of Limited Partnership of VMS National Hotel
Portfolio II; (this exhibit is incorporated by reference
to the Form 10 dated September 5, 1986.)
(iii) Amended and Restated Agreement of General Partnership
of VMS National Hotel Partners. (This exhibit is
incorporated by reference to the Form 10 dated September
5, 1986.)
(b) No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1996.
(c) See Item 14(a)(3) above.
(d) There are no additional financial schedules which are required to be
presented pursuant to Regulation S-X.
-20-
<PAGE> 21
SIGNATURES
PURSUANT to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VMS National Hotel Partners
(Registrant)
By: VMS National Hotel Portfolio I
By: VMS Realty Investment, Ltd.
Managing General Partner
By: JAS Realty Corporation
By: /s/ Joel A. Stone Date: March 24, 1997
------------------------------
Joel A. Stone, President
By: /s/ Thomas A. Gatti Date: March 24, 1997
--------------------------------------
Thomas A. Gatti, Senior Vice President
By: VMS National Hotel Portfolio II
By: VMS Realty Investment, Ltd.
Managing General Partner
By: JAS Realty Corporation
By: /s/ Joel A. Stone Date: March 24, 1997
--------------------------------
Joel A. Stone, President
By: /s/ Thomas A. Gatti Date: March 24, 1997
--------------------------------------
Thomas A. Gatti, Senior Vice President
-21-
<PAGE> 22
INDEX TO COMBINED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Pages
-----
Report of Independent Auditors F-2
Combined Financial Statements:
Combined Balance Sheets - December 31, 1996 and 1995 F-3
Combined Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Combined Statements of Partners' Capital (Deficit) for
the years ended December 31, 1996, 1995 and 1994 F-5
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-6
Notes to the Combined Financial Statements F-8
Schedule:
III - Real Estate and Accumulated Depreciation as of
December 31, 1996 F-16
Schedules other than the one listed are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
F-1
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
To the Partners of
VMS National Hotel Portfolio I,
VMS National Hotel Portfolio II and
VMS National Hotel Partners
We have audited the accompanying combined balance sheets of VMS NATIONAL HOTEL
PORTFOLIO I, VMS NATIONAL HOTEL PORTFOLIO II (Illinois limited partnerships)
and VMS NATIONAL HOTEL PARTNERS (an Illinois general partnership),
(collectively the "Partnerships"), as of December 31, 1996 and 1995, and the
related combined statements of operations, partners' capital (deficit), and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility
of the Partnerships' management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of VMS NATIONAL HOTEL
PORTFOLIO I, VMS NATIONAL HOTEL PORTFOLIO II and VMS NATIONAL HOTEL PARTNERS at
December 31, 1996 and 1995, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
March 13, 1997
F-2
<PAGE> 24
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Property and improvements:
Land $ --- $ 15,571,626
Buildings and improvements --- 149,020,464
Equipment, furniture and fixtures --- 58,309,267
----------------- -----------------
--- 222,901,357
Less accumulated depreciation --- (124,401,350)
----------------- -----------------
--- 98,500,007
---
Property and improvements held for sale --- 1,799,857
Cash and cash equivalents 847,399 6,179,655
Escrow and other deposits --- 103,988
Accounts receivable --- 2,676,744
Interest receivable 29,664 191,632
Prepaid expenses --- 1,403,700
Inventories --- 1,642,633
Other deferred costs --- 388,400
----------------- -----------------
Total assets $ 877,063 $ 112,886,616
================= =================
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage loans payable $ --- $ 261,170,960
Accrued interest payable --- 102,866,332
Other accounts payable and accrued expenses:
Affiliates 1,919 114,357
Nonaffiliates 97,333 5,453,963
----------------- -----------------
Total liabilities 99,252 369,605,612
----------------- -----------------
Partners' capital (deficit):
General Partners (684,087) (3,513,379)
Limited Partners:
Portfolio I - 514 Interests 980,393 (202,197,907)
Portfolio II - 135 Interests 481,505 (51,007,710)
----------------- -----------------
Total partners' capital (deficit) 777,811 (256,718,996)
----------------- -----------------
Total liabilities and partners' capital (deficit) $ 877,063 $ 112,886,616
================= =================
</TABLE>
The accompanying notes are an integral part of
the combined financial statements.
F-3
<PAGE> 25
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
HOTEL OPERATIONS 1996 1995 1994
------------- ---------------- ------------------
<S> <C> <C> <C>
Revenues:
Rooms $ 46,593,341 $ 58,597,065 $ 58,228,697
Food and beverage 11,379,465 15,739,522 16,540,778
Telephone 2,229,625 2,539,273 2,666,707
Other 2,638,080 3,168,195 3,051,952
------------- ---------------- ------------------
Total hotel revenues 62,840,511 80,044,055 80,488,134
Direct costs and expenses:
Rooms 11,866,634 15,619,368 16,350,929
Food and beverage 9,599,143 13,189,654 14,220,427
Telephone 2,177,871 2,881,070 3,653,496
Other 1,559,891 2,024,464 1,750,864
------------- ---------------- ------------------
Total direct hotel costs and expenses 25,203,539 33,714,556 35,975,716
Unallocated expenses:
Administrative and general 6,809,682 10,918,689 10,491,609
Management fees 1,349,601 1,547,350 1,245,088
Marketing 5,829,277 7,885,422 8,359,760
Energy 2,978,149 4,006,605 4,284,447
Property operations and maintenance 2,973,509 4,552,972 4,478,153
Property taxes and insurance 2,490,445 3,168,431 3,025,553
Rent 802,432 1,161,738 815,319
Mortgage interest expense 16,455,405 22,342,886 29,428,682
Depreciation --- 10,362,227 12,049,280
Provision to reflect impairment in the value
of property and improvements --- 38,200,000 ---
------------- ---------------- ------------------
Total unallocated expenses 39,688,500 104,146,320 74,177,891
------------- ---------------- ------------------
Loss from hotel operations (2,051,528) (57,816,821) (29,665,473)
------------- ---------------- ------------------
PARTNERSHIP OPERATIONS
Revenues:
Interest on subscription notes 65,092 60,705 18,722
Interest on temporary investments 47,761 133,046 472,852
------------- ---------------- ------------------
Total partnership revenues 112,853 193,751 491,574
------------- ---------------- ------------------
Expenses:
Managing General Partners' fees 1,023,089 1,450,767 1,425,907
Professional, consulting and other fees:
Affiliates 253,251 221,720 364,745
Nonaffiliates 488,637 463,510 336,581
Interest expense - affiliates --- --- 2,263
------------- ---------------- ------------------
Total partnership expenses 1,764,977 2,135,997 2,129,496
------------- ---------------- ------------------
Loss from partnership operations (1,652,124) (1,942,246) (1,637,922)
------------- ---------------- ------------------
REORGANIZATION ITEMS:
Professional, consulting and other fees 410,000 --- 2,504,215
------------- ---------------- ------------------
Total reorganization expenses 410,000 --- 2,504,215
------------- ---------------- ------------------
Loss before provision for loss on property and improvements held for sale,
loss recognized on sale of property and improvements, and extraordinary
gain from extinguishment of debt (4,113,652) (59,759,067) (33,807,610)
Provision for loss on property and improvements held for sale --- --- (3,338,000)
Loss recognized on sale of property and improvements --- (510,012) (4,451,014)
------------- ---------------- ------------------
Loss before extraordinary gain from extinguishment of debt (4,113,652) (60,269,079) (41,596,624)
Extraordinary gain from extinguishment of debt 261,556,070 --- ---
------------- ---------------- ------------------
Net income (loss) $ 257,442,418 $ (60,269,079) $ (41,596,624)
============= ================ ==================
Net income (loss) allocated to General Partners $ 2,829,292 $ (662,358) $ (457,147)
============= ================ ==================
Net income (loss)allocated to Limited Partners $ 254,613,126 $ (59,606,721) $ (41,139,477)
============= ================ ==================
Loss before extraordinary item
Portfolio I (514 Interests) $ (6,315) $ (92,518) $ (63,854)
============= ================ ==================
Portfolio II (135 Interests) $ (6,094) $ (89,279) $ (61,618)
============= ================ ==================
Extraordinary item
Portfolio I (514 Interests) $ 401,509 $ --- $ ---
============= ================ ==================
Portfolio II (135 Interests) $ 387,452 $ --- $ ---
============= ================ ==================
Net income (loss)
Portfolio I (514 Interests) $ 395,194 $ (92,518) $ (63,854)
============= ================ ==================
Portfolio II (135 Interests) $ 381,358 $ (89,279) $ (61,618)
============= ================ ==================
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE> 26
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
VMS National
Hotel
Partners VMS National Hotel Portfolio I
------------ -------------------------------------------------------------------------------
Limited Partners
-----------------------------------------------
General General Subscription
Partners Partners Total Notes Net Total
------------ ------------ -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Partners' deficit at
January 1, 1994 $ (231,269) $(1,722,142) $ (120,614,416) $ (1,579,039) $(122,193,455) $ (123,915,597)
Collection on
subscription notes --- --- --- 221,702 221,702 221,702
Net loss for the year (41,597) (331,525) (32,820,984) --- (32,820,984) (33,152,509)
------------ ------------ -------------- ------------- ------------- --------------
Partners' deficit at
December 31, 1994 (272,866) (2,053,667) (153,435,400) (1,357,337) (154,792,737) (156,846,404)
Collection on
subscription notes --- --- --- 148,941 148,941 148,941
Net loss for the year (60,269) (480,345) (47,554,111) --- (47,554,111) (48,034,456)
------------ ------------ -------------- ------------- ------------- --------------
Partners' deficit at
December 31, 1995 (333,135) (2,534,012) (200,989,511) (1,208,396) (202,197,907) (204,731,919)
Collection on
subscription notes --- --- --- 48,509 48,509 48,509
Net income for the year 257,442 2,051,816 203,129,791 --- 203,129,791 205,181,607
------------ ------------ -------------- ------------- ------------- --------------
Partners' capital (deficit) at
December 31, 1996 $ (75,693) $ (482,196) $ 2,140,280 $ (1,159,887) $ 980,393 $ 498,197
============ ============ ============== ============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
VMS National Hotel Portfolio II
---------------------------------------------------------------------------
Limited Partners
--------------------------------------------
General Subscription Combined
Partners Total Notes Net Total Totals
----------- ------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Partners' deficit at
January 1, 1994 $ (440,463) $ (30,453,457) $ (232,837) $ (30,686,294) $ (31,126,757) $ (155,273,623)
Collection on
subscription notes --- --- 40,633 40,633 40,633 262,335
Net loss for the year (84,025) (8,318,493) --- (8,318,493) (8,402,518) (41,596,624)
----------- ------------- ----------- ------------- ------------- --------------
Partners' deficit at
December 31, 1994 (524,488) (38,771,950) (192,204) (38,964,154) (39,488,642) (196,607,912)
Collection on
subscription notes --- --- 9,054 9,054 9,054 157,995
Net loss for the year (121,744) (12,052,610) --- (12,052,610) (12,174,354) (60,269,079)
----------- ------------- ----------- ------------- ------------- --------------
Partners' deficit at
December 31, 1995 (646,232) (50,824,560) (183,150) (51,007,710) (51,653,942) (256,718,996)
Collection on
subscription notes --- --- 5,880 5,880 5,880 54,389
Net income for the year 520,034 51,483,335 --- 51,483,335 52,003,368 257,442,418
----------- ------------- ----------- ------------- ------------- --------------
Partners' capital (deficit) at
December 31, 1996 $ (126,198) $ 658,775 $ (177,270) $ 481,505 $ 355,306 $ 777,811
=========== ============= =========== ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
F-5
<PAGE> 27
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
OPERATING AND REORGANIZATION ACTIVITIES
Net income (loss) $ 257,442,418 $ (60,269,079) $ (41,596,624)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating and reorganization activities:
Loss recognized on sale of property and improvements --- 510,012 4,451,014
Depreciation --- 10,362,227 12,049,280
Provision to reflect impairment in the value of property and improvements --- 38,200,000 ---
Provision for loss on property and improvements held for sale --- --- 3,338,000
Extraordinary gain from the extinguishment of debt (261,556,070) --- ---
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (302,664) 1,094,671 (958,641)
Decrease in interest receivable 161,968 22,000 5,252
Decrease (increase) in prepaid expenses 749,402 (995,151) (282,582)
Decrease in inventories 20,990 15,991 122,708
Decrease in other deferred costs 3,841 37,126 42,599
Increase (decrease) in accounts payable and accrued expenses 2,342,146 (1,673,979) (2,599,252)
(Decrease) increase in accrued interest payable (3,148,216) 14,842,886 23,928,682
-------------- -------------- --------------
NET CASH (USED IN) PROVIDED BY OPERATING
AND REORGANIZATION ACTIVITIES (4,286,185) 2,146,704 (1,499,564)
-------------- -------------- --------------
INVESTING ACTIVITIES
Additions to property and improvements (1,904,608) (6,285,876) (4,868,299)
Net proceeds from transfer of deeds to property and improvements 810,160 --- ---
Net proceeds from sale of property and improvements --- 1,739,800 2,312,073
Principal payoff received on note receivable --- --- 1,490,273
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (1,094,448) (4,546,076) (1,065,953)
-------------- -------------- --------------
FINANCING ACTIVITIES
Partners' capital contributions 54,389 157,995 262,335
Principal payment on mortgage loan payable --- (1,582,967) (3,778,618)
(Increase) decrease in escrow and other deposits (6,012) 163,857 357,986
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 48,377 (1,261,115) (3,158,297)
-------------- -------------- --------------
Net decrease in cash and cash equivalents (5,332,256) (3,660,487) (5,723,814)
-------------- -------------- --------------
Cash and cash equivalents at beginning of year 6,179,655 9,840,142 15,563,956
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 847,399 $ 6,179,655 $ 9,840,142
============== ============== ==============
Interest Paid $ 19,603,621 $ 7,500,000 $ 5,500,000
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
F-6
<PAGE> 28
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
COMBINED STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosure of noncash investing and financing activities:
The following assets and liabilities were transferred to the senior lender in
consideration for t indebtedness on September 26, 1996:
<TABLE>
<S> <C>
Property and improvements $ 102,204,472
Cash and cash equivalents 214,840
Escrow and other deposits 110,000
Accounts receivable 2,979,408
Prepaid expenses 654,298
Inventories 1,621,643
Other deferred costs 384,559
-------------
Total assets $ 108,169,220
=============
Mortgage loan payable $ 261,170,960
Accrued interest payable 99,718,116
Other accounts payable and accrued expenses 7,811,214
-------------
Total liabilities $ 368,700,290
=============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-7
<PAGE> 29
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. Organization
VMS National Hotel Partners, an Illinois general partnership (the "Operating
Partnership") was formed on November 1, 1985 under the laws of the State of
Illinois and commenced operations on November 26, 1985, the date of the
Hotel acquisitions. The Operating Partnership was formed to acquire, own
and operate twenty-four Holiday Inn hotels (the "Hotels"). The Operating
Partnership conveyed thirteen of the Hotels to other affiliated partnerships
(the "Subpartnerships") that each own and operate a Hotel (as used herein,
the term "Operating Partnership" includes the subpartnerships where context
requires). The Operating Partnership holds at least a 99% interest as a
general partner in each Subpartnership. VMS Realty, Inc., an Illinois
corporation, is the Managing General Partner of the Operating Partnership.
in 1995 one Hotel was sold and in 1994 two of the Hotels were sold.
VMS National Hotel Portfolio I ("Portfolio I") and VMS National Hotel
Portfolio II ("Portfolio II") are illinois limited partnerships formed to
purchase an aggregate 99.9% interest as General Partners in the Operating
Partnership (as used herein, the term partnerships includes the Operating
Partnership, Portfolio I and Portfolio II where context requires). VMS
Realty Investment, ltd. is the managing General Partner of Portfolios I and
II. In addition, an unaffiliated corporation is the minority General
Partner of Portfolio I.
On August 13, 1993 and again on May 10, 1996, the Operating Partnership
filed for Chapter 11 Bankruptcy Protection in the United States Bankruptcy
Court for the Central District of California. The filings included only
the Operating Partnership and excluded Portfolio I and Portfolio II. On May
9, 1994, the United States Bankruptcy Court, Northern District of Illinois,
confirmed the original plan of reorganization (the "Plan") subject to the
final negotiations of the Second Amended and Restated Note purchase and Loan
Agreement and certain other events. On July 27, 1994, the Second Amended and
Restated Note Purchase and Loan Agreement (the "Loan Agreement") was
consummated and the remaining terms of the plan were finalized on August 11,
1994. Under the Plan, the Operating Partnership was to sell properties as
stated in the Loan Agreement. Pursuant to the Plan, all pre-petition
payables have been paid. The Operating Partnership subsequently negotiated
a further restructuring of its outstanding debt with certain secured
lenders. As a result, the Operating Partnership filed a second pre-packaged
Plan of Reorganization (the "Second Plan") on May 10, 1996. The Second Plan
was confirmed by the court on July 24, 1996. Pursuant to the Second Plan,
the deeds to the properties were transferred to the senior lender on
September 26, 1996 in consideration for the cancellation of the senior
indebtedness (the "Transfer") (See Note 5).
As a result of the Transfer, the Partnerships recognized an extraordinary
gain of $214,542,473 for financial reporting purposes, which represents the
excess of the remaining senior debt, related accrued interest, other
operating liabilities and net cash received by the Partnerships of
$810,160 (in conjunction with the Transfer, VMS National Hotel Partners
received amounts in lieu of sales advisory fees totaling $1,025,000 from the
senior lender, net of $214,840 of operating cash transferred to the senior
lender), over the carrying value of the property and improvements and
operating assets transferred. In addition, the Partnerships Recognized an
extraordinary gain of $47,013,597 from the cancellation of the junior
mortgage indebtedness pursuant to the Second Plan (see Note 5).
F-8
<PAGE> 30
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies
A. Basis of Combination: The accompanying combined financial statements
include the accounts of Portfolio I, Portfolio II and the Operating
Partnership (collectively the "Partnership"). Significant
intercompany accounts and transactions have been eliminated in
the combination of these financial statements.
b. The 1996 and 1994 combined financial statements reflect the financial
reporting guidance prescribed by the AICPA Statement of Position 90-7
(SOP 90-7), "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code", during the periods the Operating Partnership
was in bankruptcy (August 13, 1993 through August 11, 1994 and again
May 10, 1996 through July 24, 1996). The Operating Partnership's
assets and liabilities were stated at their Plan determined values at
August 11, 1994, which resulted in 1994 and 1993 contractual mortgage
interest not previously recognized pursuant to SOP 90-7, being
recognized in the 1994 combined financial statements. Included in
interest expense recognized during the fourth quarter of 1994 is
$13,930,533 and $5,741,314 of previously unrecognized contractual
interest relating to the period January 1, 1994 through August 10, 1994
and from August 13, 1993 to December 31, 1993, respectively. During
1996, all contractual interest was paid.
Items of income or expense that were realized or incurred as a result
of the reorganization are included in the combined statement of
operations as reorganization items. During 1996 and 1994, $410,000
and $2,504,215, respectively, were paid for professional, consulting
and other fees for the administration of Chapter 11 proceedings.
C. Method of Accounting: The books and records are maintained on the
accrual basis of accounting used for federal income tax reporting
purposes. The accompanying combined financial statements have been
prepared from these records, after making appropriate adjustments, to
reflect the accounts in accordance with generally accepted accounting
principles (GAAP). The significant items causing these adjustments
are: (1) the differing lives and methods of depreciation used (see
below); (2) provision to reflect impairment in the value of property
and improvements recorded under the GAAP basis not recorded under a tax
basis; (3) the treatment of certain fees and other consideration due to
the managing general partner and its affiliates (see below); (4) the
costs incurred in connection with raising capital (offering costs) and
subscription notes, which are treated as reductions to the Limited
Partners' capital for GAAP purposes and as assets for tax purposes; (5)
the differing lives over which deferred loan costs are being amortized;
and (6) the treatment of restructured debt.
D. Property and Improvements: Property and improvements were stated at
cost, net of reductions to reflect impairment in the value of property
and improvements (GAAP basis). Depreciation was computed using the
following methods and useful lives:
f-9
<PAGE> 31
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies
<TABLE>
<CAPTION>
GAAP Basis Tax Basis
----------------------------------- ---------------------------------------
Lives Lives
Method Years Method Years
----------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Building and Straight-line 7.5 to 39 Straight-line 19 or 39
improvements (ACRS)
Personal Straight-line 3 to 5 150% declining-balance 5
property (ACRS)
200% declining-balance 5, 7 or 15
(Modified ACRS) for
assets acquired in 1987
through 1990
</TABLE>
In March 1995, the FASB issued Statement No. 121,
Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on
long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash
flows estimated to be generated by those assets
are less than the assets carrying amount.
Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed
of. The Partnerships adopted Statement 121 in
the first quarter of 1996 and, based on current
circumstances, the effects of adoption are as
follows: pursuant to the Plan, all remaining
properties had been held for sale and accordingly
were classified as Property and Improvements held
for sale on the Combined Balance Sheet as January
1, 1996 and no further depreciation expense was
recorded subsequent to that date.
E. Fees and expenses Paid to Affiliates: Various
fees and expense reimbursements are made to the
Managing General Partner and its affiliates. These
charges are accounted for using the following
basis:
<TABLE>
<CAPTION>
GAAP Basis Tax Basis
--------------------------- -----------
<S> <C> <C>
Salary reim- Charged to expense in the Deducted in
bursement fee year service is rendered the year paid
Asset management Charged to expense in the Deducted in
fee year service is rendered the year paid
Assignment note Interest has been waived The note was discounted in
interest under the terms of the 1991, with the discount
note agreements being amortized through
maturity date.
</TABLE>
F-10
<PAGE> 32
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (Continued)
F. Inventories: Inventories were carried at the lower of cost,
determined in accordance with the first-in first-out method, or
market.
G. Income Taxes: No provision (benefit) for income taxes or
related credits has been recorded in the Partnerships' combined
financial statements as the results of their operations are
includable in the income tax returns of the Partners.
H. Cash Equivalents and Other Financial Instruments: The
Partnerships consider all highly liquid investments with
a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents and other financial
instruments are carried at cost which approximates their fair
value, based upon their relatively short maturity.
I. Use of Estimates: The preparation of the combined financial
statements in conformity with generally accepted accounted
principles requires management to make estimates and
assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Actual results
could differ from those estimates.
3. Partnership Agreements
Profits and losses of the Operating Partnership are allocated to
Portfolio I and Portfolio II on a pro rata basis using the ratio
of their respective Limited Partnership units issued and outstanding.
The profits and losses of Portfolio I and Portfolio II are allocated 99%
to the Limited Partners and 1% to the General Partners.
Cash flow distributions of the Operating Partnership will be made as
follows: 99.9% in total to Portfolio I and Portfolio II, on a pro rata
basis in proportion to their contributions to the Operating Partnership.
The remaining .1% will be distributed equally to the two General
Partners of the Operating Partnership. Cash flow distributions by
Portfolio I and Portfolio II will be made at the discretion of the
Managing General Partner first to the Limited Partners in an amount equal
to 12% per annum (on a noncumulative basis) of their contributed capital,
then to the extent that cash flow is available to pay the General Partners
of Portfolio I and Portfolio II a subordinated incentive fee in an amount
equal to 28.57% of remaining cash flow. For Portfolio I, 20.86% will be
paid to the Managing General Partner and 7.71% will be paid to the
Minority General Partner. Any remaining cash flow will be distributed 99%
to the Limited Partners and 1% to the General Partners.
Distributions arising from the sale or refinancing of the Hotels owned by
the Operating Partnership will be allocated 99.9% to Portfolio I and
Portfolio II in an amount proportionate to the capital contributions
made by each Partnership to the Operating Partnership, and .1% will be
allocated equally to the General Partners of the Operating Partnership.
Distributions resulting from the sale or refinancing of Hotels received by
Portfolio I and Portfolio II, to the extent of 1% of the net
proceeds from a SSSpecial Capital Item (as defined in the Partnership
Agreements), shall be distributed first to Banyan Short Term Income Trust
("Special Limited Partner") in consideration for interim financing
provided by the Trust to the Operating Partnership. The remaining
amount shall be distributed in the following priority: (1) to the
Limited Partners until each Limited Partner has received distributions of
Capital Items equal to
F-11
<PAGE> 33
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. Partnership Ageements (Continued)
his adjusted capital contributions; (2) to the Limited Partners until the
amount so distributed combined with all amounts previously
distributed equals 10% per annum of the Limited Partners' average
capital contribution (on a cumulative basis); (3) to the Managing General
Partner of Portfolio I and Portfolio II in an amount equal to its
adjusted capital contribution; (4) 90% of the Preference Amount (defined
as 9.05% of the purchase price of the property, increased by 6% per
year until the date of the sale or refinancing) shall be distributed to
the Limited Partners and 10% to the General Partners (with respect to
Portfolio I, 7.3% to the Managing General Partner and 2.7% to the
Minority General Partner); (5) of the balance, if any, 70% will be
distributed to the Limited Partners and 30% to the General Partners
(with respect to Portfolio I, 21.9% to the Managing General Partner and
8.1% to the Minority General Partner).
4. Subscription Notes
Under the terms of the Partnership Agreements for Portfolio I and
Portfolio II, the General Partners offered 514 and 135 units of Limited
Partnership interests, respectively. All units offered were sold as of
December 31, 1985. The Limited Partners agreed to contribute
capital of $77,100,000 (reduced to $77,082,812 as of December 31, 1992
by investors opting out of the settlement agreement) to Portfolio I and
$20,250,000 to Portfolio II. Of these amounts, $75,922,925 and
$20,072,730, respectively, had been contributed to each as of December
31, 1996. The remaining balance, in the aggregate amount of
$1,337,157 as of December 31, 1996, is represented by promissory notes
of the Limited Partners. This balance is included in the combined
financial statements as a reduction of Partners' Capital. The
promissory notes as originally executed required that the Limited
Partners make installment payments to Portfolios I and II with the final
installment due March 1, 1990. However, a settlement agreement has been
reached which enables the settling Limited Partners to have the option
of making their remaining principal payments on terms more favorable than
originally provided in their subscription notes. Amounts due from those
Limited Partners not paying under the more favorable terms are considered
past due. The principal amounts due from those Limited Partners paying
under the more favorable terms bear interest at prime plus 2% per annum.
The principal amounts due from Limited Partners considered past due
bear interest at 18% per annum.
F-12
<PAGE> 34
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (Continued)
5. Mortgage Loans Payable
Mortgage loans payable consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Non-recourse, non-interest bearing (subsequent to
April 10, 1991), junior mortgage loans payable to
Partners Liquidating Trust, (PLT) an unaffiliated
entity. VMS assigned their interest in the loans to
PLT in 1993. No previously unpaid interest was paid
on these loans during 1996, 1995 or 1994. Interest in
arrears at December 31, 1995 totaled $5,248,328.
Pursuant to the Second Plan, the junior mortgage loans
and related accrued interest were forgiven as of
September 26, 1996. $ --- $ 41,765,269
10% non-recourse first mortgage loans, with
principal and interest payable from available cash
flow, including proceeds from hotel sales (see
below). Total cash flow payments of $19,603,621,
$7,500,000 and $5,500,000 (representing interest)
were made in 1996, 1995 and 1994, respectively.
Interest in arrears at December 31, 1995 totaled
$97,618,004. The first mortgage loans, and
related accrued interest, were canceled in
conjunction with the Transfer. $ --- $219,405,691
----------------- ------------
$ --- $261,170,960
----------------- ============
</TABLE>
In 1995, the Partnerships sold the Milwaukee West Quality Inn to an
unaffiliated third party at a gross sales price of $1,800,000. The
Partnerships recognized a loss of $886,000 at December 31, 1994 for
financial reporting purposes to reduce the carrying value of the
Quality Inn to its estimated sales price, and an additional loss of
$510,012 was recognized in 1995 as a result of a downward adjustment of
the sales price as well as the payment of costs associated with the
closing. Principal on the first mortgage of $1,582,967 was repaid out of
the sale proceeds. In addition, the Operating Partnership received
$36,000 in repayment of the closing payment.
In 1994, the Partnerships sold the Jackson Inn and the Detroit Clarion
Inn to unaffiliated third parties at a gross sales price of $2,400,000.
The Partnerships recognized a loss of $3,970,066 at December 31, 1993
for financial reporting purposes to reduce the carrying value of the
Jackson Inn assets to the sales price, and a loss of $5,941,287 on the
sale of the Detroit Clarion Inn in 1994. Principal on the first mortgage
of $2,052,768 was repaid out of the sales proceeds. In addition, during
1994 the Operating Partnership received $1,490,273 as payment in full on
the principal balance of a note receivable related to the 1992 sale of
the Seattle Crowne Plaza, not previously recognized by the Operating
Partnership. The Operating Partnership also received $292,990 of accrued
interest related to the note receivable. Of the total received, the
Operating Partnership retained $57,413 towards repayment of closing
costs and $1,725,850 was repaid on the principal of the first
mortgage. The principal portion of the note receivable has been
recorded as a reduction of the 1994 loss on sale of property and
improvements.
F-13
<PAGE> 35
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. Mortgage Loans Payable (continued)
In accordance with SOP 90-7, the accrual of interest on all mortgage
loans was discontinued as of the bankruptcy filing dates due to the
"unsecured" or "undersecured" positions on these Notes obligations. All
of the 1996 contractual interest was paid and recorded in 1996. The
accrual of interest in 1994 was resumed on August 11, 1994 when the
Operating Partnership emerged from bankruptcy, at which time previously
unrecorded 1994 contractual interest and $5,741,314 of previously
unrecorded 1993 contractual interest was recognized.
6. Management Agreement
Management of the Holiday Inn and Crowne Plaza hotel properties (the
"Hotels") owned by the Partnerships was performed by American General
Hospitality, Inc. ("AGHI") Under the terms of the management
agreement with AGHI, the Operating Partnership was assessed a basic
management fee at the lesser of 2.25% of gross revenue, as defined, or the
amount of available cash flow in excess of the base year cash flow as set
forth in the management agreement. During 1996, 1995 and 1994 management
fees of $1,349,601, $1,547,350 and $1,245,088, respectively, were incurred
under the agreement with AGHI.
7. Related Party Transactions
Under the terms of the various Partnership Agreements, the Managing
General Partner and its affiliates are to provide management, financing,
organization and other services to the Partnerships in return for certain
fees as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ---------------------- -----------------------
Paid Payable Paid Payable Paid Payable
----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Managing General
Partner salary (1) $ 50,000 $ --- $ 50,000 $ --- $ 100,000 $ ---
Asset Management
fees (2) 1,205,176 --- 1,403,491 105,485 1,422,345 108,209
---------- --------- ---------- ---------- --------- ---------
Total management
fees and salary 1,255,176 --- 1,453,491 105,485 1,522,345 108,209
Other services
and costs (3) 251,292 1,919 267,744 8,872 556,865 18,012
---------- --------- ----------- ----------- ---------- ---------
$1,506,468 $ 1,919 $ 1,721,235 $ 114,357 $2,079,210 $ 126,221
========== ========= =========== =========== ========== =========
</TABLE>
(1) The Partnership Agreements specify the dollar amount of the fees. The
various Partnerships are obligated to incur $50,000 per year of salary fees
in the future.
(2) This fee is assessed at 1.75% of gross revenue of the Hotels.
(3) These fees represent reimbursement for partnership accounting, due
diligence, data processing and travel and communication expenses incurred
by affiliates of the Managing General Partner for operation of the
Partnerships.
F-14
<PAGE> 36
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. Lease Commitments
The Operating Partnership leased the land on which five hotel
properties were located. Rent expense under these leases was
approximately $640,394, $894,986 and $533,114 for the years ended
December 31, 1996, 1995 and 1994, respectively. The Operating
Partnership is no longer obligated under the lease commitments due to the
Transfer.
9. Litigation
The Operating Partnership is involved in various claims and legal
actions related to the operations of the Hotels. In the opinion of
management, the ultimate disposition of these matters will not have
a material adverse effect on the Operating Partnership's financial
position.
-15-
<PAGE> 37
VMS NATIONAL HOTEL PORTFOLIO I
VMS NATIONAL HOTEL PORTFOLIO II
VMS NATIONAL HOTEL PARTNERS
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1996 1995 1994
-------------- --------------- ---------------
<S> <C> <C> <C>
Reconciliation of Real Estate:
Balance at beginning of year $ 222,901,357 $ 254,815,481 $ 281,098,831
Improvements 1,904,608 6,285,876 4,868,299
Provision to reflect impairment in the value
of property and improvements --- (38,200,000) ---
Reduction due to transfer of deeds to the hotels (1) (224,805,965) --- ---
Reduction due to sale of hotels --- --- (31,151,649)
-------------- --------------- ---------------
Balance at end of year $ --- $ 222,901,357 $ 254,815,481
============== =============== ===============
Reconciliation of Accumulated Depreciation:
Balance at beginning of year $ 124,401,350 $ 114,039,123 $ 118,295,115
Depreciation during the year --- 10,362,227 12,049,280
Reduction due to transfer of deeds to the hotels (1) (124,401,350) --- ---
Reduction due to sale of hotels --- --- (16,305,272)
-------------- --------------- ---------------
Balance at end of year $ --- $ 124,401,350 $ 114,039,123
============== =============== ===============
</TABLE>
(1) The reduction due to the transfer of deeds to the hotel Second Plan
described in Note 1 to the Notes to the Combined Financial Statements.
F-16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from VMS National
Hotel Portfolio I, VMS National Hotel Portfolio II, VMS National Hotel Partners
1996 10-K and is qualified in its entirety by reference to such 10-K filing.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 847,399
<SECURITIES> 0
<RECEIVABLES> 29,664
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 877,063
<CURRENT-LIABILITIES> 99,252
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 777,811
<TOTAL-LIABILITY-AND-EQUITY> 877,063
<SALES> 0
<TOTAL-REVENUES> 62,953,364
<CGS> 25,203,539
<TOTAL-COSTS> 23,233,095
<OTHER-EXPENSES> 2,174,977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,455,405
<INCOME-PRETAX> (4,113,652)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (4,113,652)
<EXTRAORDINARY> 261,556,070
<CHANGES> 0
<NET-INCOME> 257,442,418
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
