FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-16862
CAPITAL SOURCE II L.P.-A
(Exact name of registrant as specified in its charter)
Delaware 38-2684691
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 400, 1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
<PAGE> -i-
Part I. Financial Information
Item 1. Financial Statements
CAPITAL SOURCE II L.P.-A
BALANCE SHEETS
<TABLE>
<CAPTION>
Mar. 31, 2000
(unaudited) Dec. 31, 1999
-------------- --------------
<S> <C> <C>
Assets
Cash and temporary cash investments, at cost which
approximates market value $ 193,725 $ 278,134
Investment in FHA Loan (Note 4) 6,460,719 6,470,165
Investment in GNMA Certificates (Note 4) 20,333,125 20,367,475
Investment in Operating Partnerships (Note 5) - -
Interest receivable 193,074 193,934
Other assets 20,480 39,064
-------------- --------------
$ 27,201,123 $ 27,348,772
============== ==============
Liabilities and Partners' Capital (Deficit)
Liabilities
Accounts payable (Note 6) $ 155,073 $ 295,599
Distribution payable (Note 3) 303,871 303,871
-------------- --------------
458,944 599,470
-------------- --------------
Partners' Capital (Deficit)
General Partner (299,036) (298,965)
Beneficial Assignment Certificate Holders
($6.74 per BAC in 2000 and $6.74 in 1999) 27,041,215 27,048,267
-------------- --------------
26,742,179 26,749,302
-------------- --------------
$ 27,201,123 $ 27,348,772
============== ==============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 1 -
CAPITAL SOURCE II L.P.-A
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
Mar. 31, 2000 Mar. 31, 1999
--------------- ---------------
<S> <C> <C>
Income
Mortgage-backed securities income $ 577,368 $ 580,957
Interest income on temporary cash investments 3,248 4,151
Equity in earnings of Operating Partnerships (Note 5) 35,127 -
Other income - 400
--------------- ---------------
615,743 585,508
Expenses
Operating and administrative expenses (Note 6) 167,059 133,446
--------------- ---------------
Net income and net comprehensive income 448,684 452,062
=============== ===============
Net income allocated to:
General Partners $ 4,487 $ 4,521
Limited Partners 444,197 447,541
--------------- ---------------
$ 448,684 $ 452,062
=============== ===============
Net income, basic and diluted, per BAC $ .11 $ .11
=============== ===============
</TABLE>
CAPITAL SOURCE II L.P.-A
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
General BAC
Partner Holders Total
-------------- ---------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1999 $ (298,965) $ 27,048,267 $ 26,749,302
Net income 4,487 444,197 448,684
Cash distributions paid or accrued (Note 3) (4,558) (451,249) (455,807)
-------------- ---------------- ---------------
Balance at March 31, 2000 $ (299,036) $ 27,041,215 $ 26,742,179
============== ================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> - 2 -
CAPITAL SOURCE II L.P.-A
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
Mar. 31, 2000 Mar. 31, 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 448,684 $ 452,062
Adjustments to reconcile net income to net cash
from operating activities
Equity in earnings of Operating Partnerships (35,127) -
Amortization of discount on mortgage-backed securities (83) (77)
Decrease in interest receivable 860 438
Decrease in other assets 18,584 15,164
Decrease in accounts payable (140,526) (120,411)
--------------- ---------------
Net cash provided by operating activities 292,392 347,176
--------------- ---------------
Cash flow provided by investing activity
FHA Loan and GNMA Certificate principal payments received 43,879 40,209
Distributions received from Operating Partnerships 35,127 -
--------------- ---------------
Net cash provided by investing activities 79,006 40,209
--------------- ---------------
Cash flow used in financing activity
Distributions paid (455,807) (455,807)
--------------- ---------------
Net decrease in cash and temporary cash investments (84,409) (68,422)
Cash and temporary cash investments at beginning of period 278,134 432,999
--------------- ---------------
Cash and temporary cash investments at end of period $ 193,725 $ 364,577
=============== ===============
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE> - 3 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. Organization
Capital Source II L.P.-A (the Partnership) was formed on August 22, 1986,
under the Delaware Revised Uniform Limited Partnership Act. The General
Partners of the Partnership are Insured Mortgage Equities II L.P. and America
First Capital Source II, L.L.C. (the General Partners).
The Partnership was formed to invest principally in federally-insured
mortgages on multifamily housing properties and limited partnership interests
in Operating Partnerships which construct and operate these properties. Each
federally insured loan is guaranteed in amounts equal to the face amount of
the mortgage, by the Federal Housing Administration (FHA) or the Government
National Mortgage Association (GNMA). Hereinafter, the Partnership's
investments in such mortgages are referred to as investments in
mortgage-backed securities. The Operating Partnerships are geographically
located as follows: (i) two in Michigan; and, (ii) one each in Florida and
North Carolina.
CS Properties II, Inc., which is owned by the General Partners, serves as the
Special Limited Partner for the Operating Partnerships. The Special Limited
Partner has the power, among other things, to remove the general partners of
the Operating Partnerships under certain circumstances and to consent to the
sale of the Operating Partnerships' assets. CS Properties II, Inc. also
serves as a co-general partner of The Ponds at Georgetown.
The Partnership will terminate subsequent to the sale of all properties but in
no event will the Partnership continue beyond December 31, 2035.
2.Summary of Significant Accounting Policies
A) Financial Statement Presentation
The financial statements of the Partnership are prepared without audit on
the accrual basis of accounting in accordance with generally accepted
accounting principles. The financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K for the year ended December
31, 1999. In the opinion of management, all normal and recurring
adjustments necessary to present fairly the financial position at March
31, 2000, and results of operations for all periods presented have been
made.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
B) Investment in Mortgage-Backed Securities
Investment securities are classified as held-to-maturity,
available-for-sale, or trading. Investments classified as
held-to-maturity are carried at amortized cost. The Partnership does not
have investment securities classified as trading or available-for-sale.
<PAGE> - 4 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
C) Investment in Operating Partnerships
The Partnership's Investment in Operating Partnerships consists of
interests in limited partnerships which own properties underlying the
mortgage-backed securities and are accounted for using the equity method.
The investments by the Partnership in the Operating Partnership were
recorded at the cost to acquire such interests. Subsequently losses were
recorded by the Partnership as they were realized by the Operating
Partnerships. The Partnership suspended recognizing losses in the
Operating Partnerships when its entire initial investment had been consumed
by such losses. Subsequently, losses have been recognized only to the
extent of additional contributions, net of distributions received, to the
Operating Partnerships by the Partnership. Any distributions received by
the Partnership from the Operating Partnerships are recorded as income.
The Operating Partnerships are not insured or guaranteed. The value of
these investments is a function of the value of the real estate owned by
the Operating Partnerships. With regard to the Operating Partnerships,
the Partnership is not the general partner and it has no legal obligation
to provide additional cash support, nor has it indicated any commitment to
provide this support; accordingly, it has not reduced its investment in
these Operating Partnerships below zero.
D) Income Taxes
No provision has been made for income taxes since Beneficial Assignment
Certificate (BAC) Holders are required to report their share of the
Partnership's income for federal and state income tax purposes.
E) Temporary Cash Investments
Temporary cash investments are invested in short-term debt securities
purchased with an original maturity of three months or less.
F) Net Income Per BAC
Net income per BAC has been calculated based on the number of BACs
outstanding (4,011,101) for all periods presented.
3. Partnership Income, Expenses and Cash Distributions
Profits and losses from continuing operations and cash available for
distribution will be allocated 99% to the investors and 1% to the General
Partners. Certain fees payable to the General Partners will not become due
until investors have received certain priority returns. Cash distributions
included in the financial statements represent the actual cash distributions
made during each period and the change in cash distributions accrued at the
end of each period.
The General Partners will receive 1% of the net proceeds from any sale of
Partnership assets. The General Partners will receive a termination fee equal
to 3% of all sales proceeds less actual costs incurred in connection with all
sales transactions, payable only after the investors have received a return of
their capital contributions and an 11.5% annual return on a cumulative basis.
The General Partners will also receive a fee equal to 9.1% of all cash
available for distribution and sales proceeds (after deducting from cash
available or sales proceeds any termination fee paid therefrom) after
investors have received a return of their capital contributions and an 11.5%
annual return on a cumulative basis.
<PAGE> - 5 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
4. Investment in Mortgage-Backed Securities
The mortgage-backed securities held by the Partnership represent Government
National Mortgage Association (GNMA) Certificates and a Federal Housing
Administration (FHA) Loan. The GNMA Certificates are backed by first mortgage
loans on multifamily housing properties and pools of single-family
properties. The GNMA Certificates are debt securities issued by a private
mortgage lender and are guaranteed by GNMA as to the full and timely payment
of principal and interest on the underlying loans. The FHA Loan is guaranteed
as to the full and timely payment of principal and interest on the underlying
loan.
At March 31, 2000, all of the Partnership's mortgage-backed securities were
classified as held-to-maturity. The total amortized cost, gross unrealized
holding gains and aggregate fair value of such securities were $26,793,844,
$39,631 and $26,833,475, respectively.
Descriptions of the Partnership's mortgage-backed securities at March 31,
2000, are as follows:
<TABLE>
<CAPTION>
Number Interest Maturity Carrying
Type of Security and Name Location of Units Rate Date Amount
---------------------------------- -------------------- -------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
GNMA Certificates:
Crane's Landing Winter Park, FL 252 8.75% 12-15-2030 $ 10,104,196
Monticello Apartments Southfield, MI 106 8.75% 11-15-2029 5,256,211
The Ponds at Georgetown Ann Arbor, MI 134 7.50% 12-15-2029 4,972,718
---------------
20,333,125
FHA Loan:
Delta Crossing Charlotte, NC 178 9.10% 10-01-2030 6,460,719
---------------
Balance at March 31, 2000 $ 26,793,844
===============
</TABLE>
Reconciliation of the carrying amount of the mortgage-backed securities is as
follows:
<TABLE>
<S> <C>
Balance at December 31, 1999 $ 26,837,640
Addition
Amortization of discount on mortgage-backed securities 83
Deduction
FHA Loan and GNMA Certificate principal payments received (43,879)
---------------
Balance at March 31, 2000 $ 26,793,844
===============
</TABLE>
<PAGE> - 6 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
5. Investment in Operating Partnerships
The Partnership's Investment in Operating Partnerships consist of interests in
limited partnerships which own multifamily properties financed by the GNMA
Certificates and FHA Loan held by the Partnership. The limited partnership
agreements provide for the payment of a base return on the equity provided to
the limited partnerships and for the payment of additional amounts out of a
portion of the net cash flow or net sale or refinancing proceeds of the
properties, subject to various priority payments.
Descriptions of the Operating Partnerships held at March 31, 2000, are as
follows:
<TABLE>
<CAPTION>
Carrying
Name Location Partnership Name Amount
- ------------------------ --------------------- ----------------------------------------- ------------
<S> <C> <C> <C>
Delta Crossing Charlotte, NC Delta Crossing Limited Partnership $ -
Crane's Landing Winter Park, FL Crane's Landing Partnership, Ltd. -
Monticello Apartments Southfield, MI Centrum Monticello Limited Partnership -
The Ponds at Georgetown Ann Arbor, MI Ponds at Georgetown Limited Partnership -
------------
Balance at March 31, 2000 $ -
============
</TABLE>
Reconciliation of the carrying amount of the Operating Partnerships is as
follows:
<TABLE>
<CAPTION>
For the Three
Months Ended
Mar. 31, 2000
---------------
<S> <C>
Balance at beginning of year $ -
Addition
Equity in earnings of Operating Partnerships 35,127
Deduction
Distributions received from Operating Partnerships (35,127)
---------------
Balance at end of period $ -
===============
</TABLE>
6. Transactions with Related Parties
The General Partners, certain of their affiliates and the Operating
Partnerships' general partners have received or may receive fees,
compensation, income, distributions and payments from the Partnership in
connection with the offering and the investment, management and sale of the
Partnership's assets (other than disclosed elsewhere) as follows.
The General Partners are entitled to receive an asset management and
partnership administrative fee equal to 0.5% of invested assets per annum, the
first $50,000 of which will be paid each year with the balance payable only
during such years that a 6.5% annual return has been paid to investors on a
noncumulative basis. An additional fee equal to 0.5% of invested assets per
annum will be payable only during those years that an 11.5% annual return has
been paid to investors on a noncumulative basis. Any unpaid amounts will
accrue and be payable only after an 11.5% annual return to investors has been
paid on a cumulative basis and the investors have received the return of their
capital contributions. Asset management and partnership administration fees
of $12,500 were incurred during the three months ended March 31, 2000.
<PAGE> - 7 -
CAPITAL SOURCE II L.P.-A
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
Substantially all of the Partnership's general and administrative expenses are
paid by a General Partner or an affiliate and reimbursed by the Partnership.
The amount of such expenses reimbursed to such General Partner for three
months ended March 31, 2000 was $289,508. These reimbursed expenses are
presented on a cash basis and do not reflect accruals made at quarter end.
An affiliate of the General Partners has been retained to provide property
management services for The Ponds at Georgetown. The fees for services
provided were $10,534 for the three months ended March 31, 2000 and
represented the lower of costs incurred in providing management of the
property or customary fees for such services determined on a competitive basis.
7. Legal Proceedings
The Partnership has been named as a defendant in a purported class action
lawsuit filed in the Delaware Court of Chancery on February 3, 1999, by two
BAC holders, Alvin M. Panzer and Sandra G. Panzer, against the Partnership,
its General Partners, America First and various of their affiliates (including
Capital Source L.P., a similar partnership with general partners that are
affiliates of America First) and Lehman Brothers, Inc. The plaintiffs seek to
have the lawsuit certified as a class action on behalf of all BAC holders of
the Partnership and Capital Source L.P. The lawsuit alleges, among other
things, that a proposed merger transaction involving the Partnership and
Capital Source L.P. is deficient and coercive, that the defendants have
breached the terms of the Partnership's partnership agreement and that the
defendants have acted in manners which violate their fiduciary duties to the
BAC holders. In this complaint, the plaintiffs sought to enjoin the proposed
merger transaction and seek to appoint an independent BAC holder
representative to investigate alternative transactions. The lawsuit also
requests a judicial dissolution of the Partnership, an accounting, and
unspecified damages and costs.
The General Partners determined not to pursue the merger transaction which
was the subject of the initial lawsuit and proposed an alternative transaction
to BAC holders. A prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about November 16,
1999. The plaintiffs amended their complaint on December 8, 1999, and again
on February 22, 2000. The second amended complaint challenges this current
prospectus/consent solicitation statement on grounds similar to those alleged
in the original complaint, as well as on other procedural grounds. The second
amended complaint does not seek to enjoin the proposed merger transaction.
On July 12, 1999, Alvin M. Panzer, one of the named plaintiffs in the action
described above, filed an additional complaint against the Partnership, its
General Partners and America First in the Delaware Court of Chancery (the
Books and Records Action). The complaint seeks to compel the General
Partners to supply the plaintiff with a list of all BAC holders of the
Partnership and copies of the limited partnership agreements of the Operating
Partnerships.
To resolve these lawsuits, the Partnership and affiliates, on April 24, 2000,
entered into a settlement agreement (the Settlement) with the plaintiffs. The
Settlement remains subject to approval by the Court. In connection with the
Settlement, which, if approved, will also result in the dismissal of the Book
and Records Action, the Partnership expects to submit a revised transaction to
BAC holders for approval. The complete terms of the Settlement, along with
the updated consent solicitation material describing the revised merger
transaction, will be filed with the Securities and Exchange Commission (the
SEC). As soon as it receives SEC clearance, the Partnership will deliver to
BAC holders materials that fully describe the Settlement and revised
transaction.
<PAGE> - 8 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership originally acquired: (i) four GNMA Certificates which are
guaranteed as to principal and interest by the Government National Mortgage
Association (GNMA) collateralized by first mortgage loans on multifamily
housing properties located in three states; (ii) an FHA Loan which is insured
as to principal and interest by the Federal Housing Administration (FHA) on a
multifamily housing property; and (iii) Partnership Equity Investments in five
Operating Partnerships which own the multifamily properties financed by the
GNMA Certificates and the FHA Loan. The Partnership has been repaid by GNMA
on one of the GNMA Certificates and the related property has been deeded to
GNMA in lieu of foreclosure, thus eliminating the Partnership Equity
Investment in such Property. Collectively, the remaining GNMA Certificates,
the FHA Loan and the Partnership Equity Investments are referred to as the
"Permanent Investments". The obligations of GNMA and FHA are backed by the
full faith and credit of the United States government.
Distributions
Cash distributions paid or accrued per BAC were as follows:
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
Mar. 31, 2000 Mar. 31, 1999
-------------- --------------
<S> <C> <C>
Regular monthly distributions
Income $ .1107 $ .1116
Return of capital .0018 .0009
-------------- --------------
$ .1125 $ .1125
============== ==============
Distributions
Paid out of cash flow $ .1125 $ .1125
============== ==============
</TABLE>
Regular monthly distributions to BAC Holders consist primarily of interest
received on the FHA Loan and GNMA Certificates. Additional cash for
distributions is received from other investments. The Partnership is
permitted to replenish its reserves with cash flows in excess of distributions
paid. For the three months ended March 31, 2000, $17,223 was placed into
reserves for cash flow in excess of the regular monthly cash distributions.
The Partnership believes that cash provided by operating and investing
activities and, if necessary, withdrawals from the Partnership's reserves, to
the extent available, will be adequate to meet short-term liquidity
requirements, including the payments of distributions to BAC Holders. The
Partnership has no other internal or external sources of liquidity. Under the
terms of its Partnership Agreement, the Partnership has the authority to enter
into short- and long-term debt financing arrangements; however, the
Partnership currently does not anticipate entering into such arrangements.
The Partnership is not authorized to issue additional BACs to meet short-term
and long-term liquidity requirements.
<PAGE> - 9 -
Asset Quality
The FHA Loan and GNMA Certificates owned by the Partnership are guaranteed as
to principal and interest by FHA and GNMA, respectively. The obligations of
FHA and GNMA are backed by the full faith and credit of the United States
government. The Partnership Equity Investments, however, are not insured or
guaranteed. The value of these investments is a function of the value of the
real estate underlying the Operating Partnerships. The fair value of the
properties underlying the Operating Partnerships is based on management's best
estimate of the net realizable value of such properties; however, the ultimate
realized values may vary from these estimates.
The overall status of the Partnership's investments has remained relatively
constant since December 31, 1999.
The following table shows the occupancy levels of the properties financed by
the Partnership as of March 31, 2000:
<TABLE>
<CAPTION>
Number Percentage
Number of Units of Units
Property Name Location of Units Occupied Occupied
- ------------------------------------- ------------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Crane's Landing Winter Park, FL 252 241 96%
Delta Crossing Charlotte, NC 178 169 95%
Monticello Apartments Southfield, MI 106 95 90%
The Ponds at Georgetown Ann Arbor, MI 134 134 100%
--------- ---------- ----------
670 639 95%
========= ========== ==========
</TABLE>
Results of Operations
The table below compares the results of operations for each period shown.
<TABLE>
<CAPTION>
For the Three For the Three Increase
Months Ended Months Ended (Decrease)
Mar. 31, 2000 Mar. 31, 1999 From 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Mortgage-backed securities income $ 577,368 $ 580,957 $ (3,589)
Interest income on temporary cash investments 3,248 4,151 (903)
Equity in earnings of Operating Partnerships 35,127 - 35,127
Other income - 400 (400)
--------------- --------------- ---------------
615,743 585,508 30,235
Operating and administrative expenses 167,059 133,446 33,613
--------------- --------------- ---------------
Net income $ 448,684 $ 452,062 $ (3,378)
=============== =============== ===============
</TABLE>
<PAGE> - 10 -
Mortgage-backed securities income decreased for the three months ended March
31, 2000, compared to the same period in 1999. This decrease is due to the
continued amortization of the principal balances of the Partnership's
mortgage-backed securities.
Interest income on temporary cash investments decreased for the three months
ended March 31, 2000, compared to the same period in 1999, due to withdrawals
made from the Partnership's reserves during 1999 to supplement distributions
to BAC Holders.
The Partnership suspended recognizing losses in the Operating Partnerships
when its entire initial investment had been consumed by such losses.
Subsequently, losses have been recognized only to the extent of additional
contributions, net of distributions received, to the Operating Partnerships by
the Partnership. Any distributions received by the Partnership from the
Operating Partnerships are recorded as income.
During the three months ended March 31, 2000, the Partnership received a
distribution of $35,127 from The Ponds at Georgetown whereas no such
distributions were received from any of the Operating Partnerships during the
comparable period of 1999. No additional contributions were made to the
Operating Partnerships during the three months ended March 31, 2000 or 1999.
As such, equity in earnings of Operating Partnerships of $35,127 was recorded
for the three months ended March 31, 2000.
Operating and administrative costs for the three months ended March 31, 2000,
increased approximately $33,613 compared to the same period in 1999. This
increase was primarily due to an increase in legal fees and salaries and
related expenses.
Forward Looking Statements
This report contains forward looking statements that reflect management's
current beliefs and estimates of future economic circumstances, industry
conditions, the Partnership's performance and financial results. All
statements, trend analysis and other information concerning possible or
assumed future results of operations of the Partnership and the real estate
investments it has made (including, but not limited to, the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations"), constitute forward-looking statements. BAC Holders
and others should understand that these forward looking statements are subject
to numerous risks and uncertainties and a number of factors could affect the
future results of the Partnership and could cause those results to differ
materially from those expressed in the forward looking statements contained
herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in the Partnership's market risk since
December 31, 1999.
<PAGE> - 11 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership has been named as a defendant in a purported
class action lawsuit filed in the Delaware Court of Chancery on
February 3, 1999, by two BAC holders, Alvin M. Panzer and
Sandra G. Panzer, against the Partnership, its General Partners,
America First and various of their affiliates (including Capital
Source L.P., a similar partnership with general partners that
are affiliates of America First) and Lehman Brothers, Inc.
The plaintiffs seek to have the lawsuit certified as a class
action on behalf of all BAC holders of the Partnership and
Capital Source L.P. The lawsuit alleges, among other things,
that a proposed merger transaction involving the Partnership
and Capital Source L.P. is deficient and coercive, that the
defendants have breached the terms of the Partnership's
partnership agreement and that the defendants have acted in
manners which violate their fiduciary duties to the BAC holders.
In this complaint, the plaintiffs sought to enjoin the proposed
merger transaction and seek to appoint an independent BAC holder
representative to investigate alternative transactions. The
lawsuit also requests a judicial dissolution of the Partnership,
an accounting, and unspecified damages and costs.
The General Partners determined not to pursue the merger
transaction which was the subject of the initial lawsuit and
proposed an alternative transaction to BAC holders. A
prospectus/consent solicitation statement outlining this
alternative transaction was sent to BAC holders on or about
November 16, 1999. The plaintiffs amended their complaint on
December 8, 1999, and again on February 22, 2000. The second
amended complaint challenges this current prospectus/consent
solicitation statement on grounds similar to those alleged in
the original complaint, as well as on other procedural grounds.
The second amended complaint does not seek to enjoin the
proposed merger transaction.
On July 12, 1999, Alvin M. Panzer, one of the named plaintiffs
in the action described above, filed an additional complaint
against the Partnership, its General Partners and America First
in the Delaware Court of Chancery (the Books and Records
Action). The complaint seeks to compel the General Partners
to supply the plaintiff with a list of all BAC holders of the
Partnership and copies of the limited partnership agreements of
the Operating Partnerships.
To resolve these lawsuits, the Partnership and affiliates, on
April 24, 2000, entered into a settlement agreement (the
Settlement) with the plaintiffs. The Settlement remains subject
to approval by the Court. In connection with the Settlement,
which, if approved, will also result in the dismissal of the
Book and Records Action, the Partnership expects to submit a
revised transaction to BAC holders for approval. The complete
terms of the Settlement, along with the updated consent
solicitation material describing the revised merger transaction,
will be filed with the Securities and Exchange Commission (the
SEC). As soon as it receives SEC clearance, the Partnership
will deliver to BAC holders materials that fully describe the
Settlement and revised transaction.
There are no other material pending legal proceedings to which
the Partnership is a party or to which any of its property is
subject.
<PAGE> - 12 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Agreement of Limited Partnership of Capital Source II
L.P.-A (incorporated herein by reference from Exhibit A of
the Prospectus contained in the Registrant's
Post-Effective Amendment No. 4 dated February 5, 1987 to
the Registration Statement on Form S-11 (Commission File
No. 0-16862)).
4(b) Amendment to the Capital Source II L.P.-A Limited
Partnership Agreement (incorporated by reference to Exhibit
3.09 to Pre-Effective Amendment No. 3 to the Registration
Statement on Form S-4 filed by America First Real Estate
Investment Partners, L.P. on July 21, 1999 (Commission
File No. 333-52117)).
4(c) Beneficial Assignment Certificate (incorporated by
reference from Exhibit 10(a) to the Registrant's Amendment
No. 2 dated January 27, 1987, to the Registration Statement
on Form S-11 (Commission File No. 0-16862)).
10(a) Stipulation of Settlement
IN THE CASE OF
ALVIN M. PANZER and
SANDRA G. PANZER
Plaintiffs,
v.
INSURED MORTGAGE EQUITIES, INC.,
INSURED MORTGAGE EQUITIES II
LP., AMERICA FIRST CAPITAL
SOURCE I, LLC., AMERICA FIRST
CAPITAL SOURCE II, LLC, AMERICA
FIRST COMPANIES, LLC, AMERICA
FIRST REAL ESTATE INVESTMENT
PARTNERS, L.P., LEHMAN
BROTHERS, INC., CAPITAL SOURCE
L.P., PAUL L. ABBOTT, and CAPITAL
SOURCE II, L.P.,
Defendants.
27. Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file a report on Form 8-K during the
quarter for which this report is filed.
<PAGE> - 13 -
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.
CAPITAL SOURCE II L.P.-A
By America First Capital
Source II L.L.C., General
Partner of the Registrant
By /s/ Michael Thesing
Michael Thesing,
Vice President and
Principal Financial Officer
Dated: May 11, 2000
<PAGE> - 14 -
Exhibit 10(a)
Stipulation of Settlement
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
ALVIN M. PANZER and
SANDRA G. PANZER
Plaintiffs, C.A. No. 16929 NC
v.
STIPULATION OF
INSURED MORTGAGE EQUITIES, INC., SETTLEMENT
INSURED MORTGAGE EQUITIES II
LP., AMERICA FIRST CAPITAL
SOURCE I, LLC., AMERICA FIRST
CAPITAL SOURCE II, LLC, AMERICA
FIRST COMPANIES, LLC, AMERICA
FIRST REAL ESTATE INVESTMENT
PARTNERS, L.P., LEHMAN
BROTHERS, INC., CAPITAL SOURCE
L.P., PAUL L. ABBOTT, and CAPITAL
SOURCE II, L.P.,
Defendants.
WHEREAS:
A. Plaintiffs Alvin. M. Panzer and Sandra G. Panzer have brought this action
(the "Action") in the Delaware Court of Chancery (the "Court") on behalf of
themselves and the class of public holders of units of limited partnership
interests in Capital Source L.P. ("Capital Source I") and Capital Source II
L.P.-A ("Capital Source II") (collectively the "Partnerships"), against
defendants Insured Mortgage Equities, Inc., Insured Mortgage Equities II L.P.,
America First Capital Source I, L.L.C., America First Capital Source II
L.L.C., America First Companies LLC, America First Real Estate Investment
Partners, L.P., Lehman Brothers, Inc., Capital Source I, Paul Abbott, Capital
Source II, (collectively the "Defendants"). The general partners of Capital
Source I are Insured Mortgage Equities, Inc. and America First Capital Source
I L.L.C. The general partners of Capital Source II are Insured Mortgage
Equities II L.P. and America First Capital Source II L.L.C. The foregoing are
herein referred to collectively as the General Partners.
B. On or about May 7, 1998, the America First Defendants (defined below) filed
a preliminary Prospectus/Consent Solicitation Statement with the Securities
and Exchange Commission ("SEC") in connection with a proposed solicitation of
consents from the unitholders of the Partnerships, among other things, to
convert the Partnerships into a newly-formed corporation, America First Real
Estate Investment Company, Inc. On or about July 21, 1998, the America First
Defendants filed Amendment No. 1 to the Prospectus/Consent Solicitation
Statement, subject to completion. On or about November 3, 1998, the America
First Defendants filed Amendment No. 2 to the Prospectus/Consent Solicitation
Statement, subject to completion.
<PAGE> - 15 -
C. Plaintiffs filed the Action on February 3, 1999, seeking a decree of
dissolution under 6 Del. C. section 17-802, the appointment of a receiver to
wind-up the Partnerships' affairs and an accounting from the defendants. The
Action also asserted claims for breaches of fiduciary duties against the
General Partners, Lehman Brothers, America First Real Estate Investment
Company, Inc., America First Companies, LLC, and Paul L. Abbott (the "America
First Defendants"). The Action also asserted claims for breaches of the
agreements of limited partnership for the Partnerships (the "Partnership
Agreements") by the General Partners, and alleged that Lehman Brothers and the
America First Defendants caused and substantially assisted violations of the
Partnership Agreements. The Complaint as originally filed alleged that the
Partnerships were not meeting their objectives and should be dissolved and
liquidated, and that the General Partners were instead seeking improperly to
perpetuate the lives of the Partnerships by converting them into a new
corporation. The Complaint alleged that the General Partners had the ability
to direct the sale or liquidation of the apartment projects constituting the
assets of the subsidiary limited partnerships which hold the operating assets
of the Partnerships (the "Operating Partnerships") ten years after completion
of those projects, and that the ten year period had expired or was about to
expire for all of the Operating Partnerships. The Action as originally filed
also alleged that in May 1997, Lehman Brothers, as then-controlling parent of
the IME General Partners, improperly transferred ownership and control of the
IME General Partners to America First Companies, LLC. The Action alleged that
the transfer of ownership and control by Lehman Brothers was improperly
effected without an effective vote, consent or ratification by the unitholders
of the Partnerships as required under Delaware law and the Partnership
Agreements. The Complaint alleged that the transfer of control by Lehman
Brothers to the America First Defendants violated the Partnership Agreements
and the fiduciary duties of the General Partners, Lehman Brothers and Abbott,
then-managing director of Lehman Brothers and the General Partners.
D. During May 1999, the parties engaged in discussions regarding possible
settlement of the Action. While these discussions were pending, the parties
agreed to extend the Defendants' period of time to respond to the Complaint.
The discussions did not lead to any agreement to settle the litigation.
E. On June 16, 1999, plaintiffs Sandra G. Panzer and Alvin M. Panzer sent to
the General Partners a written request for access to certain Partnership
records. Plaintiffs requested (1) a current list of the full names and last
known home or business addresses of each partner and unitholder of the
Partnerships, set forth in alphabetical order ("Holder List"), and (2) copies
of all Partnership agreements of the Operating Partnerships ("Operating
Partnership Agreements"). In a letter dated June 23, 1999, plaintiffs'
request for access to the Holder List and Operating Partnerships Agreements
was denied by the Partnerships, stating that the plaintiffs lacked a proper
purpose and that the items were not required to be provided under the
Partnership Agreements or relevant law.
F. On July 12, 1999, plaintiffs Sandra G. Panzer and Alvin M. Panzer filed
separate actions, Civil Action Nos. 17292 and 17293 (the "Books and Records
Actions"), in the Court, seeking access to the Holder List and Operating
Partnership Agreements pursuant to 6 Del. C. section 17-305 and the
Partnership Agreements. The Books and Records Actions alleged that the
plaintiffs requested the Holder List and Operating Partnership Agreements to
analyze the issue of the Partnerships' control over the assets of the
Operating Partnerships in order value their investments and communicate with
other holders regarding the Action and the conduct of the General Partners and
their affiliates with respect to the Partnerships' assets.
G. On July 21, 1999, the General Partners announced a consent solicitation to
secure unitholders' approval of the conversion of the Partnerships into a new
limited partnership, America First Real Estate Investment Partners, L.P. (the
"Company").
<PAGE> - 16 -
H. On November 24, 1999, the America First Defendants mailed to unitholders of
record as of October 28, 1999 a Prospectus/Consent Solicitation Statement and
supplements thereto, and other materials (collectively the "Consent
Solicitation") which sought approval for, among other things, a merger of the
Partnerships with and into the Company (the "Merger"). In connection with the
Merger, the Company stated it would issue new securities to the unitholders of
the Partnerships in exchange for the assets of the Partnerships pro rata
according to an exchange value based upon the assets of the respective
Partnerships (the "Exchange Values"), and the Partnerships would cease to
exist. Unitholders could also elect to receive certain junior notes in
exchange for their units up to a maximum total amount of $20 million in
notes. The Merger requires the approval of a majority of the unitholders of
each Partnership.
I. On December 8, 1999, plaintiffs filed an Amended Class Action Complaint.
The Amended Class Action Complaint added allegations directed to the proposed
conversion of the Partnerships into a newly-formed limited partnership,
including that the America First Defendants had wrongfully expended over $2.5
million of Partnership funds in connection with the abandoned transaction.
The Amended Class Action Complaint also repeated the claims in the original
Complaint and substituted America First Real Estate Investment Partners L.P.
for America First Real Estate Investment Company, Inc. as a party defendant.
On January 7, 2000, the defendants moved to dismiss the Action on the grounds
that the Complaint failed to state a claim upon which relief can be granted
and that certain claims are barred by the Statute of Limitations.
J. On or about November 16, 1999, the parties to the Books and Records Actions
reached an agreement pursuant to which plaintiffs would be provided with the
Holder List. The parties did not, however, reach an agreement regarding the
plaintiffs' access to the Operating Partnership Agreements.
K. On December 13, 1999, plaintiffs mailed a letter to the unitholders
informing them, among other things, of the pendency of the Action and of
plaintiffs' intent to vote "no" in the ongoing consent solicitation and to
pursue the Action seeking a dissolution and winding up of the Partnerships if
the Merger was not approved by the unitholders. The plaintiffs also urged the
unitholders to vote "no" or revoke any previously submitted consents in favor
of the Merger. The December 13, 1999 letter also stated that plaintiffs would
seek to force the General Partners to honor revocations, notwithstanding the
instruction in the Consent Solicitation that unitholders may not withdraw or
revoke consents after the consent card is delivered to the proxy solicitor,
Kissel-Blake. On January 14, 2000, plaintiffs mailed a second letter to the
unitholders urging those who had not yet voted to vote "no", and those who had
voted "yes" to revoke their consents.
L. On February 4, 2000, the plaintiffs filed a motion for leave to amend the
complaint and a motion for certain declaratory and injunctive relief relating
to the right to revoke consents and the disclosures related thereto (the
"Motion For Relief"). The Second Amended Class Action Complaint, which was
the subject of the motion to amend, repeated the claims and allegations of the
Amended Class Action Complaint and added a claim for corrective disclosure and
injunctive relief directed to the right to revoke consents. The Second
Amended Class Action Complaint alleged that the instructions in the Consent
Solicitation that unitholders may not withdraw or revoke consents were
materially misleading, and that the General Partners' refusal to honor
revocations of consents was improper. On March 7, 2000, the defendants again
moved to dismiss the Action, this time on the grounds that the Complaint
failed to state a claim upon which relief can be granted, that certain claims
are barred by the Statute of Limitations and that certain other claims are
moot.
<PAGE> - 17-
M. On February 10, 2000, the Court held a conference on plaintiffs' request to
be heard on the Motion For Relief prior to February 18, 2000, the then-current
expiration date of the Consent Solicitation. The Court granted plaintiffs'
request to be heard and scheduled a hearing for February 16, 2000. In part
due to these motions, the General Partners agreed to allow unitholders to
revoke consents. Plaintiffs thus withdrew their request to be heard on the
Motion For Relief prior to February 18, 2000. On February 18, 2000, the
Partnerships issued a press release announcing that the consent solicitation
would be extended and that unitholders had the right to revoke consents. In
February and March of 2000, counsel for the parties engaged in extensive
settlement negotiations. These negotiations culminated in this agreement to
settle this action, subject to Court approval, satisfactory completion by
Plaintiff's counsel of confirmatory discovery and subject to the approval of
the Merger by a majority of the unitholders of record as of October 28, 1999
of each Partnership. N. The Defendants, while continuing to deny all
allegations of wrongdoing or liability or damage to the purported class
whatsoever, and contending that they acted properly and lawfully at all times,
desire to settle and terminate the purported class's claims so as to put to
rest any and all claims that were or could have been asserted in this action
or arising out of matters set forth in the pleading, and to avoid the expense
and burdens of continued litigation without in any way acknowledging any fault
or liability.
NOW, THEREFORE, IT IS STIPULATED AND AGREED by and among Plaintiffs and
Defendants, as follows:
1. Certification of a Settlement Class
a. Solely for the purposes of this settlement, the parties stipulate and
agree (i) to certification of the Action as a class action on behalf of the
unitholders of the Partnerships who were holders of record as of October 28,
1999 (the "Class") pursuant to Rule 23(b)(2) of the Delaware Court of Chancery
Rules; (ii) that named plaintiffs Alvin M. Panzer and Sandra G. Panzer shall
act as representatives of the Class ("Representative Plaintiffs"); (iii) that
Plaintiffs' counsel, Chimicles & Tikellis LLP and Goodkind Labaton Rudoff &
Sucharow LLP shall act as Plaintiffs' Co-Lead Counsel, and that Plaintiffs'
other counsel shall be Milberg Weiss Bershad Hynes & Lerach, LLP; Wolf
Haldenstein Adler Freeman & Herz LLP; Girard & Green; Hanzman, Criden, Korge,
Hertzberg & Chaykin, P.A., (collectively, "Class Counsel"); and (iv) to a
finding that the Class is so numerous that joinder of all members thereof is
impracticable, that there are questions of law or fact common to the Class,
that the claims are typical of the claims of the Class, that the
representative plaintiffs will fairly and adequately represent the interests
of the Class, that the representative plaintiffs and Class Counsel will fairly
and adequately represent the interests of the Class; and that the defendants
have acted or refused to act on grounds generally applicable to the Class,
thereby making appropriate final injunctive relief with respect to the Class
as a whole.
b. The Class shall be composed of all holders of units (otherwise known as
Beneficial Assignment Certificates) in either of the Partnerships as of
October 28, 1999, the record date for voting on the proposed Merger.
c. In the event this Settlement Agreement is terminated, the certification of
the Class and appointment of the representative plaintiffs and Class Counsel
shall automatically be vacated, and the Action shall proceed as though the
Class had never been certified and the representative plaintiffs and Class
Counsel had never been appointed. This subparagraph shall survive the
termination of this Settlement Agreement.
2. Distributions to the Class
In full settlement and compromise of all claims against Defendants by
Plaintiffs and all members of the Class, and subject to the terms and
conditions of this Settlement Agreement, including Court approval of the
Settlement, satisfactory completion by Plaintiffs' counsel of confirmatory
discovery, and approval of the Merger by a majority of the unitholders of both
Partnerships on the revised terms provided for herein, Defendants, upon the
execution of this Stipulation of Settlement, will amend the existing Merger
proposal and distribute an amended Consent Solicitation or supplement to the
Consent Solicitation to the unitholders in connection therewith, to provide,
if and only if the unitholders approve the Merger as amended and the other
conditions of the Settlement are met:
<PAGE> - 18 -
a. First Post-Closing Distribution. The Company will, subject to the review
and approval of the National Association of Securities Dealers ("NASD"), make
a $6 million distribution to (i) the unitholders of the Company and (ii)
current unitholders of the Partnerships who subsequent to the Merger elect to
receive variable rate junior notes from the Company (the "Notes") instead of
units issued by the Company ("Noteholders"). These payments to Noteholders
will be made in partial payment of the Company's debt to them, pro rata based
upon the Exchange Values attributable to the Partnerships for purposes of the
Merger. These distributions shall be made as soon as practicable after the
Merger is effective, but in any event no later than the end of the first full
fiscal quarter subsequent to the effective date of the Merger. This
distribution will be in addition to the regular quarterly distributions to
unitholders that the Company intends to make beginning with the first full
fiscal quarter of operations following the completion of the Merger.
b. Second Post-Closing Distribution. As of the end of the first full fiscal
quarter of operations following the Merger, the Company will, subject to the
review and approval of the NASD, make a $5 million distribution to (i) the
unitholders, and to (ii) the Noteholders, pro rata based upon the Exchange
Values of the Company. This second post-closing distribution will be
inclusive of the regular quarterly distribution, but in no event shall the
total amount of this distribution be less than $5 million.
c. Unit Repurchase. Subject to the review and approval of the NASD, the
Company will publicly announce and commence a unit repurchase program under
which the Company shall purchase from unitholders up to $3.5 million in units
of the Company within the first full twelve months after the Merger is
effective. These repurchases will be made in compliance with all applicable
laws and regulations. If for any reason the Company does not purchase $3.5
million in units in the repurchase program during the first full twelve months
after the Merger is effective, at the end of the first twelve months, the
Company will make a further post-closing special distribution to the
unitholders. The amount of this distribution will be $3.5 million, less the
cost of the units purchased by the Company in the repurchase program during
the first twelve months after the Merger. This distribution will be in
addition to the regular quarterly distributions to unitholders that the
Company intends to make beginning with the first full fiscal quarter of
operations following the completion of the Merger.
d. Reservations of Rights. (i) The general partner of the Company, in its
sole discretion, subject to the terms of the Company's partnership agreement
and the fiduciary duties of the general partner of the Company, may change the
Company's distribution policy at any time, and any such change shall not
affect in any way this Stipulation of Settlement, so long as the Company makes
the distributions and/or unit repurchases required by 2(a), 2(b) and 2(c).
(ii) In connection with this transaction, the Company may, at its option, pay
cash instead of issuing Notes. If the Company elects to pay cash to investors
otherwise entitled to receive Notes, it will pay these investors an amount
equal to the principal amount of notes these investors would have received
plus interest accrued to the date of payment.
3. Release and Discharge of Claims
a. The Release. The Order and Final Judgment will provide, among other
things, that the Actions and any and all claims, rights, causes of action and
suits that have been or could have been asserted, either directly,
individually, representatively, derivatively or in any other capacity, by the
plaintiffs and any other members of the Class against the Defendants, or any
of their respective present or former directors, officers, agents, employees,
attorneys, financial advisers, commercial bank lenders, investment bankers,
representatives, associates, parents, subsidiaries, general or limited
partners, shareholders, limited partners, administrators, successors and
assigns (the "Released Parties"), whether under state or federal law, and
whether directly, representatively, or in any other capacity in connection
with, or that arise out of the subject matter of the Action (the "Released
Claims"), shall be fully, finally and forever compromised, settled, released,
discharged and dismissed with prejudice.
<PAGE> - 19 -
b. Covenant Not To Sue. The Class members and their attorneys, agents,
representatives, survivors, heirs, successors, assigns, executors and
administrators further covenant that they will refrain from commencing any
action, suit, or administrative proceeding, or prosecuting any pending action,
suit, arbitration or administrative proceeding, in law or in equity, against
the Released Parties, concerning the Released Claims. In the event that such
Class members or their attorneys, agents, representatives, survivors, heirs,
successors, assigns, executors, and administrators commence or continue any
such action, the Released Parties shall be entitled to seek an order from the
Court enjoining the continuation of such action, suit or proceeding.
c. Other Litigation. Simultaneous with the final approval of the Settlement,
the Class representatives, Alvin M. Panzer and Sandra G. Panzer, will also
agree to dismiss with prejudice the Books and Records Actions.
d. Effect of Releases. This Settlement Agreement may be pleaded as a full
and complete defense to any action, suit, or other proceeding that may be
instituted, prosecuted, or attempted with respect to any of the Released
Claims. The Settling Class Members and Defendants agree that any such
proceeding would cause irreparable injury to the party against whom it is
brought and that the Court or any court of competent jurisdiction may enter an
injunction restraining prosecution hereof. The Class Members and Defendants
further agree that this Settlement Agreement maybe pleaded as necessary for
the purpose of enforcing this Settlement Agreement.
4. Court Approval and Notice to the Class
a. Class Notice. The Company shall bear the cost of providing notice of the
settlement to the Class. The parties shall submit a form of scheduling order
to the Court for approval as soon as practicable upon expiration of the
Consent Solicitation as revised hereunder. The proposed Scheduling Order
which the parties shall seek from the Court shall: temporarily certify the
Class for settlement purposes under Delaware Court of Chancery Rule 23(b)(2)
pending a final hearing on the Settlement and plaintiffs' application for
attorneys' fees and costs; certify the plaintiffs as Class representatives and
Class Counsel as counsel for the Class; approve the form and manner of Notice
to the Class and direct dissemination of the Notice to unitholders; schedule a
hearing on the Settlement and plaintiffs' application for attorneys' fees and
costs to be held thirty days following the dissemination of the Notice or at
such other time as the Court orders; provide the time by which objections to
the Settlement or plaintiffs' application for attorneys' fees and costs must
be filed; and stay further proceedings in the Action other than proceedings in
connection with the Settlement pending final determination regarding the
Settlement by the Court.
b. Final Approval. If this Stipulation of Settlement (including any
modification thereto made with the consent of the parties as provided for
herein) shall be approved by the Court, the parties shall jointly request the
Court to enter Final Judgment:
i. certifying the Class and approving the settlement set forth in this
Stipulation of Settlement as fair, reasonable and adequate;
ii. dismissing the complaint in the Action on the merits as to all Defendants
with prejudice to plaintiffs and all members of the Class, and releasing the
Released Parties from the Released Claims.
iii. permanently barring and enjoining the institution or prosecution by any
of the plaintiffs or any other member of the Class, whether directly,
representatively, derivatively, or in any other capacity, or any action
asserting any Released Claims;
iv. decreeing that this Stipulation of Settlement and the settlement
contemplated by this Stipulation of Settlement (the "Settlement") provided for
herein are not an admission for any purpose by any of the parties in this
action of any wrongdoing, liability or damage whatsoever on the part of the
Defendants;
v. reserving jurisdiction by the Court over the consummation, implementation
and administration of the Settlement; and containing such other and further
provisions consistent with the terms of this Stipulation of Settlement to
which the parties may consent; and
vi. awarding attorneys' fees and costs as determined by the Court.
<PAGE> - 20 -
5. Conditions of Settlement
a. Sequence of Events. Immediately upon execution of this Stipulation of
Settlement, the parties shall file the Stipulation with the Court and commence
confirmatory discovery so that such discovery can be completed prior to the
expiration of the Consent Solicitation on the revised Merger and dissemination
of the Notice of Settlement and plaintiffs' application for attorneys' fees
and costs to the Class. As soon practical after the execution of this
Stipulation of Settlement, the Partnerships will present to the SEC and the
NASD an amended Prospectus/Consent Solicitation. The amended
Prospectus/Consent Solicitation shall include, among other things, a
description, agreeable to the parties, of the proposed Settlement, the claims
proposed to be released thereunder and the proposed application and sources of
payment of plaintiffs' attorneys' fees and costs. After approval by the SEC
and NASD, the amended or supplemented Prospectus/Consent Solicitation will be
distributed to unitholders. If the necessary majority of unitholders of each
Partnership approves the revised Merger, and if confirmatory discovery is
satisfactorily completed, the parties shall as soon as practicable submit a
proposal Scheduling Order to the Court, as discussed above.
b. Conditions of Settlement. In order for this Settlement to be valid and
binding, these conditions must be satisfied:
i. Completion by the plaintiffs of confirmatory discovery.
ii. Approval of the Revised Merger by a majority of the holders of each
Partnership.
iii. Approval of the Settlement by the Court.
c. Result of Failure to Satisfy Conditions. If these conditions are not
satisfied, or if the Settlement set forth in this Stipulation of Settlement
fails to become effective in accordance with its terms, or if the Final
Judgment is reversed, vacated or modified, the Settlement provided herein and
any actions to be taken in connection therewith (including the Notice of
Settlement, Hearing Order and Final Judgment to be entered) and all
negotiations, transactions and proceedings connected with it (i) shall be
without prejudice to the rights of any party, (ii) shall not be deemed or
construed as evidence or an admission by any party of any fact, matter or
thing, (iii) shall not be admissible in evidence or used for any purpose in
any other action or proceeding, and (iv) shall be void, invalid and without
effect.
6. No Admission
Acceptance of the terms of this Stipulation of Settlement and the
negotiations, papers and proceedings relating to this Stipulation of
Settlement and its terms are not and shall not be construed as evidence or an
admission by the Defendants of the validity of any of the claims made by the
Class or liability of the Defendants therefor or of any wrongdoing whatsoever
whether or not the Settlement is consummated. Neither this Stipulation of
Settlement nor any of its terms, or the negotiations or papers relating
thereto shall be offered or received in evidence in this or any other action
or proceeding or utilized in any manner whatsoever as an admission or
concession of liability or wrongdoing or lack thereof of any nature on the
part of the Defendants.
7. Implementation and Scheduling
a. Counterparts. This Stipulation of Settlement may be executed in one or
more counterparts. All executed counterparts and each of them shall be deemed
to be one and the same instrument, provided, that no party shall be bound
until all parties have executed this Stipulation of Settlement. The
undersigned counsel for the parties shall exchange among themselves original
signed counterparts and a complete set of original executed counterparts of
this Stipulation of Settlement shall be filed with the Court.
<PAGE> - 21 -
b. Attorneys' Fees. Plaintiffs' counsel intend to apply to the Court for,
and defendants will not object to, approval of $1.6 million in attorneys' fees
and expenses ("Fee Award"). The first $600,000 of such Fee Award will be paid
by the following defendants: Insured Mortgage Equities Inc., Insured Mortgage
Equities II, L.P., America First Capital Source I, LLC, America First Capital
Source II, LLC, Capital Source I, and Capital Source II (and shall not include
Partnership funds). The $600,000 shall be placed immediately upon the
execution of this stipulation into an interest bearing escrow account and
shall be paid to Plaintiffs' Co-Lead Counsel, together with accrued interest,
within five days after the expiration of any time to appeal or, if an appeal
is taken from the Court's entry of an order awarding fees, after the judgment
confirming the settlement has become final. The balance of such Fee Award
shall be paid equally from the following sources: five hundred thousand
dollars ($500,000) from the Company; and five hundred thousand dollars
($500,000) from the distributions of capital made to unitholders and
noteholders (paid proportionately based upon the amount of distributions to
unitholders and noteholders at the time of the distributions described in
paragraph 2 (a) and 2(b) herein).
c. Record Date. The record date for investors entitled to grant their
consents for this transaction will remain October 28, 1999, in order to permit
investors to change or revoke their consent. The Consent Solicitation shall
be extended for an additional 60 days following the declaration of
effectiveness (the "Declaration") by the Securities and Exchange Commission
with respect to the post-effective amendment to the Registration Statement
relating to the Merger. Class members will be permitted to revoke their
previously submitted written consents and/or revocations of consents.
d. Letter from Class Representatives. Plaintiffs shall send a letter to all
of the Unitholders of Capital Source I and Capital Source II informing them,
in text agreed to by the parties, of the amendments to the Merger resulting
from this Settlement Agreement and urging those unitholders to support the
settlement and vote in favor of the Merger, as amended. The letter shall be
mailed together with the amended Prospectus/Consent Solicitation to the
unitholders.
e. Governing Law. The rights and obligations of the parties to this
Stipulation of Settlement shall be construed and enforced with, and governed
by the laws of the State of Delaware, without regard to that state's choice of
law principles.
f. Entire Agreement. This Stipulation of Settlement constitutes the entire
agreement among the parties hereto and no representations, warranties or
inducements have been made to anyone concerning the Stipulation other than the
representations, warranties and covenants contained and memorialized in such
documents. Except as otherwise provided herein, each party shall bear its own
costs.
g. Non-severability. If any provision of the Stipulation of Settlement is
held to be illegal or invalid by a court of competent jurisdiction, the
remaining provisions of the Stipulation of Settlement are void, invalid and
ineffective.
h. Amendment. This Stipulation of Settlement may be amended or any of its
provisions waived only by a writing executed by or on behalf of all
signatories hereto.
<PAGE> - 22 -
IN WITNESS WHEREOF, this Stipulation and Settlement Agreement has been
executed this 24th day of April, 2000 by the undersigned counsel of record for
the Plaintiffs and Defendants.
CHIMICLES & TIKELLIS LP
________________________________
Pamela S. Tikellis
Robert J. Kriner, Jr.
One Rodney Square
Wilmington, Delaware 19801
(302) 656-2500
Attorneys for Plaintiffs
SMITH, KATZENSTEIN & FURLOW LLP
__________________________________
David A. Jenkins
800 Delaware Avenue
Post Office Box 410
Wilmington, Delaware 19899
(302) 652-8400
Attorneys for Defendants
<PAGE> - 23 -
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0
0
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<EPS-DILUTED> .11
</TABLE>
