As filed with the Securities and Exchange Commission on June 18, 1997
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 3)
Filed by the Registrant [X]
Filed by the Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Summit Insured Equity L.P. (Commission File No.: 0-15703);
Summit Insured Equity L.P. II (Commission File No.: 0-16873);
Summit Preferred Equity L.P. (Commission File No.: 0-16695);
and Eagle Insured L.P. (Commission File No.: 016860)
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in [a] Charter)
AEGIS REALTY, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
[ ] $125 per Exchange Act Rule 0-11(c)(i), 14a-6(l)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each Party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
8,097,539 shares of common stock
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$15 per share based upon (for purposes of this fee calculation
only) adjusted net asset value of consolidated entities)
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$121,463,086
- --------------------------------------------------------------------------------
(5) Total fee paid:
$24,293
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a))(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- 0 -
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement to:
N/A
- --------------------------------------------------------------------------------
(3) Filing Party:
N/A
- --------------------------------------------------------------------------------
(4) Date Filed:
N/A
- --------------------------------------------------------------------------------
<PAGE>
The Related General Goodkind Labaton Milberg Weiss Bershad
Partners Rudoff & Sucharow LLP Hynes & Lerach LLP
625 Madison Avenue 100 Park Avenue One Pennsylvania Plaza
New York, New York 10022 New York, New York 10017 New York, New York 10119
June 18, 1997
Dear Investor:
Enclosed you will find a notice and a solicitation statement concerning a
proposed settlement of a pending class action that affects units you own in one
or more of the following partnerships: Summit Insured Equity L.P.; Summit
Insured Equity L.P. II; Summit Preferred Equity L.P.; and Eagle Insured L.P.
(the "Diversified Funds"). As part of the proposed settlement, if it is
approved by the Court after a hearing to be held on August 28, 1997, the four
currently separate Diversified Funds will be reorganized into a single real
estate investment trust, which will be approved for listing on the American
Stock Exchange (or other national exchange or market) upon official notice of
issuance prior to consummation of the proposed reorganization.
The terms, conditions, risks and benefits of the proposed settlement and
reorganization are described in detail in the enclosed notice and solicitation
statement, which you are urged to read carefully. The Related General Partners
and Plaintiffs' Class Counsel recommend approval of the settlement as fair and
reasonable and in the best interests of the investors. If for any reason you
disagree and wish to object, the procedure for doing so is described in the
enclosed notice and solicitation statement. If you approve of the settlement,
you do not have to do anything to indicate such approval.
For additional information, you may call: Related Capital Company
(Investor Services Department) at 800-600-6422 for information about the
reorganization; or write to counsel for the plaintiff class in In re Prudential
Securities Incorporated Limited Partnerships Litigation, M.D.L. No. 1005
(S.D.N.Y.) at the address set forth above for information about the settlement.
Sincerely,
<TABLE>
<CAPTION>
<S> <C>
Milberg Weiss Bershad Hynes & Lerach LLP Related Insured Equity Associates, Inc.
by Melvyn I. Weiss, Esq. RIDC II, L.P.
-and- Related Equity Funding Inc.
Goodkind Labaton Rudoff & Sucharow LLP Related Federal Insured L.P.
by Lawrence A. Sucharow, Esq.
The Related General Partners
Class Counsel Co-Chairmen
</TABLE>
<PAGE>
SOLICITATION STATEMENT
AEGIS REALTY, INC.
This Solicitation Statement is being provided to the limited partners and
holders of beneficial unit certificates representing assignments of limited
partnership interests (collectively, the "BUC$holders"), of Summit Insured
Equity L.P. ("Insured I"), Summit Insured Equity L.P. II ("Insured II"), Summit
Preferred Equity L.P. ("Summit Preferred") and Eagle Insured L.P. ("Eagle")
(each, a "Partnership" and, collectively, the "Partnerships") pursuant to a
preliminary order, dated December 31, 1996 (the "Order"), of the United States
District Court for the Southern District of New York (the "Court") issued in
connection with the proposed settlement of class action litigation (the
"Litigation") captioned In re Prudential Securities Incorporated Limited
Partnerships Litigation brought on behalf of the BUC$holders. The Litigation
named as defendants Prudential Securities Incorporated ("PSI"), Prudential-Bache
Properties, Inc., a general partner of the Partnerships (the "P-B General
Partner"), and affiliates of Related Capital Company ("Related") that also serve
as general partners of the Partnerships (the "Related General Partners"). PSI
and the P-B General Partner have previously settled claims against them in the
Litigation; the proposed settlement relates to the settlement of the causes of
actions against the Related General Partners (the "Related Settlement").
Pursuant to the Related Settlement, among other matters, the Partnerships
would be consolidated (the "Consolidation") into Aegis Realty, Inc. (the
"Company"), a newly formed Maryland corporation (i) that intends to qualify as a
real estate investment trust ("REIT") for tax purposes and (ii) whose common
stock will be approved for listing on the American Stock Exchange (or other
national exchange or market) prior to the consummation of the Consolidation.
Pursuant to the Consolidation, the Company will issue shares ("Shares") of its
par value $.01 per share common stock ("Common Stock") which will be allocated
to each BUC$holder and the Related General Partner and its affiliates based upon
his or its proportionate interest in the Shares allocated to his or its
Partnership in the Consolidation. The allocation of Shares among the
Partnerships was made by the Related General Partners based on the relative
adjusted net asset values (the "Adjusted Net Asset Value") of each Partnership.
For the purpose of determining Adjusted Net Asset Values, the Related General
Partners utilized, in part, the letter of value appraisals prepared by Jones
Lang Wootton USA as of October 1, 1995, to independently appraise the value of
the real properties in which each Partnership has a direct or indirect interest
and adjusted such appraised values based on certain qualitative factors.
Oppenheimer & Co., Inc. has issued its fairness opinion that the Consolidation,
including the allocation of Shares among the Partnerships, is fair, from a
financial point of view, to the BUC$holders of each Partnership.
The Consolidation involves certain risks that should be considered by
BUC$holders. See "RISK FACTORS" beginning on page 20 of this Solicitation
Statement. In particular, BUC$holders should consider the following:
[bullet] The comparative analysis prepared by the Related General Partners to
assist BUC$holders in analyzing the Consolidation indicates that,
based on a variety of assumptions, the estimated going concern and
liquidation values exceed the lowest estimated market value of the
Shares.
[bullet] Uncertainty as to prices at which the Shares will trade and the
possibility that such prices will be below the proportionate Adjusted
Net Asset Value of the assets exchanged for Shares.
[bullet] The Consolidation involves a fundamental change in the nature of a
BUC$holder's investment from (i) an investment in a finite-life
entity, in which a BUC$holder will receive liquidating distributions
based upon the net proceeds from the sale of the entity's assets, to
(ii) an investment in an infinite-life entity that will be able to
issue additional equity securities and reinvest asset sale proceeds
and mortgage repayments and in which a BUC$holder who receives Shares
will recover his investment not from liquidating distributions but
rather from the sale of such Shares. In addition, BUC$holders will own
an interest in a Company with a portfolio of assets which is different
from, and more varied than, the type of assets in which they
originally invested.
[bullet] The Consolidation involves potential conflicts of interest from the
Related General Partners and the Advisor receiving consideration and
economic benefits with respect to the Consolidation.
[bullet] Although the pro forma financial information provides three possible
scenarios of participation among the Partnerships, the pro formas do
not analyze all of the several potential scenarios of Partnership
participation and the resulting uncertainty will prevent BUC$holders
from fully evaluating the Company's potential financial strength or
asset base in determining whether or not to object to the
Consolidation. See "PRO FORMA FINANCIAL INFORMATION."
[bullet] Pursuant to the Court's Order preliminarily approving the Settlement
Stipulation and subject to final Court approval, a Partnership will
participate in the Consolidation unless BUC$holders holding more than
33 1/3% of the outstanding Units in such Partnership object to the
Consolidation. Participation by a Partnership in the Consolidation
will bind all BUC$holders, including BUC$holders that object to the
Consolidation.
[bullet] BUC$holders in Participating Partnerships who object to the
Consolidation do not have the right to receive cash based on an
appraisal of their interests in the Participating Partnerships or
otherwise.
[bullet] The Company will be allowed to incur debt of up to 50% of its Total
Market Value, as defined below (measured at the time such debt is
incurred), and will be more highly leveraged than the Partnerships,
two of which are presently debt-free and the
<PAGE>
(Cover Page Continued)
other two of which have immaterial amounts of debt outstanding. An
increase in debt may increase the risk of default in the Company's
obligations.
[bullet] The Company will have the ability to offer additional shares of its
Common Stock or other equity or debt securities in exchange for money,
property or otherwise. Stockholders will have no preemptive right to
acquire any such securities, and any such issuance of equity
securities could result in dilution of a Stockholder's investment in
the Company.
[bullet] Regardless of the initial level of distributions by the Company, there
is no guarantee with respect to the level of future distributions.
[bullet] The Consolidation will result in expenses to the Company, currently
estimated to be approximately $1,205,000, or approximately .99% of the
total Adjusted Net Asset Value, as defined below, of the Company
(based on the aggregate Adjusted Net Asset Values assigned to the
Partnerships in the Consolidation, and assuming 100% Participation).
[bullet] The Company will be subject to corporate income tax if it fails to
qualify as a REIT.
The Court's Order, among other matters, (a) certified for purposes of
settlement, two classes consisting of (i) all BUC$holders (the "Equitable
Class") and (ii) generally, all persons that purchased Units, as defined below,
in certain partnerships sponsored by PSI or its affiliates between January 1,
1980 and June 8, 1994, regardless of whether they currently hold Units (the
"Monetary Class"), and (b) preliminarily approved the Related Settlement
pursuant to the Stipulation of Settlement (the "Settlement Stipulation") entered
into by the Related General Partners and certain other parties to the
Litigation. The Settlement Stipulation generally provides for the settlement,
discharge and release of all claims against the Related General Partners in
exchange for certain benefits to the two classes.
The Related Settlement consists of the two parts: a monetary settlement
(the "Monetary Settlement") for the benefit of the Monetary Class and an
equitable settlement (the "Equitable Settlement") for the benefit of the
Equitable Class. This Solicitation Statement provides information with respect
to the Equitable Settlement.
Pursuant to the Court's Order preliminarily approving the Settlement
Stipulation and subject to final Court approval, unless the BUC$holders of a
Partnership holding more than 33 1/3% of the outstanding limited partnership
interests and beneficial unit certificates representing assignments of limited
partnership interests (collectively, the "Units") object to the participation of
that Partnership, that Partnership will participate (each, a "Participating
Partnership" and, collectively, the "Participating Partnerships"), in the
Consolidation whereby the Units held by all BUC$holders of a Participating
Partnership will be exchanged for Shares of the Company thereby combining the
Participating Partnerships into the Company.
Equitable Class Members may not individually opt out of the Equitable
Settlement or the Consolidation. If, however, either (a) BUC$holders holding 1/3
or more of the Units of a particular Partnership object to that Partnership
participating in the Consolidation, or (b) the Court does not approve of any
particular Partnership participating in the Consolidation, then that Partnership
will not participate in the Consolidation.
In connection with the Consolidation, immediately following the exchange by
the BUC$holders of the Participating Partnerships of their Units for Shares,
Related Aegis LLC, a newly formed affiliate of Related, will acquire the general
partner interests of the P-B General Partner in each of the Participating
Partnerships (the "P-B Interests") and the P-B General Partner will withdraw as
a general partner of the Partnerships. One-half of the P-B Interests will be
contributed back to the Participating Partnerships by Related Aegis LLC,
resulting in the BUC$holders of the Participating Partnerships ultimately owning
a greater percentage of the Shares than would otherwise be the case if Related
Aegis LLC did not make such a contribution. Related Aegis LLC will then transfer
to the Company the remaining one-half of the P-B Interests in exchange for
Shares. The Related General Partners will also transfer to the Company their
general partner interests in the Participating Partnerships in exchange for
Shares (other than with respect to Insured I and Insured II in which the Related
General Partner's general partner interest will be converted into a limited
partner interest). The Participating Partnerships (other than Insured I and
Insured II which will remain in existence) will then dissolve and the assets of
such Participating Partnerships will be distributed to the Company as the sole
BUC$holder. The Company will assume all of the liabilities of the Participating
Partnerships which are dissolved.
Related Aegis LLC will also serve as the advisor (the "Advisor") to the
Company pursuant to an advisory agreement (the "Advisory Agreement") that will
provide for, among other things, the Advisor to provide services to the Company
consistent with those currently provided to the Partnerships by the Related
General Partners and the P-B General Partner (collectively, the "General
Partners") and for annual fees to the Advisor that will be approximately 25%
lower than those currently payable by the Partnerships to the General Partners.
If all of the Partnerships participate in the Consolidation ("100%
Participation"), (i) the Company and its affiliates will initially own direct or
indirect interests in 14 neighborhood shopping centers, two garden apartment
complexes and three participating FHA co-insured mortgage loans, and (ii) the
Company will issue an aggregate of 8,097,539 Shares which will be allocated to
each BUC$holder, the Related General Partners and the Advisor based upon his or
its proportionate interest in the Shares allocated to his or its Partnership in
the Consolidation. Based on such allocation, the 8,097,539 Shares will be issued
as follows: (i) 8,006,614 (or, approximately 98.88%, assuming the Advisor and
the Related General Partners have exercised the Conversion Option, as defined
below, with respect to the Insured
<PAGE>
(Cover Page Continued)
LP Interests) to the BUC$holders and (ii) 90,925 (or, approximately 1.12%) of
which will be issued, or reserved for issuance, to the Related General Partners
and the Advisor.
Consummation of the Consolidation is conditioned upon, among other things,
(i)(a) participation in the Consolidation by Insured I and either Insured II or
Eagle and (b) the Related General Partners' agreement to proceed with the
Consolidation notwithstanding that there is less than 100% Participation
(collectively, "Minimum Participation") and (ii) Court approval of the
Consolidation and the Related Settlement after a fairness hearing (the "Fairness
Hearing") that is scheduled for 10:30 a.m. on August 28, 1997 at United States
Courthouse, 40 Centre Street, New York, New York 10007, Courtroom 1305. See "THE
CONSOLIDATION AND RELATED TRANSACTIONS--The Consolidation--Conditions to the
Consolidation."
This Solicitation Statement is first being mailed to BUC$holders by the
Related General Partners and the Company on or about June 18, 1997.
NEITHER THE CONSOLIDATION NOR THE ISSUANCE OF SHARES HAS BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION. NEITHER THE SECURITIES AND EXCHANGE
COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED
UPON THE FAIRNESS OR MERITS OF THE CONSOLIDATION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS SOLICITATION STATEMENT; ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THE CONSOLIDATION; ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
OBJECTIONS TO THE CONSOLIDATION MAY BE DELIVERED TO THE RELATED GENERAL
PARTNERS UNTIL 5:00 P.M., EASTERN TIME
ON AUGUST 18, 1997, UNLESS EXTENDED.
BUC$HOLDERS ALSO HAVE THE OPPORTUNITY TO OBJECT TO THE CONSOLIDATION
AT THE SETTLEMENT FAIRNESS HEARING.
THE RELATED GENERAL PARTNERS RECOMMEND
THAT BUC$HOLDERS NOT OBJECT TO THE CONSOLIDATION. COUNSEL FOR PLAINTIFFS IN
THE CLASS ACTION SUPPORT THE CONSOLIDATION AS PART OF THE RELATED
SETTLEMENT.
BUC$HOLDERS THAT WISH TO OBJECT TO THE CONSOLIDATION SHOULD
PROVIDE NOTICE OF SUCH OBJECTION TO THE RELATED
GENERAL PARTNERS AT THE ADDRESS BELOW, AS SOON AS POSSIBLE.
BUC$HOLDERS THAT DO NOT WISH TO
OBJECT TO THE CONSOLIDATION
SHOULD DO NOTHING.
ALL QUESTIONS AND INQUIRIES SHOULD BE DIRECTED TO
RELATED CAPITAL COMPANY
625 MADISON AVENUE
NEW YORK, NY 10022
TELEPHONE (800) 600-6422
ATTENTION: INVESTOR SERVICES DEPARTMENT
The date of this Solicitation Statement is June 18, 1997.
<PAGE>
AVAILABLE INFORMATION
The Partnerships are subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
required to file reports and other information with the Securities and Exchange
Commission (the "Commission"), 450 Fifth Street N.W., Washington, D.C. 20549.
For further information concerning the Partnerships, please refer to the reports
of the Partnerships filed under the Exchange Act, copies of which may be
examined without charge at, or obtained upon payment of prescribed fees from,
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and which will also be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, Suite 1300, New York, New York 10048 and at its web site
(http://www.sec.gov) and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
Statements contained in this Solicitation Statement as to the contents of
any agreement or other document which are referenced in this Solicitation
Statement are not necessarily complete, and each such statement is qualified in
its entirety by reference to the full text of such agreement or document, copies
of which may be obtained from the Related General Partners without charge. In
addition, copies of the latest Annual Reports on Form 10-K and Quarterly Reports
on Form 10-Q for each of the Partnerships may also be obtained from the Related
General Partners without charge. All requests should be directed to Related
Capital Company, 625 Madison Avenue, New York, NY 10022; Telephone (800)
600-6422, Attention: Investor Services Department.
Upon consummation of the Consolidation, the Company will be required to
file reports and other information with the Commission pursuant to the Exchange
Act. In addition to applicable legal or American Stock Exchange requirements, if
any, holders of the Common Stock will receive semi-annual reports containing
unaudited financial statements and annual reports containing audited financial
statements with a report thereon by the Company's independent auditors. If a
Partnership does not participate in the Consolidation, such Partnership will
continue to file reports and other information with the Commission, as required
by law, and will continue to furnish reports to BUC$holders.
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS SOLICITATION STATEMENT CONTAINS
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT,"
"ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE CAUTIONARY STATEMENTS SET
FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN THE SOLICITATION
STATEMENT IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
<PAGE>
TABLE OF CONTENTS
Page
-----
SUMMARY .............................................................. 1
The Consolidation .................................................. 1
Conditions to the Consolidation ................................. 1
Allocation of Shares ............................................ 2
Purchase of P-B General Partner's Interest ...................... 2
Restrictions on Transfers and other Activities Prior
to Final Approval of Consolidation ............................. 2
Risk Factors ....................................................... 2
Lowest Estimated Market Value of Shares is
Less Than Estimated Going Concern and Liquidation Values ....... 2
Market Price May Decrease after Consolidation ................... 2
Fundamental Change in Nature of Investment ...................... 2
Conflicts of Interest of Related General Partners ............... 3
Uncertain Capital Structure Prior to Objection Deadline ......... 3
Less Than Majority in Interest Will Bind All BUC$holders
in a Partnership ............................................... 3
No Cash Paid to Objecting BUC$holders ........................... 3
Risk of Increased Leverage ...................................... 3
Possible Dilutive Effect Arising from Shares
Available for Future Sale ...................................... 3
Risk of Lower Distributions ..................................... 3
Consolidation Expenses will Reduce Cash of the Company .......... 3
Tax Consequences of Failure to Qualify as a REIT ................ 4
Risk of Improper Allocation of Shares ........................... 4
Negative Impact of Being an Advised REIT ........................ 4
The Company ........................................................ 4
General ......................................................... 4
Management ...................................................... 4
Organization .................................................... 4
Business and Objectives ......................................... 5
Common Stock .................................................... 5
Background ......................................................... 5
History of the Partnerships ..................................... 5
History of Related .............................................. 6
Related General Partners' Reasons for Recommending
the Consolidation ................................................. 6
Liquidity ....................................................... 6
Increased Percentage of Distributions ........................... 6
Reduced Fees and Expenses ....................................... 7
Increased Distributions ......................................... 7
Increase in Trading Value of Shares ............................. 7
Ability to Raise Capital ........................................ 7
Growth .......................................................... 8
Diversification ................................................. 8
Withdrawal of P-B General Partner as a General
Partner/Equity Holder .......................................... 8
Limited Liability ............................................... 8
Fairness of the Consolidation ...................................... 8
Recommendation of the Related General Partners .................. 8
Fairness Opinion ................................................ 8
The Advisory Agreement ............................................. 8
Objection Procedures ............................................... 9
Appraisal Rights ................................................... 10
Alternatives to the Consolidation .................................. 10
Continuation of Partnerships .................................... 10
Liquidation ..................................................... 10
Comparison of Alternatives to the Consolidation .................... 10
Conflicts of Interest .............................................. 12
Related General Partners ........................................ 12
Class Counsel ................................................... 12
<PAGE>
TABLE OF CONTENTS
(Continued)
Distribution Policy ................................................ 12
Federal Income Tax Considerations .................................. 13
Accounting Treatment ............................................... 13
Selected Financial Data ............................................ 13
Comparison of Partnership Units and Company Shares ................. 16
Non-Participating Partnerships ..................................... 19
RISK FACTORS ......................................................... 20
Risks Relating to the Consolidation ................................ 20
Lowest Estimated Market Value of Shares is Less Than
Estimated Going Concern and Liquidation Values ................. 20
No Prior Market for Common Stock; Market Price
May Decrease After Consolidation ............................... 20
Risks Related to the Differences in the Business and
Investment Objectives Between the Company and the
Partnerships ................................................... 20
Potential Conflicts of Interest of Related General
Partners ....................................................... 21
Potential Conflicts of Interest Due to Competition
with Affiliates ................................................ 21
Potential Conflict of Interest of Class Counsel ................. 21
Uncertain Capital Structure Prior to Objection Deadline ......... 22
Less than Majority in Interest Will Bind All
BUC$holders in a Partnership ................................... 22
No Cash Paid to Objecting BUC$holders ........................... 22
Relinquishment of Rights from Court Approval
of Related Settlement .......................................... 22
Risk of Increased Leverage ...................................... 22
Risk of Lower Distributions ..................................... 23
Consolidation Expenses Will Reduce the Cash of the
Company Available for Distribution to Stockholders ............. 23
Tax Consequences of Failure to Qualify as a REIT ................ 23
Risk of Improper Allocation of Shares ........................... 23
Contingent or Undisclosed Liabilities ........................... 23
Loss of Relative Voting Power by BUC$holders .................... 24
Negative Impact of Being an Advised REIT ........................ 24
The Consolidation Will Require Participating BUC$holders
to Forego Alternatives to the Consolidation .................... 24
Board of Directors May Change Investment Policies ............... 24
Lack of Operating History ....................................... 24
Risks Related to Anti-takeover Provisions ....................... 24
Possible Dilutive Effect Arising from Shares Available
for Future Sale and Shares to Be Issued to
Class Counsel Pursuant to the Settlement ....................... 26
Risks Relating to the Business of the Company ...................... 26
General Risks Associated with Commercial Real Estate ............ 26
Risk of Interest Rate Increases ................................. 26
Possible Inability to Achieve Growth ............................ 26
Risks Associated with Renovation and Redevelopment .............. 27
Risk of Not Achieving Investment Objectives ..................... 27
Reliance Upon Major Tenant ...................................... 27
Competition ..................................................... 27
Uninsured Loss .................................................. 27
Environmental Laws May Impose Additional Liability .............. 27
Possible Changes in Tax Laws .................................... 28
Status of the Company Under ERISA ............................... 28
Potential Liability Under the Americans With
Disabilities Act ............................................... 28
BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION .......... 28
History of the Partnerships ........................................ 28
Formation ....................................................... 28
The Related General Partners' Management of the Partnerships .... 28
Historical Information and Achievement of Objectives ............ 28
Insured I ....................................................... 29
<PAGE>
TABLE OF CONTENTS
(Continued)
Insured II ..................................................... 29
Summit Preferred ............................................... 29
Eagle ........................................................... 29
Recent Tender Offer for Insured I ............................... 30
Description of the Litigation ..................................... 30
The Related Settlement ............................................. 30
History of Settlement Negotiations ............................. 30
Summary of Related Settlement; Effect on Rights of
BUC$holders..................................................... 32
Right to Terminate ............................................. 32
Consolidation Approval Procedure ............................... 32
Class Counsel ..................................................... 33
Alternatives to the Consolidation ................................. 33
Continuation of the Partnerships ................................... 34
Benefits of Continuation ....................................... 34
Detriments of Continuation ..................................... 34
Valuation Comparison ........................................... 34
Liquidation of the Partnerships ................................... 34
Benefits of Liquidation ......................................... 34
Detriments to Liquidation ....................................... 34
Potential Acquisition of Partnership Assets by a REIT ........... 35
Valuation Comparison ........................................... 35
Benefits of, and Reasons for, the Consolidation ................... 35
Increase in Liquidity ........................................... 35
Increased Distributions ......................................... 35
Reduction in Aggregate Annual Fees ............................. 35
Increase in Trading Value of Shares ............................. 36
Ability to Raise Capital ....................................... 37
Growth ......................................................... 37
Diversification ................................................. 37
Withdrawal of P-B General Partner as a General
Partner/Equity Holder .......................................... 37
Limited Liability ............................................... 37
Cash Flow ..................................................... 37
Sales and Refinancing Proceeds ................................. 37
Market Attractiveness ........................................... 37
Reduction in Administrative Costs; Simplified Administration ... 37
Benefits to Certain Taxable Investors ........................... 38
Benefits to Tax-Exempt Stockholders ............................. 38
Simplified Income Tax Reporting ................................. 38
Consequences if Consolidation Not Completed ....................... 38
Disadvantages of the Use of Corporate Form ......................... 38
THE CONSOLIDATION AND RELATED TRANSACTIONS ........................... 39
The Consolidation ................................................. 39
Exchange of Units ............................................... 39
General Partner Interests ....................................... 39
Amendments to Partnership Agreements of Insured I and Insured II 39
Other Amendments ............................................... 40
Recommendation of the Related General Partners and Class Counsel 40
Objections Required to Prevent Consolidation ................... 40
Minimum Participation Requirement ............................... 40
Conditions to the Consolidation ................................. 40
Allocation of Shares ........................................... 41
Appraisals and Fairness Opinion ................................. 41
Accounting Treatment ........................................... 41
No Fractional Shares ........................................... 41
Taxable Gain or Loss ........................................... 41
Effect of Consolidation on Objecting BUC$holders................. 42
<PAGE>
TABLE OF CONTENTS
(Continued)
Effect of Consolidation on Non-Participating Partnerships ...... 42
Title Insurance ................................................ 42
Representations and Warranties .................................. 42
Legal Proceedings .............................................. 42
Environmental Matters .......................................... 42
Related Transactions .............................................. 43
Purchase Agreement between Related and the P-B General Partner .... 43
Overview ........................................................ 43
Covenants as to Voting of Units, Tender Offers .................. 43
Conditions to Closing; Court Approval .......................... 43
Withdrawal of the P-B General Partner .............................. 43
Consolidation Expenses ............................................ 44
FAIRNESS ............................................................ 44
General Partners' Belief as to Fairness ............................ 44
Related General Partners ........................................ 44
P-B General Partner ............................................ 45
Material Factors Underlying Belief as to Fairness .................. 45
Negotiation of Related Settlement; Court Approval .............. 45
Appraisals ...................................................... 45
Fairness of Allocations ........................................ 45
Allocation of Shares ............................................ 45
Fairness Opinion ................................................ 46
Court Approval of Fairness ...................................... 46
Comparison of Benefits and Detriments of Alternatives to the
Consolidation .................................................... 46
Continuation .................................................... 46
Liquidation .................................................... 46
Fairness in View of Conflicts of Interest .......................... 47
Related General Partners ........................................ 47
Class Counsel .................................................. 47
Fairness of Allocations ............................................ 47
Impact of Consolidation on Expected Distributions
to Stockholders ............................................... 47
Distribution of Shares to BUC$holders, Related General
Partners and the Advisor in Proportion to Interests in
the Partnerships ............................................... 48
Fairness to Non-Participating Partnerships ........................ 48
Allocation of Consolidation Expenses ............................ 48
Continuance of Non-Participating Partnerships .................. 48
Comparison of Alternatives to the Consolidation .................... 48
General ........................................................ 48
Summary of Comparative Valuation Alternatives ...................... 49
Conclusion ...................................................... 49
Estimated Market Value of Shares ................................ 50
Going-Concern Value ............................................ 53
Liquidation Values .............................................. 54
Comparative Analysis of Values .................................. 55
Secondary and Market Prices for Units .......................... 55
Recent Tender Offer for Insured I .............................. 55
Distribution Comparison ............................................ 55
Compensation, Reimbursements and Distributions to the
Related General Partners ......................................... 56
ALLOCATION OF SHARES ................................................ 59
Overview .......................................................... 59
Explanation of Allocations ........................................ 59
Allocation among the Partnerships .............................. 59
Allocation among the BUC$holders, the Related
General Partners and the Advisor ............................... 59
<PAGE>
TABLE OF CONTENTS
(Continued)
Determination of Adjusted Net Asset Value .......................... 60
Valuations ...................................................... 60
Possible Revisions to Valuations ................................ 60
FAIRNESS OPINION AND APPRAISALS ...................................... 61
Fairness Opinion .................................................. 61
General ........................................................ 61
Information Reviewed ............................................ 61
Assumptions, Limitations and Qualifications .................... 62
Summary of Analysis and Methodology ............................ 62
Liquidation Analysis--Discounted Cash Flow Analysis--Insured I
and Insured II ................................................ 63
Liquidation Analysis--Capitalization Rate Valuation
Analysis--Summit Preferred ..................................... 63
Discounted Cash Flow Analysis--Eagle ............................ 63
Continuation of the Partnerships--Valuation of the
Partnerships on a Continuing Basis ............................ 64
Valuation of the Company--Consolidation of the Partnerships
into the Company--Comparative Company Analysis ............... 65
Valuation of the Company--Consolidation of the Partnerships
into the Company--Discounted Cash Flow Analysis .............. 66
Allocation of Shares in the Consolidation ...................... 66
Conclusions .................................................... 67
Appraisals ........................................................ 67
General ........................................................ 67
Methodology .................................................... 67
Summary of Analysis ............................................ 67
Conclusions as to Value ........................................ 69
Assumptions, Limitations and Qualifications of Appraisals ...... 69
Compensation and Material Relationships ............................ 70
COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY AND
BUC$HOLDERS OF THE PARTNERSHIPS ..................................... 71
THE COMPANY .......................................................... 80
Overview .......................................................... 80
Ownership Structure ................................................ 80
Assets and Operations .............................................. 81
Retail Properties .............................................. 81
Insurance Coverage .............................................. 82
Residential Properties .......................................... 83
Pinehurst Partnership .......................................... 83
Chateau Creste Partnership ...................................... 83
Participating FHA Co-Insured Mortgage Loans .................... 84
Structure of Mortgage Loans and Equity Loans ...................... 84
Co-Insurance .................................................... 84
Base and Additional Interest .................................... 84
Term ............................................................ 84
Description of Existing Indebtedness .............................. 85
New York Life Loan .............................................. 85
Principal Mutual Loan .......................................... 85
Consolidation Expenses Loan .................................... 85
Internal Growth .................................................... 85
Business and Investment Objectives and Operating Strategies ........ 85
Distribution Policy ................................................ 86
Investment Policies ................................................ 86
Financing Policies ................................................ 87
Disposition of Properties .......................................... 87
<PAGE>
TABLE OF CONTENTS
(Continued)
Policies with Respect to Other Activities ......................... 87
Change in Policies ............................................... 87
Employees ......................................................... 87
OBJECTION PROCEDURES ................................................. 88
Time of Objecting and Record Date ................................. 88
Objection Notice ................................................... 88
Revocability of Objection ......................................... 88
No Right of Appraisal ............................................. 88
Information Services ............................................... 88
DESCRIPTION OF COMMON STOCK ......................................... 89
General ........................................................... 89
Listing, Price and Trading ......................................... 89
Restrictions on Ownership and Transfer ............................. 89
Conversion Option ................................................. 91
SHARES ELIGIBLE FOR FUTURE SALE ..................................... 91
CERTAIN PROVISIONS OF MARYLAND LAW AND THE CHARTER
AND BYLAWS ......................................................... 92
General ........................................................... 92
Additional Classes and Series of Stock ............................. 92
Advance Notice of Director Nominations and New Business ........... 92
Non-Applicability of Certain Statutory Anti-Takeover
Provisions ....................................................... 92
Business Combinations ........................................... 92
Control Share Acquisitions ..................................... 93
Amendment or Rescission of Exemptions ........................... 93
Change of Control; Anti-Takeover Provisions ....................... 93
Amendment of Charter ............................................... 93
Number of Directors; Removal; Filling Vacancies ................... 93
Indemnification and Limitation of Liability ....................... 94
Officers and Directors ......................................... 94
The Withdrawing/Terminated General Partners ..................... 95
CONFLICTS OF INTEREST ............................................... 95
General ........................................................... 95
Conflicts of Interest of the Related General Partners ............. 96
Substantial Benefits to Related General Partners ............... 96
Conflicts of Interest of the Company ............................... 96
Future Dealings With Related General Partners
and Affiliates ................................................ 96
Initial Company Directors and Officers ......................... 97
Competition with Affiliates of the Company ......................... 97
Conflicts of Interest of Class Counsel ............................. 97
FINANCIAL INFORMATION ............................................... 98
Index to Financial Information ..................................... 98
Selected Financial Data ........................................... 101
PRO FORMA FINANCIAL INFORMATION ..................................... 104
FEDERAL INCOME TAX CONSIDERATIONS ................................... 226
General ........................................................... 226
Opinions of Counsel ............................................... 226
Certain Tax Differences Between the Ownership of
the Units and Shares ............................................. 226
Tax Consequences of the Consolidation ............................. 227
Consequences to Participating Partnerships
and BUC$holders ................................................ 227
Consequences to Company ......................................... 228
Taxation of the Company ........................................... 228
General ......................................................... 228
<PAGE>
TABLE OF CONTENTS
(Continued)
Requirements for Qualification .................................. 229
Income Tests .................................................... 229
Asset Tests .................................................... 230
Restrictions on Ownership ...................................... 230
Annual Distribution Requirements ................................ 230
Taxation of Real Estate Investment Trusts ...................... 231
Failure to Qualify as a REIT ...................................... 231
Tax Aspects of the Company's Investment in Insured I
and Insured II .................................................... 231
Entity Classifications .......................................... 232
Sale of Properties ................................................ 232
Taxation of Taxable Domestic Stockholders .......................... 232
Taxation of Stockholders on the Disposition
of the Common Stock ............................................... 232
Backup Withholding ................................................ 233
Taxation of Tax-Exempt Stockholders ................................ 233
Taxation of Foreign Stockholders .................................. 233
State Tax Consequences and Withholding ............................ 234
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ...... 235
Security Ownership of Certain Beneficial Owners .................... 235
Class Counsel .................................................. 235
Security Ownership of Management .................................. 235
MANAGEMENT .......................................................... 236
Directors and Executive Officers of the Company .................... 236
Committees of the Board of Directors .............................. 238
Audit Committee ................................................ 238
Compensation Committee .......................................... 238
The Advisor ........................................................ 238
Summary of the Advisory Agreement .................................. 239
Description of Incentive Stock Option Plan ........................ 240
EXECUTIVE COMPENSATION .............................................. 241
Executive Officers of the Company .................................. 241
Directors ........................................................ 241
INDEPENDENT AUDITORS ................................................ 241
LEGAL MATTERS ........................................................ 241
GLOSSARY ............................................................ 242
APPENDICES:
APPENDIX A: Fairness Opinion ...................................... A-1
APPENDIX B: Appraisal Summary .................................... B-1
APPENDIX C: Financial Forecasts of Partnership/Company
Operations .......................................... C-1
APPENDIX D: Objection Notice ...................................... D-1
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
SUMMARY
The following Summary is qualified in its entirety by the detailed
information appearing elsewhere in this Solicitation Statement, including the
appendix hereto. Unless the context otherwise requires, all references to the
"Company" in this Solicitation Statement (i) include Aegis Realty, Inc. and
Insured I and Insured II, which Partnerships will remain in existence as
majority-owned subsidiaries of Aegis Realty, Inc. upon consummation of the
Consolidation and (ii) assumes 100% Participation of the Partnerships in the
Consolidation. See "GLOSSARY" for the definitions of certain of the capitalized
terms used in this Solicitation Statement.
The Consolidation
The Consolidation is being proposed by the Related General Partners and
supported by Class Counsel as part of the Related Settlement.
Pursuant to the Court's Order preliminarily approving the Settlement
Stipulation and subject to final Court approval, unless the BUC$holders of a
Partnership holding more than 33 1/3% of the outstanding Units object to the
participation of that Partnership in the Consolidation (by timely delivery of a
notice of objection in the form attached as Appendix D (an "Objection Notice")
by the Objection Deadline), that Partnership will participate in the
Consolidation whereby the Units held by all BUC$holders of a Participating
Partnership ("Participating BUC$holders") will be exchanged for shares of Common
Stock of Aegis Realty, Inc. In connection with the Consolidation, the assets and
liabilities of the Participating Partnerships will be combined into the Company.
Unlike most consolidation transactions in which investors are not
independently represented in structuring or determining the terms and conditions
of the transaction, the Consolidation is the result of extensive negotiations,
under the auspices of the Court, between Related and Class Counsel, on behalf of
the BUC$holders, in connection with the settlement of the Litigation. Class
Counsel has negotiated a settlement that it considers fair and reasonable to,
and in the best interests of, the BUC$holders.
Class Counsel has also retained Oppenheimer & Co., Inc. ("Oppenheimer") to
opine as to the fairness of the Consolidation, including the allocation of
Shares among the Partnerships, from a financial point of view, to the
BUC$holders of each Partnership (the "Fairness Opinion"). The allocation of
Shares among the Partnerships was made by the Related General Partners based on
the relative adjusted net asset value (the "Adjusted Net Asset Value") of each
Partnership. For the purpose of determining Adjusted Net Asset Values, the
Related General Partners utilized the letter of value appraisals (the
"Appraisals") prepared by Jones Lang Wootton USA ("JLW USA"), as of October 1,
1995, to independently appraise the value of the real properties in which each
Partnership has a direct or indirect interest (the "Appraised Values") and
adjusted such Appraised Values based on certain qualitative factors.
In addition, the Court has scheduled the Fairness Hearing at which time (i)
BUC$holders and other Class Members may appear before the Court and object to
any aspect of the Related Settlement, including the Consolidation
(notwithstanding a BUC$holder's failure to deliver an Objection Notice by the
Objection Deadline), (ii) the Related General Partners will provide the Court
with a tabulation of the number of Units held by BUC$holders in each Partnership
that have objected to the Consolidation and (iii) the Court will either (x)
approve the Related Settlement or (y) notwithstanding satisfaction of the
Minimum Participation requirement and all other conditions to consummation of
the Consolidation, not approve the Related Settlement.
Assuming that all of the Partnerships participate in the Consolidation
("100% Participation"), upon consummation of the Consolidation (the "Effective
Date"), (i) the BUC$holders of Insured I will receive 99.25% of the 4,071,745
Shares allocated to Insured I in the Consolidation, and the applicable Related
General Partner and the Advisor will receive an aggregate .75% limited
partnership interest in Insured I, which interest is convertible into an
aggregate of .75% of the Shares allocated to Insured I in the Consolidation,
(ii) the BUC$holders of Insured II will receive 98.5% of the 1,086,586 Shares
allocated to Insured II in the Consolidation, and the applicable Related General
Partner and the Advisor will receive an aggregate 1.5% limited partnership
interest in Insured II, which interest is convertible into an aggregate of 1.5%
of the Shares allocated to Insured II in the Consolidation, and (iii) the
BUC$holders of Summit Preferred and Eagle will receive 98.5%, and the applicable
Related General Partner and the Advisor will receive, in the aggregate, 1.5%, of
the 615,144 and 2,324,064 Shares allocated to Summit Preferred and Eagle,
respectively, in the Consolidation.
Conditions to the Consolidation. The Company will not proceed to consummate
the Consolidation unless, among other things, (i) the Minimum Participation
requirement is met; (ii) the P-B General Partner withdraws as general partner of
each Partnership and relinquishes its right to obtain an equity or other
interest in the Company in respect of the P-B Interests; (iii) the Common Stock
is approved for listing on the American Stock Exchange (or other national
exchange or market) subject to notice of issuance; and (iv) the Court has issued
its final order approving the Related Settlement, including the Consolidation
(the "Final Order"). "Minimum Participation" means, collectively, (a) the
participation in the Consolidation by Insured I and either Insured II or Eagle
and (b) the waiver by the Related General Partners of their right under the
Settlement Stipulation to not proceed unless there is 100% Participation.
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<PAGE>
Allocation of Shares. Assuming 100% Participation in the Consolidation,
the Shares to be issued in the Consolidation will be allocated among the
Partnerships as follows:
Percentage of Number of
Adjusted Aggregate Shares
Net Asset Adjusted Net Allocated to
Partnership Value Asset Value Partnership
- ---------------------- -------------- --------------- -------------
Insured I $ 61,076,169 50.28% 4,071,745
Insured II 16,298,792 13.42% 1,086,586
Summit Preferred 9,227,154 7.60% 615,144
Eagle 34,860,971 28.70% 2,324,064
------------- ------- ----------
TOTAL $121,463,086 100.00% 8,097,539
============= ======= ==========
See "ALLOCATION OF SHARES" for more detailed information regarding the
allocation of Shares. Shares will be allocated to each BUC$holder, the Related
General Partners and the Advisor in accordance with the respective Partnership
Agreements and based upon their respective interests in distributions of cash
flow from operations of the Partnership.
Purchase of P-B General Partner's Interest. As part of the Consolidation,
the Advisor will acquire the P-B Interests and the P-B General Partner will
withdraw as a general partner of the Partnerships, in accordance with the terms
and conditions of a purchase agreement, dated as of December 19, 1996 (the "P-B
Purchase Agreement"), among the P-B General Partner, Related and other
affiliates of Prudential. The Advisor will contribute one-half of the P-B
Interests it acquires to the Participating Partnerships, resulting in the
BUC$holders of such Partnerships ultimately owning a greater percentage of the
Shares than would otherwise be the case if the Advisor did not make such a
contribution. Pursuant to the P-B Purchase Agreement, the Advisor may, subject
to the approval of the Court, acquire the P-B Interests whether or not the
Consolidation is consummated. See "THE CONSOLIDATION AND RELATED TRANSACTIONS--
Related Transactions--Purchase Agreement between Related and the P-B General
Partner--Overview."
Restrictions on Transfers and other Activities Prior to Final Approval of
Consolidation. Pending final approval of the Related Settlement, the Court's
Order prohibits Class Members from (i) transferring their Units unless the
transferee agrees to be bound by the Related Settlement; (ii) granting a proxy
to object to the Consolidation or (iii) commencing a tender offer for the Units.
In addition, the General Partners are enjoined from (i) recording any transfers
made in violation of the Order and (ii) providing the list of investors in any
Partnership to any person conducting a tender offer.
In addition, pursuant to the P-B Purchase Agreement, the P-B General
Partner is not required to consummate the sale of the P-B Interests to Related
if Related makes a tender offer for any Units (except in response to a third
party tender offer) and Related has agreed not to tender, without the P-B
General Partners' prior consent, for any Units or Shares for a period of one
year from the Effective Date (except in response to a third party tender offer).
Furthermore, if prior to the Effective Date, Related acquires Units in
connection with a defensive tender offer, Related is obligated to offer such
Units to the Company at a price equal to the tender price, including any
borrowing or other costs incurred by Related to acquire the Units.
Risk Factors
BUC$holders should carefully consider the matters disclosed under "RISK
FACTORS" before deciding whether or not to object to the Consolidation. The
following is a summary of the material risks and other adverse features of the
Consolidation.
Lowest Estimated Market Value of Shares is Less Than Estimated Going
Concern and Liquidation Values. The comparative analysis prepared by the Related
General Partners to assist BUC$holders in analyzing the Consolidation indicates
that, based on such estimates which include a number of assumptions, the
estimated going concern and liquidation values exceed the lowest estimated value
of the Shares. See "FAIRNESS--Comparison of Alternatives to the Consolidation."
Market Price May Decrease after Consolidation. Recently, equity securities
issued in transactions comparable to the Consolidation have traded at a premium
to the value of underlying assets. There is, however, substantial uncertainty as
to the prices at which the Shares will trade and the possibility exists, that
the trading price of the Shares may be lower than the proportionate Adjusted Net
Asset Value assigned to the Partnerships in the Consolidation.
Fundamental Change in Nature of Investment. The nature of each
Participating BUC$holder's investment will change from (i) an interest in a
finite-life entity holding a specified portfolio of real estate related assets
that will be liquidated over time to (ii) an equity interest (i.e., shares of
Common Stock), in an ongoing, infinite life company, that will reinvest the
proceeds of asset sales and mortgage repayments and whose portfolio of real
estate related assets will initially be more diversified than that of any single
Partnership, but may be changed from time to time by the Company's Board of
Directors without approval of Stockholders. If the Consolidation is
2
<PAGE>
consummated, a Stockholder's investment will be recovered not from proceeds of
sales of Partnership assets, but from a sale of his Shares, either on the
American Stock Exchange or in private transactions. In addition, BUC$holders
will own an interest in a Company with a portfolio of assets which is different
from, and more varied than, the type of assets in which they originally
invested.
Conflicts of Interest of Related General Partners. The Related General
Partners initiated and participated in the structuring of the Consolidation and
have certain conflicts of interest with respect to its completion. The Related
General Partners have a financial interest in the consummation of the
Consolidation, which creates an inherent conflict of interest in their
recommending that BUC$holders not object to the Consolidation. The Related
General Partners and their affiliates will realize certain economic benefits if
the Consolidation is consummated, including the Advisor entering into the
Advisory Agreement which is not cancelable for four years, other than for Cause.
See "CONFLICTS OF INTEREST--Conflicts of Interest of the Related General
Partners."
Uncertain Capital Structure Prior to Objection Deadline. Although the pro
forma financial information provides three possible scenarios of participation
among the Partnerships, the pro formas do not analyze all of the several
potential scenarios of Partnership participation and the resulting uncertainty
will prevent BUC$holders from fully evaluating the Company's potential
financial strength or asset base in determining whether or not to object to the
Consolidation. See "PRO FORMA FINANCIAL INFORMATION."
Less Than Majority in Interest Will Bind All BUC$holders in a Partnership.
Pursuant to the Court's Order preliminarily approving the Settlement Stipulation
and subject to final Court approval, a Partnership will participate in the
Consolidation unless BUC$holders holding more than 33 1/3% of the outstanding
Units in such Partnership object to the Consolidation. If a Partnership
participates in the Consolidation, all BUC$holders of such Partnership,
including BUC$holders who objected to the Consolidation (either by delivering an
Objection Notice by the Objection Deadline or by objecting at the Fairness
Hearing), will participate in the Consolidation. Under the applicable
Partnership Agreements, if the Consolidation were not subject to a judicial
determination and Court order following a Fairness Hearing, it could only be
consummated by obtaining the approval of holders of a majority of the
outstanding Units of each Participating Partnership. See "OBJECTION PROCEDURES."
No Cash Paid to Objecting BUC$holders. BUC$holders who object to the
Consolidation do not have a right to receive cash based on an appraisal of their
Units in the Participating Partnerships or otherwise.
Risk of Increased Leverage. Insured I and Insured II are the only
Partnerships that currently have outstanding debt. Pursuant to the Charter, the
Company is permitted to incur debt of up to 50% of the Company's Total Market
Value (measured at the time such debt is incurred). Assuming 100% Participation,
upon consummation of the Consolidation, the Company's indebtedness is
anticipated to represent approximately 7.8% of the Company's Total Market Value.
An increase in debt may increase the risk of default on the Company's
obligations and, along with fluctuations in interest rates that may be
applicable to the indebtedness of the Company, may reduce the cash flow
available for distribution.
Possible Dilutive Effect Arising from Shares Available for Future Sale. The
Board of Directors of the Company will have the ability, without Stockholder
approval, to offer additional shares of its Common Stock or other equity or debt
securities in exchange for money, property or otherwise. In particular, the
Company may issue shares to Class Counsel (as part of the Related Settlement)
and to the Advisor (upon the exercise of certain options which may be granted to
the Advisor). No prediction can be made as to the effect, if any, that future
sales of Common Stock or the availability of such shares for future sale will
have on the market price of the Common Stock. Future sales of substantial
amounts of Common Stock (including Common Stock issued to Class Counsel) or the
perception that such sales would occur, may adversely affect prevailing market
prices for the Common Stock. Stockholders will have no preemptive right to
purchase shares issued in any such offerings, and any such offerings might cause
a dilution of a Stockholder's investment in the Company. See "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT--Security Ownership of Certain
Beneficial Owners" and "RISK FACTORS--Risk and Other Adverse Factors Relating to
the Consolidation--Possible Dilutive Effect Arising from Shares Available for
Future Sale."
Risk of Lower Distributions. There is no guarantee with respect to the
level of future cash distributions, and regardless of the initial level of such
distributions, they could decline in the future to a level at which some
Stockholders would receive lower distributions than they received prior to the
Consolidation and lower than they would have received had the Consolidation not
occurred. The Company's 1996 annual pro forma financial statements indicate that
BUC$holders of Summit Preferred and Eagle would have received lower
distributions (approximately 0.66% or $0.30 per $1,000 of original investment
("Original Investment") less than 1996 annual distributions for Summit Preferred
and approximately 9.95% or $6.18 per $1,000 of Original Investment less than
1996 annual distributions for Eagle had the Consolidation occurred on January 1,
1996, with 100% Participation).
Consolidation Expenses will Reduce Cash of the Company. Expenses of the
Consolidation (the "Consolidation Expenses") are estimated to be approximately
$1,205,000 or approximately .99% of the total Adjusted Net Asset Value of the
Company (based on the aggregate Adjusted Net Asset Values of the Partnerships
and assuming 100% Participation). The Company will borrow to pay the
Consolidation Expenses which will reduce the Company's cash balances to the
extent of payments on such debt. Funds used to pay
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<PAGE>
Consolidation Expenses (including with respect to any debt incurred to finance
such expenses) would otherwise be available for distribution to Stockholders.
See "RISK FACTORS--Consolidation Expenses."
Tax Consequences of Failure to Qualify as a REIT. Failure of the Company to
qualify as a REIT in any taxable year will (i) prevent deduction from its
taxable income of amounts distributed to Stockholders as dividends, (ii)
substantially reduce the amount available for distributions to Stockholders and
(iii) subject the Company to federal and state income tax on its taxable income
at regular corporate rates. See "FEDERAL INCOME TAX CONSIDERATIONS--Failure to
Qualify as a REIT."
Risk of Improper Allocation of Shares. The allocation of Shares among
Participating Partnerships is based upon the Adjusted Net Asset Values assigned
to each such Partnership, which are based upon and subject to significant
assumptions and limitations, and which are based, in part, on the Appraisals
which necessarily include their own significant assumptions and limitations.
Accordingly, there can be no assurance that the number of Shares allocated to
each Participating Partnership reflects the relative values at which the assets
of each such Partnership could be sold, the relative values at which the Units
of each such Partnership could be sold, or that such Shares could be sold at a
price equal to the Adjusted Net Asset Value assigned to such Shares. The risk of
improper allocation of Shares passes through to Stockholders, each of whom, upon
consummation of the Consolidation, will receive a pro rata percentage of the
Shares allocated to the Participating Partnership in which such Stockholder held
Units prior to the Consolidation.
Negative Impact of Being an Advised REIT. The Company will be an externally
advised REIT, rather than a self-administered REIT, which may have a negative
impact on the value of the Common Stock. The Company believes that many
investment bankers, brokerage firms, financial consultants, institutional
investors and others believe that self-administered REITs are more favorably
received in the equity markets. The Related General Partners, together with
Class Counsel, explored the possibility of structuring the Company as a self-
administered REIT. Such a structure would require the Company to purchase those
operating divisions of Related necessary to support the activities of the
Advisor. The purchase price for such a transaction is generally determined by
applying a multiple to recurring and transaction income generated by the entity
to be purchased. Because the Advisor is newly formed and has no operating
history, and due to the potentially dilutive effect of issuing Shares to
accomplish such structure, Related and Class Counsel were unable to establish a
mutually agreeable price for the Advisor. The Company could determine in the
future to acquire the Advisor or otherwise become self-administered although
management does not have any present intention to do so.
The Company
General. Aegis Realty, Inc. is a newly formed Maryland corporation which
intends to qualify as a REIT for tax purposes. The Company was organized under
the laws of the State of Maryland on August 13, 1996 to facilitate the
Consolidation. The Company's principal executive offices are located at 625
Madison Avenue, New York, NY 10022; Telephone (800) 600-6422.
Management. The Company's Board of Directors will initially be comprised of
five individuals; three of whom have been selected by the Related General
Partners and two of whom were recommended by the Related General Partners and
approved by Class Counsel. See "MANAGEMENT--Directors and Executive Officers of
the Company." The Company's assets will be managed by the Advisor pursuant to
the Advisory Agreement between the Company and the Advisor. See "MANAGEMENT--The
Advisor" and "--Summary of the Advisory Agreement."
Organization. The following table sets forth the percentage ownership of
Shares of the Company, assuming 100% Participation, upon consummation of the
Consolidation. As discussed in greater detail under the heading "THE
CONSOLIDATION AND RELATED TRANSACTIONS," and as illustrated below, upon
consummation of the Consolidation, Insured I and Insured II will remain in
existence as majority-owned subsidiaries of the Company. The limited partnership
interests held by the Advisor and the Related General Partners in Insured I and
Insured II (the "Insured LP Interests") will be convertible (generally on a
one-for-one basis) into an aggregate of 46,837 Shares.
- --------------------------------------------------------------------------------
The Company
Percentage Ownership Percentage Ownership
Prior to Conversion of After Conversion of
Owners Insured LP Interests Insured LP Interests
- --------------------------------- ---------------------- ---------------------
Related General Partners 0% .38%
The Advisor .55% .74%
Stockholders (former BUC$holders) 99.45% 98.88%
------- -------
100.00% 100.00%
======= =======
- --------------------------------------------------------------------------------
4
<PAGE>
In addition, the following diagram illustrates the structure and the
ownership of the Company, assuming 100% Participation, and the relationships
among the Company, the Partnerships, the Related General Partners and the
Advisor upon consummation of the Consolidation, including the percentage
ownership of such persons of Shares outstanding immediately after consummation
of the Consolidation.
[FLOW CHART]
---------- --------------
Advisor* Stockholders
---------- --------------
\ /
.55% 99.45%
Shares Shares
\ /
------- ------- \ / ------- -------
Related \ / Related
Advisor General ----------- General Advisor
Partner The Company Partner
------- ------- ----------- ------- -------
| / /|\ | /
.25%| .50% / / | \ 1.00% 50% LP
LP | LP / / | \ LP /
| / / | \ | /
| / / | \ | /
| / 99.25% | 98.50% | /
| / / GP | GP \ | /
| / / | \ | /
------------ / | \ ------------
Insured I ----------/ | --- Insured II
------------ | ------------
\ | |
\ | |
- ----------------- ---------------------- ----------------
Interests in 2
11 residential properties 3
Shopping Centers and 3 mortgages Shopping Centers
- ----------------- ---------------------- -----------------
*Includes Shares attributable to (i) the P-8 interests purchased from the
P-8 General Partner, and (ii) the Related General Partners' interests in
Eagle and Preferred.
[END FLOW CHART]
Business and Objectives. The Company's primary objective will be to
generate distributable cash flow through the acquisition and ownership (either
directly or through subsidiary partnerships) of a diversified portfolio of
retail and residential properties and participating FHA insured and co-insured
mortgages consistent with the present objectives of the Participating
Partnerships. If all of the Partnerships participate in the Consolidation, the
Company and its affiliates will own direct or indirect interests in 14
neighborhood shopping centers, two garden apartment complexes and three
participating FHA co-insured mortgage loans. Based upon current market
conditions, the Advisor anticipates that the Company's acquisition strategy will
initially focus on direct equity investments in retail properties and in
particular shopping centers. In addition, the Advisor believes that the greatest
growth opportunities will come from purchasing properties which need
redevelopment and repositioning rather than purchasing only new and recently
improved properties as the Partnerships have done in the past. Such focus may
change based on future market conditions and other factors.
The Board of Directors, in its sole discretion, may change the Company's
investment objectives as the Board of Directors deems appropriate and in the
best interests of the Shareholders, providing the Company with flexibility to
adjust its investment objectives in a timely manner when faced with changing
market conditions and growth opportunities. Prior to its changing any of the
Company's investment objectives, the Board of Directors will consider, among
other factors, Shareholder expectations, changing market trends, the expertise
and the ability of the Advisor and the relative risks and rewards associated
with any such change. See "THE COMPANY--Business and Investment Objectives and
Operating Strategies." Also see "RISK FACTORS--Board of Directors May Change
Investment Policies."
To finance its growth, the Company will be permitted to reinvest the
proceeds of asset sales and mortgage repayments and to incur debt up to 50% of
the Company's Total Market Value (measured at the time such debt is incurred).
Common Stock. The Common Stock will be approved for listing on the American
Stock Exchange (or other national exchange or market) upon official notice of
issuance prior to consummation of Consolidation, which should provide a
Stockholder with an efficient means of liquidating his or her investment.
There is currently no market for the Shares.
Background
History of the Partnerships. All of the Partnerships were originally
sponsored between 1986 and 1989 by the Related General Partners and the P-B
General Partner.
The Partnerships' original investment objectives and other aspects of their
formation are discussed under "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE
CONSOLIDATION--History of the Partnerships."
All of the Partnerships have paid quarterly distributions since inception.
5
<PAGE>
History of Related. Affiliates of Related were founded in 1972 by Stephen
M. Ross to engage in the business of providing financial and real estate
acquisition, development and management services. Its real estate related
products include luxury apartments, commercial office properties, retail centers
and affordable multifamily properties located in nearly every state and major
market place in the U.S. and Puerto Rico.
Through Related's Financial Services Division, Related and its affiliates
have sponsored 22 public and 238 private real estate investment programs that
have raised in excess of $3.1 billion from more than 106,000 investors. This
positions Related as one of the nation's largest sponsors of real estate
investment programs for retail and institutional investors. These programs have
accounted for the acquisition of over 800 properties with a valuation, at cost,
of approximately $7.3 billion. The Related portfolio, in the aggregate, consists
of approximately 112,000 residential apartment units, 25 shopping centers and 5
regional malls. This division also provides asset monitoring services for the
properties comprising the Related sponsored investment programs' real estate
portfolio. This involves regular site visits, monitoring of financial and
operating reports, regulatory compliance checks and independent periodic
analysis of local marketplace conditions. These services are currently provided
with respect to approximately 440 properties encompassing 59,000 residential
units.
Related's Development Division ranks as one of New York's largest
developers of luxury rental housing and as one of Florida's largest developers
of multifamily rental housing. To date, the Development Division has completed
approximately 3.5 million square feet of commercial space, 6,300 units of market
rate housing and 9,700 units of government-assisted affordable rental housing,
together valued at approximately $2 billion. Among its commercial projects are
the U.S. headquarters for Nestle Foods, Revlon and American Brands.
Related's Property Management Division provides property management
services. It directly manages approximately 11,400 residential units and 3.2
million square feet of first class commercial and mixed use space from its New
York offices. From its Florida offices, Related manages approximately 16,400
residential units and 17 shopping centers.
Related General Partners' Reasons for Recommending the Consolidation
The Consolidation is being proposed by the Related General Partners in
connection with the Related Settlement and pursuant to the Settlement
Stipulation, and the Related Settlement is being supported by Class Counsel. The
P-B General Partner has not taken a position with respect to the Consolidation
due to its conflict of interest in selling the P-B Interests to the Advisor.
Summarized below are the principal benefits of the Consolidation to
BUC$holders. There can be no assurance that such benefits will be achieved by
the Company.
[bullet] Liquidity. The Consolidation offers Stockholders liquidity through the
public trading expected to result from listing the Common Stock on the
American Stock Exchange. The Related General Partners believe that
BUC$holders desire more control over the timing of liquidating their
investments than they would have if the Partnerships were to continue
in existence. While the Consolidation is not the only means by which
BUC$holders could achieve liquidity for their investments in the
Partnerships, the Related General Partners believe that the
Consolidation is preferable to the potential principal alternatives,
which are (i) sale of Units in the informal secondary markets for real
estate limited partnership interests, in which trading values are
generally steeply discounted from underlying asset value and, thus, in
the Related General Partners' opinion, not an attractive option for
most BUC$holders, and (ii) a sale of all of a Partnership's assets and
distribution of the net proceeds to BUC$holders, which in the opinion
of the Related General Partners is not in the BUC$holders' best
interests (even if the Consolidation were not being offered), given
that the current level of market value of the Partnerships' assets
have not as yet increased to a level which would result in the return
of the BUC$holders Original Investment and, in light of the attendant
estimated costs of liquidation, would not provide the BUC$holders with
their greatest return.
By participating in the Consolidation and receiving Shares,
BUC$holders can obtain the opportunity to liquidate their investment
at a time most advantageous and convenient to them. However, the
Related General Partners anticipate that the liquidity benefit
inherent in the Consolidation may temporarily be adversely affected by
a number of factors, including the likelihood that some Stockholders
will sell their Shares as soon as possible after the Consolidation,
putting downward pressure on the market value of the Common Stock; and
market uncertainty about the Company's performance until a stable
earnings and distribution record is established. Accordingly,
Stockholders who must immediately generate cash from any available
source, regardless of the loss of future opportunities, may be forced
to accept a price for their Shares that is less than underlying asset
value. For the near term, other Stockholders may wish to consider
holding their Shares and focusing more on distributions and growth
than on liquidity, in assessing the potential benefits of the
Consolidation.
[bullet] Increased Percentage of Distributions. As a result of the contribution
by the Advisor to the Participating Partnerships of one-half of the
P-B Interests, BUC$holders will receive a greater percentage of the
Shares allocated to the Partnerships and, therefore, a greater
percentage of distributions as Stockholders than they would have
received as BUC$holders.
6
<PAGE>
Percentage of Percentage of Increase in
Cash Flow Cash Flow Percentage of
Distributable Distributable Distributable
to BUC$holders to Stockholders Cash Flow
---------------- ----------------- --------------
Insured I 99.00% 99.25% .25%
Insured II 98.00% 98.50% .50%
Summit Preferred 98.00% 98.50% .50%
Eagle 98.00% 98.50% .50%
[bullet] Reduced Fees and Expenses. The Consolidation will result in
approximately 25% lower aggregate annual fees being paid by the
Company to the Advisor than the aggregate annual fees currently
payable by the Partnerships to the General Partners. In addition, the
Related General Partners believe that the Company will be able to
achieve lower costs thereby increasing the cash available for
distribution. Cost reductions are expected to result from the
elimination of expenses associated with the operation and maintenance
of the Partnerships as public partnerships (including eliminating the
necessity of furnishing Schedule K-1's) and certain economies of scale
resulting from the common beneficial ownership and management of the
Participating Partnerships' portfolio. Furthermore, the Consolidation
will simplify the preparation of financial statements, tax returns,
investor information and reports and filings otherwise required.
Certain cost savings will be enhanced to the extent that more than the
minimum number of Partnerships participate in the Consolidation. See
"FINANCIAL INFORMATION--Pro Forma Financial Information." Although the
formulas used to calculate all post-Consolidation fees (except the
Mortgage Selection Fee, which remains unchanged) reflect reduced
amounts from those currently payable to the General Partners, the
gross amount of such fees could be higher post-Consolidation due to
the increased size of the Company's portfolio as a result of new
acquisitions expected to be made by the Company (although such fees
will still be less than they would have been under the old formulas).
Pursuant to the Partnership Agreements and the Advisory Agreement, the
General Partners and the Advisor are entitled to reimbursement of
certain administrative costs incurred by them on behalf of the
Partnerships and the Company. Reimbursement of such costs is included
in General Administrative Expenses ("G & A") in the pro forma and
historical financial statements. Pursuant to the Advisory Agreement,
the maximum amount of expenses which the Company may reimburse the
Advisor is $200,000 in any given year of operations, subject to the
following adjustments: the overall limit on reimbursements for
administrative expenses shall be increased (i) after the Company's
first year of operations and each year thereafter by a percentage
equal to the Consumer Price Index for the year then ended, and (ii)
proportionately as the Company increases its asset portfolio.
[bullet] Increased Distributions. The Consolidation provides all BUC$holders
with an opportunity to participate in a transaction that is
anticipated to result in an increase in distributions as a result of
(i) lower fees and costs and (ii) the contribution by the Advisor to
the Partnerships of one-half of the P-B Interests. The Company's 1996
pro forma financial statements indicate that BUC$holders of Summit
Preferred and Eagle would have received lower distributions
(approximately 0.66% or $0.30 per $1,000 of Original Investment less
than 1996 annual distributions for Summit Preferred and approximately
9.95% or $6.18 per $1,000 of Original Investment less than 1996 annual
distributions for Eagle) had the Consolidation occurred on January 1,
1996, with 100% Participation. However, the Related General Partners
believe that additional cost savings together with the benefits
anticipated to be derived from the Company's new business plan,
neither of which is reflected in the Company's 1996 pro forma
financial statements, will be achieved, thereby progressively
increasing distributions to BUC$holders including those in Summit
Preferred and Eagle (these savings and benefits cannot be reflected in
the pro forma financial statements because regulations regarding
preparation of pro forma financial information as promulgated by the
Commission do not permit the inclusion of this type of prospective
information). There can be no assurance that such additional cost
savings or benefits expected to be derived from the Company's new
business plan will be achieved.
For additional information regarding aggregate compensation paid and
distributions made by the Company and the Partnerships on a pro forma and
historical basis, see "FAIRNESS--Compensation, Reimbursements and Distributions
to the General Partners."
[bullet] Increase in Trading Value of Shares. The Related General Partners
expect the stabilized market price of the Company's Shares will
increase relative to the current market/trading value of the Units.
This belief is based on the expectation that the marketplace will
place a greater value on an entity which has the ability to grow and
has a significant enough capitalization to be able to access the
financial markets and achieve greater liquidity, none of which
qualities exist with the Partnerships. Notwithstanding the expected
outlook for the stabilized value of the Company's Shares, the Related
General Partners recognize that there is substantial uncertainty as to
the prices at which the Shares will trade in the short-term following
the consummation of the Consolidation. Trading pressure resulting from
BUC$holders wishing to sell their Shares immediately after the
Effective Date may result in the trading price of the Shares being
artificially depressed until the market for the Shares is stabilized.
[bullet] Ability to Raise Capital. The Company will have access to financing
sources and the capital markets and the ability to fund future growth
and capital requirements through the issuance of additional equity
securities and the raising of funds from debt
7
<PAGE>
and mortgage obligations, subject to a maximum debt limit equal to 50%
of the Company's Total Market Value (measured at the time such debt is
incurred).
[bullet] Growth. The Partnerships were originally formed to acquire (i) new or
recently improved substantially leased neighborhood shopping centers,
(ii) preferred equity interests in new apartment properties and (iii)
FHA insured and co-insured mortgages on stabilized or to-be-built
apartment properties. The Related General Partners believe that the
current marketplace provides opportunities to acquire existing assets
at prices below replacement cost and, therefore, growth opportunities
are available for those companies able to redevelop and reposition
such assets. The Consolidation will provide a capital structure and
increased efficiency of portfolio management which will allow the
Company to take advantage of such opportunities.
[bullet] Diversification. The Company's initial investment portfolio will be
substantially more diversified than the portfolio of any Partnership,
some of which are highly concentrated in terms of property type,
geographic region, or single-tenant exposure. This diversification
reduces a BUC$holder's exposure to product-specific, region-specific
or tenant-specific problems.
[bullet] Withdrawal of P-B General Partner as a General Partner/Equity Holder.
As part of the Consolidation, the P-B General Partner will relinquish
its general partner interests in the Partnerships and will not receive
any equity interest in the Company. The Advisor, an affiliate of
Related, will serve as sole advisor to the Company and will perform
the investor services, accounting and administrative responsibilities
and functions that currently are performed by the General Partners for
the Partnerships.
[bullet] Limited Liability. Similar to the limited liability of the BUC$holders
of the Partnerships, Stockholders will not have any liability for
obligations of the Company solely as a result of their status as
stockholders under Maryland law.
For a more complete description of these and other anticipated benefits,
see "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION--Benefits of,
and Reasons for, the Consolidation."
Fairness of the Consolidation
Recommendation of the Related General Partners. The Related General
Partners believe that the terms of the Consolidation are fair when considered as
a whole, and to the BUC$holders in each of the Partnerships, regardless of which
of the Partnerships are included in the Consolidation, assuming the requirements
of either of the Minimum Participation scenarios are met. The material factors
underlying the beliefs of the Related General Partners relating to the fairness
of the Consolidation are discussed under "FAIRNESS--Material Factors Underlying
Belief as to Fairness." The Related General Partners' judgment as to the
fairness of the Consolidation may be affected by the fact that they will derive
financial benefits from the Consolidation, and are thus subject to conflicts of
interest. See "CONFLICTS OF INTEREST--Conflicts of Interest of the Related
General Partners."
The Related General Partners based their determination as to the fairness
of the Consolidation on a variety of factors, including, but not limited to: (i)
the process of arm's length negotiation of the structure, terms and conditions
of the Consolidation with Class Counsel acting on behalf of the Class Members,
and Class Counsel's responsibility to act in the best interests of the
BUC$holders; (ii) the Related General Partners' knowledge that any settlement
would necessarily entail obtaining preliminary and final approval by the Court
of the Related Settlement, including the Consolidation; (iii) the opportunity
for each BUC$holder to object to the Consolidation; (iv) with respect to the
allocation of Shares among the Partnerships, the Adjusted Net Asset Values
assigned to the Partnerships based in part upon the Appraisals of the direct or
indirect interests in real properties held by the Partnerships on a
partnership-by-partnership basis as set forth in the Appraisals prepared by JLW
USA; (v) the fact that JLW USA prepared all the Appraisals thereby maximizing
consistency among the Appraisals; (vi) a comparison of the potential benefits
and detriments of the Consolidation with those of the alternatives to the
Consolidation; and (vi) the Fairness Opinion rendered by Oppenheimer.
The Related General Partners believe that an investment in the Company
through the ownership of Shares will provide greater overall benefits to
BUC$holders than the benefits derived from an investment in an individual
Partnership or from any of the alternatives to the Consolidation analyzed by the
Related General Partners. Based upon the foregoing, the Related General Partners
are recommending that BUC$holders not object to the Consolidation.
Fairness Opinion. The preparation and delivery of the Fairness Opinion were
requested by Class Counsel. Subject to the qualifications and limitations set
forth under "FAIRNESS OPINION AND APPRAISALS--Fairness Opinion", Oppenheimer
concluded that the Consolidation, including the allocation of Shares among the
Partnerships, is fair, from a financial point of view, to the BUC$holders of the
Partnerships assuming 100% Participation and all other combinations of
Participating Partnerships, including the Minimum Participation scenarios.
The Advisory Agreement
Pursuant to the Advisory Agreement to be entered into between the Company,
Insured I and Insured II and the Advisor, the Advisor will provide to the
Company, Insured I and Insured II substantially the same services as are
provided by the General Partners to the Partnerships. In consideration for such
services the Company, Insured I and Insured II, as applicable, will pay the
Advisor (i) an acquisition
8
<PAGE>
fee equal to 3.75% of the acquisition price of each property acquired by the
Company, Insured I and Insured II, respectively (the "Acquisition Fee"); (ii) a
mortgage selection fee equal to 3.00% of the principal amount of each mortgage
funded by the Company (the "Mortgage Selection Fee"); and (iii) an asset
management fee from the Company (the "Asset Management Fee") and a Special
Distribution from Adjusted Cash Flow of Insured I and Insured II, respectively
(the "Special Distribution"), equal to 0.375% per annum of the Company's,
Insured I's and Insured II's Total Invested Assets, respectively. In addition,
(a) the Related General Partners and the Advisor will be entitled to receive
distributions (x) from the Company in respect of any Shares they hold and (y)
from Insured I and Insured II in respect of their limited partnership interests
in Insured I and Insured II (the "Insured LP Interests"), respectively (which
interests are convertible into an aggregate of 46,837 Shares (approximately
0.578% of the Shares)); (b) the Company will reimburse the Advisor for direct
expenses incurred by the Advisor in an amount not to exceed $200,000 per annum
(subject to annual increases based upon increases in the Consumer Price Index
and the increase in the Company's assets); (c) the Advisor will be entitled to a
Mortgage Placement Fee equal to .75% of the principal amount of each mortgage
loan originated by the Company (payable by the borrower under such mortgage, and
not the Company) (the "Mortgage Placement Fee"); (d) if the Company is
dissolved, a Liquidation Fee equal to 1.50% of the gross sales price of the
assets sold by the Company in connection with a liquidation of the Company's
assets supervised by the Advisor (the "Liquidation Fee"); and (e) the Advisor
may receive options to acquire additional shares of Common Stock pursuant to the
Company's Incentive Stock Option Plan only if the Company's distributions in any
year exceed $0.9869 per Share (i.e., the 1996 pro forma distributions set forth
in this Solicitation Statement), and the Compensation Committee of the Board of
Directors determines to grant such options.
The foregoing annual fees are less than the aggregate annual fees currently
paid by the Partnerships to the General Partners. It is anticipated that the
Advisor will retain affiliates of Related to provide the services which it is
required to provide to the Company under the Advisory Agreement.
The Advisory Agreement cannot be terminated by the Company prior to the
fourth anniversary of the Effective Date, other than for Cause, and the Company
cannot liquidate prior to such anniversary date except upon a recommendation of
the Advisor and the affirmative vote of holders of not less than a majority of
the then outstanding shares of Common Stock (the "Majority Vote"). The four-year
limitation on termination was negotiated with Class Counsel in order to allow
the Advisor sufficient time to implement the Company's strategies for growth as
described in this Solicitation Statement. The Advisor may be removed after the
fourth anniversary of the Effective Date upon the Majority Vote of Stockholders,
with or without Cause. After the fourth anniversary of the Effective Date, the
vote of the holders of 662/3% of the Company's then outstanding shares of Common
Stock is required to approve a liquidation of the Company that is not
recommended by the Advisor, and the Majority Vote of Stockholders is required to
approve a liquidation of the Company that is recommended by the Advisor. If for
any reason, whether prior to or after the fourth anniversary of the Effective
Date, the Advisory Agreement is terminated in accordance with its terms, the
Company may liquidate upon the Majority Vote of Stockholders.
Objection Procedures
Pursuant to the Court's Order preliminarily approving the Settlement
Stipulation and subject to final Court approval, a Partnership will participate
in the Consolidation unless BUC$holders holding more than 331/3% of the
outstanding Units in such Partnership object to the Consolidation. BUC$holders
may object to the participation of their Partnership in the Consolidation by
delivering an Objection Notice to the Related General Partners. BUC$holders may
also object to any aspect of the Related Settlement, including the
Consolidation, at the Fairness Hearing by following the procedures set forth in
the Class Notice which accompanies this Solicitation Statement.
Equitable Class Members may not individually opt out of the Equitable
Settlement or the Consolidation. If, however, either (a) Unitholders holding 1/3
or more of the Units of a particular Partnership object to that Partnership
participating in the Consolidation, or (b) the Court does not approve of any
particular Partnership participating in the Consolidation, then that Partnership
will not participate in the Consolidation.
BUC$holders that wish to object to the Consolidation should return the
Objection Notice (the form of which is attached as Appendix D) to the Related
General Partners at 625 Madison Avenue, New York, New York 10022, as soon as
possible.
BUC$holders holding Units as of December 24, 1996 (the date the Settlement
Stipulation was entered into by the parties, which the Court Order preliminarily
approved while certifying the class) (the "Record Date") have until 5:00 p.m.
Eastern Time, on August 18, 1997, unless extended (the "Objection Deadline"), to
object to the Consolidation.
All BUC$holders, including BUC$holders who object to the Consolidation,
will receive Shares if their Partnership participates in the Consolidation. See
"OBJECTION PROCEDURES."
BUC$holders may withdraw or revoke their objection at any time prior to
the Objection Deadline. See "OBJECTION PROCEDURES--Revocability of Objection."
THE RELATED GENERAL PARTNERS AND CLASS COUNSEL RECOMMEND THAT BUC$HOLDERS
NOT OBJECT TO THE CONSOLIDATION. The Related General Partners are subject to
conflicts of interest with respect to the Consolidation. See "CONFLICTS OF
INTEREST--Conflicts of Interest of the Related General Partners."
9
<PAGE>
Appraisal Rights
BUC$holders of a Participating Partnership who object to the Consolidation
will not be entitled to dissenters' or appraisal rights under the Partnership
Agreements. Such rights, when they exist, give the holders of securities the
right to surrender such securities for an appraised value in cash, if they
oppose a merger or similar reorganization. No such rights will be provided by
the Partnerships or the Company in connection with the Consolidation.
Alternatives to the Consolidation
The following is a brief summary of the alternatives to the Consolidation
considered by the Related General Partners and is qualified in its entirety by
the more complete discussions set forth under the heading "BACKGROUND, BENEFITS
OF, AND REASONS FOR, THE CONSOLIDATION--Alternatives to the Consolidation."
Continuation of Partnerships. An alternative to the Consolidation would be
to continue each of the Partnerships in accordance with its respective existing
business plan and Partnership Agreement. Continuing the Partnerships without
change would have the following benefits: (i) each Partnership would remain a
separate entity with its own assets and liabilities, and would remain under an
obligation to pursue its original investment objectives, consistent with the
guidelines, restrictions and safeguards set forth in its Partnership Agreement;
(ii) the Partnership's performance would not be affected by the performance of
the other Partnerships, including the investment objectives, interests and
intentions of the BUC$holders of the other Partnerships; (iii) there would be no
change in the nature of the BUC$holders' investment or relative voting rights;
(iv) there would be no change in the cash distribution policy; (v) the
BUC$holders would continue to defer certain income taxes on Partnership
distributions; and (vi) the Participating Partnerships would not incur the
Consolidation Expenses, which are estimated to be approximately $1,205,000.
However, maintaining the Partnerships as separate entities would have the
following disadvantages, among others: (i) illiquidity of investment on a
current basis due to the lack of an established secondary market; (ii) the
inability of the Partnerships to increase distributions over the long term;
(iii) inability to realize the fee reductions and cost savings associated with
the Consolidation; and (iv) difficulty in valuing the investment due to the
limited secondary market for Units.
Liquidation. Although not considered by the Related General Partners to be
a viable option at this time, each of the Partnerships could dissolve, sell its
assets, pay off existing liabilities and distribute the net liquidation proceeds
to the BUC$holders and general partners in accordance with the distribution
provisions of its Partnership Agreement. The primary benefit of this strategy is
that it would allow for a final liquidation of all of the BUC$holders'
investment and a distribution of cash equal to the net liquidation proceeds.
The Related General Partners do not, however, consider this an opportune
time to liquidate the assets of the Partnerships. Although in recent years the
investment demand and availability of financing for some types of real estate
assets in some areas of the country have shown marked improvement, the market
values of most of the Partnerships' assets generally have not, as yet, shown
increases to a level sufficient to allow BUC$holders to obtain a return of their
Original Investment in a liquidation at this time. Therefore the Related General
Partners have concluded that the sale of the Partnerships' assets and the
liquidation of the Partnerships would be premature and would not provide the
BUC$holders with the best alternative to realize the greatest return on their
investments.
It is not certain whether market conditions and the values of the
Partnerships' assets are likely to improve in the near future or over the long
term to permit the sales of the real estate assets on more favorable terms.
However, if the Partnerships were to liquidate, such liquidations would involve
significant transaction costs at the property level such as selling commissions,
transfer taxes, recording fees, title insurance premiums, legal fees, escrow
expenses, repair and deferred maintenance costs, and other closing costs which
would be incurred by the Partnerships in connection with the sale and
disposition of their assets. In addition there may be additional contingent
liabilities and costs incurred by the Partnerships relating to representations,
warranties, and indemnifications which purchasers of such assets generally
require. Further, there may be significant Partnership administration and
overhead costs incurred in the winding-down of the Partnerships, which costs are
largely independent of asset size, and which could over an extended liquidation
period reach disproportionately high levels in relation to revenues and thus
reduce the portion of net sales proceeds ultimately available for distribution
to BUC$holders.
Comparison of Alternatives to the Consolidation
To assist BUC$holders in evaluating the Consolidation, the Related General
Partners have attempted to compare the estimated value of the Shares against:
(i) estimates of the value of the Units on a going-concern basis, (ii) estimates
of the value of the Units on a liquidation basis, and (iii) recent prices at
which the Units have been sold in the illiquid secondary market. Such valuation
estimates are subject to significant uncertainties and, with respect to the
value of the Shares, the Related General Partners have established a range of
estimated values. Since the value of the Shares, as well as that of the possible
alternatives to the Consolidation, is dependent upon a number of estimates,
variables and assumptions, as well as varying market conditions, no assurance
can be given that the estimated values indicated could be realized. However, the
Related General Partners believe that analyzing the alternatives in terms of
estimated values, based upon currently available market data and reasonable
estimates and assumptions, establishes a reasonable basis for comparing the
estimated
10
<PAGE>
value of the Shares to the alternatives. The results of this comparative
analysis are discussed in detail in the table under "FAIRNESS--Comparison of
Alternatives to the Consolidation."
The Related General Partners believe that the comparison of the values that
might be realized by the BUC$holders from various alternatives when considered
together with the anticipated effect of the Consolidation on distributions and
with all the other differences between continued ownership of Units as compared
with the receipt of Shares, supports the Related General Partners' conclusion
that the Consolidation is fair to BUC$holders. BUC$holders should, however, bear
in mind that the estimated values assigned to the Shares and the alternatives to
the Consolidation are based on a variety of assumptions that have been made by
the Related General Partners. These assumptions relate, among other things, to
the assumptions used by JLW USA in preparing the Appraisals, projections as to
the Partnerships' future income, expenses, cash flow and other significant
financial matters and discounts attributable to sales of assets. In addition,
these estimates are based upon certain information available to the Related
General Partners at the time the estimates were computed, and no assurance can
be given that the same conditions will exist at the time of the Consolidation.
While the Related General Partners believe they have a reasonable basis for the
assumptions selected, it is unlikely that the assumptions employed by the
Related General Partners will prove to be accurate in all respects, and some
assumptions used by the Related General Partners as to future events have been
selected to simplify the analysis and may not approximate the actual experience
of the Partnerships. The estimated values of the Shares and alternative forms of
consideration would have been different had the Related General Partners made
different assumptions.
The following table summarizes the results of the comparative analysis
described above.
Summary of Comparative Valuation Alternatives*
<TABLE>
<CAPTION>
Estimated
Market Value of
Units per
$1,000 of
Original
Estimated Investment
Market Value Based on
of Shares Per Estimated Secondary
$1,000 of Going Concern Estimated Liquidation Market
Original Value of Value of Units Per Trades(4)
Investment(1) Units $1,000 of Original ----------------
---------------- per $1,000 of Investment if Assets
High Low Original Sold at Adjusted High Low
Partnership Value Value Investment(2) Net Asset Value(3) Value Value
- ----------------- -------- ----- --------------- ---------------------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Insured I $ 760 $456 $590 $587 $412 $336
Insured II $ 800 $480 $576 $609 $412 $320
Summit Preferred $ 866 $520 $654 $662 $711 $399
Eagle $1,065 $639 $812 $755 $674 $550
</TABLE>
- --------------
* The information shown on this table assumes 100% Participation; see
"FAIRNESS--Comparison of Alternatives to the Consolidation" for additional
comparisons based upon the Minimum Participation scenarios. An Original
Investment of $1,000 equates to: 40 Units in each of Insured I and Insured
II, 50 Units in Summit Preferred, and 65.3595 Units in Eagle (after taking
into account the distribution of prepayment proceeds from the Tivoli Lakes
Mortgage). BUC$holders should note that certain assumptions used by the
Related General Partners to determine the valuations set forth in this table
are different from those utilized by Oppenheimer in connection with the
analysis used by Oppenheimer to support its Fairness Opinion. See "FAIRNESS
OPINION AND APPRAISALS--Fairness Opinion." Furthermore, there can be no
assurance that the assumptions utilized by the Related General Partners will
in fact occur and that the conclusions based upon such assumptions would not
differ substantially from those set forth in this table.
(1) The High Value and Low Value figures were computed by capitalizing
anticipated annual distributions after the Consolidation (which, for this
purpose, are assumed to equal the December 31, 1996 pro forma distributions)
by a range of yield rates for traded REITs which are comparable to the
Company, ranging from 5.25% (High Value) and 8.75% (Low Value) as more fully
discussed under "FAIRNESS--Comparison of Alternatives to the Consolidation."
(2) These values were derived from a discounted cash flow analysis, applied to
the anticipated cash flows from the operation and sale of each asset, based
on the Appraisals. For each asset, it was assumed that the asset would be
operated until the end of the eleventh calendar year following the date of
acquisition of the last property acquired, followed by the immediate
liquidation of all assets for cash and the immediate distribution of the
proceeds. The resulting cash flows were then adjusted for Partnership
administration expenses, which were increased annually at the rate of 3% and
the adjusted cash flows then discounted back to present value at a rate
equal to the average of the rate used in the property cash flow analysis.
(3) The figures in this column represent the amount that would be distributed
with respect to each $1,000 of Original Investment if the Partnerships sold
their assets based on the following assumptions. First, total proceeds were
calculated as follows: (i) with respect to three of the Partnerships: their
real estate is sold at its Appraised Value; (ii) with respect to Eagle, its
mortgages are sold at assumed values for the mortgages based on a discounted
cash flow analysis which took into account the present value of the first
mortgages and base interest payments at rates ranging from 7% to 10.5% and
the present value of the equity loans and additional loan or contingent
interest payments at rates ranging from 17% to 22%; and (iii) with respect
to all Partnerships, the foregoing amounts were increased by the value of
other collateral as may exist and be relevant to determining realizable
value in a liquidation (e.g., guarantees). Once the amount of total proceeds
upon sale of each of the Partnerships' assets was established, a deduction
was taken in all Partnerships except Eagle for property level selling costs
and an allowance was taken for partnership level liquidation costs, expenses
and contingencies, together equaling 6%-6.9% of the Appraised Value of the
real estate assets, resulting in net sales proceeds from liquidation.
Finally, non-real estate assets (cash, receivables, temporary investments)
were added and debts and other obligations were subtracted from the net
sales proceeds, and the resulting balance was deemed to be distributed to
BUC$holders and the General Partners in accordance to the terms of the
respective Partnership Agreements.
11
<PAGE>
(4) Based on the high and low value of secondary market trades during the twelve
months from December 1, 1995 through November 30, 1996 as compiled by
Partnership Spectrum. Partnership Spectrum has advised that its methodology
for compiling trade prices is as follows: trade price information reflects
per Unit transaction prices for trades involving the purchase of Units by
third-party investors during the applicable period. Firms supplying trade
price data are instructed to provide information only on those transactions
whereby third party investors acquired Units from or through such firms. If
the firm acted as an agent, the per Unit price is to include any commissions
charged the buyer (but not including commissions paid to retail brokers
representing buyers). Due to commission and mark-ups, sellers of Units
typically receive less than the amounts paid for Units by buyers as set
forth in the table.
Conflicts of Interest
Related General Partners. The Related General Partners initiated and
participated in the structuring of the Consolidation and have conflicts of
interest with respect to its completion, including the following:
[bullet] The Related General Partners, each of which is an affiliate of Related,
serve as general partners of each Partnership, which creates an
inherent conflict of interest when they serve in such capacity for
Participating Partnerships that have different interests.
[bullet] The Consolidation affords a number of benefits to the Related General
Partners, including the following: The Advisor, an affiliate of
Related, will enter into the Advisory Agreement, which the Company may
not terminate, except for Cause, until the fourth anniversary of the
Effective Date. Pursuant to the Advisory Agreement (and as a result of
the Advisor's purchase of the P-B Interests), the Advisor will be
entitled to receive from the Company approximately 75% of the aggregate
annual fees currently payable by the Partnerships to the General
Partners. Therefore, although the aggregate annual fees payable by the
Company will be reduced by approximately 25%, the Advisor's share of
such fees will increase by approximately $200,000 per year.
The Advisor will also have the ability, subject to the terms and conditions
of the Advisory Agreement, to cause the Company to incur debt to finance asset
purchases and reinvest proceeds from asset sales and mortgage repayments to grow
the Company's assets and thereby increase the amount of compensation it can
earn, including the Asset Management Fee, Acquisition Fee, Mortgage Selection
Fee, Mortgage Placement Fee, and Special Distribution. If the Company were to
utilize the maximum leverage permitted, the Advisor would be entitled to
Acquisition Fees, Mortgage Selection Fees and Mortgage Placement Fees
aggregating approximately $4,687,000 and increased annual Special Distributions
and Asset Management Fees of approximately $468,700. Such additional fees will
only be payable to the Advisor if and when the Company is able to acquire
additional assets.
Finally, pursuant to the Incentive Stock Option Plan, the Advisor may
receive additional shares of Common Stock only if the Company's distributions in
any year exceed $0.9869 per Share (i.e., the 1996 pro forma annual distributions
set forth in this Solicitation Statement) and the Compensation Committee of the
Board of Directors determines to grant such options. Similar to the BUC$holders,
the Related General Partners and the Advisor will receive Shares and, therefore,
will have enhanced their liquidity. Pursuant to the Amended Insured Partnership
Agreements, however, the Advisor, as a holder of the Insured LP Interests, will
be restricted from converting all of the Insured LP Interests into shares of
Common Stock in order to preserve the partnership status of Insured I and
Insured II.
As a result of the Consolidation, the Related General Partner's negative
capital account in Summit Preferred and Eagle could be reduced or limited, which
would lessen or eliminate altogether the obligation that the Related General
Partner would otherwise have had to contribute funds to Summit Preferred and
Eagle upon liquidation.
In addition, if the Consolidation is consummated, the Related General
Partners and Class Counsel would effect a settlement in connection with the
Litigation, therefore, the Related General Partners are subject to a conflict of
interest in recommending to the BUC$holders that they not object to the
Consolidation.
For a more complete discussion of the conflicts of interest of the Related
General Partners and their affiliates with respect to the Consolidation, see
"CONFLICTS OF INTEREST."
Class Counsel. In assessing Class Counsel's recommendation that BUC$holders
not object to the Consolidation, BUC$holders should consider that Class Counsel
may be deemed to have a conflict of interest with respect to such
recommendation. In particular, the fees and expenses of Class Counsel, if
approved by the Court, will be paid from the cash settlement pool provided by
Related and other defendants pursuant to the Related Settlement and settlements
reached with other defendants in the Litigation. In addition, as part of the
Equitable Settlement, Class Counsel will have the right to petition the Court
for additional attorneys' fees in an amount to be determined in the Court's sole
discretion but which will be proposed to be 25% of the increase, if any, as of
the first anniversary of the date the Shares are first publicly traded (the
"Anniversary Date") in the capitalization of the Company, based upon (i) the
difference between the trading prices of the Company's Shares on the Anniversary
Date and (ii) the trading prices of the Units and the asset values of the
Partnerships prior to the Effective Date. The number of Counsel's Fee Shares
issued shall be subject to a maximum amount not to exceed 3.95% of the total
number of shares of the Company's outstanding Common Stock on the Anniversary
Date. See "CONFLICTS OF INTEREST--Conflicts of Interest of Class Counsel."
Distribution Policy
To qualify as a REIT under the Code, the Company will be required to make
distributions to its Stockholders in an amount at least equal to 95% of the
Company's REIT taxable income. The Company intends to pay regular quarterly
distributions to its Stockholders, commencing in its first fiscal quarter after
consummation of the Consolidation. Prior to the Consolidation, the Partnerships
will continue
12
<PAGE>
to make quarterly distributions to BUC$holders. The Maryland General Corporation
Law (the "Maryland GCL") imposes certain restrictions on the Company's ability
to make distributions under certain circumstances. See "THE COMPANY--
Distribution Policy."
Federal Income Tax Considerations
The Consolidation and ownership of Shares involve numerous federal income
tax consequences to Stockholders and the Company. In evaluating the
Consolidation, BUC$holders should consider the matters set forth below, as well
as those set forth in the more detailed discussion under "FEDERAL INCOME TAX
CONSIDERATIONS."
[bullet] In general, tax losses are expected to result from the Consolidation to
Participating BUC$holders who acquired Units from Insured I, Insured II
and Eagle in the initial offering and taxable gain is expected to
result from the Consolidation to Participating BUC$holders who acquired
Units from Summit Preferred in the initial offering. Tax losses for
BUC$holders who hold Units and who acquired them from Insured I,
Insured II and Eagle in the initial offering are estimated to range,
per $1,000 of Original Investment, from $30 to $156. Taxable gain to
BUC$holders, who hold Units in Summit Preferred and who acquired such
Units in the initial offering, is estimated to be $170 per $1,000 of
Original Investment. Certain Participating BUC$holders that acquired
Units in the secondary market in any of the Participating Partnerships
may recognize taxable gain with respect to their investment in Units,
which will generally be recognized in the year of the Consolidation.
Consequently, certain Participating BUC$holders may be required to pay
tax on any gains recognized but will not receive a special cash
distribution for the payment of such taxes.
[bullet] The amount of gain or loss recognized by Participating BUC$holders who
are subject to income tax will be based upon the difference between the
respective basis of each BUC$holder in its BUC$ and the fair market
value of the Shares received.
[bullet] The gain or loss from the Consolidation generally will be treated as
capital gain or loss. However, to the extent a Participating
Partnership claimed accelerated depreciation, a corresponding portion
of such gain or loss may be treated as ordinary gain or loss.
[bullet] Participating BUC$holders who are not subject to income tax should not
recognize a material amount of unrelated business taxable income
("UBTI") from the Consolidation.
[bullet] A REIT, generally, is not subject to federal income tax on that portion
of its taxable income or net capital gain that is distributed to its
stockholders. A REIT, however, is subject to tax at normal corporate
rates on any undistributed REIT Taxable Income, including net capital
gains. To qualify as a REIT, the Company must satisfy a number of
income, asset, distribution and stock ownership tests imposed by the
Code. There can be no assurance that the Company will be able to
qualify, or continue to qualify, as a REIT. Failure to so qualify will
result in significant additional federal income tax on the Company and
substantially reduced distributions to Stockholders.
[bullet] Company distributions received by Stockholders subject to federal
income tax will be treated as portfolio income and, therefore, cannot
be offset by passive losses from a Stockholder's other activities. Such
distributions will not be treated as UBTI to certain tax-exempt
Stockholders.
The Company intends to qualify as a REIT for federal income tax purposes.
Accordingly, as a result of the Consolidation, Participating BUC$holders will
cease to be partners in a partnership and will become stockholders of a REIT.
This change in status will affect the character and amount of income and loss
reportable by Participating BUC$holders in the future. It is anticipated that a
greater portion of distributions by the Company will be taxable to recipients
than is the case with distributions by the Partnerships because of the reduced
depreciation deductions generally claimed by REITs.
Accounting Treatment
The Consolidation will be accounted for using the purchase method of
accounting. Under this method, the Participating Partnership with the BUC$holder
group receiving the largest ownership in the Company (in this case for all three
scenarios, Insured I) will be deemed to be the acquirer. As the surviving entity
for accounting purposes, Insured I's assets and liabilities will be recorded by
the Company at their historical cost, with the assets and liabilities of the
other Participating Partnerships recorded at their estimated fair values, using
the Adjusted Net Asset Values. See "FINANCIAL INFORMATION."
Selected Financial Data
The following table sets forth selected financial data on a pro forma basis
for the Company (assuming 100% Participation, Minimum Participation (including
Insured II) and Minimum Participation (including Eagle)), and on a historical
basis for Insured I. The table should be read in conjunction with the unaudited
pro forma financial information and with the financial statements and notes
thereto of the Partnerships included under the heading "FINANCIAL INFORMATION."
The following unaudited pro forma operating and other data have been
prepared to reflect the Consolidation and related transactions as if such
transactions had occurred on January 1, 1996. The unaudited pro forma balance
sheet data has been prepared assuming that the Consolidation and related
transactions had occurred on March 31, 1997. The Consolidation will be accounted
for using the purchase method of accounting. See "Accounting Treatment" above.
13
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
Insured I Historical
----------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $8,710,091 $8,907,984 $9,272,415 $9,081,226 $9,224,030
Total expenses (G) 6,143,055 6,457,832 6,563,660 6,790,935 6,797,394
Minority interest in operating partnerships -- -- -- -- --
Net income 2,567,036 2,450,152 2,708,755 2,290,291 2,426,636
Distributions to limited partners 4,177,652 3,700,004 3,600,003 3,600,005 3,600,005
BALANCE SHEET DATA:
Cash and cash equivalents 937,686 1,081,265 1,433,699 2,057,134 2,398,013
Total assets at book value 83,328,533 81,104,315 79,552,661 77,862,045 75,842,337
Notes payable 5,976,244 5,976,244 5,959,212 5,792,615 5,565,841
Total liabilities (C) 7,721,362 7,219,644 7,030,876 7,121,610 6,746,907
Partners' capital/Shareholders' equity (D) 75,607,171 73,884,671 72,521,785 70,740,435 69,095,430
Net assets at Consolidation value (B) N/A N/A N/A N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents 329,605 143,579 352,434 623,435 340,879
Net cash provided by operating activities 5,371,815 4,562,847 5,054,997 5,057,000 5,108,069
Ratio of earnings to fixed charges 5.59 5.27 6.13 5.15 5.57
Ratio of earnings to total assets 0.03 0.03 0.03 0.03 0.03
Book value per $1,000 of Original Investment (A) 757.99 740.94 727.44 709.81 693.52
Book value per share at Consolidation value (H) N/A N/A N/A N/A N/A
Earnings per $1,000 of Original Investment (A)(F) 21.10 19.95 22.51 18.36 19.71
Earnings per share-pro forma (I) N/A N/A N/A N/A N/A
Distribution per $1,000 of Original Investment (A)(E) 41.78 37.00 36.00 36.00 36.00
<CAPTION>
As of and for the Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
1996 Pro Forma of the Company
----------------------------------------------------
100% Minimum Minimum
Participation Participation(1) Participation(2)
--------------- ------------------ -----------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $14,933,341 $11,655,295 $11,998,154
Total expenses (G) 8,732,609 8,284,766 7,038,810
Minority interest in operating partnerships 437,504 437,260 342,751
Net income 5,763,228 2,933,269 4,616,593
Distributions to limited partners 7,901,476 4,750,184 6,340,492
BALANCE SHEET DATA:
Cash and cash equivalents N/A N/A N/A
Total assets at book value N/A N/A N/A
Notes payable N/A N/A N/A
Total liabilities (C) N/A N/A N/A
Partners' capital/Shareholders' equity (D) N/A N/A N/A
Net assets at Consolidation value (B) N/A N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents 204,143 128,237 423,471
Net cash provided by operating activities 9,529,262 6,388,875 7,707,954
Ratio of earnings to fixed charges 8.67 5.12 8.48
Ratio of earnings to total assets N/A N/A N/A
Book value per $1,000 of Original Investment (A) N/A N/A N/A
Book value per share at Consolidation value (H) N/A N/A N/A
Earnings per $1,000 of Original Investment (A)(F) 32.07(J) 23.44(J) 32.70(J)
Earnings per share-pro forma (I) 0.72 0.57 0.73
Distribution per $1,000 of Original Investment (A)(E) 44.22(J) 37.96(J) 45.16(J)
</TABLE>
- ----------------
(1) Minimum participation-Insured I (historical) and Insured II (fair value)
(2) Minimum participation-Insured I (historical) and Eagle (fair value)
(A) On the historical information and on the pro forma, the respective
calculations have been presented using the base of $1,000 of Original
Investment, adjusted for the 1994 return of capital of $235 per $1,000
Original Investment to BUC$holders of Eagle as a result of the Tivoli Lakes
prepayment of mortgage receivable. For comparison of historical to pro forma
distribution on a Partnership by Partnership basis see Distribution
Comparison table (page 56).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the values assigned for purposes of the
Consolidation. This disclosure is informational only; the assets and
liabilities of the Company will be recorded at the carrying values for
Insured I and fair values for Insured II, Summit Preferred and Eagle.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,205,000, $767,615, and $951,765 for 100% Participation,
Minimum Participation (1) and Minimum Participation (2), respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect additional distributions after taking into
account the reduction in fees payable to the General Partners, decrease in
general & administrative expenses and increase in additional interest
expense expected to be incurred as a result of financing.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis, adjusted for the 1994 return of capital
of $235 per $1,000 Original Investment to BUC$holders of Eagle as a result
of the Tivoli Lakes prepayment of mortgage receivable.
(G) Total pro forma expenses after the Consolidation include management fees
which were recorded as special distributions prior to the Consolidation.
(H) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of Shares assumed to be
outstanding upon Consolidation (8,050,702, 5,111,494, and 6,365,271 shares
at 100% Participation, Minimum Participation(1) and Minimum
Participation(2), respectively).
(I) Pro forma earnings per share has been calculated using the number of Shares
assumed to be outstanding upon Consolidation, as in Note (H) above.
(J) Original capital has been adjusted for Eagle to reflect distribution of
proceeds from a prepayment of mortgage receivable due to the sale of Tivoli
Lakes in 1994. Such distribution equals $4.70 per Unit. Each $1,000 of
Original Investment (net of such prepayment proceeds) equals 65.3595 Units.
14
<PAGE>
SELECTED FINANCIAL DATA
As of and for the Three Months Ended March 31,
- -------------------------------------------------------------------------------
Insured I Historical
-------------------------
1996 1997
-------------------------
OPERATING DATA:
Total revenues $2,323,747 $2,470,884
Total expenses (G) 1,964,634 1,473,654
Minority interest in operating partnerships -- --
Net income 359,113 997,230
Distributions to limited partners 900,001 900,001
BALANCE SHEET DATA:
Cash and cash equivalents 2,464,004 2,717,373
Total assets at book value 77,097,098 75,687,007
Notes payable 5,736,659 5,309,039
Total liabilities (C) 7,015,460 6,612,257
Partners' capital/Shareholders' equity (D) 70,081,638 69,074,750
Net assets at Consolidation value (B) N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents 406,870 319,360
Net cash provided by operating activities 1,580,277 1,622,268
Ratio of earnings to fixed charges 3.66 9.17
Ratio of earnings to total assets 0.00 0.01
Book value per $1,000 of Original Investment (A) 703.29 693.32
Book value per share at Consolidation value (H) N/A N/A
Earnings per $1,000 of Original Investment (A)(F) 2.48 8.80
Earnings per share-pro forma (I) N/A N/A
Distribution per $1,000 of Original Investment (A)(E) 9.00 9.00
<TABLE>
<CAPTION>
As of and for the Three Months Ended March 31,
- ------------------------------------------------------------------------------------------------
1997 Pro Forma of the Company
------------------------------------------------
100% Minimum Minimum
Participation Participation(1) Participation(2)
-------------- ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 3,901,630 $3,068,640 $ 3,146,008
Total expenses (G) 2,048,729 1,931,122 1,561,493
Minority interest in operating partnerships 110,967 110,930 88,479
Net income 1,741,934 1,026,588 1,496,036
Distributions to limited partners 1,909,843 1,167,507 1,526,020
BALANCE SHEET DATA:
Cash and cash equivalents 5,572,466 3,977,210 4,013,870
Total assets at book value 138,523,826 93,903,404 110,714,576
Notes payable 7,871,546 7,434,161 6,260,804
Total liabilities (C) 10,267,159 9,297,477 7,730,620
Partners' capital/Shareholders' equity (D) 127,487,155 83,836,415 102,461,351
Net assets at Consolidation value (B) 121,463,086 77,374,961 95,937,140
OTHER DATA:
Net increase in cash and cash equivalents 162,362 62,020 387,370
Net cash provided by operating activities 2,759,678 1,943,855 2,258,018
Ratio of earnings to fixed charges 11.06 7.28 11.42
Ratio of earnings to total assets 0.01 0.01 0.01
Book value per $1,000 of Original Investment (A) 709.52(J) 669.94(J) 725.74(J)
Book value per share at Consolidation value (H) 15.84 16.40 16.10
Earnings per $1,000 of Original Investment (A)(F) 9.69(J) 8.20(J) 10.60(J)
Earnings per share-pro forma (I) 0.22 0.20 0.24
Distribution per $1,000 of Original Investment (A)(E) 10.69(J) 9.33(J) 10.87(J)
</TABLE>
- ----------------
(1) Minimum participation-Insured I (historical) and Insured II (fair value)
(2) Minimum participation-Insured I (historical) and Eagle (fair value)
(A) On the historical information and on the pro forma, the respective
calculations have been presented using the base of $1,000 of Original
Investment, adjusted for the 1994 return of capital of $235 per $1,000
Original Investment to BUC$holders of Eagle as a result of the Tivoli Lakes
prepayment of mortgage receivable. For comparison of historical to pro forma
distribution on a Partnership by Partnership basis see Distribution
Comparison table (page 56).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the values assigned for purposes of the
Consolidation. This disclosure is informational only; the assets and
liabilities of the Company will be recorded at the carrying values for
Insured I and fair values for Insured II, Summit Preferred and Eagle.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,205,000, $767,615, and $951,765 for 100% Participation,
Minimum Participation (1) and Minimum Participation (2), respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect additional distributions after taking into
account the reduction in fees payable to the General Partners, decrease in
general & administrative expenses and increase in additional interest
expense expected to be incurred as a result of financing.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis, adjusted for the 1994 return of capital
of $235 per $1,000 Original Investment to BUC$holders of Eagle as a result
of the Tivoli Lakes prepayment of mortgage receivable.
(G) Total pro forma expenses after the Consolidation include management fees
which were recorded as special distributions prior to the Consolidation.
(H) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of Shares assumed to be
outstanding upon Consolidation (8,050,702, 5,111,494, and 6,365,271 shares
at 100% Participation, Minimum Participation(1) and Minimum
Participation(2), respectively).
(I) Pro forma earnings per share has been calculated using the number of Shares
assumed to be outstanding upon Consolidation, as in Note (H) above.
(J) Original capital has been adjusted for Eagle to reflect distribution of
proceeds from a prepayment of mortgage receivable due to the sale of Tivoli
Lakes in 1994. Such distribution equals $4.70 per Unit. Each $1,000 of
Original Investment (net of such prepayment proceeds) equals 65.3595 Units.
15
<PAGE>
Comparison of Partnership Units and Company Shares
The following is a summary of certain attributes of the ownership of Units
and the ownership of Shares. The following descriptions are qualified in their
entirety by reference to the Charter and Bylaws and to each Partnership's
Partnership Agreement as well as the Maryland GCL and the Delaware Partnership
Law. The descriptions are summaries and do not purport to be complete
discussions of these matters. BUC$holders are encouraged to review carefully the
more detailed comparison regarding the Units and the Shares discussed under
"COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE
PARTNERSHIPS" in this Solicitation Statement for additional comparisons. A
Stockholder's investment in Shares and a BUC$holder's investment in Units are
subject to the risks of the Company's business and each Partnership's business,
respectively. Similar to the limited liability of a BUC$holder of the
Partnerships, a Stockholder will not have any liability under Maryland law for
obligations of the Company solely as a result of his status as a Stockholder.
<TABLE>
<CAPTION>
Characteristic Limited Partnership (Units) Company (Shares)
- ------------------ ------------------------------------------------- ------------------------------------------------------
<S> <C> <C>
General Business [bullet] Insured I and Insured II: investing in [bullet] Own and acquire a diversified portfolio
existing, improved shopping center of retail and residential properties and
properties; Summit Preferred: equity participating FHA insured mortgages in
investments in partnerships that own a manner which is generally consistent
garden apartment complexes; Eagle: with past practice. The Company expects
investing in participating FHA d to initially focus on the acquisition of
co-insured mortgages. Acquisition of, shopping centers and properties in need of
or investment in, assets owned by redevelopment or repositioning in order to
affiliates of Related generally not attempt to maximize growth. The Company
permitted except in Eagle. is not currently permitted to acquire or
invest in properties owned by affiliates of
Related but may make loans to properties or
developments owned or acquired by affiliates
of Related under certain circumstances.
[bullet] Unlike Summit Preferred, the Company may
directly invest in multi-family residential
properties (in addition to indirect
investment through operating partnerships
that hold such investments)
[bullet] No reinvestment of proceeds from asset [bullet] Reinvestment of proceeds from asset sales
sales or mortgage repayments and mortgage repayments and incurrence of
debt to finance asset purchases, for growth
[bullet] Charter permits the Company to engage in any
lawful act or activity for which corporations
may be formed under the laws of the State of
Maryland including the issuance of securities
in exchange for properties or other assets of
the Company
[bullet] Board of Directors may change investment
policies, including the ability to acquire
properties owned by affiliates of Related
if approved by Independent Directors
[bullet] Joint Ventures are permitted under the [bullet] Joint ventures and similar business ventures
Partnership Agreements within certain are permitted under the Charter and Bylaws,
specified parameters provided that the Company owns a majority
interest or otherwise has veto rights over, or
control of, major decisions
</TABLE>
16
<PAGE>
Characteristic Limited Partnership (Units)
- ---------------------- -------------------------------------------------------
Liquidity and [bullet] Illiquid--no established market
Transferability
[bullet] Transfers are subject to limitation
Property Portfolio [bullet] Static Portfolio
Duration of Entity [bullet] 34 to 40 years from formation
Asset Holding Period [bullet] 10 to 12 year anticipated holding period
Federal Taxation [bullet] Partnerships not subject to federal tax
Tax on Distributions [bullet] Distributions are taxable to BUC$holders
State Tax [bullet] Some states require withholding on
Withholding partnership distributions
Tax Characterization [bullet] Passive income for Insured I, Insured II and
of Income Summit Preferred; portfolio income for Eagle
Tax Reporting [bullet] Schedule K-1, generally mailed by March 15
of each year
Borrowing [bullet] Generally not permitted (other than Insured
I & II)
Management [bullet] Vested in General Partners
Characteristic Company (Shares)
- ---------------------- --------------------------------------------------------
Liquidity and [bullet] To be listed on the American Stock Exchange
Transferability (or other national exchange or market)
[bullet] Freely transferable subject to Ownership Limit
Property Portfolio [bullet] Investment flexibility
[bullet] More diversification and ability to grow
[bullet] Larger portfolio
Duration of Entity [bullet] Perpetual; provided that if the Advisory
Agreement is still in effect, the Company
may be dissolved (i) prior to the fourth
anniversary of the Effective Date, only with
recommendation of the Advisor and Majority
Vote of Stockholders; (ii) after the fourth
anniversary of the Effective Date, upon
recommendation of Advisor and a Majority
Vote of Stockholders or upon a two-thirds vote
of Stockholders without recommendation of
Advisor
Asset Holding Period [bullet] No established holding period;
proceeds of asset sales and mortgage repayments
will be reinvested
Federal Taxation [bullet] As a qualified REIT, Company generally not
subject to federal tax on amounts distributed
to Stockholders
Tax on Distributions [bullet] Distributions are taxable to Stockholders
State Tax [bullet] Some states may require withholding on the
Withholding Company's distributions
Tax Characterization [bullet] Portfolio income
of Income
Tax Reporting [bullet] Form 1099-DIV must be mailed by January 31
of each year
Borrowing [bullet] Permitted, up to 50% of the Company's Total
Market Value (measured at the time debt is
incurred)
Management [bullet] Vested in Board of Directors elected by
Stockholders
[bullet] Advisor manages day-to-day affairs
17
<PAGE>
Characteristic Limited Partnership (Units)
- ---------------------- -------------------------------------------------------
Voting [bullet] Voting is based on a BUC$holder's ownership
interest in a Partnership; voting is generally
permitted only for significant actions, as
provided under Delaware Partnership Law
Management Fees [bullet] Acquisition Fees ranging from 5% to 6%
[bullet] Special Distributions from Adjusted Cash Flow of
0.50% of Total Invested Assets
[bullet] Mortgage Selection Fee of 3%
[bullet] Disposition Fees ranging from 0% (Eagle) to 3%
(all other Partnerships) subordinated to prior
return of BUC$holders' capital
[bullet] Percentage of Sales and Refinancing Proceeds,
generally subordinated to prior return of
BUC$holders' capital
[bullet] None
Acquisition Expenses [bullet] Amounts payable by the Partnerships for expenses
related to the initial acquisition of assets
were subject to limitations based upon the
overall front-end fees which a Partnership was
permitted to incur; generally capped at
approximately 1% of the gross proceeds raised in
the initial offering
Anti-takeover [bullet] While the Units are transferable, subject to
Provisions certain restrictions, the General Partners under
the Partnership Agreements may under certain
circumstances refuse to permit assignees (who
are not permitted to vote on any Partnership
matters) to become substituted BUC$holders
Characteristic Company (Shares)
- ---------------------- --------------------------------------------------------
Voting [bullet] One vote per Share. Stockholders of a Maryland
corporation are generally entitled to vote on
any material transactions or actions relating to
such corporation, and such transactions or
actions may not be consummated without the
approval of the requisite number of
stockholders. No super-majority voting
requirements (except a liquidation which has not
been recommended by the Advisor)
Management Fees [bullet] Acquisition Fees of 3.75%
[bullet] Special Distribution from Adjusted Cash Flow/
Asset Management Fee of 0.375% of Total Invested
Assets
[bullet] Mortgage Selection Fee of 3%
[bullet] None
[bullet] None
[bullet] Liquidation Fees of 1.5%, payable in connection
with a liquidation of the Company supervised by
the Advisor
Acquisition Expenses [bullet] As an operating company, the Company will be
directly responsible for all acquisition
expenses incurred in connection with future
asset acquisitions
Anti-takever [bullet] Certain provisions of the Maryland GCL, the
Provisions Charter and Bylaws might have the effect of
delaying, deferring or preventing a transaction
or a change in control of the Company that might
involve a premium price for Shares or otherwise
be in the best interest of the Stockholders.
Such provisions include the Ownership Limit, a
classified Board of Directors and the power of
the Board of Directors to issue preferred or
common shares which could have an anti-takeover
effect
[bullet] Advisory Agreement may be terminated only for
Cause for four years. Company not permitted to
liquidate for four years and, thereafter,
supermajority vote required to liquidate, unless
Advisor recommends liquidation
18
<PAGE>
Characteristic Limited Partnership (Units)
- ---------------------- -------------------------------------------------------
Distributions [bullet] General Partners' distribution of cash flow
ranging from 1% (Insured I) to 2% (all other
partnerships)
Expenses [bullet] All Partnership expenses paid by
Partnerships; General Partners reimbursed
for certain services performed for the
Partnerships
Potential Dilution [bullet] Partnerships are not authorized to issue
additional equity securities without the
consent of a majority in interest of the
BUC$holders
Potential Redemption [bullet] The Partnerships have no ability to purchase
or redeem Units
Characteristic Company (Shares)
- ---------------------- ---------------------------------------------------------
Distributions [bullet] Related General Partners and the Advisor will
be entitled to receive an aggregate 1.12% of the
Shares issuable in the Consolidation, assuming
100% Participation
[bullet] Incentive Stock Options may be issued to the
Advisor if the Company's distributions in any
year exceed $0.9869 per Share (i.e., the 1996
pro forma annual distributions set forth in this
Solicitation Statement) if granted by the
Compensation Committee
Expenses [bullet] Reimbursements to the Advisor for administrative
expenses will not exceed $200,000 per annum
subject to the following adjustments: the limit
on reimbursements for administrative expenses
will be increased (i) after the Company's first
year of operations and each year thereafter by a
percentage equal to the Consumer Price Index for
the year then ended, and (ii) proportionately as
the Company increases its asset portfolio
Potential Dilution [bullet] Board of Directors may, in its discretion, cause
the Company to issue additional shares of Common
Stock, preferred stock and other debt and equity
securities without any Stockholder approval,
including certain Shares which may be issued to
the Advisor upon exercise of options granted to
it and its employees pursuant to the Incentive
Stock Option Plan. The Company may be required
to issue Shares to Class Counsel pursuant to the
Related Settlement
Potential Redemption [bullet] The Board of Directors may, at its sole
discretion, determine to cause the Company to
repurchase Shares from time to time out of
surplus funds, if any, to further the business
objectives of the Company
Non-Participating Partnerships
A Partnership in which BUC$holders representing more than 33 1/3% of the
Units object to the Consolidation (a "Non-Participating Partnership") will not
participate in the Consolidation, and will continue to operate as a separate
legal entity subject to its existing Partnership Agreement.
19
<PAGE>
RISK FACTORS
The Consolidation involves certain risks and other adverse factors.
BUC$holders are urged to read this Solicitation Statement carefully in its
entirety, including all appendices and supplements hereto, and should consider
carefully the following factors in evaluating the Consolidation, the Company and
its business before determining whether to object to the Consolidation. Unless
otherwise indicated, the risks described below are materially the same for the
BUC$holders of each of the Partnerships.
Risks Relating to the Consolidation
Lowest Estimated Market Value of Shares is Less Than Estimated Going
Concern and Liquidation Values. The comparative analysis prepared by the Related
General Partners to assist BUC$holders in analyzing the Consolidation indicates
that, based on a variety of assumptions, the estimated going concern and
liquidation values exceed the lowest estimated market value of the Shares. There
can be no assurance that the actual market value of the Shares after the
Effective Date will exceed the going concern or liquidation values. See
"FAIRNESS--Comparison of Alternatives to the Consolidation."
No Prior Market for Common Stock; Market Price May Decrease After
Consolidation. There has been no prior market for the Common Stock and it is
possible that the Common Stock will trade at prices substantially below the
estimated liquidation value of the assets of the Company and the value assigned
to the Shares for purposes of the Consolidation. The Common Stock will be
approved for listing on the American Stock Exchange (or other national exchange
or market) upon official notice of issuance prior to consummation of the
Consolidation. The market price of the Common Stock may be subject to
significant volatility after the Consolidation and could substantially decrease
as a result of substantial initial selling activity following issuance of the
Common Stock, the interest level of investors in purchasing the Common Stock
after the Consolidation, interest rate levels, the amount of distributions to be
paid by the Company and the continuing acceptance by the securities markets of
REITs as an investment vehicle. The relatively small size of the Company, in
terms of equity capitalization, could also tend to depress the market value of
the Common Stock by comparison to REITs with larger equity capitalization. Thus,
there is substantial uncertainty as to the prices at which the Common Stock will
trade and the possibility that such prices will be less than the Adjusted Net
Asset Values of the Partnerships.
Although equity securities issued in transactions comparable to the
Consolidation have recently traded at a premium to the value of underlying
assets, there is substantial uncertainty as to the prices at which the Shares
will trade and the possibility that such prices will be less than the Adjusted
Net Asset Value per Share. See "FAIRNESS--Comparison of Alternatives to the
Consolidation."
Risks Related to the Differences in the Business and Investment Objectives
Between the Company and the Partnerships. As a result of the Consolidation,
BUC$holders will own an interest in a Company with a portfolio of assets which
is different from, and more varied than, the type of assets in which they
originally invested. Furthermore, the Company, unlike the Partnerships, will
seek to expand its portfolio of assets. As a result of the foregoing changes,
the business and investment objectives of the Company will differ from those of
the individual Partnerships in certain respects resulting in the following new
risks to BUC$holders:
Fundamental Change in Nature of Investment; Change in the Portfolio of
Assets. BUC$holders who become Stockholders will have fundamentally changed the
nature of their investment. Each Partnership was formed as a finite-life entity
with certain characteristics, including: (i) investments in a specified
portfolio of real estate related assets; (ii) BUC$holders who expected to
receive regular cash distributions from the Partnership's cash flow and special
distributions upon liquidation of the Partnership's assets; (iii) the
Partnerships were expected to hold assets for between ten and twelve years after
their acquisition, depending on market conditions; (iv) any net proceeds from
the sale, financing, refinancing or other disposition of any Partnership assets
would be distributed to BUC$holders to the extent such proceeds exceed the
Partnership's other cash requirements, rather than reinvested; and (v) upon
liquidation, the BUC$holders would realize the market value of the Partnerships'
assets, less expenses of liquidation and disposition fees payable to the General
Partners.
By contrast, (i) the Company's portfolio of real estate related assets will
initially be more diversified than that of any single Partnership, but the
composition of such portfolio may be changed from time to time by the Company's
Board of Directors without Stockholder approval; and (ii) although Stockholders
are expected to receive regular cash distributions, the Company has no specific
intention to liquidate or to sell a substantial amount of its assets, and it
plans to continue operations indefinitely. If the Consolidation is completed,
Stockholders will not receive liquidation proceeds through asset sales but may
liquidate their investment at any time by selling their Shares on the American
Stock Exchange or in private transactions. In this regard, the market value of
the Common Stock may never reflect the full fair market value of the Company's
assets and, consequently, Stockholders may not realize the full fair market
value of such assets by selling their Shares at prices which will be determined
by trading on the American Stock Exchange. See "COMPARISON OF RIGHTS OF
STOCKHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE PARTNERSHIPS."
Risks Relating to the Diversification of Asset Portfolios; Change in
Geographic Diversity and Overall Asset Quality. The assets and liabilities of
the Participating Partnerships will be combined in the Consolidation. Changes in
the value of the assets or in the operating cash flows will be shared by all
Stockholders. In addition, certain risks are inherent in the combination of real
estate related assets as contemplated by the Consolidation, including
environmental and similar risks. As a result of the Consolidation, the type and
geographic diversity of the assets in which the Stockholders will own an
interest will change. In all cases, the change will increase geo-
20
<PAGE>
graphic diversity. However, because the market for real estate may vary widely
from one region of the country to another, the change in geographic diversity
may expose Stockholders to different and greater risks than those to which they
are presently exposed as BUC$holders. For geographic information regarding the
Partnerships' assets, see "THE COMPANY--Assets and Operations." In addition,
because the assets owned by the Partnerships are not of uniform type or quality,
combining assets and liabilities of the Participating Partnerships in the
Consolidation may diminish the overall asset quality underlying the investments
of certain of the Stockholders by comparison with their existing Partnership
investment. Furthermore, because the Consolidation may be completed without the
participation of Insured II or Summit Preferred and Eagle, no assurance can be
given as to whether these Partnerships will participate in the Consolidation. If
these Partnerships do not participate in the Consolidation, the Company's
ability to provide diversification in its asset base will decrease, thereby
reducing the benefits to be realized from the Company's greater size and
limiting the investment flexibility that would be realized if all Partnerships
participate.
Potential Conflicts of Interest of Related General Partners. The Related
General Partners initiated and participated in the structuring of the
Consolidation and have conflicts of interest with respect to its completion,
including the following: (i) the Related General Partners, each of which is an
affiliate of Related, serve as general partners of each Partnership, which
creates an inherent conflict of interest when they serve in such capacity for
Participating Partnerships that have different interests; and (ii) the
Consolidation affords a number of benefits to the Related General Partners,
including the following: (a) if the Consolidation is consummated, the Related
General Partners and Class Counsel would effect a settlement in connection with
the Litigation, therefore, the Related General Partners are subject to a
conflict of interest in recommending to the BUC$holders that they not object to
the Consolidation; and (b) the Advisor, an affiliate of Related, will enter into
the Advisory Agreement, which the Company may not terminate, except for Cause,
until the fourth anniversary of the Effective Date. Pursuant to the Advisory
Agreement (and as a result of the Advisor's purchase of the P-B Interests), the
Advisor will be entitled to receive from the Company approximately 75% of the
aggregate annual fees currently paid by the Partnerships to the Related General
Partners and the P-B General Partner. Therefore, although the aggregate annual
fees payable by the Company will be reduced by approximately 25%, the Advisor's
share of such fees will increase by approximately $200,000 per year.
The Advisor will also have the ability, subject to the terms and conditions
of the Advisory Agreement, to grow the Company's assets and thereby increase the
amount of fees it can earn, including the Asset Management Fee, Acquisition Fee,
Mortgage Selection Fee, Mortgage Placement Fee, and Special Distribution. If the
Company were to utilize the maximum leverage permitted, the Advisor would be
entitled to Acquisition Fees, Mortgage Selection Fees and Mortgage Placement
Fees aggregating approximately $4,687,000 and increased annual Special
Distributions and Asset Management Fees of approximately $468,700. Such
additional fees will only be payable to the Advisor if and when the Company is
able to acquire additional assets.
Finally, pursuant to the Incentive Stock Option Plan, the Advisor may
receive additional Shares of Common Stock if the Company's distributions in any
year exceed the pro forma distributions set forth in this Solicitation
Statement. Similar to the BUC$holders, the Related General Partners and the
Advisor will receive Shares and, therefore, will have enhanced their liquidity.
Pursuant to the Amended Insured Partnership Agreements, however, the Advisor, as
a holder of the Insured LP Interests, will be restricted from converting all of
the Insured LP Interests into Shares of Common Stock in order to preserve the
partnership status of Insured I and Insured II. As a result of the
Consolidation, the Related General Partner's negative capital account in Summit
Preferred and Eagle could be reduced or limited, which would lessen or eliminate
altogether the obligation that the Related General Partner would otherwise have
had to contribute funds to Summit Preferred and Eagle upon liquidation.
Potential Conflicts of Interest Due to Competition with Affiliates. It is
anticipated that the Advisor will retain affiliates of Related to provide the
services which it is required to provide to the Company under the Advisory
Agreement. Furthermore, the Advisor and such affiliates may also act as advisor
to other clients or investment vehicles (affiliated or otherwise) which invest
in real estate assets. To the extent that other publicly-offered programs with
similar investment objectives have funds available for investment at the same
time as the Company, and/or an investment is potentially suitable for more than
one such entity, conflicts of interest will arise as to which entity should
acquire the investment. In such situations the Advisor and its affiliates will
review the investment portfolio of each such entity and will make the decision
as to which such entity will acquire the investment on the basis of such factors
as the effect of the acquisition on each such entity's portfolio and objectives,
the amount of funds available and the then length of time such funds have been
available for investment, and the cash requirements of each such entity. If
funds should be available to two or more publicly-offered programs to purchase a
given investment and the other factors enumerated above have been evaluated and
deemed equally applicable to each entity, then the affiliates will acquire such
investment for the publicly-offered programs on a basis of rotation with the
initial order of priority determined by the dates of formation of the entities.
Potential Conflict of Interest of Class Counsel. In assessing Class
Counsel's recommendation that BUC$holders not object to the Consolidation,
BUC$holders should consider that Class Counsel may be deemed to have a conflict
of interest with respect to such recommendation. In particular, the fees and
expenses of Class Counsel, if approved by the Court, will be paid from the cash
settlement pool provided by Related and other defendants pursuant to the Related
Settlement and settlements reached with other defendants in the Litigation. In
addition, as part of the Equitable Settlement, Class Counsel will have the right
to petition the Court for additional attorneys' fees in an amount to be
determined in the Court's sole discretion but which will be proposed to be 25%
of the increase, if any, as of the Anniversary Date in the capitalization of the
Company, based upon (i) the difference between the trading prices of the
Company's
21
<PAGE>
Shares on the Anniversary Date and (ii) the trading prices of the Units and the
asset values of the Partnerships prior to the Effective Date. The number of
Counsel's Fee Shares issued shall be subject to a maximum amount not to exceed
3.95% of the total number of shares of the Company's outstanding Common Stock on
the Anniversary Date. See "CONFLICTS OF INTEREST--Conflicts of Interest of Class
Counsel."
Uncertain Capital Structure Prior to Objection Deadline. Although the pro
forma financial information provides three possible scenarios of participation
among the Partnerships, the pro formas do not analyze all of the several
potential scenarios of Partnership participation and the resulting uncertainty
will prevent BUC$holders from fully evaluating the Company's potential
financial strength or asset base in determining whether or not to object to the
Consolidation. See "PRO FORMA FINANCIAL INFORMATION."
Less than Majority in Interest Will Bind All BUC$holders in a Partnership.
Pursuant to the Court's Order preliminarily approving the Settlement Stipulation
and subject to final Court approval, a Partnership will participate in the
Consolidation unless BUC$holders holding more than 331/3% of the outstanding
Units in such Partnership object to the Consolidation. If a Partnership
participates in the Consolidation, all BUC$holders of such Partnership,
including BUC$holders who objected to the Consolidation (by delivering the
Objection Notice by the Objection Deadline), will participate in the
Consolidation. Unlike the Monetary Settlement, BUC$holders may not separately
"opt-out" from the Equitable Settlement if their Partnership participates in the
Consolidation. See "--Relinquishment of Rights from Court Approval of Related
Settlement" below. The Units held by each Participating BUC$holder, including
objecting BUC$holders, will be exchanged for Shares. Conversely, if BUC$holders
holding more than 331/3% of the outstanding Units in a Partnership object to the
Consolidation, that Partnership will not participate in the Consolidation. If a
Partnership does not participate in the Consolidation, none of its BUC$holders
will be permitted to receive Shares in exchange for their Units. Under the
applicable Partnership Agreements, if the Consolidation were not subject to a
judicial determination and Court Order following a Fairness Hearing, it could be
consummated only by obtaining the approval of holders of a majority of the
outstanding Units. See "THE CONSOLIDATION AND RELATED TRANSACTIONS" and
"OBJECTION PROCEDURES."
No Cash Paid to Objecting BUC$holders. Objecting BUC$holders do not have
the right to receive cash based on an appraisal of their interests in the
Participating Partnerships or otherwise. See "OBJECTION PROCEDURES--No Right of
Appraisal."
Relinquishment of Rights from Court Approval of Related Settlement. If the
Related Settlement is approved by the Court: (a) all Participating BUC$holders
(including those who have objected to the Consolidation) will release and
discharge all claims against the Related General Partners and their affiliates
based on allegations similar to those made in the Consolidated Complaint or in
any Constituent Action which seek equitable relief different from that provided
by the Related Settlement; (b) all Participating BUC$holders will also release
and discharge all claims against the Related General Partners, their affiliates,
the P-B General Partner and its affiliates, relating to or arising out of the
terms or implementation of the Related Settlement with the Equitable Class, the
Consolidation, and the withdrawal of the P-B General Partners; and (c) all
non-participating BUC$holders will release and discharge all claims against the
Related General Partners, their affiliates, the P-B General Partner and its
affiliates arising out of or relating to the withdrawal of the P-B General
Partner. In addition, if the Related Settlement is approved by the Court, all
members of the Monetary Class who do not "opt-out" of the Monetary Settlement
will release and discharge all claims against the Related General Partners and
their affiliates in connection with or which arise out of the allegations set
forth in the Consolidated Complaint or in any pleading in any Constituent Action
or which relate to (i) the marketing, purchase, sale or holding of Units during
the period January 1, 1980 through June 8, 1994 or (ii) the operation,
oversight, monitoring or management of the Partnerships and other partnerships
during such period (other than claims, rights, causes of action or liabilities
described in this clause (ii) that are based on actual fraud committed by the
Related General Partners, their officers, directors and employees). See
"BACKGROUND, BENEFITS OF, AND REASONS FOR THE CONSOLIDATION--The Related
Settlement."
If the Related Settlement is not approved, members of the Monetary Class
and BUC$holders could pursue the claims which are being released as part of the
approval of the Related Settlement, subject to the right of the parties against
whom claims were asserted to raise any defenses available to them.
Risk of Increased Leverage. The Partnership Agreements of the Partnerships
contain various restrictions on the amount and nature of Partnership borrowings
and repayment terms. The Charter permits the Company to incur debt up to 50% of
the Company's Total Market Value (measured at the time such debt is incurred),
but will not limit repayment terms or interest rate structures. As of the date
of this Solicitation Statement, the maximum amount the Company would be able to
borrow is approximately $130,822,000.
Only Insured I and Insured II currently have outstanding debt. See "THE
COMPANY--Financing Policies."
If the Company incurs substantial debt, it will be subject to the following
risks: (a) the Company could lose its interests in assets given as collateral
for secured borrowings if the required principal and interest payments are not
made when due; (b) the Company's obligation to make principal payments, which
are not treated as deductions for federal income tax purposes, does not relieve
it from the obligation of distributing at least 95% of its REIT taxable income
to Stockholders; (c) the Company's cash flow from operations may not be
sufficient to retire these obligations as they mature, making it necessary for
the Company to either refinance these obligations prior to maturity or to raise
additional debt and/or equity for the Company or dispose of some of the
Company's assets to retire the obligations, which could have an adverse effect
on the amount of funds available for distribution to Stockholders; (d) the
Company's ability
22
<PAGE>
to borrow additional funds will be restricted by the 50% debt to Total Market
Value limitation unless there is an increase in the value of the Common Stock or
the Company's assets; (e) no assurance can be given as to the availability, or
the terms and conditions, of any financing needed by the Company to refinance
borrowings; and (f) if such debt is incurred at interest rates that adjust based
on prevailing market interest rates, an increase in the prevailing market
interest rates would adversely affect the Company's cash flow and could reduce
the amount of funds available for distribution to Stockholders.
Risk of Lower Distributions. There is no guarantee with respect to the
level of the Company's future cash distributions. Regardless of the initial
level of such distributions, they could decline in the future to a level at
which some Participating BUC$holders would receive lower distributions than they
received prior to the Consolidation. The Company's 1996 pro forma financial
statements indicate that BUC$holders of Summit Preferred and Eagle would have
received lower distributions (approximately 0.66% or $0.30 per $1,000 of
Original Investment less than 1996 annual distributions for Summit Preferred and
approximately 9.95% or $6.18 per $1,000 of Original Investment less than 1996
annual distributions for Eagle) had the Consolidation occurred on January 1,
1996, with 100% Participation. Also, the Maryland GCL limits a Maryland
corporation's ability to make distributions in certain circumstances.
See "THE COMPANY--Distribution Policy."
Consolidation Expenses Will Reduce the Cash of the Company Available for
Distribution to Stockholders. Consolidation Expenses are estimated to be
approximately $1,205,000 or approximately .99% of the Company's total Adjusted
Net Asset Value (based on the Adjusted Net Asset Values of the Partnerships and
assuming 100% Participation). The Company will borrow to pay the Consolidation
Expenses which will reduce the Company's cash balances to the extent of payments
on such debt. Funds used to pay Consolidation Expenses (including with respect
to any debt incurred to finance such expenses) would otherwise be available for
distributions to Stockholders. If the Consolidation is consummated with 100%
Participation, all Consolidation Expenses will be paid by the Company. If the
Consolidation is not consummated, the Related General Partners will bear the
Consolidation Expenses. If the Consolidation is consummated at less than 100%
Participation, the Related General Partners will be responsible for the
Consolidation Expenses otherwise allocable to Non-Participating Partnerships.
Tax Consequences of Failure to Qualify as a REIT. The Company intends to
elect to be treated as a REIT under the Code. No assurance can be given,
however, that the Company will be organized or operated in a manner which would
permit it to qualify to make such election. To qualify as a REIT, the Company
will be required to satisfy many complex and technical requirements, including
requirements regarding the nature of its assets and sources of its income. The
determination of various factual matters and circumstances not entirely within
the Company's control may affect its ability to qualify as a REIT. The Company
is relying on the opinion of Counsel regarding its ability to initially qualify
as a REIT. Such legal opinion is not binding on the IRS. See "FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of the Company."
If in any taxable year the Company were to fail to qualify as a REIT, the
Company would not be allowed a deduction for distributions to Stockholders in
computing taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain statutory mitigation provisions, the Company would also be disqualified
from treatment as a REIT for the four taxable years following the year during
which qualification was lost. As a result, the funds available for distribution
to the Company's Stockholders would be substantially reduced for each of those
years. The Company currently intends to operate in a manner designed to qualify
as a REIT, but it is possible that future economic, market, legal, tax or other
considerations may cause the Company to fail to qualify as a REIT or may cause
the Company's Board of Directors to revoke the REIT election. See "FEDERAL
INCOME TAX CONSIDERATIONS."
Risk of Improper Allocation of Shares. The allocation of Shares among
Participating Partnerships is based upon the Adjusted Net Asset Values assigned
to each such Partnership, which are based upon and subject to significant
assumptions and limitations, and which are based, in part, on the Appraisals
which necessarily include their own significant assumptions and limitations.
Accordingly, there can be no assurance that the number of Shares allocated to
each Participating Partnership reflects the relative values at which the
underlying assets of each such Partnership could be sold, the relative values at
which the Units of each such Partnership could be sold, or that such Shares
could be sold at a price equal to the Adjusted Net Asset Value assigned to such
Shares. The risk of improper allocation of Shares passes through to BUC$holders,
each of whom, upon the Effective Date, will receive a pro rata percentage of the
Shares allocated to the Participating Partnership in which such BUC$holders held
Units prior to the Consolidation. If, based on future operations of the Company,
it could be shown that the allocation method resulted in an inequitable
allocation of Shares, some BUC$holders would have received more or less Shares
than they otherwise should have been allocated.
Contingent or Undisclosed Liabilities. By acquiring Units in exchange for
Shares, the Company will, upon consummation of the Consolidation, succeed to all
assets and liabilities of the Participating Partnerships including any
contingent, unknown liabilities. Neither the General Partners nor the
Partnerships will make any representations or warranties to the Company with
respect to the assets or liabilities of the Partnerships. As a result, the
Company will not be entitled to any indemnification if assets are encumbered or
if undisclosed liabilities exist. If after the Consolidation the Company
determines that the assets are materially encumbered or that undisclosed
liabilities exist, there may be an adverse effect on the market value of the
Shares. See "--Risks Relating to the Business of the Company--Environmental Laws
May Impose Additional Liability" below as to the possibility of undisclosed
environmental conditions potentially affecting the value of the Partnerships'
assets.
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Loss of Relative Voting Power by BUC$holders. If the Consolidation is
completed, Stockholders will have an investment in a larger entity and will thus
lose relative voting power. BUC$holders may currently vote on certain
Partnership matters in proportion to their interests in the Partnership relative
to the interests of all BUC$holders in the same Partnership. After the
Consolidation, Participating BUC$holders will be able to vote as Stockholders of
the Company and will hold approximately 99.45% of the outstanding Shares
(assuming the Advisor and the Related General Partners have not exercised the
Conversion Option with respect to the Insured LP Interests). Stockholders will
have one vote per Share. Stockholders of a Maryland corporation are generally
entitled to vote on any material transactions or actions relating to such
corporation, and such transactions or actions may not be consummated without the
approval of the requisite number of stockholders. See "COMPARISON OF RIGHTS OF
STOCKHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE PARTNERSHIPS."
Negative Impact of Being an Advised REIT. The Company will be an externally
advised REIT, rather than a self-administered REIT, which may have a negative
impact on the value of the Common Stock. The Related General Partners believe
that many investment bankers, brokerage firms, financial consultants,
institutional investors and others believe that self-administered REITs are more
favorably received in the equity markets. The Related General Partners, together
with Class Counsel, explored the possibility of structuring the Company as a
self-administered REIT. Such a structure would require the Company to purchase
those operating divisions of Related necessary to support the activities of the
Advisor. The purchase price for such a transaction is generally determined by
applying a multiple to recurring and transaction income generated by the entity
to be purchased. Because the Advisor is newly formed and has no operating
history, and due to the potentially dilutive effect of issuing Shares to
accomplish such structure, Related and Class Counsel were unable to establish a
mutually agreeable price for the Advisor. The Company could determine in the
future to acquire the Advisor or otherwise become self-administered although
management does not have any present intention to do so.
The Company does not own any equity interests in the Advisor and,
therefore, will not be able to influence the day-to-day decisions of the
Advisor. As a result, the Advisor may implement business policies or decisions
that would not have been implemented by persons controlled by the Company which
are adverse to the Company or could lead to adverse financial results which
could impact the Company's financial condition and ability to make distributions
to Stockholders. See "MANAGEMENT--Description of Incentive Stock Option Plan."
The Consolidation Will Require Participating BUC$holders to Forego
Alternatives to the Consolidation. The Related General Partners considered
alternatives to the Consolidation, such as the continuation of the Partnerships
as currently structured and the liquidation of the Partnerships through sales of
entire Partnership portfolios or sales of individual Partnership assets. The
benefits of these alternatives are avoiding certain expenses of the
Consolidation and avoiding some of the risks associated with the Consolidation
as set forth in this section. Retaining the finite-life feature of the
Partnerships would allow BUC$holders eventually to receive liquidation proceeds
from the sale of the Partnership assets. A BUC$holder's share of these sale
proceeds from a liquidation in the future or currently could be higher than the
amount realized from a sale of the Company's Shares received in exchange for the
Units in the Consolidation. See "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE
CONSOLIDATION--Alternatives to the Consolidation."
Board of Directors May Change Investment Policies. The descriptions in this
Solicitation Statement of the major policies and the various types of
investments to be made by the Company reflect only the current plans of the
Company's Board of Directors. The Company's Board of Directors may change the
investment policies of the Company without a vote of the Stockholders. If the
Company changes its investment policies, the risks and potential rewards of an
investment in the Company may also change. In addition, the methods of
implementing the Company's investment policies may vary as new investment
techniques are developed. See "THE COMPANY--Investment Policies."
Lack of Operating History. The Company is newly formed, with no operating
history. In addition, the Company's business and investment objectives differ
from those of the Partnerships. For example, the Company expects to acquire
interests in shopping center properties and residential apartment complexes that
will require redevelopment and repositioning, whereas the Partnerships invested
in new and/or stable shopping center properties and residential apartment
complexes. In addition, the Company will be able to issue additional equity
securities, incur debt and reinvest the proceeds from the sale of assets and
repayments of mortgages while none of the Partnerships are permitted to do so.
There can be no assurance that the Company will achieve its stated objectives.
Risks Related to Anti-takeover Provisions. Certain provisions of Maryland
law and the Charter and the Bylaws may have the effect of discouraging a third
party from making an acquisition proposal for the Company and may thereby
inhibit a change in control of the Company under circumstances that could give
Stockholders the opportunity to realize a premium over the then-prevailing
market prices of the Shares. Such provisions include the following:
Ownership Limit. For the Company to maintain its qualification as a REIT
under the Internal Revenue Code of 1986 (the "Code"), not more than 50% in value
of the outstanding shares of stock of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the Company's taxable year
(other than the first taxable year for which the election to be treated as a
REIT has been made).
To ensure that the Company will not fail to qualify as a REIT under this
and other tests under the Code, the Charter, subject to certain exceptions,
authorizes the directors to take such actions as are necessary and desirable to
preserve its qualification as a REIT
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and to limit any person to direct or indirect ownership of no more than 9.9%
(the "Ownership Limit") of the value of the outstanding Shares (including, for
this purpose, preferred stock) of the Company. The Company's Board of Directors,
in its sole discretion, may exempt a proposed transferee from the Ownership
Limit. However, the Board may not grant an exemption from the Ownership Limit to
any proposed transferee whose ownership, direct or indirect, of in excess of
9.9% of the value of the outstanding shares of Common Stock of the Company would
result in the termination of the Company's status as a REIT. See "DESCRIPTION OF
COMMON STOCK-- Restrictions on Ownership and Transfer." These restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interests of the Company to attempt
to qualify, or to continue to qualify, as a REIT.
The Ownership Limit may delay, defer or prevent a transaction or a change
in control of the Company that might involve a premium price for the Common
Stock or otherwise be in the best interest of the Stockholders. See
"DESCRIPTION OF COMMON STOCK" and "FEDERAL INCOME TAX CONSIDERATIONS."
Preferred Stock. The Charter permits the Board of Directors to issue shares
of preferred stock and to establish the preferences and rights (including the
right to vote and the right to convert to Common Stock) of any such preferred
stock issued. Thus, the Board of Directors could authorize the issuance of
preferred stock with terms and conditions which could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the Shares might receive a premium for their Shares over the
then-prevailing market price of such Shares. See "DESCRIPTION OF COMMON STOCK."
Staggered Board. The Board of Directors has three classes of directors. The
terms of the first, second and third classes will expire in 1998, 1999 and 2000,
respectively. Directors for each class will be chosen for a three-year term upon
the expiration of the current class' term, beginning in 1998. Directors may be
removed by the Majority Vote of Stockholders only for Cause prior to the fourth
anniversary of the Effective Date, and with or without Cause after such
anniversary. The use of a staggered board makes it more difficult for a third
party to acquire control over the Company.
Exemption from Maryland Business Combination Law. Under the Maryland GCL,
certain "business combinations" (including certain issuances of equity
securities) between a Maryland corporation such as the Company and any person
who owns 10% or more of the voting power of the entity's shares (an "Interested
Stockholder") are prohibited for five years after the most recent date on which
the Interested Stockholder became an Interested Stockholder. Thereafter, any
such business combination must be approved by two super-majority stockholder
votes unless, among other things, the holders of shares of Common Stock receive
a minimum price (as defined in the Maryland GCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. As permitted by the Maryland GCL, the
provisions of the Charter exempt any "business combinations" involving any
stockholder. Accordingly, the five-year prohibition and the super-majority vote
requirement will not apply to any "business combinations" and any stockholder
may be able to enter into "business combinations" with the Company, which may or
may not be in the best interests of the other stockholders, without the
super-majority stockholder approval. See "CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE CHARTER AND BYLAWS--Business Combinations."
Exemption from Maryland Control Shares Acquisition Statute. The Maryland
control shares acquisition statute may have the effect of discouraging a third
party from making an acquisition proposal for the Company. The Maryland GCL
provides that "control shares" of a corporation acquired in a "control shares
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the votes eligible under the statute to be cast on the matter.
"Control shares" are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-third,
(ii) one-third or more but less than a majority, or (iii) a majority of all
voting power. Control shares do not include shares that the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "control shares acquisition" means the acquisition of control
shares, subject to certain exceptions.
If voting rights are not approved at a meeting of stockholders then,
subject to certain conditions and limitations, the issuer may redeem any or all
of the control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at a
stockholders' meeting and the acquiror becomes entitled to vote a majority of
the shares of stock entitled to vote, all other stockholders may exercise
appraisal rights.
As permitted by the Maryland GCL, the Charter contains a provision
exempting from the control shares acquisition statute any and all acquisitions
by any persons of shares of Capital Stock. There can be no assurance that such
provision will not be amended or eliminated at any point in the future. If the
foregoing exemption in the Charter is rescinded, the control shares acquisition
statute could have the effect of discouraging offers to acquire the Company and
of increasing the difficulty of consummating any such offer.
Advisory Agreement. The Advisory Agreement cannot be terminated by the
Company prior to the fourth anniversary of the Effective Date, other than for
Cause, and the Company cannot liquidate prior to such anniversary date except
upon a recommendation of the Advisor. After the fourth anniversary of the
Effective Date, the vote of the holders of 66 2/3% of the Company's then
outstanding shares of Common Stock is required to approve a liquidation of the
Company that is not recommended by the Advisor and the vote of the holders a
majority of the then outstanding shares of Common Stock is required to approve a
liquidation of the Company recommended
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by the Advisor. The inability to terminate the Advisory Agreement until after
the fourth anniversary of the Effective Date could discourage third parties
willing to acquire a controlling interest in the Company from doing so
especially if they were seeking to replace the Advisor in order to permit them
to provide advisory services to the Company and receive the fees otherwise
payable to the Advisor.
Possible Dilutive Effect Arising from Shares Available for Future Sale and
Shares to Be Issued to Class Counsel Pursuant to the Settlement. The Board of
Directors of the Company will have the ability, without Stockholder approval, to
offer additional shares of its Common Stock or other equity or debt securities
in exchange for money, property or otherwise. No prediction can be made as to
the effect, if any, that future sales of Common Stock or the availability of
such shares for future sale will have on the market price of the Common Stock.
Future sales of substantial amounts of Common Stock (including Common Stock
issued to Class Counsel as described below) or the perception that such sales
would occur, may adversely affect prevailing market prices for the Common Stock.
Stockholders will have no preemptive right to purchase shares issued in any such
offerings, and any such offerings might cause a dilution of a Stockholder's
investment in the Company.
As part of the Equitable Settlement, Class Counsel will have the right to
petition the Court for additional attorneys' fees in an amount to be determined
in the Court's sole discretion but which will be proposed to be 25% of the
increase, if any, as of the Anniversary Date in the capitalization of the
Company, based upon (i) the difference between the trading prices of the
Company's Shares on the Anniversary Date and (ii) the trading prices of the
Units and the asset values of the Partnerships prior to the Effective Date.
One-half of such fees, if any, will be paid in the form of restricted securities
(restricted only with respect to sale, assignment, pledge or other transfer of
such securities) (the "Restricted Securities") and the remaining one-half of
such fees will be paid in the form of unrestricted securities (the "Unrestricted
Securities" and, together with the Restricted Securities, "Counsel's Fee
Shares"). The number of Counsel's Fee Shares issued shall be subject to a
maximum amount not to exceed 3.95% of the total number of shares of the
Company's outstanding Common Stock on the Anniversary Date. Although the value
of such Shares cannot be determined at this time, if Class Counsel were to
receive the maximum number of Shares possible it would own approximately 316,300
Shares based upon the number of Shares outstanding as of the consummation of the
Consolidation. The Counsel's Fee Shares will be distributed to Class Counsel
quarterly in eight equal distributions commencing thirty days after the
Anniversary Date and restrictions on the Restricted Securities expire one year
from the date of issuance. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT--Security Ownership of Certain Beneficial Owners."
Risks Relating to the Business of the Company
General Risks Associated with Commercial Real Estate. The Company is
subject to the risks inherent in the ownership of commercial properties,
including, without limitation, fluctuations in occupancy rates and operating
expenses, variation in rental schedules, the character of the tenancy and the
possible effect on cash flow from a property if its tenants incur financial
difficulties. Such events may, in turn, be adversely affected by general and
local economic conditions, interest rate levels, the availability of financing,
the supply of and demand for properties of the type in which the Company invests
(directly or indirectly), environmental laws and regulations, zoning laws,
federal and local rent controls, other laws and regulations and real property
tax rates. Certain expenditures associated with real estate equity investments
(principally real estate taxes and maintenance costs) are not necessarily
decreased by events adversely affecting the Company's income from such
investments. Thus, the cost of operating a property may exceed the rental income
earned thereon, and the Company may have to advance funds in order to protect
its investment or may be required to dispose of the property at a loss. For
these and other reasons, no assurance of profitable operations can be made.
The ability of the Company to manage its assets is subject to federal
bankruptcy laws and state laws affecting creditors' rights and remedies
available to real property owners. In the event of the financial failure or
bankruptcy of a tenant, there can be no assurance that the Company could
promptly recover the tenant's premises from the tenant or from a trustee or
debtor-in-possession in any bankruptcy proceeding filed by or against such
person, or that the Company would receive rent in such proceeding sufficient to
cover its expenses with respect to such premises. In the event of the bankruptcy
of a tenant, the Company will be subject to the provisions of the federal
bankruptcy code, which in some instances may restrict the amount and
recoverability of claims held by the Company against such tenant. If any tenant
defaults on its obligations to the Company, the Company may lose some or all of
the income receivable from such tenant which could have a material adverse
effect on the Company's financial condition, profitability and cash available
for distribution to Stockholders.
Risk of Interest Rate Increases. Historically, the market value of REIT
securities has been sensitive to changes in market interest rates. Due to the
fluctuating nature of interest rates in general, and the impact of such
fluctuations on the prices of REIT securities in particular, and the impact of
such fluctuations on the Company's debt, some of which may bear interest at
variable rates, the Common Stock will be vulnerable to increases in interest
rates, which may tend to reduce cash flow available for distributions and the
market price of the Common Stock. In addition, because of the Company's
investments in mortgage loans, the trading price of the Common Stock may be
affected by prevailing market interest rates, including (i) in periods of high
interest rates, the Common Stock may be less attractive than alternative
investments of equal or lower risk, and (ii) high interest rates may have a
negative effect on the value of certain of the Company's assets which would
negatively affect the value of the Shares.
Possible Inability to Achieve Growth. The Company's growth objectives will
be affected by a variety of factors (including factors over which the Company
may have little or no control), including (i) conditions prevailing in the
public securities markets generally,
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such as the level of interest rates, and the relative demand for public
securities generally, and REIT securities specifically, and (ii) the performance
and perception of the Company, which will be affected by general real estate
conditions, as well as by the Company's specific assets and operations. Thus,
there is no assurance that the Company will be able either to raise through debt
or equity offerings the necessary funds for growth, or to persuade others to
accept the securities of the Company in a direct exchange for assets.
Risks Associated with Renovation and Redevelopment. The Company intends to
acquire existing shopping centers and apartments which need redevelopment and
renovation. In connection with any redevelopment project, the Company will bear
certain risks, including the risks of construction delays or cost overruns that
may increase project costs and could make such project uneconomical, the risk
that occupancy or rental rates at a completed project will not be sufficient to
enable the Company to pay operating expenses or earn its targeted rate of return
on the investment, and the risk of incurrence of redevelopment costs in
connection with projects that are not pursued to completion. In case of an
unsuccessful redevelopment project, the Company's loss could exceed its
investment in such project.
Risk of Not Achieving Investment Objectives. The original investment
objectives of the Partnerships are generally to preserve Partnership capital and
provide distributions of cash flow from operations to BUC$holders while
providing the potential for capital appreciation and increasing cash
distributions through the ownership and eventual disposition of real estate and
real estate related assets. The Company's investment objectives, on the other
hand, are (a) to maximize the value of the Common Stock, (b) to provide for
current income for distribution to Stockholders, and (c) to increase
distributions per share of Common Stock through the acquisition and ownership of
a diversified portfolio of retail and residential properties and participating
FHA insured and co-insured mortgages. If the Consolidation is completed, there
can be no assurance that the Company will be able to achieve its investment
objectives. See "THE COMPANY--Investment Objectives."
Reliance Upon Major Tenant. One major tenant, Kroger Food Stores, will
represent in excess of 17% of the Company's pro forma total revenues (assuming
100% Participation). No other single tenant will account for more than 10% of
the Company's pro forma total revenues, assuming 100% Participation. The six
leases with Kroger as a tenant expire from 2003 to 2013. The ability to renew
such leases or to re-lease the space upon lease expiration cannot be assured or
determined. Although, the Related General Partners believe that Kroger will
renew their leases at expiration, there can be no assurance they will do so. If
any of the leases are not renewed by Kroger at their respective expiration
dates, the Company would attempt to lease the space to another tenant or
tenant(s) appropriate for such space. Failure to lease the space could have an
adverse effect on both the cash flow from operations and capital appreciation of
the centers where Kroger is the anchor tenant. In addition, the continued credit
quality of this tenant cannot be assured, nor can the ability to re-lease the
space in the event of a tenant default or bankruptcy. In addition, three major
tenants representing, in the aggregate, 4.2% of the Company's pro forma total
revenues (assuming 100% Participation) have closed their facilities, but
continue to pay rent in accordance with the terms of their respective leases.
Although the Related General Partners believe that such tenants will continue to
pay rent in accordance with their lease commitments, there can be no assurance
that such tenants will continue to do so.
Competition. In acquiring retail and residential real estate and
participating FHA insured and co-insured mortgages, the Company will be in
competition with private investors, mortgage banking companies, lending
institutions, trust funds, pension funds and other entities, some with similar
objectives to those of the Company. Some of these entities can be expected to
have substantially greater resources and experience in acquiring retail and
residential real estate and participating FHA insured and co-insured mortgages,
than the Company.
Uninsured Loss. The Company's tenants carry comprehensive liability, fire
and extended coverage insurance with respect to the Company's real properties,
with policy specification and insured limits customarily carried for similar
properties. There are, however, certain types of losses that may be either
uninsurable or not economically insurable. Should an uninsured total loss occur,
the Company could lose both its capital invested in and anticipated profits from
one or more of its assets which could have an adverse effect on the Company's
financial condition, profitability and cash available for distribution.
Environmental Laws May Impose Additional Liability. A current or previous
owner or operator of real property may be legally liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Such liability may exist whether or not the owner or operator knew of,
or was responsible for, such hazardous or toxic substances. In addition, the
presence of hazardous or toxic substances may adversely affect the owner's
ability to borrow using such real property as collateral. Certain environmental
laws impose liability for release of asbestos-containing materials ("ACMs") into
the air and third parties may seek recovery from owners or operators of real
properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Company may be liable for removal or remediation costs, as well
as certain other potential costs which could relate to such hazardous or toxic
substances or ACMs (including governmental fines and injuries to persons and
property).
Insured I and Insured II obtained Phase I Environmental Assessments ("Phase
I Reports") on three of the shopping center properties at the times Insured I
and Insured II financed their purchase of the Insurance Policies. The Phase I
Reports found no violations of applicable environmental regulations, and
concluded that there has been no verifiable or apparent adverse environmental
impact from past or present land use. The Related General Partners' and each
Partnership's awareness of environmental problems associated with its real
estate related assets is derived from information obtained from prior owners,
due diligence inquiries when the assets were acquired, or inquiries to
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or correspondence with state regulatory agencies. There may, however, be
environmental problems associated with those properties not known to the Related
General Partners or the Partnerships and not disclosed in the Phase I Reports,
which problems would have been disclosed had the Related General Partners or the
Partnerships conducted environmental analyses in connection with the
Consolidation. In the event pre-existing environmental conditions requiring
remediation are discovered subsequent to the consummation of the Consolidation,
the cost of remediation may be borne by the Company.
Possible Changes in Tax Laws. Income tax treatment of REITs may be
modified, prospectively or retroactively, by legislative, judicial or
administrative action at any time. No assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to the qualification as a REIT or
the federal income tax consequences of such qualification. In addition to any
direct effects such changes might have, such changes might also indirectly
affect the market value of all real estate investments, and consequently the
ability of the Company to realize its investment objectives. While any such
legislation may contain transitional rules that would reduce its impact on the
Company, it is impossible to predict whether or in what form such legislation
may be enacted in the future. See "FEDERAL INCOME TAX CONSIDERATIONS."
Status of the Company Under ERISA. The Company has received an opinion of
Counsel to the effect that, based on certain assumptions concerning the public
ownership and transferability of the Common Stock, shares of Common Stock should
be "publicly offered securities" for purposes of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and that, consequently, the assets
of the Company should not be deemed "plan assets" of an ERISA plan, individual
retirement account or other non-ERISA plan that invests in the Common Stock. If
the Company's assets were deemed to be plan assets of any such plan, then, among
other consequences, certain persons exercising discretion as to the Company's
assets would be fiduciaries under ERISA, transactions involving the Company
undertaken at their direction or pursuant to their advice might violate ERISA,
and certain transactions that the Company might enter into in the ordinary
course of its business might constitute "prohibited transactions" under ERISA
and the Code.
Potential Liability Under the Americans With Disabilities Act. As of
January 26, 1992, all of the real properties of the Partnerships were required
to be in compliance with the Americans With Disabilities Act (the "ADA"). The
ADA generally requires that places of public accommodation be made accessible to
people with disabilities to the extent readily achievable. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the federal government, an award of
damages to private litigants and/or a court order to remove access barriers.
Because of the limited history of the ADA, the impact of its application to the
Partnership properties, including the extent and timing of required renovations,
is uncertain. The Related General Partners have surveyed all Partnership
properties and believe that all of the properties are in substantial compliance
with the ADA. Pursuant to certain lease agreements with tenants in certain of
the Partnership properties, such tenants are obligated to comply with the ADA
provisions, and the Related General Partners believe that such tenants can cover
any costs associated with such compliance with funds from operations,
established reserves or normal bank borrowings. If required changes involve a
greater expenditure than anticipated, or if the changes must be made on a more
accelerated basis than anticipated, the ability of tenants to cover such costs
could be adversely affected.
BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION
History of the Partnerships
Formation. The Partnerships were formed between 1986 and 1989 to invest in
shopping centers, garden apartment complexes and mortgages secured by real
property. In general, the Partnerships' original investment objectives were to
preserve Partnership capital and provide distributions of cash flow from
operations to BUC$holders, while providing the potential for capital
appreciation and increasing cash distributions through the ownership and
eventual disposition of real estate related assets. The original objectives of
the Partnerships varied somewhat with respect to whether it was an equity real
estate or mortgage program and the relative emphasis on such attributes as
property type, current cash flow and tax benefits. The original anticipated
holding periods also varied.
The Related General Partners' Management of the Partnerships. The Related
General Partners have managed the day-to-day operations of the Partnerships
since inception. As general partners of the Partnerships, they have been
responsible for management and administration of the Partnerships, including
finance and accounting, asset management and administration, overall loan
compliance and coordination of loan modification and restructuring, where
applicable.
Historical Information and Achievement of Objectives. All of the
Partnerships have paid distributions since inception. As set forth in the table
below, as of March 31, 1997, the Partnerships had made aggregate cash
distributions to BUC$holders of approximately $103,288,154. Distributions for
Insured I, Insured II, Summit Preferred and Eagle have been at stable levels
(adjusted for dispositions) for 16 quarters, 15 quarters, 19 quarters and 13
quarters, respectively.
The Partnerships have suffered to some varying degree from the adverse
conditions that prevailed in the real estate industry in the 1980s and that
still persist in some areas of the country. These adverse conditions have
resulted in varying levels of reduced cash flow or erosion of capital or both.
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The table set forth below provides a comparison of the capital raised and
distributions made by the Partnerships as of March 31, 1997:
Historical Information Concerning the Partnerships
<TABLE>
<CAPTION>
Distributions Distributions
to to Date of Last
BUC$holders BUC$holders Admission
Total through in Most of Original
Partnership Type of Investments Capital Raised 3/31/97 Recent Quarter BUC$holders
- ------------------ ---------------------------------------- ---------------- ------------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Insured I Shopping Centers $100,000,000 $ 46,787,423 $ 900,001 8/1/87
Insured II Shopping Centers 25,140,575 9,715,729 232,501 6/15/89
Summit Preferred Residential Garden Apartment Complexes 13,147,780 7,407,091 150,478 2/15/89
Eagle Participating FHA
Co-insured mortgages 52,822,000 39,377,911(1) 627,270 6/16/89
------------- -------------- -----------
TOTAL $191,110,355 $ 103,288,154 $1,910,250
============= ============== ===========
</TABLE>
- --------------
(1) Includes a special distribution in March 1994 of approximately $12,413,000
from the proceeds of a prepayment of a mortgage-receivable.
To the best knowledge of the Related General Partners, 100% of the net
proceeds of the original offerings of all of the Partnerships was invested in
accordance with the Partnerships' original investment objectives.
The following information sets forth, on a Partnership-by-Partnership
basis, the original investment objectives of each Partnership and the extent to
which the Related General Partners believe such objectives have been met.
Insured I. Original investment objectives: (i) preserve and protect
capital; (ii) provide BUC$holders with cash distributions of net rental income
from Partnership properties which are anticipated to be partially tax sheltered;
and (iii) provide the potential for capital appreciation of the Partnership's
properties. Based upon the original capital raised from BUC$holders of
$100,000,000, cash distributions to BUC$holders of $46,787,423, as of March 31,
1997, and an Adjusted Net Asset Value to BUC$holders of $60,618,098, the Related
General Partners believe that objectives (i) and (ii) above were substantially
met but objective (iii) has not yet been met.
Insured II. Original investment objectives: (i) preserve and protect
capital; (ii) provide BUC$holders with cash distributions of net rental income
from Partnership properties which are anticipated to be partially tax sheltered;
and (iii) provide the potential for capital appreciation of the Partnership's
properties. Based upon the original capital raised from BUC$holders of
$25,140,575, cash distributions to BUC$holders of $9,715,729 as of March 31,
1997, and an Adjusted Net Asset Value to BUC$holders of $16,054,310, the Related
General Partners believe that objectives (i) and (ii) above were substantially
met but objective (iii) has not yet been met.
Summit Preferred. Original investment objectives: (i) preserve and protect
capital; (ii) provide BUC$holders with cash distributions; and (iii) provide for
additional cash flow and a participation in capital appreciation of properties
owned by the operating partnership. Based upon the original capital raised from
BUC$holders of $13,147,780, cash distributions to BUC$holders of $7,407,091 as
of March 31, 1997, and an Adjusted Net Asset Value to BUC$holders of $9,088,747,
the Related General Partners believe that objectives (i) and (ii) have been met
but objective (iii) above has not yet been met.
Eagle. Original investment objectives: (i) preserve and protect capital;
(ii) provide BUC$holders with cash distributions; and (iii) provide additional
distributions from additional interest arising from participations in cash flow
of developments and/or sale or refinancing of developments and, to a lesser
extent, from prepayment of any mortgage acquired at a discount. Based upon
original capital raised from BUC$holders of $52,822,000, cash distributions to
BUC$holders of $39,377,911 as of March 31, 1997, and an Adjusted Net Asset Value
to BUC$holders of $34,338,056, the Related General Partners believe that
objectives (i) and (ii) have been met and that objective (iii) has been met in
part.
Since the Units are not listed on any national or regional stock exchange,
nor quoted on the Nasdaq National Market, there has been limited liquidity
available to BUC$holders. Secondary market sales activity in the Units has been
limited and sporadic, with less than five percent of all outstanding Units
traded (excluding intra-family transfers) during 1996. Based upon information
provided by Partnership Spectrum as compiled from approximately twelve secondary
market firms, for the twelve months from December 1, 1995 through November 30,
1996, secondary market sales prices were below the Adjusted Net Asset Values of
the Partnerships. See "FAIRNESS--Comparison of Alternatives to the
Consolidation--Secondary and Market Prices for Units."
The offering materials for the Partnerships generally contemplated
investment holding periods between ten years and twelve years following the date
of the last Partnership investment, unless economic conditions indicated that a
variation from those periods was in the best interests of the BUC$holders.
The following table sets forth, with respect to each Partnership, the age
of the Partnership relative to the anticipated holding period of the
Partnership's investments as set forth in the applicable offering materials:
29
<PAGE>
Original Anticipated Holding
Period of the Partnerships
Remaining
Originally
Original Anticipated
Last Date Anticipated Holding
Assets Holding Period
Partnership Acquired Period (years) (years)
- ----------------------- ----------- ---------------- ------------
Insured I ............ 12/31/86 10-12 0-2
Insured II ............ 8/18/88 10-12 2-4
Summit Preferred ...... 9/1/88 8-12 0-4
Eagle ................ 6/10/88 10-12 2-4
Recent Tender Offer for Insured I. In June 1996, the BUC$holders of Insured
I received an unsolicited tender offer from Equity Resource Fund XIX, a
Massachusetts limited partnership, to purchase up to 120,000 Units (3% of the
outstanding Units) of Insured I at a price of $5.00 per Unit ($200 per $1,000 of
Original Investment). The applicable Related General Partner recommended that
BUC$holders not tender their Units pursuant to such tender offer. The applicable
Related General Partner believes that slightly less than 3% of the outstanding
Units of Insured I were acquired in such tender offer.
Description of the Litigation
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of BUC$holders in the Partnerships against the Partnerships, PSI, the P-B
General Partner and a number of other defendants including certain other
partnerships (the "Other Partnerships") sponsored by Prudential and affiliates
of Related. Plaintiffs alleged violations of the Racketeer Influenced and
Corrupt Organizations Act ("RICO") statutes, breach of fiduciary duty, fraud,
deceit and negligence, and demanded an accounting. Plaintiffs sought unspecified
compensatory, punitive and treble damages, and rescission, including costs and
attorneys' fees. PSI and the P-B General Partner have previously settled claims
against them in the Litigation.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions, was transferred
to a single judge of the Court and consolidated for pretrial proceedings under
the caption In re Prudential Securities Incorporated Limited Partnerships
Litigation (MDL Docket No. 1005). On June 8, 1994, plaintiffs in the transferred
cases filed a complaint (the "Consolidated Complaint") covering, for pretrial
purposes, all of the transferred actions ("the Constituent Actions") and their
constituent complaints (the "Constituent Complaints"), and naming as defendants,
among others, Prudential and the Related General Partners. The Partnerships are
not named as defendants in the Consolidated Complaint (although they remain
named-defendants in certain of the Constituent Complaints), but the names of the
Partnerships are listed as being among the limited partnerships at issue in the
case.
The Consolidated Complaint alleges violations of the federal and New Jersey
RICO statutes, fraud, negligent misrepresentation, breach of fiduciary duties,
breach of third-party beneficiary contracts and breach of implied covenants in
connection with the marketing and sales of the Units. In particular, the
Consolidated Complaint alleges material misrepresentations and omissions
respecting the level of safety, income and growth and complains about the
illiquidity of the Units.
Plaintiffs request relief in the nature of rescission of the purchase of
the Units and recovery of all consideration and expenses in connection
therewith, as well as compensation for lost use of money invested less cash
distributions; compensatory damages; consequential damages; treble damages for
defendants' RICO violations (both federal and New Jersey); general damages for
all injuries resulting from negligence, fraud, breaches of contract, and
breaches of duty in an amount to be determined at trial; disgorgement and
restitution of all earnings, profits, benefits and compensation received by
defendants as a result of their unlawful acts; costs and disbursements of the
action; reasonable attorneys' fees; and such other and further relief as the
Court deems just and proper.
On November 28, 1994, the Court deemed certain of the Constituent
Complaints (including Kinnes) amended to incorporate into the Constituent
Complaints the new allegations and new parties (e.g. the Related General
Partners) set forth in the Consolidated Complaint.
The defendants have vigorously denied and continue to deny all liability to
the Class Members and all allegations of wrongdoing directed at defendants in
the Consolidated Complaint. Notwithstanding the foregoing, settlement
discussions with the plaintiffs have resulted in proposed settlements with some,
but not all, of the defendants. In particular, after a fairness hearing on
November 17, 1995, the Court, among other matters, granted (i) final approval to
the class certification and (ii) final approval of a partial settlement of the
Class Action against PSI and the P-B General Partner pursuant to which they
agreed to establish a settlement fund of $110 million. Settlement negotiations
with respect to defendants other than Prudential and Related are continuing.
The Related Settlement
History of Settlement Negotiations. Related first explored with Class
Counsel the possibility of a settlement of the Litigation at a meeting on or
about August 8, 1994. During that meeting, Related described the broad outlines
of a settlement involving a monetary
30
<PAGE>
payment and the reorganization of the Partnerships and the Other Partnerships.
As a result of that meeting, and at Class Counsel's request, on or about
September 26, 1994, Related delivered to Class Counsel a written outline of a
possible settlement. That outline assumed that the P-B General Partner would be
negotiating a settlement with Class Counsel which would result in, among other
things, the P-B General Partner's withdrawal as a general partner from each of
the Partnerships and the Other Partnerships without compensation for doing so.
For approximately one year thereafter, there was little communication with
Class Counsel regarding a possible settlement. During that time Class Counsel
negotiated and ultimately reached a settlement with PSI and the P-B General
Partner in the amount of $110,000,000.
On July 11, 1995, Related met with Class Counsel to review certain aspects
of the proposal that had been made. On August 17, 1995, Related sent to Class
Counsel a draft memorandum of understanding that contained more detail than the
original August 1994 settlement outline. At about this time, Related and PSI
determined that the P-B General Partner would be compensated by Related for
withdrawing as a general partner of the Partnerships and the Other Partnerships.
As a result, Related sought to reduce the cash component of the settlement
inasmuch as it would now have to compensate the P-B General Partner for its
interests. Class Counsel, however, refused.
On September 14, 1995, Class Counsel delivered a term sheet to Related
containing a draft of the settlement terms. A series of meetings then ensued
between Related, its counsel, Class Counsel and their financial consultant,
including meetings on September 19, 1995, October 19, 1995, December 1, 1995,
December 7, 1995, December 15, 1995 and January 3, 1996. Various issues were
negotiated at those meetings including the structure and terms of the
Consolidation, the scope of releases to be given, the scope of the monetary
class and the equitable class, the extent to which fees payable by the
Partnerships would be reduced, the extent to which Related would be responsible
for the costs attendant to the Consolidation and the extent to which Related
would be reimbursed if the Consolidation were approved and became effective. In
addition, during this period, at Class Counsel's request, Related delivered to
Class Counsel detailed information, including a break-down of the fees the
General Partners had been receiving from each Partnership and the reduction in
each type of fee which would inure to the benefit of the Partnerships.
On January 16, 1996, Related sent Class Counsel a term sheet outlining the
proposed Consolidation. On March 12, 1996, Class Counsel sent an initial draft
of the proposed Settlement Stipulation. On March 28, 1996, Class Counsel sent a
revised draft of the term sheet. On or about March 29, 1996, Related
communicated its comments regarding the term sheet and the proposed Settlement
Stipulation. As a result, on May 16, 1996, Class Counsel sent a revised draft of
the proposed Settlement Stipulation to Related. Subsequently, several revised
drafts of the proposed Settlement Stipulation and term sheets were prepared and
distributed in June 1996. In addition, Related met with Class Counsel several
times in June 1996 to discuss, among other items, the addition of Pru-Bache Tax
Credit to the equitable class and the equitable relief that members of that
partnership would be receiving. After the details of the equitable relief had
been determined, Related and representatives of Class Counsel discussed and
agreed upon the methodology that the Court would be asked to approve pursuant to
which Class Counsel would be compensated for their services to the Equitable
Class. See "CONFLICTS OF INTEREST--Conflicts of Interest of Class Counsel." The
Settlement Stipulation and other documents respecting the Related Settlement
were further negotiated, drafted and revised during the period from June to
December 1996.
On December 24, 1996, Class Counsel and Related entered into the Settlement
Stipulation, which was preliminarily approved by order of the Court dated
December 31, 1996.
The Order, among other matters, (i) certified two classes for settlement
purposes: one pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure
for monetary relief (the "Monetary Class Members") and the other pursuant to
Rule 23(b)(1) and (2) for equitable relief (the "Equitable Class Members" and,
together with the Monetary Class Members, the "Class Members"); (ii) approved
the form of class notices ("Class Notices") and directed that the Class Notices
be sent, along with this Solicitation Statement, to the applicable Class Members
after review and approval by the Court subsequent to the filing and clearance of
the Solicitation Statement with the Commission; and (iii) scheduled a date for
the Fairness Hearing at which all BUC$holders and Class Members will have an
opportunity to be heard. In addition, the Court enjoined: (i) the Class Members
from (a) transferring their Units prior to the Fairness Hearing unless the
transferee agrees to be bound by the Related Settlement, (b) conducting a tender
offer for Units, or (c) transferring their right to vote or granting a proxy
with respect to the Consolidation; and (ii) the General Partners from (a)
recognizing or processing transfers of Units except in accordance with the
Order, and (b) making the list of unitholders in each Partnership available to
any person seeking to conduct a tender offer.
The Monetary Class Members consist of, among others, all persons who
between January 1, 1980 and June 8, 1994 purchased Units, regardless of whether
they currently hold Units, excluding those BUC$holders who have previously
settled or litigated to conclusion with PSI or the P-B General Partner in
arbitrations or court proceedings other than MDL Docket No. 1005. The Equitable
Class Members consist of, among others, all current holders of Units, regardless
of whether they have settled with PSI or the P-B General Partner. There is
substantial overlap between the two classes and they are not mutually exclusive.
Accordingly, many people will be a member of both classes. However, some
Monetary Class Members will not be members of the Equitable Class (e.g., persons
who purchased their Units between January 1, 1980 through June 8, 1994 but who
have sold their Units and are no longer BUC$holders). Conversely, some Equitable
Class Members will not be members of the Monetary Class (e.g., persons who are
current BUC$holders but who purchased their Units
31
<PAGE>
after June 8, 1994). If a person who is a member of both classes opts out of the
Monetary Class, he will still be able to sue individually for money damages
notwithstanding the fact that he remains a member of the Equitable Class.
Conversely, a person who is an Equitable Class Member who is also a Monetary
Class Member will be able to object to the Consolidation in response to the
Solicitation Statement without opting out of the Monetary Class. However,
Equitable Class Members whose Partnership is a Participating Partnership may not
opt out of the Equitable Class even if they object to the Consolidation.
Summary of Related Settlement; Effect on Rights of BUC$holders. The Related
Settlement is comprised of two parts, the Monetary Settlement, in which only
Monetary Class Members may participate, and the Equitable Settlement, in which
only Equitable Class Members will participate.
The Monetary Settlement requires Related to pay $2,058,333 (the "Settlement
Amount") in settlement of its portion of the Monetary Class claims. The
Settlement Amount, less Court-approved fees and expenses, will be distributed
among Monetary Class Members in accordance with a plan of allocation that was
formulated by Class Counsel and approved by the Court.
Equitable relief provided to the Equitable Class Members as part of the
Related Settlement consists of (a) the Consolidation and/or (b) the withdrawal
of the P-B General Partner as a general partner of each of the Partnerships.
The Related Settlement will result in the full and complete settlement,
discharge and release of the claims by Monetary Class Members against the
Related General Partners and their affiliates in connection with or which arise
out of the allegations set forth in the Consolidated Complaint or in any
pleading in any Constituent Action or which relate to (i) the marketing,
purchase, sale or holding of Units during the period January 1, 1980 through
June 8, 1994 or (ii) the operation, oversight, monitoring or management of the
Partnerships and Other Partnerships during such period (other than claims,
rights, causes of action or liabilities described in this clause (ii) that are
based on actual fraud committed by the Related General Partners, their officers,
directors and employees. Each BUC$holder who invested in a Partnership that is
part of the Consolidation is restrained from commencing or prosecuting any
settled claims.
If the Related Settlement is approved by the Court, all Participating
BUC$holders will release and discharge, and be enjoined from bringing, all
claims against the Related General Partners and their affiliates based on
allegations similar to those made in the Consolidated Complaint or in any
Constituent Action and that seek equitable relief different from that provided
by the Related Settlement. If the Related Settlement is approved by the Court,
all Participating BUC$holders will also release and discharge, and be enjoined
from bringing, all claims against the Related General Partners, their
affiliates, the P-B General Partner and its affiliates relating to or arising
out of the terms or implementation of the Related Settlement with the Equitable
Class, the Consolidation, and the withdrawal of the P-B General Partners. If the
Related Settlement is approved by the Court, all non-Participating BUC$holders
will release and discharge, and be enjoined from bringing, all claims against
the Related General Partners, their affiliates, the P-B General Partner and its
affiliates arising out of or relating to the withdrawal of the P-B General
Partner.
The Related General Partners will advance payment for all costs of notice
and administration of the Related Settlement. However, if the Monetary
Settlement is approved, the Related General Partners will be reimbursed, subject
to Court approval of such reimbursement, for all costs of notice and
administration incurred by the Related General Partners in connection with the
Monetary Settlement in excess of $100,000. Such reimbursement will be made from
the settlement pool created by the Related General Partners cash settlement
payment. The Related General Partners will initially pay all expenses incurred
in connection with the Equitable Settlement. If approval of the Consolidation is
obtained, the Company will reimburse the Related General Partners for the
expenses incurred in connection with the Consolidation. If the Consolidation is
not consummated for any reason then the Related General Partners shall bear all
costs related to the Equitable Settlement and shall not be entitled to any
reimbursement of such costs from the Partnerships.
Right to Terminate. The Related General Partners may, at their discretion,
terminate the Related Settlement for any of the following reasons: (1) requests
for exclusion from the Monetary Class are validly filed by persons otherwise
entitled to be Monetary Class Members who purchased Units in the Partnerships
and other Partnerships having an aggregate original purchase price equal to or
greater than a certain specified amount agreed upon by Class Counsel and the
Related General Partners; (2) the Court fails or declines to enter the Order and
final judgment within 180 days after the Fairness Hearing; (3) the Court enters
an alternative judgment; (4) the action entitled Romano v. Prudential Insurance
Company of America, No. 94 Civ. 3527 ("Romano") is not dismissed with respect to
the Related General Partners and their affiliates named as defendants in Romano;
(5) the requirements of one of the two Minimum Participation scenarios are not
satisfied or such Minimum Participation requirements are met but, as permitted
by the Settlement Stipulation, Related refuses to proceed without 100%
Participation; or (6) the Court has not approved the Related Settlement,
including the Consolidation.
Consolidation Approval Procedure. Approval of the Equitable Settlement and,
therefore, the Consolidation is in the sole discretion of the Court. The
Equitable Settlement provides that, assuming certain other conditions are met, a
Partnership will participate in the Consolidation unless BUC$holders holding
more than 33 1/3% of the outstanding Units in such Partnership object to the
Consolidation. BUC$holders have until August 18, 1997 to object to the
Consolidation. Thus, a Partnership will participate in the Consolidation if (a)
BUC$holders holding less than 33 1/3% of the outstanding Units of a given
Partnership object to including that Partnership in the Consolidation, (b) the
Court approves of the Partnership being included in the Consolidation, (c) the
P-B General Partner withdraws as a general partner from each of the
Partnerships, and (d) the other terms and conditions of the Settlement
Stipulation are satisfied or waived.
32
<PAGE>
Under the applicable Partnership Agreements, if the Consolidation were not
subject to a judicial determination and court order following a Fairness
Hearing, it could only be consummated by obtaining the affirmative approval of
holders of a majority of the outstanding Units.
In addition to a BUC$holder's right to object to the Consolidation by
delivery of an Objection Notice pursuant to this Solicitation Statement,
BUC$holders may object to any aspect of the Related Settlement, including the
Consolidation, by following the procedures set forth in the Class Notice which
accompanies this Solicitation Statement. However, if the Court approves the
Consolidation after the Fairness Hearing and an objecting BUC$holder is a
BUC$holder in a Participating Partnership, such BUC$holder may not opt out of
the Equitable Settlement.
If more than 33 1/3% of the BUC$holders of a Partnership object to the
participation of that Partnership in the Consolidation, that Partnership will
not participate in the Consolidation and will continue to operate as a separate
legal entity with its own existing properties and other assets and its own
existing liabilities. Consummation of the Consolidation with respect to
Participating Partnerships will not have any impact on the investment
objectives, policies or restrictions applicable to a Non-Participating
Partnership, or affect the fees and distributions payable by such
Non-Participating Partnership to its general partners and their affiliates
(although, at the Related General Partner's option (and subject to Court
approval), the P-B General Partner will be required to withdraw from such
Partnership).
Class Counsel
Class Counsel consists of 25 law firms located throughout the United
States, each of which is unaffiliated with the Related General Partners. Such
firms were selected by the individual plaintiffs who commenced or intervened in
the Litigation, all of whom are BUC$holders, to represent and act on behalf of
BUC$holders in the Litigation, including settlement of the Litigation. Class
Counsel represented all BUC$holders in the Litigation. Class Counsel are
coordinated by an Executive Committee consisting of seven nationally recognized
law firms with extensive experience in the prosecution and resolution of
securities class actions. The Executive Committee is chaired by: Melvyn I.
Weiss, Esq., Milberg Weiss Bershad Hynes & Lerach LLP, One Pennsylvania Plaza,
New York, New York 10119; and Lawrence A. Sucharow, Esq., Goodkind Labaton
Rudoff & Sucharow LLP, 100 Park Avenue, New York, New York 10017.
Each of the above law firms is experienced in representing investors in
securities and limited partnership class action litigation, and each has
represented investors in complex settlement negotiations resulting in a variety
of transactions. Class Counsel have recovered billions of dollars on behalf of
class members and have been involved in numerous actions the resolution of which
required the issuer to take remedial actions.
Class Counsel investigated the claims asserted against the Related General
Partners in the Litigation, conducted discovery, including the review of
numerous documents and the taking of depositions, and conducted extensive
negotiations with the Related General Partners resulting in the Related
Settlement. Prior to agreeing to the final terms of the Related Settlement, of
which the Consolidation forms a part, and recommending it to the Equitable Class
Members, Class Counsel retained the services of Oppenheimer & Co., a well known
investment banking firm, and obtained the Fairness Opinion. See "FAIRNESS
OPINION AND APPRAISALS."
The fees of Class Counsel, as approved by the Court, will be paid from the
cash settlement pool provided by the Related General Partners and other
defendants pursuant to the terms of the Related Settlement and settlements
reached with other defendants in the Litigation.
Class Counsel may be deemed to have a conflict of interest in determining
to recommend to Equitable Class Members that they not object to the Related
Settlement, of which the Consolidation is a part, because Class Counsel intend
to apply to the Court for an award of fees and reimbursement of expenses. Such
fees would be payable in Counsel's Fee Shares which will be issued only in the
event that the Consolidation results in an increase in the value of investor
equity as determined one year following the commencement of trading of the
securities to be issued to Equitable Class Members pursuant to the
Consolidation. The maximum amount of Shares which may be issued to Class Counsel
will be equal to 3.95% of the total number of shares outstanding as of the
Anniversary Date. See "CONFLICTS OF INTEREST--Conflicts of Interest of Class
Counsel." The settlement and Class Counsel's fee application are subject to the
approval of the Court. See "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE
CONSOLIDATION--Description of the Litigation."
Alternatives to the Consolidation
Before deciding to recommend the Consolidation, the Related General
Partners examined certain alternatives to the proposed Consolidation in an
effort to achieve maximum benefits to each BUC$holder. These alternatives were
(a) continued management of the Partnerships as currently structured and (b)
liquidation of the Partnerships through entire portfolio sales or sales of
individual assets (including sales of assets to a REIT as discussed below). For
a detailed quantitative comparison of the alternatives to the Consolidation, see
"FAIRNESS."
Furthermore, inasmuch as the Consolidation is being proposed by the Related
General Partners in connection with the Related Settlement, they did not
actually consider other transactions as alternatives to the Consolidation.
However, in comparing the alternatives examined, the Related General Partners
considered the fact that the Partnerships' offering prospectuses contemplated a
holding period for their respective assets of eight to twelve years from the
date of a Partnership's last acquisition of assets (which dates of acquisition
range from 1986 to 1988). However, such holding periods were only estimations
made at the time of the offering of Units and, as more fully discussed below,
due to current real estate market conditions, the Related General Partners do
not believe that the sale of the assets at this time
33
<PAGE>
would be in the best interest of BUC$holders. Finally, the Related General
Partners are not required to cause the Partnerships to sell their assets at any
specific time.
Continuation of the Partnerships
Benefits of Continuation. An alternative to the Consolidation would be to
continue each of the Partnerships in accordance with its existing business plan.
Each Partnership would remain a separate legal entity, with its own assets and
liabilities, governed by its existing Partnership Agreement. BUC$holders in
favor of this option should consider objecting to the Consolidation. Continuing
the Partnerships without change has a number of benefits, including the
following: (i) each Partnership would remain a separate entity, with its own
assets and liabilities, and its original investment objectives, consistent with
the guidelines, restrictions and safeguards in its Partnership Agreement; (ii)
the Partnership's performance would not be affected by the performance of the
other Partnerships, including the investment objectives, interests and
intentions of the BUC$holders in the other Partnerships; (iii) there would be no
change in the nature of the BUC$holders' investment or relative voting rights;
(iv) there would be no change in the cash distribution policy (solely as a
result of not participating in the Consolidation); (v) the BUC$holders would
continue to defer certain income taxes on Partnership distributions and would
not have an immediate recognition of gain or loss; and (vi) the Participating
Partnerships would not incur the expenses associated with the Consolidation,
which are estimated to be approximately $1,205,000.
In addition, continuing the Partnerships without change avoids the
disadvantages inherent in the Consolidation. These disadvantages include, among
others: (i) the uncertainties of allocating the Shares to be issued by the
Company on a fair and equitable basis; (ii) the uncertain market value of the
Shares to be issued by the Company; (iii) the fundamental change in the
investment caused by the Consolidation; (iv) the fact that the Consolidation is
a taxable transaction; and (v) the risks and other detriments set forth in this
Solicitation Statement.
Detriments of Continuation. Maintaining the Partnerships as separate
entities may have the following potentially negative results when compared with
the benefits that the Related General Partners perceive may be derived from the
Consolidation: (i) illiquidity of investment on a current basis due to the lack
of a large and established secondary market; (ii) a less efficient and cost
effective exit strategy for BUC$holders wishing to liquidate their investment at
some future date; (iii) complicated tax filings for BUC$holders based on
Schedule K-1; (iv) duplication among the Partnerships in reporting, filing and
other costly administrative services; (v) difficulty in valuing the investment
due to the limited secondary market for Units; (vi) complex administration,
valuation and reporting of ERISA information for tax-exempt investors (IRAs,
pension and profit-sharing plans, etc.); (vii) inability to achieve cost savings
and (viii) less flexibility and control in actively managing the portfolio.
Valuation Comparison. As discussed in the more detailed quantitative
analysis of the alternatives to the Consolidation, the Related General Partners
have estimated that the going-concern value of the Units per $1,000 of Original
Investment for each Partnership would be less than the highest estimated value
of the Shares (on the same per $1,000 of Original Investment basis) and more
than the lowest estimated value of the Shares (on the same basis). See
"FAIRNESS--Comparison of Alternatives to the Consolidation".
Liquidation of the Partnerships
Benefits of Liquidation. Although not considered by the Related General
Partners to be a viable option at this time, each of the Partnerships could
immediately dissolve, sell its assets, pay off existing liabilities and
distribute the net liquidation proceeds to the BUC$holders and General Partners
in accordance with the distribution provisions of its Partnership Agreement. The
primary benefit of this strategy is that it would allow for an immediate final
liquidation of all of the BUC$holders's investment and a distribution of cash
equal to the net liquidation proceeds.
Detriments to Liquidation. Circumstances currently affecting the financial
and real estate markets must be taken into consideration in analyzing the
desirability of selling the Partnerships' assets, including timing of the sale
of assets. Although in recent years the investment demand and availability of
financing for certain types of real estate assets in many parts of the country
have shown marked improvement, overall conditions have not fully recovered to
the levels prevailing when most of the Partnerships' assets were originally
acquired, and the market values of many of the Partnerships' assets have not
increased to levels sufficient to allow BUC$holders to obtain a return of their
Original Investment. It is not certain whether market conditions are likely to
improve sufficiently in the near future to permit asset sales at more favorable
market values, but, investments in real estate historically have been considered
a stable long term investment despite periodic market fluctuations. The Related
General Partners believe that holding, rather than liquidating, the
Partnerships' assets, with the expectation that market values will continue to
improve over the long term is in the best interest of the BUC$holders and could
improve their overall investment return. Based on the factors described above,
the Related General Partners concluded that a sale of the Partnerships' assets
and a liquidation of the Partnerships' at this time would be premature.
A liquidation would be expected to occur in one of two ways: (i) on an
asset-by-asset basis, which would likely realize optimum prices for each asset,
but which would be expensive, drawn-out, and result in the protracted life of a
Partnership until all of its assets could be sold and the entity dissolved; or
(ii) on a portfolio basis to one or two buyers, which may result in a less
drawn-out liquidation period and less protracted life of the Partnership, but
would likely result in some price reductions or other additional costs to
compensate a buyer for purchasing assets which may not entirely fit its
investment criteria. If the Partnerships were to liquidate, such liquidations
would involve significant transaction costs at the property level, including
expenses such as selling commissions, transfer taxes, recording
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fees, title insurance premiums, legal fees, repair or other escrow expenses, and
various other closing costs, in addition to potentially significant costs
relating to representations, warranties and indemnifications, which are
generally required by purchasers of such assets. There would, in addition, be
potentially significant partnership administrative and overhead costs incurred
as the Partnerships windup, which costs are largely independent of asset size
and nature, and which over an extended liquidation period, could reach
disproportionately high levels in relation to revenues, thereby further reducing
the portion of net sales proceeds ultimately available for distribution to
BUC$holders from the liquidation.
Potential Acquisition of Partnership Assets by a REIT. The Related General
Partners believe that the most obvious buyers for the Partnerships' assets in a
liquidation scenario would be existing REITs, which have access to capital and
are seeking growth through acquisitions. As buyers, existing REITs are seeking
to capture the increased value derived from the difference between the expected
cash flow from properties they purchase and the amount of cash that they pay to
purchase such properties (whether in the form of interest on debt or the cost of
equity in the form of distributions on its stock). However, it is this value
differential, less Consolidation expenses, which the Company seeks to capture by
consummating the Consolidation. In a liquidation sale of assets, the
Partnerships would not only forfeit this value differential together with
potential increases in value but they would also incur the transaction costs of
the liquidation as well as Partnership administration and overhead costs during
the liquidation period as outlined above. Thus, the Related General Partners
believe that the Consolidation, with its attendant transaction costs, would
result in a greater overall benefit to the BUC$holders than a liquidation sale
of the Partnerships assets.
Valuation Comparison. As discussed in the more detailed quantitative
analysis of the alternatives to the Consolidation, the Related General Partners
have estimated that the going-concern value of the Units per $1,000 of Original
Investment for each Partnership would be less than the highest estimated value
of the Shares (on the same per $1,000 of Original Investment basis) and more
than the lowest estimated value of the Shares (on the same basis). See
"FAIRNESS--Comparison of Alternatives to the Consolidation."
Benefits of, and Reasons for, the Consolidation
In deciding whether to recommend the Consolidation to BUC$holders, and in
negotiating the terms of the Consolidation, the Related General Partners and
Class Counsel considered the benefits to be derived as a result of the
Consolidation. The following is a brief discussion of the primary advantages the
Consolidation is expected to generate for BUC$holders.
Increase in Liquidity. Currently, the Partnerships' Units are traded only
through an informal and inefficient secondary market. The Company's Common Stock
will be approved for listing on the American Stock Exchange (or other national
exchange or market) upon official notice of issuance prior to consummation of
the Consolidation. The Related General Partners believe that listing the Common
Stock on the American Stock Exchange is likely to substantially enhance the
liquidity of the investment. The Related General Partners believe the
Consolidation offers Participating BUC$holders a faster and more efficient means
of liquidating their investment than if the Partnerships were to attempt to
liquidate their portfolios through conventional asset sales or if the
BUC$holders were to sell their Units in the relatively illiquid secondary market
for such Units.
Increased Distributions. Lower costs resulting from the elimination of a
portion of the fees payable to the P-B General Partner and the contribution to
the Company of one-half of the P-B Interest acquired by the Advisor as well as
reduced costs associated with the operation and maintenance of the Partnerships
as public partnerships (including the necessity of furnishing Schedule K-1's)
and certain economies of scale resulting from the common beneficial ownership
and management of the Participating Partnerships' portfolio is expected to
generate an increase in the funds available for distribution from that which
could be generated by the individual Partnerships. Furthermore, the
Consolidation will simplify the preparation of financial statements, tax
returns, investor information and reports and filings otherwise required.
Certain cost savings will be enhanced to the extent that more than the minimum
number of Partnerships participate in the Consolidation. The Company's 1996 pro
forma financial statements indicate that BUC$holders of Summit Preferred and
Eagle would have received lower distributions (approximately 0.66% or $0.30 per
$1,000 of Original Investment less than 1996 annual distributions for Summit
Preferred and approximately 9.95% or $6.18 per $1,000 of Original Investment
less than 1996 annual distributions for Eagle) had the Consolidation occurred on
January 1, 1996, with 100% Participation. However, the Related General Partners
believe that additional cost savings together with the benefits anticipated to
be derived from the Company's new business plan, neither of which is reflected
in the Company's 1996 pro forma financial statements, will be achieved, thereby
resulting in a progressive increase in distributions to BUC$holders including
those in Summit Preferred and Eagle. There can be no assurance that such
additional cost savings or benefits derived from the Company's new business plan
will be achieved.
Reduction in Aggregate Annual Fees. The Consolidation will result in lower
aggregate annual fees being paid by the Company to the Advisor than the
aggregate annual fees currently paid by the Partnership to the General Partners.
In addition, the Related General Partners believe that the Company will be able
to achieve cost savings as a result of combining the services currently provided
to the Partnerships, thereby increasing the aggregate cash flow which would be
available for distribution. See "PRO FORMA FINANCIAL INFORMATION." Although the
formulas used to calculate all post-Consolidation fees (except the Mortgage
Servicing Fee, which remains unchanged) reflect reduced amounts from those
currently payable to the General Partners, the gross amount of such fees could
be higher post-Consolidation due to the increased size of the Company's
portfolio as a result of new acquisitions to be made by the Company (although
such fees will still be less than they would have been under the old formulas).
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The following is a comparison of (i) the aggregate fees paid by each of the
Partnerships to the General Partners, to (ii) the fees that will be paid by the
Company to the Advisor.
Summary of Reduction in Fees
<TABLE>
<CAPTION>
Percentage
Post- (Decrease)/
Current Consolidation Increase
Fees Fees* in Fees
------- ------------- ------------
<S> <C> <C> <C>
Insured I
Acquisition Fee(1) .................................. 5.000% 3.750% (25.0%)
Special Distribution from Adjusted Cash Flow(2) ...... 0.500% 0.375% (25.0%)
Disposition Fee(3) .................................. 3.000% 0.000% (100.0%)
Insured II
Acquisition Fee(1) .................................. 5.000% 3.750% (25.0%)
Special Distribution from Adjusted Cash Flow(2) ...... 0.500% 0.375% (25.0%)
Disposition Fee(3) .................................. 3.000% 0.000% (100.0%)
Summit Preferred
Acquisition Fee(1) .................................. 6.000% 3.750% (37.5%)
Asset Management Fee(4)(5) .......................... 0.500% 0.375% (25.0%)
Disposition Fee(3) .................................. 3.000% 0.000% (100.0%)
Eagle
Mortgage Selection Fee(6) ............................ 3.000% 3.000% 0.0%
Mortgage Placement Fee(7) ............................ 1.250% 0.750% (40.0%)
Asset Management Fee(4) .............................. 0.500% 0.375% (25.0%)
</TABLE>
- --------------
* The advisor may also receive (a) incentive stock options which will be
issued only if the Company's distributions in any year exceed $0.9869 per
Share (i.e., the 1996 pro forma annual distributions set forth in this
Solicitation Statement) and if granted by the Compensation Committee and (b)
a Liquidation Fee payable only if the Company is dissolved and such
dissolution and liquidation of the assets of the Company is supervised by
the Advisor.
(1) Based on the acquisition price of each property acquired by the Company.
(2) Per annum based on Insured I's and Insured II's Total Invested Assets;
payable by Insured I and Insured II, respectively.
(3) Represents a subordinated fee payable to the General Partners, generally
based on the gross sales price of a property. It is unlikely that the
General Partners would receive such fee.
(4) Per annum based on the Company's Total Invested Assets; payable by the
Company quarterly, in arrears, at the end of each calendar quarter.
(5) The General Partners are currently deferring all of the amount due and
payable by Summit Preferred to the General Partners with respect to such fee
(the Company will continue to carry these deferred fees as a liability on
its books). The Advisor will not defer any portion of such fee after the
Effective Date.
(6) Based on the principal amount of each mortgage funded by the Company.
(7) This fee is and will continue to be paid by the borrower under any mortgage
originated by the Company, and not by the Company.
Pursuant to the Partnership Agreements and the Advisory Agreement, the
General Partners and the Advisor are entitled to reimbursement of certain
administrative costs incurred by them on behalf of the Partnerships or the
Company. Reimbursement of such costs is included in General Administrative
Expenses ("G & A") in the pro forma and historical financial statements. The
Related General Partners believe that as a result of the Consolidation the
Company's G & A will be reduced as a result of combining services currently
provided to the Partnerships. Pursuant to the Advisory Agreement, the maximum
amount of expenses which the Company may reimburse the Advisor is $200,000 in
any given year of operations, subject to the following adjustments: the overall
limit on reimbursements for administrative expenses will be increased (i) after
the Company's first year of operations and each year thereafter by a percentage
equal to the Consumer Price Index for the year then ended, and (ii)
proportionately as the Company increases its asset portfolio.
For more information regarding aggregate compensation paid and
distributions made by the Company and the Partnerships on a pro forma and
historical basis, see "FAIRNESS--Compensation, Reimbursements and Distributions
to the General Partners."
Increase in Trading Value of Shares. The Related General Partners expect
the stabilized market price of the Company's Shares will increase relative to
the current market/trading value of the Units. This belief is based on the
expectation that the marketplace will place a greater value on an entity which
has the ability to grow and has a significant enough capitalization to be able
to access the financial markets and achieve greater liquidity, none of which
qualities exist with the Partnerships. Notwithstanding the expected outlook for
the stabilized value of the Company's Shares, the Related General Partners
recognize that there is substantial uncertainty as to the prices at which the
Shares will trade in the short-term following the consummation of the
Consolidation. Trading pressure resulting from BUC$holders wishing to sell their
Shares immediately after the Effective Date may result in the trading price of
the Shares being artificially depressed until the market for the Shares is
stabilized.
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Ability to Raise Capital. The Company will have access to financing and the
capital markets with the ability to fund future growth and capital requirements
through the issuance of additional publicly-traded and privately-placed
securities and the raising of funds from debt and mortgage obligations, subject
to a maximum debt limit equal to 50% of the Company's Total Market Value
(measured at the time such debt is incurred).
Growth. The Partnerships were originally formed to acquire (i) new or
recently improved substantially leased neighborhood shopping centers, (ii)
preferred equity interests in new apartment properties and (iii) FHA insured and
co-insured mortgages on stabilized or to-be-built apartment properties. The
Related General Partners believe that the current market place provides
opportunities to acquire existing assets at prices below replacement cost and,
therefore, growth opportunities are available for those companies able to
redevelop and reposition such assets. The Consolidation will provide a capital
structure and increased efficiency of portfolio management which will allow the
Company to take advantage of such opportunities. The Advisor intends to retain
affiliates of Related to provide the services to the Company required to be
provided by the Advisor. Related has substantial experience in raising capital,
developing residential and commercial properties and managing residential,
commercial and mixed use properties.
Diversification. The Company's initial real estate and mortgage portfolio
will be more diversified in terms of geographic location, number and type of
assets and single tenant exposure, than that of any of the Partnerships. Such
diversification may be further enhanced through the acquisition of additional
mortgages and properties. A more diversified portfolio should result in greater
protection against certain risks associated with real estate ownership. Although
Kroger Food Stores will represent in excess of 14% of the Company's pro forma
total revenues (assuming 100% Participation), Kroger Food Stores currently
accounts for more than 31% of Insured I and 9% of Insured II's total revenues,
respectively.
Withdrawal of P-B General Partner as a General Partner/Equity Holder. As
part of the Consolidation, the P-B General Partner will relinquish its general
partner interests in the Partnerships and will not receive an equity interest in
the Company. See "THE CONSOLIDATION AND RELATED TRANSACTIONS--Related
Transactions; Purchase Agreement between Related and the P-B General
Partner--Overview." The Advisor, an affiliate of Related will serve as the sole
advisor to the Company and perform the investor services, accounting and
administrative responsibilities and functions that currently are performed by
the P-B General Partner.
Limited Liability. Similar to the limited liability of the BUC$holders of
the Partnerships, Stockholders will not have any liability under Maryland law
for obligations of the Company solely as a result of their status as
Stockholders. See "COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY AND
BUC$HOLDERS OF THE PARTNERSHIPS."
Cash Flow. Currently, among other compensation, the General Partners are
entitled to receive 1% (Insured I) or 2% (all other Partnerships) of all
distributions from the Partnerships. As a result of the contribution of one-half
of the P-B Interests to the Partnerships, BUC$holders will receive a greater
percentage of the Shares allocated to the Partnerships and, therefore, a greater
percentage of distributions as Stockholders than they would have received as
BUC$holders as follows:
Percentage
Percentage of Percentage of Increase in
Cash Flow Cash Flow Percentage of
Distributable Distributable Distributable
to BUC$holders to Stockholders Cash Flow
---------------- ----------------- --------------
Insured I 99.00% 99.25% .25%
Insured II 98.00% 98.50% .50%
Summit Preferred 98.00% 98.50% .50%
Eagle 98.00% 98.50% .50%
Sales and Refinancing Proceeds. The General Partner's interest in
distributions from capital transactions increases to between 10% and 15% after
BUC$holders of the Partnerships have received a specified return on their
original investment. In connection with the Consolidation, the Related General
Partners have eliminated their right to receive such increased distributions.
The Related General Partners believe that it is unlikely that they would receive
any increased distributions from capital transactions under the current
Partnership Agreements.
Market Attractiveness. The Related General Partners expect that the Company
will be more attractive in the marketplace than the Partnerships, with attendant
benefits for its Stockholders. In particular, the Related General Partners
believe that the Company, with its capability for growth by making additional
investments will be viewed by the market as an operating business and,
therefore, the Common Stock may be expected to trade at a higher level than the
Units of the Partnerships which are closed-end funds (i.e., a "going concern"
should trade at a price which (i) is greater than the sum of its underlying
assets or (ii) represents a smaller discount to the value of its assets than a
closed-end fund; each of the Partnerships' Units currently trade sporadically in
the informal secondary market at a price which reflects a substantial discount
to the value of its underlying assets).
Reduction in Administrative Costs; Simplified Administration. Each year,
the Partnerships must prepare four separate annual audited financial statements,
as well as tax returns and investor communications, and throughout the year
provide other periodic reports to BUC$holders and the Commission. The
preparation of this material requires substantial expense, time and effort.
Furthermore, to the
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<PAGE>
extent service providers, such as legal counsel, accountants, appraisers and
other professionals, render services benefitting two or more of the
Partnerships, costs and expenses associated with such services must be fairly
and equitably allocated among the Partnerships relative to the benefits afforded
the Partnerships. The Consolidation will reduce the number of entities for which
administrative services are required and eliminate much of the duplication in
reporting, filing and other administrative services, thus simplifying
administration and reducing administrative costs of the consolidated entities.
The Consolidation will eliminate the cumbersome process of allocating common
costs and expenses, and simplify the preparation of financial statements, tax
returns, investor information and reports and filings otherwise required. In
light of the foregoing, the Related General Partners believe that the
Consolidation will result in cost savings to Participating BUC$holders. For
information relating to the pro forma operating expenses of the Company see
"FINANCIAL STATEMENTS."
Benefits to Certain Taxable Investors. Participating BUC$holders in Insured
I, Insured II and Eagle may be entitled to a capital loss deduction if they
realize a loss on the Consolidation, and Participating BUC$holders in each
Participating Partnership may be entitled to deduct their remaining "suspended"
passive activity losses, if any, from a Participating Partnership (i.e.,
post-1986 net losses in excess of statutorily provided "phase-in" amounts) free
of the passive activity loss limitation, upon the exchange of Units for Shares
in each case without having to dispose of their Shares in the Company.
Benefits to Tax-Exempt Stockholders. Unlike the Partnerships, the Company
generally may incur indebtedness in connection with the acquisition or
improvement of property without causing dividends to tax-exempt stockholders to
constitute unrelated business taxable income.
Simplified Income Tax Reporting. Participating BUC$holders will no longer
receive a Schedule K-1 (which is generally received in February or March of each
year) which complicates and typically leads to more costly tax return
preparation, but instead will receive the simple and familiar Form 1099-DIV by
January 31 of each year. In addition, whereas BUC$holders generally must file
state income tax returns and may incur state income tax in various states in
which the Partnerships own properties, Stockholders generally will not be
required to file state income tax returns or pay state income taxes outside
their state of residence with respect to their Shares.
Consequences if Consolidation Not Completed
If the Consolidation is not completed, the Partnerships will continue to
operate as separate legal entities with their own assets and liabilities. There
will be no change in their investment objectives, policies and restrictions.
Disadvantages of the Use of Corporate Form
The Company is a Maryland corporation subject to the Maryland GCL. A
comparison of the limited partnership structure of the Partnerships and the
corporate structure of the Company is set forth under "COMPARISON OF RIGHTS OF
STOCKHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE PARTNERSHIPS." There are
various potential disadvantages in converting to corporate form, including the
following: (a) the corporate structure permits a wide range of business
activities, possibly increasing risks to Participating BUC$holders; (b) the
corporate structure permits perpetual existence, thereby eliminating the
contractual right of Participating BUC$holders to receive cash proceeds from the
sale or refinancing of properties or the repayment of mortgages; (c) the
corporate structure permits the Board of Directors to change certain investment
objectives of the Company without a vote of Stockholders, possibly increasing
risks to Participating BUC$holders; (d) the change to a corporate form changes
the tax characterization of distributions to Participating BUC$holders in that
Stockholders will receive dividends (or portfolio income) from the Company,
which, unlike passive income received from the Partnerships (other than Eagle),
cannot be offset against passive losses to the extent permitted under the Code;
and (e) in a corporate structure, the rights of Stockholders against management
of the Company may be more restricted than in a limited partnership form due to
the fact that the Charter and Bylaws include provisions that limit the liability
of its directors and officers to the Company and the Stockholders for money
damages in most circumstances and require the Company to provide indemnification
to directors and officers in a broader range of circumstances than those in
which the Partnership Agreements require the Partnerships to provide
indemnification to the General Partners. See "CERTAIN PROVISIONS OF MARYLAND LAW
AND THE CHARTER AND BYLAWS--Indemnification and Limitation of Liability."
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<PAGE>
THE CONSOLIDATION AND RELATED TRANSACTIONS
The Consolidation
Exchange of Units. If the Consolidation is approved by the Court, the
Participating Partnerships and the Company will enter into one or more
contribution agreements (the "Contribution Agreements") described below which
the Participating Partnerships will effectively merge with and into the Company.
Consummation of the Consolidation is subject to certain conditions.
See "--Conditions to the Consolidation" below.
If Summit Preferred and Eagle participate in the Consolidation, the
Contribution Agreements will provide that (i) the Units will be converted into
the right to receive Shares based on the proportion which each Unit represents
of the total Units outstanding and the Units will be deemed transferred to the
Company in exchange for Shares, (ii) the respective Assignor Limited Partners of
Summit Preferred and Eagle will assign to the Company all of the limited
partnership interests it holds in such Partnerships, and (iii) the Related
General Partners and the Advisor will assign their respective general partner
interests in such Partnerships to the Company, in each case, in consideration
for the issuance by the Company to the BUC$holders, the Related General Partners
and the Advisor of the aggregate number of Shares allocated to such Partnership
in the Consolidation. The Company will issue to the BUC$holders (as well as the
applicable Related General Partners and the Advisor) Shares in proportion to the
respective interests in distributions of cash flow from operations of such
persons in such Partnerships.
If Insured I and Insured II participate in the Consolidation, the
Contribution Agreement will provide that (i) the Units will be converted into
the right to receive Shares based on the proportion which each Unit represents
of the total Units outstanding and the Units will be deemed transferred to the
Company in exchange for Shares, (ii) the respective Assignor Limited Partners of
Insured I and Insured II will assign to the Company, all of the limited
partnership interests in such Partnerships in consideration for the issuance by
the Company to the BUC$holders of the aggregate number of Shares allocated to
such Partnerships in the Consolidation and (iii) the general partner interests
will be retained by the Related General Partners and the Advisor and converted
to limited partnership interests as described below. The Company will issue to
the BUC$holders Shares in proportion to the respective interests in
distributions of cash flow from operations of such BUC$holders in the
Partnerships.
The limited partners in each Participating Partnership (other than the
Assignor Limited Partner) will be deemed to have transferred to the Company
their limited partnership interests in exchange for Shares. Such Shares will be
distributed to the respective limited partners in proportion to the respective
interests in distributions of cash flow from operations of such limited partners
in the Partnerships.
General Partner Interests. The Related General Partners and the Advisor
will receive either Shares (with respect to their interests in Summit Preferred
and Eagle) or limited partnership interests (with respect to their interests in
Insured I and Insured II) as described below.
Summit Preferred and Eagle. The Related General Partners and the Advisor
will receive, in the aggregate, 1.5% of the aggregate Shares allocated to Summit
Preferred and Eagle in the Consolidation, in respect of their general partner
interests in such Partnerships.
Insured I and Insured II. If Insured I and Insured II participate in the
Consolidation, the Contribution Agreement will provide that the Related General
Partners and the Advisor will retain their aggregate .75% and 1.5% general
partner interests in Insured I and Insured II and the Company will initially
hold a 99.25% and 98.5% limited partnership interest in Insured I and Insured
II, respectively. The Partnership Agreements of Insured I and Insured II will be
amended to provide that the general partner interests held by the Related
General Partners and the Advisor will be converted to limited partnership
interests in such Partnerships and that the limited partnership interests of the
Company will be converted to general partner interests in such Partnerships.
Pursuant to the Amended Insured Partnership Agreements, the Insured LP Interests
will be convertible into a number of Shares equal to .75% and 1.5%,
respectively, of the Shares allocated to Insured I and Insured II in the
Consolidation; provided that the Advisor will be prohibited from converting a
portion of the Insured LP Interests in order to maintain the partnership status
of Insured I and Insured II.
Amendments to Partnership Agreements of Insured I and Insured II. The
Insured I and II Partnerships are each insured under a respective insurance
policy (the "Insurance Policy") from Continental Casualty Company ("CNA"), each
of which policies provide, in effect, that the cumulative amount of insured cash
available for distribution (as defined in each policy) from all sources as
determined in accordance with the Insurance Policies and related agreements,
together with the appraised values of each Partnership's real estate assets then
owned by the Partnerships, will equal at least 100% of the original
contributions of BUC$holders allocated to investment in properties on the day on
which each of the Partnerships acquired its last property, with the liability of
CNA under each Insurance Policy to increase pursuant to a formula based upon the
length of time properties are held by the Partnerships, up to a maximum of 125%
of original contributions of BUC$holders allocated to investment in properties
on the tenth anniversary of the date the last property was purchased by each
Partnership. The policies are intended to cover the various economic risks of
the ownership of the properties, but do not apply to certain losses, costs,
penalties or expenses, including among others, those arising out of any physical
loss, damage, loss of use or other physical injury to the properties. Payment
amounts due under respective claims, if any, will only be made under each policy
to each respective Partnership and only after the tenth anniversary date from
the last acquisition by each Partnership. The Insurance Policies also limit
CNA's obligation to pay any party other than Insured I and II, respectively.
Therefore the Related General Partners have determined that in connection with
the Consolidation, the partnership status of Insured I and II must be
maintained.
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<PAGE>
Upon consummation of the Consolidation, the Partnership Agreements of
Insured I and Insured II will be amended to provide that the general partner
interests held by the Advisor and the Related General Partners in Insured I and
Insured II will be converted to limited partnership interests and that the
limited partnership interests of the Company will be converted to general
partner interests. Pursuant to the Amended Insured Partnership Agreements, the
Insured LP Interests will be convertible at any time into a number of Shares
equal to .75% and 1.5%, respectively, of the Shares allocated to Insured I and
Insured II in the Consolidation; provided that the Advisor will be prohibited
from converting a portion of the Insured LP Interests in order to maintain the
partnership status of Insured I and Insured II.
Insured I and Insured II will continue to pay their own respective fees and
expenses to the Advisor and/or to the Related General Partners. Such
Partnerships will also continue to make distributions to the Company in respect
of its general partner interests, and to the Related General Partners and the
Advisor in respect of their limited partnership interests, in Insured I and
Insured II.
Other Amendments. The Court's final order will provide that the General
Partners, Assignor Limited Partners of each Participating Partnership and the
Company, as the sole BUC$holder of each Participating Partnership, may amend
their respective Partnership Agreements (the "Amendments") to the extent
necessary to implement and consummate the Related Settlement and the
Consolidation. Such Amendments and actions may include, but are not limited to,
authorizing (i) the P-B General Partner (A) to transfer its entire P-B Interest
in each of the Participating Partnerships to the Advisor (who will not be
admitted to the Participating Partnerships as a general partner), and (B) to
cease to be a general partner of the Participating Partnerships; (ii) the
Advisor to contribute to each Participating Partnership one-half of the P-B
Interests transferred to it by the P-B General Partner which interest shall
thereupon be deemed cancelled; (iii) each Related General Partner (A) with
respect to Eagle and Summit Preferred, to transfer its entire general partner
interest in each such Participating Partnership to the Company in exchange for
Shares, and (B) to cease to be a general partner of the Participating
Partnerships; (iv) with respect to Eagle and Summit Preferred, the Advisor to
transfer its remaining general partner interest in the Participating
Partnerships to the Company in exchange for Shares; (v) the Assignor Limited
Partner to transfer to the Company its entire limited partnership interest in
the Participating Partnerships; (vi) the dissolution of Eagle and Summit
Preferred and, after satisfaction of such Partnerships' creditors, the
distribution in kind to the Company, as the sole BUC$holder and sole holder of
general partner interests of each such Participating Partnership, of all of the
assets of such Participating Partnerships; and (vii) the continued
indemnification of a withdrawing general partner of each Participating
Partnership for the period prior to such withdrawal. See "CERTAIN PROVISIONS OF
MARYLAND LAW AND THE CHARTER AND BYLAWS--Indemnification and Limitation of
Liability--Withdrawing/Terminated General Partners."
Recommendation of the Related General Partners and Class Counsel. The
Related General Partners recommend the Consolidation. Class Counsel believes
that the Consolidation is in the best interests of the BUC$holders. The P-B
General Partner takes no position with respect to the Consolidation due to its
conflict of interests in selling the P-B Interests to the Advisor. The Related
General Partners believe that an investment in the Company through the ownership
of Shares will provide greater overall benefits to BUC$holders than the benefits
derived from an investment in an individual Partnership or from any of the
alternatives to the Consolidation analyzed by the Related General Partners. See
"FAIRNESS" and "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION--
Alternatives to the Consolidation." This belief is based on a comparison of the
consideration to be received by BUC$holders with respect to alternatives
analyzed. Consequently, the Related General Partners and Class Counsel recommend
that the BUC$holders not object to the Consolidation. However, BUC$holders are
urged to consider carefully the factors described under "RISK FACTORS" and the
comparison of an investment in a limited partnership versus an investment in the
Company set forth under "COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY AND
BUC$HOLDERS OF THE PARTNERSHIPS." BUC$holders are also urged to consult with
their independent financial and tax advisors prior to determining whether or not
to object to the Consolidation. The Related General Partners and Class Counsel
are subject to conflicts of interest with respect to the Consolidation. See
"CONFLICTS OF INTEREST--Conflicts of Interest of the Related General Partners,"
and "--Conflicts of Interest of Class Counsel."
Objections Required to Prevent Consolidation. Pursuant to the Court's Order
preliminarily approving the Settlement Stipulation and subject to final Court
approval, a Partnership will participate in the Consolidation unless BUC$holders
holding more than 33 1/3% of the outstanding Units in such Partnership object to
the Consolidation. If a Partnership participates in the Consolidation, all
BUC$holders of such Partnership, including BUC$holders who object to the
Consolidation will participate in the Consolidation. Additionally, such
BUC$holders will have no appraisal rights in connection with their Units.
Minimum Participation Requirement. Participation by all Partnerships is not
required in order for the Consolidation to be consummated. However, the
Consolidation will not be consummated unless it is approved by Insured I and
either of Insured II or Eagle and, if there is less than 100% Participation,
unless the Related General Partners waive their right not to proceed with the
Consolidation with less than 100% Participation. See "--Conditions to the
Consolidation." The Fairness Opinion considers the fairness of the Consolidation
based on both 100% Participation and the two Minimum Participation scenarios.
See "FAIRNESS OPINION AND APPRAISALS--Fairness Opinion."
Conditions to the Consolidation. The Company will not proceed to consummate
the Consolidation unless, among other things, (i) the Minimum Participation
requirement is met; (ii) the P-B General Partner withdraws as a general partner
of each Partnership and relinquishes its right to obtain an equity or other
interest in the Company in respect of the P-B Interests; (iii) the Common Stock
is approved for listing on the American Stock Exchange (or other national
exchange or market) subject to notice of issuance; and (iv) the Court has
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approved the Related Settlement, including the Consolidation. The Minimum
Participation requirement has been included by the Related General Partners as a
condition to the Consolidation because the Related General Partners believe that
many of the expected benefits of the Consolidation, including increased
liquidity, reduced expenses and diversification, may be more difficult to
achieve if the Consolidation is consummated without Insured I and either Insured
II or Eagle based on the relative Adjusted Net Asset Values of each of the
Partnerships.
Prior to, and as a condition of, obtaining the Order and distributing this
Solicitation Statement, the Related General Partners received a letter from the
Commission in which it took a "no-action" position to the effect that, among
other matters, (i) the distribution by the Company of the Shares to the
BUC$holders, the Related General Partners and the Advisor in the Consolidation
may be made without registration under the Securities Act of 1933, as amended
(the "Securities Act"), (ii) the public resale of the Shares by (a) persons that
are not deemed to be affiliates of the Related General Partners or the Advisor
may be made without registration under the Securities Act and without compliance
with Rule 144 promulgated under the Securities Act, and (b) persons that are
deemed to be affiliates of the Related General Partners or the Advisor may be
made in compliance with certain other rules depending upon whether they were
affiliates of the Related General Partner or the Advisor either before or after
the Consolidation.
Allocation of Shares. The total Shares allocated to the Participating
Partnerships (8,097,539 Shares, assuming 100% Participation) will be allocated
among the Participating Partnerships based on relative Adjusted Net Asset Value
assigned to each such Partnership. The Shares to be received in the
Consolidation will be allocated to each Participating BUC$holder, the Related
General Partners and the Advisor in accordance with the respective Partnership
Agreements and his or its proportionate interest in distributions of cash flow
from operations of the Partnership. See "ALLOCATION OF SHARES."
The Shares allocated to the Related General Partners and the Advisor in
respect of their interests in Insured I and Insured II will not be issued to the
Related General Partners or the Advisor, but will be reserved by the Company for
issuance upon the Related General Partners or the Advisor's exercise of the
Conversion Option with respect to the Insured LP Interests. See "DESCRIPTION OF
COMMON STOCK--Conversion Option."
Appraisals and Fairness Opinion. The Partnerships engaged JLW USA to
appraise the value of the real properties in which the Partnerships have a
direct or indirect interest. The Appraisals were prepared in connection with a
valuation of the real properties for purposes of complying with ERISA
requirements and for use in connection with the Partnerships' 1995 audit of
their financial statements. The Adjusted Net Asset Value of each of the
Partnerships was determined primarily based on those Appraised Values, plus the
value of certain other non-real estate related assets, less debt outstanding. In
addition, Class Counsel retained Oppenheimer to render its opinion which
concluded that, based on the assumptions and subject to the qualifications and
limitations stated therein, that the Consolidation, including the allocation of
Shares among the Partnerships is fair, from a financial point of view, to the
BUC$holders of the Partnerships assuming 100% Participation and all other
combinations of Participating Partnerships (including the Minimum Participation
scenarios). See "FAIRNESS OPINION AND APPRAISALS," regarding JLW USA and
Oppenheimer, any material relationships with, and compensation received or
expected to be received by JLW USA and Oppenheimer, and summaries of the
Appraisals and the Fairness Opinion.
Accounting Treatment. The Consolidation will be accounted for using the
purchase method of accounting. Under this method, the Participating Partnership
with the BUC$holder group receiving the largest ownership in the Company (in
this case for all three scenarios, Insured I) will be deemed to be the acquirer.
As the surviving entity for accounting purposes, Insured I's assets and
liabilities will be recorded by the Company at their historical cost, with the
assets and liabilities of the other Participating Partnerships recorded at their
estimated fair values, using the Adjusted Net Asset Values. For a discussion of
the accounting adjustments necessary to give effect to the Consolidation, see
"FINANCIAL INFORMATION."
No Fractional Shares. No fractional Shares will be issued by the Company in
the Consolidation. Each Participating BUC$holder who would otherwise be entitled
to a fractional Share (which entitlement will be determined by combining such
Participating BUC$holder's allocation of Shares from each Participating
Partnership as to which such Participating BUC$holder is receiving Shares) will
receive one Share for each fractional share of 0.5 or greater. No Shares will be
issued for fractional shares of less than 0.5.
Taxable Gain or Loss. Tax losses are expected to result from the
Consolidation to Participating BUC$holders who acquired Units from Insured I,
Insured II and Eagle in the initial offering and taxable gain is expected to
result from the Consolidation to Participating BUC$holders who acquired Units
from Summit Preferred in the initial offering. Tax losses for BUC$holders who
hold Units and who acquired them from Insured I, Insured II and Eagle in the
initial offering are estimated to range, per $1,000 of Original Investment, from
$30 to $156. Taxable gain to BUC$holders, who hold Units in Summit Preferred and
who acquired such Units in the initial offering, is estimated to be $170 per
$1,000 of Original Investment. Certain Participating BUC$holders that acquired
Units in the secondary market in any of the Participating Partnerships may
recognize taxable gain with respect to their investment in Units, which will
generally be recognized in the year of the Consolidation. Consequently, certain
Participating BUC$holders may be required to pay tax on any gains recognized but
will not receive a special cash distribution for the payment of such taxes. To
assist BUC$holders in estimating the federal income tax consequences of the
Consolidation, the following table sets forth an estimate, prepared by the
Related General Partners, of the income and loss that may be realized by
Participating BUC$holders receiving Shares in the Consolidation in exchange for
each $1,000 of Original Investment in Units. These estimates assume that the
fair market value of the Shares is equal to the Adjusted Net Asset Values
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of the Participating Partnerships' assets acquired in the Consolidation. The
actual amount and timing of income and loss recognized by each BUC$holder will
depend on a variety of factors, including the actual value of the Shares at the
Closing Date for federal income tax purposes (which may differ from the
estimates set forth below). Because the fair market value of the Shares will
begin to fluctuate immediately after the Consolidation, it is possible that such
fair market values rather than estimated Adjusted Net Asset Value may be used by
the Participating Partnerships or by the IRS for purposes of calculating the
taxable income and loss to BUC$holders, and, as a result, the taxable income and
loss per $1,000 of Original Investment would differ from the respective amounts
stated below. A BUC$holder that acquired Units in the secondary market for
consideration less than that which a Participating BUC$holder paid to the
respective Participating Partnership for its Units may recognize gain upon
receipt of Shares (which gain is not shown in the table below). In addition,
actual loss may differ from the respective estimated amounts set forth below,
due to, among other things, the factors discussed above, or to successful
challenge of the Partnerships' reporting positions by taxing authorities. See
"FEDERAL INCOME TAX CONSIDERATIONS."
Approximate Taxable Gain (Loss) Estimates
Per $1,000 of Original Investment
Net Tax Estimated Estimated
Basis of Value Gain
Partnership Units(1) of Shares(2) (Loss)(3)
- ----------------------- ---------- ------------ ----------
Insured I ............ $783 $685 $ (98)
Insured II ............ $877 $721 $(156)
Summit Preferred ...... $559 $729 $ 170
Eagle ................ $900 $870 $ (30)
- --------------
(1) Computations are as of December 31, 1996.
(2) The estimated values set forth under the column heading "Estimated Value
of Shares" in this table are different from the estimated values of Shares
set forth elsewhere in this Solicitation Statement in order to account for
the difference between tax and GAAP accounting. The other calculations
were derived using GAAP-based accounting while the analysis utilized in
this table (i.e. the tax implications of the Consolidation) must use
tax-based accounting. For purposes of the gain/loss calculation, the
values in this table were determined by taking (i) the Adjusted Net Asset
Value of a Partnership as of March 31, 1996 plus certain adjustments to
reflect the difference between financial reporting bases to tax bases,
(ii) dividing it by the number of Shares allocated to the Partnership and
(iii) multiplying the result by the number of Shares allocated to
BUC$holders per $1,000 of Original Investment, without rounding to the
nearest whole Share. See "ALLOCATION OF SHARES."
(3) Estimated gain/(loss) from the Consolidation is potentially capital
gain/(loss), which may be subject to limitations on deductibility. See
"FEDERAL INCOME TAX CONSIDERATIONS--Tax Consequences of the Consolidation."
Effect of Consolidation on Objecting BUC$holders. A BUC$holder of a
Participating Partnership who objects to the Consolidation does not have a
statutory right to elect to be paid the appraised value of his or her interest
in the Partnership.
Effect of Consolidation on Non-Participating Partnerships. Each
Non-Participating Partnership that does not participate in the Consolidation
will continue to operate as a separate legal entity with its own assets and
liabilities. There will be no change in its investment objectives, policies or
restrictions, or fees or distributions payable to its General Partners. Each
Non-Participating Partnership will remain subject to the terms of its
Partnership Agreement, and each will continue to be managed by substantially the
same persons currently employed by the Related General Partners. See
"FAIRNESS--Fairness to Non-Participating Partnerships."
Title Insurance. The Company intends to obtain a title insurance
endorsement under which the coverage of the existing lender's or owner's
policies, as the case may be, will be extended to the Company.
Representations and Warranties. Neither the General Partners nor the
Partnerships will make any representations or warranties to the Company (in the
Contribution Agreements or otherwise) with respect to the assets or liabilities
of the Partnerships. As a result, the Company will not be entitled to any
indemnification if undisclosed liabilities exist.
Legal Proceedings. The Related General Partners and one or more of the
Partnerships may be involved in litigation incidental to their businesses, but
no material litigation is currently pending or threatened against any of the
Partnerships, the Partnership properties or the Related General Partners (other
than the Litigation being settled pursuant to the Settlement Stipulation).
Environmental Matters. The environmental laws of the federal government and
of certain state and local governments impose liability on property owners for
the cleanup of hazardous and toxic substances located on the property. This
liability may be imposed without regard to the timing, cause or person
responsible for the release of such substances onto the property. Certain
lessees of the Partnerships' properties are required to comply with such laws
pursuant to their lease agreements, but the Company could be subject to
liability in the event that it acquires property having such environmental
problems, or if a lessee defaults on its cleanup obligations. This potential
liability could adversely affect the BUC$holders of Partnerships without such
environmental liability, and no adjustment was made in the Appraisals for the
possible effects of the presence of hazardous or toxic substances at any of the
properties. In addition, similar liabilities could be imposed on persons holding
mortgages secured by properties with environmental problems.
Insured I and Insured II obtained Phase I Reports on three of the shopping
center properties at the time Insured I and Insured II financed their purchase
of the Insurance Policies. The Phase I Reports found no violations of applicable
environmental regulations, and
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concluded that there has been no verifiable or apparent adverse environmental
impact from past or present land use. Other than these Phase I Reports, the
Partnerships have had no further environmental analyses performed with respect
to their properties, and the Related General Partners are not aware of any other
environmental problems.
No environmental audits were obtained by the Partnerships at the time their
properties were acquired or during the Partnerships' ownership (other than the
Phase I Reports). Other than the results of the Phase I Reports described above,
each Partnership's awareness of environmental problems associated with its real
estate related assets is derived, for the most part, from information obtained
from prior owners, due diligence inquiries when the assets were acquired, or
visual inspections of properties by independent appraisers, or grows out of the
development process, and, in some cases, inquiries to or correspondence with
state regulatory agencies. There may, however, be environmental problems
associated with these properties not known to the Partnerships and not revealed
by the Phase I Reports. In the event preexisting environmental conditions
requiring remediation are discovered subsequent to the consummation of the
Consolidation, the cost of remediation with respect to other properties will be
borne by the Company, except to the extent that the Company is able to obtain
remediation from a lessee. In any circumstance in which the Company bears the
remediation cost, the Company will pursue all reasonable means of obtaining
reimbursement from third parties who may have been liable to the Partnership.
Neither the Related General Partners nor any of the Partnerships is aware
of any noncompliance, liability or other claim in connection with any of the
assets of the Partnerships.
Related Transactions
Purchase Agreement between Related and the P-B General Partner
Overview. Pursuant to the P-B Purchase Agreement, among other things and
subject to the conditions set forth therein, the P-B General Partner has agreed
to withdraw as a general partner of the Partnerships and to sell, assign and
transfer the P-B Interests to Related or an affiliate of Related (e.g., the
Advisor) for an aggregate purchase price of $1,137,000 (assuming the P-B
Interests in each of the Partnerships is acquired). Related is also acquiring
the interests of the P-B General Partner in four other partnerships (three of
which were co-sponsored by Related) for $2,863,000. The P-B General Partner (and
the Related General Partners) will also be entitled to receive payment from the
Partnerships of any deferred fees, if any, which remain unpaid as of the closing
of the P-B Purchase Agreement. See the Partnerships' financial statements under
the heading "FINANCIAL INFORMATION." The total amount payable to the P-B General
Partner pursuant to the P-B Purchase Agreement is, therefore, $4,000,000. The
P-B General Partner paid a nominal amount for its interests in each of the
Partnerships.
The withdrawal of the P-B General Partner was requested by Class Counsel as
part of the Related Settlement. The P-B General Partner has advised the Related
General Partners that it acquiesced in such request based upon Related's
agreement to pay fair consideration for the P-B Interests and its desire to
terminate its involvement in the sponsorship and management of limited
partnerships.
The Advisor has not yet determined whether it will utilize its own funds in
the purchase of the P-B Interests or seek to finance the purchase. If it
utilizes financing, the Advisor expects that it will secure such financing by
pledging (i) the P-B Interests (which, following the Consolidation, will be
represented by Shares and the Insured LP Interests) and the distributions
receivable in respect of such interests to the lender providing such financing;
and (ii) the portion of the fees payable by the Company and Insured I and II
that relate to the P-B Interests.
The Advisor will contribute one-half of the P-B Interests it acquires to
the Participating Partnerships, resulting in the BUC$holders of such
Partnerships ultimately owning a greater percentage of the Shares than otherwise
would be the case if the Advisor did not make such a contribution. Such
contribution was requested by Class Counsel in negotiating the Related
Settlement and represents an added benefit to the Equitable Class.
Covenants as to Voting of Units, Tender Offers. Pursuant to the P-B
Purchase Agreement, the P-B General Partner has agreed that with respect to any
Units held by it or its affiliates (less than 1% of the aggregate Units
outstanding as of the date of this Solicitation Statement), it would not object
to the Consolidation. Furthermore, if as of the Effective Date, the P-B General
Partner and its affiliates own more than 1% of the Company, they have agreed
(subject to certain exceptions) not to sell any Shares they receive as part of
the Consolidation in respect of their Units until after the first anniversary of
the Effective Date.
In addition, pursuant to the P-B Purchase Agreement, the P-B General
Partner is not required to consummate the sale of the P-B Interests to Related
if Related makes a tender offer for any Units (except in response to a third
party tender offer) and Related has agreed not to tender without the P-B General
Partners' prior consent, for any Units or Shares for a period of one year from
the Effective Date (except in response to a third party tender offer).
Furthermore, if prior to the closing, Related acquires Units in connection with
a defensive tender offer, Related is obligated to offer such Units to the
Company at a price equal to the tender price, including any borrowing or other
costs incurred by Related to acquire the Units; and such offer must remain open
for a period of one year after the Effective Date.
Conditions to Closing; Court Approval. Pursuant to the terms of the P-B
Purchase Agreement, Related has no obligation to purchase the P-B Interests if
Court approval of the Related Settlement, including the Consolidation, is not
obtained. However, Related or its affiliates may, subject to the approval of the
Court, acquire the P-B Interests whether or not the Consolidation is
consummated.
Withdrawal of the P-B General Partner
As noted above, Related at its option, may acquire the P-B interests even
if the Consolidation is not consummated. The option is subject to the approval
of the Court which may be granted by the Court whether or not it approves the
Consolidation or a Partnership
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would otherwise have been a Participating Partnership. In the event Related
exercises its option, the Related General Partners will be the sole general
partner of their respective Partnerships. In such event, the Related General
Partners are not obligated to contribute any portion of the P-B Interests they
acquire to the Partnerships nor to reduce the fees payable to the General
Partners.
Consolidation Expenses
The Consolidation Expenses are estimated, in the aggregate, to be as
follows:
Printing and postage $ 110,000
Legal Fees 550,000
Fairness Opinion (including fees and expenses) 146,500(1)
Registration, Listing and Filing Fees 76,000(2)
Accounting Fees 205,000
Contingency 117,500
-----------
TOTAL $1,205,000
===========
- --------------
(1) Oppenheimer was engaged by Class Counsel to render its opinion as to the
fairness, from a financial point of view, of the Consolidation and in
connection with a consolidation transaction involving three other limited
partnerships sponsored by affiliates of Related and Prudential. The
aggregate cost of such engagement (including fees and expenses) is
expected to total $550,000. The cost of the Fairness Opinion allocated to
the Company is in proportion to the aggregate Adjusted Net Asset Value of
the Partnerships and the aggregate adjusted net asset value of the limited
partnerships that are the subject of the other consolidation transaction.
See "FAIRNESS OPINION AND APPRAISALS--Fairness Opinion."
(2) Includes an estimate of initial entry fees to include the Company's Shares
for listing on the American Stock Exchange of approximately $30,000, the
Commission's required filing fees of approximately $25,250 and Blue Sky
fees of $20,750.
If the Consolidation is consummated, Consolidation Expenses will be paid by
the Company. If the Consolidation is not consummated, the Related General
Partners will bear the Consolidation Expenses. If the Consolidation is
consummated with less than 100% Participation, the Related General Partners will
be responsible for the Consolidation Expenses otherwise allocable to
Non-Participating Partnerships. NonParticipating Partnerships will not bear any
portion of the Consolidation Expenses. The Company intends to borrow the funds
necessary to pay the Consolidation Expenses. For a description of the terms of
such debt, see "THE COMPANY--Description of Existing Indebtedness--Consolidation
Expenses Loan."
FAIRNESS
General Partners' Belief as to Fairness
Related General Partners. The Related General Partners believe that the
terms of the Consolidation are fair when considered as a whole, and to the
BUC$holders in each of the Partnerships, regardless of which of the Partnerships
are included in the Consolidation, assuming the requirements of either of the
Minimum Participation scenarios are met. The material factors underlying the
beliefs of the Related General Partners relating to the fairness of the
Consolidation are discussed below under "--Material Factors Underlying Belief as
to Fairness." The Related General Partners' judgment as to the fairness of the
Consolidation may be affected by the fact that they will derive financial
benefits from the Consolidation, and are thus subject to conflicts of interest.
See "CONFLICTS OF INTEREST--Conflicts of Interest of the Related General
Partners."
The Related General Partners based their determination as to the fairness
of the Consolidation on a variety of factors, including, but not limited to: (i)
the process of arm's length negotiation of the structure, terms and conditions
of the Consolidation with Class Counsel acting on behalf of the Class Members,
and Class Counsel's responsibility to act in the best interests of the
BUC$holders; (ii) the Related General Partners' knowledge that any settlement
would necessarily entail obtaining preliminary and final approval by the Court
of the Related Settlement, including the Consolidation; (iii) the opportunity
for each BUC$holder to object to the Consolidation; (iv) with respect to the
allocation of Shares among the Partnerships, the Adjusted Net Asset Values
assigned to the Partnerships based in part upon the Appraisals of the direct or
indirect interests in real properties held by the Partnerships on a
partnership-by-partnership basis as set forth in the Appraisals prepared by JLW
USA; (v) the fact that JLW USA prepared all the Appraisals thereby maximizing
consistency among the Appraisals; (vi) a comparison of the potential benefits
and detriments of the Consolidation with those of the alternatives to the
Consolidation; and (vi) the Fairness Opinion rendered by Oppenheimer. The
Related General Partners did not give any specific weight to any one of the
foregoing factors but viewed them in the aggregate in supporting its fairness
determination.
The Related General Partners believe that an investment in the Company
through the ownership of Shares will provide greater overall benefits to
BUC$holders than the benefits derived from an investment in an individual
Partnership or from any of the alternatives to the Consolidation analyzed by the
Related General Partners. Based upon the foregoing, the Related General Partners
are recommending that BUC$holders not object to the Consolidation.
In reaching the conclusion that the Consolidation is fair, the Related
General Partners also considered, in particular, the fact that Participating
BUC$holders will surrender their right to receive cash proceeds from the
liquidation of the Partnerships at some time in the future. In this regard, the
Related General Partners compared the amount of consideration to be received if
the Partnerships were
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liquidated, to the anticipated market value of the Shares (computed by
capitalizing distributions based upon the December 31, 1996 pro forma
distributions and applying a yield of 5.25% and 8.75%). Notwithstanding the
uncertainties in estimating the value of the Shares, the Related General
Partners believe that the Shares constitute reasonable consideration for the
Units. See "--Comparison of Alternatives to the Consolidation--Valuation of
Shares" below. In proposing the Consolidation, the Related General Partners
determined that achieving the Partnerships' objective of receiving net
liquidation proceeds from finite-life entities was outweighed by the Company's
(i) potential to provide improved liquidity to BUC$holders through ownership of
Shares of Common Stock, (ii) potential for growth, (iii) greater flexibility
with respect to its investment portfolio as an infinite-life entity, and (iv)
potential for increased distributions of cash flow from operations to
Stockholders.
P-B General Partner. The P-B General Partner takes no position with respect
to the Consolidation due to the fact that it (i) has not been a party to the
negotiations which led to the Related Settlement (PSI and the P-B General
Partners have previously settled with the Class Members) and (ii) will have no
involvement with the Company after the Consolidation. Furthermore, the P-B
General Partner has an inherent conflict of interest in selling the P-B
Interests to the Advisor, due to the fact that consummation of the P-B Agreement
is dependent upon approval of the Consolidation and/or the P-B General Partner's
withdrawal from the Partnership.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying the
Related General Partners' belief that the Consolidation is fair as a whole and
to the BUC$holders in each of the Partnerships. No specific weight was given to
any one of these factors; rather the Related General Partners viewed them in the
aggregate in supporting their fairness determination.
Negotiation of Related Settlement; Court Approval. Unlike most
consolidation transactions in which investors are not independently represented
in structuring or determining the terms and conditions of the transaction, the
Consolidation is the result of extensive negotiations, under the auspices of the
Court, between Related and Class Counsel, on behalf of the BUC$holders, in
connection with the settlement of the Litigation. Class Counsel has negotiated a
settlement that it considers to be in the best interests of the BUC$holders.
To further protect the interests of BUC$holders, Class Counsel retained
Oppenheimer to opine as to the fairness of the Consolidation, including the
allocation of Shares among the Partnerships, from a financial point of view, to
the BUC$holders of each Partnership. See "FAIRNESS OPINION AND
APPRAISALS--Fairness Opinion." The allocation of Shares among the Partnerships
was made by the Related General Partners based on the relative Adjusted Net
Asset Values of each Partnership. For the purpose of determining Adjusted Net
Asset Values, the Related General Partners utilized, in part, the Appraisals
prepared by JLW USA as of October 1, 1995. See "ALLOCATION OF SHARES."
Finally, the Court has scheduled the Fairness Hearing at which time (i)
BUC$holders and other Class Members may appear before the Court and object to
any aspect of the Related Settlement, including the Consolidation, (ii) the
Related General Partners will provide the Court with a tabulation of the number
of Units held by BUC$holders in each Partnership that have objected to the
Consolidation and (iii) the Court will either (x) approve the Related Settlement
and the Consolidation or (y) notwithstanding satisfaction of the requirements of
one of the two Minimum Participation scenarios and all other conditions to
consummation of the Consolidation, not approve the Related Settlement and the
Consolidation.
Appraisals. The Related General Partners have relied upon the Appraisals
prepared by JLW USA, an independent appraiser, to establish the fair market
value (the "Appraised Value") of the real properties in which the Partnerships
have a direct or indirect interest and such Appraised Values were utilized, in
part, in determining the Adjusted Net Asset Value of the Partnerships. In
preparing the Appraisals, JLW USA was not engaged to represent the interests of
the Related General Partners or any specific group of BUC$holders, but was
engaged to determine the fair market value of the real properties in which the
Partnerships hold a direct or indirect interest without taking into account the
specific financial interest of any person or group of investors.
The Related General Partners believe that the use of a single independent
appraiser, applying consistent methodology and criteria in assessing the value
of each of the Partnerships' real properties, increased the likelihood that the
value of each such real property would be determined on a fair, consistent and
unbiased basis. See "FAIRNESS OPINION AND APPRAISALS--Appraisals" for a more
comprehensive discussion of the factors considered and the methodology employed
by JLW USA in making the Appraisals. The Related General Partners believe the
Appraisals support the fairness of the terms of the Consolidation.
Fairness of Allocations. The Related General Partners believe that based
upon the method of allocation of Shares in the Consolidation, the consideration
to be paid to BUC$holders is fair to BUC$holders regardless of the combination
of Participating Partnerships, assuming the Minimum Participation requirement is
satisfied.
Allocation of Shares. The Related General Partners believe that the
Adjusted Net Asset Values of each of the Partnerships represent fair estimates
of the value of the assets of each such Partnership, net of liabilities as of
March 31, 1996, and constitute a reasonable basis for allocating the Shares
among the Partnerships. The Adjusted Net Asset Values were determined, in part,
based upon the Appraised Values. Certain adjustments to the Appraised Values
were made by the Related General Partners in arriving at Adjusted Net Asset
Value to take account of amounts due under the mortgage documents and certain
guarantees made by affiliates of the Related General Partners with respect to
the Eagle portfolio, which were not considered by JLW USA in preparing the
Appraisals.
45
<PAGE>
Fairness Opinion. The Related General Partners have relied, in part, upon
the Fairness Opinion to support their conclusion that the Shares have been
fairly allocated among the Partnerships. The preparation and delivery of the
Fairness Opinion were requested by Class Counsel, which retained Oppenheimer to
render its opinion as to the fairness, from a financial point of view, of the
Consolidation, including the allocation of Shares among the Partnerships, to the
BUC$holders of the Partnerships, from a financial point of view, assuming 100%
Participation and all other combinations of Participating Partnerships
(including the Minimum Participation scenarios). Subject to the qualifications
and limitations set forth under "FAIRNESS OPINION AND APPRAISALS--Fairness
Opinion", Oppenheimer concluded that the Consolidation, including the allocation
of Shares among the Partnerships, is fair, from a financial point of view, to
the BUC$holders of the Partnerships assuming 100% Participation and all other
combinations of Participating Partnerships, including the Minimum Participation
scenarios. The Related General Partners believe that the Fairness Opinion
supports the Related General Partners' conclusions as to fairness of the
allocations of Shares among the Partnerships.
Court Approval of Fairness. Prior to consummating the Consolidation, the
Court will be asked to approve the procedural and substantive fairness of the
Related Settlement, including the Consolidation. Specifically, (i) the Court
will hold the Fairness Hearing to determine whether the Related Settlement,
including the Consolidation and the allocation of Shares among the Participating
Partnerships and the BUC$holders, is fair, reasonable and adequate; (ii) the
BUC$holders will receive notice of the Fairness Hearing and have the opportunity
to object to the Consolidation, or appear before the Court in person or through
Class Counsel at the hearing; (iii) the Court's final approval order will
approve the method used to allocate the Shares among the Partnerships and among
the partners of each Partnership; and (iv) if it approves of the Settlement, the
Court will expressly find that the terms and conditions of the Related
Settlement are fair, reasonable and adequate and in the best interests of the
BUC$holders.
Comparison of Benefits and Detriments of Alternatives to the Consolidation
Prior to concluding that the Consolidation should be proposed to
BUC$holders and in order to evaluate the fairness of the transaction, the
Related General Partners examined the estimated values which could be derived
from alternatives to the Consolidation. The alternatives examined by the Related
General Partners were: (i) continuation of the Partnerships and (ii) liquidation
of the Partnerships. See "BACKGROUND, BENEFITS OF, AND REASONS FOR, THE
CONSOLIDATION--Alternatives to the Consolidation." In order to determine whether
the Consolidation or one of these alternatives would be more beneficial to
BUC$holders, the Related General Partners compared the potential benefits and
detriments of the Consolidation with the potential benefits and detriments of
each of the alternatives. Each of the Consolidation and its alternatives have
potential benefits and detriments not present in the other alternatives. For the
reasons set forth below, the Related General Partners determined that the
Consolidation is more beneficial to BUC$holders than either of the alternatives
to the Consolidation. For further information regarding these alternatives, see
"BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION--Alternatives to
the Consolidation."
Continuation. The Related General Partners believe that when compared to
the Consolidation, continuation of the Partnerships in their present form would
provide: (i) a less efficient and less cost effective exit strategy for
BUC$holders who wish to liquidate their Partnership investment; (ii) illiquidity
of the BUC$holders' investment; (iii) the inability, due to restrictions in the
Partnership Agreements, to take advantage of future investment opportunities;
(iv) continued complicated tax filings; (v) duplication in reporting, filing and
other administrative services; (vi) inability to achieve cost savings; and (vii)
less flexibility in managing their real estate portfolio. Continuation of the
Partnerships would, however, allow the Partnerships to: (i) maintain their
current legal form, with their own assets and liabilities and an investment
strategy governed by the guidelines, restrictions and safeguards in the
Partnership Agreements; (ii) avoid having their performance tied to that of the
other Partnerships; (iii) maintain the legal nature of the BUC$holders' original
investment; (iv) maintain the current Partnership cash distribution policy,
which would result in the liquidation and distribution of proceeds to the
BUC$holders in accordance with the original business plan of investing in real
estate related assets and holding them for a finite period of time; (v) avoid
the incurrence of their pro rata share of Consolidation Expenses; and (vi) avoid
the taxable gains or losses associated with the Consolidation in the case of
BUC$holders who are subject to federal income tax. See "THE CONSOLIDATION AND
RELATED TRANSACTIONS--Consolidation Expenses" and "FEDERAL INCOME TAX
CONSIDERATIONS--Tax Consequences of the Consolidation."
Liquidation. Liquidation is not currently considered to be a viable option
by the Related General Partners. However, for comparison purposes, the Related
General Partner has analyzed this alternative and concluded that a liquidation
would not be as beneficial to BUC$holders as the Consolidation because, by
comparison to conditions prevailing when most of the Partnerships' properties
were originally acquired, market values have not increased to a level sufficient
to allow BUC$holders to obtain a return of their Original Investment. Because
the Related General Partners believe these conditions may improve over time,
they believe that liquidation of the assets at this time is premature and would
not provide BUC$holders with their best alternative to realize the optimum
return on their investments. If the Partnerships were to liquidate, such
liquidation would involve significant transaction costs at the property level
such as selling commissions, transfer taxes, recording fees, title insurance
premiums, legal fees, repair and other escrows, and other closing costs
associated with the disposition of each Partnerships' assets. In addition, there
may be additional costs associated with representations, warranties, and
indemnifications that purchasers generally require and which may result in
additional escrow costs. Further there would be potentially significant
Partnership administration and overhead costs in the winding down of the
Partnerships that are largely independent of asset size and which could over an
extended liquidation period, reach disproportionately high levels in relation to
revenues, thereby
46
<PAGE>
reducing the portion of proceeds available for distribution to BUC$holders.
Liquidation would, however, provide for the final liquidation of the
BUC$holders' investments and a likely substantial distribution of cash equal to
net liquidation proceeds, though not at a level that would allow BUC$holders to
realize their original investment.
Based upon this comparison of the potential benefits and detriments of the
Consolidation to the potential benefits and detriments of certain possible
alternatives to the Consolidation, the Related General Partners have concluded
that the Consolidation is the more attractive alternative for BUC$holders.
Fairness in View of Conflicts of Interest
Related General Partners. In determining whether or not to object to the
Consolidation, BUC$holders should consider that the Consolidation affords a
number of benefits to the Related General Partners, including that the Advisor,
an affiliate of Related, will enter into the Advisory Agreement, which the
Company may not terminate, except for Cause, until the fourth anniversary of the
Effective Date. Pursuant to the Advisory Agreement (and as a result of the
Advisor's purchase of the P-B Interests), the Advisor will be entitled to
receive from the Company approximately 75% of the aggregate annual fees and
distributions currently payable by the Partnerships to the General Partners. The
Advisor will be incentivized, in part, because it will have the ability, subject
to the terms and conditions of the Advisory Agreement, to grow the Company's
assets and thereby increase the amount of fees it can earn. Pursuant to the
Company's Incentive Stock Option Plan, the Advisor may receive additional shares
of Common Stock if the Company's distributions in any year exceed $0.9869 per
share (i.e. the 1996 pro forma annual distributions set forth in this
Solicitation Statement). Similar to the BUC$holders, the Related General
Partners and the Advisor will receive Shares and, therefore, will have enhanced
their liquidity. Pursuant to the Amended Insured Partnership Agreements,
however, the Advisor will be restricted from converting all of the Insured LP
Interests into Shares in order to preserve the partnership status of Insured I
and Insured II.
The Related General Partners have fiduciary duties to each of their
Partnerships, in addition to the specific duties and obligations imposed upon
them under the Partnership Agreements. Subject to the terms of the Partnership
Agreements, the Related General Partners, in managing the affairs of the
Partnership, are expected to exercise good faith, to use care and prudence and
to act with an undivided duty of loyalty to the BUC$holders. Under these
fiduciary duties, the Related General Partners are obligated to ensure that each
Partnership is treated fairly and equitably in transactions with third parties,
especially where consummation of such transactions may result in the interests
of the Related General Partners being opposed to, or not aligned with, the
interests of the BUC$holders. Accordingly, the Related General Partners are
required to assess whether the Consolidation is fair and equitable, taking into
account the unique characteristics of each Partnership (such as the
Partnership's revenues and expenses and the prospects for increases or decreases
in future cash flow) affecting the value of its assets, and comparing these
factors against similar factors affecting the value of the assets held by the
other Partnerships and the Related General Partners. The Related General
Partners believe that they have fulfilled their fiduciary duties as described
above in reaching their recommendation that BUC$holders not object to the
Consolidation notwithstanding the inherent conflicts of interest present in this
transaction.
Class Counsel. In assessing Class Counsel's recommendation that BUC$holders
not object to the Consolidation, BUC$holders should consider that Class Counsel
may be deemed to have a conflict of interest with respect to such
recommendation. In particular, the fees and expenses of Class Counsel, if
approved by the Court, will be paid from the cash settlement pool provided by
Related and other defendants pursuant to the Related Settlement and settlements
reached with other defendants in the Litigation. In addition, as part of the
Equitable Settlement, Class Counsel will have the right to petition the Court
for additional attorneys' fees in an amount to be determined in the Court's sole
discretion but which will be proposed to be 25% of the increase, if any, as of
the Anniversary Date in the capitalization of the Company, based upon (i) the
difference between the trading prices of the Company's Shares on the Anniversary
Date and (ii) the trading prices of the Units and the asset values of the
Partnerships prior to the Effective Date. The number of Counsel's Fee Shares
issued shall be subject to a maximum amount not to exceed 3.95% of the total
number of shares of the Company's outstanding Common Stock on the Anniversary
Date. See "CONFLICTS OF INTEREST--Conflicts of Interest of Class Counsel."
Fairness of Allocations
Impact of Consolidation on Expected Distributions to Stockholders. The
Consolidation is expected to affect the level of distributions made to
BUC$holders who become Stockholders. Distributions are expected to increase. The
Company's 1996 pro forma financial statements indicate that BUC$holders of
Summit Preferred and Eagle would have received lower distributions
(approximately 0.66% or $0.30 per $1,000 of Original Investment less than 1996
annual distributions for Summit Preferred and approximately 9.95% or $6.18 per
$1,000 of Original Investment less than 1996 annual distributions for Eagle) had
the Consolidation occurred on January 1, 1996, with 100% Participation. However,
the Related General Partners believe that additional cost savings together with
the benefits anticipated to be derived from the Company's new business plan,
neither of which is reflected in the Company's 1996 pro forma financial
statements, will be achieved, thereby progressively increasing distributions to
BUC$holders including those in Summit Preferred and Eagle. There can be no
assurance that such additional cost savings or benefits expected to be derived
from the Company's new business plan will be achieved. Distributions to any
particular investor are not expected to vary materially depending upon how many
Partnerships participate in the Consolidation. The Related General Partners
believe that the principles being used to allocate the consideration among the
Partnerships take into account fairly the relative value of the assets to be
contributed to the Company and, therefore, any differences in the level of
distributions made to a BUC$holder who becomes a Stockholder, before and after
the Consolidation, are properly attributable
47
<PAGE>
to these differences in relative contribution among the Partnerships.
BUC$holders should also bear in mind that the levels of prior distributions of
cash flow from operations from the Partnerships were influenced by various
factors not directly related to the net cash flow generated by the Partnerships'
assets and the underlying value of the Partnership's assets. These factors
included the Partnerships' quarterly cash distribution policies, capital
expenditure levels (where applicable) and payments on outstanding debt, if any.
These factors will not continue to affect distributions in precisely the same
fashion, due to the consolidation of the Participating Partnerships' assets and
liabilities.
Distribution of Shares to BUC$holders, Related General Partners and the
Advisor in Proportion to Interests in the Partnerships. Shares will be allocated
to each Participating BUC$holder, the Related General Partners and the Advisor
in accordance with the respective Partnership Agreements and his or its
proportionate interest in distributions of cash flow from operations of the
Partnership. Under the various Partnership Agreements, the Related General
Partners and the Advisor are entitled to receive between .75% and 1.5% of the
Partnership's distributions of cash flow from operations (after reflecting that
one-half of the P-B Interests are being allocated to the BUC$holders as part of
the Consolidation). Assuming 100% Participation, the Related General Partners
and the Advisor will receive an aggregate of 44,088 Shares for their general
partner interests in Summit Preferred and Eagle, and the Related General
Partners and the Advisor will have the right (subject to restrictions in order
to maintain the partnership status of Insured I and Insured II) to convert their
limited partner interests in Insured I and Insured II into an aggregate of
46,837 Shares. The Related General Partners believe that the distribution to
partners of Shares allocated to a Partnership in proportion to their interests
in cash flow from operations of the applicable Partnership supports their
conclusion that the Consolidation is fair to BUC$holders. See "ALLOCATION OF
SHARES" for a discussion of the procedures followed in allocating the Shares to
be issued by the Company.
Fairness to Non-Participating Partnerships
The Related General Partners believe the Consolidation is fair to
BUC$holders in Non-Participating Partnerships for the reasons discussed below.
Allocation of Consolidation Expenses. If the Consolidation is consummated
with 100% Participation, all Consolidation Expenses will be paid by the Company.
If the Consolidation is not consummated, the Related General Partners will bear
the Consolidation Expenses. If the Consolidation is consummated at less than
100% Participation, the Related General Partners will be responsible for the
Consolidation Expenses otherwise allocable to Non-Participating Partnerships.
Continuance of Non-Participating Partnerships. A Non-Participating
Partnership will continue to operate as a separate legal entity subject to its
existing Partnership Agreement. There will be no change in its investment
objectives, policies or restrictions, or fees or distributions payable to its
General Partners as a result of its non-participation in the Consolidation. Each
Non-Participating Partnership will remain subject to the terms of its
Partnership Agreement, and each will continue to be managed by substantially the
same persons currently employed by the Related General Partners.
Comparison of Alternatives to the Consolidation
General. To assist BUC$holders in evaluating the fairness of the
consideration offered by the Company in the Consolidation, the Related General
Partners have compared the estimated market value of the Shares with: (i)
estimates of the value of the Units under a "liquidation" scenario, assuming
that the Partnerships' assets were sold at their Appraised Values or, with
respect to Eagle, the mortgages were sold at an assumed value based on
discounted cash flow analysis, together with the value of other collateral as
may exist and be relevant to determining realizable value in a liquidation (i.e.
of guarantees), and followed by a distribution of net proceeds to the General
Partners and BUC$holders in accordance with the respective Partnership
Agreement; (ii) estimates of the value of the Units on a "going concern" basis,
assuming that the assets would be operated until the end of the calendar year
which is eleven years following the date of the acquisition of the last property
acquired by each respective Partnership, followed by the immediate liquidation
of all assets for cash and the immediate distribution of the proceeds in
accordance with the Partnership Agreements; and (iii) prices at which Units have
been trading on the illiquid secondary market over the recent twelve-month
period ended September 30, 1996, as compiled and reported by Partnership
Spectrum. The above valuation estimates are subject to significant
uncertainties, since the value of the Shares, as well as the comparative
estimated values, are based upon a number of estimates, variables, assumptions
and varying market conditions. Therefore, no assurance can be given that the
estimated values indicated could be realized and actual realized values may be
higher or lower than the estimates of such values.
The results of this comparative analysis are summarized in the table
entitled "Summary of Comparative Valuation Alternatives" set forth below.
BUC$holders should bear in mind that the estimated values assigned to the Shares
and alternative forms of consideration are based on a variety of assumptions
that have been made by the Related General Partners. These assumptions relate,
among other things, to: (i) projections as to the Partnerships' future income,
expenses, cash flow and other significant financial matters; (ii) the
capitalization rates that would likely be used by prospective buyers if the
Partnerships' assets were liquidated; (iii) appropriate discount rates applied
to expected cash flows in computing the present value of the cash flows that may
be received with respect to the Units; and (iv) selling costs and other
expenses, costs, offsets and contingencies attributable to the sale of assets
and liquidation of the Partnerships. In addition, these estimates are based upon
certain information available to the Related General Partners at the time the
estimates were computed, and no assurance can be given that the same conditions
analyzed by the Related General Partners in arriving at the estimates of value
would exist at the time of the Consolidation. The assumptions used have been
determined by the Related General Partners and, where
48
<PAGE>
appropriate, are based upon current historical information regarding the
Partnerships and current real estate markets, and have been highlighted below to
the extent critical to the Related General Partners' conclusions. While the
Related General Partners believe they have a reasonable basis for the
assumptions made, it is unlikely that all of the assumptions employed by the
Related General Partners will prove to be accurate in all material respects and
some assumptions used by the Related General Partners as to future events have
been selected to simplify the analysis and may not approximate the actual
experience of the Partnerships. The estimated values of the Shares and
alternative forms of consideration, would have been different had the Related
General Partners made different assumptions. No assurance can be given that such
consideration would have been realized through any of the alternatives
described.
Summary of Comparative Valuation Alternatives*
<TABLE>
<CAPTION>
Estimated Market Value of Shares per $1,000 of
Original Investment(1)
-----------------------------------------------------------
Minimum Estimated
Participation Minimum Liquidation Estimated
100% Including Participation Value of Market Value
Participation Insured II Including Eagle Units Per of Units
------------------ ----------------- ------------------ $1,000 of per $1,000
Estimated Original of Original
Going Original Investment
Concern Investment Based on
Value of if Assets Secondary
Units Per Sold at Market Trades(4)
$1,000 of Adjusted ----------------
High Low High Low High Low Original Net Asset High Low
Partnership Value Value Value Value Value Value Investment(2) Value(3) Value Value
- ------------- -------- ------- ------- ------- -------- ------- --------------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Insured I $ 760 $456 $715 $429 $ 771 $463 $590 $587 $412 $336
Insured II $ 800 $480 $754 $452 -- -- $576 $609 $412 $320
Summit $ 866 $520 -- -- -- -- $654 $662 $711 $399
Preferred
Eagle $1,065 $639 -- -- $1,081 $648 $812 $755 $674 $550
</TABLE>
- --------------
* An Original Investment of $1,000 equates to: 40 Units in each of Insured I
and Insured II, 50 Units of Summit Preferred, and 65.3595 Units in Eagle
(after taking into account the distribution of prepayment proceeds from
the Tivoli Lakes Mortgage). BUC$holders should note that certain
assumptions used by the Related General Partners to determine the
valuations set forth in this table are different from those utilized by
Oppenheimer in connection with the analysis used by Oppenheimer to support
its Fairness Opinion. See "FAIRNESS OPINION AND APPRAISALS--Fairness
Opinion." Furthermore, there can be no assurance that the assumptions
utilized by the Related General Partners will in fact occur and that the
conclusions based upon such assumptions would not differ substantially
from those set forth in this table.
(1) The High Value and Low Value figures were computed by capitalizing
anticipated annual distributions after the Consolidation (which, for this
purpose, are assumed to equal the December 31, 1996 pro forma
distributions) by a range of yield rates for traded REITs which are
comparable to the Company, ranging from 5.25% (High Value) and 8.75% (Low
Value).
(2) These values were derived from a discounted cash flow analysis, applied to
the anticipated cash flows from the operation and sale of each asset,
based on the Appraisals. For each asset, it was assumed that the asset
would be operated until the end of the eleventh calendar year following
the date of acquisition of the last property acquired, followed by the
immediate liquidation of all assets for cash and the immediate
distribution of the proceeds. The resulting cash flows were then adjusted
for Partnership administration expenses, which were increased annually at
the rate of 3% and the adjusted cash flows then discounted back to present
value at a rate equal to the average of the rate used in the property cash
flow analysis.
(3) The figures in this column represent the amount that would be distributed
with respect to each $1,000 of Original Investment if the Partnerships
sold their assets based on the following assumptions. First, total
proceeds were calculated as follows: (i) with respect to three of the
Partnerships: their real estate is sold at its Appraised Value; (ii) with
respect to Eagle, its mortgages are sold at assumed values for the
mortgages based on a discounted cash flow analysis which took into account
the present value of the first mortgages and base interest payments at
rates ranging from 7% to 10.5% and the present value of the equity loans
and additional loan or contingent interest payments at rates ranging from
17% to 22%; and (iii) with respect to all Partnerships, the foregoing
amounts were increased by the value of other collateral as may exist and
be relevant to determining realizable value in a liquidation (e.g.,
guarantees). Once the amount of total proceeds upon sale of each of the
Partnerships' assets was established, a deduction was taken in all
Partnerships except Eagle for property level selling costs and an
allowance was taken for partnership level liquidation costs, expenses and
contingencies, together equaling 6%-6.9% of the Appraised Value of the
real estate assets, resulting in net sales proceeds from liquidation.
Finally, non-real estate assets (cash, receivables, temporary investments)
were added and debts and other obligations were subtracted from the net
sales proceeds, and the resulting balance was deemed to be distributed to
BUC$holders and the General Partners in accordance to the terms of the
respective Partnership Agreements.
(4) Based on the high and low value of secondary market trades during the
twelve months from December 1, 1995 through November 30, 1996 as compiled
by Partnership Spectrum. Partnership Spectrum has advised that its
methodology for compiling trade prices is as follows: trade price
information reflects per Unit transaction prices for trades involving the
purchase of Units by third-party investors during the applicable period.
Firms supplying trade price data are instructed to provide information
only on those transactions whereby third party investors acquired Units
from or through such firms. If the firm acted as an agent, the per Unit
price is to include any commissions charged the buyer (but not including
commissions paid to retail brokers representing buyers). Due to commission
and mark-ups, sellers of Units typically receive less than the amounts
paid for Units by buyers as set forth in the table.
Conclusion. The Related General Partners reached the following conclusions
when comparing the estimated potential values of the Shares with the estimated
potential values of the consideration which may be offered in the alternatives
to the Consolidation: (i) it is not possible to assign a specific value to the
Shares or to predict accurately the prices at which the Shares will trade in the
market following the Consolidation; (ii) given the uncertainty as to the value
of the Shares, which is dependent in part upon the capital structure resulting
from the Consolidation, it is appropriate to analyze the Shares as having a
range of potential values; (iii) the Shares, when traded,
49
<PAGE>
may trade at prices higher or lower than the range of values estimated by the
Company, depending upon a variety of market conditions not susceptible to
precise determination; (iv) there are similar difficulties in establishing the
value of the consideration available to BUC$holders from alternatives to the
Consolidation, with such values also dependent upon a number of market
conditions not susceptible to precise determination; and (v) the assumptions
used by the Related General Partners in establishing values for the alternatives
to the Consolidation may not prove to be accurate, and such consideration may
have a value higher or lower than the values estimated by the Related General
Partners. Furthermore, even if based on present market conditions, there is an
overlap between the indicated ranges of likely values of the Shares versus the
consideration which may be offered in the alternatives to the Consolidation, so
that the lower range of potential values of the Shares following the
Consolidation may be less than potential values for one or more of the
alternatives to the Consolidation, the Shares may still constitute fair
consideration for a Partnership's assets because (i) the Consolidation entails
other potential benefits to BUC$holders (e.g., liquidity and the potential
impact on distributions) besides the market value of the Shares which, in the
Related General Partners' opinion, could outweigh the possibility that the value
of the Shares at the time of Consolidation might be less than the value of
alternative consideration; (ii) as market conditions change over time, the range
of possible values for the Shares may improve in relation to the potential
values for the alternatives to the Consolidation; and (iii) the upper end of the
range of estimated potential values for the Shares is equal to or higher than
the estimated value for such alternatives. Notwithstanding the uncertainties in
estimating the value of the Shares, the Related General Partners believe the
available information suggests that the Shares constitute fair consideration for
the assets of the Partnerships taking into account the ranges of estimated
values for the Shares and the estimated values for alternatives to the
Consolidation.
Estimated Market Value of Shares
The Related General Partners have estimated a range of possible values for
the Shares, which values were computed by capitalizing the December 31, 1996 pro
forma distribution by yield rates of 5.25% and 8.75% based on a range of yields
for traded REITs which are comparable to the Company.
In order to estimate the market value at which the Shares will initially
trade, the Related General Partner analyzed data for selected real estate
investment trusts ("REITs") in connection with its determination of the range of
estimated trading values for the Shares. Such analysis included: (i)
identification of REITs with portfolios which are comparable to the assets to be
owned by the Company ("Comparable Diversified REITs"); (ii) determination of the
current trading value of the common stock and annual distribution per share of
such Comparable Diversified REITs; (iii) derivation of the distribution yield of
each Comparable Diversified REIT (equal to the annual distribution rate per
share divided by the trading value per share); (iv) identification of a range of
possible distribution yields based on all yield rates falling between the
highest and lowest distribution yields of each Comparable Diversified REIT; (v)
determination of the pro forma annual distribution per Share of the Company; and
(vi) estimation of a possible range of trading values for the Shares of the
Company by a range determined by capitalizing (i.e., dividing) the Company's pro
forma annual distribution per Share by the high and low distribution yields for
the Comparable Diversified REITs and the REITs identified in the table "Recent
Consolidations of Public Partnerships" below.
50
<PAGE>
The following table sets forth data with regard to each Comparable
Diversified REIT. These REITs were identified by the Related General Partner as
REITs which are engaged in businesses which are comparable to the Company based
both on their diversified asset holdings and their equity market capitalization
ranging from $86 million to $197 million as of September 13, 1996 (since that
date the market capitalizations have increased as indicated in the table below).
At 100% Participation, the Company's anticipated initial equity market
capitalization is expected to be approximately $121,463,000. The table sets
forth each Comparable Diversified REIT's trading price, yield against current
trading price, 52 week high-low stock price range, and equity market
capitalization level at and/or as of September 13, 1996 and December 31, 1996.
Table 1
Selected Comparable Diversified REITs
<TABLE>
<CAPTION>
Per Share Information at December 31, 1996
-----------------------------------------------------------------------
(millions) (millions)
Market Market
Capitalization Indicated Capitalization
as of Annualized 52 week as of
9/13/96 Price Yield High-Low Price 12/31/96
---------------- -------- ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C>
Chicago Dock and Canal Trust $86.00 $15.25 1.57% x $ 15.50-9.50 140.30
East Group Properties 105.80 24.50 8.00% 24.50-19.88 192.50
First Union Real Estate
Investments 113.70 6.50 6.77% 8.13-6.38 218.30
MGI Properties 197.50 19.00 5.26% 19.13-14.88 254.40
Pacific Gulf Properties 115.20 18.50 8.65% 18.75-13.00 190.30
Pennsylvania RE Investment Trust 168.10 20.75 9.06% x 21.88-18.75 211.50
x--high and low yields are excluded for purposes of statistical analysis
w/o exclusion:
--------------
Average 6.75%
w/exclusion:
--------------
Average 6.86%
High Yield Low Yield
---------- ---------
8.65% 5.26%
<CAPTION>
Per Share Information at Dec. 31,
1996
-------------------------------------
Indicated
Annualized 52 week
Price Yield High-Low Price
-------- ------------ ---------------
<S> <C> <C> <C>
Chicago Dock and Canal Trust $24.25 1.32% x 25.13-10.25
East Group Properties 27.38 7.16% 27.38-20.75
First Union Real Estate
Investments 12.50 3.52% 12.25-6.38
MGI Properties 22.00 4.55% 22.25-16.00
Pacific Gulf Properties 19.50 8.21% x 20.00-15.88
Pennsylvania RE Investment Trust 24.38 7.71% 25.00-18.75
x--high and low yields are excluded for purposes of statistical analysis
w/o exclusion:
--------------
Average 5.21%
w/exclusion:
--------------
Average 5.69%
High Yield Low Yield
---------- ---------
8.21% 3.52%
</TABLE>
Source: The Wall Street Journal
The Stanger Report
NAREIT REIT Watch
The Related General Partner also analyzed data regarding traded equity
REITs which were formed through the consolidation of real estate limited
partnerships during the past three years (the "Consolidation REITs"). The
analytical data on the Consolidation REITs is summarized below and includes the
same data analyzed above for Comparable Diversified REITs as well as (i)
identification of the original net asset value per share for each such REIT and
(ii) the current premium or discount to such original net asset value (expressed
as a percentage):
Table 2
Recent Consolidations of Public Partnerships
<TABLE>
<CAPTION>
Per Share Information at Dec. 31, 1996
-------------------------------------------------------------------
(millions) Current
Market Indicated 52 week Premium to
Capitalization Annualized High-Low Orig. NAV Orig. NAV at
REIT at 12/31/96 Price Yield Price per Share 12/31/96
- ------------------------------------ ---------------- ----------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lexington Corporate Properties $ 137.5 $14.60 7.66% 14.38-10.50 $10.00 46.3%
Shurgard Storage Centers $ 754.2 $29.70 6.68% 29.75-23.25 $18.00 64.6%
Franchise Finance Corp. of America $1,119.1 $27.60 6.52% 27.75-18.75 $20.00 38.2%
Realty Income Corp. $ 548.6 $23.88 8.91% 24.50-19.50 $20.00 19.4%
Glenborough Realty Trust $ 170.3 $17.63 6.81% 17.38-12.00 $15.00 17.5%
Average
High Yield Low Yield Yield
------------- ---------- -------
8.91% 6.52% 8.58%
</TABLE>
Source: The Wall Street Journal
The Stanger Report
NAREIT REIT Watch
51
<PAGE>
Based on the above data, the Related General Partner observed that the
distribution yields for the Comparable Diversified REITs generally range from
approximately 3.58% to approximately 8.21%, excluding for statistical analysis
purposes the highest and lowest yields in the sample (see Table 1). The Related
General Partner also observed that the distribution yields for the Consolidation
REITs range from 7.66% to 8.91% (see Table 2). The Related General Partner
concluded that the per share price range established by a 5.25% to 8.75%
distribution yield, as identified above in both samples, provides a value range
which is generally consistent with the range of yields determined by sampled
Comparable Diversified REITs and the range of yields for Consolidation REITs
whose consolidations were completed during the past three years.
Based on the above, the Related General Partner utilized a distribution
yield range of 5.25% to 8.75% to estimate the trading value of the Company's
Shares. To calculate the range of estimated trading values for each $1,000 of
Original Investment, the Related General Partner first capitalized (i.e.
divided) the Company's annualized distribution based on December 31, 1996 pro
forma financials of $0.9869 per Share by the foregoing distribution yield rates,
which resulted in a range of estimated trading values per Share of between
$11.28 and $18.80. The higher value of the estimated trading value range per
$1,000 of Original Investment for each Partnership was then determined by
multiplying the $18.80 figure by the number of Shares to be received by Limited
Partners for each $1,000 of Original Investment. Similarly the low value of
estimated trading value ranges per $1,000 of Original Investment for each
Partnership was determined by multiplying the $11.28 figure by the number of
Shares to be received by the Limited Partners for each $1,000 of Original
Investment. The average or midpoint of the range of estimated trading values per
Share as calculated above (i.e., $11.28 to $18.80) is approximately the same as
the assumed hypothetical price of $15 per share for the Company's Shares (based
on Adjusted Net Asset Value).
The Related General Partners also compared the Company to the REITs listed
above in terms of distribution yields at December 31, 1996. Utilizing a
distribution based on December 31, 1996 pro forma financials of $0.9869 per
Share and a hypothetical share value of $15.00 per Share (based on Adjusted Net
Asset Value), the Company's distribution yield is 6.58%, which is slightly below
the mid-point of the average of yields as of December 31, 1996 for Comparable
Diversified REITs (5.21%) and the average of yields as of December 31, 1996 for
Consolidation REITs (8.58%). Based on a hypothetical share value of $12.00, the
Company's annual distribution yield is 8.22% and at a hypothetical share value
of $18.00 the Company's annual distribution yield is 5.50%. These yields are
within the yield ranges established below in table 3 for comparable companies.
Table 3
Comparison of the Company's Distribution Yield
With That of Selected Existing REITs
Indicated
Distribution
Yield
12/31/96
--------------
Comparable Diversified REITS
- -------------------------------------
Chicago Dock and Canal Trust 1.32%
East Group Properties 7.16%
First Union Real Estate Investments 3.52%
MGI Properties 4.55%
Pacific Gulf Properties 8.21%
Pennsylvania RE Investment Trust 7.71%
Average 5.21%
Consolidation REITs
- -------------------------------------
Lexington Corporate Properties 7.66%
Shurgard Storage Centers 6.68%
Franchise Finance Corp. of America 6.52%
Realty Income Corp 8.91%
Glenborough Realty Trust 6.81%
Average 8.58%
Combined Average Yield 7.65%
Pro Forma
Yield
as of
12/31/96
-----------
The Company
- -------------------------------------
100% Participation at $15 per Share 6.58%
52
<PAGE>
As a means of further confirming the reasonableness of the range of
estimated market values of the Shares, the Related General Partners analyzed the
premium/discount of the current stock prices to the original net asset values of
each of the Consolidation REITs. It was observed that the Consolidation REITs
(all of which were formed within the last three years) traded, as of December
31, 1996, within a range of 17.5% to 64.6% higher than their original net asset
value per share. The Related General Partners believe that the performance of
the Consolidation REITs generally supports the range of estimated trading values
of the Shares based upon the high and low distribution yields utilized above
(i.e. 8.75% and 5.25%), the percentage difference in range of high and low
trading value of shares ($11.28-18.80) being 67%.
The prices at which the Shares initially trade will be affected by, among
other things, (i) the potential pent-up selling pressures as a result of the
historic illiquidity of investments in the Partnerships; (ii) the Company's lack
of an operating history; (iii) the unfamiliarity of institutional investors,
financial analysts and broker-dealers with the Company and its prospects as an
investment when compared with other equity securities; (iv) the historical
financial performance of the Participating Partnerships which may be viewed by
some analysts as disappointing; and (v) the fact that equity securities of new
companies formed through consolidation of partnerships have traded below the
stockholders' equity reflected in the consolidated entity's financial
statements. It is impossible to predict how these factors will affect the price
of the Shares. For this reason, neither the data, nor the Company's use of such
materials, should be regarded as an opinion of the Related General Partners or
the Company as to the prices at which the Shares may trade following the
Consolidation. The range of estimated values shown for the Shares is designed to
facilitate an analysis of the Consolidation's fairness, and not to predict the
future trading prices of the Shares. Such prices may be either lower or higher
than those in the range of estimated values.
Going-Concern Value
The Related General Partners have estimated the going-concern value of the
Units by analyzing projected cash distributions generated by the assets,
assuming that the assets would be held until the end of the calendar year which
is eleven years following the date of the acquisition of the last property
acquired for each Partnership, followed by the immediate liquidation of all
assets for cash and the immediate distribution of the net proceeds and other
cash available for distribution to the holder of each Unit.
In order to analyze the projected cash distribution with respect to the
Units, the Related General Partners undertook discounted cash flow projections
from the operation of each property and the sale of each asset based on the same
assumptions utilized by JLW USA in preparing the Appraisals including discount
rates, capitalization rates and growth rates. For each asset it was assumed that
it operated until the end of the calendar year which is eleven years after the
date of acquisition of the last asset acquired, followed by the immediate
liquidation of assets for cash. The resulting cash flows were then adjusted for
partnership-level administrative expenses, which were grown annually at 3% and
discounted back to present value at the average of discount rates utilized in
preparing the Appraisals relating to the assets of each of Insured I and II;
discount rates were not provided in the Summit Preferred and Eagle Appraisals.
Discount rates of 11.64%, 11.83%, 12% and 9% were utilized in this regard for
Insured I, Insured II, Summit Preferred and Eagle, respectively.
Although the Related General Partners consider it unlikely that all assets
could be liquidated in a single transaction, this assumption was utilized in the
going-concern analysis. This approach does not take account of market conditions
or other factors that may affect asset management strategies, and it is unlikely
that operation of a Partnership as a going-concern would in fact follow such a
format. Should the assets be liquidated over time, even at prices equal to those
projected, distributions of cash flow from operations to the BUC$holders might
be reduced because the Partnership's relatively fixed costs, such as general and
administrative expenses, are not proportionately reduced with the liquidation of
assets. However, for simplification purposes, the sales are assumed to occur
concurrently.
The value of the Units on a going-concern basis is not intended to be
indicative of the prices at which the Units could be sold by BUC$holders in the
currently illiquid secondary market, nor are such estimates intended to reflect
the distributions payable with respect to the Units if the Partnership's assets
were to be sold at their current fair market values.
The following chart sets forth a summary of the results of the Related
General Partners' analysis with respect to the going concern values of each
Partnership.
Going Concern Analysis (as of June 30, 1996)
<TABLE>
<CAPTION>
Insured I Insured II Summit Preferred Eagle
------------- ------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Present Value of Net Income(1) $63,610,146 $14,802,389 $8,865,905 $32,448,087
Plus: Other Assets 2,981,227 1,847,793 248,867 1,205,360
Less: Liabilities (7,020,655) (1,872,343) (337,476) (158,045)
----------- ----------- ---------- -----------
Net Proceeds $59,570,718 $14,777,839 $8,777,296 $33,495,402
General Partners 1% $ 595,707 2% $ 295,557 2% $ 754,546 2% $ 669,908
Limited Partners 99% $58,975,011 98% $14,482,282 98% $8,601,750 98% $32,825,494
Value per $1000 Original Investment $ 590 $ 576 $ 654 $ 812
</TABLE>
- --------------
(1) Based on discounted cash flow analysis assuming assets are held until the
end of calendar year that is eleven years from the acquisition of the last
asset for each Partnership.
53
<PAGE>
Liquidation Values
Although not considered to be a viable option at this time, an alternative
available to the Related General Partners is to proceed with a liquidation of
the Partnerships and with a corresponding distribution of the net liquidation
proceeds to the Related General Partners and BUC$holders in accordance with the
Partnership Agreements. The Related General Partners have estimated the
liquidation values of the Units with respect to Insured I, Insured II and Summit
Preferred, assuming that each Partnership's real properties are sold as of June
30, 1996 at their Appraised Values. For purposes of this analysis, property
level selling costs (state or local transfer taxes, recording fees, title
insurance premiums, legal fees, repair and other escrows and other costs
associated with the disposition of each of the Partnership's assets, including
costs associated with representations, warranties and indemnifications typically
required) and selling commissions estimated at 3% of the Appraised Values were
subtracted from the Appraised Values, resulting in net proceeds from the sale of
assets. Then Partnership level liquidation costs were subtracted from this
result. Property level selling costs and commissions, together with Partnership
level liquidation expenses, were estimated to equal approximately 6% to 6.9% of
the Appraised Values for Insured I, Insured II and Summit Preferred. With
respect to Eagle which holds mortgage loans as its assets, the Related General
Partners have assumed that the mortgages are sold as of June 30, 1996 at the
present values of the mortgage loans and the equity loans, based on discounting
the stream of base interest payments, utilizing discount rates ranging from 7%
to 10.5% (depending on credit quality of the loan) and the stream of additional
interest and contingent interest payments, utilizing discount rates ranging from
17% to 22%. The resulting values reasonably indicate the selling prices or
values of the mortgage loans and equity loans held by Eagle. From these values,
selling commissions and expenses and Partnership level liquidation expenses were
subtracted. Mortgage selling commissions and expenses and Partnership level
liquidation expenses were estimated to be approximately 1.9% of the indicated
value of the assets (mortgage loans and equity loans). All of Eagle's other
assets, including accounts receivable, undistributed cash and other assets or
collateral that may exist and be relevant to determining realizable value in a
liquidation (i.e. guarantees), are added to the net proceeds from the sale of
the assets. Liabilities are then subtracted, including accounts payable, amounts
due to the General Partners and affiliates and other liabilities. The resulting
net liquidation proceeds are then distributed among the General Partners and
BUC$holders in accordance with the Partnership Agreements. The amount
distributed to BUC$holders is the indicated liquidation value for the Units.
Applying these procedures, the Related General Partners arrived at the
liquidation values set forth in the table entitled "Summary of Comparative
Valuation Alternatives," above. The Appraisals set forth, subject to the
specified assumptions, limitations and qualifications of the Partnership's
future income, expenses, cash flow and other significant financial matters, JLW
USA's professional opinion as to the Appraised Value of the real estate
underlying the Partnerships' properties. While the Appraisals are not
necessarily indicative of the price at which the real properties would sell, the
valuation methodology utilized by JLW USA generally seeks to estimate the prices
at which the real properties would sell if disposed of in an arm's-length
transaction between a buyer and a willing seller, each having access to relevant
information regarding the historical revenues and expenses of such properties.
The Appraisals assume that the Partnerships' real properties are disposed of in
an orderly manner and are not sold in forced or distressed sales where sellers
might be expected to dispose of their interests at substantial discounts to
their actual fair market value.
The following chart sets forth a summary of the results of the Related
General Partners' analysis with respect to the liquidation values of each
Partnership.
Liquidation Analysis (as of June 30, 1996)
<TABLE>
<CAPTION>
Insured I Insured II
------------- -------------
<S> <C> <C> <C> <C>
Proceeds from sale of properties/loans(1)(2) $67,400,000 $16,800,000
less: selling commissions (3%) (2,022,000) (504,000)
less: property level selling expenses (1,836,000) (477,000)
----------- -----------
Net Proceeds from sale of properties/loans 63,542,000 15,819,000
add: Undistributed cash/other assets 2,683,238 1,681,765
Accounts receivable 297,989 166,028
less: Notes payable (5,679,293) (1,364,539)
Accounts payable/other liabilities (431,769) (172,810)
Real estate taxes payable (676,581) (177,751)
Due to General Partners and affiliates (233,012) (137,243)
less: Partnership liquidation costs (186,000) (178,850)
----------- -----------
Net proceeds for distribution $59,316,572 $15,615,600
General Partners 1% $ 593,166 2% $ 312,312
Limited Partners 99% $58,723,406 98% $15,303,974
Value per $1,000 Original Investment $ 587 $ 608
<CAPTION>
Summit Preferred Eagle
------------------ -------------
<S> <C> <C> <C> <C>
Proceeds from sale of properties/loans(1)(2) $9,600,000 $30,669,623
less: selling commissions (3%) (288,000) (306,700)
less: property level selling expenses (244,000) --
---------- -----------
Net Proceeds from sale of properties/loans 9,068,000 30,362,923
add: Undistributed cash/other assets 248,867 1,205,360
Accounts receivable --
less: Notes payable --
Accounts payable/other liabilities (24,366) (158,045)
Real estate taxes payable -- --
Due to General Partners and affiliates (313,110) --
less: Partnership liquidation costs (100,850) (263,300)
---------- -----------
Net proceeds for distribution 8,878,541 $31,146,938
General Partners 2% $ 177,570 2% $ 622,939
Limited Partners 98% $8,700,970 98% $30,523,999
Value per $1,000 Original Investment $ 662 $ 755
</TABLE>
- --------------
(1) Summit I and II; Summit Preferred: Estimated sales price is equal to the
10/1/95 appraised values of the properties.
(2) Eagle: Proceeds from mortgages/loans are the amounts assumed to be paid to
Eagle at the present values of the mortgages/loans, based on discounting
the stream of base interest payments, utilizing discount rates ranging
from 7% to 10.5% (depending on credit quality of the mortgage/loan) and
the stream of additional interest and contingent interest payments,
utilizing discount rates ranging from 17% to 22%.
54
<PAGE>
Comparative Analysis of Values
In reviewing the fairness of the Consolidation, the Related General
Partners also reviewed and compared the estimated market value of the Shares
with the estimated liquidation and going-concern values of the Partnerships
(calculated as described above). The Related General Partners observed that
anticipated liquidation and going-concern proceeds are higher than the "Low
Value" of Shares to be issued in the Consolidation. Thus, it is possible that
the value that would be derived by BUC$holders in one or more of the
Partnerships from a liquidation or continuation of the Partnership may be
greater than the value that would be derived from the Consolidation. The Related
General Partners concluded that this potential detriment of the Consolidation
does not affect the fairness of the Consolidation to BUC$holders. This
conclusion takes into account (a) the inherent uncertainty in setting forth and
comparing estimated market valuations of publicly traded securities and the
liquidation and going-concern values for entities such as the Partnerships which
have illiquid assets whose disposition would occur over time, (b) the fact that
the top end of the range of potential values of Shares to be issued in the
Consolidation is higher than the liquidation and going-concern values of the
Partnerships (calculated as described above), (c) the absence of any assurance
that the liquidation and going-concern values (calculated as described above)
can actually be achieved, especially in light of administrative costs likely to
be incurred over a measured liquidation or continued operation of the
Partnerships, together with other transaction costs and (d) the Related General
Partners' belief that the value of the Shares to be issued in the Consolidation
includes a greater potential for liquidity and growth than the liquidation or
going-concern value of the Partnerships (calculated as described above). In
light of all of the foregoing factors, BUC$holders are urged to carefully review
the information regarding valuation estimations in this Solicitation Statement,
including the information set forth under "--Comparison of Alternatives to the
Consolidation."
Secondary and Market Prices for Units
The information in the table above under the heading "Secondary Market
Trades" shows the highest and lowest secondary market prices for the Units as
reported to Partnership Spectrum by certain secondary market firms involved in
sales of the Units over the twelve-month period ended November 30, 1996. When
gathering such data, Partnership Spectrum requests that the recorded prices per
Unit include any mark-ups for Units sold by the firms acting as principals in
the secondary market transactions and include any commissions charged by them
for facilitating the transactions, unless the firms acted as retail brokers.
No established market for the Units was ever expected to develop and the
secondary market transactions for the Units have been limited and sporadic. It
is not known to what extent the transactions in the secondary market are between
buyers and willing sellers, each having access to relevant information regarding
the financial affairs of the Partnerships, expected value of their assets, and
their prospects for the future. Many transactions in the secondary market are
believed to be distressed sales where sellers are highly motivated to dispose of
the Units and willing to accept substantial discounts from what might otherwise
be regarded as the fair value of the interest being sold, to facilitate the
sales. Secondary market prices generally do not reflect the current market of
the Partnerships' assets, nor are they indicative of total return, since prior
cash distributions and tax benefits received by the original investor are not
reflected in the price. Nonetheless, notwithstanding these qualifications, the
secondary market prices, to the extent that the reported data are reliable, are
indicative of the prices at which the Units trade in the illiquid secondary
markets.
Recent Tender Offer for Insured I
In June 1996, the BUC$holders of Insured I received an unsolicited tender
offer from Equity Resource Fund XIX, a Massachusetts limited partnership, to
purchase up to 120,000 Units (3% of the outstanding Units) of Insured I at a
price of $5.00 per Unit ($200 per $1,000 of Original Investment). The applicable
Related General Partner recommended that BUC$holders not tender their Units
pursuant to such tender offer. The Related General Partners believe that
slightly less than 3% of the outstanding Units of Insured I were acquired in
such tender offer.
Distribution Comparison
The Related General Partners have considered the potential impact of the
Consolidation upon distributions that would be made to BUC$holders that become
Stockholders. The Related General Partners anticipate that BUC$holders will
experience an increase in distributions. Lower costs resulting from the
elimination of certain fees payable to the P-B General Partner and the
contribution to the Company of one-half of the P-B Interest acquired by the
Related General Partner as well as reduced costs associated with the operation
and maintenance of the Partnerships as public partnerships (including
eliminating the necessity of furnishing Schedule K-1's) and certain economies of
scale resulting from the common beneficial ownership and management of the
Participating Partnerships' portfolio is expected to increase funds higher than
funds available for distribution by the individual Partnerships. Furthermore,
the Consolidation will simplify the preparation of financial statements, tax
returns, investor information and reports and filings otherwise required.
Certain cost savings will be enhanced to the extent that more than the minimum
number of Partnerships participate in the Consolidation.
Notwithstanding the Related General Partners' belief that distributions to
BUC$holders will increase after the Consolidation, the Company's 1996 pro forma
financial statements indicate that BUC$holders of Summit Preferred and Eagle
would have received lower distributions (approximately 0.66% or $0.30 per $1,000
of Original Investment less than 1996 annual distributions for Summit Preferred
and approximately 9.96% or $6.19 per $1,000 of Original Investment less than
1996 annual distributions for Eagle had the Consolidation occurred on January 1,
1996 with 100% Participation). However, the Related General Partners believe
that additional cost savings together with the benefits anticipated to be
derived from the Company's new business plan, neither of which is reflected in
the Company's 1996
55
<PAGE>
pro forma financial statements, will be achieved, thereby resulting in a
progressive increase in distributions to BUC$holders including those in Summit
Preferred and Eagle. There can be no assurance that such additional cost savings
or benefits from the Company's new business plan will be achieved.
The Related General Partners have prepared the following pro forma
distribution comparison to show the distributions that would have been made to
BUC$holders had they become Stockholders of the Company on January 1, 1996,
assuming 100% Participation and two levels of minimum participation, as compared
with the actual distributions made by the Partnerships in 1996.
Historical/Pro-Forma Distribution Comparison
<TABLE>
<CAPTION>
Pro Forma Distribution Per $1,000 of Original
Investment(3)
------------------------------------------------
Pro Forma
Distribution Historical
to Distribution Scenario
Historical Shareholders calculated per Minimum Scenario
Distribution to in 1996 $1000 of Scenario Participation Minimum
BUC$holders (BUC$holders Original 100% Including Participation
Partnership in 1996 Only)(1)(3) Investment Participation Insured II Including Eagle
- ------------------ ----------------- -------------- ---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Insured I $ 3,600,005 $3,988,140 $36.00 $39.88 $37.56 $40.48
Insured II 930,005 1,056,233 $36.99 $42.01 $39.56 N/A
Summit Preferred 601,918 597,960 $43.94(2) $45.48 N/A N/A
Eagle 2,509,080 2,259,143 $62.09(4) $55.91(4) N/A $56.74(4)
------------ -----------
$ 7,641,008 $7,901,476
</TABLE>
- --------------
(1) Assumes 100% Participation.
(2) The historical distribution has been adjusted to reflect the payment of the
special distribution due to the general partners in the amount of $24,748.
The special distribution historically has been accrued but not paid. The
calculation of the distribution per $1,000 excluding this adjustment is
$45.78.
(3) Assumes pro forma adjustments to the Company's distributable cash flow for
the year ending December 31, 1996 as follows: (1) reduction in G & A
expenses pursuant to the Advisory Agreement (the maximum amount of expenses
which the Company may reimburse the Advisor is $200,000 (pro rata for
Minimum Participation scenarios)); (ii) additional interest expense expected
to be incurred as a result of financing the Consolidation Expenses; (iii)
decrease of approximately 25% of the aggregate annual fees (Special
Distribution/Asset Management Fee); and (iv) an increase in allocable cash
flow to the former BUC$holders as a result of the Advisor contributing back
one-half of the P-B Interest.
(4) Original capital has been adjusted for Eagle to reflect distribution of
proceeds from a prepayment of mortgage receivable due to the sale of Tivoli
Lakes in 1994. Such distribution equals $4.70 per Unit. Each $1,000 of
Original Investment (net of such prepayment proceeds) equals 65.3595 Units.
When analyzing distribution data, BUC$holders should bear in mind that a
number of factors affect the level of the Partnerships' quarterly distributions.
These factors include the distributable income generated by Partnership
operations, capital expenditure levels (in excess of normal expenditures for
ongoing maintenance and repairs), and the Partnership policy with respect to
quarterly cash distributions. In some cases, the Partnerships have, in order to
maintain constant levels of distributions, made quarterly distributions in
excess of distributable cash generated by Partnership operations during the
preceding quarter. The Partnership's ability to make such an excess distribution
would also be affected by existing cash reserves and/or the ability to borrow
funds necessary to make the distribution. Alternatively, the Partnerships have,
on occasion, reduced distribution levels to increase cash reserves for
anticipated expenditures. In addition, the portion of total assets represented
by income-generating real estate versus cash and non-cash generating assets
differs among the Partnerships. Such differences affect to some degree the
amount of distributable cash generated relative to the Adjusted Net Asset Values
of the Partnerships. For the foregoing reasons, the fact that pro forma
distributions may be higher than actual distributions for a single period (such
as the Company's pro forma distributions for 1996 for three of the four
Partnerships) does not necessarily mean that distributions to BUC$holders of a
given Partnership following the Consolidation will exceed distributions that
would have been paid by that Partnership when analyzed over a number of years.
Compensation, Reimbursements and Distributions to the Related General Partners
Under the Partnership Agreements, the Related General Partners and their
affiliates are entitled to receive compensation in connection with managing the
affairs of each Partnership. Such compensation includes distributions in respect
of general partner equity interests, management and transaction fees, and
reimbursement of expenses for partnership level services such as legal,
accounting, data processing and duplicating services. For a comparison of the
compensation structure of each of the Partnerships with that of the Company, see
"COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE
PARTNERSHIPS--Fees and Expenses."
Following the Consolidation, the Company will retain the Advisor to manage
the operations of the Company. The Advisor will generally receive from the
Company approximately 75% of the aggregate annual fees and distributions payable
by the Partnerships to the General Partners. See "MANAGEMENT--Summary of the
Advisory Agreement" for a description of the fees and other compensation payable
to the Advisor.
56
<PAGE>
The following table sets forth the historical compensation and
distributions paid by the Partnerships on a combined basis to the General
Partners and their affiliates for the Partnerships' last three fiscal years and
for the three months ended March 31, 1997 (Historical) and the compensation and
distributions that would have been paid in the last three fiscal years if the
Consolidation had been in effect, assuming 100% Participation (Pro Forma).
COMPENSATION AND DISTRIBUTIONS TO GENERAL PARTNERS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
Three Months
Ended
March 31, 1997 1996 1995 1994
---------------- -------- -------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Historical:
Acquisition Fees(1) $ -- $ -- $ -- $ --
Mortgage Selection Fees(1) -- -- -- --
Mortgage Placement Fees(1) -- -- -- --
----- ------- ------- -------
Subtotal -- -- -- --
----- ------- ------- -------
Property Management and Transaction Fees(2) 137 581 571 547
Partnership Administration Fees and Reimbursements(3) 73 399 335 403
----- ------- ------- -------
Subtotal 210 980 906 950
----- ------- ------- -------
Special Distributions(4) 175 702 702 702
General Partner Distributions(4) 30 119 119 372
----- ------- ------- -------
Subtotal 205 821 821 1,074
----- ------- ------- -------
Disposition Fee(5) -- -- -- --
----- ------- ------- -------
Total Historical $415 $1,801 $1,727 $2,024
===== ======= ======= =======
Pro Forma (Assuming no leverage):
Acquisition Fees $ -- $ -- $ -- $ --
Mortgage Selection Fees -- -- -- --
Mortgage Placement Fees -- -- -- --
----- ------- ------- -------
Subtotal -- -- -- --
----- ------- ------- -------
Property Management and Transaction Fees(2) 137 581 571 547
G & A Reimbursements(6) 54 211 205 200
----- ------- ------- -------
Subtotal 191 792 776 747
----- ------- ------- -------
Asset Management Fees/Special Distributions(7) 141 564 564 564
Distributions Attributable to Shares(8) 21 87 87 279
----- ------- ------- -------
Subtotal 162 651 651 843
----- ------- ------- -------
Liquidation Fee(9) -- -- -- --
----- ------- ------- -------
Total Pro Forma (assuming no leverage) $353 $1,443 $1,427 $1,590
===== ======= ======= =======
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
Three Months
Ended
March 31, 1997 1996 1995 1994
---------------- ---------- ---------- -------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Pro Forma (Assuming maximum leverage):
Acquisition Fees(10) $ -- $ -- $ -- $4,687
Mortgage Selection Fees -- -- -- --(10)
Mortgage Placement Fees -- -- -- --(10)
----- ------- ------- ------
Subtotal -- -- -- 4,687
----- ------- ------- ------
Property Management and Transaction Fees(2) 137 581 571 547
G & A Reimbursements(6) 102 398 388 378
----- ------- ------- ------
Subtotal 239 979 959 925
----- ------- ------- ------
Asset Management Fee/Special Distributions(7) 258 1,032 1,032 1,032
Distributions Attributable to Shares(11) N/A N/A N/A N/A
----- ------- ------- ------
Subtotal 258 1,032 1,032 1,032
Liquidation Fee(9) -- -- -- --
----- ------- ------- ------
Total Pro Forma (assuming maximum leverage) $497 $2,011 $1,991 $6,644
===== ======= ======= ======
</TABLE>
- --------------
(1) No Acquisition, Mortgage Selection or Mortgage Placement Fees have been
paid by these Partnerships during this time.
(2) Property management and transaction fees include all fees paid by (i) the
Partnerships to the General Partners and affiliates, pursuant to the
applicable partnership agreement and (ii) the Company in each case for
property management, leasing commissions and insurance services. The
amount of increased fees assuming maximum leverage is not determinable at
this time as these fees are contingent upon, among other things, (a)
whether an affiliate of the Company manages the new assets, (b) rent
revenues, which are not determinable, and (c) the amount of leasing which
may be required to lease up the new assets.
(3) Partnership administration fees and reimbursements include all amounts
paid by the Partnerships to the General Partners and their affiliates for
partnership administration services, as a reimbursement for general and
administrative and overhead costs payable by each Partnership, pursuant to
the applicable partnership agreement.
(4) Reflects the distributions paid by the Partnerships to the General
Partners by virtue of their general partner interests in the Partnership
and Special Distributions from the Partnerships' adjusted cash flow.
(5) Represents a subordinated fee payable to the General Partners, generally
based on the gross sales price of a property. It is unlikely that the
General Partners would receive such fee.
(6) Reimbursements to the Advisor for administrative expenses will not exceed
$200,000 in any given year of operations, subject to the following
adjustments: the overall limit on reimbursements for administrative
expenses will be increased (i) after the Company's first year of operations
and each year thereafter by a percentage equal to the Consumer Price Index
for the year then ended, and (ii) proportionately as the Company increases
its asset portfolio.
(7) Reflects an Asset Management Fee payable to the Advisor with respect to
the Company and a Special Distribution payable to the Advisor with respect
to Insured I and Insured II.
(8) Reflects distributions paid to the Related General Partners and the
Advisor by virtue of their ownership of Shares/Insured LP Interests.
(9) The Liquidation Fee is only payable in the event of the Company's
liquidation.
(10) In determining the pro forma compensation payable with respect to new
acquisitions by the Company in the last three fiscal years, the table does
not attempt to differentiate between the type of assets being acquired
inasmuch as the effective fees payable with respect to the acquisition of
any assets (i.e. property or mortgages) are equal to 3.75% of the amount
invested in such assets. Therefore, such fees are combined in the line
item for "Acquisition Fees." In other words, whether the mix of fees for
asset acquisitions is (i) the Acquisition Fee of 3.75% for property
acquisitions or (ii) the Mortgage Selection Fee of 3% plus the Mortgage
Placement Fee of .75% (i.e. a total of 3.75%) for mortgage
origination/acquisition, the aggregate fee is the same. The table also
assumes that 100% of the proceeds of the maximum leverage was incurred and
fully invested as of January 1, 1994.
(11) These distributions are based on future cash flow which is not
determinable at this time.
58
<PAGE>
ALLOCATION OF SHARES
Overview
The number of Shares to be allocated in the Consolidation will be
determined as the result of two separate allocations: (i) Shares allocated among
the Participating Partnerships, and (ii) Shares allocated to each Participating
Partnership which are then allocated among the BUC$holders, the Related General
Partners and the Advisor.
Explanation of Allocations
Allocation among the Partnerships. The total Shares allocated to the
Participating Partnerships (8,097,539 shares, assuming 100% Participation) will
be allocated among the Participating Partnerships based on the relative Adjusted
Net Asset Values assigned to each such Partnership. The Shares allocated to the
Related General Partners and the Advisor in respect of their interests in
Insured I and Insured II will not be issued to the Related General Partners or
the Advisor, but will be reserved for issuance by the Company and will be
issuable by the Company upon the Related General Partners', or the Advisor's
exercise of the Conversion Option attached to the Insured LP Interests. See
"DESCRIPTION OF COMMON STOCK--Conversion Option".
The following table assumes 100% Participation and sets forth for each of
the Partnerships the Adjusted Net Asset Value, the percentage of aggregate
Adjusted Net Asset Value, and the number of Shares allocable to such
Partnership.
Allocation Summary
Percentage of Number of
Adjusted Aggregate Shares
Net Asset Adjusted Net Allocated to
Partnership Value Asset Value Partnership
- ---------------------- -------------- --------------- ------------------
Insured I $ 61,076,169 50.28% 4,071,745(1)
Insured II 16,298,792 13.42% 1,086,586(1)
Summit Preferred 9,227,154 7.60% 615,144
Eagle 34,860,971 28.70% 2,324,064
------------- ------- -------------
TOTAL $121,463,086 100.00% 8,097,539
============= ======= =============
- --------------
(1) Includes Shares represented by Insured LP Interests.
Allocation among the BUC$holders, the Related General Partners and the
Advisor. Each of the Partnership Agreements sets forth a procedure for
allocating distributions (iv) between the General Partners and the BUC$holders
and (v) among the BUC$holders as a group. These distribution rules were
described in detail in the disclosure documents delivered to the BUC$holders
when, through the sale of Units, capital was originally raised by the
Partnerships. The allocation of Shares between the Related General Partners
(including the Advisor) and the BUC$holders will be made in accordance with the
provisions applicable to distributions of cash flow from operations of the
Partnership. With respect to the Shares allocated to the BUC$holders as a group,
such Shares will be allocated among the BUC$holders in proportion to, and in
accordance with, the number of Units held by each BUC$holder. The table below
sets forth the number of Shares allocable to the Related General Partners, the
Advisor and the BUC$holders and the number of Shares per $1,000 of Original
Investment in each Partnership.
Allocation of Shares per $1,000 of Original Investment
<TABLE>
<CAPTION>
No. of Shares
No. of Shares Allocated to
No. of Shares Allocated to Related No. of Shares BUC$holders per
Allocated to General Partners Allocated to $1,000 of Original
Partnership Partnership and the Advisor BUC$holders Investment(2)
- ---------------------- --------------- ---------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Insured I 4,071,745 30,538(1) 4,041,207 40
Insured II 1,086,586 16,299(1) 1,070,287 43
Summit Preferred 615,144 9,227 605,916 46
Eagle 2,324,064 34,861 2,289,204 57
---------- ------- ---------- ---
Total 8,097,539 90,925 8,006,614
========== ======= ==========
</TABLE>
- --------------
(1) Shares allocated to Related General Partners and the Advisor in respect of
Insured I and Insured II not issued immediately upon consummation of the
Consolidation are represented by the Insured LP Interests.
(2) Rounded to the nearest whole Share.
59
<PAGE>
Determination of Adjusted Net Asset Value
Valuations. The adjusted net asset value (the "Adjusted Net Asset Value")
of each Partnership was based, in part, on the Appraised Value determined by JLW
USA of all real properties (i) owned directly by a Partnership or (ii) which
secure loans held by a Partnership. The Related General Partners determined not
to obtain new appraisals or update the Appraisals, based on their belief that
the Appraised Value of the Partnership's real estate related assets has not
changed materially since October 1, 1995 and the cost of obtaining new
appraisals or updating the Appraisals. Adjusted Net Asset Value for a
Partnership is equal to an amount calculated as follows:
(i) (a) the aggregate Appraised Values of the Partnership's real
properties less a 3% selling commission and/or (b) the aggregate Loan Values
(defined and calculated as set forth below) of the loans held by the
Partnership; plus
(ii) the amount of any undistributed cash and other assets held by the
Partnership as of March 31, 1996; less
(iii) the amount of the Partnership's accounts payable (including,
without limitation, Partnership indebtedness and deferred fees payable to the
General Partners and affiliates) as of March 31, 1996; plus
(iv) with respect to Eagle, certain adjustments to the Appraised Values
were made by the Related General Partners to take account of the amounts due to
the Partnership pursuant to (a) the mortgage documents and (b) certain
guarantees made by affiliates of the Related General Partners. See "THE
COMPANY--Description of Existing Indebtedness--Cross Creek Guarantee."
The "Loan Value" of each loan held by a Partnership is equal to the amount
which the Partnership would receive under the terms of the loan (i.e. principal,
accrued and unpaid interest and participating interest) if (i) the property
which secures the loan were sold for an amount equal to its Appraised Value and
(ii) the net sale proceeds (i.e. after payment of third party expenses) were
applied first to repay the Partnership's loan(s).
Set forth below is a table which shows the derivation of the Adjusted Net
Asset Values for each Partnership based upon the formula described above:
DERIVATION OF ADJUSTED NET ASSET VALUES
<TABLE>
<CAPTION>
Summit Summit Summit
Insured I Insured II Preferred Eagle Insured
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Proceeds from sale of properties/mortgages(1)(2) $67,400,000 $16,800,000 $9,600,000 $30,780,824
Less: Selling expenses (3% of sales proceeds) (2,022,000) (504,000) (288,000) --
Net proceeds from sale of properties 65,378,000 16,296,000 9,312,000 30,780,824
Add: Undistributed cash 2,464,004 1,723,959 301,799 1,187,451
Add: Accounts Receivable 249,625 160,496 -- --
Add: Notes Receivable -- -- -- 3,000,000
Less: Notes Payable (5,736,659) (1,387,291) -- --
Less: Accounts Payable (497,564) (158,190) (24,599) (107,304)
Less: Real estate taxes payable (564,960) (182,097) -- --
Less: Due to General Partners and Affiliates (216,277) (154,085) (362,046) --
Adjusted Net Asset Value((3))((4)) $61,076,169 $16,298,792 $9,227,154 $34,860,971
</TABLE>
- --------------
(1) Summit I and II; Summit Preferred: Estimated sales price is equal to the
10/1/95 appraised values of the properties.
(2) Eagle: Proceeds from mortgages are the amounts assumed to be paid to Eagle
according to the mortgage documents, assuming the properties securing the
mortgages were sold on 3/31/96 at the 10/1/95 appraised values.
(3) No Consolidation Expenses were attributed in this analysis.
(4) Assets and liabilities are as of 3/31/96.
Possible Revisions to Valuations. The Company has used these Adjusted Net
Asset Values to determine the allocation of Shares, even though such Adjusted
Net Asset Values might be different if calculated as of the date of the Fairness
Hearing. The Adjusted Net Asset Values will not be recalculated as of the date
of the Fairness Hearing based upon the Related General Partner's belief that the
Adjusted Net Asset Values of the Partnerships, as computed, will not differ
materially from the Adjusted Net Asset Values of the Partnership as of the date
of this Solicitation Statement. However, if the assets of any Partnership are
actually different as of the date of the Fairness Hearing, the Related General
Partners reserve the right to revise the Adjusted Net Asset Values, subject to
the approval of the Court. BUC$holders will not have the opportunity to review
and object to any revisions made to the Adjusted Net Asset Values. However, at
the Fairness Hearing, the Court will have the opportunity to review any such
revisions and, pursuant to the Settlement Stipulation, the Court must
specifically find as part of its Final Order that the allocations were fair,
just and equitable. Therefore, the Court, in its discretion, can reject any
revisions to the Adjusted Net Asset Values set forth in this Solicitation
Statement (as well as modify the allocation method set forth in this
Solicitation Statement or any other aspect of the Related Settlement) subject to
Related's option to terminate the Related Settlement if such revisions are not
acceptable to it.
60
<PAGE>
Furthermore, in the event that due to unforeseen developments the Adjusted
Net Asset Values as of the Effective Date (or such other time as the
Consolidation is consummated) are materially different from the Adjusted Net
Asset Values set forth in the Solicitation Statement, then Class Counsel and
Related have the right to apply to the Court for an order altering the
allocation of Shares to take into account such materially changed circumstances
that result in material differences in the Adjusted Net Asset Values. The
proposed Final Order that the parties will ask the Court to enter after the
Fairness Hearing in connection with the Court's Approval of the Related
Settlement provides that the Court will retain exclusive jurisdiction, among
other things, over the parties and the Class Members for the purpose of the
administration and implementation of the Related Settlement, including the
resolution of any disputes relating to the allocation of Shares.
FAIRNESS OPINION AND APPRAISALS
Fairness Opinion
General. Class Counsel retained Oppenheimer to render its opinion as to the
fairness, from a financial point of view, of the Consolidation, including the
allocation of Shares among the Partnerships, to the BUC$holders of the
Partnerships assuming 100% Participation and all other combinations of
Participating Partnerships (including the Minimum Participation scenarios). The
full text of the Fairness Opinion, which contains a description of the
assumptions and qualifications made, matters considered and limitations imposed
on the review and analysis, is set forth in Appendix A and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations to
the Fairness Opinion are described below. The summary set forth below does not
purport to be a complete description of the analyses used by Oppenheimer in
rendering the Fairness Opinion.
In connection with its engagement, Oppenheimer was not requested to serve
as financial advisor to Class Counsel or any other party in the negotiation of
the terms of the Consolidation. Oppenheimer was not requested to and does not
make any recommendation to the BUC$holders regarding the Consolidation. Also,
Oppenheimer was not requested to and did not analyze or give any effect to the
impact of any federal, state or local income taxes to the BUC$holders arising
out of the Consolidation contemplated herein.
Oppenheimer, as part of its investment banking business, is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. Class Counsel's selection
of Oppenheimer was based upon several factors, including experience, reputation
and price.
Class Counsel did not place any limitation on the scope of Oppenheimer's
investigation or review.
In connection with preparing the Fairness Opinion, Oppenheimer was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the opinion obtained.
The Related General Partners and the Partnerships have agreed to indemnify
Oppenheimer against certain liabilities arising out of Oppenheimer's engagement
to prepare and deliver the Fairness Opinion. In addition, the Related General
Partners and the Partnerships have agreed to cause the Company to become an
additional indemnifying party upon consummation of the Consolidation. Upon
consummation of the Consolidation, the Partnerships' indemnity obligations will
become obligations of the Company.
The preparation and receipt of the Fairness Opinion was requested by Class
Counsel. In connection with such request, Class Counsel asked that the Related
General Partners interview and provide them with a list of firms qualified to
render fairness opinions. After interviewing several such entities, the Related
General Partners provided Class Counsel with the names of four such entities
based on each such entity's experience, expression of interest, timing and
price. From the list provided by the Related General Partners, Class Counsel
initially sought to retain Bear Stearns & Co., Inc. ("Bear Stearns") to render
the Fairness Opinion. However, after initially agreeing to being engaged for
this assignment, Bear Stearns withdrew from the assignment after Class Counsel
insisted that Bear Stearns directly represent the interests of investors and
that the opinion be rendered directly to it and the BUC$holders. Specifically,
Bear Stearns declined to be retained by, and render a fairness opinion to, Class
Counsel or to the BUC$holders although they were willing to be retained by and
consider rendering a fairness opinion to the Related General Partners and the
Partnerships. Bear Stearns advised Class Counsel that it is its general policy
with respect to engagements relating to limited partnerships to render fairness
opinions only to the general partner(s) and/or the partnerships themselves, and
not to other parties such as Class Counsel or investors.
Information Reviewed. In rendering its Fairness Opinion which is dated
September 20, 1996, and as the basis therefor, Oppenheimer, among other things,
reviewed: this Solicitation Statement; the Prospectus dated December 23, 1986
for Insured I; the Prospectus dated November 13, 1987 for Insured II; the
Prospectus dated August 6, 1987 for Summit Preferred; the Prospectus dated
December 11, 1987 for Eagle; audited financial statements for each Partnership
for calendar years 1994 and 1995; the Form 10-K for each Partnership for the
year ended December 31, 1995 and the Form 10-Q for each Partnership for the
quarter ended June 30, 1996; Letter of Value appraisals in a summary format
dated October 25, 1995 prepared by JLW USA for each property owned by a
Partnership (Insured I and Insured II), or securing a Partnership's investment
interest in a property (Summit Preferred), or securing a mortgage loan made by a
Partnership (Eagle); the insurance policies issued by Continental Casualty
Company owned by Insured I and Insured II; audited financial statements for
calendar years 1994 and 1995 and unaudited financial statements and other
financial information for the period ending
61
<PAGE>
June 30, 1996 for each of the properties owned by Insured I and Insured II;
audited financial statements for calendar years 1994 and 1995 and unaudited
financial statements and other financial information for the period ended June
30, 1996 for each of the properties securing Summit Preferred's investments; and
audited financial statements for calendar years 1994 and 1995 and unaudited
financial statements and other financial information for the period ended June
30, 1996 for each of the properties securing a mortgage loan made by Eagle; pro
forma financial statements of the Company for the year ended December 31, 1995
and as of and for the quarterly period ended March 31, 1996, assuming in each
case that the Consolidation occurred as of January 1, 1995; financial forecasts
of future operations of the Partnerships covering each of the years in the five
year period ended June 30, 2001; financial forecasts of future operations of the
Company covering each of the years in the five year period ended June 30, 2001,
assuming the Consolidation occurred as of June 30, 1996; a business plan of the
Company; and certain other financial and other information that was publicly
available or furnished to Oppenheimer by Class Counsel or the Related General
Partners. The financial forecasts provided to Oppenheimer by the Related General
Partners are attached as Appendix C.
In addition, Oppenheimer held discussions with representatives of Class
Counsel and the Related General Partners, inspected a representative number of
the properties either owned by a Partnership, or in which a Partnership had
acquired an interest or which secured a mortgage loan made by a Partnership,
interviewed property managers at the properties inspected, interviewed a
representative of JLW USA and conducted such other investigations, financial
analyses and studies, and reviewed such other information and factors as it
deemed appropriate for the purposes of the Fairness Opinion.
Oppenheimer also reviewed the procedures and methodology applied by JLW USA
to value the properties owned by Insured I and Insured II and the properties in
which Summit Preferred owns a Preferred Equity Investment, and the properties
encumbered by the Eagle Mortgages to determine if they had been applied on a
consistent basis among the Partnership properties, reviewed the components of
each Partnerships' other assets and other liabilities and analyzed the method
used to allocate the Shares among the Partnerships by the Related General
Partners.
Assumptions, Limitations and Qualifications. In rendering the Fairness
Opinion, Oppenheimer, without assuming responsibility for independent
verification, relied on the accuracy and completeness of all financial and
operating data, financial analyses, reports and other information that were
publicly available, compiled or approved by or otherwise furnished or
communicated to Oppenheimer by or on behalf of the Related General Partners.
With respect to the financial and operating forecasts furnished to Oppenheimer,
Oppenheimer assumed, with Class Counsel's approval, that they reflected the best
current judgement of the Related General Partners as to future financial
performance, and that there was a reasonable probability that the projections
would prove to be substantially correct. Oppenheimer did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnerships.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analyses or summary description. Accordingly, Oppenheimer believes that
its analyses must be considered as a whole and that considering any portion of
such analyses and of the factors considered, without considering all analyses
and factors, could create a misleading or incomplete view of the process
underlying its Fairness Opinion. Any estimates contained in these analyses are
not necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
herein. In addition, analyses relating to the value of the properties, Mortgages
and/or the business of the Company do not purport to be appraisals or to reflect
the prices at which the properties, Mortgages or Company may actually be sold.
Oppenheimer expressed no opinion as to the price or trading range at which
the Company's Shares would trade following completion of the Consolidation and
the listing of the Shares on the American Stock Exchange. It is likely that, at
least during the immediate period following completion of the Consolidation,
that the Shares will trade below the estimated ranges of values.
Oppenheimer's Fairness Opinion, dated September 20, 1996, was based solely
upon information available to Oppenheimer and the economic market and other
circumstances that existed as of the date of the Fairness Opinion. In general,
Oppenheimer used historical financial information through June 30, 1996. Events
occurring after such date could materially affect the assumptions and
conclusions contained in the Fairness Opinion. Oppenheimer has not undertaken to
reaffirm or revise the Fairness Opinion or otherwise comment upon any events
occurring after the date thereof. The Related General Partners believe that as
of the date of this Solicitation Statement there have not been any material
changes in the financial or operating condition of the Partnerships which would
materially affect the assumptions and conclusions contained in the Fairness
Opinion.
Summary of Analysis and Methodology. The following paragraphs summarize the
significant quantitative and qualitative analyses performed by Oppenheimer in
arriving at the Fairness Opinion. Oppenheimer considered all such quantitative
and qualitative analyses in connection with its analysis, and no one method of
analysis was given particular emphasis. All references to the conversion of
Units into Shares are based upon the Related General Partners' allocation of
Shares among the Partnerships.
In determining appropriate capitalization and discount rates underlying its
analysis Oppenheimer utilized as a base the same rates employed by JLW USA in
its appraisals of each property owned by a Partnership (Insured I and Insured
II), or securing a Partnership's investment interest in a property (Summit
Preferred) or securing a mortgage loan made by a partnership (Eagle). These
rates were then
62
<PAGE>
adjusted upward and downward by 50 basis points to develop a range of discount
and capitalization rates for each property. Mortgage revenue bond yield rates
were obtained from discussions with Oppenheimer traders active in the mortgage
revenue bond market.
In determining the adequacy of these rates, Oppenheimer met with
representatives from JLW USA, inspected a representative sample of the
properties, interviewed property managers at the properties inspected, examined
recent surveys of institutional investors conducted by Cushman & Wakefield,
Inc., Real Estate Research Corporation, National Multi-housing Council and the
Urban Land Institute, held discussions with institutional investors actively
acquiring properties similar to those owned or invested in by the Partnerships,
and reviewed such other information and factors as it deemed appropriate.
Liquidation Analysis--Discounted Cash Flow Analysis--Insured I and Insured
II. Oppenheimer assumed each property owned by Insured I and Insured II was sold
as of June 30, 1996. Oppenheimer performed a discounted cash flow analysis of
(i) the present value of the forecasted net operating income after capital
expenditures ("Forecasted Cash Flow") from future operations of the properties,
and (ii) the present value of the proceeds of sale of the properties at the
conclusion of the forecast period. In completing its analysis, Oppenheimer
utilized financial and operating forecasts of each property's Forecasted Cash
Flow for the period July 1, 1996 to June 30, 2001 and applied discount rates of
10.5% to 13.0% to Forecasted Cash Flow and to forecasted residual value which
was based upon capitalizing Forecasted Cash Flow for the period July 1, 2001 to
June 30, 2002 at 9.5% to 11.0%. Oppenheimer believes a discounted cash flow
analysis provides a basis for estimating what a real estate investor would be
willing to pay for a particular property. Oppenheimer then deducted the
estimated expenses associated with sale of the properties and with liquidating
the Partnerships, including general and administrative expenses. To the
resulting range of values, Oppenheimer added the Partnerships' other assets and
subtracted its other liabilities.
Oppenheimer's analysis indicated a range of values for Insured I of $54.5
million to $60.9 million (or $13.63 to $15.23 per Unit) compared to the
estimated value of $57.9 million to $64.0 million (or $14.48 to $16.00 per
Unit), assuming each Unit is converted into 1.02 Shares of the Company and each
Share is valued as determined by utilizing the methodology described below at
Valuation of the Company--Consolidation of the Partnerships into the
Company--Comparative Company Analysis and an estimated value of $76.8 million to
$79.0 million (or $19.20 to $19.75 per Unit), assuming each Unit is converted
into 1.02 Shares of the Company and each Share is valued as determined by
utilizing the methodology described below at Valuation of the
Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis.
Oppenheimer's analysis further indicated a range of values for Insured II
of $14.5 million to $15.8 million (or $14.41 to $15.50 per Unit) compared to the
estimated value of $15.5 million to $17.1 million (or $15.50 to $16.99 per
Unit), assuming each Unit is converted into 1.08 Shares of the Company and each
Share is valued as determined by utilizing the methodology described below at
Valuation of the Company--Consolidation of the Partnerships into the
Company--Comparable Company Analysis and an estimated value of $20.5 million to
$21.1 million (or $20.38 to $20.97 per Unit), assuming each Unit is converted
into 1.08 Shares of the Company and each Share is valued as determined by
utilizing the methodology described below at Valuation of the
Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis.
Oppenheimer believes the discounted cash flow analysis supports its
fairness determination because the implied ranges of values of the Units
assuming they are converted into Shares in the Consolidation is within or
greater than the implied range of equity value of Insured I and Insured II under
the discounted cash flow analysis.
Liquidation Analysis--Capitalization Rate Valuation Analysis--Summit
Preferred. Oppenheimer assumed the Operating Partnerships which own the
properties in which Summit Preferred owns a Preferred Equity Investment sold the
properties as of June 30, 1996. Oppenheimer applied capitalization rates ranging
from 8.75% to 9.75% to each property's Forecasted Cash Flow for the period July
1, 1995 to June 30, 1996 to determine a range of its capitalized value.
Oppenheimer believes that a capitalization rate analysis provides a basis for
estimating what a real estate investor would be willing to pay for a particular
property. Oppenheimer then deducted the estimated expenses associated with sale
of the properties and with liquidating the Partnerships, including general and
administrative expenses. To the resulting range of values, Oppenheimer added the
Partnerships' other assets and subtracted its other liabilities.
Oppenheimer's analysis indicated a range of values for Summit Preferred of
$7.6 million to $8.5 million (or $11.56 to $12.98 per Unit) compared to the
estimated value of $8.8 million to $9.7 million (or $13.31 to $14.71 per Unit),
assuming each Unit is converted into 0.94 Shares of the Company and each Share
is valued as determined by utilizing the methodology described below at
Valuation of the Company--Consolidation of the Partnerships--Comparable Company
Analysis and an estimated value of $11.6 million to $11.9 million (or $17.65 to
$18.16 per Unit), assuming each Unit is converted into 0.94 Shares of the
Company and each Share is valued as determined by utilizing the methodology
described below at Valuation of the Company--Consolidation of the
Partnerships--Discounted Cash Flow Analysis.
Oppenheimer believes the capitalization rate analysis supports its fairness
determination because the implied range of values of the Units assuming they are
converted into Shares in the Consolidation is greater than the implied range of
equity values of Summit Preferred under the capitalization rate analysis.
Discounted Cash Flow Analysis--Eagle. Oppenheimer performed a discounted
cash flow analysis of the (i) present value of the forecasted interest payments
to be received from the properties encumbered by Eagle's Mortgages from July 1,
1996 to June 30, 2001,
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and (ii) the present value of the principal to be received by Eagle, upon
repayment of the Mortgages. Oppenheimer calculated, utilizing the financial
forecasts provided by the Related General Partners, the base interest and
contingent and additional interest, if any, to be received by Eagle from July 1,
1996 through June 30, 2001 and the estimated amount of principal to be received
assuming the properties were sold on June 30, 2001 and the Mortgages were
repaid. Oppenheimer then discounted the base interest payments projected to be
received by Eagle to present value utilizing discount rates of 6.5% to 11.0%,
which Oppenheimer estimated to be the current yield for comparable mortgages
having similar maturities and investment characteristics, including debt
coverage ratios. Oppenheimer then discounted the contingent and additional
interest, if any, projected to be received by Eagle to present value utilizing
discount rates of 15.0% to 25.0%, which Oppenheimer estimated to be the current
yield requirement for comparable mortgage investments having similar investment
characteristics. Oppenheimer discounted the estimated principal to be received
by the Partnership to present value utilizing discount rates of 6.5% to 11.0%.
Oppenheimer then deducted the estimated expenses associated with liquidating
Eagle, including the costs of general and administrative expenses. To the
resulting range of values, Oppenheimer added Eagle's other assets and subtracted
its other liabilities.
Oppenheimer's analysis indicated a range of values for the Eagle
Partnership of $30.1 million to $31.7 million (or $11.39 to $12.01 per Unit)
compared to the estimated value of $33.1 million to $36.5 million (or $12.53 to
$13.84 per Unit), assuming each Unit is converted into 0.88 Shares of the
Company and each Share is valued as determined by utilizing the methodology
described below at Valuation of the Company--Consolidation of the Partnerships
into the Company--Comparable Company Analysis and an estimated value of $43.8
million to $45.1 million (or $16.60 to $17.08 per Unit), assuming each Unit is
converted into 0.88 Shares of the Company and each Share is valued as determined
by utilizing the methodology described below at Valuation of the
Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis.
Oppenheimer believes the discounted cash flow analysis supports its
fairness determination because the implied range of values of the Units assuming
they are converted into Shares in the Consolidation is greater than the implied
range of equity value of Eagle under the discounted cash flow analysis.
Continuation of the Partnerships--Valuation of the Partnerships on a
Continuing Basis. Oppenheimer performed an analysis of the Partnerships assuming
the Partnerships continued to operate on an ongoing basis from July 1, 1996
through June 30, 2001.
Insured I and Insured II. Oppenheimer assumed each property owned by Insured I
and Insured II was sold as of June 30, 2001. Oppenheimer calculated (i) the
Forecasted Cash Flow from future operations of the properties based on the
financial forecasts provided by the Related General Partners and (ii) the
proceeds expected to be available from the sale of the properties at the
conclusion of the forecast period. In connection with this analysis,
Oppenheimer estimated such sales proceeds by capitalizing Forecasted Cash Flow
for the period July 1, 2001 to June 30, 2002 at 9.5% to 11.0% for each
property.
Summit Preferred. Oppenheimer assumed the operating partnerships which own the
properties in which Summit Preferred owns a preferred equity investment sold
the properties as of June 30, 2001. Oppenheimer calculated the Forecasted Cash
Flow from (i) future operations of the properties based on the financial
forecasts provided by the Related General Partners and (ii) the proceeds
expected to be available from the sale of the property at the conclusion of
the forecast period. In connection with this analysis, Oppenheimer estimated
such sales proceeds by capitalizing Forecasted Cash Flow for the period July
1, 2001 to June 30, 2002 at 8.75% to 9.75% for each property.
Eagle. Oppenheimer estimated the (i) the interest payments to be received from
the properties encumbered by Eagle's Mortgages, and (ii) the Mortgage
principal repayment to be received by Eagle assuming the properties encumbered
by Eagle's Mortgages were sold on June 30, 2001 and the estimated proceeds
utilized to repay the outstanding balances of Eagle's mortgages and any
outstanding and accrued interest. In connection with this analysis,
Oppenheimer estimated such sales proceeds by capitalizing Forecasted Cash Flow
for the period July 1, 2001 to June 30, 2002 at 8.75% to 10.0% for each
property.
In connection with the Continuation of the Partnerships-Valuation of the
Partnerships on a Continuing Basis analysis for each of the four Partnerships,
Oppenheimer then deducted the projected annual fees due the respective General
Partners and the projected general and administrative expenses associated with
operating each Partnership on an annual basis for the forecast period from the
estimated annual cash available for distribution of the Partnerships, allocated
the remainder between the BUC$holders and the General Partners based upon the
terms of the respective Partnerships' Partnership Agreements and discounted the
projected distributions to Limited Partners to present value utilizing discount
rates of 10.5% to 13.5% for Insured I and Insured II 9.0% to 12.0% for Summit
Preferred and 8.5% to 11.5% for Eagle. To the resulting range of value,
Oppenheimer added the estimated present value, as of June 30, 1996, of each
Partnerships' other assets and subtracted the estimated value, as of June 30,
1996, of each Partnerships' other liabilities.
Oppenheimer's analysis indicated an implied range of present values for
Insured I of $11.77 to $13.22 per Unit compared to the estimated value per Unit
of $14.48 to $16.00, assuming each Unit is converted into 1.02 Shares of the
Company and each Share is valued as determined by utilizing the methodology
described below at Valuation of the Company--Consolidation of the Partnerships
into the Company--Comparative Company Analysis and an implied range of present
values per Unit of $19.20 to $19.75, assuming each Unit is converted into 1.02
Shares of the Company and each Share is valued as determined by utilizing the
methodology described below at Valuation of the Company--Consolidation of the
Partnerships into the Company--Discounted Cash Flow Analysis. Oppenheimer's
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<PAGE>
analysis indicated an implied range of present values for Insured II of $13.91
to $15.46 per Unit compared to the estimated value per Unit of $15.37 to $16.99,
assuming each Unit is converted into 1.08 Shares of the Company and each Share
is valued as determined by utilizing the methodology described below at
Valuation of the Company--Consolidation of the Partnerships into the Company--
Comparable Company Analysis and an implied range of present values per Unit of
$20.38 to $20.97, assuming each Unit is converted into 1.08 Shares of the
Company and each Share is valued as determined by utilizing the methodology
described below at Valuation of the Company--Consolidation of the Partnerships
into the Company--Discounted Cash Flow Analysis.
Oppenheimer's analysis also indicated an implied range of present values
for Summit Preferred of $12.12 to $13.56 per Unit compared to the estimated
value per Unit of $13.31 to $14.71, assuming each Unit is converted into 0.94
Shares of the Company and each Share is valued as determined by utilizing the
methodology described below at Valuation of the Company--Consolidation of the
Partnerships into the Company--Comparable Company Analysis and an implied range
of present values per Unit of $17.65 to $18.16, assuming each Unit is converted
into 0.94 Shares of the Company and each Share is valued as determined by
utilizing the methodology described below at Valuation of the
Company--Consolidation of the Partnerships into the Company--Discounted Cash
Flow Analysis.
Oppenheimer's analysis also indicated an implied range of present values
for Eagle of $11.27 to $12.57 per Unit compared to the estimated value per Unit
of $12.52 to $13.84, assuming each Unit is converted into 0.88 Shares of the
Company and each Share is valued as determined by utilizing the methodology
described below at Valuation of the Company--Consolidation of the Partnerships
into the Company--Comparative Company Analysis and an implied range of present
values of $16.60 to $17.08, assuming each Unit is converted into 0.88 Shares of
the Company and each Share is valued as determined by utilizing the methodology
described below at Valuation of the Company--Consolidation of the Partnerships
into the Company--Discounted Cash Flow Analysis.
Oppenheimer believes this analysis supports its fairness determination
because the implied range of values of the Units in each Partnership assuming
they are converted into Shares in the Consolidation for each Partnership is
greater than the implied range of equity values for such Units assuming the
continuation of the Partnerships.
Valuation of the Company--Consolidation of the Partnerships into the
Company--Comparative Company Analysis. Oppenheimer assumed the Consolidation
occurred as of July 1, 1996. As consummation of the Consolidation is conditioned
upon, among other things, minimum participation in the Consolidation by Insured
I and either Insured II or Eagle, Oppenheimer developed a matrix of the various
combinations which could occur so as to achieve the minimum participation
required to complete the Consolidation, in addition to considering the
Consolidation assuming all four Partnerships participated. Oppenheimer utilized
the business plans and projections of future operations of the Company prepared
by the Related General Partners to estimate the value of the Company.
Oppenheimer reviewed the determination of funds from operations ("FFO") per
Share developed by the Related General Partners and reflected in their financial
forecasts and business plan.(1) Such forecasts give effect to the reduction in
fees and the increased interest in the Company to be owned by the Shareholders
due to the withdrawal of the P-B General Partner as a general partner of the
Partnerships.
Oppenheimer derived ranges of values for the Shares by applying estimated
FFO per Share of the Company upon consummation of the Consolidation for the
fiscal year ended June 30, 1998, the first stabilized fiscal year occurring
after implementation of the Company's business plan to the corresponding range
of FFO multiples(2) for certain publicly-traded companies that Oppenheimer
considered comparative to the Company (the "Comparative Companies"). The
Comparative Companies represented 16 REITs which focused on ownership of retail
properties because the properties to be owned by the Company upon consummation
of the Consolidation predominantly will be retail properties.(3) Because of
such predominance, Oppenheimer did not consider it appropriate to utilize as
Comparative Companies REITs engaged principally in the ownership of other types
of properties. The per share FFO estimates and FFO multiples for the Comparative
Companies were based on average First Call FFO estimates for calendar year 1997,
the last period for which such estimates were currently available.(4) In
calculating the FFO multiples for the selected period, the September 16, 1996
closing stock prices of the Comparative Companies were used. Based on this
analysis, Oppenheimer allocated to each Partnership the number of shares of the
Company each Partnership would receive based upon the allocation percentages
utilized by the Related General Partners. Oppenheimer observed that the FFO
multiples for the Comparative Companies for the year ended December 31, 1997
ranged from 7.9x to 12.0x.
- --------------
(1) FFO (as defined by the National Association of Real Estate Investment
Trusts ("NAREIT") is calculated as net income (loss) adjusted for
depreciation expense attributable to real property, amortization expense
attributable to capitalized leasing costs, tenant allowances and
improvements, gains on sales of real estate investments and extraordinary
and nonrecurring items. REITs generally consider FFO to be a useful
measure of the operating performance of an equity REIT because, together
with net income and cash flows, FFO provides investors with an additional
basis to evaluate the ability of a REIT to incur and service debt and to
fund acquisitions and other capital expenditures. FFO does not represent
net income or cash flows from operations as defined by GAAP and does not
necessarily indicate that cash flows will be sufficient to fund cash
needs. It should not be considered as an alternative to net income as an
indicator of a REIT's operating performance or to cash flows as a measure
of liquidity. FFO does not measure whether cash flow is sufficient to fund
all of a REIT's cash needs, including principal amortization, capital
improvements and distributions to shareholders. FFO also does not
represent cash flows generated from operating, investing or financing
activities as defined by GAAP. Further, not all REITs utilize NAREIT's
definition of FFO.
(2) The FFO multiples are derived by multiplying (i) the projected FFO (using
the NAREIT definition) on a per share basis by (ii) the share price of the
given REIT at the date of the analysis. Oppenheimer believes that FFO is
the primary measure of profitability used in the REIT industry.
(3) The Comparative Companies are as follows: Alexander Haagen Properties,
Bradley Real Estate, Inc., Burnham Pacific Properties, Commercial Net
Lease Realty, Developers Diversified Realty, Excel Realty Trust, Inc.,
Federal Realty Investment, IRT Property Company, JDN Realty Corp., Kranzco
Realty Trust, Mark Centers Trust, Price REIT, Inc., Realty Income
Corporation, Regency Realty Corp., Saul Centers, Inc. and Western
Investment.
(4) First Call is a financial services company which provides estimates of per
share FFO for selected REITs. The First Call estimates are derived by
polling equity research analysts for FFO estimates of the REITs they
follow. Average First Call estimates represent the mean of these
estimates.
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<PAGE>
Based on the foregoing, Oppenheimer estimated a range of values of the
Shares, assuming the various combinations which could occur in the Consolidation
so as to achieve the minimum participation, in addition to considering the
Consolidation assuming all four Partnerships participate therein, of $13.45 to
$14.87. BUC$holders should be aware that estimates of values of the Shares are
not intended and should not be construed as a prediction of estimate as to the
trading price of the Shares upon consummation of the Consolidation. It is likely
that, at least during the immediate period following the completion of the
Consolidation, that the Shares will trade below the estimated ranges of values.
Valuation of the Company--Consolidation of the Partnerships into the
Company--Discounted Cash Flow Analysis. Oppenheimer analyzed the Company on a
consolidated basis based upon a discounted cash flow analysis utilizing
projections of FFO and cash distributions prepared by the Related General
Partners for the period July 1, 1996 through June 30, 2002. Oppenheimer derived
a range of per share values for the Company by calculating the present value of
projected cash distributions and a terminal equity value. Oppenheimer assumed a
range of discount rates of 9.5% to 10.5% for the projected cash distributions of
the Company which Oppenheimer believes appropriately reflects the risks inherent
in the ownership of the Company's Shares. Terminal equity values were calculated
using projected FFO for the period July 1, 2001 to June 30, 2002 and terminal
FFO multiples of 9.5x to 10.5x, with the resulting range of values discounted to
present value at discount rates ranging from 9.5% to 10.5%. Based on the
foregoing, Oppenheimer estimated a range of value for the Shares, assuming the
various combinations which could occur in the Consolidation so as to achieve the
minimum participation, in addition to considering the Consolidation assuming all
four Partnerships participate therein, of $17.84 to $18.35.
Allocation of Shares in the Consolidation. In assessing the fairness of the
allocation of Shares of the Company among each of the Partnerships, Oppenheimer
observed that, assuming all Partnerships participated in the Consolidation, the
Shares will be allocated as follows: Insured I 50.28%; Insured II 13.42%; Summit
Preferred 7.60%; and Eagle 28.70%. In the following analysis, Oppenheimer
utilized the aggregate values of each Partnership determined above under
Liquidation Analysis--Discounted Cash Flow Analysis--Insured I and Insured II,
Capitalization Rate Valuation Analysis--Summit Preferred and Discounted Cash
Flow Analysis--Eagle, as applicable, to determine a range of allocation
percentages of the Shares among the Partnerships and compared such range with
the allocation percentages being utilized by the Related General Partners to
allocate Shares among each of the Partnerships.
Insured I. Oppenheimer compared the percentage of Shares to be allocated to
Insured I to the range of percentages determined by (i) comparing the low end of
the range of values for Insured I to the total of the low end of the range of
values for Insured I and the high end of the combined range of values for
Insured II, Summit Preferred and Eagle (which amounts to 49.4%) and (ii)
comparing the high end of the range of values for Insured I to the total of the
high end of the range of values for Insured I and the low end of the combined
range of values for Insured II, Summit Preferred and Eagle (which amounts to
53.86%). Oppenheimer believes that this analysis supports its opinion that the
allocation of Shares to Insured I is fair to the BUC$holders of Insured I from a
financial point of view because the percentage of Shares allocated to Insured I
by the Related General Partners (which amounts to 50.28%) is within the range of
the percentages determined by Oppenheimer in the above analysis.
Insured II. Oppenheimer compared the percentage of Shares to be allocated
to Insured II to the range of percentages determined by (i) comparing the low
end of the range of values for Insured II to the total of the low end of the
range of values for Insured II and the high end of the combined range of values
for Insured I, Summit Preferred and Eagle (which amounts to 12.53%) and (ii)
comparing the high end of the range of values for Insured II to the total of the
high end of the range of values for Insured II and the low end of the combined
range of values for Insured I, Summit Preferred and Eagle (which amounts to
14.46%). Oppenheimer believes that this analysis supports its opinion that the
allocation of Shares to Insured II is fair to the BUC$holders of Insured II from
a financial point of view because the percentage of Shares allocated to Insured
II by the Related General Partner (which amounts to 13.42%) is within the range
of the percentages determined by Oppenheimer in the above analysis.
Summit Preferred. Oppenheimer compared the percentage of Shares to be
allocated to Summit Preferred to the range of percentages determined by (i)
comparing the low end of the range of values for Summit Preferred to the total
of the low end of the range of values for Summit Preferred and the high end of
the combined range of values for Insured I, Insured II and Eagle (which amounts
to 6.56%) and (ii) comparing the high end of the range of values for Summit
Preferred to the total of the high end of the range of values for Summit
Preferred and the low end of the combined range of values for Insured I, Insured
II and Eagle (which amounts to 7.93%). Oppenheimer believes that this analysis
supports its opinion that the allocation of Shares to Summit Preferred is fair
to the BUC$holders of Summit Preferred from a financial point of view because
the percentage of Shares allocated to Summit Preferred by the Related General
Partner (which amounts to 7.60%) is within the range of the percentages
determined by Oppenheimer in the above analysis.
Eagle. Oppenheimer compared the percentage of Shares to be allocated to
Eagle to the range of percentages determined by (i) comparing the low end of the
range of values for Eagle to the total of the low end of the range of values for
Eagle and the high end of the combined range of values for Insured I, Insured II
and Summit Preferred (which amounts to 26.13%) and (ii) comparing the high end
of the range of values for Eagle to the low end of the total of the high end of
the range of values for Eagle and the combined range of values for Insured I,
Insured II and Summit Preferred (which amounts to 29.28%). Oppenheimer believes
that this analysis supports its opinion that the allocation of Shares to Eagle
is fair to the BUC$holders of Eagle from a financial point of view because the
percentage of Shares allocated to Eagle by the Related General Partner (which
amounts to 28.70%) is within the range of the percentages determined by
Oppenheimer in the above analysis.
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<PAGE>
Oppenheimer has analyzed, but did not give significant weight to, the
trading history of Insured I, Insured II, Summit Preferred, and Eagle which
trade in the informal secondary market for limited partnership interests.
Conclusions. Based on the foregoing analysis, and subject to the
assumptions, limitations and qualifications noted above and in their Fairness
Opinion, Oppenheimer concluded that the Consolidation, including the allocation
of Shares among the Partnerships, is fair from a financial point of view, to the
BUC$holders of the Partnerships assuming 100% Participation and all other
combinations of Participating Partnerships (including the Minimum Participation
scenarios).
Appraisals
General. JLW USA was engaged by the Partnerships to prepare appraisals
utilizing the letter of value format (the "Appraisals") for each of the real
properties underlying the real estate related assets of the Partnerships and has
delivered letters of value which set forth summaries of its analysis, based upon
the review, analysis, scope and limitations described therein, as to the fair
market value of the Partnerships' portfolios as of October 1, 1995. The
Appraisals were prepared in connection with a valuation of the real properties
for purposes of complying with ERISA requirements and for use in connection with
the Partnerships' 1995 audit of their financial statements. The Appraisals were
certified by an MAI Appraiser. The Appraisals with respect to the retail
properties were updates of appraisals prepared in January 1995 by JLW USA. The
Related General Partners determined not to obtain new appraisals or update the
Appraisals, based on their belief that the Appraised Value of the Partnership's
real estate related assets has not changed materially since October 1, 1995 and
the cost of obtaining new appraisals or updating the Appraisals. A summary of
the Appraisals is attached as Appendix B (the "Appraisal Summary").
The Partnerships selected JLW USA to provide the Appraisals because of its
experience and reputation in connection with real estate assets. JLW USA has
substantial experience and expertise in assessing the value of real estate and
preparing real estate appraisals, having prepared real estate appraisals for
over 20 years. In addition to valuation, JLW USA provides services to the
investment community that include investment research and consulting, property
management, leasing, investment sales and acquisitions as well as hospitality
and leisure consulting services. The Related General Partners and the
Partnerships have agreed to indemnify JLW USA against certain liabilities
arising out of JLW USA's engagement to prepare and deliver the Appraisals. Upon
consummation of the Consolidation, Participating Partnerships' indemnity
obligations will be obligations of the Company pursuant to an indemnification
agreement between the Company and JLW USA. The Related General Partners have
relied, in part, upon these Appraisals to determine the Adjusted Net Asset
Values.
The Appraisals, which contain a description of the assumptions and limiting
conditions made, matters considered and limitations on the review and analysis,
will be made available for inspection during normal business hours at the
offices of the Related General Partners upon not less than two business days'
prior written notice to the Related General Partners and should be read in their
entirety. Certain of the material assumptions, qualifications and limitations to
the Appraisals are described below.
Methodology. Each Appraisal was prepared utilizing the letter of value
format to comply with the Uniform Standards of Professional Appraisal Practice
(USPAP) guidelines for the preparation of a restricted report. The purpose of
each Appraisal was to establish the current market value of each real property
of the Partnerships as of October 1, 1995. Each Appraisal was based upon the
appraiser's analysis of the real property's income through discounted cash flow
and/or direct capitalization techniques, supported by comparable sales. A cost
approach was not undertaken. For purposes of their undertaking, JLW USA has
defined "Market Value" pursuant to USPAP guidelines, as the most probable price
which a property should bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer and seller each acting prudently
and knowledgeably and assuming the price is not affected by any undue stimulus.
Implicit in this definition is the consummation of a sale as of a date and the
passing of title from seller to buyer under conditions whereby:
(i) buyer and seller are typically motivated;
(ii) both parties are well informed or well advised and are acting in what
they consider their best interest;
(iii) a reasonable time is allowed for exposure in the open market;
(iv) payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(v) the price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted
by anyone associated with the sale.
Summary of Analysis. As noted in the Appraisal Summary attached as Appendix
B, in conducting the appraisals, representatives of JLW USA originally performed
site inspections for each shopping center property (Insured I and II) in
December 1994 and, at that time, also reviewed financial information provided
by, and made other inquiries of, the Related General Partners as it deemed
appropriate. In September 1995, in order to update the 1994 letters of value,
representatives of JLW USA reviewed the previous analysis used in preparing the
1994 letters of value and analyzed updated rent rolls, recent leases, current
operating budgets and capital expenditures. JLW USA representatives also
interviewed property management personnel and updated its market research as
well as its investment sales transaction data base of capitalization rates and
discount rates. The valuation methodology, as outlined below, used for the
October 1, 1995 updated appraisals was not changed from that which was used in
December 1994 and the properties were not reinspected.
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With respect to the multi-family properties (Eagle and Summit Preferred),
which were appraised for the first time as of October 1, 1995, JLW USA
representatives performed inspections of each of the residential properties and
their surrounding neighborhoods. JLW USA representatives also analyzed each
property's rent roll income and expense statement as well as its capital budget.
JLW USA then prepared a pro forma income and expense statement for each
property.
Pursuant to the terms of its engagement letters with the Partnerships, JLW
USA estimated the value of the shopping centers (Insured I and II) based on the
income approach using the discounted cash flow methodology and supported this
methodology, where possible, by using direct sales comparisons. In the case of
the apartment portfolios (Eagle and Summit Preferred), the income approach was
also utilized but was based upon the direct capitalization methodology which was
again supported, where possible, by direct sales comparisons.
The discount rates, direct capitalization rates and/or terminal
capitalization rates utilized in each of the Appraisals were determined by
referring to investor surveys including the Korpacz Real Estate Investor Survey
for the second quarter of 1995 as well as JLW USA's discussions with the
relevant investor audience at that time. The selected discount and
capitalization rates reflected the strength of a property and its tenancy,
current market conditions, historical operating performance and future potential
of a property as well as other relevant economic and demographic considerations.
Shopping Centers
Set forth for each shopping center property are (i) the terminal
capitalization rates and (ii) the discount rates utilized by JLW USA in its
Appraisals together with the indicated conclusion of value as of October 1,
1995:
Summit Insured I and II
<TABLE>
<CAPTION>
Terminal
Discount Capitalization
Property Location Rate Rate Value
- --------------------------- ----------------------------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Cactus Village Phoenix, Arizona 12.50% 10.00% $3,600,000
Forest Park Plaza Cincinnati, Ohio 11.00% 9.50% 6,600,000
Hickory Plaza Nashville, Tennessee 11.50% 10.00% 4,700,000
Highland Fair Gresham, Oregon 11.50% 10.00% 5,400,000
Kokomo Plaza Kokomo, Indiana 11.50% 10.00% 5,100,000
Mountain Park Plaza Roswell, Georgia 12.50% 10.30% 5,100,000
Mountain View Village Snellville, Georgia 11.50% 10.00% 7,100,000
Pablo Plaza Jacksonville Beach, Florida 12.50% 11.00% 7,200,000
Rolling Hills Tucson, Arizona 12.00% 10.30% 5,100,000
Southaven Southaven, Mississippi 11.50% 10.00% 5,500,000
Town West Indianapolis, Indiana 11.50% 10.00% 3,700,000
Westbird Miami, Florida 11.50% 10.00% 8,100,000
Winery Square Fairfield, California 12.00% 11.00% 10,400,000
Applewood Center Omaha, Nebraska 11.10% 9.50% 6,600,000
</TABLE>
The discounted cash flow methodology utilized by JLW USA in valuing the
retail properties measures the present value of projected income flows and the
reversion value of a property sale at the end of a ten-year holding period. In
certain instances, the holding period was extended beyond ten years in order to
capitalize a stabilized income stream. For each retail property, income and
expenses were estimated and projected over the holding period. Market rents and
expenses were assumed to grow at an annual rate of 4.0%. Gross rental income was
determined based upon current leases in place (current rent roll). Effective
gross income was calculated by deducting from the gross rental income a vacancy
allowance equivalent to 5.0% and an average downtime allowance between lease
expirations generally equivalent to 2-3 months of gross rent. Cash flow
projections accounted for the estimated costs associated with leasing as well as
a reserve for replacement generally of $.10/square foot of rentable area.
Leasing costs, including tenant improvement allowances and commissions, were
forecasted based on the tenant expiration schedule. JLW USA's estimate of net
operating income was calculated by taking the difference between the effective
gross income and estimated operating expenses.
The present value of the cash flows and the reversions was determined using
discount rates ranging between 11.00% and 12.50%. The reversions at the end of
the holding period were calculated by applying a terminal capitalization rate to
the following year's net operating income and deducting a disposition cost of
3.00%.
Apartment Complexes
Set forth below for each multi-family property are (i) the net operating
income for the twelve-month period ended October 1, 1996 and (ii) the direct
capitalization rate utilized by JLW USA in its Appraisals together with the
indicated conclusion of value as of October 1, 1995:
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Eagle Insured L.P. and Summit Preferred Equity L.P.
<TABLE>
<CAPTION>
Direct
Net Operating Capitalization
Property Location Income Rate Value
- ---------------- ------------------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Cross Creek Mathews, North Carolina $1,723,000 9.25% $18,600,000
Weatherly Walk Fayetteville, Georgia 802,000 9.25% 8,700,000
Woodgate Manor Gainesville, Florida 542,620 9.50% 5,700,000
Pinehurst Kansas City, Missouri 498,000 9.25% 5,400,000
Chateau Creste Tacoma, Washington 386,281 9.25% 4,200,000
</TABLE>
The direct capitalization methodology utilized by JLW USA in valuing the
multi-family properties estimates the value of a property by applying a direct
capitalization rate (or going-in rate) to the first year's net operating income,
in effect capitalizing a stabilized level of income in perpetuity.
Capitalization rates were determined by referring to recently published investor
surveys and where possible were supported by comparable sales in the local
marketplace. In general, a direct capitalization rate of 9.25% was applied to
JLW USA's estimate of net operating income for the twelve-month period
commencing October 1, 1995. A slightly higher capitalization rate of 9.50% was
utilized for Woodgate Manor given the fact that it is a relatively older
property. JLW USA's estimate of net operating income was derived from the
difference between effective gross income and estimated operating expenses.
Effective gross income was determined by deducting from the gross rental income
a 5.0% vacancy allowance. Gross rental income was determined based upon current
leases in place. Net operating income estimates were net of normalized operating
expenses and appropriate replacement reserves.
Conclusions as to Value. Based on the valuation methodology described
above, JLW USA assigned a value to each of the real properties underlying the
real estate assets of each Partnership, the aggregate amounts of which for each
Partnership are set forth in the following table:
Partnerships Aggregate Property Value Conclusion
- ---------------------- ------------------------------------
Insured I $67,400,000
Insured II 16,800,000
Summit Preferred 9,600,000
Eagle 33,000,000
Assumptions, Limitations and Qualifications of Appraisals. JLW USA utilized
certain assumptions to determine the Appraised Value of the real properties in
which the Partnerships have a direct or indirect interest under the income
approach. Specifically, JLW USA was not responsible for, unless otherwise stated
in the Appraisals, verifying or confirming: (a) that title to the property was
good and marketable; (b) that the property was free and clear of any and all
liens or encumbrances, unless otherwise stated; (c) responsible ownership and
competent property management of each such property; (d) the accuracy of
information furnished by others in connection with preparing the Appraisals; (e)
the accuracy of engineering studies relied upon in connection with the
preparation of the Appraisals; (f) that there were no hidden or unapparent
conditions of the property, subsoil or structures that would render it more or
less valuable; (g) the property was in full compliance with all applicable
federal, state, and local environmental regulations and laws, unless the lack of
compliance was stated, described, and considered in the Appraisals; (h) that the
property conformed to all applicable zoning and use regulations and
restrictions, unless a nonconformity was identified, described and considered in
the appraisal report; (i) that all required licenses, certificates of occupancy,
consents, and other legislative or administrative authority from any local,
state, or national government or private entity or organization have been or can
be obtained or renewed for any use on which the value estimate contained in each
such Appraisal was based; (j) that the use of the land and improvements is
confined within the boundaries or property lines of the property described and
that there was no encroachment or trespass, unless noted in each such Appraisal;
and (k) the non-existence of hazardous materials, which may or may not be
present on the property; provided, however, that JLW USA has no knowledge of the
existence of such materials on or in the property (JLW USA is not qualified to
detect such substances, however, the presence of substances such as asbestos,
urea-formaldehyde foam insulation, and other potentially hazardous materials may
affect the value of the property. The value estimated for each property was
predicated on the assumption that there is no such material on or in the
property that would cause a loss in value). In addition, JLW USA was not
responsible for providing a compliance survey and analysis or otherwise
determining whether or not each property complies with the various detailed
requirements of the Americans with Disabilities Act ("ADA").
The Appraisals reflect JLW USA's opinion as of October 1, 1995 of the real
properties in which the Partnerships have a direct or indirect interest in the
context of the information available on such date. Events occurring after
October 1, 1995 and before the Closing of the Consolidation could affect the
real properties or assumptions used in preparing the Appraisals. JLW USA has no
obligation to update the Appraisals on the basis of subsequent events. In
rendering its opinion, JLW USA relied, without independent verification, on the
accuracy and completeness of all financial and other information contained in
this Solicitation Statement or that was otherwise publicly available or
furnished or otherwise communicated to JLW USA. In connection with preparing the
Appraisals, JLW USA was not engaged to, and consequently did not, prepare any
written report or compendium of its analysis for internal or external use other
than the letters of value which summarize its analysis as of October 1, 1995.
JLW USA will not deliver any additional written summary of the analysis other
than the Appraisal Summary attached as Appendix B which was prepared
specifically for inclusion in this Solicitation Statement in order to comply
with disclosure requirements under certain governmental rules and regulations.
69
<PAGE>
Compensation and Material Relationships
The Related General Partners will pay Oppenheimer aggregate fees of
$146,500 (including legal expenses subject to a maximum of $50,000) to prepare
the Fairness Opinion and the Partnerships paid JLW USA $54,800 in 1995 for
preparing the Appraisals in connection with the Partnership's year-end audits,
portfolio valuation requirements under ERISA and for other internal purposes. In
addition, Oppenheimer is entitled to reimbursement for reasonable travel and
out-of-pocket expenses incurred in making site visits and preparing the
valuations. Both Oppenheimer and JLW USA are entitled to indemnification against
certain liabilities, including certain liabilities under federal securities laws
from the Partnerships, the Company and the Related General Partners.
Oppenheimer was retained by Class Counsel, but will be paid by the Related
General Partners. The fees were negotiated between the Related General Partners
and each of Oppenheimer and JLW USA and payment thereof is not dependent upon
completion of the Consolidation or the conclusions reached in the Fairness
Opinion or the Appraisals.
Oppenheimer was also engaged by Class Counsel to provide a fairness opinion
in connection with a consolidation transaction involving three other limited
partnership sponsored by affiliates of Related and Prudential. The aggregate
cost of these fairness opinions, including the Fairness Opinion to be provided
in connection with the Consolidation (including fees and expenses), is expected
to total $550,000. The cost of the Fairness Opinion allocated to the Company is
in proportion to the aggregate Adjusted Net Asset Value of the Partnerships and
the aggregate adjusted net asset value of the limited partnerships that are the
subject of the other consolidation transaction. Oppenheimer has not provided any
other services to the Related General Partners or the Partnerships during the
past two years.
JLW USA has been engaged from time to time by Related and its affiliates to
perform appraisal services. In the past two years, neither Related nor its
affiliates have retained JLW USA to perform appraisal services other than the
Appraisals and the original appraisals which were updated by the Appraisals.
Related and its affiliates do not engage JLW USA exclusively for appraisal
services and all prior engagements of JLW USA have been at an arms-length basis
after considering bids from two or more qualified appraisers. Over the past two
years, Related has paid JLW USA fees aggregating approximately $60,000.
70
<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE
PARTNERSHIPS
In the Consolidation, all Participating BUC$holders will be issued Common
Stock in exchange for their Units. The effect of the Consolidation, therefore,
for the Participating BUC$holders, is to convert their Units into Shares. Due to
the inherent differences in form, the change in structure from a partnership to
a corporation will result in certain differences in the scope and operation of
the Participating Partnerships' current businesses and in the interests of the
BUC$holders. In addition, the Participating Partnerships have certain features
and characteristics which are different from those which will exist in the
Company.
The rights of BUC$holders are governed by the Delaware Partnership Law and
by the respective Partnership Agreements of the Participating Partnerships. The
rights of the Company's Stockholders will be governed by the Maryland GCL and
the Charter and Bylaws.
UNITS SHARES
------ -------
Form of Organization
Each of the Partnerships is a limited The Company was organized as a
partnership formed under the Delaware corporation under the Maryland GCL.
Partnership Law. Each Partnership has The Company intends to qualify as a
been treated as a partnership for REIT under the Code.
federal income tax purposes.
Business
The Partnership Agreements generally The Company will own a diversified
limit the business of the Partnerships portfolio of participating FHA insured
to investment in existing, improved mortgages and retail and residential
shopping center properties (Insured I properties. The Company anticipates
and Insured II), operating acquiring additional assets comprising
partnerships that own residential a diversified portfolio of retail and
garden apartment complexes (Summit residential properties and
Preferred) and participating FHA participating FHA insured and
insured and co-insured mortgages co-insured mortgages in a manner which
(Eagle). In some cases the Partnership is generally consistent with the
Agreements prohibit investments in procedures followed by the
certain types of assets. The Partnerships. However, based upon
Partnerships are organized to hold current market conditions, the Advisor
only a fixed pool of assets for a anticipates that the Company's
limited time period. The Partnership acquisition strategy will initially
Agreements do not permit the focus on direct equity investments in
Partnerships to raise new capital. The retail properties and in particular
Partnership Agreements permit the shopping centers. In addition, the
Partnerships to invest in mortgages Advisor believes that the greatest
on, or lend to, developments owned or growth opportunities will come from
acquired by affiliates of Related purchasing properties which need
(Eagle) and generally do not permit redevelopment and repositioning rather
the Partnerships to invest in or than purchasing only new or recently
acquire properties owned by affiliates improved properties as the
of Related (Insured I, Insured II and Partnerships have done in the past.
Summit Preferred). Such focus may change based on future
market conditions and other factors.
Certain of the powers and limitations
with respect to the real estate
operations conferred in the Partnership
Agreements will not be applicable to
the business activities of the Company.
The Company may be able to take
advantage of financing opportunities
that may not be available to the
Partnerships. Further, the Company may
use forms of financing which the
Partnerships did not use. For example,
the Charter and Bylaws permit the
Company to issue securities in exchange
for properties or other assets of the
Company. Additional capital may be
raised through all available sources,
including additional equity financing,
borrowing from banks, institutional
investors, public and private debt
markets or other financing vehicles
which will be dependent upon the equity
and debt market conditions, interest
rates and other factors including the
Company's policy on limiting debt. Many
of these additional forms of financing
also expose the Company to additional
risks which do not exist with respect
to the Partnerships, including the risk
of default and foreclosure on any
assets securing debt.
The Charter also permits the Company to
engage in any lawful act or activity
for which corporations may be formed
under the laws of the State of
Maryland, which includes any act or
activity required to permit the Company
to acquire and own a diversified
portfolio of retail and residential
properties and participating FHA
insured and co-insured mortgages.
Unlike certain of the Partner-
71
<PAGE>
ships (Summit Preferred), the Company
may directly invest in multi-family
residential properties (in addition to
indirect investment through operating
partnerships that hold such
investments).
The Company is not currently permitted
to acquire or invest in properties
owned by affiliates of Related but may
make loans to properties or
developments owned or acquired by
affiliates of Related under certain
circumstances.
Joint Ventures and similar business Joint Ventures and similar business
ventures are permitted under the ventures are permitted under the
Partnership Agreements under certain Charter, provided that the Company owns
specified parameters. a majority interest or otherwise has
veto rights over, or control of, major
decisions.
Partnership Agreements are silent as The Company will be specifically
to Partnerships' authority to provide permitted to make forward loan
forward loan commitments to commitments to take advantage of
prospective borrowers. additional fees that can be earned by
the Company.
The Company will have broader business opportunities than the Partnerships, as
well as access to additional financing opportunities which are currently not
available to the Partnerships. Inherent in such financing opportunities are
certain risks which may not presently exist in the case of the Partnerships.
Duration of Existence
The Partnership Agreements provide In accordance with the Maryland GCL
that the Partnerships may exist for and the Charter, the Company will
original terms ranging from 34 to 40 continue its existence indefinitely.
years and that the Partnerships have a The Company has no present intention
limited existence. In furtherance of to sell a substantial number of
this objective the Partnership assets. The Company currently does not
Agreements generally provide that the have any restrictions on reinvesting
proceeds from the sale, financing, funds after the sale of an original
refinancing or other disposition of investment other than those required
any property or the repayment of to maintain the Company's REIT status.
mortgage loans owned by the respective Therefore, the Company believes that
Partnerships will not be reinvested it will be in a position to take
but will be distributed to the advantage of economic opportunities as
BUC$holders to the extent such they are presented. Because the
proceeds exceed the respective Company currently does not have any
Partnership's other cash requirements. restrictions on the reinvestment of
If market conditions permit, the funds (other than the debt limit),
Partnerships intend to hold their Stockholders assume the risk of such
respective investments for original reinvestment and will not be entitled
periods ranging from 10 to 12 years, to an immediate distribution from
although the assets could be sold sale, financing, refinancing or
earlier if economic conditions permit mortgage repayment proceeds.
or later at the discretion of the
respective General Partners based upon If the Advisory Agreement: (a) is
their assessment of prevailing still in effect prior to the fourth
economic factors. anniversary of the Effective Date, the
Company may be dissolved only with the
recommendation of the Advisor and a
Majority Vote of Stockholders; (b) is
still in effect after the fourth
anniversary of the Effective Date, the
Company may be dissolved (i) upon the
recommendation of the Advisor and a
Majority Vote of Stockholders or (ii)
upon a two-thirds vote of
Stockholders; and (c) is not in effect
at any time after the Effective Date,
the Company may be dissolved upon a
Majority Vote of Stockholders. See
"MANAGEMENT--Summary of the Advisory
Agreement."
The Partnership Agreements provide for the dissolution of the Partnerships
after a specified number of years, whereas the Charter provides for perpetual
existence. Upon completion of the Consolidation, Participating BUC$holders will
not be entitled to an immediate distribution of liquidation or disposition
proceeds.
72
<PAGE>
Investment Objectives and Policies
The principal investment objectives of The investment objectives of the
the Partnerships are similar: to Company are to provide distributions
preserve invested capital, to maximize and the potential for capital
the potential for appreciation in the appreciation as reflected in the
value of their real estate assets and market price of the Common Stock, and
to provide for cash distributions to expand the capital and asset base
throughout a finite life. of the Company.
Under the Partnership Agreements, the The Company intends to continue its
Partnerships are not permitted to operations for an indefinite period of
reinvest cash from sales in new time and is not precluded from raising
properties or other assets, except new capital through the issuance of
during a prescribed period which has equity securities, including senior
expired. The Partnerships will securities with priority over the
automatically dissolve at varying Common Stock as to cash flow,
times between the years 2011 and 2040, distributions and liquidation
unless dissolved earlier. The proceeds, or from reinvesting cash
Partnerships have no present intention flow or sale or financing proceeds in
to liquidate or to sell or finance new properties or other assets, except
their properties. to the extent such reinvestment
precludes the Company from satisfying
Under the Partnership Agreements, the the REIT distribution requirements.
General Partner may alter the Therefore, Stockholders have the
investment objectives and policies of ability to liquidate their investment
each Partnership only after obtaining only by selling their Shares in the
a majority vote of BUC$holders (i) to market, and the market value of the
alter such investment objectives and Shares may never equal or exceed the
policies (Insured I, Insured II and market value of the Company's assets
Eagle), and (ii) to amend the or the net proceeds which may be
Partnership Agreement to reflect the available for distribution upon
alteration of the Partnership's liquidation if the Company were to
existing investment objectives and liquidate. The Company has the
policies (Summit Preferred). potential for acquiring new assets and
increasing Stockholder value as such
new investments are made.
The Board of Directors may alter the
Company's investment objectives and
policies without the vote of
Stockholders if, in their sole
discretion, they determine in the
future that such a change is in the
best interests of the Company and its
Stockholders. In this regard, the
Independent Directors will have the
power to permit the Company to invest
in or acquire properties from
affiliates of Related.
BUC$holders who become Stockholders will be able to liquidate their investment
by selling their Shares in the market. The interest of Stockholders in the
Company can be diluted through the issuance of additional securities, including
securities that have priority over the Common Stock as to cash flow,
distributions and liquidation proceeds. The Company's Board of Directors may
change the investment policies of the Company without a vote of the
Stockholders.
Borrowing Policies
Summit Preferred and Eagle are not The Charter limits aggregate
authorized to incur borrowings, and indebtedness (whether secured or
Insured I and Insured II are unsecured) to 50% of the Company's
restricted in the amount and nature of Total Market Value (measured at the
borrowings. time any additional debt is incurred).
The Charter does not limit the portion
of the permitted debt that may bear
interest at a fixed rate, or at a
variable rate. An increase in debt may
increase the risk of default on the
Company's obligations and may reduce
the cash flow available for
distribution as a result of
fluctuations in the interest rates
applicable to indebtedness of the
Company. Upon consummation of the
Consolidation, the Company's
indebtedness is anticipated to
represent 7.8% of the Company's Total
Market Value.
BUC$holders who become Stockholders will have invested in an entity that may
incur debt in the ordinary course of business and that reinvests proceeds from
borrowings. The incurrence of debt increases the risk of investment.
73
<PAGE>
Management
The Partnerships are managed by the The business and affairs of the
General Partners, which have exclusive Company are managed under the
authority over the Partnerships' direction of a Board of Directors
operations, subject to certain elected by the Stockholders. Under the
limitations provided in the Maryland GCL, the directors are
Partnership Agreements. Under Delaware required to perform their duties in
Partnership law, the General Partners good faith, in a manner reasonably
are accountable to the Partnerships as believed to be in the best interests
fiduciaries and consequently are of the Company and with such care as
required to exercise good faith and an ordinarily prudent person in a like
integrity in all their dealings with position would use under similar
respect to Partnership affairs. The circumstances. The Maryland GCL, the
limited partners may not participate Charter and Bylaws include provisions
in management of the Partnerships, that (i) limit the liability of its
other than voting on the sale of all directors and officers to the Company
assets or other limited matters. The and the Stockholders for money damages
General Partners have general in most circumstances, (ii) in certain
liability for all partnership circumstances obligate the Company, to
obligations, other than those that are the maximum extent permitted by
non-recourse (which includes mortgage Maryland law, to indemnify and to pay
debt, if any). The Partnership or reimburse reasonable expenses to a
Agreements provide generally that the director or officer of the Company in
General Partners are indemnified from advance of final disposition of a
losses relating to acts performed or proceeding to which he is made a party
omitted to be performed in good faith by reason of his service in that
and in the best interests of the capacity, and (iii) require the
Partnerships, provided the conduct did Company to indemnify a director or
not constitute negligence, misconduct, officer who has been successful, on
breach of a fiduciary duty or a breach the merits or otherwise, in the
of obligations under the Partnership defense of any proceeding to which he
Agreements. The General Partners may is made a party by reason of his
be removed by a vote of a majority of service in that capacity. Additionally
partnership interests in the the Company intends to enter into
respective Partnerships. agreements with the Company's
directors and officers, indemnifying
them to the fullest extent permitted
by Maryland law.
A member of the Company's Board of
Directors may be removed by the
Majority Vote of Stockholders only for
Cause prior to the fourth anniversary
of the Effective Date, and with or
without Cause after such anniversary.
The Company's assets and day-to-day
operations will be managed by the
Advisor.
The rights of Stockholders against management of the Company in certain
circumstances are more limited than the rights of BUC$holders against the
General Partners.
Fees and Expenses
Acquisition Fee ranging from 5% to 6%. Acquisition Fee of 3.75%
Special Distributions from Adjusted Special Distributions from Adjusted
Cash Flow of 0.5% of a Partnership's Cash Flow/Asset Management Fee of
assets 0.375% of Total Invested Assets
Mortgage Selection Fee of 3 Mortgage Selection Fee of 3%
Disposition Fee ranging from 0% Liquidation Fees of 1.5%, payable in
(Eagle) to 3% (all other Partnerships) connection with a liquidation of the
Company supervised by the Advisor
Percentage of Sales and Refinancing None
Proceeds ranging from 0% (Eagle) to
15% (all other Partnerships) after
certain priority distributions have
been made.
General Partners' distribution of Cash Related General Partners and the
Flow ranging from 1% (Insured I) to 2% Advisor will be entitled to receive an
(all other Partnerships) aggregate 1.12% of the Shares
(including Shares issuable upon
conversion of the Insured Interests)
issued in the Consolidation.
74
<PAGE>
Amounts payable by the Partnerships As an operating company, the Company
for expenses related to the initial will be directly responsible for all
acquisition of assets were subject to acquisition expenses incurred in
limitations based upon the overall connection with future asset
front-end fees which a Partnership was acquisitions.
permitted to incur; generally capped
at approximately 1% of the gross
proceeds raised in the initial
offering.
All Partnership expenses paid by All expenses paid by Company; Advisor
Partnerships; General Partners reimbursed for certain services
reimbursed for certain services performed for the Company, up to a
performed for the Partnership maximum of $200,000 in any given year
of operations, subject to the
following adjustments: the overall
limit on reimbursements for
administrative expenses will be
increased (i) after the Company's
first year of operations and each year
thereafter by a percentage equal to
the Consumer Price Index for the year
then ended, and (ii) proportionately
as the Company increases its asset
portfolio.
Incentive Stock Options may be issued
to Advisor if the Company's
distributions in any year exceed
$0.9869 per Share (i.e. the 1996 pro
forma annual distributions set forth
in this Solicitation Statement) if
granted by the Compensation Committee.
Pursuant to the Advisory Agreement (and as a result of the Advisor's purchase
of the P-B Interests), the Advisor will be entitled to receive from the Company
approximately 75% of the aggregate annual fees currently payable by the
Partnerships to the General Partners. The Advisor will own Shares of the
Company, but the interests of the Advisor will not necessarily be aligned with
the interests of the Stockholders. Implementation of the Incentive Stock Option
Plan is expected to more closely align the financial interests of the Advisor
with the interests of the Stockholders by providing the Advisor with a
substantial financial interest in the Company's success.
Potential Dilution
Partnerships are not authorized to Board of Directors may, in its
issue additional equity securities discretion, issue additional Shares of
without the consent of a majority in Common Stock without any Stockholder
interest of the BUC$holders and the approval. The Company may issue (i) up
limited partners. to 3.95% of its outstanding shares of
Common Stock to Class Counsel ratably
over eight quarters after the
Anniversary Date, subject to
acceleration under certain
circumstances, as additional
attorneys' fees based upon the
increase in the Company's value, if
any, in the year following the date on
which the Shares are first publicly
traded and (ii) up to approximately
800,000 shares of Common Stock (10% of
the Shares outstanding on the
Effective Date) to the Advisor and
other employees pursuant to Incentive
Stock Option Plan. See
"MANAGEMENT--Description of Incentive
Stock Option Plan" and "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT--Security Ownership of
Certain Beneficial Owners."
Potential Dilution of Payment Rights
Since the Partnerships are not The Board of Directors may, in its
authorized to issue additional equity discretion, issue additional shares of
securities, there can be no dilution Common Stock or issue preferred stock
of distributions to BUC$holders. with such powers, preferences and
rights as the Board of Directors may
at the time designate. The issuance of
additional shares of either Common
Stock or preferred stock, beyond the
Shares to be issued in the
Consolidation, may result in the
dilution of the interests of the
Stockholders.
75
<PAGE>
Potential Redemption
The Partnerships have no ability to The Board of Directors may, at its
purchase or redeem Units. sole discretion, determine to
repurchase Shares from time to time to
further the business objectives of the
Company if, after giving effect to the
repurchase, the Company is able to pay
its debts as they become due in the
usual course of business and the
Company's total assets are not less
than the sum of the Company's
liabilities plus the amount that would
be needed if the Company were to be
dissolved at the time of the
repurchase to satisfy the preferential
rights upon dissolution of
stockholders whose rights upon
dissolution are superior to those
whose shares of stock are being
repurchased.
The Stockholders will be subject to potential dilution if the Company issues
additional equity securities. Furthermore, the Company may issue preferred stock
with priorities or preferences with respect to distributions and liquidation
proceeds. Any secured debt obligations issued by the Company would have prior
claims against the collateral given for security in the event the Company
defaults in the payments of those secured obligations.
Anti-Takeover Provisions
While the Units are transferable, The Charter and Bylaws contain the
subject to certain restrictions, the following provisions which could have
General Partners under the Partnership the effect of delaying, deferring or
Agreements may under certain preventing a transaction or a change
circumstances refuse to permit of control of the Company that might
assignees (who are not permitted to involve a premium price for Shares or
vote on any Partnership matters) to otherwise be in the best interest of
become substituted limited partners. Stockholders: (i) the Ownership Limit,
(ii) the Board's power to issue
preferred or common stock which could
include anti-takeover provisions, and
(iii) the classification of the
Company's Board of Directors (the
Company's Board of Directors will be
divided into three classes, the
directors in each of such classes will
be elected for three-year terms).
In addition, the Advisory Agreement
contains the following provisions
which may also have an anti-takeover
effect: (i) the Advisory Agreement may
be terminated only for Cause for four
years; and (ii) the Company may not
liquidate for four years and,
thereafter, a supermajority vote is
required to liquidate, unless the
Advisor recommends liquidation.
Certain provisions of the organizational documents of the Partnerships and the
Company could have the effect of delaying, deferring or preventing attempts to
obtain control of the Partnerships and the Company in transactions not approved
by the General Partners and the Board of Directors, respectively. The Charter
and Bylaws contain several such provisions (including provisions with respect to
a classified board of directors) as well as what is necessary to ensure
continued REIT status.
The following compares certain of the investment attributes and legal rights
associated with the ownership of Units and Shares.
Nature of Investment
The Units of each Partnership The Shares constitute equity interests
constitute equity interests entitling in the Company. Each Stockholder will
each BUC$holder to his or its pro rata be entitled to his or its pro rata
share of cash distributions made to share of distributions made with
the BUC$holders of the Partnership. respect to the Common Stock. The
Each of the Partnership Agreements distributions payable to the
specifies how the cash available for Stockholders are not fixed in amount
distribution is to be shared among the and are only paid when authorized by
General Partners and BUC$holders. The the Company's Board of Directors in
distributions payable to the accordance with applicable law. To
BUC$holders are not fixed in amount qualify as a REIT, the Company must
and depend upon the Partnerships' distribute on an annual basis at least
operating results and net sale, 95% of its REIT Taxable Income.
refinancing or mortgage repayment
proceeds available from the
disposition of the Partnerships'
assets.
Both the Units and Shares represent equity interests entitling the holders
thereof to participate in the growth of the Partnerships and the Company,
respectively. Distributions payable with respect to the Units and Shares depend
upon the performance of the Partnerships and the Company, respectively.
76
<PAGE>
Expected Distributions and Payments
The Partnerships make quarterly The Company intends to pay quarterly
distributions. Amounts distributed to distributions to its Stockholders. The
the BUC$holders are derived from their amount of such distributions will be
share of distributions of cash flow established by the Board of Directors,
from operations or cash flow from taking into account the cash needs of
sales or mortgage repayments or the Company, yields available to
constitute a return of the Stockholders, ranges in market prices
BUC$holders' equity contributions to for the Common Stock and the
the Partnerships. The General Partners requirements of the Code for
may, under the Partnership Agreements, qualification as a REIT. Under the
create reserves which may decrease Code, the Company is required to
cash distributions. See "SUMMARY-- distribute at least 95% of REIT
Summary Financial and Other Data" for Taxable Income. REIT Taxable Income
a presentation of distributions per generally includes taxable income from
$1,000 of Original Investment to the operations (less depreciation
BUC$holders over the five most recent deductions) and generally excludes
calendar years. Given current market gains from the sale of properties.
conditions, there is no expectation Also, under the Maryland GCL, a
that significant distributions of net dividend or other distribution may not
sale or mortgage repayment proceeds be made if after giving effect to it
will be made to the BUC$holders within (i) the corporation would not be able
the next several years. to pay its debts as they become due in
the usual course of business or (ii)
the corporation's total assets would
be less than the corporation's total
liabilities plus the amount that would
be needed, if the corporation were to
be dissolved at the time of the
distribution, to satisfy the
preferential rights upon dissolution
of stockholders whose preferential
rights upon dissolution are superior
to those receiving the distribution.
Unlike the Partnerships, the Company
is not required to distribute net
proceeds from the sale or refinancing
of assets or repayment of mortgages.
Distributions will be paid if, as and when declared by the Board of Directors
of the Company in its discretion out of assets legally available therefor.
BUC$holders who become Stockholders will receive their pro rata share of the
distributions made with respect to the Company's Common Stock. The amount of
such distributions will depend upon the Company's earnings, operating expenses,
debt service payments, capital expenditures, reserves and funds set aside for
expansion.
Liquidity and Transferability
While the Units are transferable, the The market for the Common Stock, which
General Partners have discretion under will be approved for listing on the
the Partnership Agreements to refuse American Stock Exchange (or other
to permit assignees to become national exchange or market) upon
substituted limited partners and the official notice of issuance prior to
Partnership Agreements contain various consummation of the Consolidation, is
other restrictions on the expected to be more active and broader
transferability of Units. Although based than the market for the Units.
limited secondary sales of Units have The Common Stock may trade at a
occurred (generally at prices that are discount to its book value, and the
low in relation to other measures of market value of the Shares may never
value), there is essentially no equal or exceed the net proceeds that
established public trading market for might be available if the Company's
the Units and none is expected to assets were liquidated. The
develop. The Units are not marginable. transferability of Shares of Common
Potential adverse tax consequences Stock is also restricted by certain
would arise if a Partnership were to provisions of the Charter intended to
be considered a "publicly traded" protect its status as a REIT under the
partnership and therefore the Code.
Partnerships limit trading in taxable
transactions to less than 5% of the
Units annually.
One of the primary objectives of the Consolidation is to provide increased
liquidity to the BUC$holders. The Common Stock will be approved for listing on
the American Stock Exchange (or other national exchange or market) upon official
notice of issuance prior to consummation of the Consolidation, and there is
expected to be a public market for the Common Stock following the Consolidation.
The breadth of the market for the Common Stock cannot yet be determined. While
there has been a limited secondary market for the Units, trading on that market
has been sporadic and limited, and prices at which Units have generally traded
are low in relation to other measures of value.
77
<PAGE>
Taxation of Taxable Investors
The Partnerships, as partnerships for As a REIT, the Company generally can
federal income tax purposes, are not deduct distributions to Stockholders,
subject to tax, but the BUC$holders which effectively eliminates the
report their allocable share of "double taxation" that typically
partnership income and loss on their results when a corporation earns
respective tax returns. Income from income and distributes dividends to
the Partnerships (other than income stockholders. Distributions received
from Eagle) generally constitutes by Stockholders generally will
"passive" income to the BUC$holders, constitute portfolio income, which
which can generally offset "passive" cannot be offset by "passive" losses.
losses from their other investments. Distributions may in certain
Income from Eagle constitutes circumstances constitute a larger
portfolio income, which cannot be portion of taxable income than in the
offset by "passive" losses from other case of the Partnerships, primarily
investments. Generally, by March 15 of because the taxable portion of a REIT
each year, BUC$holders receive annual distribution is computed under less
Schedule K-1 forms with respect to favorable depreciation rules than
information for inclusion on their those applicable to partnership
federal income tax returns. deductions. Each January, Stockholders
BUC$holders must file state income tax will be mailed the less complex Form
returns and incur state income tax in 1099-DIV for corporate dividends.
most states in which the Partnerships Stockholders are generally not
own property. BUC$holders pay federal, required to file state income tax
state and local income tax, if any, on returns or pay state income taxes
Partnership distributions. outside their state of residence with
respect to the Company's operations.
The Company must pay state income
taxes in certain states where it is
qualified to do business. Stockholders
will pay federal, state and local
income tax, if any, on distributions
from the Company.
Each Partnership is a pass-through entity whose income and loss is not taxed
at the entity level but instead allocated directly to the General Partners and
BUC$holders. BUC$holders are taxed on income or loss allocated to them whether
or not cash distributions are made to the BUC$holders. In contrast, the Company
intends to qualify as a REIT allowing it to deduct distributions paid to its
Stockholders. To the extent the Company has net income (after taking into
account the deduction for distributions paid), such income will be taxed at the
Company's level at the standard corporate tax rates. Distributions paid to
Stockholders will be taxable and will constitute portfolio income and not
passive income.
Taxation of Tax-Exempt Investors
A portion of income earned by Insured Distributions received from the
I and Insured II is treated as UBTI Company by tax-exempt investors should
because of the indebtedness incurred not constitute UBTI if such
by these Partnerships to acquire the Stockholders did not finance the
Insurance Policies. acquisition of their shares of Common
Stock with debt. Thus, unlike the
Units, Common Stock of the Company
would be a permitted investment for
pension funds and other tax-exempt
investors. See "FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of Tax-Exempt
Stockholders."
A tax-exempt entity is treated as owning and carrying on the business activity
conducted by a partnership in which such entity owns an interest. Accordingly,
to the extent a Tax-Exempt Investor owns an interest in a Partnership, the
income received by such Partnership must not constitute UBTI in order for the
Tax-Exempt Investor to avoid taxation. In general, income attributable to the
Common Stock is not UBTI.
78
<PAGE>
Voting Rights
The BUC$holders are entitled to vote Subject to the provisions of the
only as provided under the Delaware Charter regarding restrictions on the
Partnership Law and the respective transfer of stock, each outstanding
Partnership Agreements. Generally, a Share entitles the holder to one vote
BUC$holder may vote on, in most cases on all matters submitted to a vote of
without the consent of the General stockholders. Stockholders of a
Partners: (i) material amendments to Maryland corporation are generally
the Partnership Agreement (ii) the entitled to vote on any material
approval of the disposition of transactions or actions relating to
substantially all of the Partnership's such corporation, and such
assets; (iii) an election to dissolve transactions or actions may not be
the Partnership; (iv) the consummated without the approval of
determination to remove a General the requisite number of stockholders.
Partner; (v) the approval of the These instances include, if, in some
Partnership incurring material cases, previously declared advisable
additional amounts of indebtedness; by the Board of Directors: (i) the
(vi) the determination to terminate a right to elect the board of directors;
contract between the Partnership and (ii) the right to amend the
the General Partners or an affiliate corporation's charter; (iii) the
thereof; and (vii) the approval of a determination to dissolve the
successor General Partner. Under the corporation (subject to certain
Delaware Partnership Law and the restrictions in the first four years
Partnership Agreements, decisions after the Effective Date); (iv) the
relating to the operation and determination to merge or consolidate
management of the Partnerships are the corporation with or into, or to
made by the General Partners of each convert the corporation into, another
Partnership. There are no provisions entity; (v) the determination to
for annual meetings of the BUC$holders approve or disapprove the sale of
in the Partnership Agreements. If a substantially all of the corporation's
limited partner were granted assets; and (vi) any other matters
additional voting rights, the which are properly brought before the
possibility exists under the Code that stockholders.
the partnership structure and the
terms of the applicable Partnership Corporations are also required to hold
Agreement would be disregarded. In annual meetings which allow
such event, the Partnership may be stockholders to vote for directors.
taxed as an association for tax There is no cumulative voting in the
purposes and thus would be subject to election of directors, which means
double taxation similar to a that the holders of a majority of the
corporation. outstanding Shares can elect all of
the directors then standing for
election and the remaining Shares will
not be able to elect any directors.
Participating BUC$holders will be entitled to vote on more matters as
Stockholders of the Company than as Unitholders of a Partnership. On
substantially all Partnership matters on which BUC$holders can vote, BUC$holders
can cause the Partnerships to take action with respect to such matters without
the consent of the General Partners.
79
<PAGE>
THE COMPANY
Overview
The Company is a newly formed Maryland corporation which intends to qualify
as a REIT for tax purposes. The Company was formed to facilitate the
Consolidation and for all lawful purposes, including acquiring, managing and
disposing of a portfolio of retail and residential properties and participating
FHA insured and co-insured mortgages. The day-to-day operations of the Company
will be managed by the Advisor which is an affiliate of Related.
As a result of the Consolidation, the Company anticipates that it will be
able to take advantage of its size to obtain capital from numerous sources with
which it expects to fund growth. The Related General Partners believe that the
current marketplace provides opportunities to acquire existing assets at prices
below replacement cost and, therefore, growth opportunities are available for
those companies able to redevelop and reposition such assets. The Company
believes that the Consolidation will provide a capital structure and increased
efficiency of portfolio management which will allow the Company to take
advantage of such opportunities.
The Company's executive offices are located at 625 Madison Avenue, New
York, New York 10022, and its telephone number is (212) 421-5333.
Ownership Structure
The following diagram shows the structure and the ownership of the Company,
assuming 100% Participation, and the relationships among the Company, the
Partnerships, the Related General Partners and the Advisor upon consummation of
the Consolidation. As discussed in greater detail under the heading "THE
CONSOLIDATION AND RELATED TRANSACTIONS", upon consummation of the Consolidation,
Insured I and Insured II will remain in existence as majority-owned subsidiaries
of the Company.
[FLOW CHART]
---------- --------------
Advisor* Stockholders
---------- --------------
\ /
.55% 99.45%
Shares Shares
\ /
------- ------- \ / ------- -------
Related \ / Related
Advisor General ----------- General Advisor
Partner The Company Partner
------- ------- ----------- ------- -------
| / /|\ | /
.25%| .50% / / | \ 1.00% 50% LP
LP | LP / / | \ LP /
| / / | \ | /
| / / | \ | /
| / 99.25% | 98.50% | /
| / / GP | GP \ | /
| / / | \ | /
------------ / | \ ------------
Insured I ----------/ | --- Insured II
------------ | ------------
\ | |
\ | |
- ----------------- ---------------------- ----------------
Interests in 2
11 residential properties 3
Shopping Centers and 3 mortgages Shopping Centers
- ----------------- ---------------------- -----------------
*Includes Shares attributable to (i) the P-8 interests purchased from the
P-8 General Partner, and (ii) the Related General Partners' interests in
Eagle and Preferred.
[END FLOW CHART]
80
<PAGE>
Assets and Operations
The Company's primary objective will be to generate distributable cash flow
through acquisition and ownership (either directly or through subsidiary
partnerships) of a diversified portfolio of retail and residential properties
and participating FHA insured and co-insured mortgages which will be managed by
the Advisor pursuant to the Advisory Agreement. Assuming 100% Participation, the
Company and its affiliates will initially own 14 neighborhood shopping centers,
two garden apartment complexes and three participating FHA co-insured mortgage
loans. Based upon current market conditions, the Advisor anticipates that the
Company's acquisition strategy will initially focus on direct equity investments
in retail properties and in particular shopping centers. In addition, the
Advisor believes that the greatest growth opportunities will come from
purchasing properties which need redevelopment and repositioning rather than
purchasing only new and recently improved properties as the Partnerships have
done in the past. Such focus may change based on future market conditions and
other factors.
Retail Properties
Upon consummation of the Consolidation and assuming Insured I and Insured
II participate in the Consolidation, the Company's retail properties will
initially consist of 14 "neighborhood shopping centers" located primarily in the
southeastern, western, and midwestern United States. They range in size from
67,000 to 141,000 square feet and each center contains a number of boutique
style shops and one or two anchor tenants. Information with respect to these
properties is summarized in the following table:
<TABLE>
<CAPTION>
% Square
Feet Annualized Comparable
Name, Type of Rentable Occupied at Base Rent Competition
Property and Purchase Date Square December December Main Anchor within a
Location Price Purchased Feet 31, 1996 31, 1996 Tenant three-mile radius
- -------------------------- ------------- ----------- ---------- ------------- ------------ ------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Insured I
Cactus Village $ 6,330,000 7/25/87 72,598 97% $484,000 Safeway(1) 11 shopping centers
Shopping Center
Glendale, AZ
Hickory Plaza $ 4,902,000 4/23/87 67,336 99% $616,000 Kroger 8 shopping centers
Shopping Center
Nashville, TN
Highland Fair $ 5,950,000 7/24/87 74,754 99% $646,000 Safeway 6 shopping centers
Shopping Center
Gresham, OR
Pablo Plaza $ 7,500,000 2/18/87 140,921 86% $513,000 Publix(2) 12 shopping centers
Shopping Center
Jacksonville, FL
Southhaven $ 5,666,000 2/28/87 83,750 100% $603,000 Kroger 6 shopping centers
Shopping Center
Southhaven, MS
Town West $ 4,932,000 5/11/87 88,200 100% $472,000 Kroger 5 shopping centers
Shopping Center
Indianapolis, IN
Westbird Shopping Center $ 7,000,000 12/31/86 100,237 98% $894,000 Publix 7 shopping centers
Miami, FL
Winery Square $12,801,700 12/22/87 121,047 87% $876,000 Food 4 Less 5 shopping centers
Shopping Center
Fairfield, CA
Mountain View $10,350,000 7/25/88 99,908 95% $861,000 Kroger 4 shopping centers
Village Shopping Center
Snellville, GA
Forest Park $ 8,950,000 5/19/89 92,824 98% $806,000 Kroger 2 shopping centers
Shopping Center
Cincinnati, OH
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
% Square
Feet Annualized Comparable
Name, Type of Rentable Occupied at Base Rent Competition
Property and Purchase Date Square December December Main Anchor within a
Location Price Purchased Feet 31, 1996 31, 1996 Tenant three-mile radius
- ---------------------- ------------- ----------- ---------- ------------- ------------ --------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kokomo Plaza $ 6,987,000 5/19/89 89,546 94% $511,000 Kroger 6 shopping centers
Shopping Center
Kokomo, IN
Insured II
Rolling Hills Square $6,100,000 08/18/88 98,887 92% $536,000 Fry's Food 6 shopping centers
Shopping Center & Drug Store
Tucson, AZ
Mountain Park $6,650,000 12/14/89 77,686 94% $555,000 A&P Future(3) 8 shopping centers
Plaza Shopping Center
Atlanta, GA
Applewood Center $7,700,000 11/08/90 101,130 93% $615,000 Hy-Vee Food 5 shopping centers
Shopping Center Store &
Omaha, NE Walgreens
</TABLE>
- --------------
(1) Safeway closed its facility in December 1991 but as of the date hereof
continues to comply with the terms of its lease (which expires in
September 2006) in all respects including payment of rent. There have been
several proposals received for leasing this space, but as of September 30,
1996, this space has not been re-leased.
(2) Publix moved out of its facility in November 1995 but as of the date
hereof continues to abide by the terms of its lease, which expires in
November 1998, in all respects including payment of rent. As of September
30, 1996, this space has not been re-leased.
(3) A&P closed its facility in July 1994 but the Partnership continues to
receive rental revenue from A&P, which is actively pursuing potential
sub-tenants. The A&P lease expires on June 30, 2007.
The retail properties are managed by RCC Property Advisors, a Florida
general partnership ("RPA") which is an affiliate of the Related General
Partner, for a fee equal to approximately 4.5% of the gross rental receipts from
the properties, which fee is competitive with other fees paid on similar
projects in the areas in which the properties are located. RPA also receives
standard leasing commissions for space leased to new tenants and lease renewals
and is reimbursed for certain expenses. Management fees and leasing commissions
earned by RPA for the years ended December 31, 1996, 1995, and 1994 were
approximately $539,416, $540,000, and $530,000, respectively. Consummation of
the Consolidation will not affect the fees and commissions payable to RPA.
Four of the officers of the Related General Partners have ownership
interest in Multi-Family Program Manager Inc. ("MFP"), a company which has
provided insurance services for the properties. The amounts earned by MFP were
approximately $28,520, $28,515, and $14,000 during fiscal years 1996, 1995, and
1994, respectively. Consummation of the Consolidation will not affect amounts
payable to MFP for such services.
For the year ended December 31, 1996, Kroger Food Stores, which is a tenant
at each of Hickory Plaza Shopping Center, Southhaven Shopping Center, Town West
Shopping Center, Mountain View Village Shopping Center, Forest Park Shopping
Center and Kokomo Plaza Shopping Center, accounted for approximately 16% of the
Company's pro forma total revenues.
Insurance Coverage. The Insured I and II Partnerships are each insured
under respective Insurance Policies (the "Insurance Policies") from Continental
Casualty Company ("CNA"), each of which provides, in effect, that the cumulative
amount of insured cash available for distribution (as defined in each policy)
from all sources as determined in accordance with the Insurance Policies and
related agreements, together with the appraised values of each Partnership's
real estate assets then owned by the Partnerships, will equal at least 100% of
the original contributions of BUC$holders allocated to investment in properties
on the day on which each of the Partnerships acquired its last property, with
the liability of CNA under each Insurance Policy to increase, pursuant to a
formula based upon the length of time properties are held by the Partnerships,
up to a maximum of 125% of original contributions of BUC$holders allocated to
investment in properties on the tenth anniversary of the date the last property
was purchased by each Partnership. The policies are intended to cover the
various economic risks of the ownership of the properties, but do not apply to
certain losses, costs, penalties or expenses, including but not limited to: (i)
those arising out of any physical loss, damage, loss of use or other physical
injury to the properties including ordinary wear and tear, however caused, (ii)
those arising from liability of Insured I or Insured II to any party, however
caused, (iii) those resulting from changes in law which restrict or impair
property rights, (iv) those arising out of fraudulent, dishonest or criminal
acts or gross negligence by any director, officer, employee or affiliate of
Insured I or Insured II and their respective general partners, (v) those based
upon
82
<PAGE>
or attributed to any failure or omission on the part of the general partners of
Insured I and Insured II, respectively to effect or maintain insurance or bonds
for limited partnership assets and in an amount sufficient to cover such assets,
and (vi) those arising out of failure to purchase properties having an aggregate
acquisition cost of 80.5% of the gross proceeds of all sales of Units by Insured
I and Insured II, respectively. Payment amounts due under respective claims, if
any, will be made under each policy only to the respective Partnership and only
after the tenth anniversary date from the last acquisition by each Partnership.
The Insurance Policies limit CNA's obligation to pay any party other than
Insured I and II, respectively, and subject to the terms of each of the
policies, only after the tenth anniversary of the date each Partnership
purchased its last property. Therefore the Related General Partners have
determined that in connection with the Consolidation, the Partnership status of
Insured I and II must be maintained. See "--Ownership Structure."
Residential Properties
Upon consummation of the Consolidation and assuming Summit Preferred
participates in the Consolidation, the Company will hold interests (the
"Preferred Equity Investments") in two operating partnerships (the "Pinehurst
Partnership" and the "Chateau Creste Partnership" and, together, the "Operating
Partnerships"), each of which owns a multi-family residential garden apartment
property (the "Pinehurst Property" and the "Chateau Creste Property,"
respectively). TCR-Pinehurst Limited Partnership (the "Pinehurst Partnership")
owns the Pinehurst Property and the Dominion Totem Park Limited Partnership (the
"Chateau Creste Partnership") owns the Chateau Creste Property.
The initial interest in the Pinehurst Partnership was acquired during 1987.
In 1989 Summit Preferred made an additional investment in the Pinehurst
Partnership in connection with the second phase of development of the Pinehurst
Property. The Pinehurst Property, located in Kansas City, Missouri, contains 146
apartments. The Pinehurst Property was approximately 97% occupied as of December
31, 1996. Partnership Monitoring Corporation, an affiliate of Related, is now
the general partner of the Pinehurst Partnership, having assumed such
obligations upon the withdrawal of the original general partner. See
"--Pinehurst Partnership" below.
The Preferred Equity Investment in the Chateau Creste Partnership was
acquired during 1988. The Chateau Creste Property, located in Kirkland,
Washington, contains 90 apartments and was approximately 98% occupied as of
December 31, 1996. Dominion Chateau Creste Limited Partnership is the general
partner of the Chateau Creste Partnership.
The two Preferred Equity Investments described above provide approximately
$593,522 (4.0%) of the Company's pro forma total revenues for the nine months
ended December 31, 1996.
The following is certain data with respect to the Preferred Equity
Investments:
<TABLE>
<CAPTION>
Apartment Annualized
Name, Type Number of Units Occupied Preferred
of Property Purchase Date Apartment at Return at Preferred Equity
and Location Price Purchased Units December 31, 1996 December 31, 1996 Return %
- -------------------------- ------------ ----------- ----------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Chateau Creste Apartment $4,149,585 9/1/88 90 98% 399,438 9.625%
Complex
Kirkland, WA
Pinehurst Apartment $5,749,425 10/15/87 96 97% 372,913 6.48%
Complex
Kansas City, MO
</TABLE>
Pinehurst Partnership. The Preferred Equity Investment in the Pinehurst
Partnership will entitle the Company to a preferred equity return (a "Preferred
Equity Return") of 8.8% per annum on the initial investment ($3,799,620) in the
Pinehurst Partnership and 9.85% per annum on the additional investment in the
Pinehurst Partnership ($1,949,805). In 1990, the Preferred Equity Return was not
paid in full by the Pinehurst Partnership resulting in a default and the
withdrawal of the original general partner. Partnership Monitoring Corporation,
a Related affiliate and the special limited partner of the Pinehurst
Partnership, assumed the general partnership obligations. The Pinehurst
Partnership since that time has made and continues to make payments from 100% of
net cash flow toward payment of its preferred return. Such payments currently
approximate an annual return of 6.48%. As a result, the Preferred Equity Returns
have been and are expected to continue to be less than originally anticipated.
These Preferred Equity Returns are cumulative and non-interest bearing. The
cumulative, unrecorded and undistributed Preferred Equity Returns from the
Pinehurst Partnership totaled $1,304,103 at December 31, 1996. These Preferred
Equity Returns are payable from excess cash flow or proceeds from a sale or
refinancing of the Pinehurst Property.
Chateau Creste Partnership. The Preferred Equity Interest in the Chateau
Creste Partnership will entitle the Company to a guaranteed Preferred Equity
Return of 9.625% per annum on its initial cash contribution of $4,149,585. As of
December 31, 1996, all Preferred Equity Returns had been paid by the Chateau
Creste Partnership.
83
<PAGE>
Participating FHA Co-Insured Mortgage Loans
Upon consummation of the Consolidation and assuming Eagle participates in
the Consolidation, the Company will hold three first mortgage and equity loans
(the "Mortgages"). The following table sets forth certain information regarding
the Mortgages and the properties (the "Developments") securing such Mortgages:
<TABLE>
<CAPTION>
Original Original Interest
Funding Mortgage Equity Total Carrying Rate on
Closing Completion Loan Loan Loan Value Mortgage Maturity
Project Date Date Amount Amount Amount as of 12/31/96 Loan(2) Date(3)
- -------------------- ---------- ------------ ------------- ------------ ------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cross Creek
Apartments
Charlotte, NC(1) 06/10/88 2/1/91 $17,494,100 $1,783,900 $19,278,000 $17,106,744 8.95% 1/1/2030
Weatherly Walk
Apartments
Fayetteville, GA 08/18/88 12/5/89 $ 7,772,500 $ 895,200 $ 8,667,700 $ 7,553,454 8.95% 11/1/2029
Woodgate Manor
Gainesville, FL(1) 12/12/88 12/13/88 $ 3,110,300 $ 339,700 $ 3,450,000 $ 2,963,056 8.95% 1/1/2024
------------ ----------- ------------ ------------
TOTALS $28,376,900 $3,018,800 $31,395,700 $27,623,254
============ =========== ============ ============
</TABLE>
- --------------
(1) The general partner interest of the project is held by an affiliate of the
Related General Partner.
(2) Includes a servicing fee of 0.07% paid by the developer to Related
Mortgage Corporation (an affiliate of the Related General Partner);
however, does not include additional interest which may be payable. The
Equity Loans are non-interest bearing.
(3) The Company may call for prepayment of the total loan at any time after
the tenth anniversary of the date the mortgage loan funding was completed,
subject to termination of FHA insurance.
As of December 31, 1996, the aggregate outstanding principal balance of the
Mortgages was $27,662,905.
The following table sets forth the interest income from the Mortgages as a
percentage of the Company's pro forma total revenues for the year ended December
31, 1996, excluding equity gains (losses).
December 31, 1996
------------------
Cross Creek 10%
Weatherly Walk 4%
Woodgate Manor 2%
On January 31, 1994 an equity and mortgage loan secured by the Tivoli Lakes
Apartments was paid in full and the proceeds therefrom ($12,413,000) were
distributed to the BUC$holders of Eagle.
Structure of Mortgage Loans and Equity Loans
Co-Insurance. All base interest and initially at least 90% in the aggregate
of the principal of the Mortgages are co-insured by the Federal Housing
Administration (the "FHA") (80% of the 90%) and Related Mortgage Corporation, an
affiliate of the Related General Partner (20% of the 90%). The remaining 10% of
Mortgage portfolio consists of uninsured noninterest-bearing equity loans made
directly to the same developers and secured by property partnership interests.
Base and Additional Interest. In addition to the stated interest rates, the
Company will be entitled to receive additional interest on the Mortgages from a
percentage of the annual net cash flow of the Development and from a percentage
of the residual proceeds upon sale or refinancing of the Development. The
Company accepted lower base interest rates than were otherwise available in the
market with respect to the Mortgages in exchange for the potential to receive
additional interest payments. The notes evidencing the Mortgages for Cross Creek
and Woodgate Manor bear interest at 8.95% with the potential to receive an
additional 0.84% to 1.68% on the Mortgages plus 30% of any remaining cash flow
from the Developments and 35% of capital proceeds. The Mortgage for Weatherly
Walk is structured in the same manner except the participation in remaining cash
flow and capital proceeds is up to 50%. Additional interest is due no later than
upon prepayment or other satisfaction of the Mortgages or sale of the
Developments. The receipt of additional interest is dependent upon the economic
performance of the underlying Developments. Additional interest is not insured
by the FHA, or any private mortgage lender.
Term. The Company may call for prepayment of the total loan at any time
after the tenth anniversary of the date the mortgage loan funding was completed.
In order to call for prepayment, the Company would be required to terminate the
mortgage insurance contract with FHA (and/or the coinsurer) not later than the
accelerated payment date. Since the exercise of such option would be at the
Company's discretion, it is intended to be exercised only where the Company
determines that the value of the Development has increased by an amount which
would justify accelerating payment in full and assuming the risks of foreclosure
if the mortgagor failed to make the accelerated payment.
84
<PAGE>
Cross Creek Guarantee
In prior years, Eagle utilized $3,060,000 of an unsecured credit facility
to advance funds in the form of a loan to Walsh/Cross Creek L.P. (the "Cross
Creek Loan") to enable it to complete construction and to fund operating
deficits. On February 7, 1994, the Company used a portion of the proceeds from
the Tivoli Lakes repayment to fully repay its outstanding debt under the credit
facility of $2,837,553; however, the Cross Creek Loan remains outstanding.
Stephen M. Ross, who holds a majority interest in the Related General Partner,
has guaranteed repayment of the principal and interest on the Cross Creek Loan
(as amended, the "Cross Creek Guarantee"), subject to certain conditions
contained in the Cross Creek Guarantee, as follows: (i) the performance of all
obligations for the payment of interest on the Cross Creek Loan when due in
accordance with documentation evidencing the Cross Creek Loan; (ii) the payment
of principal on the Cross Creek Loan on or before December 31, 2000; (iii) the
repayment on or before December 31, 2000 of the $1,783,900 equity loan
(currently recorded at zero) previously made to the original developer of the
Cross Creek property; and (iv) the payment when due of interest and principal at
an interest rate of 8.95% of the $17,494,100 first mortgage loan previously made
to the original developer.
Description of Existing Indebtedness
Upon consummation of the Consolidation and assuming Insured I and Insured
II participate in the Consolidation, the Company will (i) assume an aggregate of
approximately $7,064,000 in debt of such Partnerships, and (ii) incur
approximately $1,205,000 of indebtedness to finance the Consolidation Expenses.
The aggregate indebtedness will represent approximately 7.8% of the Company's
Total Market Value upon consummation of the Consolidation.
New York Life Loan. Approximately $5,353,530 of the Company's aggregate
indebtedness represents amounts due to New York Life Insurance Company ("New
York Life") as of December 31, 1996 in respect of a note issued by Insured I in
favor of New York Life which bears interest at a fixed interest rate of 9.25%
and is payable in equal monthly installments of principal and interest in the
amount of $55,984 until June 10, 2000, at which time the balance of principal,
together with any unpaid interest, is due.
Principal Mutual Loan. Approximately $1,380,830 of the Company's
indebtedness represents amounts due to Principal Mutual Life Insurance Company
("Principal Mutual") as of December 31, 1996 in respect of a note issued by
Insured II in favor of Principal Mutual on July 29, 1996, which bears interest,
for its initial 5 year term, at a fixed interest rate of 7.03% per annum,
payable in equal monthly installments of interest and principal in the amount of
$8,147 (based on a 13.5-year amortization schedule). The loan has an initial
term of 5 years, with two renewal option periods with final maturity on January
1, 2010.
Consolidation Expenses Loan. The Company expects to borrow sufficient funds
to pay the Consolidation Expenses of approximately $1,205,000 pursuant to a loan
agreement, the terms and provisions of which are currently being negotiated by
the Advisor. The Related General Partners expect that the principal terms of
such loan will be as follows:
Principal amount $1,205,000
Origination date Consummation of the Consolidation
Term / Maturity Assumed 5 years
Interest Rate Assumed 9.0%
Amortization None
The pro forma financial statements were prepared based upon the foregoing
assumptions.
Internal Growth
The Partnerships originally acquired for investment new or recently
improved substantially fully leased neighborhood shopping centers, preferred
equity interests in new apartment properties and FHA insured and co-insured
mortgages on stabilized or to-be-built apartment properties. The Related General
Partners believe that there are growth opportunities available for those able to
acquire existing shopping centers and apartments which need redevelopment and
repositioning. See "RISK FACTORS--Risks Associated with Renovation and
Redevelopment." The Consolidation is expected to provide a capital structure and
increased efficiency of portfolio management which will allow the Company to
take advantage of such opportunities.
The Company will pursue internal growth by constantly reviewing the
investments in its portfolio and selling appropriate assets and mortgage loans
and reinvesting the proceeds consistent with its investment objectives and with
REIT restrictions. Assets which have matured to a point at which future growth
is limited may be sold and replaced by assets with comparable cash flow but
higher growth potential.
Business and Investment Objectives and Operating Strategies
The Company's principal business and investment objectives will be to (i)
maximize the value of the Shares, and (ii) provide current income for
distributions and increase distributions per Share to Stockholders by generating
distributable cash flow through acquisition and ownership (either directly or
through subsidiary partnerships) of a diversified portfolio of retail and
residential properties and participating FHA insured and co-insured mortgages
consistent with the objectives of the Participating Partnerships. By achieving
these objectives, the Company will seek to increase Stockholder value over time.
The Company intends to achieve these objectives by capitalizing on the
financial, development and management expertise of Related, and through the
following:
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[bullet] The Company will limit indebtedness to 50% of the Company's Total
Market Value (measured as of the date such indebtedness is incurred).
[bullet] The Company will seek to fund future real estate investments either
through issuance of new shares of Common Stock, future equity
offerings or the issuance of debt, subject to the debt limit
described above.
[bullet] The Company intends to take advantage of economies of scale which
have the potential to increase profitability as the investment
portfolio grows.
[bullet] The Company will seek to enhance its market position and existing
real estate industry relationships in order to improve its access to
new investment opportunities.
The Board of Directors, in its sole discretion, may change the Company's
investment objectives as it deems appropriate and in the best interests of the
Shareholders, providing the Company with flexibility to adjust its investment
objectives in a timely manner when faced with changing market conditions and
growth opportunities. Prior to its changing any of the Company's investment
objectives, the Board of Directors will consider, among other factors,
Shareholder expectations, changing market trends, the expertise and the ability
of the Manager and the relative risks and rewards associated with any such
change. Also see "RISK FACTORS--Board of Directors May Change Investment
Policies."
The financing of additional investment activity by the Company may be
funded through public or private offerings of equity securities in the Company,
by additional borrowings by the Company (subject to the debt limit) through
various means, including public or private offerings of convertible or
nonconvertible debt securities or loans, or, subject to compliance with REIT
distribution requirements, by the use of cash flow from operations or proceeds
from the sale of assets and the repayment of mortgages (including the assets and
mortgages acquired pursuant to the Consolidation). The Company may offer shares
of its stock in exchange for assets which conform to its investment standards
and to repurchase or otherwise acquire its stock or other securities. The
Company may also invest in the securities of other real estate investment
entities for the purpose of exercising control.
Distribution Policy
The Company will pay distributions to Stockholders if, as and when
authorized by its Board of Directors out of assets legally available therefor.
The Company intends to pay distributions on a quarterly basis, commencing in the
first fiscal quarter after the consummation of the Consolidation. Cash available
for distribution does not represent cash generated from operating activities
determined in accordance with GAAP, is not necessarily indicative of cash
available to fund all of the Company's cash needs and should not be considered
as an alternative to net income as an indication of the Company's performance or
to cash flows as a measure of liquidity. The Company expects to maintain its
initial distribution rate for a period of twelve months following the
Consolidation, unless actual results of operations, economic conditions or other
factors differ materially from assumptions used in its estimate. However, in
setting the level of Stockholder distributions, the Board of Directors will take
into account, among other things, the Company's financial performance, need of
funds for working capital reserves, capital improvements and new investment
opportunities. Also, under the Maryland GCL, a dividend or other distribution
may not be made if after giving effect to it (i) the corporation would not be
able to pay its debts as they become due in the usual course of business or (ii)
the corporation's total assets would be less than the corporation's total
liabilities plus (unless the charter of the corporation provides otherwise,
which the Charter does not) the amount that would be needed, if the corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of stockholders whose preferential rights
upon dissolution are superior to those receiving the distribution. Unlike the
Partnerships, the Company is not required to distribute net proceeds from the
sale or refinancing of assets or repayment of mortgages.
To qualify for the beneficial tax treatment accorded to a REIT, the Company
must pay annual distributions equal to at least 95% of its REIT taxable income.
The Company's REIT taxable income is calculated without reference to its cash
flow. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the Company--Annual
Distribution Requirements." The Company believes it will have enough available
cash to pay distributions at a level necessary to maintain REIT status.
Investment Policies
Future real estate investment opportunities will undergo an underwriting
process to be established and implemented by the Advisor which will evaluate
reasonably anticipated levels of net cash and ultimate sales value, based on
evaluation of a range of factors including, but not limited to, (i) rental
levels under existing leases; (ii) financial strength of tenants; (iii) levels
of expense required to maintain operating services and routine building
maintenance at competitive levels; (iv) levels of capital expenditure required
to maintain the capital components of the property in good working order and in
conformity with building codes, health, safety and environmental standards, and
the like. The Advisor will conduct physical site inspections of each property
and will also engage outside professionals to independently inspect properties
prior to acquisition. Outside professionals will be engaged to conduct Phase I
Environmental Assessments for all investments.
The Company will emphasize investments in retail and residential real
properties and participating FHA insured and co-insured mortgages consistent
with maintaining its qualification as a REIT. Based upon current market
conditions, the Advisor anticipates that the Com-
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pany's acquisition strategy will initially focus on direct equity investments in
retail properties and in particular shopping centers. Such focus may change
based on future market conditions and other factors.
While the Company intends to initially emphasize equity real estate
investments, it may, in its discretion, invest in mortgages and other real
estate interests. Mortgage investments will initially be comprised of the same
types of loans made by Eagle (i.e. government insured and co-insured loans) but
may also include other types of loans. The Company's investment in mortgages may
include investments as a strategy for ultimately acquiring a property, and might
also include the purchase of non-performing loans at a discounted price. Subject
to the percentage of ownership limitations and gross income tests necessary for
REIT qualification, the Company may also invest in securities of entities
engaged in real estate activities or securities of other issuers.
As is the case under the Partnership Agreements, the Company may invest in
mortgages on, or lend to, developments owned or acquired by affiliates of
Related and, although the Company is not currently permitted to invest in or
purchase properties owned by affiliates of Related, the Independent Directors
may vote to change such policy. Furthermore, joint ventures and similar business
ventures are permitted under the Charter and Bylaws, provided that the Company
owns a majority interest or otherwise has veto rights over, or control of, major
decisions. Finally, the Company will be specifically permitted to make forward
loan commitments to take advantage of additional fees that can be earned by the
Company.
Financing Policies
The Charter will limit the Company's ability to incur debt in excess of 50%
of the Company's Total Market Value (measured as of the date such debt is
incurred).
Disposition of Properties
It is not the intention of the Company to sell any particular property or
asset upon consummation of the Consolidation. However, the Company may consider
selling one or more of the properties or other assets in the event circumstances
should arise which would make such sale advisable.
Policies with Respect to Other Activities
The Company has the authority to offer its Common Stock or other equity or
debt securities (including limited partnership interests in Insured I and
Insured II) in exchange for property and to repurchase or otherwise reacquire
Shares or any other securities and may engage in such activities in the future
although it has no present intention to do so. The Company also may enter into
joint ventures and make loans to such joint ventures in which it may participate
in the future. The Company will not engage in trading, underwriting or the
agency distribution or sale of securities of other issuers.
At all times, the Company intends to make investments in such a manner as
to be consistent with the requirements of the Code to qualify as a REIT unless,
because of circumstances or changes in the Code (or in the Treasury
Regulations), the Board of Directors determines to terminate the Company's
status as a REIT. In addition, the Company intends to operate its business in a
manner that will not require the Company to register under the Investment
Company Act of 1940.
Change in Policies
The Company's Board of Directors will determine its investment and
financing policies, its growth strategy, and its debt, capitalization,
distribution and operating policies. The Board of Directors of the Company will
review the policies of the Company at least annually to determine that the
policies being followed by the Company at any time are in the best interests of
the Company's Stockholders. Although the Board of Directors has no present
intention to revise or amend these strategies and policies, the Board of
Directors may do so at any time without a vote of the Company's Stockholders
(except with respect to the debt limitation of 50% of Total Market Value). The
methods of implementing the Company's investment policies may vary as new
investment and financing techniques are developed or for other reasons.
Employees
The Company will not have any paid employees (although it will have
officers who will be able to act on behalf of the Company as required). The
Company will retain the Advisor to manage the Company's day-to-day affairs,
oversee the acquisition or disposition of investments, and manage the assets of
the Company. The Advisor has a fiduciary duty to the Company. The Company's
officers will initially also be officers of the Advisor and will receive
compensation from the Advisor and not the Company. See "MANAGEMENT--
The Advisor."
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OBJECTION PROCEDURES
Time of Objecting and Record Date
BUC$holders holding Units as of the Record Date (i.e., December 24, 1996)
have until the Objection Deadline (i.e., August 18, 1997) to object to the
Consolidation.
As of the Record Date, the following number of Units were held of record by
the number of BUC$holders indicated below:
Number of
Objecting Units
Required for a
Number of Partnership Not
Number of Units Held to Participate in
Partnership BUC$holders of Record Consolidation
- ---------------------- ------------- ------------ ------------------
Insured I 7,886 4,000,000 1,333,333
Insured II 1,900 1,005,623 335,208
Summit Preferred 950 657,389 219,130
Eagle 3,970 2,641,110 880,370
The number of Units entitled to object to the Consolidation is equivalent
to the number of Units held of record at the Record Date. The Partnership
Agreements give the BUC$holders in each Partnership the power, by a majority
vote, to approve the Consolidation and/or replace a General Partner. However, as
structured by Class Counsel and the Related General Partners, approval of the
Consolidation is in the sole discretion of the Court. In this regard, the
Court's Order preliminarily approving the Settlement Stipulation provides that
unless the BUC$holders of a Partnership holding more than 33-1/3% of the Units
object to the participation of such Partnership in the Consolidation, such
Partnership will participate in the Consolidation if the Consolidation is
approved by the Court. See "THE CONSOLIDATION AND RELATED TRANSACTIONS--The
Consolidation--Objections Required to Prevent Consolidation."
Equitable Class Members may not individually opt out of the Equitable
Settlement or the Consolidation. If, however, either (a) Unitholders holding 1/3
or more of the Units of a particular Partnership object to that Partnership
participating in the Consolidation, or (b) the Court does not approve of any
particular Partnership participating in the Consolidation, then that Partnership
will not participate in the Consolidation.
Objection Notice
BUC$holders that wish to object to the Consolidation should send the
Objection Notice attached as Appendix D to Related at 625 Madison Avenue, New
York, New York 10022 as soon as possible, but in no event later than the
expiration of the Objection Deadline. A BUC$holder who objects to his
Partnership's participation in the Consolidation must deliver notice of such
objection to the Related General Partners on or prior to the Objection Deadline.
The Court will consider any objection or comment of the BUC$holders in
determining whether to approve the Related Settlement, provided that any such
objection or comment is received on or before the Objection Deadline.
BUC$holders also have the right to object at the Fairness Hearing whether or not
they have submitted an Objection Notice in connection with this Solicitation
Statement. See "FAIRNESS--Material Factors Underlying Belief as to Fairness -
Negotiation of Related Settlement; Court Approval."
The Related General Partners and Class Counsel recommend that BUC$holders
not object to the Consolidation. Pursuant to the P-B Purchase Agreement, the P-B
General Partner has agreed that with respect to any Units held by it or its
affiliates (less than 1% of the aggregate Units outstanding as of the date of
this Solicitation Statement), it would not object to the Consolidation.
Revocability of Objection
BUC$holders may revoke their objection at any time prior to the Objection
Deadline by mailing a revocation of the Objection Notice to the address above
(which revocation must be received by Related on or prior to the Objection
Deadline) or by appearing, in person, at the Fairness Hearing and revoking such
objection before the Court.
No Right of Appraisal
BUC$holders of a Participating Partnership who object to the Consolidation
will not be entitled to dissenters' or appraisal rights under the Partnership
Agreements. Such rights, when they exist, give the holders of securities the
right to surrender such securities for an appraised value in cash, if they
oppose a merger or similar reorganization. No such rights will be provided by
the Partnerships or the Company in connection with the Consolidation.
Information Services
The Related General Partners and their officers, directors and employees
may assist in providing information to BUC$holders in connection with any
questions they may have with respect to this Solicitation Statement and the
objection procedures. Such persons and entities will be reimbursed by the
Partnerships for out of pocket expenses in connection with such services in
accordance with the procedures described under "THE CONSOLIDATION--Consolidation
Expenses." Arrangements will also be made with brokerage houses and other
custodians, nominees and fiduciaries for forwarding solicitation materials to
the beneficial owners of Units held of record by such persons, and the
Partnership will reimburse such persons for their reasonable expenses incurred
in that connection.
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DESCRIPTION OF COMMON STOCK
General
The Charter will authorize the issuance of up to 50,000,000 shares of
Common Stock with a par value of $.01 per share. There are presently 1,000
shares of Common Stock issued and outstanding, all of which are held by Related,
which purchased the shares at a price of $1.00 per share when the Company was
organized. Upon consummation of the Consolidation, all such outstanding shares
held by Related will be repurchased by the Company at a price of $1.00 per
share. The number of Shares to be issued in connection with the Consolidation
depends upon the number of Partnerships that approve and participate in the
Consolidation. Assuming 100% Participation in the Consolidation, 8,097,539
Shares will be issued and outstanding after the Consolidation. In addition,
Conversion Option Shares will be available to be issued to the Related General
Partners and the Advisor upon exercise of the Conversion Option. See "Conversion
Option," below. Under Maryland law, stockholders generally are not liable for
the Company's obligations solely as a result of their status as stockholders.
The holders of shares of Common Stock are entitled to one vote per share on
all matters voted on by Stockholders, including election of directors, and,
except as provided in the Charter in respect of any other class or series of
stock, the holders of such shares exclusively possess all voting power. The
Charter does not provide for cumulative voting in the election of directors.
Subject to any preferential rights of any outstanding shares or series of stock,
holders of shares of Common Stock are entitled to receive distributions, when
and as authorized by the Board of Directors, out of funds legally available
therefor. Upon any liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata all assets of the
Company available for distribution to its Stockholders after payment of, or
adequate provisions for, all known debts and liabilities of the Company. All
shares of Common Stock now outstanding are, and the Shares of Common Stock
offered in the Consolidation will be when issued in accordance with the terms
and conditions of the Consolidation, fully paid and nonassessable. The holders
thereof will not have preemptive rights to subscribe to additional stock or
securities issued by the Company at a subsequent date.
The Charter will also authorize the issuance of up to 5,000,000 shares of
preferred stock and authorizes the Board of Directors to classify or reclassify
any unissued shares of stock, to provide for the issuance of shares in other
classes or series, including preferred stock in one or more series, to establish
the number of shares in each class or series and to fix the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
distributions, qualifications or terms or conditions of redemption of such class
or series. The Company has no present intention to issue shares of any class or
series other than Common Stock.
Listing, Price and Trading
There is currently no established trading market for the Common Stock, and
prior to the Consolidation, the Common Stock will not be listed on any national
securities exchange or quoted on the Nasdaq National Market. Therefore, no sale
or bid price information is available with respect to the Common Stock. The
Company will meet the round lot distribution and market value standards
established by the American Stock Exchange (or other national exchange or market
on which the Common Stock is listed). The Company will appoint a transfer agent
and registrar of the Common Stock prior to the Effective Date.
Shares received by Participating BUC$holders in the Consolidation will be
freely transferable, except for Shares received by Persons who may be deemed to
be affiliates of the Company under the Securities Act and except for certain
limitations in the Charter that are intended to allow the Company to qualify as
a REIT. Persons who may be deemed to be affiliates of the Company after the
Consolidation generally include individuals or entities that control, are
controlled by, or are under common control with the Company, and may include
certain principal Stockholders of the Company. Persons who are affiliates will
be permitted to sell their Shares only pursuant to an effective registration
statement under the Securities Act or an applicable exemption from registration
under the Securities Act. Transfers which cause the Ownership Limit to be
exceeded will otherwise be null and void. See "Restrictions on Ownership and
Transfer" below for a description of the limitations on the transfer and
ownership of Shares of Common Stock.
Restrictions on Ownership and Transfer
For the Company to qualify as a REIT under the Code, its Shares must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of twelve months (other than the first year for which an election to be a
REIT has been made) or during a proportionate part of a shorter taxable year.
Also, not more than 50% of the value of the outstanding shares of stock may be
owned, directly or indirectly, by five or fewer individuals during the last half
of a taxable year (other than the first year for which an election to be a REIT
has been made).
Because the Board of Directors believes it is at present essential for the
Company to qualify as a REIT, the Charter, subject to certain exceptions,
contains certain restrictions on the number of Shares of the Company that a
person may own. The Charter prohibits any person from acquiring or holding,
directly or indirectly, Shares in excess of the Ownership Limit of 9.9% ("Excess
Common Stock").
The Company's Board of Directors, in its sole discretion, may exempt a
person from the Ownership Limit (an "Exempted Holder"). However, the Board may
not grant such an exemption to any person whose ownership, direct or indirect,
of in excess of 9.9% of the value of the outstanding Shares of the Company would
result in the Company being "closely held" within the meaning of Section 856(h)
of the Code or otherwise would result in the Company failing to qualify as a
REIT. In order to be considered by the Board as an Exempted
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Holder, a person also must not own, directly or indirectly, an interest in a
tenant of the Company (or a tenant of any entity owned or controlled by the
Company) that would cause the Company to own, directly or indirectly, more than
a 9.9% interest in such a tenant. The person seeking an exemption must represent
to the satisfaction of the Board that it will not violate the two aforementioned
restrictions. The person also must agree that any violation or attempted
violation of any of the foregoing restrictions will result in the automatic
transfer of the Shares causing such violation to the Trust (as defined below).
Prior to treating a person as an Exempted Holder, the Board of Directors may
require a ruling from the Internal Revenue Service or an opinion of counsel, in
either case in form and substance satisfactory to the Board of Directors in its
sole discretion, in order to determine or ensure the Company's status as a REIT.
The Company's Charter further prohibits (a) any person from beneficially or
constructively owning Shares of the Company that would result in the Company
being "closely held" under Section 856(h) of the Code or otherwise cause the
Company to fail to qualify as a REIT and (b) any person from transferring Shares
of the Company if such transfer would result in Shares of the Company being
owned by fewer than 100 persons. Any person who acquires or attempts or intends
to acquire beneficial or constructive ownership of Shares of the Company that
will or may violate any of the foregoing restrictions on transferability and
ownership, or any person who would have owned Shares of the Company that
resulted in a transfer of shares to the Trust, is required to give notice
immediately to the Company and provide the Company with such other information
as the Company may request in order to determine the effect of such transfer on
the Company's status as a REIT. The foregoing restrictions on transferability
and ownership will not apply if the Board of Directors determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT.
If any transfer of Shares of the Company occurs which, if effective, would
result in any person beneficially or constructively owning Shares of the Company
in excess or in violation of the above transfer or ownership limitations (a
"Prohibited Owner"), then that number of Shares of the Company the beneficial or
constructive ownership of which otherwise would cause such person to violate
such limitations (rounded to the nearest whole Share) shall be automatically
transferred to a trust (the "Trust") for the exclusive benefit of one or more
charitable beneficiaries (the "Charitable Beneficiary"), and the Prohibited
Owner shall not acquire any rights in such shares. Such automatic transfer shall
be deemed to be effective as of the close of business on the Business Day (as
defined in the Charter) prior to the date of such violative transfer. Shares
held in the Trust shall be issued and outstanding Shares of the Company. The
Prohibited Owner shall not benefit economically from ownership of any Shares
held in the Trust, shall have no rights to dividends and shall not possess any
rights to vote or other rights attributable to the Shares held in the Trust. The
trustee of the Trust (the "Trustee") shall have all voting rights and rights to
dividends or other distributions with respect to Shares held in the Trust, which
rights shall be exercised for the exclusive benefit of the Charitable
Beneficiary. Any dividend or other distribution paid prior to the discovery by
the Company that Shares have been transferred to the Trustee shall be paid by
the recipient of such dividend or distribution to the Trustee upon demand, and
any dividend or other distribution authorized but unpaid shall be paid when due
to the Trustee. Any dividend or distribution so paid to the Trustee shall be
held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no
voting rights with respect to Shares held in the Trust and, subject to Maryland
law, effective as of the date that such Shares have been transferred to the
Trust, the Trustee shall have the authority (at the Trustee's sole discretion)
(i) to rescind as void any vote cast by a Prohibited Owner prior to the
discovery by the Company that such shares have been transferred to the Trust and
(ii) to recast such vote in accordance with the desires of the Trustee acting
for the benefit of the Charitable Beneficiary. However, if the Company has
already taken irreversible corporate action, then the Trustee shall not have the
authority to rescind and recast such vote.
Within 20 days of receiving notice from the Company that Shares of the
Company have been transferred to the Trust, the Trustee shall sell the Shares
held in the Trust to a person, designated by the Trustee, whose ownership of the
shares will not violate the ownership limitations set forth in the Company's
Charter. Upon such sale, the interest of the Charitable Beneficiary in the
Shares sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the Prohibited Owner and to the Charitable Beneficiary as follows.
The Prohibited Owner shall receive the lesser of (i) the price paid by the
Prohibited Owner for the Shares or, if the Prohibited Owner did not give value
for the Shares in connection with the event causing the Shares to be held in the
Trust (e.g., a gift, devise or other such transaction), the Market Price (as
defined in the Charter) of such Shares on the day of the event causing the
Shares to be held in the Trust and (ii) the price per Share received by the
Trustee from the sale or other disposition of the Shares held in the Trust. Any
net sale proceeds in excess of the amount payable to the Prohibited Owner shall
be paid immediately to the Charitable Beneficiary. If, prior to the discovery by
the Company that Shares have been transferred to the Trust, such Shares are sold
by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on
behalf of the Trust and (ii) to the extent that the Prohibited Owner received an
amount for such shares that exceeds the amount that such Prohibited Owner was
entitled to receive pursuant to the aforementioned requirement, such excess
shall be paid to the Trustee upon demand.
In addition, Shares of the Company held in the Trust shall be deemed to
have been offered for sale to the Company, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that resulted
in such transfer to the Trust (or, in the case of a devise or gift, the Market
Price at the time of such devise or gift) and (ii) the Market Price on the date
the Company, or its designee, accepts such offer. The Company shall have the
right to accept such offer until the Trustee has sold the Shares held in the
Trust. Upon such a sale to the Company, the interest of the Charitable
Beneficiary in the shares sold shall terminate and the Trustee shall distribute
the net proceeds of the sale to the Prohibited Owner.
All certificates representing shares of Common Stock and preferred stock
will bear a legend referring to the restrictions described above.
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Every owner of more than 5% (or such lower percentage as required by the
Code or the regulations promulgated thereunder) of all classes or series of the
Company's stock, including shares of Common Stock, within 30 days after the end
of each taxable year, is required to give written notice to the Company stating
the name and address of such owner, the number of shares of each class and
series of stock of the Company which the owner beneficially owns and a
description of the manner in which such shares are held. Each such owner shall
provide to the Company such additional information as the Company may request in
order to determine the effect, if any, of such beneficial ownership on the
Company's status as a REIT and to ensure compliance with the aggregate stock
Ownership Limit. In addition, each stockholder shall upon demand be required to
provide to the Company such information as the Company may request, in good
faith, in order to determine the Company's status as a REIT and to comply with
the requirements of any taxing authority or governmental authority or to
determine such compliance.
These ownership limits are included for the purpose of maintaining the
Company's qualifications as a REIT, but may also have the effect of delaying,
deferring or preventing a transaction or a change in control of the Company that
might involve a premium price for the Common Stock or otherwise be in the best
interest of the stockholders.
Conversion Option
The Advisor and the Related General Partners will own limited partnership
interests representing .75% and 1.50% of the Partnership interests in Insured I
and Insured II, respectively. This interest will carry certain conversion rights
under which the Related General Partners and the Advisor can convert the Insured
LP Interests into an aggregate of 46,837 Shares. In order to preserve the
partnership status of Insured I and Insured II, the Advisor will not be
permitted to convert all of the Insured LP Interests.
SHARES ELIGIBLE FOR FUTURE SALE
Assuming 100% Participation upon the completion of the Consolidation, the
Company will have outstanding (or reserved for issuance upon conversion of the
Insured LP Interests) 8,097,539 Shares of Common Stock. As part of the Equitable
Settlement, Class Counsel will have the right to petition the Court for
additional attorneys' fees in an amount to be determined in the Court's sole
discretion but which will be proposed to be 25% of the increase, if any, as of
the Anniversary Date in the capitalization of the Company, based upon (i) the
difference between the trading prices of the Company's Shares on the Anniversary
Date and (ii) the trading prices of the Units and the asset values of the
Partnerships prior to the Effective Date. One-half of such fees, if any, will be
paid in the form of Restricted Securities (restricted only with respect to sale,
assignment, pledge or other transfer of such securities) and the remaining
one-half of such fees will be paid in the form of Unrestricted Securities. The
number of Counsel's Fee Shares issued shall be subject to a maximum amount not
to exceed 3.95% of the total number of shares of the Company's outstanding
Common Stock on the Anniversary Date. The Counsel's Fee Shares will be
distributed to Class Counsel quarterly in eight equal distributions commencing
thirty days after the Anniversary Date. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT--Security Ownership of Certain Beneficial
Owners," "RISK FACTORS--Risk and Other Adverse Factors Relating to the
Consolidation--Possible Dilutive Effect Arising from Shares Available for Future
Sale."
In addition, pursuant to the Incentive Stock Option Plan, in any calendar
year the Compensation Committee will have the authority (subject to the Company
meeting certain performance standards) to issue options to purchase, in the
aggregate, that number of shares of Common Stock which is equal to 3% of the
Shares outstanding as of December 31 of the immediately preceding calendar year
(or, in the initial year, as of the Effective Date), provided, that the
Compensation Committee may only issue, in the aggregate, options to purchase a
maximum number of shares of Common Stock over the life of the Incentive Stock
Option Plan equal to 10% of the Shares outstanding on the Effective Date. See
"MANAGEMENT--Description of Incentive Stock Option Plan."
The Related General Partners received a letter from the Commission in which
it took a "no-action" position to the effect that the public resale of Shares by
persons: (i) who are not deemed to be affiliates of the Partnerships prior to
the consummation of the Consolidation or the Company after consummation of the
Consolidation without registration under the Securities Act and compliance with
Rules 144 or 145(c) and (d) under the Securities Act; (ii) who are affiliates of
the Partnership(s) prior to consummation of the Consolidation but who are not
affiliates of the Company following consummation of the Consolidation in
compliance with Rule 145(d)(1) (without regard to the holding period required by
Rule 144(d) under the Securities Act, although such persons may not "tack" the
holding period of their Units exchanged for Common Stock in connection with the
Consolidation); and (iii) who are affiliates of the Partnership(s) prior to
consummation of the Consolidation or affiliates of the Company following
consummation of the Consolidation in compliance with Rule 145(d)(1) but without
regard to the holding period requirement of Rule 144(d). Therefore, all of the
Common Stock, other than any Common Stock received by affiliates and shares
reserved for issuance to affiliates in connection with the Conversion Option
("Restricted Shares"), will be tradable without restriction under the Securities
Act, and affiliates of the Company may sell Restricted Shares without
registration in accordance with the exceptions provided by Rule 144(d) or Rule
145(d)(1) under the Securities Act.
Prior to the date of this Solicitation Statement, there has been no public
market for the Common Stock. The Common Stock will be approved for listing on
the American Stock Exchange (or other national exchange or market) upon official
notice of issuance prior to the consummation of the Consolidation. No prediction
can be made as to the effect, if any, that future issuances of Common Stock, or
the availability of Common Stock for the future sale, will have on the market
price prevailing from time to time. Sales of substantial
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amounts of Common Stock (including Shares issued upon the exercise of options),
or the perception that such sales may occur, could adversely affect prevailing
market prices of the Common Stock. See "RISK FACTORS--Risks and Other Adverse
Factors Relating to the Consolidation--No Prior Market for Common Stock; Market
Price May Decrease After Consolidation."
CERTAIN PROVISIONS OF MARYLAND LAW AND THE CHARTER AND BYLAWS
General
The following summary of certain provisions of Maryland law and the Charter
and Bylaws does not purport to be complete and is subject to and qualified in
its entirety by reference to Maryland law and the Charter and Bylaws for their
entire terms.
Certain provisions of the Charter and Bylaws described in this section
could delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interests.
Additional Classes and Series of Stock
The Charter authorizes the Board of Directors to classify or reclassify any
unissued shares of stock, to provide for the issuance of shares in other classes
or series of stock, to establish the number of shares in each class or series
and to fix the preferences, conversion and other rights, voting powers,
restrictions, limitations as to distributions, qualifications or terms or
conditions of redemption of such class or series. The Company believes that the
ability of the Board of Directors to issue one or more classes or series of
stock will provide the Company with increased flexibility in structuring
possible future financings and acquisitions, and in meeting other needs which
might arise. The additional classes or series, as well as the Common Stock, will
be available for issuance without further action by the Company's Stockholders,
unless such action is required by applicable law or the rules of the American
Stock Exchange. Although the Board of Directors has no intention at the present
time of doing so, it could issue a class or series that could, depending on the
terms of such class or series, delay, defer or prevent a transaction or a change
in control of the Company that might involve a premium price for holders of
Common Stock or otherwise be in their best interest.
Advance Notice of Director Nominations and New Business
The Bylaws of the Company provide that (i) with respect to an annual
meeting of Stockholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by Stockholders may be
made only (a) pursuant to the Company's notice of the meeting, (b) by the Board
of Directors, or (c) by a Stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws, and
(ii) with respect to special meetings of Stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of Stockholders, and nominations of persons for election to the Board of
Directors may be made only (a) pursuant to the Company's notice of the meeting,
(b) by the Board of Directors, or (c) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a Stockholder who
is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
The advance notice provisions of the Bylaws could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise.
Non-Applicability of Certain Statutory Anti-Takeover Provisions
The Charter contains provisions electing not to be governed by certain
provisions of the Maryland GCL (described below) which would tend to discourage
takeover efforts.
Business Combinations. Under the Maryland GCL, certain "business
combinations" (including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who beneficially owns
10% or more of the voting power of the corporation's shares or an affiliate of
the corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate thereof, are prohibited for five years after the most recent
date on which the Interested Stockholder became an Interested Stockholder.
Thereafter, any such business combination must be recommended by the Board of
Directors of such corporation and approved by the affirmative vote of at least
(i) 80% of the votes entitled to be cast by holders of outstanding voting shares
of the corporation and (ii) two-thirds of the votes entitled to be cast by
holders of outstanding voting shares of the corporation, other than shares held
by the Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other things, the corporation's
stockholders receive a minimum price (as defined in the Maryland GCL) for their
shares and in shares. These provisions of Maryland law do not apply, however, to
business combinations that are approved or exempted by the Board of Directors of
the Corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder, or if the corporation's original articles of
incorporation (as such term is defined in Section 3-601 of the Maryland GCL)
specifically elects not to be governed by these provisions. The Charter
specifically provides that any business combination between an Interested
Stockholder and the Company is exempt from these provisions. This provision of
the Charter can be changed only by an amendment to the Charter. Amendments to
the Charter must be approved by a majority of the Board of Directors present at
a meeting at which a quorum is present and by a Majority Vote of Stockholders.
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Control Share Acquisitions. The Maryland GCL provides that control shares
of a Maryland corporation ("Control Shares") acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares
owned by the acquiror or by officers or directors who are employees of the
corporation. Control Shares are voting shares which, if aggregated with all
other shares previously acquired by the acquiror, or in respect of which the
acquiror is able to exercise, or direct the exercise of, voting power, would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
of all voting power. Control Shares do not include shares the acquiring person
is then entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of Control Shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the Control Shares (except those for which voting rights for the Control
Shares, as of the date of the last Control Share acquisition by the acquiror or
of any meeting of stockholders at which the voting rights of such shares are
considered and not approved. If voting rights for Control Shares are approved at
a stockholders meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid by the
acquiror in the Control Share acquisition.
The Control Share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the articles of
incorporation or bylaws of the corporation.
The Charter contains a provision exempting from the control share
acquisition statute any and all acquisitions by any person of Common Stock of
the Company. The provision can be amended only by an amendment to the Charter
approved by a majority of the Board of Directors present at a meeting at which a
quorum is present and by a Majority Vote of Stockholders.
Amendment or Rescission of Exemptions. If the exemptions from the business
combination statute and the control share acquisition statute are amended or
rescinded, the provisions of these statutes could have the effect of delaying,
deferring or preventing a transaction of a change of control of the Company that
might involve a premium price for Shares or otherwise be in the best interest of
Stockholders.
Change of Control; Anti-Takeover Provisions
In addition to the Ownership Limit, which is deemed to be essential in
order to ensure the maintenance of REIT status and the Company's staggered Board
of Directors, the Charter and the Bylaws contain provisions that might have the
effect of delaying, deferring or preventing a transaction or a change of control
of the Company that might involve a premium price for the Shares or otherwise be
in the best interest of the Stockholders. See "COMPARISON OF RIGHTS OF
STOCKHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE PARTNERSHIPS--Anti-takeover
Provisions."
In addition, the Advisory Agreement cannot be terminated by the Company
prior to the fourth anniversary of the Effective Date, other than for Cause, and
the Company cannot liquidate prior to such anniversary date except upon a
recommendation of the Advisor and the Majority Vote of the Stockholders. After
the fourth anniversary of the Effective Date, the vote of the holders of 66-2/3%
of the Company's then-outstanding shares of Common Stock is required to approve
a liquidation of the Company that is not recommended by the Advisor and the
Majority Vote of the Stockholders is required to approve a liquidation of the
Company recommended by the Advisor. If for any reason, whether prior to or after
the fourth anniversary of the Effective Date, the Advisory Agreement is
terminated in accordance with its terms, the Company may liquidate upon the
Majority Vote of the Stockholders.
Amendment of Charter
The Charter may be amended by Majority Vote of Stockholders. The provisions
relating to the limitation of liability and indemnification may only be amended
prospectively. See "Indemnification and Limitation of Liability," below.
Number of Directors; Removal; Filling Vacancies
The Charter will provide for not less than three nor more than nine
Directors, one-third of whom must be independent directors (each, an
"Independent Director" and, collectively, "Independent Directors").
Initially, the Company will have five Directors, two of whom will be
Independent Directors whose appointment was approved by Class Counsel. The Board
of Directors will establish written policies on investments and borrowings and
will monitor the administrative procedures, investment operations and
performance of the Company and the Advisor to assure that such policies are
carried out. Until modified by the Directors, the Company will follow the
policies on investments and borrowings set forth in this Solicitation Statement.
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The Independent Directors will be responsible for reviewing the investment
policies of the Company not less often than annually and with sufficient
frequency to determine that the policies being followed are in the best
interests of the Stockholders.
A vacancy in the Board of Directors created by the death, resignation, or
incapacity of a Director or by an increase in the number of Directors (within
the limits referred to above) may be filled by the vote of a majority of the
remaining or other Directors (with respect to a vacancy created by the death,
resignation, or incapacity of an Independent Director, the remaining Independent
Directors shall nominate a replacement). A Director may resign at any time and
may be removed by the Majority Vote of Stockholders only for Cause prior to the
fourth anniversary of the Effective Date, and with or without Cause after such
anniversary. Independent Directors will be entitled to receive compensation for
serving as directors at the rate of $5,000 per year in cash and shares of Common
Stock having an aggregate value of $10,000, based on the fair market value on
the date of issuance, in addition to the expense reimbursement for attending
meetings. At the discretion of the Board of Directors, Independent Directors may
be granted additional cash compensation for serving on a committee of the Board
of Directors.
Pursuant to the terms of the Incentive Stock Option Plan, the Compensation
Committee may, subject to certain restrictions, grant options to members of the
Board of Directors to purchase Common Stock of the Company. See
"MANAGEMENT--Description of Incentive Stock Option Plan." To date, no such
member of the Board of Directors has received any options pursuant to the
Incentive Stock Option Plan.
Pursuant to the Charter, the Board of Directors will be divided into three
(3) classes. All five members of the Board of Directors will initially be
designated by the Related General Partners (the "Initial Directors") (Class
Counsel has approved the initial Independent Directors chosen by the Related
General Partners). After consummation of the Consolidation, the Board of
Directors will be elected by the Stockholders of the Company. The Class I and
Class II Directors will each consist of two Directors, one of whom in each class
will be an Independent Director. The Class III Directors will consist of one
Director.
The term of the initial Class I Directors will terminate on the date of the
1998 annual meeting of Stockholders; the term of the initial Class II Directors
will terminate on the date of the 1999 annual meeting of Stockholders and the
term of the initial Class III Directors will terminate on the date of the 2000
annual meeting of stockholders. At each annual meeting of Stockholders,
Directors of the Class to be elected shall be elected for a three-year term.
Directors will hold office until the annual meeting for the year in which their
terms expire and until their successors shall be elected and qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. The terms of the Initial Directors will commence on the Effective
Date.
The Charter provides that, subject to the right of the holders of any class
of stock to elect additional directors under specified circumstances, directors
may be removed upon the Majority Vote of Stockholders only for Cause prior to
the fourth anniversary of the Effective Date, and with or without Cause after
such anniversary.
Indemnification and Limitation of Liability
Officers and Directors
Under the Maryland GCL, each director of the Company is required to perform
his duties as a director in good faith, in a manner he reasonably believes to be
in the best interests of the Company and with the care that an ordinarily
prudent person in a like position would use under similar circumstances. Acts or
omissions of a director not amounting to a violation of this statutory standard
may not be the basis for imposition of any liability of the director, either for
legal or equitable relief. Under Delaware Partnership law, the General Partners
are accountable to the Partnerships and the BUC$holders as fiduciaries and
consequently must exercise good faith and integrity in handing Partnership
affairs. BUC$holders who have questions concerning the duties of the directors
and officers with respect to the Company or the duties of the General Partners
with respect to any of the Partnership should consult their counsel.
The Maryland GCL requires a corporation (unless its charter provides
otherwise, which the Company's Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceeding to which he is made a party by reason of his service in that
capacity. The Maryland GCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the Maryland GCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation as authorized by the bylaws and (b) a written
statement by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met.
The Charter contains provisions which eliminate the liability of its
directors and officers to the maximum extent permitted by the Maryland GCL. In
particular, the Charter authorizes the Company, to the maximum extent permitted
by Maryland law, to obligate itself
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to indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer or
(b) any individual who, while a director or officer of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason of his or her status as a present or former director or
officer of the Company. The Bylaws obligate the Company, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer who is made a party to the proceeding by reason of
his service in that capacity or (b) any individual who, while a director or
officer of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service in
that capacity. The Charter and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any of
the capacities described above and to any employee or agent of the Company or a
predecessor of the Company.
By comparison, the Partnership Agreements generally provide for
indemnification of the Related General Partners for losses arising out of any
act or omission, provided that it was determined in good faith that such conduct
was in the best interest of the Partnership and that such conduct did not
constitute negligence, misconduct or a breach of fiduciary obligations to the
BUC$holders.
The rights of Stockholders against management of the Company in certain
circumstances are more limited than the rights of BUC$holders against the
Related General Partners.
The Company will obtain a liability insurance policy for directors and
officers of the Company. In addition, the Company will assume all
indemnification obligations of the Participating Partnerships under the
respective Partnership Agreements with respect to the General Partners and their
affiliates. See "The Withdrawing/Terminated General Partners" below.
The Company expects to enter into indemnification agreements with each of
the Company's officers and directors. The indemnification agreements will
require, among other things, that the Company indemnify its officers and
directors to the fullest extent permitted by law, and advance to the officers
and directors and expenses, subject to repayment if it is subsequently
determined that indemnification is not permitted. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in the Charter and Bylaws, it provides greater assurance
to directors and officers that indemnification will be available, because, as a
contract, it cannot be modified unilaterally in the future by the Board of
Directors or by the stockholders to eliminate the rights if provides. To the
extent that the foregoing provisions concerning indemnification apply to actions
arising under the Securities Act, the Company has been advised that, in the
opinion of the Commission, such provisions are contrary to public policy and
therefore are not enforceable.
The Withdrawing/Terminated General Partners.
Pursuant to the P-B Purchase Agreement and as a condition to its withdrawal
as a general partner of the Partnerships, the Company is required to assume the
indemnification obligations of the Partnerships to the P-B General Partner. In
this regard, the Company will enter into an indemnification agreement upon
consummation of the Consolidation to provide the P-B General Partner with the
same indemnity as that provided by the Partnerships with respect to claims
against the P-B General Partner during the period in which it acted as a general
partner (the "Tail Indemnity"). If the Consolidation is not consummated (or
there is less than 100% Participation) and the P-B General Partner withdraws as
a general partner of a Participating Partnership, the Partnership Agreement of
such Partnership will be amended to confirm that the P-B General Partner is
entitled to the Tail Indemnity.
The Tail Indemnity does not permit the P-B General Partner to seek
indemnification from the Company or the Partnerships for any liability, loss or
damage incurred by the P-B General Partner arising out of, based upon, or
otherwise related to the Litigation.
The Company will also enter into agreements with the Related General
Partners to provide the Related General Partners with similar tail indemnities.
CONFLICTS OF INTEREST
General
Realty Insured Equity Associates, Inc., RIDC II, L.P., Related Equity
Funding Inc., Partnership Monitoring Corporation and Related Federal Insured
L.P. are the co-general partners of Insured I, Insured II, Eagle and Summit
Preferred, respectively. Each of the Related General Partners is an affiliate of
Related. The Related General Partners are subject to various conflicts of
interest arising out of their relationship with the Company. The Related General
Partners are subject to a conflict of interest in recommending to the
BUC$holders that they not object to the Consolidation. The Related General
Partners have interests and affiliations different from those of BUC$holders.
The Related General Partners of each of the Partnerships have fiduciary
duties to the Partnerships, in addition to the specific duties and obligations
imposed upon them under the Partnership Agreements. Subject to the terms of the
Partnership Agreements, the Related General Partners, in managing the affairs of
the Partnership, are expected to exercise good faith, to use care and prudence
and to act with an undivided duty of loyalty to the BUC$holders. Under these
fiduciary duties, the Related General Partners are obligated to ensure
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that each Partnership is treated fairly and equitably in transactions with third
parties, especially where consummation of such transactions may result in the
interests of the Related General Partners being opposed to, or not aligned with,
the interests of the BUC$holders. Accordingly, the Related General Partners are
required to assess whether the Consolidation is fair and equitable, taking into
account the unique characteristics of each Partnership (such as the
Partnership's revenues and expenses and the prospects for increases or decreases
in future cash flow) affecting the value of its assets, and comparing these
factors against similar factors affecting the value of the assets held by the
other Partnerships and the Related General Partners. As discussed in
"BACKGROUND, BENEFITS OF, AND REASONS FOR, THE CONSOLIDATION" and "FAIRNESS,"
after consideration of the terms and conditions of the Consolidation, the
Related General Partners recommend that BUC$holders not object to their
Partnership's participation in the Consolidation.
Conflicts of Interest of the Related General Partners
Substantial Benefits to Related General Partners. The Related General
Partners initiated and participated in the structuring of the Consolidation and
have conflicts of interest with respect to its completion, including the
following: (i) the Related General Partners, each of which is an affiliate of
Related, serve as general partners of each Partnership, which creates an
inherent conflict of interest when they serve in such capacity for Participating
Partnerships that have different interests; and (ii) the Consolidation affords a
number of benefits to the Related General Partners, including the following: (a)
if the Consolidation is consummated, the Related General Partners and Class
Counsel would effect a settlement in connection with the Litigation, therefore,
the Related General Partners are subject to a conflict of interest in
recommending to the BUC$holders that they not object to the Consolidation; and
(b) the Advisor, an affiliate of Related, will enter into the Advisory
Agreement, which the Company may not terminate, except for Cause, until the
fourth anniversary of the Effective Date. Pursuant to the Advisory Agreement
(and as a result of the Advisor's purchase of the P-B Interests), the Advisor
will be entitled to receive from the Company approximately 75% of the aggregate
annual fees currently paid by the Partnerships to the Related General Partners
and the P-B General Partner. Therefore, although the aggregate annual fees
payable by the Company (as compared to the Partnerships) will be reduced by
approximately 25%, the Advisor's share of such fees will increase by
approximately $200,000 per year.
The Advisor will also have the ability, subject to the terms and conditions
of the Advisory Agreement, to grow the Company's assets and thereby increase the
amount of fees it can earn, including the Asset Management Fee, Acquisition Fee,
Mortgage Selection Fee, Mortgage Placement Fee, and Special Distribution. If the
Company were to utilize the maximum leverage permitted, the Advisor would be
entitled to Acquisition Fees, Mortgage Selection Fees and Mortgage Placement
Fees aggregating approximately $4,687,000 and increased annual Special
Distributions and Asset Management Fees of approximately $468,700. Such
additional fees will only be payable to the Advisor if and when the Company is
able to acquire additional assets.
Finally, pursuant to the Incentive Stock Option Plan, the Advisor may
receive additional shares of Common Stock if the Company's distributions in any
year exceed the pro forma distributions set forth in this Solicitation
Statement. Similar to the BUC$holders, the Related General Partners and the
Advisor will receive Shares and, therefore, will have enhanced their liquidity.
Pursuant to the Amended Insured Partnership Agreements, however, the Advisor, as
a holder of the Insured LP Interests, will be restricted from converting all of
the Insured LP Interests into shares of Common Stock in order to preserve the
partnership status of Insured I and Insured II.
The General Partners of each Partnership are subject to a deficit
restoration obligation ("DRO"). This obligation requires that upon liquidation
of the respective Partnership or upon liquidation of a General Partner's
interest therein, each General Partner must contribute to the Partnership the
lesser of (i) the negative balance in its capital account, or (ii) the excess of
1.01 percent of the total original contributions of the Partnership over the
total capital contributions of the General Partners.
As of December 31, 1995, the General Partners' capital accounts in Insured
I, Summit Preferred and Eagle were negative, while the General Partners' capital
account in Insured II was positive. The Advisor will acquire one-half of the P-B
General Partner's general partnership interest in each of the Partnerships,
including one-half of the P-B General Partner's negative capital account in
Insured I, Summit Preferred and Eagle, and one-half of the P-B General Partner's
positive capital account in Insured II. With respect to Summit Preferred and
Eagle, the Related General Partner and the Advisor may avail themselves of a
"book-up" procedure, whereby the capital accounts of all partners are increased
to equal the fair market value of the Partnership's assets. Depending on such
fair market value, the Related General Partner's and the Advisor's negative
capital account could be eliminated. However, if Summit Preferred and Eagle were
liquidated as of the date of this Solicitation Statement, the gain to be
allocated to the Related General Partners and the Advisor would be sufficient to
eliminate their respective negative capital accounts.
Conflicts of Interest of the Company
Future Dealings With Related General Partners and Affiliates. The Related
General Partners have a financial interest in the consummation of the
Consolidation, which creates an inherent conflict of interest in their
recommending that BUC$holders not object to the Consolidation. The Related
General Partners and their affiliates will realize certain economic benefits if
the Consolidation is consummated, including the Advisor entering into the
Advisory Agreement which is not cancelable for four years, other than for Cause.
As is currently the case with the Partnerships, the Company will experience a
conflict of interest if it acquires properties from, or makes loans to,
affiliates of Related. Any such investments in properties will only be made with
the approval of the Independent Directors; such mortgage investments will only
be made after receipt of a fairness opinion from an independent advisor.
96
<PAGE>
Initial Company Directors and Officers. The Company's initial Board of
Directors following the Consolidation will be comprised principally of persons
associated with Related and officers of the Company are presently directors and
officers of the Related General Partners. Owing to these relationships, such
persons may not exercise the same degree of independence in conducting the
Company's business with respect to the NonParticipating Partnerships as might be
expected of persons having no prior business, professional or personal dealings
with any of the Related General Partners or Related. These persons have,
however, no agreement or understanding, written or oral, with any of the Related
General Partners or their affiliates as to the manner in which they would
exercise their duties and responsibilities as directors or officers of the
Company and are expected to discharge such duties in the manner required by the
Maryland GCL and without regard to whether Related General Partners or their
affiliates have an interest in a proposed transaction with the Company. In
addition, it is anticipated that the Advisor will retain affiliates of Related
to provide the services which it is required to provide to the Company under the
Advisory Agreement. See "MANAGEMENT."
Competition with Affiliates of the Company
The Advisor and its affiliates (including officers, directors and/or
partners for their own account or that of others) have formed and may in the
future form other entities, some of which may have the same or similar
investment objectives as the Company. Further, officers, directors, employees
and affiliates of the Advisor may for their own account acquire properties and
other real estate related assets similar to those acquired by the Company,
provided, however, that the Advisor shall be obligated to present to the Company
any suitable investment opportunity before acquiring it for its own account.
Various other entities may in the future be formed by the Related General
Partner or its affiliates to engage in business which may be competitive with
the Company and which may have the same management as the Company. To the extent
that other publicly-offered programs with similar investment objectives have
funds available for investment at the same time as the Company, and/or an
investment is potentially suitable for more than one such entity, conflicts of
interest will arise as to which entity should acquire the investment. In such
situations the Advisor and its affiliates will review the investment portfolio
of each such entity and will make the decision as to which such entity will
acquire the investment on the basis of such factors as the effect of the
acquisition on each such entity's portfolio and objectives, the amount of funds
available and the then length of time such funds have been available for
investment, and the cash requirements of each such entity. If funds should be
available to two or more publicly-offered programs to purchase a given
investment and the other factors enumerated above have been evaluated and deemed
equally applicable to each entity, then the affiliates will acquire such
investment for the publicly-offered programs on a basis of rotation with the
initial order of priority determined by the dates of formation of the entities.
As of the date hereof, an affiliate of Related acts as the Advisor to
American Mortgage Investors Trust ("AMIT"), a real estate investment trust which
was formed to invest in participating mortgage loans which are insured by FHA or
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. AMIT has fully invested the
proceeds raised in its public offering which terminated in November 1994.
Conflicts of Interest of Class Counsel
As part of the Equitable Settlement, Class Counsel will have the right to
petition the Court for additional attorneys' fees in an amount to be determined
in the Court's sole discretion but which will be proposed to be 25% of the
increase, if any, as of the Anniversary Date in the capitalization of the
Company, based upon the difference between (i) the trading prices of the
Company's Shares on the Anniversary Date and (ii) the trading prices of the
Units and the asset values of the Partnerships prior to the Effective Date.
One-half of such fees, if any, will be paid in the form of Restricted Securities
(restricted only with respect to the sale, assignment, pledge or other transfer
of such securities) and the remaining one-half of such fees will be paid in the
form of Unrestricted Securities. The number of Counsel's Fee Shares issued shall
be subject to a maximum amount not to exceed 3.95% of the total number of shares
of the Company's outstanding Common Stock on the Anniversary Date. The Counsel's
Fee Shares will be distributed to Class Counsel quarterly in eight equal
distributions commencing thirty days after the Anniversary Date and restrictions
on the Restricted Securities expire one year from the date of issuance. See
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT--Security
Ownership of Certain Beneficial Owners."
97
<PAGE>
FINANCIAL INFORMATION
INDEX TO FINANCIAL INFORMATION
Page
------
Selected Financial Data .................................................. 101
Management's Discussion and Analysis of Results of
Operations and Liquidity and Capital Resources.............See Insured I below
Pro Forma Financial Information
Introduction to Pro Forma Consolidated Financial
Statements for the Three Months Ended March 31,
1997 and the Year Ended December 31, 1996 .............................. 104
100% Participation
Pro Forma Consolidated Balance Sheet as of
March 31, 1997 (100% Participation) .................................... 105
Pro Forma Consolidated Income Statements for the
Three Months Ended March 31, 1997 and the Year
Ended December 31, 1996 (100% Participation) ........................... 106
Pro Forma Statements of Cash Flows for the Three
Months Ended March 31, 1997 and the Year Ended
December 31, 1996 (100% Participation) ................................. 108
Supplemental Pro Forma Per Share/Unit Data for the
Three Months Ended March 31, 1997 and the Year
Ended December 31, 1996 (100% Participation) ........................... 110
Notes to Pro Forma Financial Statements for the Three
Months Ended March 31, 1997 and the Year Ended
December 31, 1996 (100% Participation) ................................. 111
Minimum Participation (including Insured II)
Pro Forma Consolidated Balance Sheet as of March 31,
1997 (Minimum Participation including Insured II) ...................... 114
Pro Forma Consolidated Income Statements for the
Three Months Ended March 31, 1997 and the Year
Ended December 31, 1996 (Minimum Participation
including Insured II) .................................................. 115
Pro Forma Statements of Cash Flows for the Three
Months Ended March 31, 1997 and the Year Ended
December 31, 1996 (Minimum Participation including
Insured II) ............................................................ 117
Supplemental Pro Forma Per Share/Unit Data for the
Three Months Ended March 31, 1997 and the Year
Ended December 31, 1996 (Minimum Participation
including Insured II) .................................................. 119
Notes to Pro Forma Financial Statements for the Three
Months Ended March 31, 1997 and the Year Ended
December 31, 1996 (Minimum Participation including
Insured II) ............................................................ 120
Minimum Participation (including Eagle)
Pro Forma Consolidated Balance Sheet as of March
31, 1997 (Minimum Participation including Eagle) ....................... 122
Pro Forma Consolidated Income Statements for the
Three Months Ended March 31, 1997 and the Year
Ended December 31, 1996 (Minimum Participation
including Eagle) ....................................................... 123
Pro Forma Statements of Cash Flows for the Three
Months Ended March 31, 1997 and the Year Ended
December 31, 1996 and (Minimum Participation
including Eagle) ....................................................... 125
Supplemental Pro Forma Per Share/Unit Data for the
Three Months Ended March 31, 1997 and the Year
Ended December 31, 1996 (Minimum Participation
including Eagle) ....................................................... 127
Notes to Pro Forma Financial Statements for the Three
Months Ended March 31, 1997 and the Year Ended
December 31, 1996 (Minimum Participation including
Eagle) ................................................................. 128
The Company
Independent Auditors' Report ........................................... 130
Balance Sheets of the Company as of March 31, 1997
(Unaudited) and December 31, 1996 ...................................... 131
Notes to Balance Sheets ................................................. 132
98
<PAGE>
The Advisor
Independent Auditors' Report ............................................. 134
Balance Sheets of the Advisor (a limited liability
company) as of March 31, 1997 (Unaudited) and
December 31, 1996 ...................................................... 135
Notes to Balance Sheets .................................................. 136
Insured I
December 31, 1996
Independent Auditors' Report ............................................. 137
Statements of Financial Condition as of December 31,
1996 and 1995 .......................................................... 138
Statements of Income--Years ended December 31, 1996,
1995 and 1994 .......................................................... 139
Statements of Changes in Partners' Capital
(Deficit)--Years ended December 31, 1996, 1995 and 1994 ................ 140
Statements of Cash Flows--Years ended December 31,
1996, 1995 and 1994 .................................................... 141
Notes to Financial Statements ............................................ 142
Management's Discussion and Analysis of Operations
and Liquidity and Capital Resources .................................... 148
March 31, 1997
Statements of Financial Condition (Unaudited) as of
March 31, 1997 and December 31, 1996 ................................... 151
Statements of Income (Unaudited)--Three months ended
March 31, 1997 and 1996 ................................................ 152
Statements of Changes in Partners' Capital (Deficit)
(Unaudited)--Three months ended March 31, 1997 ......................... 153
Statements of Cash Flows (Unaudited)--Three months
ended March 31, 1997 and 1996 .......................................... 154
Notes to Financial Statements ............................................ 155
Management's Discussion and Analysis of Operations
and Liquidity and Capital Resources .................................... 159
Insured II
December 31, 1996
Independent Auditors' Report ............................................. 161
Statements of Financial Condition as of December 31,
1996 and 1995 .......................................................... 162
Statements of Income--Years ended December 31, 1996,
1995 and 1994 .......................................................... 163
Statements of Changes in Partners' Capital
(Deficit)--Years ended December 31, 1996, 1995 and 1994 ................ 164
Statements of Cash Flows--Years ended December 31,
1996, 1995 and 1994 .................................................... 165
Notes to Financial Statements ............................................ 166
Management's Discussion and Analysis of Operations
and Liquidity and Capital Resources .................................... 172
March 31, 1997
Statements of Financial Condition (Unaudited) as of
March 31, 1997 and December 31, 1996 ................................... 174
Statements of Income (Unaudited)--Three months ended
March 31, 1997 and 1996 ................................................ 175
Statements of Changes in Partners' Capital (Deficit)
(Unaudited)--Three months ended March 31, 1997 ......................... 176
Statements of Cash Flows (Unaudited)--Three months
ended March 31, 1997 and 1996 .......................................... 177
Notes to Financial Statements ............................................ 178
Management's Discussion and Analysis of Operations
and Liquidity and Capital Resources .................................... 181
Summit Preferred
December 31, 1996
Independent Auditors' Report ............................................. 183
99
<PAGE>
Statements of Financial Condition as of December 31,
1996 and 1995 .......................................................... 184
Statements of Income--Years ended December 31, 1996,
1995 and 1994 .......................................................... 185
Statements of Changes in Partners' Capital
(Deficit)--Years ended December 31, 1996, 1995 and
1994 .................................................................. 186
Statements of Cash Flows--Years ended December 31,
1996, 1995 and 1994 .................................................... 187
Notes to Financial Statements ............................................ 188
Management's Discussion and Analysis of Operations
and Liquidity and Capital Resources .................................... 193
March 31, 1997
Statements of Financial Condition (Unaudited) as of
March 31, 1997 and December 31, 1996 ................................... 195
Statements of Income (Unaudited)--Three months ended
March 31, 1997 and 1996 ................................................ 196
Statements of Changes in Partners' Capital (Deficit)
(Unaudited)--Three months ended March 31, 1997 ......................... 197
Statements of Cash Flows (Unaudited)--Three months
ended March 31, 1997 and 1996 .......................................... 198
Notes to Financial Statements ............................................ 199
Management's Discussion and Analysis of Operations
and Liquidity and Capital Resources .................................... 203
Eagle
December 31, 1996
Independent Auditors' Report ............................................. 204
Statements of Financial Condition as of December 31,
1996 and 1995 .......................................................... 205
Statements of Income--Years ended December 31, 1996,
1995 and 1994 .......................................................... 206
Statements of Changes in Partners' Capital
(Deficit)--Years ended December 31, 1996, 1995 and 1994 .............. 207
Statements of Cash Flows--Years ended December 31,
1996, 1995 and 1994 .................................................... 208
Notes to Financial Statements ............................................ 209
Management's Discussion and Analysis of Operations
and Liquidity and Capital Resources .................................... 214
March 31, 1997
Statements of Financial Condition (Unaudited) as of
March 31, 1997 and December 31, 1996 ................................... 217
Statements of Income (Unaudited)--Three months ended
March 31, 1997 and 1996 ................................................ 218
Statements of Changes in Partners' Capital (Deficit)
(Unaudited)--Three months ended March 31, 1997 ......................... 219
Statements of Cash Flows (Unaudited)--Three months
ended March 31, 1997 and 1996 .......................................... 220
Notes to Financial Statements ............................................ 221
Management's Discussion and Analysis of Operations
and Liquidity and Capital Resources .................................... 224
100
<PAGE>
Selected Financial Data
The following table sets forth selected financial data on a pro forma basis
for the Company (assuming 100% Participation, Minimum Participation (including
Insured II) and Minimum Participation (including Eagle)), and on a historical
basis for Insured I. The table should be read in conjunction with the unaudited
pro forma financial information and with the financial statements and notes
thereto of the Partnerships included in this section of the Solicitation
Statement.
The following unaudited pro forma operating and other data have been
prepared to reflect the Consolidation and related transactions as if such
transactions had occurred on January 1, 1996. The unaudited pro forma balance
sheet data has been prepared assuming that the Consolidation and related
transactions had occurred on March 31, 1997. The Consolidation will be accounted
for using the purchase method of accounting. Under this method, the
Participating Partnership with the BUC$holder group receiving the largest
ownership in the Company (in this case for all three scenarios, Insured I) will
be deemed to be the acquirer. As the surviving entity for accounting purposes,
Insured I's assets and liabilities will be recorded by the Company at their
historical cost, with the assets and liabilities of the other Participating
Partnerships recorded at their estimated fair values, using the Adjusted Net
Asset Values. In the opinion of the Related General Partners, all adjustments
necessary to reflect the effects of the Consolidation and related transactions
have been made.
101
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
----------------------------------------------------------------
Insured I Historical
----------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $8,710,091 $8,907,984 $9,272,415 $9,081,226 $9,224,030
Total expenses (G) 6,143,055 6,457,832 6,563,660 6,790,935 6,797,394
Minority interest in operating partnerships -- -- -- -- --
Net income 2,567,036 2,450,152 2,708,755 2,290,291 2,426,636
Distributions to limited partners 4,177,652 3,700,004 3,600,003 3,600,005 3,600,005
BALANCE SHEET DATA:
Cash and cash equivalents 937,686 1,081,265 1,433,699 2,057,134 2,398,013
Total assets at book value 83,328,533 81,104,315 79,552,661 77,862,045 75,842,337
Notes payable 5,976,244 5,976,244 5,959,212 5,792,615 5,565,841
Total liabilities (C) 7,721,362 7,219,644 7,030,876 7,121,610 6,746,907
Partners' capital/Shareholders' equity (D) 75,607,171 73,884,671 72,521,785 70,740,435 69,095,430
Net assets at Consolidation value (B) N/A N/A N/A N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents 329,605 143,579 352,434 623,435 340,879
Net cash provided by operating activities 5,371,815 4,562,847 5,054,997 5,057,000 5,108,069
Ratio of earnings to fixed charges 5.59 5.27 6.13 5.15 5.57
Ratio of earnings to total assets 0.03 0.03 0.03 0.03 0.03
Book value per $1,000 of Original Investment (A) 757.99 740.94 727.44 709.81 693.52
Book value per share at Consolidation value (H) N/A N/A N/A N/A N/A
Earnings per $1,000 of Original Investment (A)(F) 21.10 19.95 22.51 18.36 19.71
Earnings per share--pro forma (I) N/A N/A N/A N/A N/A
Distribution per $1,000 of Original Investment (A)(E) 41.78 37.00 36.00 36.00 36.00
<CAPTION>
As of and for the Year Ended December 31,
-----------------------------------------------------
1996 Pro Forma of the Company
-----------------------------------------------------
100% Minimum Minimum
Participation Participation((1)) Participation((2))
--------------- ------------------ ------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $14,933,341 $11,655,295 $11,998,154
Total expenses (G) 8,732,609 8,284,766 7,038,810
Minority interest in operating partnerships 437,504 437,260 342,751
Net income 5,763,228 2,933,269 4,616,593
Distributions to limited partners 7,901,476 4,750,184 6,340,492
BALANCE SHEET DATA:
Cash and cash equivalents N/A N/A N/A
Total assets at book value N/A N/A N/A
Notes payable N/A N/A N/A
Total liabilities (C) N/A N/A N/A
Partners' capital/Shareholders' equity (D) N/A N/A N/A
Net assets at Consolidation value (B) N/A N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents 204,143 128,237 423,471
Net cash provided by operating activities 9,529,262 6,389,875 7,707,954
Ratio of earnings to fixed charges 8.67 5.12 8.48
Ratio of earnings to total assets N/A N/A N/A
Book value per $1,000 of Original Investment (A) N/A N/A N/A
Book value per share at Consolidation value (H) N/A N/A N/A
Earnings per $1,000 of Original Investment (A)(F) 32.07(J) 23.44(J) 32.70(J)
Earnings per share--pro forma (I) 0.72 0.57 0.73
Distribution per $1,000 of Original Investment (A)(E) 44.22(J) 37.96(J) 45.16(J)
</TABLE>
- --------------
((1)) Minimum participation--Insured I (historical) and Insured II (fair value)
((2)) Minimum participation--Insured I (historical) and Eagle (fair value)
(A) On the historical information and on the pro forma, the respective
calculations have been presented using the base of $1,000 of Original
Investment, adjusted for the 1994 return of capital of $235 per $1,000
Original Investment to BUC$holders of Eagle as a result of the Tivoli
Lakes prepayment of mortgage receivable. For comparison of historical to
pro forma distribution on a Partnership by Partnership basis see
Distribution Comparison table (page 56).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the values assigned for purposes of the
Consolidation. This disclosure is informational only; the assets and
liabilities of the Company will be recorded at the carrying values for
Insured I and fair values for Insured II, Summit Preferred and Eagle.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,205,000, $767,615, and $951,765 for 100%
Participation, Minimum Participation (1) and Minimum Participation (2),
respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect additional distributions after taking into
account the reduction in fees payable to the General Partners, decrease in
general & administrative expenses and increase in additional interest
expense expected to be incurred as a result of financing.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis, adjusted for the 1994 return of
capital of $235 per $1,000 Original Investment to BUC$holders of Eagle as
a result of the Tivoli Lakes prepayment of mortgage receivable.
(G) Total pro forma expenses after the Consolidation include management fees
which were recorded as special distributions prior to the Consolidation.
(H) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of Shares assumed to be
outstanding upon Consolidation (8,050,702, 5,111,494, and 6,365,271 shares
at 100% Participation, Minimum Participation(1) and Minimum
Participation(2), respectively).
(I) Pro forma earnings per share has been calculated using the number of
Shares assumed to be outstanding upon Consolidation, as in Note (H) above.
(J) Original capital has been adjusted for Eagle to reflect distribution of
proceeds from a prepayment of mortgage receivable due to the sale of
Tivoli Lakes in 1994. Such distribution equals $4.70 per Unit. Each $1,000
of Original Investment (net of such prepayment proceeds) equals 65.3595
Units.
102
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Three
Months Ended March 31,
-------------------------
Insured I Historical
-------------------------
1996 1997
------------ ------------
<S> <C> <C> <C>
OPERATING DATA:
Total revenues $2,323,747 $2,470,884
Total expenses (G) 1,964,634 1,473,654
Minority interest in operating partnerships -- --
Net income 359,113 997,230
Distributions to limited partner 900,001 900,001
BALANCE SHEET DATA:
Cash and cash equivalents 2,464,004 2,717,373
Total assets at book value 77,097,098 75,687,007
Notes payable 5,736,659 5,309,039
Total liabilities (C) 7,015,460 6,612,257
Partners' capital/Shareholders' equity (D) 70,081,638 69,074,750
Net assets at Consolidation value (B) N/A N/A
OTHER DATA:
Net increase in cash and cash equivalents 406,870 319,360
Net cash provided by operating activities 1,580,277 1,622,268
Ratio of earnings to fixed charges 3.66 9.17
Ratio of earnings to total assets 0.00 0.01
Book value per $1,000 of Original Investment (A) 703.29 693.32
Book value per share at Consolidation value (H) N/A N/A
Earnings per $1,000 of Original Investment (A)(F) 2.48 8.80
Earnings per share--pro forma (I) N/A N/A
Distribution per $1,000 of Original Investment (A)(E) 9.00 9.00
<CAPTION>
As of and for the Three Months Ended March 31,
----------------------------------------------------
1997 Pro Forma of the Company
----------------------------------------------------
100% Minimum Minimum
Participation Participation((1)) Participation((2))
--------------- ------------------ ------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 3,901,630 $3,068,640 $ 3,146,008
Total expenses (G) 2,048,729 1,931,122 1,561,493
Minority interest in operating partnerships 110,967 110,930 88,479
Net income 1,741,934 1,026,588 1,496,036
Distributions to limited partner 1,909,843 1,167,507 1,526,020
BALANCE SHEET DATA:
Cash and cash equivalents 5,572,466 3,977,210 4,013,870
Total assets at book value 138,523,826 93,903,404 110,714,576
Notes payable 7,871,546 7,434,161 6,260,804
Total liabilities (C) 10,267,159 9,297,477 7,730,620
Partners' capital/Shareholders' equity (D) 127,487,155 83,836,415 102,461,351
Net assets at Consolidation value (B) 121,463,086 77,374,961 95,937,140
OTHER DATA:
Net increase in cash and cash equivalents 162,362 62,020 387,370
Net cash provided by operating activities 2,759,678 1,943,855 2,258,018
Ratio of earnings to fixed charges 11.06 7.28 11.42
Ratio of earnings to total assets 0.01 0.01 0.01
Book value per $1,000 of Original Investment (A) 709.52(J) 669.94(J) 725.74(J)
Book value per share at Consolidation value (H) 15.84 16.40 16.10
Earnings per $1,000 of Original Investment (A)(F) 9.69(J) 8.20(J) 10.60(J)
Earnings per share--pro forma (I) 0.22 0.20 0.24
Distribution per $1,000 of Original Investment (A)(E) 10.69(J) 9.33(J) 10.87(J)
</TABLE>
- --------------
((1)) Minimum participation--Insured I (historical) and Insured II (fair value)
((2)) Minimum participation--Insured I (historical) and Eagle (fair value)
(A) On the historical information and on the pro forma, the respective
calculations have been presented using the base of $1,000 of Original
Investment, adjusted for the 1994 return of capital of $235 per $1,000
Original Investment to BUC$holders of Eagle as a result of the Tivoli
Lakes prepayment of mortgage receivable. For comparison of historical to
pro forma distribution on a Partnership by Partnership basis see
Distribution Comparison table (page 56).
(B) Net assets at Consolidation value reflect adjustment of the book value of
assets and liabilities to the values assigned for purposes of the
Consolidation. This disclosure is informational only; the assets and
liabilities of the Company will be recorded at the carrying values for
Insured I and fair values for Insured II, Summit Preferred and Eagle.
(C) Pro Forma Total liabilities reflect the accrual of the Consolidation
Expenses loan of $1,205,000, $767,615, and $951,765 for 100%
Participation, Minimum Participation (1) and Minimum Participation (2),
respectively.
(D) Pro Forma Shareholders' equity reflects the change in the respective
percentage ownership interest of BUC$holders and the General Partners.
(E) Pro Forma Distributions reflect additional distributions after taking into
account the reduction in fees payable to the General Partners, decrease in
general & administrative expenses and increase in additional interest
expense expected to be incurred as a result of financing.
(F) Earnings per $1,000 of Original Investment has been calculated over a per
$1,000 of Original Investment basis, adjusted for the 1994 return of
capital of $235 per $1,000 Original Investment to BUC$holders of Eagle as
a result of the Tivoli Lakes prepayment of mortgage receivable.
(G) Total pro forma expenses after the Consolidation include management fees
which were recorded as special distributions prior to the Consolidation.
(H) Book value per share at Consolidation value using pro forma March 31, 1997
total shareholders' equity over the number of Shares assumed to be
outstanding upon Consolidation (8,050,702, 5,111,494, and 6,365,271 shares
at 100% Participation, Minimum Participation (1) and Minimum Participation
(2), respectively).
(I) Pro forma earnings per share has been calculated using the number of
Shares assumed to be outstanding upon Consolidation, as in Note (H) above.
(J) Original capital has been adjusted for Eagle to reflect distribution of
proceeds from a prepayment of mortgage receivable due to the sale of
Tivoli Lakes in 1994. Such distribution equals $4.70 per Unit. Each $1,000
of Original Investment (net of such prepayment proceeds) equals 65.3595
Units.
103
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Introduction
Given the structure of the proposed Consolidation, the composition of the
Company after the Consolidation will differ depending on the number of
Partnerships that elect to participate in the Consolidation.
To assist BUC$holders in analyzing the Consolidation, three sets of pro
forma financial statements, have been prepared to show the impact of the
Consolidation based upon three assumptions regarding the Partnerships'
participation in the Consolidation. The first set of pro forma financial
statements assumes 100% Participation while the two Minimum Participation
scenarios assume only certain of the Partnerships participate.
The pro forma balance sheet of the Company has been prepared as if the
Consolidation was consummated on March 31, 1997. The pro forma statements of
operations and cash flows of the Company for the year ended December 31, 1996
and the three months ended March 31, 1997 assume that the Consolidation was
consummated on January 1, 1996. The Consolidation will be accounted for using
the purchase method of accounting. Under this method, the Participating
Partnership with the BUC$holder group receiving the largest ownership in the
Company (in this case for all three scenarios, Insured I) will be deemed to be
the acquirer. As the surviving entity for accounting purposes, Insured I's
assets and liabilities will be recorded by the Company at their historical cost,
with the assets and liabilities of the other Participating Partnerships recorded
at their estimated fair values, using the Adjusted Net Asset Values.
The pro forma financial statements are based upon available information and
upon certain assumptions, as set forth in the notes to pro forma financial
statements, that management of the Company believes are reasonable in the
circumstances.
These statements do not purport to represent what the Company's financial
position, results of operations or cash flows would actually have been if the
Consolidation in fact had occurred on such dates or at the beginning of such
periods or the Company's financial position, results of operations or cash flows
for any future date or period.
104
<PAGE>
Aegis Realty, Inc.--Full Participation
Pro Forma Consolidated Balance Sheet
As of March 31, 1997
Unaudited
(Dollars in Thousands)
<TABLE>
<CAPTION>
Insured I-At Insured II-At Preferred-At Eagle-At
Historical Cost Historical Cost Historical Cost Historical Cost
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment $70,242 $18,715 $ -- $ --
Cash and cash equivalents 2,717 1,260 299 1,296
Deferred insurance costs 1,251 536 -- --
Investment in mortgage loans -- -- -- 27,586
Investments in operating partnerships -- -- 7,223 --
Loan receivable from affiliate -- -- -- 3,060
Other assets 1,477 471 10 1,132
------- ------- ------ -------
Total assets $75,687 $20,982 $7,532 $33,074
======= ======= ====== =======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Notes payable $ 5,309 $ 1,358 $ -- $ --
Other liabilities 1,303 560 366 166
------- ------- ------ -------
Total liabilities 6,612 1,918 366 166
------- ------- ------ -------
Minority interest in operating
partnership -- -- -- --
------- ------- ------ -------
Partners' capital (deficit):
Limited partners 69,332 19,144 7,254 33,246
General partners (257) (80) (88) (338)
------- ------- ------ -------
Total partners' capital 69,075 19,064 7,166 32,908
------- ------- ------ -------
Total liabilities and partners' capital $75,687 $20,982 $7,532 $33,074
======= ======= ====== =======
See accompanying notes to pro forma consolidated financial statements.
<CAPTION>
Insured I At
Historical Cost,
Purchase Insured II, Summit Consolidation
Accounting Preferred and Transaction
Historical Pro Forma Eagle, At Fair Pro Forma
Combined Totals Adjustments Value Adjustments
----------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment $ 88,957 $ (1,977) (a) $ 86,980
Cash and cash equivalents 5,572 5,572
Deferred insurance costs 1,787 (536) (a) 1,251
Investment in mortgage loans 27,586 2,881 (c) 30,467
Investments in operating partnerships 7,223 2,072 (b) 9,295
Loan receivable from affiliate 3,060 3,060
(928) (c)
(10) (b)
Other assets 3,090 (253) (a) 1,899
-------- --------
Total assets $137,275 $138,524
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Notes payable $ 6,667 $ 6,667 $ 1,205 (e)
Other liabilities 2,395 2,395
-------- --------
Total liabilities 9,062 9,062
-------- --------
Minority interest in operating
partnership -- -- 770 (f)
-------- --------
1,914 (c)
------
Partners' capital (deficit): 2,021 (b)
Limited partners 128,976 (2,711) (a) 130,200 (130,200) (d)
39 (c)
41 (b)
General partners (763) (55) (a) (738) 738 (d)
-------- --------
Total partners' capital 128,213 129,462
-------- --------
Total liabilities and partners' capital $137,275 $138,524
======== ========
Shareholders' equity:
Common Stock; $.01 par value;
50,000,000 share authorized; 8,050,702
shares issued and outstanding 81 (d)
(770) (f)
Additional paid in capital (1,205) (e)
Total shareholders' equity 129,381 (d)
Total liabilities and shareholders' equity
<CAPTION>
The Company
Pro Forma
------------
<S> <C>
ASSETS
Property and equipment $ 86,980
Cash and cash equivalents 5,572
Deferred insurance costs 1,251
Investment in mortgage loans 30,467
Investments in operating partnerships 9,295
Loan receivable from affiliate 3,060
Other assets 1,899
---------
Total assets $138,524
=========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Notes payable $ 7,872
Other liabilities 2,395
---------
Total liabilities 10,267
---------
Minority interest in operating
partnership 770
---------
Partners' capital (deficit):
Limited partners $ --
General partners --
---------
Total partners' capital --
---------
Total liabilities and partners' capital $ --
=========
Shareholders' equity:
Common Stock; $.01 par value;
50,000,000 share authorized; 8,050,702
shares issued and outstanding $ 81
Additional paid in capital
Total shareholders' equity 127,406
---------
127,487
---------
Total liabilities and shareholders' equity $138,524
=========
</TABLE>
105
<PAGE>
Aegis Realty, Inc.--Full Participation
Pro Forma Consolidated Income Statement
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Insured II, Summit
Insured I - Preferred and Eagle Total Historical Pro Forma The Company
Historical Cost - Historical Cost Partnerships Adjustments Pro Forma
----------------- --------------------- ------------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $1,942 $ 459 $2,401 $2,401
Recovery of common area
maintenance charges 207 61 268 268
Real estate tax reimbursements 260 70 330 330
Interest income from mortgage
loans -- 613 613 $ (23) (j) 590
Interest income from loan
receivable from affiliate -- 71 71 71
Income from equity investments -- 174 174 (17) (j) 157
Other 61 24 85 85
------ ------ ------ ------
Total revenues 2,470 1,472 3,942 3,902
------ ------ ------ ------
EXPENSES
General and administrative 294 166 460 (23) (g) 437
Asset management fee -- -- -- 39 (h) 39
Repairs and maintenance 275 126 401 401
Real estate taxes 268 93 361 361
Interest 122 24 146 27 (i) 173
Depreciation and amortization 620 157 777 (63) (j) 714
Other (106) 30 (76) (76)
------ ------ ------ ------
Total expenses 1,473 596 2,069 2,049
------ ------ ------ ------
Net income before minority
interest 997 876 1,873 1,853
------ ------ ------ ------
Minority interest in operating
partnerships -- -- -- 111 (k) 111
------ ------ ------ ------
Net income $ 997 $ 876 $1,873 $1,742
====== ====== ====== ======
Net income per share, 8,050,702 shares outstanding during the period $ 0.22
======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
106
<PAGE>
Aegis Realty, Inc.--Full Participation
Pro Forma Consolidated Income Statement
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Insured II, Summit
Insured I - Preferred and Eagle Total Historical Pro Forma The Company
Historical Cost - Historical Cost Partnerships Adjustments Pro Forma
----------------- --------------------- ------------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $7,097 $1,867 $ 8,964 $ 8,964
Recovery of common area
maintenance charges 828 243 1,071 1,071
Real estate tax reimbursements 1,041 279 1,320 1,320
Interest income from mortgage
loans -- 2,534 2,534 $ (90) (j) 2,444
Interest income from loan
receivable from affiliate -- 288 288 288
Income from equity investments -- 566 566 (69) (j) 497
Other 257 90 347 347
------- ------- ------- -------
Total revenues 9,223 5,867 15,090 14,931
------- ------- ------- -------
EXPENSES
General and administrative 1,313 676 1,989 (199) (g) 1,790
Asset management fee -- -- -- 155 (h) 155
Repairs and maintenance 892 283 1,175 1,175
Real estate taxes 1,075 369 1,444 1,444
Interest 532 111 643 108 (i) 751
Depreciation and amortization 2,758 628 3,386 (252) (j) 3,134
Other 226 55 281 281
------- ------- ------- -------
Total expenses 6,796 2,122 8,918 8,730
------- ------- ------- -------
Net income before minority
interest 2,427 3,745 6,172 6,201
------- ------- ------- -------
Minority interest in operating
partnerships -- -- -- 438 (k) 438
------- ------- ------- -------
Net income $2,427 $3,745 $ 6,172 $ 5,763
======= ======= ======= =======
Net income per share, 8,050,702 shares outstanding during the period $ 0.72
=======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
107
<PAGE>
Aegis Realty, Inc.--Full Participation
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Insured II, Summit
Insured I - Preferred and Eagle,
Historical Cost At Fair Value (n)
----------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 997 $ 899
-------- --------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 620 134
Minority interest in operating
partnerships -- --
Changes in operating assets
and liabilities:
Increase in other assets (117) (3)
Increase in other liabilities 122 131
Distributions from investments
in excess of net income -- 20
-------- --------
Total adjustments 625 282
-------- --------
Net cash provided by operating
activities 1,622 1,181
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to property and
equipment (5) (286)
Leasing commissions paid (23) (15)
Principal payments received on
mortgage loans -- 37
-------- --------
Net cash used in investment activities (28) (264)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (257) (16)
Increase in loan payable -- --
Payment of transactional costs -- --
Distributions paid (1,018) (1,058)
-------- --------
Net cash used in financing activities (1,275) (1,074)
-------- --------
Net increase (decrease) in cash and
cash equivalents 319 (157)
Cash and cash equivalents at
beginning of period 2,398 3,012
-------- --------
Cash and cash equivalents at end
of period $ 2,717 $ 2,855
======== ========
<CAPTION>
Total Adjusted Pro Forma The Company
Partnerships Adjustments Pro Forma
---------------- ------------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $(111) (m)
(27) (l)
(39) (l)
Net income $ 1,896 23 (l) $ 1,742
------- -------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 754 754
Minority interest in operating
partnerships -- 111 (m) 111
Changes in operating assets
and liabilities:
Increase in other assets (120) (120)
Increase in other liabilities 253 253
Distributions from investments
in excess of net income 20 20
------- -------
Total adjustments 907 1,018
------- -------
Net cash provided by operating
activities 2,803 2,760
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to property and
equipment (291) (291)
Leasing commissions paid (38) (38)
Principal payments received on
mortgage loans 37 37
------- -------
Net cash used in investment activities (292) (292)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (273) (273)
Increase in loan payable -- 1,205 (l) 1,205
Payment of transactional costs -- (1,205) (l) (1,205)
Distributions paid (2,076) 27 (l) (2,033)
39 (l)
(23) (l)
------- ----------- -------
Net cash used in financing activities (2,349) (2,306)
------- -------
Net increase (decrease) in cash and
cash equivalents 162 162
Cash and cash equivalents at
beginning of period 5,410 5,410
------- -------
Cash and cash equivalents at end
of period $ 5,572 $ 5,572
======= =======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
108
<PAGE>
Aegis Realty, Inc.--Full Participation
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Insured II, Summit
Insured I - Preferred and Eagle,
Historical Cost At Fair Value (n)
----------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,427 $ 3,838
------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,758 535
Minority interest in operating
partnerships -- --
Equity (gain) loss -- 6
Changes in operating assets
and liabilities:
(Increase) decrease in other assets 71 (70)
Decrease in other liabilities (148) (30)
Distributions from investments
in excess of net income -- 206
------- -------
Total adjustments 2,681 647
------- -------
Net cash provided by operating
activities 5,108 4,485
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to property and equipment (119) (182)
Leasing commissions paid (349) (142)
Principal payments received on
mortgage loans -- 142
------- -------
Net cash used in investment activities (468) (182)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (227) (1,416)
Increase in loan payable -- 1,400
Payment of transactional costs -- --
Distributions paid (4,072) (4,390)
Increase in deferred refinancing cost -- (34)
------- -------
Net cash used in financing activities (4,299) (4,440)
------- -------
Net increase (decrease) in cash and
cash equivalents 341 (137)
Cash and cash equivalents at
beginning of year 2,057 3,149
------- -------
Cash and cash equivalents at end
of year $ 2,398 $ 3,012
======= =======
<CAPTION>
Total Adjusted Pro Forma The Company
Partnerships Adjustments Pro Forma
---------------- ---------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (438) (m)
(108) (l)
(155) (l)
Net income $ 6,265 199 (l) $ 5,763
------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,293 3,293
Minority interest in operating
partnerships -- 438 (m) 438
Equity (gain) loss 6 6
Changes in operating assets
and liabilities:
(Increase) decrease in other assets 1 1
Decrease in other liabilities (178) (178)
Distributions from investments
in excess of net income 206 206
------- -------
Total adjustments 3,328 3,766
------- -------
Net cash provided by operating
activities 9,593 9,529
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to property and equipment (301) (301)
Leasing commissions paid (491) (491)
Principal payments received on
mortgage loans 142 142
------- -------
Net cash used in investment activities (650) (650)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (1,643) (1,643)
Increase in loan payable 1,400 1,205 (l) 2,605
Payment of transactional costs -- (1,205) (l) (1,205)
Distributions paid (8,462) 108 (l) (8,398)
155 (l)
(199) (l)
Increase in deferred refinancing cost (34) (34)
------- -------
Net cash used in financing activities (8,739) (8,675)
------- -------
Net increase (decrease) in cash and
cash equivalents 204 204
Cash and cash equivalents at
beginning of year 5,206 5,206
------- -------
Cash and cash equivalents at end
of year $ 5,410 $ 5,410
======= =======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
109
<PAGE>
Aegis Realty, Inc.--Full Participation
Supplemental Pro Forma Per Share/Unit Data (o)
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
<TABLE>
<CAPTION>
Distributions Net Income
Book Value Three Months Three Months
As of Ended Ended
March 31, 1997 March 31, 1997 March 31, 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) $15.84 $0.2385 $0.22
Historical-Insured I (Per Unit) 17.33 0.2250 0.22
Equivalent pro forma-Insured I (Per Unit) 16.00 0.2410 0.22
Historical-Insured II (Per Unit) 19.04 0.2312 0.06
Equivalent pro forma-Insured II (Per Unit) 16.86 0.2539 0.23
Historical-Preferred (Per Unit) 11.03 0.2289 0.22
Equivalent pro forma-Preferred (Per Unit) 14.60 0.2198 0.20
Historical-Eagle (Per Unit) 12.59 0.2375 0.22
Equivalent pro forma-Eagle (Per Unit) 13.73 0.2067 0.19
</TABLE>
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
December 31, 1996 December 31, 1996 December 31, 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) N/A $0.9869 $0.72
Historical-Insured I (Per Unit) N/A 0.9000 0.49
Equivalent pro forma-Insured I (Per Unit) N/A 0.9970 0.72
Historical-Insured II (Per Unit) N/A 0.9247 0.53
Equivalent pro forma-Insured II (Per Unit) N/A 1.0503 0.77
Historical-Preferred (Per Unit) N/A 0.9156 0.63
Equivalent pro forma-Preferred (Per Unit) N/A 0.9096 0.66
Historical-Eagle (Per Unit) N/A 0.9500 0.93
Equivalent pro forma-Eagle (Per Unit) N/A 0.8554 0.62
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
110
<PAGE>
Aegis Realty, Inc.--Full Participation
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
<TABLE>
<S> <C>
(a) The historical balance sheet of Summit Insured Equity L.P. II has been adjusted to reflect the impact of applying the purchase
metho of accounting to this transaction. The net assets of this partnership are being adjusted to their estimated fair value
of $16,298. The estimated fair value was determined by the Related General Partner and the Advisor based on the adjusted net
asset value. The adjusted net asset value was determined primarily based on the appraisal value of the real estate properties
net of sales commission plus the value of certain other non-real estate related assets, less liabilities outstanding. The
effect of purchase accounting on t balance sheet results in the following adjustments: other assets have been adjusted to
eliminate the intangible items deemed to have no value, such as deferred insurance costs and certain other assets, property
and equipment have decreased, resulting from the net assets being recorded at their fair values, and the net effect of those
changes to the assets and liabilities has been applied to th partners' capital account.
(b) The historical balance sheet of Summit Preferred Equity L.P. has been adjusted to reflect the impact of applying the purchase
method of accounting to this transaction. The net assets of this partnership are being adjusted to their estimated fair value
of $9,228. The estimated fair value was determined by the Related General Partner and the Advisor based on the adjusted net
asset value. The adjusted net asset value was determined primarily based on the appraisal value of the real estate properties
in which the partnershi has an indirect interest, net of sales commissions, plus the value of certain other non-real estate
related assets, less liabilities outstanding. The effect of purchase accounting on the balance sheet results in the following
adjustments: other assets have been adjusted to elim the intangible items deemed to have no value, investments in operating
partnerships have increased, resulting from the net assets being recorded at their fair values, and the net effect of those
changes to the assets and liabilities has been applied to the partners' capital account.
(c) The historical balance sheet of Eagle Insured L.P. has been adjusted to reflect the impact of applying the purchase method of
accounting to this transaction. The net assets of this partnership are being adjusted to their estimated fair value of
$34,861. The estimated fair value was determined by the Related General Partner and the Advisor based on the adjusted net
asset value. The adjusted net asset value was determined primarily based on the appraisal value of the real estate
collateralizing the partnership's mortgage loans, plus the value of certain other non-real estate related assets, less
liabilities outstanding. The effect of purchase accounting on the balance sheet results in the following adjustments: other
assets have been adjusted to eliminate the intangible items deemed to have no value, mortgage loans have increased, resulting
from the net assets being recorded at their fair values, and the net effect of those changes to the assets and liabilities has
been applied to the partners' capital account.
(d) Represents reclassification of the existing partners' capital to shareholders' equity and the contribution to the Company by
Related Aegis LLC of a portion of Prudential - Bache Properties, Inc.'s former general partner interest in accordance with the
terms of the consolidation.
(e) Represents the additional financing obtained as a result of the transactional costs expected to be incurred. These
transactional cos expected to equal $1,205 and will be recorded as a reduction to shareholders' equity.
(f) Represents the minority interest share in the underlying operating partnerships (Summit Insured Equity L.P. and Summit Insured
Equity L.P. II) held by Related Aegis LLC and the Related General Partners.
Shareholders' equity allocation to minority interest:
</TABLE>
<TABLE>
<CAPTION>
Summit Insured Summit Insured
Equity L.P. Equity II L.P.
(Historical) (Fair Value)
------------ ------------
<S> <C> <C>
Partners' Capital $69,075 $16,298
Pro Forma Minority Interest .75% 1.5%
------- -------
Subtotal 518 244
Adjustment for Minority Interest's share of transactional costs 5 3
------- -------
Total $ 523 $ 247
======= =======
Combined Total $ 770
=======
</TABLE>
<TABLE>
<S> <C>
(g) Pursuant to the terms of the consolidation as outlined in the Advisory Agreement, reimbursement of overhead costs is limited
to a maximum of $200 annually for all three partnerships, subject to certain adjustments. Thus, for the periods ending March
31, 1997 and December 31, 1996, overhead costs are limited to $50 and $200, respectively. The historical overhead for these
respective periods of $73 and $399 have therefore been reduced by $23 to equal $50 for the three months and by $199 to equal
$200 for the full year.
</TABLE>
111
<PAGE>
Aegis Realty, Inc.--Full Participation
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
<TABLE>
<S> <C>
(h) Historically, the partnership agreements have provided for the general partners of all four partnerships to receive a special
distribution of .5% of total invested assets. In accordance with the terms of the consolidation, the historical distributions
for Summit Preferred Equity L.P. and Eagle Insured L.P. have been reclassified to an asset management fee. Also under the
terms of consolidation, the special distributions and the asset management fee are reduced to .375% per annum of total
invested assets.
(i) Represents interest expense at an assumed annual rate of 9% on the financing of the transactional costs expected to be
incurred.
(j) Represents the following adjustments to Summit Insured Equity L.P. II, Summit Preferred Equity L.P. and Eagle Insured L.P. due
to their being recorded at their fair values in applying the purchase method of accounting: (i) the elimination of the
historical amortization of deferred insurance costs and certain other assets because these intangible items were assigned no
value under purchase accounting, (ii) elimination of a portion of depreciation resulting from the reduction of property and
equipment carrying values, (iii) the amortization (included in income from equity investments) of the purchase accounting
adjustment made to investments in operating partnerships, using the straight line method over 30 years, which approximates the
average remaining life of the investments' partnership agreements and, (iv) the amortization (included in interest income from
mortgage loans) of the purchase accounting adjustment made to investments in mortgage loans, using the straight line method
over 32 years, which approximates the average remaining term to maturity of the mortgage investments.
(k) Reflects minority interest in net income of the underlying operating partnerships (Summit Insured Equity L.P. and Summit
Insured Equity L.P. II), including income allocation for special distribution as provided for in the original partnership
agreements. Income allocation to minority interest for three months ended March 31, 1997:
</TABLE>
Summit Insured Summit Insured
Equity L.P. Equity II L.P.
-------------- --------------
Pro Forma Special Distribution $ 81 $21
Pro Forma Minority Interest 7 2
----- ----
Total $ 88 $23
===== ====
Combined Total $111
=====
Income allocation to minority interest for year ended December 31, 1996:
Summit Insured Summit Insured
Equity L.P. Equity II L.P.
---------------- ---------------
Pro Forma Special Distribution $327 $83
Pro Forma Minority Interest 16 12
----- ----
Total $343 $95
===== ====
Combined Total $438
=====
<TABLE>
<S> <C>
(l) Represents the cash flow statement effect for the periods ending March 31, 1997 and December 31, 1996, for the following pro
forma adjustments described above: reduction of G & A expenses, $23 and $199 (note g), additional interest expense related to
the transactional costs of $27 and $108 (note i), a reclassification of the special distribution for Summit Preferred L.P. and
Eagle Insured L.P. to an asset management fee of $39 and $155 (note h), increase in loan payable related to additional
financing, $1,205, and payment of transactional costs, $1,205 (note e). The net change in cash flow resulting from the
consolidation transaction has been applied to distributions paid.
(m) Represents the minority interest share of the income of the underlying operating partnerships (Summit Insured Equity L.P. and
Summit Insured Equity L.P. II) for the periods ending March 31, 1997 and December 31, 1996, of $111 and $438, respectively
(see note k).
</TABLE>
112
<PAGE>
Aegis Realty, Inc.--Full Participation
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997 And The Year Ended December
31, 1996
(Dollars in thousands)
<TABLE>
<S> <C>
(n) The historical statements of cash flows of Summit Insured Equity L.P. II, Summit Preferred Equity L.P. and Eagle Insured L.P.
combined, have been adjusted to reflect the changes caused by applying the purchase method of accounting. For the periods
ending March 31, 1997 and December 31, 1996 respectively, historical net income increased $23 and $93 and depreciation and
amortization decreased $23 and $93 (due to the adjustments described in note j.)
(o) Equivalent pro forma data has been calculated by multiplying the Company pro forma amounts by the exchange ratio (below) for
each participating partnership, so that the Company per share pro forma amounts are equated to the respective values for one
unit of the respective partnership.
Exchange Ratio:
(1 unit=X shares)
Insured I 1.0103
Insured 1.0643
Preferred 0.9217
Eagle 0.8668
</TABLE>
113
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Summit Insured Equity L.P. II)
Pro Forma Consolidated Balance Sheet
As of March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Insured I-At Insured II-At Historical
Historical Cost Historical Cost Combined Totals
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Property and equipment $70,242 $18,715 $88,957
Cash and cash equivalents 2,717 1,260 3,977
Deferred insurance costs 1,251 536 1,787
Other assets 1,477 471 1,948
------- ------- -------
Total assets $75,687 $20,982 $96,669
======= ======= =======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Notes payable $ 5,309 $ 1,358 $ 6,667
Other liabilities 1,303 560 1,863
------- ------- -------
Total liabilities 6,612 1,918 8,530
------- ------- -------
Minority interest in operating
partnerships -- -- --
------- ------- -------
Partners' capital (deficit):
Limited partners 69,332 19,144 88,476
General partners (257) (80) (337)
------- ------- -------
Total partners' capital 69,075 19,064 88,139
------- ------- -------
Total liabilities and partners' capital $75,687 $20,982 $96,669
======= ======= =======
Shareholders' equity:
Common Stock; $.01 par value;
50,000,000 shares authorized; 5,111,494
shares issued and outstanding
Additional paid in capital
Total shareholders' equity
Total liabilities and shareholders' equity
<CAPTION>
Purchase Insured I At Consolidated
Accounting Historical Cost Transaction
Pro Forma and Insured II Pro Forma The Company
Adjustments At Fair Value Adjustments Pro Forma
-------------------- ----------------- -------------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment $ (1,977) (a) $86,980 $86,980
Cash and cash equivalents 3,977 3,977
Deferred insurance costs (536) (a) 1,251 1,251
Other assets (253) (a) 1,695 1,695
------- --------
Total assets $93,903 $93,903
======= ========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Notes payable $ 6,667 $ 768 (c) $ 7,435
Other liabilities 1,863 1,863
------- --------
Total liabilities 8,530 9,298
------- --------
Minority interest in operating
partnerships -- 770 (d) 770
------- ----------- --------
Partners' capital (deficit):
Limited partners (2,711) (a) 85,765 (85,765)(b) --
General partners (55) (a) (392) 392 (b) --
------- ----------- --------
Total partners' capital 85,373 --
------- --------
Total liabilities and partners' capital $93,903 $ --
======= ========
Shareholders' equity:
Common Stock; $.01 par value;
50,000,000 shares authorized; 5,111,494
shares issued and outstanding 51 (b) $ 51
(770)(d)
(768)(c)
Additional paid in capital 85,322 (b) 83,784
--------
Total shareholders' equity 83,835
--------
Total liabilities and shareholders' equity $93,903
========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
114
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Summit Insured Equity L.P. II)
Pro Forma Consolidated Income Statement
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Insured I - Insured II - Total Historical Pro Forma The Company
Historical Cost Historical Cost Partnerships Adjustments Pro Forma
----------------- ----------------- ------------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $1,942 $459 $2,401 $2,401
Recovery of common area
maintenance charges 207 61 268 268
Real estate tax reimbursements 260 70 330 330
Other 61 9 70 70
------ ----- ------ ------
Total revenues 2,470 599 3,069 3,069
------ ----- ------ ------
EXPENSES
General and administrative 294 89 383 $ (15)(e) 368
Repairs and maintenance 275 126 401 401
Real estate taxes 268 93 361 361
Interest 122 24 146 17 (f) 163
Depreciation and amortization 620 150 770 (56)(g) 714
Other (106) 30 (76) (76)
------ ----- ------ ------
Total expenses 1,473 512 1,985 1,931
------ ----- ------ ------
Net income before minority
interest 997 87 1,084 1,138
------ ----- ------ ------
Minority interest in operating
partnerships -- -- -- 111 (h) 111
------ ----- ------ ------
Net income $ 997 $ 87 $1,084 $1,027
====== ===== ====== ======
Net income per share, 5,111,494 shares outstanding during the period $ 0.20
======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
115
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Summit Insured Equity L.P. II)
Pro Forma Consolidated Income Statement
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Insured I - Insured II - Total Historical Pro Forma The Company
Historical Cost Historical Cost Partnerships Adjustments Pro Forma
----------------- ----------------- ------------------ ------------------ ------------
REVENUES
<S> <C> <C> <C> <C> <C>
Rental income $7,097 $1,867 $8,964 $8,964
Recovery of common area
maintenance charges 828 243 1,071 1,071
Real estate tax reimbursements 1,041 279 1,320 1,320
Other 257 42 299 299
------- ------- ------- -------
Total revenues 9,223 2,431 11,654 11,654
------- ------- ------- -------
EXPENSES
General and administrative 1,313 365 1,678 $ (141)(e) 1,537
Repairs and maintenance 892 283 1,175 1,175
Real estate taxes 1,075 370 1,445 1,445
Interest 532 111 643 69 (f) 712
Depreciation and amortization 2,758 598 3,356 (222)(g) 3,134
Other 226 55 281 281
------- ------- ------- -------
Total expenses 6,796 1,782 8,578 8,284
------- ------- ------- -------
Net income before minority
interest 2,427 649 3,076 3,370
------- ------- ------- -------
Minority interest in operating
partnerships -- -- -- 437 (h) 437
------- ------- ------- -------
Net income $2,427 $ 649 $3,076 $2,933
======= ======= ======= =======
Net income per share, 5,111,494 shares outstanding during the period $ 0.57
=======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
116
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Summit Insured Equity L.P. II)
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Insured - Insured II Total Adjusted Pro Forma The Company
Historical Cost At Fair Value (k) Partnerships Adjustments Pro Forma
----------------- ------------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (111)(j)
(17)(i)
Net income $ 997 $ 143 $ 1,140 15 (i) $ 1,027
-------- ------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 620 94 714 714
Minority interest in operating
partnerships -- -- -- 111 (j) 111
Changes in operating assets and
liabilities:
Increase in other assets (117) (9) (126) (126)
Increase in other liabilities 122 96 218 218
-------- ------- ------- -------
Total adjustments 625 181 806 917
-------- ------- ------- -------
Net cash provided by operating
activities 1,622 324 1,946 1,944
-------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to property and
equipment (5) (286) (291) (291)
Leasing commissions paid (23) (14) (37) (37)
-------- ------- ------- -------
Net cash used in investment activities (28) (300) (328) (328)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (257) (16) (273) (273)
Increase in loan payable -- -- -- 768 (i) 768
Payment of transactional costs -- -- -- (768)(i) (768)
Distributions paid (1,018) (265) (1,283) 17 (i) (1,281)
(15)(i)
-------- ------- ------- -------
Net cash used in financing activities (1,275) (281) (1,556) (1,554)
-------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents 319 (257) 62 62
Cash and cash equivalents at
beginning of period 2,398 1,517 3,915 3,915
-------- ------- ------- -------
Cash and cash equivalents at end
of period $ 2,717 $1,260 $ 3,977 $ 3,977
======== ======= ======= =======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
117
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Summit Insured Equity L.P. II)
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Insured I - Insured II Total Adjusted Pro Forma The Company
Historical Cost At Fair Value (k) Partnerships Adjustments Pro Forma
----------------- ------------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (437)(j)
(69)(i)
Net income $ 2,427 $ 871 $ 3,298 141 (i) $ 2,933
------- ------- ------- -------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 2,758 376 3,134 3,134
Minority interest in operating
partnerships -- -- -- 437 (j) 437
Changes in operating assets and
liabilities:
(Increase) decrease in other assets 71 (69) 2 2
(Decrease) increase in other
liabilities (148) 41 (107) (107)
------- ------- ------- -------
Total adjustments 2,681 348 3,029 3,466
------- ------- ------- -------
Net cash provided by operating
activities 5,108 1,219 6,327 6,399
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to property and
equipment (119) (182) (301) (301)
Leasing commissions paid (349) (141) (490) (490)
------- ------- ------- -------
Net cash used in investment activities (468) (323) (791) (791)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (227) (1,416) (1,643) (1,643)
Increase in loan payable -- 1,400 1,400 768 (i) 2,168
Payment of transactional costs -- -- -- (768)(i) (768)
Distributions paid (4,072) (1,059) (5,131) 69 (i) (5,203)
(141)(i)
Increase in deferred refinancing cost -- (34) (34) (34)
------- ------- ------- -------
Net cash used in financing activities (4,299) (1,109) (5,408) (5,480)
------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents 341 (213) 128 128
Cash and cash equivalents at beginning
of year 2,057 1,730 3,787 3,787
------- ------- ------- -------
Cash and cash equivalents at end
of year $ 2,398 $ 1,517 $ 3,915 $ 3,915
======= ======= ======= =======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
118
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Summit Insured Equity L.P.II)
Supplemental Pro Forma Per Share/Unit Data (l)
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
<TABLE>
<CAPTION>
Distributions Net Income
Book Value Three Months Three Months
As of Ended Ended
March 31, 1997 March 31, 1997 March 31, 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) $16.40 $0.2284 $0.20
Historical-Insured I (Per Unit) 17.33 0.2250 0.22
Equivalent pro forma-Insured I (Per Unit) 16.57 0.2308 0.20
Historical-Insured II (Per Unit) 19.04 0.2312 0.06
Equivalent pro forma-Insured II (Per Unit) 17.45 0.2431 0.21
</TABLE>
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
December 31, 1996 December 31, 1996 December 31, 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) N/A $0.9293 $0.57
Historical-Insured I (Per Unit) N/A 0.9000 0.49
Equivalent pro forma-Insured I (Per Unit) N/A 0.9389 0.58
Historical-Insured II (Per Unit) N/A 0.9247 0.53
Equivalent pro forma-Insured II (Per Unit) N/A 0.9891 0.61
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
119
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Summit Insured Equity L.P. II)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
<TABLE>
<S> <C>
(a) The historical balance sheet of Summit Insured Equity L.P. II has been adjusted to reflect the impact of applying the purchase
metho of accounting to this transaction. The net assets of this partnership are being adjusted to their estimated fair value
of $16,298. T estimated fair value was determined by the Related General Partner and the Advisor based on the adjusted net
asset value. The adjusted net asset value was determined primarily based on the appraisal value of the real estate properties
net of sales commission plus the value of certain other non-real estate related assets, less liabilities outstanding. The
effect of purchase accounting on t balance sheet results in the following adjustments: other assets have been adjusted to
eliminate the intangible items deemed to have no value, such as deferred insurance costs and certain other assets, property
and equipment have decreased, resulting from the net assets being recorded at their fair values, and the net effect of those
changes to the assets and liabilities has been applied to the partners' capital account.
(b) Represents reclassification of the existing partners' capital to shareholders' equity and the contribution to the Company by
Related Aegis LLC of a portion of Prudential-Bache Properties, Inc.'s former general partner interest in accordance with the
terms of the consolidation.
(c) Represents the additional financing obtained as a result of the transactional costs expected to be incurred. These
transactional costs are expected to equal $768 and will be recorded as a reduction to shareholders' equity.
(d) Represents the minority interest share in the underlying operating partnerships (Summit Insured Equity L.P. and Summit Insured
Equity L.P. II) held by Related Aegis LLC and the Related General Partners.
Shareholders' equity allocation to minority interest:
</TABLE>
<TABLE>
<CAPTION>
Summit Insured Summit Insured
Equity L.P. Equity II L.P.
(Historical) (Fair Value)
----------- ----------
<S> <C> <C>
Partners' Capital $69,075 $16,298
Pro Forma Minority Interest .75% 1.5%
------- -------
Subtotal 518 244
Adjustment for Minority Interest's share of transactional costs 5 3
------- -------
Total $ 523 $ 247
======= =======
Combined Total $ 770
=======
</TABLE>
<TABLE>
<S> <C>
(e) Pursuant to the terms of the consolidation as outlined in the Advisory Agreement, reimbursement of overhead costs is limited
to a maximum of $200 annually for all four partnerships, pro rata for the minimum scenario, subject to certain adjustments.
Thus, for the periods ending March 31, 1997 and December 31, 1996, overhead costs are limited to $23 and $118, respectively.
The historical overhead costs for these respective periods of $38 and $259 have therefore been reduced by $15 to equal $23 for
the three months and by $141 to equal $118 for the full year.
(f) Represents interest expense at an assumed annual rate of 9% on the financing of the transactional costs expected to be
incurred.
(g) Represents the following adjustments to Summit Insured Equity L.P. II due to it being recorded at its fair values in applying
the purchase method of accounting: (i) the elimination of the historical amortization of deferred insurance costs and certain
other assets because these intangible items were assigned no value under purchase accounting, and (ii) elimination of a
portion of depreciation resulting from the reduction of property and equipment carrying values.
</TABLE>
120
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Summit Insured Equity L.P. II)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
<TABLE>
<S> <C>
(h) Reflects minority interest in net income of the underlying operating partnerships (Summit Insured Equity L.P. and Summit
Insured Equity L.P. II), including income allocation for special distribution as provided in the original partnership
agreements.
Income allocation to minority interest for three months ended March 31, 1997:
</TABLE>
Summit Insured Summit Insured
Equity L.P. Equity II L.P.
---------------- ---------------
Pro Forma Special Distribution $ 81 $21
Pro Forma Minority Interest 7 2
----- ----
Total $ 88 $23
===== ====
Combined Total $111
=====
Income allocation to minority interest for Year ended December 31, 1996:
Summit Insured Summit Insured
Equity L.P. Equity II L.P.
---------------- ---------------
Pro Forma Special Distribution $327 $83
Pro Forma Minority Interest 16 11
----- ----
Total $343 $94
===== ====
Combined Total $437
=====
<TABLE>
<S> <C>
(i) Represents the cash flow statement effect for the periods ending March 31, 1997 and December 31, 1996, for the following pro
forma adjustments described above: reduction of G & A expenses, $15 and $141 (note e), additional interest expense related to
the transactional costs of $17 and $69 (note f), increase in loan payable related to additional financing, $768, and payment
of transactional costs, $768 (note c). The net change in cash flow resulting from the consolidation transaction has been
applied to distributions paid.
(j) Represents the minority interest share of the income of the underlying operating partnerships (Summit Insured Equity L.P. and
Summit Insured Equity L.P. II) for the periods ending March 31, 1997 and December 31, 1996, of $111 and $437, respectively
(see note h).
(k) The historical statement of cash flow of Summit Insured Equity L.P. II, has been adjusted to reflect the changes caused by
applying the purchase method of accounting. For the periods ending March 31, 1997 and December 31, 1996 respectively,
historical net income increased $56 and $222 and depreciation and amortization decreased $56 and $222 (due to the adjustments
described in note g.)
(l) Equivalent pro forma data has been calculated by multiplying the Company pro forma amounts by the exchange ratio (below) for
each participating partnership, so that the Company per share pro forma amounts are equated to the respective values for one
unit of the respective partnership.
Exchange Ratio:
(1 unit=X shares)
Insured I 1.0103
Insured II 1.0643
</TABLE>
121
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Eagle Insured L.P.)
Pro Forma Consolidated Balance Sheet
As of March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Insured I-At Eagle-At
Historical Cost Historical Cost
---------------- -----------------
<S> <C> <C>
ASSETS
Property and equipment $ 70,242 $ --
Cash and cash equivalents 2,717 1,296
Deferred insurance costs 1,251 --
Investment in mortgage loans -- 27,586
Loan receivable from affiliate -- 3,060
Other assets 1,477 1,132
--------- -------
Total assets $ 75,687 $33,074
========= =======
LIABILITIES AND PARTNERS'
CAPITAL
Liabilities
Notes payable $ 5,309 $ --
Other liabilities 1,303 166
--------- -------
Total liabilities 6,612 166
--------- -------
Minority interest in operating partnerships -- --
--------- -------
Partners' capital (deficit):
Limited partners 69,332 33,246
General partners (257) (338)
--------- -------
Total partners' capital 69,075 32,908
--------- -------
Total liabilities and partners' capital $ 75,687 $33,074
========= =======
Shareholders' equity:
Common Stock; $.01 par value; 50,000,000
shares authorized; 6,365,271 shares issued
and outstanding, respectively
Additional paid in capital
Total shareholders' equity
Total liabilities and shareholders' equity
<CAPTION>
Insured I At
Purchase Historical Cost, Consolidation
Accounting and Transaction
Historical Pro Forma Eagle, At Fair Pro Forma
Combined Totals Adjustments Value Adjustments
----------------- ---------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
ASSETS
Property and equipment $ 70,242 $ 70,242
Cash and cash equivalents 4,013 4,013
Deferred insurance costs 1,251 1,251
Investment in mortgage loans 27,586 $ 2,881 (a) 30,467
Loan receivable from affiliate 3,060 3,060
Other assets 2,609 (928)(a) 1,681
-------- --------
Total assets $108,761 $110,714
======== ========
LIABILITIES AND PARTNERS'
CAPITAL
Liabilities
Notes payable $ 5,309 $ 5,309 $ 952 (c)
Other liabilities 1,469 1,469
-------- --------
Total liabilities 6,778 6,778
-------- --------
Minority interest in operating partnerships -- -- 523 (d)
-------- --------
Partners' capital (deficit):
Limited partners 102,578 1,914 (a) 104,492 (104,492)(b)
General partners (595) 39 (a) (556) 556 (b)
-------- --------
Total partners' capital 101,983 103,936
-------- --------
Total liabilities and partners' capital $108,761 $110,714
======== ========
Shareholders' equity:
Common Stock; $.01 par value; 50,000,000
shares authorized; 6,365,271 shares issued
and outstanding, respectively 63 (b)
(523)(d)
(952)(c)
Additional paid in capital 103,873 (b)
Total shareholders' equity
Total liabilities and shareholders' equity
<CAPTION>
The Company
Pro Forma
------------
<S> <C>
ASSETS
Property and equipment $ 70,242
Cash and cash equivalents 4,013
Deferred insurance costs 1,251
Investment in mortgage loans 30,467
Loan receivable from affiliate 3,060
Other assets 1,681
---------
Total assets $110,714
=========
LIABILITIES AND PARTNERS'
CAPITAL
Liabilities
Notes payable $ 6,261
Other liabilities 1,469
---------
Total liabilities 7,730
---------
Minority interest in operating partnerships 523
---------
Partners' capital (deficit):
Limited partners --
General partners --
---------
Total partners' capital --
---------
Total liabilities and partners' capital $ --
=========
Shareholders' equity:
Common Stock; $.01 par value; 50,000,000
shares authorized; 6,365,271 shares issued
and outstanding, respectively $ 63
Additional paid in capital 102,398
---------
Total shareholders' equity 102,461
---------
Total liabilities and shareholders' equity $110,714
=========
</TABLE>
See accompanying notes to pro forma consolidated financial Statements.
122
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Eagle Insured L.P.)
Pro Forma Consolidated Income Statement
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Insured I - Eagle - Total Historical Pro Forma The Company
Historical Cost Historical Cost Partnerships Adjustments Pro Forma
----------------- ----------------- ------------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $1,942 $ -- $1,942 $1,942
Recovery of common area
maintenance charges 207 -- 207 207
Real estate tax reimbursements 260 -- 260 260
Interest income from mortgage
loans -- 613 613 $ (23)(h) 590
Interest income from loan
receivable from affiliate -- 71 71 71
Other 61 14 75 75
------ ----- ------ ------
Total revenues 2,470 698 3,168 3,145
------ ----- ------ ------
EXPENSES
General and administrative 294 54 348 (16)(e) 332
Asset management fee -- -- -- 29 (f) 29
Repairs and maintenance 275 -- 275 275
Real estate taxes 268 -- 268 268
Interest 122 -- 122 21 (g) 143
Depreciation and amortization 620 8 628 (8)(h) 620
Other (106) -- (106) (106)
------ ----- ------ ------
Total expenses 1,473 62 1,535 1,561
------ ----- ------ ------
Net income before minority
interest 997 636 1,633 1,584
------ ----- ------ ------
Minority interest in operating
partnership -- -- -- 88 (i) 88
------ ----- ------ ------
Net income $ 997 $636 $1,633 $1,496
====== ===== ====== ======
Net income per share 6,365,271 shares outstanding during the period $ 0.24
=======
</TABLE>
See accompanying notes to pro forma fonsolidated financial statements.
123
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Eagle Insured L.P.)
Pro Forma Consolidated Income Statement
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Insured I - Eagle - Total Historical Pro Forma The Company
Historical Cost Historical Cost Partnerships Adjustments Pro Forma
----------------- ----------------- ------------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $7,097 $ -- $7,097 $7,097
Recovery of common area
maintenance charges 828 -- 828 828
Real estate tax reimbursements 1,041 -- 1,041 1,041
Interest income from mortgage
loans -- 2,535 2,535 $ (90)(h) 2,445
Interest income from loan
receivable from affiliate -- 288 288 288
Other 257 41 298 298
------- ------- ------- -------
Total revenues 9,223 2,864 12,087 11,997
------- ------- ------- -------
EXPENSES
General and administrative 1,313 183 1,496 (145)(e) 1,351
Asset management fee -- -- -- 118 (f) 118
Repairs and maintenance 892 -- 892 892
Real estate taxes 1,075 -- 1,075 1,075
Interest 532 -- 532 86 (g) 618
Depreciation and amortization 2,758 30 2,788 (30)(h) 2,758
Other 226 -- 226 226
------- ------- ------- -------
Total expenses 6,796 213 7,009 7,038
------- ------- ------- -------
Net income before minority
interest 2,427 2,651 5,078 4,959
------- ------- ------- -------
Minority interest in operating
partnership -- -- -- 343 (i) 343
------- ------- ------- -------
Net income $2,427 $2,651 $5,078 $4,616
======= ======= ======= =======
Net income per share, 6,365,271 shares outstanding during the period $ 0.73
=======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
124
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Eagle Insured L.P.)
Pro Forma Consolidated Cash Flows
For the Three Months Ended March 31, 1997
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Insured I - Eagle At Total Adjusted Pro Forma The Company
Historical Cost Fair Value (l) Partnerships Adjustments Pro Forma
----------------- ---------------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (88)(k)
(21)(j)
(29)(j)
Net income $ 997 $ 621 $ 1,618 16 (j) $ 1,496
-------- ------ -------- --------- --------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 620 23 643 643
Minority interest in operating
partnership -- -- -- 88 (k) 88
Changes in operating assets
and liabilities:
(Increase) decrease in other
assets (117) 5 (112) (112)
Increase in other liabilities 122 22 144 144
-------- ------ -------- --------
Total adjustments 625 50 675 763
-------- ------ -------- --------
Net cash provided by operating
activities 1,622 671 2,293 2,259
-------- ------ -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to property and
equipment (5) -- (5) (5)
Leasing commissions paid (23) -- (23) (23)
Principal payments received on
mortgage loans -- 37 37 37
-------- ------ -------- --------
Net cash provided by (used in)
investment activities (28) 37 9 9
-------- ------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (257) -- (257) (257)
Increase in loan payable -- -- -- 952 (j) 952
Payment of transactional costs -- -- -- (952)(j) (952)
Distributions paid (1,018) (640) (1,658) 21 (j) (1,624)
29 (j)
(16)(j)
--------
Net cash used in financing activities (1,275) (640) (1,915) (1,881)
-------- ------ -------- --------
Net increase in cash and cash
equivalents 319 68 387 387
Cash and cash equivalents at
beginning of period 2,398 1,228 3,626 3,626
-------- ------ -------- --------
Cash and cash equivalents at end
of period $ 2,717 $1,296 $ 4,013 $ 4,013
======== ====== ======== ========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
125
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Eagle Insured L.P.)
Pro Forma Consolidated Cash Flows
For the Year Ended December 31, 1996
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
Insured I - Eagle At Total Adjusted Pro Forma The Company
Historical Cost Fair Value (l) Partnerships Adjustments Pro Forma
----------------- ---------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (343)(k)
(86)(j)
(118)(j)
Net income $ 2,427 $ 2,591 $ 5,018 145 (j) $ 4,616
------- -------- ------- --------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 2,758 90 2,848 2,848
Minority interest in operating
partnership -- -- -- 343 (k) 343
Equity (gain) loss -- 6 6 6
Changes in operating assets
and liabilities:
(Increase) decrease in other assets 71 (1) 70 70
Decrease in other liabilities (148) (28) (176) (176)
------- -------- ------- -------
Total adjustments 2,681 67 2,748 3,091
------- -------- ------- -------
Net cash provided by operating
activities 5,108 2,658 7,766 7,707
------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to property and
equipment (119) -- (119) (119)
Leasing commissions paid (349) -- (349) (349)
Principal payments received on
mortgage loans -- 141 141 141
------- -------- ------- -------
Net cash provided by (used in)
investment activities (468) 141 (327) (327)
------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable (227) -- (227) (227)
Increase in loan payable -- -- -- 952 (j) 952
Payment of transactional costs -- -- -- (952)(j) (952)
Distributions paid (4,072) (2,717) (6,789) 86 (j) (6,730)
118 (j)
(145)(j)
-------
Net cash used in financing activities (4,299) (2,717) (7,016) (6,957)
------- -------- ------- -------
Net increase in cash and cash
equivalents 341 82 423 423
Cash and cash equivalents at
beginning of year 2,057 1,146 3,203 3,203
------- -------- ------- -------
Cash and cash equivalents at end
of year $ 2,398 $ 1,228 $ 3,626 $ 3,626
======= ======== ======= =======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
126
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Eagle Insured L.P.)
Supplemental Pro Forma Per Share/Unit Data (m)
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
<TABLE>
<CAPTION>
Distributions Net Income
Book Value Three Months Three Months
As of Ended Ended
March 31, 1997 March 31, 1997 March 31, 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) $16.10 $0.2411 $0.24
Historical-Insured I (Per Unit) 17.33 0.2250 0.22
Equivalent pro forma-Insured I (Per Unit) 16.27 0.2436 0.24
Historical-Eagle (Per Unit) 12.59 0.2375 0.22
Equivalent pro forma-Eagle (Per Unit) 13.96 0.2090 0.21
</TABLE>
<TABLE>
<CAPTION>
Book Value Distributions Net Income
As of Year Ended Year Ended
December 31, 1996 December 31, 1996 December 31, 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
Pro forma-the Company (Per Share) N/A $1.0016 $0.73
Historical-Insured I (Per Unit) N/A 0.9000 0.49
Equivalent pro forma-Insured I (Per Unit) N/A 1.0119 0.74
Historical-Eagle (Per Unit) N/A 0.9500 0.93
Equivalent pro forma-Eagle (Per Unit) N/A 0.8681 0.63
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
127
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Eagle Insured L.P.)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
<TABLE>
<S> <C>
(a) The historical balance sheet of Eagle Insured L.P. has been adjusted to reflect the impact of applying the purchase method of
accounting to this transaction. The net assets of this partnership are being adjusted to their estimated fair value of
$34,861. The estimated fair value was determined by the Related General Partner and the Advisor based on the adjusted net
asset value. The adjusted net asset value was determined primarily based on the appraisal value of the real estate
collateralizing the partnership's mortgage loans, plus the value of certain other non-real estate related assets, less
liabilities outstanding. The effect of purchase accounting on the balance sheet results in the following adjustments: other
assets have been adjusted to eliminate the intangible items deemed to have no value, mortgage loans have increased, resulting
from the net assets being recorded at their fair values, and the net effect of those changes to the assets and liabilities has
been applied to the partners' capital account.
(b) Represents reclassification of the existing partners' capital to shareholders' equity and the contribution to the Company by
Related Aegis LLC of a portion of Prudential-Bache Properties, Inc.'s former general partner interest in accordance with the
terms of the consolidation.
(c) Represents the additional financing obtained as a result of the transactional costs expected to be incurred. These
transactional cos are expected to equal $952 and will be recorded as a reduction to shareholders' equity.
(d) Represents the minority interest share in the underlying operating partnerships (Summit Insured Equity L.P.) held by Related
Aegis LLC and the Related General Partners. Shareholders' equity allocation to minority interest:
</TABLE>
Summit Insured
Equity L.P.
-----------
Historical Partners' Capital $69,075
Pro Forma Minority Interest .75%
-------
Subtotal 518
Adjustment for Minority Interest's share of transactional costs 5
-------
Total $ 523
=======
<TABLE>
<S> <C>
(e) Pursuant to the terms of the consolidation as outlined in the Advisory Agreement, reimbursement of overhead costs is limited
to a maximum of $200 annually for all four partnerships, pro rata for the minimum scenario, subject to certain adjustments.
Thus, for the periods ending March 31, 1997 and December 31, 1996, overhead costs are limited to $25 and $102, respectively.
The historical overhead costs for these respective periods of $41 and $247 have therefore been reduced by $16 to equal $25 for
the three months and by $145 to equal $102 for the full year.
(f) Historically, the partnership agreements have provided for the general partners of both partnerships to receive a special
distributi of .5% of total invested assets. In accordance with the terms of the consolidation, the historical distributions
for Eagle Insured L has been reclassified to an asset management fee. Also under the terms of consolidation, the special
distributions and the asset management fee are reduced to .375% per annum of total invested assets.
(g) Represent interest expense at an assumed annual rate of 9% on the financing of the transactional costs expected to be
incurred.
(h) Represents the following adjustments to Eagle Insured L.P. due to it being recorded at its' fair values in applying the
purchase met of accounting: (i) the elimination of the historical amortization of certain other assets because these
intangible items were assign no value under purchase accounting, and (ii) amortization (included in interest income from
mortgage loans) of investments in mortgage loans, using the straight line method over 32 years, which approximates the average
remaining term to maturity of the mortgage investments.
</TABLE>
128
<PAGE>
Aegis Realty, Inc.--Minimum Participation
(Summit Insured Equity L.P. and Eagle Insured L.P.)
Notes To Pro Forma Consolidated Financial Statements
As Of And For The Three Months Ended March 31, 1997
And The Year Ended December 31, 1996
(Dollars in thousands)
<TABLE>
<S> <C>
(i) Reflects minority interest in net income of the underlying operating partnership (Summit Insured Equity L.P.), including
income allocation for special distribution as provided in the original partnership agreements. Income allocation to minority
interest for three months ended March 31, 1997:
</TABLE>
Summit Insured
Equity L.P.
---------------
Pro Forma Special Distribution $81
Pro Forma Minority Interest 7
----
Total $88
====
Income allocation to minority interest for Year ended December 31, 1996:
Summit Insured
Equity L.P.
---------------
Pro Forma Special Distribution $327
Pro Forma Minority Interest 16
-----
Total $343
=====
<TABLE>
<S> <C>
(j) Represents the cash flow statement effect for the periods ending March 31, 1997 and December 31, 1996, for the following pro
forma adjustments described above: reduction of G & A expenses, $16 and $145 (note e), additional interest expense related to
the transactional costs of $21 and $86 (note g), a reclassification of the special distribution for Eagle Insured L.P. to an
asset management fee of $29 and $118 (note f), increase in loan payable related to additional financing, $952, and payment of
transactional costs, $952 (note c). The net change in cash flow resulting from the consolidation transaction has been applied
to distributions paid
(k) Represents the minority interest share of the income of the underlying operating partnership (Summit Insured Equity L.P.) for
the periods ending March 31, 1997 and December 31, 1996, of $88 and $343, respectively (see note i).
(l) The historical statement of cash flow of Eagle Insured L.P. has been adjusted to reflect the changes caused by applying the
purchase method of accounting. For the periods ending March 31, 1997 and December 31, 1996 respectively, historical net income
decreased $15 and $60 and amortization increase $15 and $60 (due to the adjustment described in note h.)
(m) Equivalent pro forma data has been calculated by multiplying the Company pro forma amounts by the exchange ratio (below) for
each participating partnership, so that the Company per share pro forma amounts are equated to the respective values for one
unit of the respective partnership.
Exchange Ratio:
(1 unit=X shares)
Insured I 1.0103
Eagle 0.8668
</TABLE>
129
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Aegis Realty, Inc.
New York, New York
We have audited the accompanying balance sheet of Aegis Realty, Inc. as of
December 31, 1996. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Aegis Realty, Inc. as of December 31, 1996
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 1997
130
<PAGE>
Aegis Realty, Inc.
Balance Sheets
March 31, 1997 and December 31, 1996
ASSET
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
------------- -------------
<S> <C> <C>
Cash $1,000 $1,000
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Commitments and Contingencies
Common stock; $0.01 par value; 1,000 shares authorized; 1,000 shares issued and $ 10 $ 10
outstanding
Additional paid in capital 990 990
------- -------
Total Liabilities and Shareholder's Equity $1,000 $1,000
======= =======
</TABLE>
See accompanying notes to balance sheets.
131
<PAGE>
Aegis Realty, Inc.
Notes to Balance Sheets
March 31, 1997 and December 31, 1996
NOTE 1--General
Aegis Realty, Inc., formerly Summit Realty, Inc., (the "Company") was
formed on August 13, 1996 as a Maryland corporation for the primary purpose of
generating distributable cash flow through a consolidation of limited
partnerships (the "Partnerships") owning (either directly or through subsidiary
partnerships) a diversified portfolio of fourteen neighborhood shopping centers,
two garden apartment complexes and three participating FHA co-insured mortgage
loans.
On December 4, 1996 the Company issued 1,000 shares of common stock at
$1.00 per share in exchange for $1,000 cash from Related Capital Company, an
affiliate of the Company.
Upon consummation of the consolidation, assuming 100% participation by the
Partnerships, 8,006,614 shares will be issued to the former limited partners of
the Partnerships, 31,225 shares will be issued or reserved for issuance to the
former affiliated general partners of two of the Partnerships and 59,700 shares
will be issued or reserved for issuance to Related Aegis LLC, the advisor of the
Company (the "Advisor").
The Company's Charter authorizes its Board of Directors to classify or
reclassify any unissued shares of stock, to provide for the issuance of shares
in other classes or series, including preferred stock in one or more series, to
establish the number of shares in each class or series and to fix the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualification or terms or conditions of
redemption of such class or series. The Company has no present intention to
issue shares of any class or series other than common stock.
The March 31, 1997 balance sheet has been prepared without an audit. In the
opinion of management, the March 31, 1997 balance sheet contains all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position of the Company as of March 31, 1997.
As of March 31, 1997 the Company has not commenced operations.
NOTE 2--Related Party Transactions
Upon consummation of the consolidation, the Company will enter into an
agreement with Related Aegis LLC, an affiliate of Related Capital Company, to
act as Advisor to the Company (the "Advisory Agreement"). The Advisor will
receive (i) acquisition fees based on the acquisition prices of properties
acquired; (ii) mortgage selection fees based on the principal amount of
mortgages funded; (iii) asset management fees and special distributions
calculated on a percentage of total invested assets by the Company; (iv) a
liquidation fee based on the gross sales price of the assets sold by the Company
in connection with a liquidation of the Company's assets; and (v) reimbursement
of certain administrative costs incurred by the Advisor on behalf of the
Company.
The original term of the Advisory Agreement will terminate on the fourth
anniversary of the date of the consummation of the consolidation (the "Effective
Date"). Thereafter, the Advisory Agreement may be renewed annually by the
Company, subject to an evaluation of the performance of the Advisor by the
Company's directors. The Advisory Agreement cannot be terminated by the Company
prior to the fourth anniversary of the Effective Date, other than for gross
negligence or willful misconduct of the Advisor and by a majority vote of the
Company's independent directors. The Advisory Agreement may be terminated
without cause by the Advisor.
The Company cannot liquidate prior to the fourth anniversary of the
Effective Date except upon a recommendation of the Advisor and the affirmative
vote of holders of not less than a majority of the then outstanding shares of
common stock. After the fourth anniversary of the Effective Date, the vote of
the holders of 662/3% of the Company's then outstanding shares of common stock
is required to approve a liquidation of the Company that is not recommended by
the Advisor and the vote of the holders of a majority of the then outstanding
shares of common stock is required to approve a liquidation of the Company
recommended by the Advisor. If for any reason, whether prior to or after the
fourth anniversary of the Effective Date, the Advisory Agreement is terminated
in accordance with its terms, the Company may liquidate upon the affirmative
vote of the holders of not less than a majority of the then outstanding shares
of common stock.
132
<PAGE>
Aegis Realty, Inc.
Notes to Balance Sheets
March 31, 1997 and December 31, 1996
NOTE 3--Income Taxes
Subsequent to the Consolidation, the Company intends to qualify and operate
as a real estate investment trust ("REIT") under the provisions of the Internal
Revenue Code. Under these provisions, the Company is required to distribute at
least 95% of its REIT taxable income to its shareholders to maintain this
qualification and not be subject to Federal income taxes for the portion of
taxable income distributed. The Company must also satisfy tests concerning the
nature of its assets and income and meet certain record keeping requirements.
NOTE 4--Commitments and Contingencies
The Company will be liable for expenses of the consolidation. Assuming all
of the limited partnerships participate in the consolidation, such expenses are
presently estimated to be approximately $1,205,000.
133
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members of
Related Aegis LLC
New York, New York
We have audited the accompanying balance sheet of Related Aegis LLC as of
December 31, 1996. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Related Aegis LLC as of December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 1997
134
<PAGE>
Related Aegis LLC
Balance Sheets
March 31, 1997 and December 31, 1996
ASSET
March 31,
1997 December 31,
(Unaudited) 1996
------------- -------------
Cash $1,000 $1,000
====== ======
LIABILITIES AND MEMBERS' EQUITY
Commitments and Contingencies
Total Liabilities and Members' Equity $1,000 $1,000
====== ======
See accompanying notes to balance sheets.
135
<PAGE>
Related Aegis LLC
Notes to Balance Sheets
March 31, 1997 and December 31, 1996
NOTE 1--General
Related Aegis LLC (the "Company") is a limited liability company formed
pursuant to the laws of the state of Delaware on September 10, 1996 to act as
the Advisor to Aegis Realty, Inc. ("Aegis"), an affiliated entity. Aegis was
formed on August 13, 1996 as a Maryland corporation for the primary purpose of
generating distributable cash flow through a consolidation of limited
partnerships (the "Partnerships") owning (either directly or through subsidiary
partnerships) a diversified portfolio of fourteen neighborhood shopping centers,
two garden apartment complexes and three participating FHA co-insured mortgage
loans.
The Company intends to purchase the non-affiliated general partner
interests in the Partnerships for an aggregate purchase price of $1,137,000
(assuming the non-affiliated general partner interest in each of the
Partnerships is acquired), intends to finance the purchases by pledging such
interests and intends to receive the affiliated general partner interests of two
of the Partnerships from the shareholders of such general partners in exchange
for shares of the Company. Upon consummation of the consolidation, assuming 100%
participation by the Partnerships, 8,006,614 shares will be issued to the former
limited partners of the Partnerships, 31,225 shares will be issued or reserved
for issuance to the former affiliated general partners of two of the
Partnerships and, in exchange for the non-affiliated general partner interests
of the Partnerships and the affiliated general partner interests of two of the
Partnerships, 59,700 shares will be issued or reserved for issuance to the
Company.
The March 31, 1997 balance sheet has been prepared without an audit. In the
opinion of management, the March 31, 1997 balance sheet contains all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position of the Company as of March 31, 1997.
Neither the Company nor Aegis has commenced operations as of March 31,
1997.
NOTE 2--Income Taxes
The Company is not required to provide for, or pay, any federal income
taxes. Income tax attributes that arise from its operations are passed directly
to the individual members. The Company may be subject to state and local taxes
in jurisdictions in which it operates.
NOTE 3--Related Party Transactions
Upon consummation of the consolidation, the Company shall enter into an
agreement with Aegis (the "Advisory Agreement"). The Company will receive (i)
acquisition fees based on the acquisition prices of properties acquired; (ii)
mortgage selection fees based on the principal amount of mortgages funded; (iii)
asset management fees and special distributions calculated on a percentage of
total invested assets by Aegis; (iv) a liquidation fee based on the gross sales
price of the assets sold by Aegis in connection with a liquidation of Aegis'
assets; and (v) reimbursement of certain administrative costs incurred by the
Company on behalf of Aegis.
The original term of the Advisory Agreement will terminate on the fourth
anniversary of the date of the consummation of the consolidation (the "Effective
Date"). Thereafter, the Advisory Agreement may be renewed annually by Aegis,
subject to an evaluation of the performance of the Company by Aegis' directors.
The Advisory Agreement cannot be terminated by Aegis prior to the fourth
anniversary of the Effective Date, other than for gross negligence or willful
misconduct of the Company and by a majority vote of Aegis' independent
directors. The Advisory Agreement may be terminated without cause by the
Company.
Aegis cannot liquidate prior to the fourth anniversary of the Effective
Date except upon a recommendation of the Company and the affirmative vote of
holders of not less than a majority of the then outstanding shares of Aegis'
common stock. After the fourth anniversary of the Effective Date, the vote of
the holders of 662/3% of Aegis' then outstanding shares of common stock is
required to approve a liquidation of Aegis that is not recommended by the
Company and the vote of the holders of a majority of the then outstanding shares
of common stock is required to approve a liquidation of Aegis recommended by the
Company. If for any reason, whether prior to or after the fourth anniversary of
the Effective Date, the Advisory Agreement is terminated in accordance with its
terms, Aegis may liquidate upon the affirmative vote of the holders of not less
than a majority of the then outstanding shares of its common stock.
136
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Summit Insured Equity L.P.
New York, New York
We have audited the accompanying statements of financial condition of
Summit Insured Equity L.P. (a Delaware Limited Partnership) as of December 31,
1996 and 1995, and the related statements of income, changes in partners'
capital (deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
General Partners. Our responsibility is to express an opinion on these financial
statements 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 the
General Partners, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Summit Insured Equity L.P. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 20, 1997
137
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Statements of Financial Condition
ASSETS
<TABLE>
<CAPTION>
December 31
---------------------------------
1996 1995
-------------- ----------------
<S> <C> <C>
Property and equipment, net of accumulated depreciation of $14,841,244 and $13,262,215,
respectively (Note 4) $70,670,980 $ 72,538,235
Cash and cash equivalents 2,398,013 2,057,134
Accounts receivable-tenants, net of allowance for doubtful accounts of $302,609 and
$509,000,
respectively 803,219 878,701
Deferred insurance costs, net of accumulated amortization of $4,604,448 and $4,003,868,
respectively (Note 3) 1,401,356 2,001,936
Deferred refinancing costs, net of accumulated amortization of $116,043 and $110,764,
respectively (Note 3) 17,599 22,878
Deferred leasing commissions, net of accumulated amortization of $263,304 and $188,004,
respectively (Note 3) 468,653 285,179
Other assets 82,517 77,982
------------ ------------
Total Assets $75,842,337 $ 77,862,045
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Notes payable (Note 8) $ 5,565,841 $ 5,792,615
Accounts payable and other liabilities 475,862 533,115
Real estate taxes payable 564,012 646,100
Due to general partners and affiliates (Note 5) 141,192 149,780
------------ ------------
Total Liabilities 6,746,907 7,121,610
------------ ------------
Contingencies (Note 9)
Partners' Capital (Deficit):
Limited partners (4,000,000 BUC$ issued and outstanding) 69,352,193 70,980,748
General Partners (256,763) (240,313)
------------ ------------
Total Partners' Capital 69,095,430 70,740,435
------------ ------------
Total Liabilities and Partners' Capital $75,842,337 $ 77,862,045
============ ============
</TABLE>
See notes to financial statements.
138
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Rental income $7,097,398 $7,236,966 $7,145,175
Recovery of common area maintenance charges 828,478 740,722 821,767
Real estate tax reimbursements 1,040,827 868,645 942,669
Interest income 39,845 57,219 13,327
Other 217,482 177,674 349,477
----------- ----------- -----------
Total revenues 9,224,030 9,081,226 9,272,415
----------- ----------- -----------
Expenses:
General and administrative 428,235 532,673 449,951
General and administrative-related parties (Note 5) 633,084 577,670 587,374
Operating 168,757 178,136 150,126
Repairs and maintenance 892,434 773,174 873,440
Real estate taxes 1,075,573 1,184,399 1,024,013
Insurance 251,755 252,711 229,231
Interest 531,504 552,456 527,547
Bad debt 57,637 247,762 246,147
Depreciation and amortization 2,758,415 2,491,954 2,475,831
----------- ----------- -----------
Total expenses 6,797,394 6,790,935 6,563,660
----------- ----------- -----------
Net income $2,426,636 $2,290,291 $2,708,755
=========== =========== ===========
Allocation of Net Income:
Limited Partners $1,971,450 $1,836,469 $2,250,748
=========== =========== ===========
General Partners $ 19,914 $ 18,550 $ 22,735
=========== =========== ===========
Special Distributions to General Partners (Note 5) $ 435,272 $ 435,272 $ 435,272
=========== =========== ===========
Net income per BUC $ .49 $ .46 $ .56
=========== =========== ===========
</TABLE>
See notes to financial statements.
139
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
<TABLE>
<CAPTION>
Total Limited Partners General Partners
-------------- ------------------ -----------------
<S> <C> <C> <C>
Partners' capital (deficit)--January 1, 1994 $73,884,671 $ 74,093,539 $ (208,868)
Net income 2,708,755 2,250,748 458,007
Distributions (4,071,641) (3,600,003) (471,638)
------------ ------------ ----------
Partners' capital (deficit)--December 31, 1994 72,521,785 72,744,284 (222,499)
Net income 2,290,291 1,836,469 453,822
Distributions (4,071,641) (3,600,005) (471,636)
------------ ------------ ----------
Partners' capital (deficit)--December 31, 1995 70,740,435 70,980,748 (240,313)
Net income 2,426,636 1,971,450 455,186
Distributions (4,071,641) (3,600,005) (471,636)
------------ ------------ ----------
Partners' capital (deficit)--December 31, 1996 $69,095,430 $ 69,352,193 $ (256,763)
============ ============ ==========
</TABLE>
See notes to financial statements.
140
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $2,426,636 $2,290,291 $ 2,708,755
----------- ----------- -------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,758,415 2,491,954 2,475,831
Changes in assets and liabilities:
Decrease (increase) in accounts receivable-tenants 281,873 (138,725) (93,447)
(Decrease) increase in allowance for doubtful accounts (206,391) 197,000 165,000
Increase in other assets (4,535) (40,851) (29,406)
(Decrease) increase in due to General Partners and affiliates (8,588) 27,750 (955)
(Decrease) increase in accounts payable and other liabilities (57,253) 56,218 (113,903)
(Decrease) increase in real estate taxes payable (82,088) 173,363 (56,878)
----------- ----------- -------------
Total adjustments 2,681,433 2,766,709 2,346,242
----------- ----------- -------------
Net cash provided by operating activities 5,108,069 5,057,000 5,054,997
----------- ----------- -------------
Cash flows used in investing activities:
Improvements to property and equipment (119,325) (110,637) (442,739)
Leasing commissions paid (349,450) (73,292) (171,151)
Increase in sellers' rental guarantees 0 15,000 0
----------- ----------- -------------
Net cash used in investing activities (468,775) (168,929) (613,890)
----------- ----------- -------------
Cash flows used in financing activities:
Repayments of notes payable (226,774) (166,597) (367,032)
Proceeds from notes payable 0 0 350,000
Distributions paid (4,071,641) (4,071,641) (4,071,641)
Increase in deferred refinancing costs 0 (26,398) 0
----------- ----------- -------------
Net cash used in financing activities (4,298,415) (4,264,636) (4,088,673)
----------- ----------- -------------
Net increase in cash and cash equivalents 340,879 623,435 352,434
Cash and cash equivalents at beginning of year 2,057,134 1,433,699 1,081,265
----------- ----------- -------------
Cash and cash equivalents at end of year $2,398,013 $2,057,134 $ 1,433,699
=========== =========== =============
Supplemental information:
Interest paid $ 532,799 $ 553,061 $ 527,547
=========== =========== =============
</TABLE>
See notes to financial statements.
141
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 1--General
Summit Insured Equity L.P., a Delaware limited partnership (the
"Partnership"), was organized on December 12, 1985 and had no operations until
the commencement, on December 23, 1986, of the public offering of beneficial
unit certificates (BUC$) representing assignments of limited partnership
interests in the Partnership. The General Partners of the Partnership (the
"General Partners") are Related Insured Equity Associates, Inc. (the "Related
General Partner") and Prudential-Bache Properties, Inc. ("PBP"). The General
Partners manage and control the affairs of the Partnership. The Partnership's
fiscal year ends on December 31. The Partnership was formed to acquire, on an
all-cash basis, existing income producing shopping centers, and to improve,
operate, and hold such properties for investment.
The Partnership owns eleven shopping centers located in the following
states: Arizona, Indiana, Tennessee, Oregon, Florida, Mississippi, Georgia,
California and Ohio.
The Partnership owns an insurance policy (the "Policy") which insures, but
not guarantees, that the cumulative amount of insured cash available for
distribution from all sources, as determined in accordance with the Policy and
related agreement, together with the appraised values of the real estate then
owned by the Partnership, will equal at least 100% and up to a maximum of 125%
of original contributions on the tenth anniversary of the final property
acquisition date. The Policy is intended to cover various economic risks of the
ownership of the properties, but does not apply to certain losses, costs,
penalties or expenses, including, among others, those arising out of any
physical loss, damage, loss of use or other physical injury to the properties.
NOTE 2--Summary of Significant Accounting Policies
a) Basis of Accounting
The books and records of the Partnership are maintained on the accrual
basis of accounting in accordance with generally accepted accounting principles
("GAAP"). The tax basis net income was lower by approximately $145,000 from the
GAAP basis net income for the year ended December 31, 1996 primarily due to
direct write-offs for tax purposes which exceeded bad debt expense for GAAP, as
well as the treatment of sellers' rental guarantees and depreciation under GAAP
(see Note 2b). For the years ended December 31, 1995 and 1994, the tax basis net
income was greater than the GAAP basis net income by approximately $287,000, and
$271,000, respectively, primarily due to the treatment of sellers' rental
guarantees and depreciation under GAAP.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the General Partners to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
b) Property and Equipment
The carrying amount of property and equipment includes the purchase price,
acquisition fees and expenses, and any other costs incurred in acquiring the
properties less amounts received from sellers' rental guarantees. Buildings are
depreciated on the straight line basis over their estimated useful lives of 40
years. Maintenance and repairs are charged to expense as incurred. Renewals and
betterments that significantly extend the useful life of a property are
capitalized.
The Partnership reviews each of its property investments for possible
impairment at least annually, and more frequently if circumstances warrant.
Impairment of properties to be held and used is determined to exist when
estimated amounts recoverable through future operations on an undiscounted basis
are below the properties' carrying value. If a property is determined to be
impaired, it is written down to its estimated fair value.
The determination of impairment is based, not only upon future cash flows,
which rely upon estimates and assumptions including expense growth, occupancy
and rental rates, but also upon market capitalization and discount rates as well
as other market indicators. The General Partners believe that the estimates and
assumptions used are appropriate in evaluating the carrying amount of the
Partnership's properties. However, changes in market conditions and
circumstances may occur in the near term which would cause these estimates and
assumptions to change, which, in turn, could cause the amounts ultimately
realized upon the sale or other disposition of the properties to differ
materially from their estimated fair value. Such changes may also require
write-downs in future years. No write-downs for impairments have been recorded
as of December 31, 1996.
142
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 2--Summary of Significant Accounting Policies (Continued)
c) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and money market funds,
whose cost approximates market value.
d) Income Taxes
The Partnership is not required to provide for, or pay, any federal income
taxes. Net income or loss generated by the Partnership is passed through to the
individual partners and is required to be reported by them. The Partnership may
be subject to state and local taxes in jurisdictions in which it operates.
e) Reclassifications
Certain balances have been reclassified from prior years to conform to
classifications used in the current year's presentation.
NOTE 3--Costs, Fees and Expenses
a) Public Offering Costs
Costs incurred to organize the Partnership, including but not limited to
legal, accounting and registration fees, were considered deferred organization
costs. These costs were capitalized and were amortized over a 60-month period
which ended in 1995. Costs incurred to sell Partnership units (BUC$), including
brokerage and underwriting commissions (7% of the gross proceeds), certain
printing costs, and non-accountable expense allowance were considered selling
and offering expenses, and charged to Limited Partners' capital.
b) Acquisition Fees
At investor closings, the General Partners were paid a property acquisition
fee (equal to 5% of the Gross Proceeds) for evaluating and screening real
property to be acquired. This fee, along with acquisition expenses incurred by
the Partnership, was allocated to the properties based on the cost of shopping
centers acquired.
c) Deferred Insurance Costs
Costs related to the Policy purchased for the benefit of the Limited
Partners are being amortized over a 10 year period ( the life of the Policy)
which commenced on May 19, 1989, the date of the Partnership's final
acquisition.
d) Deferred Refinancing Costs
Costs incurred in connection with the refinancing of the note payable have
been capitalized and are being amortized over the life of the note (see Note 8).
e) Deferred Leasing Commissions
Costs incurred in connection with the lease-up of vacant space and lease
renewals have been capitalized and are being amortized over the term of the
underlying leases.
f) Other Expenses
In addition to the costs, fees, and expenses discussed above, the
Partnership reimburses the General Partners and its affiliates for actual
Partnership operating expenses payable by or allocable to the Partnership. The
amount of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement.
Amortization related to the deferred costs described above is included in
depreciation and amortization expense.
143
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 4--Property and Equipment
The components of property and equipment are as follows:
December 31
-----------------------------------
1996 1995
---------------- ----------------
Land $ 20,356,681 $ 20,356,681
Buildings and improvements 65,155,543 65,443,769
------------ ------------
85,512,224 85,800,450
Less:
Accumulated depreciation (14,841,244) (13,262,215)
------------ ------------
$ 70,670,980 $ 72,538,235
============ ============
Amounts estimated to be recoverable from future operations and ultimate
sales were greater than the carrying value of each property owned at December
31, 1996 and 1995. However, the carrying value of certain properties may be in
excess of their fair values as of such dates.
The following list compares gross revenues for each of the Partnership's
investment properties as a percentage of the Partnership's total gross revenues
during 1996, 1995 and 1994.
1996 1995 1994
------ ------ -----
1. Cactus Village/Glendale, AZ 6% 6% 7%
2. Hickory Plaza/Nashville, TN 7% 7% 7%
3. Highland Fair/Gresham, OR 7% 8% 8%
4. Pablo Plaza/Jacksonville, FL 10% 10% 8%
5. Southhaven/Southhaven, MS 8% 7% 6%
6. Town West/Indianapolis, IN 7% 6% 7%
7. Westbird/Miami, FL 11% 12% 11%
8. Winery Square/Fairfield, CA 14% 15% 17%
9. Mountain View Village/Snellville, GA 11% 10% 10%
10. Forest Park Square/Cincinnati, OH 12% 11% 11%
11. Kokomo Plaza/Kokomo, IN 7% 8% 8%
During the year ended December 31, 1996, the Kroger Company, which is a
tenant at Hickory Plaza Shopping Center, Southhaven Shopping Center, Town West
Shopping Center, Mountain View Village Shopping Center, Forest Park Shopping
Center and Kokomo Plaza Shopping Center, accounted for approximately 37% of the
Partnership's total rental income.
NOTE 5--Related Party Transactions
The costs and expenses incurred to related parties for the years ended
December 31, 1996, 1995 and 1994 were as follows:
1996 1995 1994
----------- ----------- ----------
Expense reimbursement (a) $ 178,600 $ 128,586 $ 150,839
Property management fees (b) 420,157 410,177 416,848
Leasing costs (c) 11,507 16,092 8,187
Insurance services (d) 22,820 22,815 11,500
---------- ---------- ----------
$ 633,084 $ 577,670 $ 587,374
========== ========== ==========
(a) The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar; transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The amount
of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement.
(b) The Partnership's eleven properties are being managed by RCC Property
Advisors, Inc. (the "Manager"), an affiliate of the Related General Partner.
144
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 5--Related Party Transactions (Continued)
(c) Leasing costs, representing travel and other reimbursable expenses
incurred, are paid to the Manager in connection with the lease-up of vacant
space and lease renewals. In addition, capitalized leasing commissions paid to
the Manager for the years ended December 31, 1996 and 1995 were approximately
$251,000 and $50,000, respectively.
(d) Four of the officers of the Related General Partner have an ownership
interest in Multi-Family Program Manager Inc., a company which has provided
insurance services for the properties.
The distributions earned by the General Partners for the years ended
December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
General Partners
-----------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Special Distributions $435,272 $435,272 $435,272
Regular Distributions of Adjusted Cash from Operations 36,364 36,364 36,366
--------- --------- ---------
$471,636 $471,636 $471,638
========= ========= =========
</TABLE>
As of December 31, 1996, Prudential Securities Incorporated ("PSI"), an
affiliate of PBP, owned 33,760 BUC$.
NOTE 6--Profit and Loss Allocation/Distribution
For financial reporting purposes, net profits or losses, after the Special
Distributions to the General Partners, are allocated 99% to the limited partners
and BUC$holders and 1% to the General Partners.
Net income per BUC is computed based on the net income for the year
allocated to the limited partners divided by the number of BUC$ outstanding for
the year.
The General Partners are paid a Special Distribution of Adjusted Cash From
Operations equal to 0.5% of invested assets per annum, as defined in the
Partnership Agreement, for managing the affairs of the Partnership.
Distributions of cash made, based on Adjusted Cash from Operations after
payment of Special Distributions as defined in the Partnership Agreement, are
allocated 99% to the limited partners and BUC$holders and 1% to the General
Partners.
NOTE 7--Leases
Future minimum base rentals due from tenants under non-cancellable
operating leases as of December 31, 1996 are as follows:
Year Ended December 31 Amount
- ------------------------ ------------
1997 $ 6,664,000
1998 6,211,000
1999 5,582,000
2000 5,084,000
2001 4,683,000
Thereafter 28,193,000
------------
Total $56,417,000
============
Certain leases require the lessees to reimburse the Partnership for real
estate taxes, insurance costs and certain other reimbursable expenses.
NOTE 8--Notes Payable
The Partnership had a loan for $5,600,000 from New York Life Insurance
Company ("NYL"). The NYL loan had a five year term at a fixed 9.25% annualized
interest rate payable in equal monthly installments of interest only which
expired on April 10, 1995. During the second quarter of 1995, the Partnership
refinanced the loan with NYL for an additional five years at a 9.25% annualized
interest rate payable in equal monthly installments of principal and interest in
the amount of $55,984 until June 10, 2000, at which time the balance of
principal, together with any unpaid interest, is due. Costs incurred in
connection with the refinancing are being amortized over the life of the loan.
Another loan, with an original balance of approximately $376,000, which was held
by Chemical Bank for a term of one year, was fully repaid on February 2, 1995.
145
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 8--Notes Payable (Continued)
Annual principal payment requirements as of December 31, 1996 for each of
the next five fiscal years and thereafter are as follows:
Year Ending Amount
-------------- ------
1997(a) $ 396,598
1998 202,078
1999 221,583
2000 242,971
2001 266,424
Thereafter 4,236,187
===========
$5,565,841
===========
(a) Includes principal repayment of loan due to High Peak on January 17,
1997 of $212,309. (See Note 9.)
The Partnership has determined that the carrying value of the notes payable
approximates their fair value at December 31, 1996 and 1995.
NOTE 9--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, were transferred to a single judge of the United States District
Court for the Southern District of New York (the "Court") and consolidated for
pretrial proceedings under the caption In re Prudential Securities Incorporated
Limited Partnerships Litigation (MDL Docket 1005) (the "Class Action"). On June
8, 1994, plaintiffs in the transferred cases filed a complaint that consolidated
the previously filed complaints and named as defendants, among others, PSI,
certain of its present and former employees and the General Partners. The
Partnership was not named a defendant in the consolidated complaint, but the
name of the Partnership was listed as being among the limited partnerships at
issue in the case.
On August 9, 1995, PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The Court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
Court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including the Partnership, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
three other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well as
each of the other concerned partnerships and final approval of the Court after
review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the Partnership
and Summit Insured Equity L.P. II, Summit Preferred Equity L.P. and Eagle
Insured L.P. will receive shares in a newly formed real estate investment trust.
It is anticipated that the shares will be allocated proportionately among the
partnerships and their respective investors based upon appraisals and other
factors as supported by a third-party fairness opinion. Detailed information
about the proposed Related Settlement and Reorganization will be sent to
BUC$holders in the near future. The terms of the Reorganization include, among
other matters, the acquisition by affiliates of the Related
146
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 9--Contingencies (Continued)
Capital Company ("RCC") of PBP's general partner interest (the "PBP Interest"),
transfer to the BUC$holders of one-half of the PBP Interest, reduction of fees
currently payable to the General Partners by 25%, filing an application to list
the new company's shares on an exchange and the creation of an infinite, as
opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by RCC
or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order prohibits
class members (including the BUC$holders) from, among other matters, (i)
transferring their BUC$ unless the transferee agrees to be bound by the Related
Settlement; (ii) granting a proxy to object to the Reorganization; or (iii)
commencing a tender offer for the BUC$. In addition, the General Partners are
enjoined from (i) recording any transfers made in violation of the Order and
(ii) providing the list of investors in any of the partnerships which are the
subject of the Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the proposed
Related Settlement and Reorganization will be satisfied nor that a closing may
occur in the projected time frame. In the event a settlement cannot be reached,
the Related General Partner believes it has meritorious defenses to the
consolidated complaint and intends to vigorously defend this action.
On August 9, 1994, House of Fabrics, Inc. ("House of Fabrics"), a tenant at
Winery Square Shopping Center ("Winery Square"), closed a $350,000 promissory
note ("the Note") with High Peak Corporation ("Lender"), a third party lender,
for tenant improvements at the tenant's location. It is an amortizing note
carrying a fixed interest rate of 12%, maturing on August 1, 1999 and with fixed
monthly payments in the amount of $7,786 due and payable on the first day of
each month. As required by the Lender, the Partnership guaranteed the payment of
all principal, interest, any additional interest and other sums of any nature
whatsoever which may or shall become due and payable pursuant to the provisions
of the Note (the "Guarantee"). On November 3, 1994, House of Fabrics filed under
Chapter 11 of the Bankruptcy Code and pursuant to subsequent court proceedings,
certain of House of Fabrics' leases were rejected and those stores were closed
including the Winery Square location. Pursuant to such proceedings, as of March
1996, the tenant ceased operations and rental payments with respect to the
Winery Square location. Management has pursued various proposals to re-lease the
space and is currently in negotiations with a replacement tenant for most of the
space. Pursuant to the terms of the Guarantee, the Partnership continued to make
payments to the Lender of amounts due under the Note and payments were current
through December 31, 1996.
Together with the Lender, the Partnership also pursued a claim in the bankruptcy
proceedings for amounts due from House of Fabrics under the Note and the lease.
In December 1996, in accordance with the Order Confirming House of Fabrics'
Third Amended Plan of Reorganization dated May 23, 1996 (as modified) stock
certificates evidencing 15,251 shares and 13,910 shares of House of Fabrics
common stock were issued to the Lender and the Partnership, respectively,
against their allowed claims of $265,981 and $242,491, respectively. Under an
agreement with the Lender, the stock issued to the Lender was assigned to the
Partnership on January 17, 1997, the balance of the loan ($212,309) due the
Lender was paid-off and the Partnership was fully released under its Guaranty.
The stock is thinly traded but was sold as of February 28, 1997 for $145,805 ($5
per share), less brokerage commissions and fees.
NOTE 10--Subsequent Events
On February 14, 1997, a distribution of $900,001 was paid to the
BUC$holders and $9,091 to the General Partners from Adjusted Cash From
Operations for the quarter ended December 31, 1996.
On January 17, 1997, under an agreement with High Peak Corporation, 13,910
shares of the common stock of House of Fabrics, Inc. were assigned to the
Partnership, the balance of the loan due to High Peak Corporation was paid off
and the Partnership was fully released under its guarantee (see Note 9).
147
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
The Registrant's current primary source of funds is cash flow from
operations of eleven shopping centers.
All distributions made during 1996, 1995 and 1994 were from Adjusted Cash
From Operations of the properties. The Registrant currently expects that cash
distributions will continue to be paid in the foreseeable future from Adjusted
Cash From Operations generated by the properties.
On February 14, 1997, a distribution of $900,001 was paid to the
BUC$holders and $9,091 to the General Partners from Adjusted Cash From
Operations for the quarter ended December 31, 1996.
As more fully discussed in Results of Operations below, two anchor tenants
have vacated their premises but continue to meet the terms of their lease.
On August 9, 1994, House of Fabrics, Inc. ("House of Fabrics"), a tenant at
Winery Square Shopping Center ("Winery Square"), closed a $350,000 promissory
note ("the Note") with High Peak Corporation ("Lender"), a third party lender,
for tenant improvements at the tenant's location. It is an amortizing note
carrying a fixed interest rate of 12%, maturing on August 1, 1999 and with fixed
monthly payments in the amount of $7,786 due and payable on the first day of
each month. As required by the Lender, the Registrant guaranteed the payment of
all principal, interest, any additional interest and other sums of any nature
whatsoever which may or shall become due and payable pursuant to the provisions
of the Note (the "Guarantee"). On November 3, 1994, House of Fabrics filed under
Chapter 11 of the Bankruptcy Code and pursuant to subsequent court proceedings,
certain of House of Fabrics' leases were rejected and those stores were closed
including the Winery Square location. Pursuant to such proceedings, as of March
1996, the tenant ceased operations and rental payments with respect to the
Winery Square location. Management has pursued various proposals to re-lease the
space and is currently in negotiations with a replacement tenant for most of the
space. Pursuant to the terms of the Guarantee, the Registrant continued to make
payments to the Lender of amounts due under the Note and payments were current
through December 31, 1996.
Together with the Lender, the Registrant also pursued a claim in the
bankruptcy proceedings for amounts due from House of Fabrics under the Note and
the lease. In December 1996, in accordance with the Order Confirming House of
Fabrics' Third Amended Plan of Reorganization dated May 23, 1996 (as modified)
stock certificates evidencing 15,251 shares and 13,910 shares of House of
Fabrics common stock were issued to the Lender and the Registrant, respectively,
against their allowed claims of $265,981 and $242,491, respectively. Under an
agreement with the Lender, the stock issued to the Lender was assigned to the
Registrant on January 17, 1997, the balance of the loan ($212,309) due the
Lender was paid-off and the Registrant was fully released under its Guaranty.
The stock is thinly traded but was sold as of February 28, 1997 for $145,805 ($5
per share), less brokerage commissions and fees.
During the year ended December 31, 1996, cash and cash equivalents of the
Registrant increased by approximately $341,000. This increase is primarily
attributable to cash flow from operations of approximately $5,108,000, which
exceeded debt payments of approximately $227,000, distributions of approximately
$4,072,000, capital expenditures of approximately $119,000 and leasing
commissions of approximately $349,000.
Future liquidity is expected to result from cash generated from the
operations of the properties, interest earned on funds invested in short-term
money market instruments and ultimately through the sale or refinancing of the
properties. The Registrant anticipates that future tenant and capital
improvements will be funded from cash generated from operations will provide
sufficient liquidity to fund in future years the Registrant's operating
expenditures, debt service, future tenant and capital improvements and
distributions.
For a discussion of the proposed settlement of the Class Action relating to
the Registrant, see Other Events in Item 1. Business above.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Registrant's investments in
properties are diversified by location so that if one area of the country is
experiencing downturns in the economy, the remaining properties may be
experiencing upswings. However, the geographic diversification of the portfolio
may not protect against a general downturn in the national economy.
Results of Operations
Results of the Registrant's operations for the year ended December 31, 1996
consist primarily of the result of the operations of the eleven shopping centers
in which the Registrant has invested.
148
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
The Registrant reviews each of its property investments for possible
impairment at least annually, and more frequently if circumstances warrant.
Impairment of properties to be held and used is determined to exist when
estimated amounts recoverable through future operations on an undiscounted basis
are below the properties' carrying value. If a property is determined to be
impaired, it is written down to its estimated fair value.
The determination of impairment is based, not only upon future cash flows,
which rely upon estimates and assumptions including expense growth, occupancy
and rental rates, but also upon market capitalization and discount rates as well
as other market indicators. The General Partners believe that the estimates and
assumptions used are appropriate in evaluating the carrying amount of the
Registrant's properties. However, changes in market conditions and circumstances
may occur in the near term which would cause these estimates and assumptions to
change, which, in turn, could cause the amounts ultimately realized upon the
sale or other disposition of the properties to differ materially from their
estimated fair value. Such changes may also require write-downs in future years.
No write-downs for impairments have been recorded as of December 31, 1996.
The Registrant's investment in the shopping centers is subject to the risks
arising from management and ownership of commercial properties. The Registrant
invests in shopping centers with substantial anchor tenants. Anchor tenants
usually provide stability to a shopping center and a steady source of rental
payments. A shopping center's revenues from all of its tenants can be adversely
affected by the loss of its anchor tenant. If the rental income from shopping
centers decreases, it could adversely affect distributions to BUC$holders and
could affect the price the Registrant is able to receive upon sale of the
properties.
All eleven shopping centers have tenants with leases that require payment
of percentage rent. Percentage rent is an amount paid by the tenant which
represents a portion of sales proceeds over a specified threshold amount as
called for in the lease.
Within the eleven shopping centers there were twenty seven tenants who
received some period of free rent during 1996. Free rent (i.e. not charging a
tenant rent for a period of time) is given to tenants as an inducement to lease
or re-lease space. The total amount of free rent was less than 1% of net rental
income. Some of the tenants will continue to receive free rent in 1997.
Safeway, the anchor tenant of Cactus Village Shopping Center ("Cactus
Village") closed its facility in December 1991 due to poor sales. However, the
tenant continues to fully abide by all aspects of its lease which will expire in
September 2006. There have been several proposals received for leasing this
space, but as of March 1, 1997, this space has not been re-leased.
In November 1995, Publix, the anchor tenant of Pablo Plaza Shopping Center
in Jacksonville, Florida, moved out of its space to a newer, larger space
approximately one mile away. This tenant's lease expires in November 1998, and
Publix intends to continue to abide by the terms of its lease until expiration.
As of March 1, 1997, this space has not been re-leased.
1996 vs. 1995
Net income per BUC was $.49 for the year ended December 31, 1996 as
compared to $.46 for the year ended December 31, 1995.
Rental income decreased approximately $140,000 or 2% from 1995 to 1996
primarily due to decreases at Highland Fair Shopping Center ("Highland Fair")
and Winery Square due to the loss of several tenants at both locations partially
offset by an increase in occupancy at Southhaven Shopping Center and Forest Park
Shopping Center ("Forest Park").
Recovery of common area maintenance charges increased approximately $88,000
for the year ended December 31, 1996 as compared to the year ended December 31,
1995. This increase is primarily due to repairs in 1996 for relamping of parking
lots at Hickory Plaza Shopping Center ("Hickory Plaza") and Winery Square, roof
repairs at Hickory Plaza as well as an underaccrual of such charges at Cactus
Village in 1995.
Real estate tax reimbursements increased approximately $172,000 for the
year ended December 31, 1996 as compared to the year ended December 31, 1995.
This increase was primarily due to an increase in real estate taxes at Forest
Park in 1995 due to an unsuccessful valuation protest which was billed in 1996
and an underaccrual of reimbursements at Mountain View Shopping Center
("Mountain View") in 1995.
Interest income decreased approximately $17,000 for the year ended December
31, 1996 as compared to the year ended December 31, 1995. This decrease is
primarily due to interest income earned on an escrow account for several years
at one of the Registrant's properties, which was recognized in the third quarter
of 1995.
149
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Other income increased approximately $40,000 for the year ended December
31, 1996 as compared to the year ended December 31, 1995 primarily due to an
increase in insurance reimbursements from tenants at Winery Square resulting
from increases in premiums for earthquake insurance.
General and administrative expense decreased approximately $104,000 for the
year ended December 31, 1996 as compared to the year ended December 31, 1995.
This decrease is primarily due to a settlement of a lawsuit with the seller of
Winery Square in connection with monies placed in escrow at closing to ensure
construction completion in 1995 as well as the cost of appraisals of the
Registrant's eleven properties in 1995.
Repairs and maintenance expense increased approximately $119,000 for the
year ended December 31, 1996 as compared to the year ended December 31, 1995.
This increase is primarily due to roof repairs at Westbird Shopping Center
("Westbird") and Hickory Plaza, relamping of parking lots at Hickory Plaza and
Winery Square and structural repairs to the building at Westbird.
Bad debt expense decreased approximately $190,000 for the year ended
December 31, 1996 as compared to the year ended December 31, 1995. This decrease
is primarily due to a decrease in reserves at Townwest, Cactus Village, Highland
Fair and Winery Square.
Depreciation and amortization increased approximately $266,000 for the year
ended December 31, 1996 as compared to the year ended December 31, 1995
primarily due to the write off of leasehold improvements and leasing commissions
relating to a tenant at Winery Square which ceased operations and rental
payments in March 1996.
1995 vs. 1994
Net income per BUC was $.46 for the year ended December 31, 1995 as
compared to $.56 for the year ended December 31, 1994.
Rental income remained fairly consistent from 1994 to 1995 with a 1%
increase primarily due to normal rent increases.
Recovery of common area maintenance charges and repairs and maintenance
expense decreased approximately $81,000 and $100,000, respectively, for the year
ended December 31, 1995 as compared to the year ended December 31, 1994. This
decrease is primarily due to nonrecurring repairs in 1994 performed on the roof
and air conditioning system at Westbird, a portion of which was charged back to
the tenants.
Interest income increased approximately $44,000 for the year ended December
31, 1995 as compared to the year ended December 31, 1994. This increase is
primarily due to accrued interest income recognized on an escrow account in 1995
at one of the Registrant's properties.
Other income decreased approximately $172,000 for the year ended December
31, 1995 as compared to the year ended December 31, 1994. This decrease is
primarily due to the receipt of approximately $135,000 in 1994 from contractors,
engineers and tradesmen for the Registrant's share of a legal settlement for
defective work at Winery Square.
General and administrative expense increased approximately $83,000 for the
year ended December 31, 1995 as compared to the year ended December 31, 1994.
This increase is primarily due to a settlement of a lawsuit with the seller of
Winery Square in connection with monies placed in escrow at closing to ensure
construction completion.
Operating expense increased approximately $28,000 for the year ended
December 31, 1995 as compared to the year ended December 31, 1994. This increase
is primarily due to an increase in utility expense at Westbird, Winery Square,
Mountain View and Forest Park.
Real estate taxes increased approximately $160,000 for the year ended
December 31, 1995 as compared to the year ended December 31, 1994. This increase
is primarily due to an unsuccessful valuation protest at Forest Park. This
increase is also due to an underaccrual of real estate taxes in 1994 at Cactus
Village and an increase of real estate taxes at Highland Fair.
Insurance expense increased approximately $23,000 for the year ended
December 31, 1995 as compared to the year ended December 31, 1994. This increase
is primarily due to an understatement of prepaid insurance at December 31, 1993.
150
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Property and equipment, net of accumulated depreciation of $15,275,484 and $14,841,244,
respectively (Note 2) $70,242,073 $70,670,980
Cash and cash equivalents 2,717,373 2,398,013
Accounts receivable-tenants, net of allowance for doubtful accounts of $107,158 and
$302,609,
respectively 892,372 803,219
Deferred insurance costs, net of accumulated amortization of $4,754,593 and $4,604,448,
respectively 1,251,211 1,401,356
Deferred refinancing costs, net of accumulated amortization of $10,119 and $116,043,
respectively 16,279 17,599
Deferred leasing commissions, net of accumulated amortization of $297,398 and $263,304,
respectively 457,422 468,653
Other assets 110,277 82,517
----------- -----------
Total Assets $75,687,007 $75,842,337
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Notes payable $ 5,309,039 $ 5,565,841
Accounts payable and other liabilities 467,850 475,862
Real estate taxes payable 562,117 564,012
Due to General Partners and affiliates 273,251 141,192
----------- -----------
Total Liabilities 6,612,257 6,746,907
----------- -----------
Contingencies (Note 5)
Partners' Capital (Deficit):
Limited Partners (4,000,000 BUC$ issued and outstanding) 69,331,720 69,352,193
General Partners (256,970) (256,763)
----------- -----------
Total Partners' Capital 69,074,750 69,095,430
----------- -----------
Total Liabilities and Partners' Capital $75,687,007 $75,842,337
=========== ===========
</TABLE>
See Notes to Financial Statements.
151
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
------------- -----------
<S> <C> <C>
Revenues:
Rental income $1,942,476 $1,872,529
Recovery of common area maintenance charges 207,120 185,181
Real estate tax reimbursements 260,207 217,161
Interest income 10,817 6,715
Other 50,264 42,161
---------- -----------
Total revenues 2,470,884 2,323,747
---------- -----------
Expenses:
General and administrative 100,350 107,811
General and administrative-related parties (Note 3) 133,185 201,140
Operating 55,689 45,883
Repairs and maintenance 274,598 216,277
Real estate taxes 268,893 280,784
Insurance 60,468 63,867
Interest 122,124 135,041
Bad debt (161,452) 284,263
Depreciation and amortization 619,799 629,568
---------- -----------
Total expenses 1,473,654 1,964,634
---------- -----------
Net Income $ 997,230 $ 359,113
========== ===========
Allocation of Net Income:
Limited partners $ 879,528 $ 247,792
========== ===========
General Partners $ 8,884 $ 2,503
========== ===========
Special distributions to General Partners $ 108,818 $ 108,818
========== ===========
Net Income per BUC $ .22 $ .06
========== ===========
</TABLE>
See Notes to Financial Statements.
152
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Limited General
Total Partners Partners
------------- ------------- --------------
<S> <C> <C> <C>
Partners' capital (deficit)--January 1, 1997 $69,095,430 $69,352,193 $ (256,763)
Net income 997,230 879,528 117,702
Distributions (1,017,910) (900,001) (117,909)
----------- ----------- ----------
Partners' capital (deficit)--March 31, 1997 $69,074,750 $69,331,720 $ (256,970)
=========== =========== ==========
</TABLE>
See Notes to Financial Statements.
153
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1996
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 997,230 $ 359,113
----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 619,799 629,568
Decrease in accounts receivable-tenants 106,298 345,076
(Decrease) increase in allowance for doubtful accounts (195,451) 284,000
(Increase) decrease in other assets (27,760) 12,714
Increase in due to General Partners and affiliates 132,059 66,497
Decrease in accounts payable and other liabilities (8,012) (35,551)
Decrease in real estate tax payable (1,895) (81,140)
----------- -----------
Total adjustments 625,038 1,221,164
----------- -----------
Net cash provided by operating activities 1,622,268 1,580,277
----------- -----------
Cash flows from investing activities:
Improvements to property and equipment (5,333) (36,077)
Leasing commissions paid (22,863) (63,464)
----------- -----------
Net cash used in investing activities (28,196) (99,541)
----------- -----------
Cash flows from financing activities:
Principal payment on notes payable (256,802) (55,956)
Distributions paid (1,017,910) (1,017,910)
----------- -----------
Net cash used in financing activities (1,274,712) (1,073,866)
----------- -----------
Net increase in cash and cash equivalents 319,360 406,870
Cash and cash equivalents--beginning of period 2,398,013 2,057,134
----------- -----------
Cash and cash equivalents--end of period $2,717,373 $ 2,464,004
=========== ===========
Supplemental Information:
Interest paid $ 123,459 $ 135,041
=========== ===========
</TABLE>
See Notes to Financial Statements.
154
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1997
(Unaudited)
NOTE 1--General
Summit Insured Equity L.P., a Delaware limited partnership (the
"Partnership"), was organized on December 12, 1985 and had no operations until
the commencement, on December 23, 1986, of the public offering of beneficial
unit certificates (BUC$) representing assignments of limited partnership
interests in the Partnership. The General Partners of the Partnership (the
"General Partners") are Related Insured Equity Associates, Inc. (the "Related
General Partner") and Prudential-Bache Properties, Inc. ("PBP"). The General
Partners manage and control the affairs of the Partnership. The Partnership was
formed to acquire, on an all-cash basis, existing income producing shopping
centers, and to improve, operate, and hold such properties for investment.
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of the Partnership as of March 31, 1997 and the results of its
operations and its cash flows for the three months ended March 31, 1997 and
1996. However, the operating results for the interim periods may not be
indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Partnership's Form 10-K for the year ended December 31,
1996.
The Partnership reviews each of its property investments for possible
impairment at least annually, and more frequently if circumstances warrant. If
this review indicates that the carrying amount of the property may not be
recoverable, the Partnership estimates the future cash flows expected to result
from the operations of the property and its eventual sale. If the sum of these
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the property, it is written down to its estimated
fair value.
The expected future cash flows used in this process rely upon estimates and
assumptions, including expense growth, occupancy, rental rates, and market
capitalization rates. The General Partners believe that the estimates and
assumptions used are appropriate. However, changes in market conditions and
circumstances may occur which would cause these estimates and assumptions to
change, resulting in revised cash flow projections. This, in turn, could lead to
future write-downs, which could be material. No write-downs for impairment have
been recorded as of March 31, 1997.
NOTE 2--Property and Equipment
The components of property and equipment are as follows:
March 31, December 31,
1997 1996
---------------- ----------------
Land $ 20,356,681 $ 20,356,681
Buildings and improvements 65,160,876 65,155,543
------------ ------------
85,517,557 85,512,224
Less: Accumulated depreciation (15,275,484) (14,841,244)
------------ ------------
$ 70,242,073 $ 70,670,980
============ ============
Amounts estimated to be recoverable from future operations and ultimate
sales were greater than the carrying value of each property owned at March 31,
1997 and December 31, 1996. However, the carrying value of certain properties
may be in excess of their fair value as of such dates.
155
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1997
(Unaudited)
NOTE 3--Related Party Transactions
The costs and expenses incurred to related parties for the three months
ended March 31, 1997 and 1996 were as follows:
Three Months Ended
March 31,
------------------------
1997 1996
----------- ----------
Expense reimbursement (a) $ 20,182 $ 69,593
Property management fees (b) 104,062 122,625
Leasing costs (c) 900 3,147
Insurance services (d) 8,041 5,775
---------- ----------
$ 133,185 $ 201,140
========== ==========
(a) The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management, registrar, transfer and assignment functions, asset management,
investor communications; printing and other administrative services. The amount
of reimbursement from the Partnership is limited by the provisions of the
Partnership agreement.
(b) The Partnership's eleven properties are being managed by RCC Property
Advisors, Inc. (the "Property Manager"), an affiliate of the Related General
Partner.
(c) Leasing costs, representing travel and other reimbursable expenses
incurred, are paid to the Property Manager in connection with the lease-up of
vacant space and lease renewals. In addition, capitalized leasing commissions
paid to the Property Manager for the three months ended March 31, 1997 and the
year ended December 31, 1996 were approximately $18,000 and $251,000
respectively.
(d) Four of the officers of the Related General Partner have ownership
interests in Multi-Family Program Inc., a company which has provided insurance
services for the properties.
The distributions earned by the General Partners for the three months ended
March 31, 1997 and 1996 were as follows:
Three Months Ended
March 31,
-----------------------
1997 1996
----------- ---------
Special Distributions $ 108,818 $ 108,818
Regular Distributions of Cash Flows from Operations 9,091 9,091
---------- ---------
$ 117,909 $ 117,909
========== =========
As of March 31, 1997 Prudential Securities Incorporated ("PSI"), an
affiliate of PBP, owns 33,760 BUC$.
NOTE 4--Notes Payable
On August 9, 1994, House of Fabrics, Inc. ("House of Fabrics"), a tenant at
Winery Square Shopping Center ("Winery Square"), closed a $350,000 promissory
note ("the Note") with High Peak Corporation ("Lender"), a third party lender,
for tenant improvements at the tenant's location. It is an amortizing note
carrying a fixed interest rate of 12%, maturing on August 1, 1999 and with fixed
monthly payments in the amount of $7,786 due and payable on the first day of
each month. As required by the Lender, the Partnership guaranteed the payment of
all principal, interest, any additional interest and other sums of any nature
whatsoever which may or shall become due and payable pursuant to the provisions
of the Note (the "Guarantee"). On November 3, 1994, House of Fabrics filed under
Chapter 11 of the Bankruptcy Code and pursuant to subsequent court proceedings,
certain of House of Fabrics' leases were rejected and those stores were closed
including the Winery Square location. Pursuant to such proceedings, as of March
1996, the tenant ceased operations and rental payments with respect to the
Winery Square location. Management has pursued various proposals to re-lease the
space and is currently in negotiations with a replacement tenant for most of the
space. Pursuant to the terms of the Guarantee, the Partnership continued to make
payments to the Lender of amounts due under the Note and payments were current
through January 17, 1997, at which time the balance of the loan was paid-off as
described below.
Together with the Lender, the Partnership also pursued a claim in the
bankruptcy proceedings for amounts due from House of Fabrics under the Note and
the lease. In December 1996, in accordance with the Order Confirming House of
Fabrics' Third Amended Plan of Reorganization dated May 23, 1996 (as modified)
stock certificates evidencing 15,251 shares and 13,910 shares of House of
Fabrics
156
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1997
(Unaudited)
NOTE 4--Notes Payable (Continued)
common stock were issued to the Lender and the Partnership, respectively,
against their allowed respective claims of $265,981 and $242,491. Under an
agreement with the Lender, the stock issued to the Lender was assigned to the
Partnership on January 17, 1997, the balance of the loan ($212,309) due the
Lender was paid-off and the Partnership was fully released under its Guaranty.
The stock is thinly traded but all 29,161 shares were sold as of February 28,
1997 for $5 per share, netting the Partnership $143,978 after brokerage
commissions and fees.
NOTE 5--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, were transferred to a single judge of the United States District
Court for the Southern District of New York (the "Court") and consolidated for
pretrial proceedings under the caption In re Prudential Securities Incorporated
Limited Partnerships Litigation (MDL Docket 1005) (the "Class Action"). On June
8, 1994, plaintiffs in the transferred cases filed a complaint that consolidated
the previously filed complaints and named as defendants, among others, PSI,
certain of its present and former employees and the General Partners. The
Partnership was not named a defendant in the consolidated complaint, but the
name of the Partnership was listed as being among the limited partnerships at
issue in the case.
On August 9, 1995, PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The Court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
Court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including the Partnership, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
three other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well as
each of the other concerned partnerships and final approval of the Court after
review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the Partnership
and Summit Insured Equity L.P. II, Summit Preferred Equity L.P. and Eagle
Insured L.P. will receive shares in a newly formed real estate investment trust.
It is anticipated that the shares will be allocated proportionately among the
partnerships and their respective investors based upon appraisals and other
factors as supported by a third-party fairness opinion. Detailed information
about the proposed Related Settlement and Reorganization will be sent to
BUC$holders in the near future. The terms of the Reorganization include, among
other matters, the acquisition by affiliates of the Related Capital Company
("RCC") of PBP's general partner interest (the "PBP Interest"), transfer to the
BUC$holders of one-half of the PBP Interest, reduction of the sum of the
aggregate annual fees currently payable to both General Partners by 25%, filing
an application to list the new company's shares on an exchange and the creation
of an infinite, as opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by RCC
or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$ unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy
157
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Notes to Financial Statements
March 31, 1997
(Unaudited)
NOTE 5--Contengencies (Continued)
to object to the Reorganization; or (iii) commencing a tender offer for the
BUC$. In addition, the General Partners are enjoined from (i) recording any
transfers made in violation of the Order and (ii) providing the list of
investors in any of the partnerships which are the subject of the Reorganization
to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor as to the
time frame in which a closing may occur. In the event a settlement cannot be
reached, the Related General Partner believes it has meritorious defenses to the
consolidated complaint and intends to vigorously defend this action.
NOTE 6--Subsequent Event
In May 1997, distributions of $900,001 and $9,091 were paid to the
BUC$holders and General Partners, respectively, from cash flow from operations
for the quarter ended March 31, 1997.
158
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources--
The Partnership's current primary source of funds is cash flow from
operations of eleven shopping centers.
During the three months ended March 31, 1997, cash and cash equivalents
increased by approximately $319,000. This increase is primarily attributable to
cash flow from operations of $1,622,000, which exceeded debt payments of
$257,000, distributions of $1,018,000, capital expenditures of $5,000 and
leasing commissions of $23,000.
Future liquidity is expected to result from cash generated from the
operations of the properties, interest earned on the funds invested in
short-term money market instruments and ultimately through the sale or
refinancing of the properties. The Partnership anticipates that cash generated
from operations will provide sufficient liquidity to fund in future years the
Partnership's operating expenditures, debt service, future tenant and capital
improvements and distributions.
In May 1997, distributions of $900,001 and $9,091 were paid to the
BUC$holders and General Partners, respectively, from cash from operations for
the quarter ended March 31, 1997.
As more fully discussed in Results of Operations below, two anchor tenants
previously vacated their premises but continue to meet the terms of their lease,
including their rental payments.
For a discussion of the proposed settlement of the Class Action relating to
the Partnership, see Note 5 to the financial statements.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Partnership's investments in
properties are diversified by location so that if one area of the country is
experiencing downturns in the economy, the remaining properties may be
experiencing upswings. However, the geographic diversification of the portfolio
may not protect against a general downturn in the national economy.
Results of Operations
Safeway, the anchor tenant of Cactus Village Shopping Center closed its
facility in December 1991 due to poor sales. However, the tenant continues to
fully abide by all aspects of its lease which will expire in September 2006.
There have been several proposals received for leasing this space, but as of May
14, 1997, this space has not been re-leased.
In November 1995, Publix, the anchor tenant of Pablo Plaza Shopping Center
in Jacksonville, Florida, moved out of its space to a newer, larger space
approximately one mile away. Their lease expires in November 1998, and Publix
continues to abide by the terms of its lease, including rental payments. As of
May 14, 1997 , this space has not been re-leased. Management continues to
explore a variety of proposals to lease or sublease this space.
Net income increased approximately $638,000 for the three months ended
March 31, 1997 as compared to the corresponding period in 1996 for the reasons
discussed below.
Revenues for the three months ended March 31, 1997 consisted primarily of
the results of the operations of the eleven shopping centers in which the
Partnership has invested. Rental income from these properties during the three
months ended March 31, 1997 increased approximately 4% as compared to the
corresponding period in 1996 primarily due to an increase in occupancy at Cactus
Village.
Recovery of common area maintenance charges increased approximately $22,000
for the three months ended March 31, 1997 as compared to the same period in 1996
primarily due to an underaccrual of such charges at Hickory Plaza and Cactus
Village in 1996.
Real estate tax reimbursements increased approximately $43,000 for the
three months ended March 31, 1997 as compared to the same period in 1996
primarily due to an underaccrual of reimbursements at Mountain View and Forest
Park in 1996.
Interest income increased approximately $4,000 for the three months ended
March 31, 1997 as compared to the same period in 1996 primarily due to higher
cash and cash equivalents balances in 1997.
Other income increased approximately $8,000 for the three months ended
March 31, 1997 as compared to the same period in 1996 primarily due to an
underaccrual of insurance reimbursements at Winery Square in 1996.
General and administrative expenses-related parties decreased approximately
$68,000 for the three months ended March 31, 1997 as compared to the same period
in 1996 primarily due to an underaccrual of expense reimbursements to PSI at
December 31, 1995 as well as a decrease in property management fees at Westbird,
Pablo Plaza and Forest Park in 1997.
159
<PAGE>
Summit Insured Equity L.P.
(a limited partnership)
Operating expenses increased approximately $10,000 for the three months
ended March 31, 1997 as compared to the same period in 1996 primarily due to
small increases in utilities at Winery Square.
Repairs and maintenance increased approximately $58,000 for the three
months ended March 31, 1997 as compared to the same period in 1996 primarily due
to an increase in landscaping expenses at Cactus Village and Winery Square as
well as an increase in paving expenses at Kokomo Plaza and the restriping of the
parking lot at Winery Square.
Bad debt expense decreased approximately $446,000 for the three months
ended March 31, 1997 as compared to the same period in 1996 primarily due to a
decrease in reserves in 1997 at Kokomo Plaza, Winery Square, Cactus Village and
Forest Park and the collection of a portion of amounts previously written off
relating to a tenant at Winery Square.
160
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Summit Insured Equity L.P. II
New York, New York
We have audited the accompanying statements of financial condition of
Summit Insured Equity L.P. II (a Delaware Limited Partnership) as of December
31, 1996 and 1995, and the related statements of income, changes in partners'
capital (deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
General Partners. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required 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 the
General Partners, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Summit Insured Equity L.P. II as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/DELOITTE & TOUCHE LLP
New York, New York
March 20, 1997
161
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Statements of Financial Condition
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
-------------- ----------------
<S> <C> <C>
Property and equipment, net of accumulated depreciation of $2,564,790 and $2,180,124,
respectively (Note 4) $18,530,554 $18,742,999
Cash and cash equivalents 1,517,177 1,729,819
Accounts receivable-tenants, net of allowance for doubtful accounts of $8,000 and $10,000,
respectively 199,988 173,846
Deferred insurance costs, net of accumulated amortization of $922,416 and $772,835,
respectively (Note 3) 573,395 722,976
Deferred loan costs, net of accumulated amortization of $42,713 and $31,892, respectively
(Note 3) 31,312 7,974
Deferred leasing commissions, net of accumulated amortization of $68,525 and $46,703,
respectively (Note 3) 178,766 80,360
Other assets 49,067 6,544
------------ ----------
Total Assets $21,080,259 $21,464,518
============ ==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Note payable (Note 8) $ 1,373,675 $ 1,389,944
Accounts payable and other liabilities 166,258 131,085
Accrued real estate taxes 143,186 142,806
Due to General Partners and affiliates (Note 5) 154,701 149,425
------------ ----------
Total Liabilities 1,837,820 1,813,260
------------ ----------
Contingencies (Note 9)
Partners' Capital (Deficit):
Limited Partners (1,005,623 BUC$ issued and outstanding) 19,318,933 19,719,573
General Partners (76,494) (68,315)
------------ ----------
Total Partners' Capital 19,242,439 19,651,258
------------ ----------
Total Liabilities and Partners' Capital $21,080,259 $21,464,518
============ ==========
</TABLE>
See notes to financial statements.
162
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Rental income $1,866,910 $1,942,339 $1,862,043
Recovery of common area maintenancce charges 243,455 198,906 215,928
Real estate tax reimbursements 278,576 294,912 306,417
Interest income 31,527 29,092 21,849
Other 10,797 13,139 9,250
----------- ----------- -----------
Total revenues 2,431,265 2,478,388 2,415,487
----------- ----------- -----------
Expenses:
General and administrative 119,002 131,093 111,588
General and administrative--related parties (Note 5) 197,186 203,184 205,904
Operating 34,160 41,569 33,585
Repairs and maintenance 282,516 209,154 175,335
Real estate taxes 370,488 357,516 353,742
Insurance 48,377 48,175 53,476
Interest 111,458 112,700 122,500
Bad debt 20,428 35,649 222
Depreciation and amortization 597,514 554,439 551,040
----------- ----------- -----------
Total expenses 1,781,129 1,693,479 1,607,392
----------- ----------- -----------
Net income $ 650,136 $ 784,909 $ 808,095
=========== =========== ===========
Allocation of Net Income:
Limited Partners $ 529,263 $ 661,340 $ 684,063
=========== =========== ===========
General Partners $ 10,801 $ 13,497 $ 13,960
=========== =========== ===========
Special Distributions to General Partners (Note 6) $ 110,072 $ 110,072 $ 110,072
=========== =========== ===========
Net income per BUC $ .53 $ .66 $ .68
=========== =========== ===========
</TABLE>
See notes to financial statements.
163
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
<TABLE>
<CAPTION>
Total Limited Partners General Partners
-------------- ------------------ -----------------
<S> <C> <C> <C>
Partners' capital (deficit)--January 1, 1994 $20,176,368 $ 20,234,178 $ (57,810)
Net income 808,095 684,063 124,032
Distributions (1,059,057) (930,004) (129,053)
------------ ------------ ---------
Partners' capital (deficit)--December 31, 1994 19,925,406 19,988,237 (62,831)
Net income 784,909 661,340 123,569
Distributions (1,059,057) (930,004) (129,053)
------------ ------------ ---------
Partners' capital (deficit)--December 31, 1995 19,651,258 19,719,573 (68,315)
Net income 650,136 529,263 120,873
Distributions (1,058,955) (929,903) (129,052)
------------ ------------ ---------
Partners' capital (deficit)--December 31, 1996 $19,242,439 $ 19,318,933 $ (76,494)
============ ============ =========
</TABLE>
See notes to financial statements.
164
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 650,136 $ 784,909 $ 808,095
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 597,514 554,439 551,040
(Increase) decrease in accounts receivable-tenants (24,142) 62,111 (135,195)
Decrease in allowance for doubtful accounts (2,000) (6,000) (23,000)
Decrease (increase) in other assets (42,523) 2 34,020
Increase (decrease) in due to General Partners and affiliates 5,276 30,565 (5,945)
Increase in accrued real estate taxes 380 748 4,983
Increase (decrease) in accounts payable and other liabilities 35,173 (43,240) 34,564
----------- ----------- -----------
Total adjustments 569,678 598,625 460,467
----------- ----------- -----------
Net cash provided by operating activities 1,219,814 1,383,534 1,268,562
----------- ----------- -----------
Cash flows from investing activities:
Improvements of property and equipment (181,655) (21) (12,097)
Leasing commissions paid (141,418) (41,608) (26,671)
----------- ----------- -----------
Net cash used in investing activities (323,073) (41,629) (38,768)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable 1,400,000 0 0
Principal repayments on notes payable (1,416,269) (10,056) 0
Increase in deferred loan costs (34,159) 0 0
Distributions paid (1,058,955) (1,059,057) (1,059,057)
----------- ----------- -----------
Net cash used in financing activities (1,109,383) (1,069,113) (1,059,057)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (212,642) 272,792 170,737
Cash and cash equivalents at beginning of year 1,729,819 1,457,027 1,286,290
----------- ----------- -----------
Cash and cash equivalents at end of year $1,517,177 $1,729,819 $ 1,457,027
=========== =========== ===========
Supplemental information:
Interest paid $ 111,458 $ 112,700 $ 122,500
=========== =========== ===========
</TABLE>
See notes to financial statements.
165
<PAGE>
Summit Insured Equity L.P., II
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 1--General
Summit Insured Equity L.P. II (the "Partnership") is a limited partnership
which was formed under the laws of the State of Delaware on July 17, 1987. The
general partners of the Partnership (the "General Partners") are RIDC II, L.P.,
a Delaware limited partnership (the "Related General Partner"), and
Prudential-Bache Properties, Inc., a Delaware corporation ("PBP"). The General
Partners manage and control the affairs of the Partnership.
The Partnership's fiscal year ends on December 31.
The Partnership owns three shopping centers: Rolling Hills Square located
in Tucson, Arizona; Mountain Park Plaza located in Atlanta, Georgia; and
Applewood Centre located in Omaha, Nebraska.
The Partnership has purchased an insurance policy (the "Policy") which
insures, but does not guarantee, that the cumulative amount of Insured Cash
Available for Distribution from all sources, as determined in accordance with
the Policy and related agreement, together with the appraised values of the real
estate then owned by the Partnership, will equal at least 100% and up to a
maximum of 125% of Original Contributions on the tenth anniversary of the final
property acquisition date. The Policy is intended to cover various economic
risks of the ownership of the properties, but does not apply to certain losses,
costs, penalties or expenses, including, among others, those arising out of any
physical loss, damage, loss of use or other physical injury to the properties.
NOTE 2--Summary of Significant Accounting Policies
a) Basis of Accounting
The books and records of the Partnership are maintained on the accrual
basis of accounting in accordance with generally accepted accounting principles
("GAAP"). The preparation of financial statements in conformity with generally
accepted accounting principles requires the General Partners to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The difference between tax basis net income and GAAP basis net income was
not significant for the years ended December 31, 1996 and 1994. The GAAP basis
net income was greater than tax basis net income by approximately $67,000 for
the year ended December 31, 1995 primarily due to a non-recurring tax adjustment
to amortization expense relating to prior years.
b) Property and Equipment
The carrying amount includes the purchase price, acquisition fees and
expenses, and any other costs incurred in acquiring the properties, less amounts
received from sellers' rental guarantees. Buildings are depreciated on the
straight line basis over their estimated useful lives of 40 years. Maintenance
and repairs are charged to expense as incurred. Renewals and betterments that
significantly extend the useful life of a property are capitalized.
The Partnership reviews each of its property investments for possible
impairment at least annually, and more frequently if circumstances warrant.
Impairment of properties to be held and used is determined to exist when
estimated amounts recoverable through future operations on an undiscounted basis
are below the properties' carrying value. If a property is determined to be
impaired, it is written down to its estimated fair value.
The determination of impairment value is based, not only upon future cash
flows, which rely upon estimates and assumptions including expense growth,
occupancy and rental rates, but also upon market capitalization and discount
rates as well as other market indicators. The General Partners believe that the
estimates and assumptions used are appropriate in evaluating the carrying amount
of the Partnership's properties. However, changes in market conditions and
circumstances may occur in the near term which would cause these estimates and
assumptions to change, which, in turn, could cause the amounts ultimately
realized upon the sale or other disposition of the properties to differ
materially from their estimated fair value. Such changes may also require
write-downs in future years. No write-downs for impairment have been recorded as
of December 31, 1996.
c) Rental Income
Rental income includes amounts received and accrued from operating leases
as well as amounts related to the reimbursement of common area maintenance
charges, real estate taxes and insurance.
166
<PAGE>
Summit Insured Equity L.P., II
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 2--Summary of Significant Accounting Policies (Continued)
d) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks, and
investments in short-term instruments with an original maturity of three months
or less whose cost approximates market value.
e) Income Taxes
The Partnership is not required to provide for, or pay, any federal income
taxes. Net income or loss generated by the Partnership is passed through to the
individual partners and is required to be reported by them. The Partnership may
be subject to state and local taxes in jurisdictions in which it operates.
NOTE 3--Costs, Fees and Expenses
a) Public Offering Costs
Costs incurred to organize the Partnership, including but not limited to
legal, accounting and registration fees, are considered deferred organization
costs. These costs were capitalized and amortized over a 60-month period. Costs
incurred to sell Partnership units (BUC$) including brokerage and underwriting
commissions (7% of the Gross Proceeds), certain printing costs, and
non-accountable expense allowances were considered selling and offering expenses
and charged to Limited Partners' capital.
b) Acquisition Fees
At investor closings, the General Partners were paid a property acquisition
fee (equal to 5% of the Gross Proceeds) for evaluating real property to be
acquired. This fee, along with acquisition expenses incurred by the Partnership,
was allocated to the properties based on the cost of shopping centers acquired.
c) Deferred Insurance Costs
Costs related to the insurance policy purchased for the benefit of the
Limited Partners are being amortized over a 10 year period ( the life of the
insurance policy) which commenced with the date of the Partnership's final
acquisition of Applewood Centre on November 8, 1990.
d) Deferred Loan Costs
Costs incurred with the refinancing of the note payable in 1991 were
capitalized and were amortized over the life of the note. Costs incurred in
connection with the refinancing of the note payable which matured in 1995 and
was extended to 2010 during 1996, are being capitalized and will be amortized
over the life of the note (see Note 8).
e) Deferred Leasing Commissions
Costs incurred in connection with the lease-up of vacant space and lease
renewals have been capitalized and are being amortized over the term of the
underlying leases.
Amortization related to the deferred costs described above is included in
depreciation and amortization expense.
f) Other Expenses
In addition to the costs, fees, and expenses discussed above, the
Partnership reimburses the General Partners and their affiliates for actual
Partnership operating expenses payable by or allocable to the Partnership. The
amount of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement.
g) Reclassifications
Certain reclassifications have been made to prior year amounts to conform
with current year's presentation.
167
<PAGE>
Summit Insured Equity L.P., II
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 4--Property and Equipment
The components of Property and Equipment are as follows:
December 31,
----------------------------
1996 1995
------------- ------------
Land $ 6,445,794 $ 6,445,794
Buildings and improvements 14,649,550 14,477,329
------------ ------------
21,095,344 20,923,123
Less:
Accumulated depreciation 2,564,790 2,180,124
------------ ------------
$18,530,554 $18,742,999
============ ============
Amounts estimated to be recoverable from future operations and ultimate
sales were greater than the carrying value of each property owned at December
31, 1996 and 1995. However, the carrying value of certain properties may be in
excess of their appraised values as of such dates.
The following list compares gross rental revenues for each of the
Partnership's investment properties as a percentage of the Partnership's total
gross revenues for each of the three years in the period ended December 31,
1996. In each year interest income accounted for the balance of gross revenues.
1996 1995 1994
------ ------ -----
Rolling Hills Square/Tucson, AZ 35% 32% 33%
Mountain Park Plaza/Atlanta, GA 28% 28% 27%
Applewood Centre/Omaha, NE 36% 39% 39%
NOTE 5--Related Party Transactions
The costs and expenses incurred to related parties for the years ended
December 31, 1996, 1995 and 1994 were as follows:
Year Ended December 31,
-----------------------------------
1996 1995 1994
----------- ----------- -----------
Expense reimbursement (a) $ 83,714 $ 83,425 $ 97,913
Property management fees (b) 104,943 109,324 108,405
Leasing costs (c) 2,809 4,735 (2,914)
Insurance services (d) 5,720 5,700 2,500
---------- ---------- ---------
$ 197,186 $ 203,184 $205,904
========== ========== =========
(a) The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The amount
of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement.
(b) The Partnership's three properties are being managed by RCC Property
Advisors, Inc. (the "Manager"), an affiliate of the Related General Partner.
(c) Leasing costs, representing travel and other reimbursable expenses
incurred, are paid to RCC in connection with the lease-up of vacant space and
lease renewals. In addition, capitalized leasing commissions paid to the Manager
for the years ended December 31, 1996 and 1995 were $141,000 and $13,000,
respectively.
(d) Four of the officers of the Related General Partner have ownership
interest in Multi-Family Program Manager Inc., a company which has provided
insurance services for the properties.
168
<PAGE>
Summit Insured Equity L.P., II
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 5--Related Party Transactions (Continued)
The distributions earned by the General Partners for the years ended
December 31, 1996, 1995 and 1994 were as follows:
Year Ended December 31,
-------------------------------
1996 1995 1994
---------- ---------- ---------
Special Distributions $110,072 $110,072 $110,072
Regular Distributions of Cash from Operations 18,980 18,981 18,981
--------- --------- ---------
$129,052 $129,053 $129,053
========= ========= =========
As of December 31, 1996, Prudential Securities Incorporated ("PSI"), an
affiliate of PBP, owns 1,980 BUC$.
NOTE 6--Profit and Loss Allocations/Distributions
For financial reporting purposes, net profits or losses, after Special
Distributions to the General Partners, are allocated 98% to the Limited Partners
and BUC$holders and 2% to the General Partners.
Net income per BUC is computed based on the net income for the period
allocated to the Limited Partners divided by the number of BUC$ outstanding for
the period.
The General Partners are paid a Special Distribution of Adjusted Cash from
Operations equal to 0.5% of Invested Assets per annum (as defined in the
Partnership Agreement) for managing the affairs of the Partnership.
Distributions of cash are based on Adjusted Cash from Operations after
payment of Special Distributions as defined in the Partnership Agreement are
allocated 98% to the Limited Partners and BUC$holders and 2% to the General
Partners.
NOTE 7--Leases
Future minimum base rentals due from tenants under non-cancellable
operating leases as of December 31, 1996 are as follows:
Year Ending December 31 Amount
- ------------------------- ------------
1997 $ 1,711,216
1998 1,575,574
1999 1,438,855
2000 1,370,076
2001 1,270,784
Thereafter 9,610,806
------------
Total $16,977,311
============
Certain leases require the lessees to reimburse the Partnership for real
estate taxes, insurance costs and certain other reimbursable expenses.
There are two tenants in two of the shopping centers who paid rent in
excess of 10% of the Partnership's total revenue. The amounts received by the
Partnership in each of the years ended December 31, 1996, 1995 and 1994 were:
Rent
Tenant Received
- ------------------------------ ---------
A&P Futurestore $269,496
Hy-Vee Food Stores 366,171
There were two tenants in two shopping centers who received free rent
during 1996 and it is not anticipated that any tenants will receive free rent in
1997. The total amount of free rent was less than 1% of net rental income.
NOTE 8--Note Payable
The Partnership had a loan with Principal Mutual Life Insurance Company
("Principal Mutual") which matured on December 1, 1995. On July 29, 1996, the
Partnership completed a refinancing with Principal Mutual of its mortgage in the
amount of $1,400,000 and, on that date, the existing outstanding mortgage in the
amount of $1,383,661 was paid off. The new loan, with a final maturity of
January 1, 2010 and a principal amount of $1,400,000, has an initial term of
five years at a fixed interest rate of 7.03% per annum. Under the
169
<PAGE>
Summit Insured Equity L.P., II
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 8--Note Payable (Continued)
terms of the loan, principal and interest are payable in equal monthly
installments of $13,405 based on a 13.5 year amortization schedule with the
unpaid principal balance becoming fully due and payable at maturity. At the end
of the initial five year term and again at the end of year ten, there is a
renewal/call option; the interest rate will be adjusted based on an index
pursuant to the loan document. This loan is prepayable without penalty only at
those times. Costs incurred in connection with this loan will be amortized over
the life of the loan. Between December 1, 1995 and the refinancing date, the
Partnership made the required payments pursuant to the terms of the matured
loan.
Annual principal payment requirements as of December 31, 1996 for each of
the next five fiscal years and thereafter are as follows:
Year Ending Amount
- ---------------------- ----------
1997 $ 66,408
1998 71,230
1999 76,402
2000 81,950
2001 87,900
Thereafter 989,785
----------
1,373,675
==========
The Partnership has determined that the carrying value of the note payable
approximates its fair value at December 31, 1996 and 1995.
NOTE 9--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, were transferred to a single judge of the United States District
Court for the Southern District of New York (the "Court") and consolidated for
pretrial proceedings under the caption In re Prudential Securities Incorporated
Limited Partnerships Litigation (MDL Docket 1005) (the "Class Action"). On June
8, 1994, plaintiffs in the transferred cases filed a complaint that consolidated
the previously filed complaints and named as defendants, among others, PSI,
certain of its present and former employees and the General Partners. The
Partnership was not named a defendant in the consolidated complaint, but the
name of the Partnership was listed as being among the limited partnerships at
issue in the case.
On August 9, 1995, PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The Court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
Court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including the Partnership, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
three other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well as
each of the other concerned partnerships and final approval of the Court after
review of the proposals at a fairness hearing.
170
<PAGE>
Summit Insured Equity L.P., II
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 9--Contingencies (Continued)
Under the proposed Reorganization plan, the BUC$holders of the Partnership
and Summit Insured Equity L.P., Summit Preferred Equity L.P. and Eagle Insured
L.P. will receive shares in a newly formed real estate investment trust. It is
anticipated that the shares will be allocated proportionately among the
partnerships and their respective investors based upon appraisals and other
factors as supported by a third party fairness opinion. Detailed information
about the proposed Related Settlement and Reorganization will be sent to
BUC$holders in the near future. The terms of the Reorganization include, among
other matters, the acquisition by affiliates of the Related Capital Company
("RCC") of PBP's general partner interest (the "PBP Interest"), transfer to the
BUC$holders of one-half of the PBP Interest, reduction of fees currently payable
to the General Partners by 25%, filing an application to list the new company's
shares on an exchange and the creation of an infinite, as opposed to finite,
life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by RCC
or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$ unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy to object to the Reorganization; or
(iii) commencing a tender offer for the BUC$. In addition, the General Partners
are enjoined from (i) recording any transfers made in violation of the Order and
(ii) providing the list of investors in any of the partnerships which are the
subject of the Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor that a
closing may occur in the projected time frame. In the event a settlement cannot
be reached, the Related General Partner believes it has meritorious defenses to
the consolidated complaint and intends to vigorously defend this action.
NOTE 10--Subsequent Event
In February 1997, a distribution of $232,501 was paid to the BUC$holders
and $4,746 to the General Partner in payment of their 2% interest from Adjusted
Cash From Operations for the quarter ended December 31, 1996.
171
<PAGE>
Summit Insured Equity L.P., II
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
The Registrant's current primary source of funds is from (i) cash flow from
operations of the shopping centers and (ii) interest earned on working capital
which is invested in money market instruments.
During the year ended December 31, 1996, cash and cash equivalents
decreased approximately $213,000 primarily as a result of capital expenditures
($182,000), leasing commisions ($141,000), an increase in deferred loan costs
($34,000) and distributions to partners ($1,059,000), which exceeded net cash
flows from operations ($1,220,000). Included in the adjustment to reconcile the
net income to net cash flows from operations is net depreciation and
amortization in the amount of approximately $598,000.
The Registrant had a loan with Principal Mutual Life Insurance Company
("Principal Mutual") which matured on December 1, 1995. On July 29, 1996, the
Registrant completed a refinancing with Principal Mutual of its mortgage in the
amount of $1,400,000 and, on that date, the existing outstanding mortgage in the
amount of $1,383,661 was paid off. The new loan with a final maturity of January
1, 2010 and a principal amount of $1,400,000, has an initial term of five years
at a fixed interest rate of 7.03% per annum. Under the terms of the loan,
principal and interest is payable in equal monthly installments of $13,405 based
on a 13.5 year amortization schedule with the unpaid principal balance becoming
fully due and payable at maturity. At the end of the initial five year term and
again at the end of year ten, there is a renewal/call option; the interest rate
will be adjusted based on an index pursuant to the loan document. This loan is
prepayable without penalty only at those times. Costs incurred in connection
with this loan will be amortized over the life of the loan. Between December 1,
1995 and the refinancing date, the Registrant made the required payments
pursuant to the terms of the matured loan.
In February 1997, a distribution of $232,501 was paid to the BUC$holders
and $4,746 to the General Partner in payment of their 2% interest from Adjusted
Cash From Operations for the quarter ended December 31, 1996.
In July 1994, A&P closed its store in the Mountain Park Plaza Shopping
Center due to reduced sales and increased competition. The Registrant continues
to receive rental revenue from the vacated tenant pursuant to the terms of the
lease and both the tenant and the Registrant are actively pursuing potential
sub-tenants or replacement tenants. As of March 15, 1997, this space has not
been re-leased.
The Registrant's investment in the shopping centers is subject to the risks
arising from ownership of commercial properties. The Registrant has invested in
shopping centers with substantial anchor tenants. Anchor tenants usually provide
stability to a shopping center and a steady source of rental payments. A
shopping center's revenues from all of its tenants can be adversely affected by
the loss of its anchor tenant. If the rental income from the shopping center
decreases, it could adversely affect distributions to BUC$holders and could
affect the price the Registrant is able to receive upon sale of the properties.
Future liquidity is expected to result from cash generated from the
operations of the properties, interest earned on funds invested in short-term
money market instruments and ultimately through the sale or refinancing of the
properties. The Registrant anticipates that future tenant and capital
improvements will be funded from cash generated from operations will be
sufficient to fund in future years the Registrant's operating expenditures, debt
service, future tenant and capital improvements and distributions.
For a discussion of the proposed settlement of the Class Action relating to
the Registrant, see Other Events in Item 1. Business above.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Registrant's investments in
properties are diversified by location so that if one area of the country is
experiencing downturns in the economy, the remaining properties may be
experiencing upswings. However, the geographic diversification of the portfolio
may not protect against a general downturn in the national economy.
Results of Operations
The primary components of the Registrant's results of operations for the
year ended December 31, 1996 are the results of the Registrant's investments in
three shopping centers. (See Item 2 and Item 14 Schedule III)
The Registrant reviews each of its property investments for possible
impairment at least annually, and more frequently if circumstances warrant.
Impairment of properties to be held and used is determined to exist when
estimated amounts recoverable through future operations on an undiscounted basis
are below the properties' carrying value. If a property is determined to be
impaired, it is written down to its estimated fair value.
The determination of impairment is based, not only upon future cash flows,
which rely upon estimates and assumptions including expense growth, occupancy
and rental rates, but also upon market capitalization and discount rates as well
as other market indicators.
172
<PAGE>
Summit Insured Equity L.P., II
(a limited partnership)
The General Partners believe that the estimates and assumptions used are
appropriate in evaluating the carrying amount of the Registrant's properties.
However, changes in market conditions and circumstances may occur in the near
term which would cause these estimates and assumptions to change, which, in
turn, could cause the amounts ultimately realized upon the sale or other
disposition of the properties to differ materially from their estimated fair
value. Such changes may also require write-downs in future years. No write-downs
for impairments have been recorded as of December 31, 1996.
1996 vs. 1995
Net income per BUC was $.53 for the year ended December 31, 1996. This
decrease of $.13 or $135,000 from 1995 to 1996 was primarily attributable to the
following reasons.
Rental income decreased approximately $75,000 or 3.9% from 1995 to 1996
primarily attributable to a decrease in occupancy at Applewood Centre.
Recovery of common area maintenance charges increased approximately $45,000
from 1995 to 1996 primarily due to reimbursements for improvements at Rolling
Hills Square.
Operating expenses decreased approximately $7,000 from 1995 to 1996
primarily due to the payment by Applewood Centre of the gas and electric
expenses for one of the tenants in 1995 for which the reimbursement in November
1995 was included in rental income.
Repairs and maintenance increased approximately $73,000 from 1995 to 1996
primarily due to an increase in landscaping, painting and parking lot repairs at
Rolling Hills Square.
Bad debt expense decreased approximately $15,000 from 1995 to 1996
primarily due to a decrease in direct write-offs in 1996.
1995 vs. 1994
Net income per BUC was $.66 for the year ended December 31, 1995. This
decrease of $.02 or $23,000 from 1994 to 1995 was primarily attributable to the
reasons below.
Rental income increased approximately $80,000 or 4.3% from 1994 to 1995.
This increase was primarily attributable to an increase in occupancy at
Applewood Centre from 95% as of December 31, 1994 to 97% as of December 31,
1995. Rolling Hills Square and Mountain Park Plaza, with occupancy rates of 88%
and 97% at December 31, 1995, respectively, had increases in rental income due
to fewer rental concessions in 1995.
Interest income increased approximately $7,000 from 1994 to 1995 primarily
due to higher interest rates and invested balances in 1995.
General and administrative expenses increased approximately $20,000 from
1994 to 1995 primarily due to the timing of certain accruals recorded in the
respective periods.
Operating expenses increased approximately $8,000 from 1994 to 1995
primarily due to the payment by Applewood Centre of the gas and electric
expenses for one of the tenants in 1995 for which the reimbursement in November
1995, included in rental income.
Repairs and maintenance increased approximately $34,000 from 1994 to 1995
primarily due to increased snow removal at Applewood Centre and landscaping
performed at Rolling Hills Square, of which a portion is expected to be
recovered through common area maintenance charges in subsequent quarters.
Bad debt expense increased approximately $35,000 from 1994 to 1995
primarily due to an increase in direct write-offs in 1995.
173
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Property and equipment, net of accumulated depreciation of $2,665,984 and $2,564,790,
respectively (Note 2) $18,715,685 $18,530,554
Cash and cash equivalents 1,259,837 1,517,177
Accounts receivable-tenants, net of allowance for doubtful accounts of $25,000 and $8,000,
respectively 217,959 199,988
Deferred insurance costs, net of accumulated amortization of $959,812 and $922,416,
respectively 535,999 573,395
Deferred loan costs, net of accumulated amortization of $4,555 and $42,713, respectively 29,604 31,312
Deferred leasing commissions, net of accumulated amortization of $77,782 and $68,525,
respectively 183,427 178,766
Other assets 39,765 49,067
----------- -----------
Total Assets $20,982,276 $21,080,259
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Note payable $ 1,357,507 $ 1,373,675
Accrued real estate taxes 187,204 143,186
Due to General Partners and affiliates (Note 3) 199,468 154,701
Accounts payable and other liabilities 173,426 166,258
----------- -----------
Total Liabilities 1,917,605 1,837,820
----------- -----------
Contingencies (Note 4)
Partners' Capital (Deficit):
Limited Partners (1,005,623 BUC$ issued and outstanding) 19,144,720 19,318,933
General Partners (80,049) (76,494)
----------- -----------
Total Partners' Capital 19,064,671 19,242,439
----------- -----------
Total Liabilities and Partners' Capital $20,982,276 $21,080,259
=========== ===========
</TABLE>
See Notes to Financial Statements.
174
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Statements of Income
(Unaudited)
Three Months Ended
March 31,
----------------------
1997 1996
---------- ---------
Revenues:
Rental income $458,573 $462,507
Recovery of common area maintenance charges 60,864 49,727
Real estate tax reimbursements 69,644 73,728
Interest income 7,890 6,727
Other income 785 1,251
--------- ---------
Total revenues 597,756 593,940
--------- ---------
Expenses:
General and administrative 31,867 11,983
General and administrative-related parties (Note 3) 46,656 36,144
Operating 12,380 8,542
Repairs and maintenance 125,500 42,987
Real estate taxes 92,622 89,379
Insurance 10,711 11,821
Interest 23,953 29,489
Bad debt 17,516 47,958
Depreciation and amortization 149,555 141,573
--------- ---------
Total expenses 510,760 419,876
--------- ---------
Net Income $ 86,996 $174,064
========= =========
Allocation of Net Income:
Limited Partners $ 58,288 $143,615
========= =========
General Partners $ 1,190 $ 2,931
========= =========
Special distributions to General Partners $ 27,518 $ 27,518
========= =========
Net Income per BUC $ .06 $ .14
========= =========
See Notes to Financial Statements.
175
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Limited General
Total Partners Partners
------------- ------------- -------------
<S> <C> <C> <C>
Partners' capital (deficit)--January 1, 1997 $19,242,439 $19,318,933 $ (76,494)
Net income 86,996 58,288 28,708
Distributions (264,764) (232,501) (32,263)
----------- ----------- ---------
Partners' capital (deficit)--March 31, 1997 $19,064,671 $19,144,720 $ (80,049)
=========== =========== =========
</TABLE>
See Notes to Financial Statements.
176
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 86,996 $ 174,064
---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 149,555 141,573
Increase in accounts receivable-tenants (34,971) (31,650)
Increase in allowance for doubtful accounts 17,000 45,000
Decrease (increase) in other assets 9,302 (35,462)
Increase in due to General Partners and affiliates 44,767 4,660
Increase in accrued real estate taxes 44,018 39,291
Increase in accounts payable and other liabilities 7,168 27,105
---------- ----------
Total adjustments 236,839 190,517
---------- ----------
Net cash provided by operating activities 323,835 364,581
---------- ----------
Cash flows from investing activities:
Improvements to property and equipment (286,325) (70,448)
Leasing commissions paid (13,918) (3,677)
---------- ----------
Net cash used in investing activities (300,243) (74,125)
---------- ----------
Cash flows from financing activities:
Increase in deferred loan costs 0 (29,000)
Principal repayments on note payable (16,168) (2,653)
Distributions paid (264,764) (264,663)
---------- ----------
Net cash used in financing activities (280,932) (296,316)
---------- ----------
Net decrease in cash and cash equivalents (257,340) (5,860)
Cash and cash equivalents at beginning of period 1,517,177 1,729,819
---------- ----------
Cash and cash equivalents at end of period $1,259,837 $1,723,959
========== ==========
Supplemental information:
Interest paid $ 24,048 $ 29,489
========== ==========
</TABLE>
See Notes to Financial Statements.
177
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Notes to Financial Statements
March 31, 1997
(Unaudited)
NOTE 1--General
Summit Insured Equity L.P. II (the "Partnership") is a limited partnership
which was formed under the laws of the State of Delaware on July 17, 1987. The
general partners of the Partnership (the "General Partners") are RIDC II, LP., a
Delaware limited partnership (the "Related General Partner"), and
Prudential-Bache Properties, Inc., a Delaware corporation ("PBP"). The General
Partners manage and control the affairs of the Partnership.
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of the Partnership as of March 31, 1997 and the results of its
operations and its cash flows for the three months ended March 31, 1997 and
1996. However, the operating results for the interim periods may not be
indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the annual financial statements and notes
thereto included in the Partnership's Form 10-K for the year ended December 31,
1996.
The Partnership reviews each of its property investments for possible
impairment at least annually, and more frequently if circumstances warrant. If
this review indicates that the carrying amount of the property may not be
recoverable, the Partnership estimates the future cash flows expected to result
from the operations of the property and its eventual sale. If the sum of these
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the property, it is written down to its estimated
fair value.
The expected future cash flows used in this process rely upon estimates and
assumptions, including expense growth, occupancy, rental rates, and market
capitalization rates. The General Partners believe that the estimates and
assumptions used are appropriate. However, changes in market conditions and
circumstances may occur which would cause these estimates and assumptions to
change, resulting in revised cash flow projections. This, in turn, could lead to
future write-downs, which could be material. No write-downs for impairment have
been recorded as of March 31, 1997.
Note 2--Property and Equipment
The components of property and equipment are as follows:
March 31, December 31,
1997 1996
------------- -------------
Land $ 6,445,794 $ 6,445,794
Buildings and improvements 14,935,875 14,649,550
----------- -----------
21,381,669 21,095,344
Less: Accumulated depreciation (2,665,984) (2,564,790)
----------- -----------
$18,715,685 $18,530,554
=========== ===========
Amounts estimated to be recoverable from future operations and ultimate
sales were greater than the carrying value of each property owned at March 31,
1997 and December 31, 1996. However, the carrying value of certain properties
may be in excess of their appraised values as of such dates.
Note 3--Related Party Transactions
The costs and expenses incurred to related parties for the three months
ended March 31, 1997 and 1996 were as follows:
Three Months Ended
March 31,
---------------------
1997 1996
---------- --------
Expense reimbursement (a) $ 18,141 $ 9,111
Property management fees (b) 25,709 25,255
Leasing costs (c) 592 348
Insurance services (d) 2,214 1,430
--------- --------
$ 46,656 $36,144
========= ========
178
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Notes to Financial Statements
March 31, 1997
(Unaudited)
Note 3--Related Party Transactions (Continued)
(a) The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The amount
of reimbursement from the Partnership is limited by the provisions of the
Partnership agreement.
(b) The Partnership's three properties are being managed by RCC Property
Advisors, Inc. (the "Property Manager"), an affiliate of the Related General
Partner.
(c) Leasing costs, representing travel and other reimbursable expenses
incurred are paid to the Property Manager in connection with the lease-up of
vacant space and lease renewals. In addition, capitalized leasing commissions
paid to the Property Manager for the three months ended March 31, 1997 and the
year ended December 31, 1996 were $7,000 and $141,000 respectively.
(d) Four of the officers of the Related General Partner have ownership
interest in Multi-Family Program Inc., a company which has provided insurance
services for the properties.
The distributions earned by the General Partners for the three months ended
March 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Special Distributions $ 27,518 $ 27,518
Regular Distributions of Adjusted Cash from Operations 4,745 4,745
--------- ---------
$ 32,263 $ 32,263
========= =========
</TABLE>
As of March 31, 1997, Prudential Securities Incorporated ("PSI"), an
affiliate of PBP, owns 1,980 BUC$.
Note 4--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, were transferred to a single judge of the United States District
Court for the Southern District of New York (the "Court") and consolidated for
pretrial proceedings under the caption In re Prudential Securities Incorporated
Limited Partnerships Litigation (MDL Docket 1005) (the "Class Action"). On June
8, 1994, plaintiffs in the transferred cases filed a complaint that consolidated
the previously filed complaints and named as defendants, among others, PSI,
certain of its present and former employees and the General Partners. The
Partnership was not named a defendant in the consolidated complaint, but the
name of the Partnership was listed as being among the limited partnerships at
issue in the case.
On August 9, 1995, PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The Court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
Court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including the Partnership, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
three other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
179
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Notes to Financial Statements
March 31, 1997
(Unaudited)
Note 4--Contingencies (Continued)
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well as
each of the other concerned partnerships and final approval of the Court after
review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the Partnership
and Summit Insured Equity L.P., Summit Preferred Equity L.P. and Eagle Insured
L.P. will receive shares in a newly formed real estate investment trust. It is
anticipated that the shares will be allocated proportionately among the
partnerships and their respective investors based upon appraisals and other
factors as supported by a third party fairness opinion. Detailed information
about the proposed Related Settlement and Reorganization will be sent to
BUC$holders in the near future. The terms of the Reorganization include, among
other matters, the acquisition by affiliates of the Related Capital Company
("RCC") of PBP's general partner interest (the "PBP Interest"), transfer to the
BUC$holders of one-half of the PBP Interest, reduction of the sum of the
aggregate annual fees currently payable to both General Partners by 25%, filing
an application to list the new company's shares on an exchange and the creation
of an infinite, as opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996 PBP and RCC entered into an agreement for the purchase by RCC
or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$ unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy to object to the Reorganization; or
(iii) commencing a tender offer for the BUC$. In addition, the General Partners
are enjoined from (i) recording any transfers made in violation of the Order and
(ii) providing the list of investors in any of the partnerships which are the
subject of the Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor as to the
time frame in which a closing may occur. In the event a settlement cannot be
reached, the Related General Partner believes it has meritorious defenses to the
consolidated complaint and intends to vigorously defend this action.
Note 5--Subsequent Event
In May 1997, a distribution of $232,502 was paid to the BUC$holders and
$32,263 to the General Partners (in payment of their 2% interest and special
distributions) from cash flow from operations for the quarter ended March 31,
1997.
180
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
The Partnership's primary source of funds continues to be the cash flow
from operations of three shopping centers.
During the three months ended March 31, 1997, cash and cash equivalents
decreased approximately $257,000 primarily due to capital expenditures
($286,000), leasing commissions ($14,000), principal repayments on notes payable
($16,000), and distributions to partners ($265,000), which exceeded cash flows
from operations ($324,000). Included in the adjustments to reconcile the net
income to cash flows from operations is depreciation and amortization in the
amount of approximately $150,000.
During May 1997, the Partnership paid a distribution from adjusted cash
flow from operations of $232,502 to the BUC$holders of record for the quarter
ended March 31, 1997. Also during May 1997, the General Partners received
$32,263 in payment of their regular and special distributions from cash flow
from operations for the quarter ended March 31, 1997.
In July 1994, A&P closed its store in the Mountain Park Plaza Shopping
Center due to reduced sales and increased competition. The Partnership continues
to receive rental revenue from the vacated tenant pursuant to the terms of the
lease and both the tenant and the Partnership are actively pursuing potential
sub-tenants or replacement tenants. As of May 7, 1997, this space has not been
re-leased.
The Partnership's investment in the shopping centers is subject to the
risks arising from ownership of commercial properties. The Partnership has
invested in shopping centers with substantial anchor tenants. Anchor tenants
usually provide stability to a shopping center and a steady source of rental
payments. A shopping center's revenues from all of its tenants can be adversely
affected by the loss of its anchor tenant. If the rental income from the
shopping centers decreases, it could adversely affect distributions to
BUC$holders and could affect the price the Partnership is able to receive upon
sale of the properties.
Future liquidity is expected to result from cash generated from the
operations of the properties, interest earned on funds invested in short-term
money market instruments and ultimately through the sale or refinancing of the
properties. The Partnership anticipates that cash generated from operations will
be sufficient to fund in future years the Partnership's operating expenditures,
debt service, future tenant and capital improvements and distributions.
For a discussion of the proposed settlement of the Class Action relating to
the Partnership, see Note 4 to the financial statements.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed that will or are likely
to impact liquidity in a material way. The Partnership's investments in
properties are diversified by location so that if one area of the country is
experiencing downturns in the economy, the remaining properties may be
experiencing upswings. However, the geographic diversification of the portfolio
may not protect against a general downturn in the national economy.
Results of Operations
Net income decreased by approximately $87,000 for the three months ended
March 31, 1997 as compared to the corresponding period in 1996 for the reasons
described below.
Revenues for the three months ended March 31, 1997 consisted primarily of
the results of the Partnership's investment in the three shopping centers.
Rental income decreased approximately 1% or $4,000 for the three months ended
March 31, 1997 as compared to the corresponding period in 1996 primarily due to
decreases in occupancy at Applewood Centre and Mountain Park Plaza.
Recovery of common area maintenance charges increased approximately $11,000
for the three months ended March 31, 1997 as compared to the corresponding
period in 1996 primarily due to underaccrual of such charges in 1996.
General and administrative expenses increased approximately $20,000 for the
three months ended March 31, 1997 as compared to the corresponding period in
1996 primarily due to an increase in legal expenses.
General and administrative-related parties expenses increased approximately
$11,000 for the three months ended March 31, 1997 as compared to the
corresponding period in 1996 primarily due to an underaccrual of expense
reimbursements to the General Partners and their affiliates in 1996.
Operating expenses increased approximately $4,000 for the three months
ended March 31, 1997 as compared to the corresponding period in 1996 primarily
due to an increase in utilities at Rolling Hills Square and Mountain Park.
Repairs and maintenance increased approximately $83,000 for the three
months ended March 31, 1997 as compared to the corresponding period in 1996
primarily due to parking lot repairs at Rolling Hills Square, a portion of which
is expected to be recovered through common area maintenance charges in
subsequent quarters.
181
<PAGE>
Summit Insured Equity L.P. II
(a limited partnership)
Interest expense decreased approximately $6,000 for the three months ended
March 31, 1997 as compared to the corresponding period in 1996 primarily due to
an interest rate reduction which resulted from the refinancing of a loan in July
1996.
Bad debt expense decreased approximately $30,000 for the three months ended
March 31, 1997 as compared to the corresponding period in 1996 primarily due to
a decrease in reserves at Applewood Centre and Mountain Park Plaza.
182
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Summit Preferred Equity L.P.
New York, New York
We have audited the accompanying statements of financial condition of Summit
Preferred Equity L.P. (a Delaware Limited Partnership) as of December 31, 1996
and 1995, and the related statements of income, changes in partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
General Partners. Our responsibility is to express an opinion on these financial
statements 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 the
General Partners, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Summit Preferred Equity L.P. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
March 20, 1997
183
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Statements of Financial Condition
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
------------- -----------
<S> <C> <C>
Cash and cash equivalents $ 266,427 $ 273,113
Investments in Operating Partnerships (Note 3) 7,241,379 7,447,538
Other assets 9,951 9,951
----------- ---------
Total Assets $7,517,757 $7,730,602
=========== =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and other liabilities $ 27,826 $ 22,289
Due to General Partners and affiliates (Note 5) 316,591 340,323
----------- ---------
Total Liabilities 344,417 362,612
----------- ---------
Contingencies (Note 7)
Partners' Capital (Deficit):
Limited Partners (657,389 BUC$ issued and outstanding) 7,262,101 7,452,854
General Partners (88,761) (84,864)
----------- ---------
Total Partners' Capital 7,173,340 7,367,990
----------- ---------
Total Liabilities and Partners' Capital $7,517,757 $7,730,602
=========== =========
</TABLE>
See notes to financial statements.
184
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Income from equity investments $566,192 $586,988 $474,178
Interest income 6,522 4,891 2,192
--------- --------- ---------
Total revenues 572,714 591,879 476,370
--------- --------- ---------
Expenses:
General and administrative 56,664 49,222 74,718
General and administrative--related parties (Note 5) 71,750 49,062 64,473
--------- --------- ---------
Total expenses 128,414 98,284 139,191
--------- --------- ---------
Net income $444,300 $493,595 $337,179
========= ========= =========
Allocation of Net Income:
Limited Partners $411,161 $459,470 $306,182
========= ========= =========
General Partners $ 8,391 $ 9,377 $ 6,249
========= ========= =========
Special Distributions to General Partners (Note 6) $ 24,748 $ 24,748 $ 24,748
========= ========= =========
Net income per BUC $ .63 $ .70 $ .47
========= ========= =========
</TABLE>
See notes to financial statements.
185
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
<TABLE>
<CAPTION>
Total Limited Partners General Partners
------------ ------------------ -----------------
<S> <C> <C> <C>
Partners' capital (deficit)--January 1, 1994 $7,815,116 $7,891,030 $ (75,914)
Net income 337,179 306,182 30,997
Distributions (638,950) (601,914) (37,036)
---------- ---------- ----------
Partners' capital (deficit)--December 31, 1994 7,513,345 7,595,298 (81,953)
Net income 493,595 459,470 34,125
Distributions (638,950) (601,914) (37,036)
---------- ---------- ----------
Partners' capital (deficit)--December 31, 1995 7,367,990 7,452,854 (84,864)
Net income 444,300 411,161 33,139
Distributions (638,950) (601,914) (37,036)
---------- ---------- ----------
Partners' capital (deficit)--December 31, 1996 $7,173,340 $7,262,101 $ (88,761)
========== ========== ==========
</TABLE>
See notes to financial statements.
186
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 444,300 $ 493,595 $ 337,179
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase (decrease) in accounts payable and other liabilities 5,537 (7,060) (2,699)
Distributions from investments in operating partnerships in excess of net
income 206,159 182,613 254,912
(Decrease) increase in due to General Partners and affiliates (48,480) 448 78,116
---------- --------- --------
Net cash provided by operating activities 607,516 669,596 667,508
---------- --------- --------
Cash flows used in financing activities:
Distributions paid to partners (614,202) (614,202) (614,202)
---------- --------- --------
Net (decrease) increase in cash and cash equivalents (6,686) 55,394 53,306
Cash and cash equivalents--beginning of year 273,113 217,719 164,413
---------- --------- --------
Cash and cash equivalents--end of year $ 266,427 $ 273,113 $ 217,719
========== ========= ========
Supplemental schedule of noncash financing activities:
Distributions to partners $(638,950) $(638,950) $(638,950)
Increase in distributions payable to General Partners 24,748 24,748 24,748
---------- --------- --------
Distributions paid to partners $(614,202) $(614,202) $(614,202)
========== ========= ========
</TABLE>
See notes to financial statements.
187
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 1--General
Summit Preferred Equity L.P. (the "Partnership") is a limited partnership
which was formed under the laws of the State of Delaware on January 19, 1987,
but had no activity until March 24, 1987. The General Partners of the
Partnership are Related Equity Funding Inc. (the "Related General Partner"),
Partnership Monitoring Corporation (the "Special General Partner" and an
affiliate of the Related General Partner), and Prudential-Bache Properties,
Inc. ("PBP"), collectively, the "General Partners."
The Partnership acquired on an all-cash basis equity interests (the
"Preferred Equity Investments") in two operating partnerships (the "Operating
Partnerships") each of which holds a multi-family residential garden apartment
property (the "Properties").
NOTE 2--Summary of Significant Accounting Policies
a) Basis of Accounting
The books and records of the Partnership are maintained on the accrual
basis of accounting in accordance with generally accepted accounting principles
("GAAP"). The Partnership accounts for its investments in Operating Partnerships
using the equity method. The Partnership is allocated substantially all of the
income of the Operating Partnerships until its Preferred Return is achieved.
There are no material differences between the GAAP and tax basis financial
statements.
The preparation of financial statements in conformity with GAAP requires
the General Partners to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
b) Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks, and
investments in short-term instruments with an original maturity of three months
or less, whose costs approximate market value.
c) Income Taxes
The Partnership is not required to provide for, or pay, any federal income
taxes. Net income or loss generated by the Partnership is passed through to the
individual partners and is required to be reported by them. The Partnership may
be subject to state and local taxes in jurisdictions in which it operates.
d) Reclassification
Certain balances have been reclassified from the prior years to conform to
the current year's presentation.
e) Investments in Operating Partnerships
The Partnership reviews each property held by the Operating Partnerships
for possible impairment at least annually, and more frequently if circumstances
warrant. If this review indicates that the carrying amount of the property may
not be recoverable, the Partnership estimates the future cash flows expected to
result from the operations of the property and its eventual sale. If the sum of
these expected future cash flows (undiscounted and without interest charges) is
less that the carrying amount of the property, it is written down to its
estimated fair value.
The expected future cash flows used in this process rely upon estimates and
assumptions, including expense growth, occupancy, rental rates, and market
capitalization rates. The General Partners believe that the estimates and
assumptions used are appropriate. However, changes in market conditions and
circumstances may occur which would cause these estimates and assumptions to
change, resulting in revised cash flow projections. This, in turn, could lead to
future write-downs, which could be material. No write-downs for impairment have
been recorded as of December 31, 1996.
NOTE 3--Investments in Operating Partnerships
The partnership accounts for its investments in Operating Partnerships
using the equity method. The Partnership holds a Preferred Equity Investment in
the TCR-Pinehurst Limited Partnership ("Pinehurst"), which acquired and operates
the Pinehurst apartment complex in Kansas City, Missouri. Under the original
terms of this investment, the Partnership is entitled to a Preferred Equity
Return of 8.8% (9.6% prior to April 15, 1989) per annum on its initial
investment of $3,799,620. On May 8, 1989 the Partnership invested an additional
$1,949,805 in Pinehurst relating to Phase II. The Partnership was entitled to a
Preferred Equity Return of 9.85% (10.875% for the first
188
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 3--Investments in Operating Partnerships (Continued)
eighteen months) per annum on its initial investment in Pinehurst relating to
Phase II. These Preferred Equity Returns are cumulative and non
interest-bearing. The cumulative, unrecorded and undistributed Preferred Equity
Returns to the Partnership totaled $1,304,103 and $1,150,630 at December 31,
1996 and 1995, respectively. These Preferred Equity Returns are payable from
excess cash flow from operations or proceeds from a sale or refinancing of
Pinehurst's rental property. The Special General Partner is the general partner
of Pinehurst.
The carrying value of the Partnership's investment in Pinehurst is
summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Investment in Pinehurst, January 1 $4,181,249 $4,274,029 $4,414,296
Distributions (372,913) (370,163) (329,652)
Net Income 275,892 277,383 189,385
---------- ---------- ----------
Investment in Pinehurst, December 31 $4,084,228 $4,181,249 $4,274,029
========== ========== ==========
</TABLE>
The Partnership made a Preferred Equity Investment in the Dominion Totem
Park Limited Partnership ("Dominion"), which operates the Chateau Creste
apartment complex in Kirkland, Washington. Under the terms of this investment,
the Partnership is entitled to receive a Preferred Equity Return of 9.625%
(10.875% prior to March 1, 1990) per annum on its initial cash contribution of
$4,149,585. As of December 31, 1996, the Partnership has received all of the
Preferred Equity Returns due from Dominion.
The carrying value of the Partnership's investment in Dominion is
summarized below:
1996 1995 1994
------------ ------------ ----------
Investment in Dominion, January 1 $3,266,289 $3,356,122 $3,470,767
Distributions (399,438) (399,438) (399,438)
Net Income 290,300 309,605 284,793
---------- ---------- ----------
Investment in Dominion, December 31 $3,157,151 $3,266,289 $3,356,122
========== ========== ==========
Amounts estimated to be recoverable from future operations and ultimate
sales were greater than the carrying value of the Investments in Operating
Partnerships at December 31, 1996.
NOTE 4--Supplementary Operating Partnership Financial Information
The following summarized financial information is for Pinehurst:
Years Ended December 31,
---------------------------------------------
OPERATIONS 1996 1995 1994
- ------------------------------- ------------- ------------- -------------
Revenues $ 907,386 $ 888,682 $ 831,692
Operating Expenses (466,239) (446,049) (463,851)
Depreciation and Amortization (165,228) (165,222) (178,437)
--------- --------- ---------
Net Income $ 275,919 $ 277,411 $ 189,404
========= ========= =========
December 31,
--------------------------
FINANCIAL POSITION 1996 1995
- -------------------- ------------ -----------
Total Assets $4,389,980 $4,473,484
=========== ===========
Total Liabilities $ 305,276 $ 291,749
=========== ===========
189
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 4--Supplementary Operating Partnership Financial Information (Continued)
The following summarized financial information is for Dominion:
Years Ended December 31,
---------------------------------------------
OPERATIONS 1996 1995 1994
- ------------------------------- ------------- ------------- -------------
Revenues $ 725,356 $ 702,181 $ 680,066
Operating Expenses (304,331) (281,717) (276,844)
Depreciation and Amortization (130,725) (110,859) (118,429)
--------- --------- ---------
Net Income $ 290,300 $ 309,605 $ 284,793
========= ========= =========
December 31,
--------------------------
FINANCIAL POSITION 1996 1995
- -------------------- ------------ -----------
Total Assets $3,245,457 $3,357,643
=========== ===========
Total Liabilities $ 88,306 $ 91,354
=========== ===========
NOTE 5--Related Party Transactions
The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The amount
of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. An affiliate of one of the General Partners performs
asset monitoring for the Partnership. These services include site visits and
evaluations of the two properties in which the Partnership has an investment.
The cost and expenses incurred were $71,750, $49,062 and $64,473 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The distributions earned by the General Partners for the years ended
December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Special Distributions $24,748 $24,748 $24,748
Regular Distributions of Cash from Operations 12,288 12,288 12,288
-------- -------- --------
Total $37,036 $37,036 $37,036
======== ======== ========
</TABLE>
As discussed in Note 6 below, Special Distributions earned by the General
Partners have been accrued but unpaid since the first quarter of 1992. Such
amounts totaled $123,740 and $98,992 at December 31, 1996 and 1995,
respectively, and are included in Due to General Partners and affiliates in the
Statements of Financial Condition.
As of December 31, 1996, Prudential Securities Incorporated, an affiliate
of PBP, owns 13,750 BUC$.
A minority shareholder of the Related General Partner has a minority
ownership interest in a management company which provides property management
services to the Pinehurst Operating Partnership under the terms of a one year
management agreement that automatically renews. The agreement may be canceled
with thirty days notice by either party. Management fees equal to 5% of gross
revenue are paid monthly and amounted to $44,969, $43,386 and $41,133 for the
years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 6--Profit and Loss Allocations/Distributions
For financial reporting purposes, net profits or losses, after providing
for the General Partners' Special Distribution, are allocated 98% to the Limited
Partners and BUC$holders and 2% to the General Partners.
The General Partners earn a Special Distribution of Adjusted Cash from
Operations of 0.5% per annum of Invested Assets (as defined in the Partnership
Agreement) for managing the affairs of the Partnership; half of which is
subordinated to the BUC$holders' receipt of an annual 8% return on their
investment. The Special Distributions earned by the General Partners continue to
be accrued but unpaid since 1992.
190
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 6--Profit and Loss Allocations/Distributions (Continued)
Distributions of cash made after providing for the General Partners'
Special Distribution as defined in the Limited Partnership Agreement are
allocated 98% to the Limited Partners and BUC$holders and 2% to the General
Partners.
NOTE 7--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, were transferred to a single judge of the United States District
Court for the Southern District of New York (the "Court") and consolidated for
pretrial proceedings under the caption In re Prudential Securities Incorporated
Limited Partnerships Litigation (MDL Docket 1005) (the "Class Action"). On June
8, 1994, plaintiffs in the transferred cases filed a complaint that consolidated
the previously filed complaints and named as defendants, among others, PSI,
certain of its present and former employees and the General Partners. The
Partnership was not named a defendant in the consolidated complaint, but the
name of the Partnership was listed as being among the limited partnerships at
issue in the case.
On August 9, 1995, PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The Court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
Court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including the Partnership, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
three other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well as
each of the other concerned partnerships and final approval of the Court after
review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the Partnership
and Summit Insured Equity L.P., Summit Insured Equity L.P. II and Eagle Insured
L.P. will receive shares in a newly formed real estate investment trust. It is
anticipated that the shares will be allocated proportionately among the
partnerships and their respective investors based upon appraisals and other
factors as supported by a third-party fairness opinion. Detailed information
about the proposed Related Settlement and Reorganization will be sent to
BUC$holders in the near future. The terms of the Reorganization include, among
other matters, the acquisition by affiliates of the Related Capital Company
("RCC") of PBP's general partner interest (the "PBP Interest"), transfer to the
BUC$holders of one-half of the PBP Interest, reduction of fees currently payable
to the General Partners by 25%, filing an application to list the new company's
shares on an exchange and the creation of an infinite, as opposed to finite,
life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by RCC
or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$ unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy to object to the Reorganization; or
(iii) commencing a tender offer for the BUC$. In addition, the General Partners
are enjoined from (i) recording any transfers made in violation of the Order and
(ii) providing the list of investors in any of the partnerships which are the
subject of the Reorganization to any person conducting a tender offer.
191
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996
NOTE 7--Contingencies (Continued)
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor that a
closing may occur in the projected time frame. In the event a settlement cannot
be reached, the Related General Partner believes it has meritorious defenses to
the consolidated complaint and intends to vigorously defend this action.
NOTE 8--Subsequent Event
On February 14, 1997, a distribution of $150,478 and $3,072 was paid to the
BUC$holders and General Partners, respectively, from operations for the quarter
ended December 31, 1996.
192
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Capital Resources and Liquidity
The Registrant's primary source of funds is the Preferred Distributions
from the investments in the Operating Partnerships.
During the year ended December 31, 1996, Registrant cash and cash
equivalents decreased $6,686 as a result of cash flow from operations of
$607,516 offset by distributions paid to partners of $614,202.
For the years ended December 31, 1996, 1995 and 1994, Preferred
Distributions received from the Registrant's investments, net of general and
administrative expenses, were sufficient to cover distributions to partners.
However, certain expense reimbursements for the year ended December 31, 1996 and
the payment of the Special Distribution to the General Partners since the first
quarter of 1992 have been accrued but unpaid.
Preferred Distributions from the Registrant's investment in the Pinehurst
Operating Partnership totaled $372,913, $370,163 and $329,652 for the years
ended December 31, 1996, 1995 and 1994, respectively. The Registrant was
guaranteed a Preferred Equity Return of 8.8% (9.6% prior to April 15, 1989) per
annum on the initial cash contribution of $3,799,620 in Phase I and 9.85%
(10.875% for the first eighteen months) per annum on the additional investment
of $1,949,805 in Phase II. These Preferred Equity Returns are cumulative and
noninterest-bearing. The cumulative, unrecorded and undistributed Preferred
Equity Returns to the Registrant totaled $1,304,103 and $1,150,630 at December
31, 1996 and 1995, respectively. These Preferred Equity Returns are payable from
excess cash flow or proceeds from a sale or refinancing of Pinehurst's rental
property.
Preferred Distributions from the Registrant's investment in Dominion
totaled $399,438 for each of the years ended December 31, 1996, 1995 and 1994
based on a guaranteed Preferred Equity Return of 9.625% (10.875% prior to March
1, 1990) per annum on its initial cash contribution of $4,149,585. As of
December 31, 1996 the Partnership has received all of the Preferred Equity
Returns due from Dominion.
On February 14, 1997, the Registrant paid a distribution of $150,478 and
$3,072 to the BUC$holders and General Partners, respectively, from cash
generated by operations for the quarter ended December 31, 1996. The Special
Distribution of $24,748 due to the General Partners was accrued but not paid.
Future liquidity is expected to result from the cash generated from the
properties and ultimately through the sale of the properties by the Operating
Partnerships.
For a discussion of the proposed Settlement of the Class Action relating to
the Registrant see Other Events in Item 1. Business above.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed, that will or are likely
to impact liquidity in a material way.
Results of Operations
The Registrant reviews each property held by the Operating Partnerships for
possible impairment at least annually, and more frequently if circumstances
warrant. If this review indicates that the carrying amount of the property may
not be recoverable, the Registrant estimates the future cash flows expected to
result from the operations of the property and its eventual sale. If the sum of
these expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the property, it is written down to its
estimated fair value.
The expected future cash flows used in this process rely upon estimates and
assumptions, including expense growth, occupancy, rental rates, and market
capitalization rates. The General Partners believe that the estimates and
assumptions used are appropriate. However, changes in market conditions and
circumstances may occur which would cause these estimates and assumptions to
change, resulting in revised cash flow projections. This, in turn, could lead to
future write-downs, which could be material. No write-downs for impairment have
been recorded as of December 31, 1996.
1996 vs. 1995
Results of operations for the year ended December 31, 1996 consisted
primarily of net operating income from the Preferred Equity Investments in
Pinehurst and Dominion.
Income from equity investments remained fairly consistent with a decrease
of approximately $21,000 for the year ended December 31, 1996 as compared to
1995.
193
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
General and administrative expenses increased approximately $7,000 for the
year ended December 31, 1996 as compared to 1995 primarily due to an
underaccrual of tax return preparation fees at December 31, 1995. General and
administrative expenses-related parties increased approximately $23,000 for the
year ended December 31, 1996 primarily due to higher expense reimbursements to
the General Partners and their affiliates for services performed for the
Registrant.
Net income per BUC was $.63 for the year ended December 31, 1996. The
decrease of $.07 from 1995 is mainly attributable to the decrease in income from
equity investments and the increase in total expenses.
1995 vs. 1994
Results of operations for the year ended December 31, 1995 consisted
primarily of net operating income from the Preferred Equity Investments in
Pinehurst and Dominion.
Income from equity investments increased approximately $113,000 for the
year ended December 31, 1995 as compared to 1994. This was primarily due to
normal rent increases at both properties as well as a decrease in expenses at
Pinehurst, including repairs and maintenance, property taxes and insurance.
General and administrative expenses decreased approximately $25,000 for the
year ended December 31, 1995 as compared to 1994 primarily due to a decrease in
legal expenses in 1995. General and administrative expenses-related parties
decreased approximately $15,000 due to lower expense reimbursements to the
General Partners and their affiliates for services performed for the Registrant.
Net income per BUC was $.70 for the year ended December 31, 1995. The
increase of $.23 over 1994 is mainly attributable to the increase in income from
equity investments and the decrease in total expenses.
194
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 298,759 $ 266,427
Investments in Operating Partnerships (Note 2) 7,221,767 7,241,379
Other assets 9,951 9,951
----------- -----------
Total Assets $ 7,530,477 $ 7,517,757
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and other liabilities $ 29,308 $ 27,826
Due to General Partners and affiliates (Note 4) 336,391 316,591
----------- -----------
Total Liabilities 365,699 344,417
----------- -----------
Contingencies (Note 5)
Partners' Capital (Deficit):
Limited Partners (657,389 BUC$ issued and outstanding) 7,253,711 7,262,101
General Partners (88,933) (88,761)
----------- -----------
Total Partners' Capital 7,164,778 7,173,340
----------- -----------
Total Liabilities and Partners' Capital $ 7,530,477 $ 7,517,757
=========== ===========
</TABLE>
See Notes to Financial Statements.
195
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Statements of Income
(Unaudited)
Three Months Ended
March 31,
----------------------
1997 1996
---------- ---------
Revenues:
Income from equity investments $173,547 $138,181
Interest income 1,588 1,746
--------- ---------
Total revenues 175,135 139,927
--------- ---------
Expenses:
General and administrative 11,480 14,765
General and administrative-related parties (Note 4) 12,480 15,500
--------- ---------
Total expenses 23,960 30,265
--------- ---------
Net Income $151,175 $109,662
========= =========
Allocation of Net Income:
Limited Partners $142,088 $101,406
========= =========
General Partners $ 2,900 $ 2,069
========= =========
Special Distributions to General Partners $ 6,187 $ 6,187
========= =========
Net Income per BUC $ .22 $ .15
========= =========
See Notes to Financial Statements.
196
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Statement of Changes in Partners' Capital (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Limited General
Total Partners Partners
------------- ------------- -------------
<S> <C> <C> <C>
Partners' capital (deficit)-January 1, 1997 $ 7,173,340 $7,262,101 $ (88,761)
Net income 151,175 142,088 9,087
Distributions (159,737) (150,478) (9,259)
----------- ----------- ---------
Partners' capital (deficit)-March 31, 1997 $ 7,164,778 $7,253,711 $ (88,933)
=========== =========== =========
</TABLE>
See Notes to Financial Statements.
197
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 151,175 $ 109,662
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in accounts payable and other liabilities 1,482 2,310
Distributions from investments in operating partnerships in excess of net income 19,612 54,728
Increase in due to General Partners and affiliates 13,613 15,536
---------- ----------
Net cash provided by operating activities 185,882 182,236
---------- ----------
Cash flows used in financing activities:
Distributions paid to partners (153,550) (153,550)
---------- ----------
Net increase in cash and cash equivalents 32,332 28,686
Cash and cash equivalents-beginning of period 266,427 273,113
---------- ----------
Cash and cash equivalents-end of period $ 298,759 $ 301,799
========== ==========
Supplemental schedule of noncash financing activities:
Distributions to partners $ (159,737) $ (159,737)
Increase in distributions payable to General Partners 6,187 6,187
---------- ----------
Distributions paid to partners $ (153,550) $ (153,550)
========== ==========
</TABLE>
See Notes to Financial Statements.
198
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Notes To Financial Statements
March 31, 1997
(Unaudited)
NOTE 1--General
Summit Preferred Equity L.P. (the "Partnership") is a limited partnership
which was formed under the laws of the State of Delaware on January 19, 1987,
but had no activity until March 24, 1987. The general partners of the
Partnership are Related Equity Funding Inc. (the "Related General Partner"),
Partnership Monitoring Corporation (the "Special General Partner" and an
affiliate of the Related General Partner) and Prudential-Bache Properties, Inc.
("PBP"), collectively the "General Partners".
The Partnership acquired on an all-cash basis equity interests (the
"Preferred Equity Investments") in two operating partnerships (the "Operating
Partnerships") each of which holds a multi-family residential garden apartment
property.
These financial statements have been prepared without an audit. In the
opinion of management, the financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position of the Partnership as of March 31, 1997 and the results
of its operations and its cash flows for the three months ended March 31, 1997
and 1996. However, the operating results for the interim periods may not be
indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the annual financial statements and notes
thereto included in the Partnership's Form 10-K/A-1 for the year ended December
31, 1996.
NOTE 2--Investments in Operating Partnerships
The Partnership accounts for its investments in Operating Partnerships
using the equity method. The Partnership holds a Preferred Equity Investment in
the TCR-Pinehurst Limited Partnership ("Pinehurst") which acquired and operates
the Pinehurst apartment complex located in Kansas City, Missouri. Under the
original terms of this investment, the Partnership is entitled to a preferred
equity return of 8.8% per annum on its initial investment of $3,799,620 and
9.85% per annum on its initial investment of $1,949,805 in Phase II of
Pinehurst. These preferred equity returns are cumulative and
noninterest-bearing. The cumulative, unrecorded and undistributed preferred
equity returns to the Partnership totaled $1,342,409 and $1,304,103 at March 31,
1997 and December 31, 1996, respectively. These preferred equity returns are
payable from excess cash flow from operations or proceeds from a sale or
refinancing of Pinehurst's rental property. The Special General Partner is the
general partner of Pinehurst.
The carrying value of the Partnership's investment in Pinehurst is
summarized below:
Investment in Pinehurst, January 1, 1997 $4,084,228
Distributions (93,300)
Net Income 80,243
-----------
Investment in Pinehurst, March 31, 1997 $4,071,171
===========
The Partnership made a Preferred Equity Investment in the Dominion Totem
Park Limited Partnership ("Dominion"), which operates the Chateau Creste
apartment complex in Kirkland, Washington. Under the terms of this investment,
the Partnership is entitled to receive a preferred equity return of 9.625% per
annum on its initial cash contribution of $4,149,585. As of March 31 1997, the
Partnership has received all of the preferred equity returns due from Dominion.
The carrying value of the Partnership's investment in Dominion is
summarized below:
Investment in Dominion, January 1, 1997 $3,157,151
Distributions (99,859)
Net Income 93,304
-----------
Investment in Dominion, March 31, 1997 $3,150,596
===========
Amounts estimated to be recoverable from future operations and ultimate
sales were greater than the carrying value of the Investments in Operating
Partnerships at March 31, 1997.
199
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Notes To Financial Statements
March 31, 1997
(Unaudited)
NOTE 3--Supplementary Operating Partnership Financial Information
The following summarized financial information is for Pinehurst:
Three Months Ended March 31,
-----------------------------
OPERATIONS 1997 1996
- -------------------- ------------- -------------
Revenues $ 244,333 $ 211,923
Operating Expenses (122,775) (120,639)
Depreciation (41,307) (41,307)
--------- ---------
Net Income $ 80,251 $ 49,977
========= =========
March 31, December 31,
FINANCIAL POSITION 1997 1996
- -------------------- ------------- -------------
Total Assets $ 4,405,967 $ 4,389,980
============ ============
Total Liabilities $ 334,312 $ 305,276
============ ============
The following summarized financial information is for Dominion:
Three Months Ended
March 31,
-------------------------
OPERATIONS 1997 1996
- -------------------- ---------- ------------
Revenues $183,761 $184,775
Operating Expenses (60,259) (68,851)
Depreciation (30,198) (27,715)
-------- --------
Net Income $ 93,304 $ 88,209
======== ========
March 31, December 31,
FINANCIAL POSITION 1997 1996
- -------------------- ------------- -------------
Total Assets $ 3,219,069 $ 3,245,457
============ ============
Total Liabilities $ 68,472 $ 88,306
============ ============
NOTE 4--Related Party Transactions
The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The amount
of reimbursement from the Partnership is limited by the provisions of the
Partnership agreement. An affiliate of one of the General Partners performs
asset monitoring for the Partnership. These services include site visits and
evaluations of the two properties in which the Partnership has an investment.
The costs and expenses incurred for the three months ended March 31, 1997 and
1996 were $12,480, and $15,500, respectively.
The distributions earned by the General Partners for the three months ended
March 31, 1997 and 1996 were as follows:
Three Months Ended
March 31,
------------------
1997 1996
-------- -------
Special Distributions $6,187 $6,187
Regular Distributions of Cash from Operations 3,072 3,072
------- -------
Total $9,259 $9,259
======= =======
Special Distributions earned by the General Partners have been accrued but
unpaid since the first quarter of 1992. Such amounts totaled $129,927 and
$123,740 at March 31, 1997 and December 31, 1996, respectively, and are included
in Due to General Partners and affiliates in the Statements of Financial
Condition.
A minority shareholder of the Related General Partner has a minority
ownership interest in a management company which provides property management
services to the Pinehurst Operating Partnership under the terms of a one year
management agreement that
200
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Notes To Financial Statements
March 31, 1997
(Unaudited)
NOTE 4--Related Party Transactions (Continued)
automatically renews. The agreement may be canceled with thirty days notice by
either party. Management fees equal to 5% of gross revenue are paid monthly and
amounted to $11,896, and $10,788 for the three months ended March 31, 1997 and
1996, respectively.
As of March 31, 1997, Prudential Securities Incorporated ("PSI"), an
affiliate of PBP, owns 13,750 BUC$.
NOTE 5--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, were transferred to a single judge of the United States District
Court for the Southern District of New York (the "Court") and consolidated for
pretrial proceedings under the caption In re Prudential Securities Incorporated
Limited Partnerships Litigation (MDL Docket 1005) (the "Class Action"). On June
8, 1994, plaintiffs in the transferred cases filed a complaint that consolidated
the previously filed complaints and named as defendants, among others, PSI,
certain of its present and former employees and the General Partners. The
Partnership was not named a defendant in the consolidated complaint, but the
name of the Partnership was listed as being among the limited partnerships at
issue in the case.
On August 9, 1995, PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The Court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
Court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including the Partnership, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
three other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well as
each of the other concerned partnerships and final approval of the Court after
review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the Partnership
and Summit Insured Equity L.P., Summit Insured Equity L.P. II and Eagle Insured
L.P. will receive shares in a newly formed real estate investment trust. It is
anticipated that the shares will be allocated proportionately among the
partnerships and their respective investors based upon appraisals and other
factors as supported by a third-party fairness opinion. Detailed information
about the proposed Related Settlement and Reorganization will be sent to
BUC$holders in the near future. The terms of the Reorganization include, among
other matters, the acquisition by affiliates of the Related Capital Company
("RCC") of PBP's general partner interest (the "PBP Interest"), transfer to the
BUC$holders of one-half of the PBP Interest, reduction of the sum of the
aggregate annual fees currently payable to both General Partners by 25%, filing
an application to list the new company's shares on an exchange and the creation
of an infinite, as opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by RCC
or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$ unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy to object to the Reorganization; or
(iii) commencing a tender offer for the BUC$. In addition, the General Partners
are enjoined from
201
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Notes To Financial Statements
March 31, 1997
(Unaudited)
NOTE 5--Contingencies (Continued)
(i) recording any transfers made in violation of the Order and (ii) providing
the list of investors in any of the partnerships which are the subject of the
Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor as to the
time frame in which a closing may occur. In the event a settlement cannot be
reached, the Related General Partner believes it has meritorious defenses to the
consolidated complaint and intends to vigorously defend this action.
NOTE 6--Subsequent Event
In May 1997, a distribution of $150,478 and $3,072 was paid to the
BUC$holders and General Partners, respectively, from operations for the quarter
ended March 31, 1997.
202
<PAGE>
Summit Preferred Equity L.P.
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
The Partnership's primary source of funds is the preferred distributions
from the investments in the Operating Partnerships.
During the three months ended March 31, 1997, cash and cash equivalents of
the Partnership increased $32,332 due to cash flow from operations of $185,882
which exceeded distributions paid to partners of $153,550.
Preferred distributions from the Partnership's investment in the Pinehurst
Operating Partnership, paid from cash flow from operations, totaled $93,300 for
the three months ended March 31, 1997. As of March 31, 1997, the cumulative,
unrecorded and undistributed preferred distributions totaled $1,342,409, of
which $38,306 arose during the three months ended March 31, 1997.
During the first three months of 1997, the Partnership received preferred
distributions totaling $99,859 from its investment in Dominion based on a 9.625%
preferred equity return on its initial cash contribution of $4,149,585. As of
March 31, 1997, the Partnership has received all of the preferred equity returns
due from Dominion.
In May 1997, the Partnership paid a distribution of $150,478 and $3,072 to
the BUC$holders and General Partners, respectively, from cash generated by
operations for the quarter ended March 31, 1997. The Special Distribution of
$6,187 due to the General Partners was accrued but not paid.
Future liquidity is expected to result from the cash generated from the
properties and ultimately through the sale of the properties by the Operating
Partnerships.
For a discussion of the proposed settlement of the Class Action relating to
the Partnership, see Note 5 to the financial statements.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed, that will or are likely
to impact liquidity in a material way.
Results of Operations
Results of operations for the three months ended March 31, 1997 consisted
primarily of net income from the Preferred Equity Investments in Pinehurst and
Dominion.
Income from equity investments increased approximately $35,000 for the
three months ending March 31, 1997 as compared to the same period in 1996
primarily due to rental rate increases and a decrease in rent concessions and
bad debts at Pinehurst in the first quarter of 1997.
General and administrative expenses decreased approximately $3,000 for the
three months ended March 31, 1997 as compared to the same period in 1996
primarily due to an under-accrual of tax return preparation fees at December 31,
1995 which was corrected in the first quarter of 1996.
General and administrative expenses-related parties decreased approximately
$3,000 for the three months ending March 31, 1997 as compared to the same period
in 1996 primarily due to lower expense reimbursements to the General Partners
and their affiliates for services performed for the Partnership.
At April 20, 1997, the occupancy at Pinehurst and Dominion was 95% and 99%,
respectively.
203
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Eagle Insured L.P.
New York, New York
We have audited the accompanying statements of financial condition of Eagle
Insured L.P. (a Delaware Limited Partnership) as of December 31, 1996 and 1995,
and the related statements of income, changes in partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the General Partners. Our
responsibility is to express an opinion on these financial statements 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 the
General Partners, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Eagle Insured L.P. as of December 31, 1996
and 1995 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/DELOITTE & TOUCHE LLP
New York, New York
March 20, 1997
204
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Statements of Financial Condition
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Investments in mortgage loans $27,623,254 $ 27,764,817
Loan receivable from affiliate 3,060,000 3,060,000
Deferred loan origination fees, net 932,303 962,387
Cash and cash equivalents 1,228,487 1,145,895
Interest receivable 204,387 206,763
Equity loan to developer 0 6,162
Other assets 6,997 3,253
------------ ------------
Total assets $33,055,428 $ 33,149,277
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Due to affiliates $ 47,974 $ 76,429
Accrued expenses 58,033 57,222
------------ ------------
Total liabilities 106,007 133,651
------------ ------------
Contingencies
Partners' capital (deficit):
BUC$holders (2,641,100 BUC$ issued and outstanding) 33,286,865 33,351,747
General partners (337,444) (336,121)
------------ ------------
Total partners' capital 32,949,421 33,015,626
------------ ------------
Total liabilities and partners' capital $33,055,428 $ 33,149,277
============ ============
</TABLE>
See accompanying notes to financial statements.
205
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -----------
<S> <C> <C> <C>
Revenues:
Interest income:
Mortgage loans $2,534,475 $ 2,536,426 $2,774,540
Equity gain (loss) (6,162) (66,265) 1,256,027
Loan receivable from affiliate 288,426 305,022 252,684
Temporary investments 47,412 51,627 84,349
Other income 0 0 403,000
----------- ----------- -----------
Total revenues 2,864,151 2,826,810 4,770,600
----------- ----------- -----------
Expenses:
Interest expense on loan payable 0 0 20,415
General and administrative 183,129 208,878 192,098
Amortization of deferred loan origination fees 30,084 30,084 31,277
Write-off of deferred loan origination fees 0 0 494,925
----------- ----------- -----------
Total expenses 213,213 238,962 738,715
----------- ----------- -----------
Net income $2,650,938 $ 2,587,848 $4,031,885
=========== =========== ===========
Allocation of Net Income:
BUC$holders $2,444,199 $ 2,382,371 $3,797,527
=========== =========== ===========
General partners:
Special distribution $ 156,857 $ 156,857 $ 156,857
Other 49,882 48,620 77,501
----------- ----------- -----------
$ 206,739 $ 205,477 $ 234,358
=========== =========== ===========
Net income per BUC $ .93 $ .90 $ 1.44
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
206
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
<TABLE>
<CAPTION>
Total BUC$holders General Partner
-------------- -------------- ----------------
<S> <C> <C> <C>
Partners' capital (deficit)-January 1, 1994 $44,665,108 $ 44,768,241 $ (103,133)
Net income 4,031,885 3,797,527 234,358
Distributions (15,552,072) (15,087,311) (464,761)
------------ ------------ ----------
Partners' capital (deficit)-December 31, 1994 33,144,921 33,478,457 (333,536)
Net income 2,587,848 2,382,371 205,477
Distributions (2,717,143) (2,509,081) (208,062)
------------ ------------ ----------
Partners' capital (deficit)-December 31, 1995 33,015,626 33,351,747 (336,121)
Net income 2,650,938 2,444,199 206,739
Distributions (2,717,143) (2,509,081) (208,062)
------------ ------------ ----------
Partners' capital (deficit)-December 31, 1996 $32,949,421 $ 33,286,865 $ (337,444)
============ ============ ==========
</TABLE>
See accompanying notes to financial statements.
207
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $2,872,689 $ 2,940,221 $ 3,223,547
Other income received 0 0 403,000
General and administrative expenses paid (214,517) (180,564) (223,676)
Interest paid 0 0 (20,415)
----------- ----------- ------------
Net cash provided by operating activities 2,658,172 2,759,657 3,382,456
----------- ----------- ------------
Cash flows from investing activities:
Principal payments received on mortgage loans 141,563 127,699 13,632,206
Repayment of equity loan receivable 0 0 1,523,300
----------- ----------- ------------
Net cash provided by investing activities 141,563 127,699 15,155,506
----------- ----------- ------------
Cash flows from financing activities:
Distributions paid (2,717,143) (2,717,143) (15,552,072)
Repayment of loan payable 0 0 (2,837,553)
----------- ----------- ------------
Net cash used in financing activities (2,717,143) (2,717,143) (18,389,625)
----------- ----------- ------------
Net increase in cash and cash equivalents 82,592 170,213 148,337
Cash and cash equivalents at beginning of year 1,145,895 975,682 827,345
----------- ----------- ------------
Cash and cash equivalents at end of year $1,228,487 $ 1,145,895 $ 975,682
=========== =========== ============
Reconciliation of net income to net cash
provided by operating activities:
Net income $2,650,938 $ 2,587,848 $ 4,031,885
----------- ----------- ------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity (gain) loss 6,162 66,265 (1,256,027)
Amortization of deferred loan origination fees 30,084 30,084 31,277
Write-off of deferred loan origination fees 0 0 494,925
Changes in:
Interest receivable 2,376 36,854 104,726
Other assets (3,744) 11,598 7,809
Due to affiliates (28,455) 13,753 (15,190)
Accrued expenses 811 13,255 (16,949)
----------- ----------- ------------
Total adjustments 7,234 171,809 (649,429)
----------- ----------- ------------
Net cash provided by operating activities $2,658,172 $ 2,759,657 $ 3,382,456
=========== =========== ============
</TABLE>
See accompanying notes to financial statements.
208
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 1--General
Eagle Insured L.P., a Delaware limited partnership (the "Partnership"), was
formed on August 13, 1987 and will terminate on December 31, 2040 unless
terminated sooner under the provisions of the Amended and Restated Agreement of
Limited Partnership (the "Partnership Agreement"). The Partnership was formed to
invest in insured, coinsured or guaranteed mortgage investments. The general
partners of the Partnership are Prudential-Bache Properties, Inc. ("PBP") and
Related Federal Insured L.P. (the "Related General Partner") (collectively, the
"General Partners"). Related FI BUC$ Associates, Inc. (the "Assignor Limited
Partner"), which acquired and holds limited partnership interests on behalf of
those persons who purchased Beneficial Unit Certificates ("BUC$"), has assigned
to those persons substantially all of its rights and interests in and under such
limited partnership interests. The Related General Partner and the Assignor
Limited Partner are under common ownership.
NOTE 2--Summary of Significant Accounting Policies
a) Basis of Accounting
The books and records of the Partnership are maintained on the accrual
basis of accounting in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the General Partners to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
b) Cash and Cash equivalents
Cash and cash equivalents include cash in banks and investments in
short-term instruments with an original maturity of three months or less, for
which cost approximates market value.
c) Investment in Mortgage Loans
The insured mortgage investments are recorded as loans. Amounts received or
receivable from the properties for interest payments on these loans are
reflected as interest income in the Statements of Income. Equity loans to
developers are accounted for under the equity method of accounting without
elimination of the amount due and owing to the Partnership. Equity gains
(losses) recorded on these loans are included in the Statements of Income.
At least annually, and more frequently if circumstances warrant, the
Partnership evaluates the collectibility of both interest and principal of each
of its loans to determine whether it is impaired. A loan is considered to be
impaired when, based on current information and events, it is probable the
Partnership will be unable to collect all amounts due according to the existing
contractual terms. When a loan is considered to be impaired, the amount of the
loss accrual is determined by discounting the expected future cash flows at the
loan's effective interest rate or, for practical purposes, from the estimated
fair value of the collateral.
d) Loan Origination Fees
The General Partners were paid loan origination fees equal to 3% of gross
proceeds from the initial offering. Loan origination fees were capitalized and
are amortized over the lives of the mortgages. The accumulated amortization
relating to mortgages outstanding at December 31, 1996 and 1995 was $250,798 and
$220,714, respectively.
e) Income Taxes
The Partnership is not required to provide for, or pay, any Federal income
taxes. Income tax attributes that arise from its operations are passed directly
to the individual BUC$holders. The Partnership may be subject to state and local
taxes in jurisdictions in which it operates.
f) Profit and Loss Allocations/Distributions
The General Partners receive a special distribution of adjusted cash from
operations for managing the affairs of the Partnership (equal to .5% per annum
of total invested assets) which is payable quarterly, subject to certain
limitations. After payment of the special distribution, quarterly distributions
of cash are made from adjusted cash from operations and are allocated 98% to the
BUC$holders and 2% to the General Partners. For financial reporting purposes,
net profits or losses after the special distribution are allocated 98% to the
BUC$holders and 2% to the General Partners.
209
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Investment in Mortgage Loans and Equity Loans to Developers
All base interest and initially at least 90% in the aggregate of the
principal of the loans made by the Partnership are coinsured by the Federal
Housing Administration (the "FHA") (80% of the 90%) and Related Mortgage
Corporation, and affiliate of the Related General Partner (20% of the 90%), with
the remaining 10% of the Partnership's original portfolio comprised of uninsured
noninterest-bearing equity loans made directly to the same developers as are the
mortgages. With respect to a default on FHA co-insured loans, the Partnership
would bear the risk of loss with respect to uninsured portions of the loans (10%
of Mortgage Loan and additional interest), however these are secured by the
interests in the partnerships owning the underlying properties. The loans
require monthly payment of principal and interest over the life of the mortgage
loan.
Equity loans to developers, in the original amount of $3,018,800 on the
remaining three projects represented noninterest-bearing advances made to the
developers for such items as initial operating deficit escrow requirements and
Housing and Urban Development ("HUD") related contingencies such as working
capital escrow and cash requirements. Such amounts are due on demand after six
months notice any time after the tenth anniversary of the initial endorsement of
the loan by HUD. Equity operating losses have reduced the carrying value of
these loans to zero as of Decemer 31, 1996 without elimination of the amount due
and owing to the Partnership.
Information relating to investments in FHA co-insured mortgage loans and
equity loans to developers as of December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Interest Mortgage Mortgage Equity Equity
Funding Final Rate on Loan Loan Loan Loan
Closing Completion Maturity Mortgage Balance at Balance at Balance at Balance at
Project Date Date Date (1) Loan (2) 12/31/96 13/31/95 12/31/96 12/31/95
- ---------------------------- ---------- ------------ ---------- ---------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cross Creek
Apartments
Charlotte, NC (3) ......... 06/10/88 2/1/91 1/1/30 8.95% $17,106,744 $17,187,347 $0 $ 0
Weatherly Walk Apartments
Fayetteville, GA ......... 08/18/88 12/5/89 11/1/29 8.95% 7,553,454 7,589,607 0 0
Woodgate Manor
Gainesville, FL (3) ...... 12/12/88 12/13/88 1/1/24 8.95% 2,963,056 2,987,863 0 6,162
------------ ------------ --- -------
$27,623,254 $27,764,817 $0 $6,162
============ ============ === =======
</TABLE>
(1) The Partnership may call for prepayment of the total loan at any time
after the tenth anniversary of the date the mortgage loan funding was completed.
The Partnership, in order to call for prepayment, would be required to terminate
the mortgage insurance contract with FHA (and/or the coinsurer) not later than
the accelerated payment date. Since the exercise of such option would be at the
Partnership's discretion, it is intended to be exercised only where the
Partnership determines that the value of the Development has increased by an
amount which would justify accelerating payment in full and assuming the risks
of foreclosure if the mortgagor failed to make the accelerated payment. The
Partnership presently expects to dispose of such loans within 10 to 15 years
after acquisition.
For a period of five years from the loan closing date, the owners of the
properties did not have the right to prepay the mortgage loans without the
consent of the General Partners. Beginning in the sixth year and thereafter, any
prepayment during one calendar year in an amount in excess of 15% of the
original principal amount of the mortgage loan will be subject to a prepayment
penalty. The prepayment penalty is 5% in the sixth year and decreases 1% per
year thereafter.
(2) Includes a servicing fee of 0.07% paid by the developer to Related
Mortgage Corporation (an affiliate of the Related General Partner); however,
does not include additional interest which may be payable.
(3) The general partnership interest of the project is held by an affiliate
of the Related General Partner.
On January 31, 1994, Tivoli Lakes Associates, Ltd., the owner of Tivoli
Lakes Apartments, a property securing a first mortgage note held by the
Partnership, sold the property to a real estate investment trust which is not
affiliated with the Partnership, its General Partners or Tivoli Lakes
Associates, Ltd. With the consent of the General Partners, the proceeds from the
sale were used to fully repay the Partnership's first mortgage note of
$13,513,611 as well as to repay the original equity loan made to the property's
developer of $1,523,300, the carrying value of which had been reduced to zero in
previous years. In addition, prepayment penalties and other fees of
approximately $403,000 were paid to the Partnership in connection with this
transaction. Tivoli Lakes Associates, Ltd. also used a portion of the proceeds
from the sale to pay the Partnership approximately $63,000 of interest pursuant
to their additional interest guaranty. Deferred loan origination fees of
approximately $495,000 were written off in 1994 as a result of the loan
repayments.
210
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 3--Investment in Mortgage Loans and Equity Loans to Developers (Continued)
On February 7, 1994, the Partnership used a portion of the proceeds
received from the transaction described above to fully repay its outstanding
debt of $2,837,553. See Note 4 for further information. In March 1994,
distributions of $12,413,170 ($4.70 per BUC) and $253,330 were paid to the
BUC$holders and General Partners, respectively, as a result of the prepayment by
Tivoli Lakes Associates, Ltd.
Following is the interest income from mortgage loans as a percentage of
total revenues, excluding equity gains (losses).
1996 1995 1994
------ ------ -----
Cross Creek 53% 53% 49%
Weatherly Walk 23 23 22
Woodgate Manor 12 11 13
Tivoli Lakes - - 5
Tivoli Lakes Apartments was sold on January 31, 1994 and the related
Mortgage was paid in full.
At December 31, 1996 and 1995, the estimated fair value of the
Partnership's portfolio of mortgage loans, equity loans and the Cross Creek Loan
(see Note 4) was approximately $32,639,000 and $32,814,000, respectively. The
estimated fair values for the years ended December 31, 1996 and 1995 were based
on internal valuations, of the three properties collateralizing these loans and
independently appraised values, as of October 1, 1995, respectively. Fair value
estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. This estimate is
subjective in nature and involves uncertainties and matters of significant
judgment. Changes in assumptions could significantly affect estimates. Due to
the property-specific nature of the loans and the lack of a ready market for
such investments, this fair value estimate does not necessarily represent the
amount which the Partnership could realize upon a current sale of its
investments.
NOTE 4--Related Parties
The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The General
Partners and their affiliates receive reimbursements for costs incurred in
connection with these services, the amount of which is limited by the provisions
of the Partnership Agreement. The costs and expenses were:
Year ended December 31
--------------------------------
1996 1995 1994
--------- --------- --------
PBP and affiliates $36,045 $63,422 $79,645
Related General Partners and affiliates 41,931 13,000 12,375
-------- -------- --------
$77,976 $76,422 $92,020
======== ======== ========
The present owner of the Cross Creek property ("Walsh/Cross Creek L.P.")
acquired title to the property upon the default of the original developer.
Significant interests in Walsh/Cross Creek L.P. are held by affiliates of the
Related General Partner. The Partnership made a loan of $3,060,000 to
Walsh/Cross Creek L.P. (the "Cross Creek Loan") to pay for costs incurred to
complete construction and to fund operating deficits. The Cross Creek Loan bears
interest at the prime rate plus 1% and is due on January 1, 2030 or on the
occurrence of other events as more fully described in the loan agreement. The
amount loaned to Walsh/Cross Creek L.P. is classified as a loan reveivable from
affiliate and is anticipated to be repaid from cash flows from the property.
Stephen M. Ross holds a majority interest in the Related General Partner and has
guaranteed to the Partnership, subject to certain conditions contained in the
Guarantee Agreement and Amendment to the Guarantee as follows: (i) the
performance of all obligations for the payment of interest on the Cross Creek
Loan when due in accordance with documentation evidencing the Cross Creek Loan;
(ii) the payment of principal on the Cross Creek Loan on or before December 31,
2000; (iii) the repayment on or before December 31, 2000 of the $1,783,900
equity loan (currently recorded at zero) previously made to the original
developer of Cross Creek; and (iv) the payment when due of interest and
principal at an interest of 8.95% of the $17,494,100 first mortgage loan
previously made to the original developer.
In accordance with the Guarantee Agreement and Amendment to the Guarantee
and except as otherwise required by HUD, available cash flow or capital proceeds
from the Cross Creek property will be applied first to all expenses of operating
and maintaining the property, debt service and/or satisfaction of the mortgage
loan, equity loan and Cross Creek Loan, then to reimburse Stephen M. Ross for
operating deficit payments which he has made (amounting to $255,000 for the year
ended December 31, 1996 and $3,182,732, cumulatively), then to additional
interest, default rate and guaranteed rate payments as set forth in the
Subordinated Note and the Additional Interest Guarantee.
211
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 4--Related Parties (Continued)
The Partnership maintained an account with the Prudential Institutional
Liquidity Portfolio Fund, an affiliate of PBP, for investment of its available
cash in short-term instruments in 1995 in accordance with the guidelines
established by the Partnership Agreement.
Prudential Securities Incorporated ("PSI"), an affiliate of PBP, owns 6,655
BUC$ at December 31, 1996.
NOTE 5--Income Taxes
The following is a reconciliation of net income for financial reporting
purposes with net income for tax reporting purposes for the years ended December
31, 1996, 1995, and 1994, respectively.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ---------------
<S> <C> <C> <C>
Net income per financial statements $2,650,938 $2,587,848 $ 4,031,885
Elimination of equity (gain) loss 6,162 66,265 (1,256,027)
Other 0 35,509 (35,509)
----------- ----------- -----------
Tax basis net income $2,657,100 $2,689,622 $ 2,740,349
=========== =========== ===========
</TABLE>
The differences between the tax and book bases of partners' capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments and the recording of the fourth quarter distribution.
Effective October 1, 1995, the Related General Partner has assumed from
PBP, the responsibilities and duties of the Tax Matters Partner as defined in
the Partnership Agreement.
NOTE 6--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, were transferred to a single judge of the United States District
Court for the Southern District of New York (the "Court") and consolidated for
pretrial proceedings under the caption In re Prudential Securities Incorporated
Limited Partnerships Litigation (MDL Docket 1005) (the "Class Action"). On June
8, 1994, plaintiffs in the transferred cases filed a complaint that consolidated
the previously filed complaints and named as defendants, among others, PSI,
certain of its present and former employees and the General Partners. The
Partnership was not named a defendant in the consolidated complaint, but the
name of the Partnership was listed as being among the limited partnerships at
issue in the case.
On August 9, 1995, PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The Court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
Court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including the Partnership, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
three other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well as
each of the other concerned partnerships and final approval of the Court after
review of the proposals at a fairness hearing.
212
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
NOTE 6--Contingencies (Continued)
Under the proposed Reorganization plan, the BUC$holders of the Partnership
and Summit Insured Equity L.P., Summit Insured Equity L.P. II and Summit
Preferred Equity L.P. will receive shares in a newly formed real estate
investment trust. It is anticipated that the shares will be allocated
proportionately among the partnerships and their respective investors based upon
appraisals and other factors as supported by a third-party fairness opinion.
Detailed information about the proposed Related Settlement and Reorganization
will be sent to BUC$holders in the near future. The terms of the Reorganization
include, among other matters, the acquisition by affiliates of the Related
Capital Company ("RCC") of PBP's general partner interest (the "PBP Interest"),
transfer to the BUC$holders of one-half of the PBP Interest, reduction of fees
currently payable to the General Partners by 25%, filing an application to list
the new company's shares on an exchange and the creation of an infinite, as
opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by RCC
or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$ unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy to object to the Reorganization; or
(iii) commencing a tender offer for the BUC$. In addition, the General Partners
are enjoined from (i) recording any transfers made in violation of the Order and
(ii) providing the list of investors in any of the partnerships which are the
subject of the Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor that a
closing may occur in the projected time frame. In the event a settlement cannot
be reached, the Related General Partner believes it has meritorious defenses to
the consolidated complaint and intends to vigorously defend this action.
NOTE 7--Subsequent Event
In February 1997, distributions of approximately $627,000 and $13,000 were
paid to the BUC$holders and General Partners, respectively, for the quarter
ended December 31, 1996.
213
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
The Registrant originally invested in four Mortgages which financed
multifamily residential rental properties. As further discussed in Note 3 to the
financial statements, Tivoli Lakes Apartments was sold on January 31, 1994 and
the related Mortgage was paid in full.
All base interest and initially at least 90% in the aggregate of the
principal of the Mortgages made by the Registrant are coinsured by the FHA (80%
of the 90%) and an affiliate of the Related General Partner (20% of the 90%),
with the remaining 10% of the Registrant's original portfolio comprised of
uninsured non-interest-bearing equity loans made directly to the same developers
as are the mortgage investments. With respect to a default on FHA co-insured
loans, the Partnership would bear the risk of loss with respect to uninsured
portions of the loans (10% of Mortgage Loan and additional interest), however,
these are secured by the interests in the partnerships owning the underlying
properties. The equity loans to developers are recorded at zero as of December
31, 1996 as a result of being accounted for under the equity method of
accounting without elimination of the amount due and owing to the Partnership.
The Registrant is entitled to receive additional interest on each Mortgage
from the annual net cash flow of the development and from a percentage of the
residual value upon sale or refinancing. The receipt of additional interest is
dependent upon the economic performance of the underlying properties. During
1996, the Registrant received additional interest payments of approximately
$77,000 from Woodgate Manor.
In prior years, the Registrant utilized $3,060,000 of an unsecured credit
facility to advance funds in the form of a loan to Walsh/Cross Creek L.P.
("Cross Creek Loan") to enable it to complete construction and to fund operating
deficits. See Note 4 to the financial statements. On February 7, 1994, the
Registrant used a portion of the proceeds from the Tivoli Lakes repayment to
fully repay its outstanding debt under the credit facility of $2,837,553;
however, the Cross Creek Loan remains outstanding. Stephen M. Ross, who holds a
majority interest in the Related General Partner, has guaranteed repayment of
the principal and interest on the Cross Creek Loan (as amended, the "Guarantee
Agreement"). See Note 4 to the financial statements for further information. Mr.
Ross remains in compliance with his obligations under the Guarantee Agreement
and Amendment to the Guarantee. However, significant portions of his assets are
in the form of partnership interests and corporate stock which are pledged or
are otherwise illiquid. Furthermore, a significant portion of the cash flow
which Mr. Ross would otherwise be expected to receive from his business
operations is presently pledged to meet other obligations. Mr. Ross also has
contingent liabilities that, if simultaneously called upon, could result in Mr.
Ross having insufficient liquid assets to meet all of his current liabilities.
There can be no assurance that Mr. Ross will have the liquidity necessary to
continue to comply with his obligations under the Guarantee Agreement and
Amendment to the Guarantee. In addition, Mr. Ross has capitalized the Related
General Partner with a demand promissory note and, if called upon to pay all or
a portion of this note, there is no assurance that he will have the liquidity
necessary to meet such demand.
FAI, Ltd. Weatherly Walk Apartments ("Weatherly Walk") and Walsh/Cross
Creek Limited Partnership ("Cross Creek") have in the past experienced recurring
operating losses, working capital deficiencies and negative cash flows which
raised concerns of a potential default on the related Mortgages and equity
loans. With respect to Weatherly Walk, the Fayetteville, Georgia market has
improved, and the partnership which owns the property is no longer experiencing
operating deficits, working capital deficiencies on negative cash flows and it
is currently meeting its operating obligations including required Mortgage
payments. With respect to Cross Creek, which continues to experience recurring
operating losses, as indicated above and in Note 4, Stephen M. Ross has
guaranteed the performance of all obligations for the payment of interest (at
8.95%) and principal of the first Mortgage together with the equity loan and has
contributed $255,000 during 1996 ($3,182,732 cumulatively) to cover operating
losses and working capital deficiencies, allowing this property to meet all
required Mortgage payments.
The quarterly distribution to BUC$holders was decreased to $.2375 per BUC
in the second quarter of 1994 as a result of the Tivoli Lakes loan repayment
which reduced the Partnership's interest income. The fourth quarter 1996
distribution of approximately $627,000 was paid to BUC$holders in February 1997
from adjusted cash flow from operations and the Registrant anticipates
continuing to fund cash distributions in the future from the same source.
Principal and interest payments from Mortgages are anticipated to provide
sufficient liquidity to meet the operating expenditures of the Registrant in
future years.
At the beginning of the year, the Registrant had cash and cash equivalents
of approximately $1,146,000. After the receipt of net cash flow from operations
of approximately $2,658,000, principal payments received on mortgage loans of
approximately $141,000 and the payment of distributions of approximately
$2,717,000, the Registrant had approximately $1,228,000 in cash and cash
equivalents at December 31, 1996.
For a discussion of the proposed settlement of the Class Action relating to
the Registrant see Other Events in Item 1. Business above.
214
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Management is not aware of any trends or events, commitments or
uncertainties which have not otherwise been disclosed, that will or are likely
to impact liquidity in a material way. All base interest and at least 90% of the
principal of the Registrant's investments in Mortgages are insured or co-insured
by the FHA and a private mortgage lender (which is an affiliate of the Related
General Partner). The Registrant's investment in unsecured non-interest bearing
equity loans (which represent approximately 10% of the Registrant's original
portfolio) are secured by the interest in the partnerships owning the underlying
properties which are diversified by location so that if one state is
experiencing downturns in the economy, the remaining properties may be
experiencing upswings. However, the geographic diversifications of the portfolio
may not protect against a general downturn in the national economy.
The Registrant anticipates that cash generated currently from the
operations of the properties underlying the Registrant mortgage loans (taking
into account certain guarantees and the current performance of the properties
and the markets) will be sufficient to meet the required debt service payments
to the Registrant.
Results of Operations
1996 vs. 1995
The Registrant's net income for the year ended December 31, 1996 increased
by approximately $63,000 as compared to 1995 for the reasons described below.
During the years ended December 31, 1996 and 1995, the Partnership recorded
equity losses of approximately $6,000 and $66,000, respectively, relating to net
equity losses from the Woodgate Manor property. The decrease in 1996 was due to
the carrying value of the Woodgate Manor equity loan being reduced to zero by
the current year loss.
General and administrative expenses decreased approximately $26,000 for the
year ended December 31, 1996 as compared to 1995 primarily due to the cost of
obtaining appraisals of the properties securing the Partnership's three mortgage
loans in 1995 as well as an overaccrual of audit fees at December 31, 1995.
1995 vs. 1994
The Registrant's net income for the year ended December 31, 1995 decreased
by approximately $1,444,000 as compared to 1994 for the reasons described below.
Interest income from mortgage loans decreased approximately $238,000 in
1995 as compared to 1994 primarily due to the reduced interest received by the
Registrant as a result of the repayment of the Tivoli Lakes mortgage in January
1994 and reduced amounts of additional interest received from Woodgate Manor in
1995 relative to 1994. With regard to Woodgate, certain capital repairs and
improvements were made to the property in 1995 which reduced net cash flow and
therefore, the amount of additional interest which was due and payable to the
Registrant.
Interest income from loan receivable increased approximately $52,000 for
the year ended December 31, 1995 as compared to the corresponding period in 1994
due to increases of approximately 2% in the prime rate in 1995.
Interest income from temporary investments decreased approximately $33,000
for the year ended December 31, 1995 as compared to the corresponding period in
1994 primarily from nonrecurring interest earned on the undistributed proceeds
from the Tivoli Lakes Mortgage repayment during the first quarter of 1994.
During 1995 and 1994, the Registrant recorded an equity loss of
approximately $66,000 and equity gain of approximately $1,256,000, respectively.
The carrying value of the Tivoli Lakes equity loan of $1,523,000 had been
reduced to zero in previous years. The equity loan was fully repaid on January
31, 1994 resulting in an equity gain of $1,523,000 in 1994. The 1994 gain was
offset, in part, by an equity loss of approximately $267,000 relating to the
Woodgate Manor property. The equity loss recorded in 1995 was attributable to
the Woodgate Manor property.
Other income decreased approximately $403,000 for the year ended December
31, 1995 as compared to the corresponding period in 1994 primarily due to
prepayment penalties and other fees associated with the Tivoli Lakes Mortgage
loan payment in 1994.
Interest expense on loan payable decreased approximately $20,000 in 1995 as
compared to 1994 as a result of the repayment of the outstanding debt under the
credit facility with a portion of the proceeds from the Tivoli Lakes repayment
in February 1994.
The Registrant wrote off approximately $495,000 in loan origination fees
relating to the Tivoli Lakes Mortgage in the first quarter of 1994.
215
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Additional Information
The following table lists the respective occupancy rates at each of the
properties securing Mortgages as of March 9, 1997.
Property Location Occupancy %
- ---------------------------------- ------------------ ------------
Cross Creek Apartments Charlotte, NC 91.0%
Weatherly Walk Apartments Fayetteville, GA 84.4%
Woodgate Manor Gainesville, FL 96.0%
216
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Investments in mortgage loans $27,585,846 $27,623,254
Loan receivable from affiliate 3,060,000 3,060,000
Deferred loan origination fees, net 924,782 932,303
Cash and cash equivalents 1,296,497 1,228,487
Interest receivable 203,731 204,387
Other assets 3,314 6,997
----------- -----------
Total assets $33,074,170 $33,055,428
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Due to affiliates $ 71,530 $ 47,974
Accrued expenses 55,854 58,033
Distribution payable 39,214 0
----------- -----------
Total liabilities 166,598 106,007
----------- -----------
Contingencies
Partners' capital (deficit):
BUC$holders (2,641,100 BUC$ issued and outstanding) 33,245,853 33,286,865
General partners (338,281) (337,444)
----------- -----------
Total partners' capital 32,907,572 32,949,421
----------- -----------
Total liabilities and partners' capital $33,074,170 $33,055,428
=========== ===========
</TABLE>
See accompanying notes to financial statements.
217
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Statements of Income
(Unaudited)
Three Months Ended
March 31,
----------------------
1997 1996
---------- ---------
Revenues:
Interest income:
Mortgage loans $612,684 $614,254
Loan receivable from affiliate 70,890 72,207
Temporary investments 14,299 11,085
Equity gain 0 14,985
--------- ---------
Total revenues 697,873 712,531
--------- ---------
Expenses
General and administrative 52,915 46,960
Amortization of deferred loan origination fees 7,521 7,521
--------- ---------
Total expenses 60,436 54,481
--------- ---------
Net income $637,437 $658,050
========= =========
Allocation of Net Income
BUC$holders $586,258 $606,459
========= =========
General partners:
Special distribution $ 39,214 $ 39,214
Other 11,965 12,377
--------- ---------
$ 51,179 $ 51,591
========= =========
Net income per BUC $ .22 $ .23
========= =========
See accompanying notes to financial statements.
218
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Statements of Changes in Partners' Capital (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Limited General
Total Partners Partners
------------- ------------- --------------
<S> <C> <C> <C>
Partners' capital (deficit)-January 1, 1997 $32,949,421 $33,286,865 $ (337,444)
Net income 637,437 586,258 51,179
Distributions (679,286) (627,270) (52,016)
----------- ----------- ----------
Partners' capital (deficit)-March 31, 1997 $32,907,572 $33,245,853 $ (338,281)
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
219
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1996
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 698,529 $ 643,104
General and administrative expenses paid (27,855) (70,054)
----------- -----------
Net cash provided by operating activities 670,674 573,050
----------- -----------
Cash flows from investing activities:
Principal payments received on mortgage loans 37,408 31,282
----------- -----------
Cash flows from financing activities:
Distributions paid to partners (640,072) (640,072)
----------- -----------
Net increase (decrease) in cash and cash equivalents 68,010 (35,740)
Cash and cash equivalents at beginning of the period $1,228,487 1,145,895
----------- -----------
Cash and cash equivalents at end of the period $1,296,497 $ 1,110,155
=========== ===========
Reconciliation of net income to net cash provided by operating activities:
Net income $ 637,437 $ 658,050
----------- -----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity gain 0 (14,985)
Amortization of deferred loan origination fees 7,521 7,521
Changes in:
Interest receivable 656 (54,442)
Other assets 3,683 3,253
Due to affiliates 23,556 (20,775)
Accrued expenses (2,179) (5,572)
----------- -----------
Total adjustments 33,237 (85,000)
----------- -----------
Net cash provided by operating activities $ 670,674 $ 573,050
=========== ===========
Reconciliation of distributions paid to partners:
Distributions to partners $ (679,286) $ (679,286)
Increase in distribution payable 39,214 39,214
----------- -----------
Distributions paid to partners $ (640,072) $ (640,072)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
220
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Notes To Financial Statements
March 31, 1997
(Unaudited)
NOTE 1--General
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of Eagle Insured L.P. (the "Partnership") as of March 31, 1997 and the
results of operations and cash flows for the three months ended March 31, 1997
and 1996. However, the operating results for the interim periods may not be
indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K/A-2 filed with the Securities and
Exchange Commission for the year ended December 31, 1996.
NOTE 2--Investment in Mortgage Loans and Equity Loans to Developers
Information relating to investments in FHA co-insured mortgage loans and
equity loans to developers as of March 31, 1997 and December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Interest
Funding Final Rate on
Closing Completion Maturity Mortgage
Project Date Date Date (1) Loan (2)
- ---------------------------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Cross Creek Apartments
Charlotte, NC (3) ......... 06/10/88 2/1/91 1/1/30 8.95%
Weatherly Walk Apartments
Fayetteville, GA ......... 08/18/88 12/5/89 11/1/29 8.95%
Woodgate Manor
Gainesville, FL (3) ...... 12/12/88 12/13/88 1/1/24 8.95%
<CAPTION>
Mortgage Mortgage Equity Equity
Loan Loan Loan Loan
Balance at Balance at Balance at Balance at
Project 12/31/97 13/31/96 12/31/97 (4) 12/31/96 (4)
- ---------------------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Cross Creek Apartments
Charlotte, NC (3) ......... $17,085,445 $17,106,744 $ 0 $0
Weatherly Walk Apartments
Fayetteville, GA ......... 7,543,901 7,553,454 0 0
Woodgate Manor
Gainesville, FL (3) ...... 2,956,500 2,963,056 0 0
------------ ------------ ---- ---
$27,585,846 $27,623,254 $ 0 $0
============ ============ ==== ===
</TABLE>
(1) The Partnership may call for prepayment of the total loan at any time
after the tenth anniversary of the date the mortgage loan funding was completed.
The Partnership, in order to call for prepayment, would be required to terminate
the mortgage insurance contract with FHA (and/or the coinsurer) not later than
the accelerated payment date. Since the exercise of such option would be at the
Partnership's discretion, it is intended to be exercised only where the
Partnership determines that the value of the Development has increased by an
amount which would justify accelerating payment in full and assuming the risks
of foreclosure if the mortgagor failed to make the accelerated payment. The
Partnership presently expects to dispose of such loans within 10 to 15 years
after acquisition.
For a period of five years from the loan closing date, the owners of the
properties did not have the right to prepay the mortgage loans without the
consent of the General Partners. Beginning in the sixth year and thereafter, any
prepayment during one calendar year in an amount in excess of 15% of the
original principal amount of the mortgage loan will be subject to a prepayment
penalty. The prepayment penalty is 5% in the sixth year and decreases 1% per
year thereafter.
(2) Includes a servicing fee of 0.07% paid by the developer to Related
Mortgage Corporation (an affiliate of the Related General Partner); however,
does not include additional interest which may be payable.
(3) The general partnership interest of the project is held by an affiliate
of the Related General Partner.
(4) Equity operating losses have reduced the carrying value of these loans
to zero as of March 31, 1997 and December 31, 1996 without elimination of the
amount due and owing to the Partnership.
221
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Notes To Financial Statements
March 31, 1997
(Unaudited)
NOTE 3--Related Parties
The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The General
Partners and their affiliates receive reimbursements for costs incurred in
connection with these services, the amount of which is limited by the provisions
of the Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement"). The costs and expenses were:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
---------- --------
<S> <C> <C>
Prudential-Bache Properties, Inc. ("PBP") and affiliates $ 9,923 $15,392
Related Federal Insured L.P. (the "Related General Partner") and affiliates 11,112 15,000
--------- --------
$ 21,035 $30,392
========= ========
</TABLE>
The present owner of the Cross Creek property ("Walsh/Cross Creek L.P.")
acquired title to the property upon the default of the original developer.
Significant interests in Walsh/Cross Creek L.P. are held by affiliates of the
Related General Partner. The Partnership made a loan of $3,060,000 to
Walsh/Cross Creek L.P. (the "Cross Creek Loan") to pay for costs incurred to
complete construction and to fund operating deficits. The Cross Creek Loan bears
interest at the prime rate plus 1.0% and is due on January 1, 2030 or on the
occurrence of other events as more fully described in the loan agreement. The
amount loaned to Walsh/Cross Creek L.P. is classified as a loan receivable from
affiliate and is anticipated to be repaid from cash flows from the property.
Stephen M. Ross holds a majority interest in the Related General Partner and has
guaranteed to the Partnership, subject to certain conditions contained in the
Guarantee Agreement and Amendment to the Guarantee as follows: (i) the
performance of all obligations for the payment of interest on the Cross Creek
Loan when due in accordance with documentation evidencing the Cross Creek Loan;
(ii) the payment of principal on the Cross Creek Loan on or before December 31,
2000; (iii) the repayment on or before December 31, 2000 of the $1,783,900
equity loan (currently recorded at zero) previously made to the original
developer of Cross Creek; and (iv) the payment when due of interest and
principal at an interest rate of 8.95% of the $17,494,100 first mortgage loan
previously made to the original developer.
In accordance with the Guarantee Agreement and Amendment to the Guarantee
and except as otherwise required by HUD, available cash flow or capital proceeds
from the Cross Creek property will be applied first to all expenses of operating
and maintaining the property, debt service and/or satisfaction of the mortgage
loan, equity loan and Cross Creek Loan, then to reimburse Stephen M. Ross for
operating deficit payments which he has made (amounting to $80,000 for the three
months ended March 31, 1997 and $3,262,732 cumulatively), then to additional
interest, default rate and guaranteed rate payments as set forth in the
Subordinated Note and the Additional Interest Guarantee.
Prudential Securities Incorporated ("PSI"), an affiliate of PBP, owns 6,655
BUC$ at March 31, 1997.
NOTE 4--Contingencies
On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group, Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership, against the Partnership, PBP, PSI and a number
of other defendants.
By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, were transferred to a single judge of the United States District
Court for the Southern District of New York (the "Court") and consolidated for
pretrial proceedings under the caption In re Prudential Securities Incorporated
Limited Partnerships Litigation (MDL Docket 1005) (the "Class Action"). On June
8, 1994, plaintiffs in the transferred cases filed a complaint that consolidated
the previously filed complaints and named as defendants, among others, PSI,
certain of its present and former employees and the General Partners. The
Partnership was not named a defendant in the consolidated complaint, but the
name of the Partnership was listed as being among the limited partnerships at
issue in the case.
On August 9, 1995, PBP, PSI and other Prudential defendants entered into a
Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The Court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
Court gave final approval to the settlement, certified a class of purchasers
222
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Notes To Financial Statements
March 31, 1997
(Unaudited)
NOTE 4--Contingencies (Continued)
of specific limited partnerships, including the Partnership, released all
settled claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI. The consolidated action
remains pending against the Related General Partner and certain of its
affiliates.
On December 31, 1996, the Court issued a preliminary approval order (the
"Order") with respect to settlement (the "Related Settlement") of the Class
Action against the Related General Partner and certain of its affiliates.
Pursuant to the stipulation of settlement entered into with counsel for the
class on December 24, 1996, the proposed Related Settlement contemplates, among
other matters, the reorganization (the "Reorganization") of the Partnership and
three other partnerships co-sponsored by affiliates of the Related General
Partner and PBP.
The proposed Related Settlement and Reorganization are subject to
objections by the BUC$holders and limited partners of the Partnership as well as
each of the other concerned partnerships and final approval of the Court after
review of the proposals at a fairness hearing.
Under the proposed Reorganization plan, the BUC$holders of the Partnership
and Summit Insured Equity L.P., Summit Insured Equity L.P. II and Summit
Preferred Equity L.P. will receive shares in a newly formed real estate
investment trust. It is anticipated that the shares will be allocated
proportionately among the partnerships and their respective investors based upon
appraisals and other factors as supported by a third-party fairness opinion.
Detailed information about the proposed Related Settlement and Reorganization
will be sent to BUC$holders in the near future. The terms of the Reorganization
include, among other matters, the acquisition by affiliates of the Related
Capital Company ("RCC") of PBP's general partner interest (the "PBP Interest"),
transfer to the BUC$holders of one-half of the PBP Interest, reduction of the
sum of the aggregate annual fees currently payable to both General Partners by
25%, filing an application to list the new company's shares on an exchange and
the creation of an infinite, as opposed to finite, life-operating business.
In connection with the proposed Related Settlement and Reorganization, on
December 19, 1996, PBP and RCC entered into an agreement for the purchase by RCC
or its affiliates of the PBP Interest. The agreement is subject to numerous
conditions, including the effectiveness of the Related Settlement of the Class
Action and the approval of the sale and withdrawal of PBP as a general partner
of the Partnership by the Court.
Pending final approval of the Related Settlement, the Court's Order
prohibits class members (including the BUC$holders) from, among other matters,
(i) transferring their BUC$ unless the transferee agrees to be bound by the
Related Settlement; (ii) granting a proxy to object to the Reorganization; or
(iii) commencing a tender offer for the BUC$. In addition, the General Partners
are enjoined from (i) recording any transfers made in violation of the Order and
(ii) providing the list of investors in any of the partnerships which are the
subject of the Reorganization to any person conducting a tender offer.
There can be no assurance that the conditions to the closing of the
proposed Related Settlement and Reorganization will be satisfied nor as to the
time frame in which a closing may occur. In the event a settlement cannot be
reached, the Related General Partner believes it has meritorious defenses to the
consolidated complaint and intends to vigorously defend this action.
NOTE 5--Subsequent Event
In May 1997, distributions of approximately $627,000 and $13,000 were paid
to the BUC$holders and General Partners, respectively, for the quarter ended
March 31, 1997.
223
<PAGE>
Eagle Insured L.P.
(a limited partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity and Capital Resources
The Partnership originally invested in four mortgage loans which finance
multifamily residential rental properties, one of which was prepaid in 1994.
All base interest and initially at least 90% in the aggregate of the
principal of the mortgage loans made by the Partnership are coinsured by the FHA
(80% of the 90%) and an affiliate of the Related General Partner (20% of the
90%), with the remaining 10% of the Partnership's original portfolio comprised
of uninsured non-interest bearing equity loans made directly to the same
developers as are the mortgage investments. With respect to a default on FHA
co-insured loans, the Partnership would bear the risk of loss with respect to
uninsured portions of the loans (10% of the mortgage loan and additional
interest), however, these are secured by the interests in the partnerships
owning the underlying properties. The equity loans to developers are recorded at
zero as of March 31, 1997 as a result of being accounted for under the equity
method of accounting without elimination of the amount due and owing to the
Partnership.
The Partnership is entitled to receive additional interest on each mortgage
loan from the annual net cash flow of the development and from a percentage of
the residual value upon sale or refinancing. The receipt of additional interest
is dependent upon the economic performance of the underlying properties. The
Partnership did not receive additional interest payments during the three months
ended March 31, 1997.
Stephen M. Ross has guaranteed repayment of the principal and interest on a
loan to the Cross Creek developer. See Note 3 to the financial statements for
further information. Mr. Ross remains in compliance with his obligations under
the Guarantee Agreement and Amendment to the Guarantee. However, significant
portions of his assets are in the form of partnership interests and corporate
stock which are pledged or are otherwise illiquid. Furthermore, a significant
portion of the cash flow which Mr. Ross would otherwise be expected to receive
from his business operations is presently pledged to meet other obligations. Mr.
Ross also has contingent liabilities that, if simultaneously called upon, could
result in Mr. Ross having insufficient liquid assets to meet all of his current
liabilities. There can be no assurance that Mr. Ross will have the liquidity
necessary to continue to comply with his obligations under the Guarantee
Agreement and Amendment to the Guarantee. In addition, Mr. Ross has capitalized
the Related General Partner with a demand promissory note and, if called upon to
pay all or a portion of this note, there is no assurance that he will have the
liquidity necessary to meet such demand.
FAI, Ltd. Weatherly Walk Apartments ("Weatherly Walk") and Walsh/Cross
Creek Limited Partnership ("Cross Creek") have in the past experienced recurring
operating losses, working capital deficiencies and negative cash flows which
raised concerns of a potential default on the related mortgage and equity loans.
With respect to Weatherly Walk, the Fayetteville, Georgia market has improved
and the partnership which owns the property is no longer experiencing operating
deficits, working capital deficiencies or negative cash flows and it is
currently meeting its operating obligations including required mortgage
payments. With respect to Cross Creek, which continues to experience recurring
operating losses, as indicated above and in Note 3 to the financial statements,
Stephen M. Ross has guaranteed the performance of all obligations for the
payment of interest (at 8.95%) and principal of the first mortgage together with
the equity loan and has contributed $80,000 during the three months ended March
31, 1997 ($3,262,732 cumulatively) to cover operating losses and working capital
deficiencies, allowing this property to meet all required mortgage payments.
At the beginning of the year, the Partnership had cash and cash equivalents
of approximately $1,228,000. After the receipt of net cash flow from operations
of approximately $671,000, principal payments received on mortgage loans of
approximately $37,000 and the payment of distributions of approximately
$640,000, the Partnership had approximately $1,296,000 in cash and cash
equivalents at March 31, 1997. The first quarter distribution of approximately
$627,000 was paid to BUC$holders in May 1997 from adjusted cash flow from
operations. Principal and interest payments from the mortgage loans are
anticipated to provide sufficient liquidity to meet the operating expenditures
of the Partnership and to pay distributions in future years.
For a discussion of the proposed settlement of the Class Action relating to
the Partnership, See Note 4 to the financial statements.
Management is not aware of any trends or events, commitments or
uncertainties, which have not otherwise been disclosed, that will or are likely
to impact liquidity in a material way. All base interest and at least 90% of the
principal of the Partnership's investments in mortgage loans are insured or
co-insured by the FHA and a private mortgage lender (which is an affiliate of
the Related General Partner). The Partnership's investment in unsecured
non-interest bearing equity loans (which represent approximately 10% of the
Partnership's original portfolio) are secured by the interests in the
partnerships owning the underlying properties which are diversified by location
so that if one state is experiencing downturns in the economy, the remaining
properties may be experiencing upswings. However, the geographic
diversifications of the portfolio may not protect against a general downturn in
the national economy.
224
<PAGE>
Eagle Insured L.P.
(a limited partnership)
The Partnership anticipates that cash generated currently from the
operations of the properties underlying the Partnership mortgage loans (taking
into account certain guarantees and the current performance of the properties
and the markets) will be sufficient to meet the required debt service payments
to the Partnership.
Results of Operations
The Partnership's net income for the three months ended March 31, 1997
decreased by approximately $21,000, as compared to the corresponding period in
1996 for the reasons described below.
Interest income from temporary investments increased approximately $3,000
for the three months ended March 31, 1997 as compared to the corresponding
period in 1996 primarily due to higher cash and cash equivalents balances in
1997.
During the three months ended March 31, 1996, the Partnership recorded an
equity gain of approximately $15,000 relating to a net equity gain from the
Woodgate Manor property. The reason for not recording any equity gain (loss) in
1997 was due to the carrying value of the Woodgate Manor equity loan being
reduced to zero by the net equity loss for the full year 1996.
General and administrative expenses increased approximately $6,000 for the
three months ended March 31, 1997 as compared to the corresponding period in
1996 primarily due to an increase in legal costs relating to the Kinnes
litigation described in Note 4 of the financial statements as well as an
overaccrual of audit fees at December 31, 1995 partially offset by a decrease in
cost and expense reimbursements to the General Partners.
Additional Information
The following table lists the respective occupancy rates at the properties
securing the mortgage loans as of April 20, 1997:
Property Location Occupancy %
- ---------------------------------- ------------------ ------------
Cross Creek Apartments Charlotte, NC 91.3%
Weatherly Walk Apartments Fayetteville, GA 87.5%
Woodgate Manor Gainesville, FL 92.7%
225
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion summarizes the material federal income tax issues
associated with the Consolidation, the operations of the Company and the
transactions related thereto which may affect BUC$holders who are individuals
and citizens or residents of the United States. The following discussion also
summarizes such issues which may affect BUC$holders that are tax-exempt
investors. This summary was prepared by Counsel and is based upon the Code,
Treasury regulation promulgated or proposed thereunder and published rulings and
court decisions, all of which are subject to changes which could adversely
affect the BUC$holders. Each BUC$holder should consult his or her own tax
advisor as to the specific consequences of the proposed Consolidation, the
receipt and ownership of Common Stock by Participating BUC$holders, the taxation
of the Company as a REIT and the application and effect of federal, state and
local income and other tax laws and of any potential changes in the applicable
law after the date hereof. No ruling from the IRS, or from any other taxing
authority, will be sought or obtained as to any of the following tax issues, and
neither the IRS nor the courts are bound by the discussion or the opinions of
Counsel set forth below.
Income tax laws and treatment of REITs may be modified, prospectively or
retroactively, by legislative, judicial or administrative action at any time. No
assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to REITs or otherwise. In addition to any direct effects such
changes might have, such changes might also indirectly affect the market value
of all real estate investments, and consequently the ability of the Company to
realize its investment objectives. While any such legislation may contain
transitional rules that would reduce their impact on the Company, it is
impossible to predict whether or in what form such legislation may be enacted in
the future.
Opinions of Counsel
Counsel has rendered its opinion to the Company and the Partnerships
concerning the material federal income tax issues regarding the Consolidation
and related transactions. In rendering its opinion, Counsel has relied upon
representations of the Company with respect to certain factual matters and upon
representations from the Related General Partners that the assets of the
Partnerships are held for investment and not for resale. Counsel has not
undertaken an independent inquiry into or verification of these facts. Based
upon the foregoing representations, and subject to the limitations and
qualifications described above and herein, Counsel has opined that:
(a) as of the date of the consummation of the Consolidation, the Company
will be organized in conformity with the requirements for qualification as a
REIT and its proposed methods of operations described in this Solicitation
Statement will enable the Company to qualify as a REIT;
(b) for the Participating BUC$holders, the exchange of their interests in
the Participating Partnerships for Shares pursuant to the Consolidation will
be a taxable event in which such BUC$holders will recognize gain or loss,
subject to the limitations described below, for federal income tax purposes;
(c) the Consolidation will not result in the recognition of unrelated
business taxable income by any Tax-Exempt Participating BUC$holder which does
not hold Units either as a "dealer" or subject to acquisition indebtedness,
and is not an organization described in Sections 501(c)(7) (social clubs),
501(c)(9) (voluntary employees' beneficiary associations), 501(c)(17)
(supplemental unemployment benefit trusts), or 501(c)(20) (qualified group
legal services plans) of the Code;
(d) distributions with regard to Shares owned by Tax-Exempt Stockholders
(other than organizations described in Sections 501(c)(7), 501(c)(9),
501(c)(17) or 501(c)(20) of the Code) will not result in the recognition of
unrelated business taxable income, unless such Shares are subject to
acquisition indebtedness or the Company is a "pension-held REIT" (see "Federal
Income Tax Considerations--Taxation of Tax-Exempt Stockholders");
(e) to the extent the summary of federal income tax consequences set forth
in this Solicitation Statement involves matters of law, such statements of law
are correct; and
(f) the following discussion fairly summarizes the material federal income
tax considerations associated with the Consolidation and the operations of the
Company.
Certain Tax Differences Between the Ownership of the Units and Shares
BUC$holders are treated as limited partners of a partnership for federal
income tax purposes. The Partnerships are not subject to federal income
taxation, and instead each BUC$holder is required to take into account his or
her share of the income or loss or such Partnership, regardless of whether any
cash is distributed. Upon consummation of the Consolidation with respect to a
Participating Partnership, the Participating BUC$holders therein will receive
Shares in exchange for their interests in such Partnership. See "COMPARISON OF
RIGHTS OF STOCKHOLDERS OF THE COMPANY AND BUC$HOLDERS OF THE PARTNERSHIPS."
226
<PAGE>
A REIT is generally not subject to tax on income which it timely
distributes to its stockholders. However, the ownership of Shares pursuant to
the Consolidation will affect the character and amount of income reportable by
the Participating BUC$holder in the future. Currently, as the owners of Units in
a Partnership, BUC$holders must take into account their distributive shares of
all income, loss and separately stated Partnership items, regardless of the
amount of any distributions of cash to such BUC$holders. That information is
supplied to each BUC$holder annually on a Schedule K-1. The character of the
income recognized by partners is dependent upon the assets and activities of the
Partnership and may, in some circumstances, be treated as passive income.
In contrast to the treatment of BUC$holders, Stockholders of the Company
will be taxed based on the amount of distributions received from the Company.
Each Stockholder will receive a Form 1099-DIV reporting the amount of taxable
and nontaxable distributions paid to him or her during the preceding year. The
taxable portion of such distributions depends on the amount of the Company's
earnings and profits. In computing earnings and profits, the Company may be
required to use a slower method of depreciation than that used by certain
Participating Partnerships with respect to some or all of the properties which
will be owned by the Company. Accordingly, under certain circumstances, even if
the Company were to make the same level of distributions as the Participating
Partnerships, a larger portion of such distributions by the Company could
constitute taxable income as compared to the distributions by such Partnerships.
In addition, the character of this income to Stockholders is not dependent on
its character to the Company, is generally ordinary dividend income to the
Stockholders and is classified as a portfolio income under the passive loss
rules, except with respect to capital gains dividends, discussed below.
Furthermore, should the Company incur a taxable loss, such loss will not be
passed through to the Stockholders. Certain other differences attributable to
the Company's status as a REIT are discussed below. See "--Taxation of the
Company" and "--Taxation of Taxable Domestic Stockholders."
Tax Consequences of the Consolidation
In connection with the Consolidation, the BUC$holders' interests in the
Participating Partnerships will be transferred to the Company in exchange for
Shares of the Company. Summit Preferred and Eagle will then be liquidated and
will distribute their property to the Company while Summit Insured I and Summit
Insured II will remain in existence, with the Company as a general partner and
the Related General Partner and the Advisor as limited partners. Each BUC$holder
will be required to recognize income or loss as a result of the transfer of
Units to the Company.
Consequences to Participating Partnerships and BUC$holders. Under the Code,
an individual or entity other than a corporation cannot transfer its assets on a
tax-free basis to a corporation if that corporation is a REIT and the transfer
results in the diversification of the transferor's interests. A transfer
ordinarily results in the diversification of the transferors' interests if two
or more persons (or entities) transfer nonidentical assets to a corporation in
the exchange. The Consolidation will result in diversification within the
meaning of the applicable Treasury regulations because each BUC$holder has
nonidentical assets. Accordingly, except as described below, the transfer of
Units will result in the recognition of gain or loss by each BUC$holder.
The overall amount of gain or loss recognized by a Participating BUC$holder
will equal the difference between (a) the sum of the fair market values of the
Shares of the Company received in the Consolidation plus the amount of any
liabilities of the Participating Partnership, if any, assumed by or taken
subject to the Company and (b) the adjusted basis of the Units exchanged
therefor. It is anticipated that tax losses will result from the Consolidation
to Participating BUC$holders who acquired Units from Insured I, Insured II and
Eagle and taxable gain will result from the Consolidation to Participating
BUC$holders who acquired Units from Summit Preferred.
The Participating Partnerships intend to take the position that the fair
market value of the Shares will be based primarily on the Adjusted Net Asset
Value of the properties of the respective Participating Partnerships. While the
Company believes that such a method is reasonable, the determination of the fair
market value of the Shares is a question of fact. Thus, there can be no
assurance as to what such fair market value will be finally determined to be, or
whether some other method of valuation may be used by the Participating
Partnership depending on the actual circumstances at the time of the
Consolidation, including the recommendations of their accountants and the
closing price of the Shares on the date of the Consolidation. There can also be
no assurance that the IRS will not take the position that valuation of the
Shares by some other method more accurately reflects their fair market values
and that the amount of gain to be recognized by Participating BUC$holders should
be increased or amount of loss decreased.
Each BUC$holder's gain or loss in connection with the Consolidation will be
determined by reference to the basis of his Units. As described in greater
detail below, the basis which each Participating BUC$holder will take in Shares
received as a result of the Consolidation will equal the BUC$holder's basis in
his or her Units, adjusted to reflect any gain recognized by the BUC$holder on
the receipt of Shares.
In general, gains or losses realized with respect to transfers of Units in
exchange for Shares are likely to be treated as capital gains or losses, except
for any portion of gain attributable to a Participating Partnership's
"unrealized receivables," including accelerated depreciation, which will be
treated as ordinary income. In general, an individual may only use up to $3,000
of capital losses in excess of capital gains to offset ordinary income in any
taxable year. Any excess loss is carried forward to future years subject to the
same limitations. The Code provides that, in general, a taxpayer who disposes of
his or her entire interest in a passive activity in a taxable transaction to an
unrelated party during a taxable year is entitled to treat the excess of passive
losses from such activity (including any prior suspended losses) over such
year's passive income or gains from all activities as not being subject to
passive activity loss limitations. The Con-
227
<PAGE>
solidation will allow Participating BUC$holders to deduct any suspended passive
activity losses attributable to their investment in a Participating Partnership,
since the Consolidation will be a taxable disposition of the activities.
Based on the General Partners' representations that the assets of the
Participating Partnerships are held for investment and not for resale, the
Consolidation will not result in the recognition of unrelated business taxable
income by any Tax-Exempt BUC$holder which does not hold Units in a Participating
Partnership either as a "dealer" or as debt-financed property within the meaning
of Code Section 514, and is not an organization described in Sections 501(c)(7)
(social clubs), 501(c)(9) (voluntary employees' beneficiary associations),
501(c)(17) (supplemental unemployment benefit trusts) or 501(c)(20) (qualified
group legal services plans). The four classes of exempt organizations noted in
the previous sentence may recognize gain or loss on the Consolidation.
Assuming Summit Preferred and Eagle participate in the Consolidation, upon
consummation of the Consolidation, such Partnerships will be liquidated and will
distribute their assets to the Company. The taxable year of Summit Preferred and
Eagle will end at such time and each BUC$holder in Summit Preferred and Eagle
must report, in his or her taxable year that includes the Consolidation, his or
her share of all income, gain, loss, deduction, and credit for Summit Preferred
and Eagle through the date of the Consolidation (including gain or loss
resulting from the Consolidation described above). It is possible that a
BUC$holder whose taxable year is not a calendar year could be required to take
into account in a single taxable year his share of income of Summit Preferred
and/or Eagle attributable to more than one of its taxable years.
The receipt of Shares will cause a Participating BUC$holder to recognize
gain if the fair market value of the Shares exceeds the Participating
BUC$holder's adjusted basis in his Units. A Stockholder's basis in the Shares
received in the Consolidation will equal the basis in his or her Units adjusted
by his or her distributive share of income, gain, loss, deduction, and credit
for the final taxable year of the Participating Partnership as well as
distributions received in such final taxable year (other than the distribution
of the Common Stock) plus any gain recognized on the receipt of the Shares. A
Stockholder's holding period for the Shares for purposes of determining capital
gain or loss will begin on the date of the Consolidation.
Consequences to Company. The Company will not recognize gain or loss as
result of the Consolidation. The Company will have a holding period in the Units
which begins on the Closing Date. The basis of the Units received by the Company
will be equal to their fair market value, and the basis of the assets received
by the Company from the Participating Partnerships which are liquidated (Summit
Preferred and Eagle) will equal the adjusted basis of the Company in the Units,
reduced by the amount of any money (including the amount of any liabilities of
these Participating Partnerships assumed by the Company) distributed in the same
transaction.
The aggregate basis of the Company's assets will be allocated among such
assets in accordance with their relative fair market values as described in
Section 1060 of the Code. As a result, the Company's basis in the acquired
properties may differ from the Participating Partnerships' basis therein, and
the acquired properties may be subject to different depreciable lives and
methods as a result of the Consolidation. These factors will result in an
overall change in the depreciation deductions attributable to the assets
acquired from the Participating Partnerships following the Consolidation.
The Company may have market discount or premium with respect to its
acquisition in the Consolidation of loans held by Eagle. The market discount
rules provide, in part, for the treatment of gain attributable to accrued market
discount as ordinary income upon the receipt of principal payments or on the
sale or other disposition of the loan (to the extent such payment, sale or other
disposition proceeds do not exceed the accrued market discount on such
obligations) and for the deferral of interest deductions with respect to debt
incurred to acquire or carry the market discount loan. If a loan is treated as
being acquired by the Company at a premium such premium will be amortized as an
offset to interest income (with a corresponding reduction in the Company's
basis) under a constant-yield method over the term of the loan if an election
under Section 171 of the Code is made.
Taxation of the Company
General. Upon consummation of the Consolidation, the Company plans to make
an election to be taxed as a REIT under Sections 856 through 860 of the Code.
The Company believes that it will be organized and will operate in such a manner
as to qualify to elect to be treated as a REIT under the Code, and although the
Company intends to operate in such a manner, no assurance can be given that the
Company will qualify or remain qualified as a REIT.
In the opinion of Counsel, as of the date of the consummation of the
Consolidation based on representations from the Company representing certain
facts and assuming the Consolidation and the operations of the Company are
conducted substantially as described in this Solicitation Statement, the Company
will be organized so as to enable it to be treated as a REIT under the Code and
its proposed method of operation described herein will enable the Company to
qualify as a REIT. Moreover, such qualification and taxation as a REIT depends
upon, among other things, actual annual operating results, future distribution
levels and diversity of stock ownership, which cannot be ascertained as of the
date of this Solicitation Statement. Accordingly, no assurance can be given that
the actual result of the Company's operation for any taxable year will satisfy
such requirements. See "--Failure to Qualify as a REIT."
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Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (a) which is managed by one or more trustees or directors;
(b) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (c) which would be taxable as
a domestic corporation, but for the REIT provisions of the Code; (d) which is
neither a financial institution nor an insurance company subject to certain
provisions of the Code; (e) the beneficial ownership of which is held by 100 or
more persons; (f) during the last half of each taxable year not more than 50% in
value of the outstanding stock of which is owned, actually or constructively, by
five or fewer individuals (as defined in the Code to include certain entities);
and (g) which meet certain other tests, described below, regarding the nature of
its income and assets. The Code provides that conditions (a) to (d), inclusive,
must be met during the entire taxable year, and that condition (e) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (e) and
(f) will not apply until after the first taxable year for which an election is
made to be taxed as a REIT.
The Company expects to issue sufficient shares pursuant to the
Consolidation to allow it to satisfy the requirements set forth in (e) and (f)
above. In addition, prior to consummation of the Consolidation, the Company will
amend its Charter to provide for restrictions regarding transfer of its shares,
which amendment is intended to satisfy the share ownership requirements
described in (e) and (f) above. Such transfer restrictions are described in
"DESCRIPTION OF COMMON STOCK--Restrictions on Ownership and Transfer." Further,
the Company will elect a taxable year ending on December 31.
The Code provides special rules regarding the income and assets of REIT
that invests in a partnership or joint venture. In general, under these
provisions the Company will be required to take into account its pro rata share
of the income and assets of any such partnership or joint venture in analyzing
the income and asset requirements discussed herein. The Company will not invest
in a joint venture or partnership unless the Company believes that it will
continue to satisfy such income and asset requirements.
Income Tests. In order to qualify as a REIT, three gross income
requirements must be satisfied annually. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from certain limited sources
including "rents from real property" and, in certain circumstances, interest on
obligations secured by mortgages on real property or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from sources that qualify for the 75% income test, plus dividends,
other interest and gain from the sale of disposition of stock or securities, or
from any combination of the foregoing). Third, short-term gain from the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, directly or
constructively owns 10% or more in voting power or number of shares of such
tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease (determined by reference to the
adjusted bases of the leased property), then the portion of rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for rents received to qualify as "rents from real property," the REIT generally
must not operate or manage the property or furnish or render services to the
tenants of such property, other than through an independent contractor from whom
the REIT derives no income; provided, however, the Company may directly perform
certain basic services that are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not considered rendered to
the occupant of the property. The Company does not expect to charge rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage of receipts or sales, as
described above), and the Company does not expect to derive rentals from any
Related Party Tenant. The Company does not believe that rents attributable to
any personal property leased with real property will exceed 15% of the total
rent payable under its leases as determined by reference to adjusted bases of
the leased property. Finally, the Company or a non-liquidated Participating
Partnership may directly perform services under certain of its leases. However,
the Company believes that such services will constitute customary services and
will not cause the rents payable under the leases to fail to be rents from real
property under this provision. However, there can be no assurance that the IRS
will not assert that all or some portion of the income received by the Company
does not constitute rents from real property.
The term "interest" for purposes of qualification as a REIT generally does
not include any amount received or accrued (directly or indirectly) if the
determination of such amounts depends in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded from the term "interest" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Interest on obligations secured
by mortgages on real property includes the entire amount of interest payable
under a loan secured by both real and personal property if the fair market value
of such real property equals or exceeds the principal balance of such loan.
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If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. As
discussed in "--Taxation of Real Estate Investment Trusts," even if these relief
provisions apply, a tax would be imposed with respect to the excess net income.
Asset Tests. At the close of each quarter of the Company's taxable year,
the Company must satisfy two tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
interests in real property, interests in mortgages on real property, shares in
other REITs, cash, cash items, Government securities and qualified temporary
investments. Second, although the remaining 25% of the Company's assets
generally may be invested without restriction, securities in this class may not
exceed either (a) 5% of the value of the Company's total assets as to any one
non-governmental issuer, or (b) 10% of the outstanding voting securities of any
one issuer. The Company's direct investment in the properties and investments
through its interest in Insured I and Insured II will constitute qualified
assets for purposes of the 75% asset test. See "THE COMPANY--Assets and
Operations." The Company will be deemed to own its pro rata share of the assets
of these partnerships.
The Company may organize one or more wholly owned subsidiaries. However, as
anticipated, if the Company's subsidiaries are "qualified REIT subsidiaries" as
defined in the Code, such subsidiaries will not be treated as separate
corporations for federal income tax purposes. As a result, the Company will be
deemed to own the assets and recognize the income of the REIT subsidiary.
Ownership of the stock of a "qualified REIT subsidiary" will not cause the
Company to fail the income or asset tests.
The Company may acquire stock of one or more corporations which do not
constitute qualified REIT subsidiaries. In such a case, the Company has
represented that it will acquire only nonvoting stock and/or less than 10% of
its voting stock. Further, the Company has represented that it will hold less
than 10% of the voting power and total number of outstanding shares of any such
corporation if such corporation is a tenant. Also, the Company intends to limit
such acquisitions so that the fair market value of the stock of any nonqualified
REIT subsidiary would be less than 5% of the aggregate of the fair market value
of the Company's assets. Thus, based on these representations, the acquisition
of stock of any nonqualified REIT subsidiary would not cause it to fail to
satisfy the foregoing asset requirements.
Restrictions on Ownership. For the Company to qualify as a REIT under the
Code, not more than 50% in value of its outstanding Common Stock may be owned,
directly or constructively, by five or fewer individuals (as defined in the
Code) during the last half of a taxable year, and the Common Stock must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months (or during a proportionate part of a shorter taxable year). In
addition, rent from certain related party tenants is not qualifying income for
purposes of the gross income tests under the Code. Because the Board of
Directors believes it is essential for the Company to continue to qualify as a
REIT, the Ownership Limit has been included in the Charter.
The Ownership Limit provides that, subject to certain exception, no
stockholder may own, or be deemed to own by virtue of the constructive ownership
provisions of the Code, shares of Common Stock in excess of 9.9% of the
outstanding Common Stock. The constructive ownership rules are complex and may
cause Common Stock owned directly or constructively by a group of related
individuals or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.9% of the
Common Stock (or the acquisition of an interest in an entity which owns Common
Stock) by an individual or entity could cause that individual or entity (or
another individual or entity) to own constructively in excess of 9.9% of the
Common Stock.
The Board of Directors may waive the Ownership Limit with respect to a
particular stockholder in certain instances. See "Description of Common
Stock--Restrictions on Ownership and Transfer."
An additional limitation on ownership provides that if a transfer or issue
of shares of Common Stock would cause the REIT to be beneficially owned by fewer
than 100 persons, such transfer or issuance shall be null and void, and the
intended transferee will acquire no right to the stock. See "Description of
Common Stock--Restrictions on Ownership and Transfer." The Company has
represented that it will use its best efforts to enforce the Ownership Limit, by
making prohibited transferees aware of their obligation to pay over any
distributions received, by refusing to give effect to prohibited transfers on
its books, by instituting proceedings to enjoin any transfer violating the
Ownership Limitation, and by declaring all votes of prohibited transferees
invalid.
All persons who own a specified percentage (or more) of the outstanding
Common Stock must file a statement with the Company containing information
regarding their ownership of Common Stock as set forth in the Treasury
Regulations. Under current Treasury Regulations the percentage will be set
between one-half of one percent and five percent, depending on the number of
record holders of Common Stock. In addition, each stockholder shall upon demand
be required to disclose to the Company in writing such information with respect
to the direct, indirect and constructive ownership of shares as the Board of
Directors deems necessary to comply with the provisions of the Code applicable
to a REIT or to comply with the requirements of any taxing authority or
governmental agency.
Annual Distribution Requirements. In order to qualify as a REIT, the
Company is required to make distributions (other than capital gain dividends) to
its Stockholders in an amount at least equal to (a) the sum of (i) 95% of the
Company's REIT taxable income (computed
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without regard to the dividends paid deduction and the Company's net capital
gain) and (ii) 95% of the net income, if any, from foreclosure property less the
tax thereon, minus (b) the sum of certain items of noncash income. Such
distributions must be non-preferential and must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular distribution payment after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will
be subject to tax thereon at corporate income tax rates. Furthermore, if the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
The Company intends to make timely distributions sufficient to satisfy the
annual distributions requirements. In this regard, the partnership agreements of
Insured I and Insured II will be amended to authorize the Company, as general
partner, to take such steps as may be necessary to cause Insured I and Insured
II to distribute to its partners an amount sufficient to permit the Company to
meet these distribution requirements. It is possible that the Company may not
have sufficient cash or other liquid assets to meet the 95% distribution
requirement, due to timing differences between the actual receipt of income and
actual payment of expenses on the one hand, and the inclusion of such income and
deduction of such expenses in computing the Company's REIT taxable income on the
other hand. Further, as described below, it is possible that, from time to time,
the Company may be allocated a share of gain attributable to sale of depreciated
property that exceeds its allocable share or cash attributable to that sale. To
avoid any problem with the 95% distribution requirement, the Company will
closely monitor the relationship between its REIT taxable income and cash flow
and, if necessary, will attempt to cause Insured I and Insured II to borrow
funds in order to satisfy the distribution requirement. The Company (or Insured
I and Insured II) may be required to borrow funds at times when market
conditions are not favorable; therefore, no assurance can be given that such
borrowing would be available at such time.
If the Company fails to meet the 95% distribution requirement as a result
of an adjustment to its tax return by the IRS, it may retroactively cure the
failure by paying a "deficiency dividend" (plus applicable penalties and
interest) within a specified period.
In addition, if the IRS successfully challenged the Company's deduction of
all or a portion of the fees it pays to the Advisor, such payments could be
recharacterized as dividend distributions to the Advisor in its capacity as
Stockholder. If such distributions were viewed as preferential distributions the
Company would not meet the 95% annual distribution requirement and would not
qualify as a REIT.
Taxation of Real Estate Investment Trusts. If the Company qualifies for
taxation as a REIT, it generally will not be subject to federal corporate income
taxes on its net income that is currently distributed to Stockholders. This
treatment substantially eliminates the "double taxation" (at the corporate and
stockholder levels) that generally results from investment in a corporation.
However, the Company will be subject to federal income tax as follows: first, as
described above, the Company will be taxed at regular corporate rates on any
undistributed taxable income, including undistributed net capital gains; second,
under certain circumstances, the Company may be subject to the "alternative
minimum tax" on its items of tax preference; third, if the Company has (a) net
income from the sale or other disposition of "foreclosure property" which is
held primarily for sale to customers in the ordinary course of business or (b)
other nonqualifying income from foreclosure property, it will be subject to tax
at the highest corporate rate on such income; fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property other than foreclosure property held primarily
for sale to customers in the ordinary course of business), such income will be
subject to a 100% tax; fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed above), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% test, multiplied by a fraction intended to reflect the Company's
profitability; and sixth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amount
actually distributed.
Failure to Qualify as a REIT
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the above-described mitigation provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to Stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to Stockholders will be
taxable as ordinary income, and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
Tax Aspects of the Company's Investment in Insured I and Insured II
The Company will hold a direct ownership interest in Insured I and Insured
II. In general, partnerships are "pass-through" entities which are not subject
to federal income tax. Rather, partners are allocated their proportionate shares
of the items of income, gain, loss, deduction, and credit of a partnership, and
are potentially subject to tax thereon, without regard to whether the partners
receive a dis-
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tribution from the partnership. The Company will include its proportionate share
of the tax items of Insured I and Insured II for purposes of the various REIT
income tests and in the computation of its REIT taxable income. See "--Taxation
of the Company" and "--Requirements For Qualification." Any resultant increase
in the Company's REIT taxable income will increase its distribution requirements
regardless of whether or not any corresponding cash distribution is received
from Insured I and Insured II (see "--Taxation of the Company--Annual
Distribution Requirements"). Moreover, for purposes of the REIT asset tests (see
"--Taxation of the Company--Asset Tests"), the Company will include its
proportionate share of assets held by Insured I and Insured II.
Entity Classifications. The Company's interest in Insured I and Insured II
involves special tax considerations, including the possibility of a challenge by
the IRS of the status of Insured I and Insured II as partnerships (as opposed to
associations taxable as corporations) for federal income tax purposes. If
Insured I and/or Insured II were to be treated as an association taxable as a
corporation, such partnership would be required to pay income tax at corporate
rates on its net income, and distributions to partners would constitute
dividends that would not be deductible in computing net income. In addition, the
character of the Company's assets and items of gross income would change, and
this would preclude it from qualifying as a REIT. See "Taxation of the
Company--Requirements for Qualification" and "Failure to Qualify as a REIT"
above for a discussion of the effect of a failure to meet such tests for a
taxable year. Based on certain representations by the Company, on certain
assumptions regarding future events and upon the descriptions contained in this
Solicitation Statement, in the opinion of Counsel, Insured I and Insured II will
be treated for federal income tax proposes as partnerships (and not as
associations or publicly traded partnerships taxable as corporations). No
absolute assurances can be given that the actual operation of Insured I and
Insured II will satisfy such requirements. In addition, such opinion is not
binding on the IRS.
Sale of Properties
Generally, any gain realized by the Company, Insured I or Insured II on the
sale of property held for more than one year will be Section 1231 gain, except
for any portion of such gain that is treated as depreciation or cost recovery
recapture. Net Section 1231 gains are generally treated as long-term capital
gains. Gain recognized by Insured I and Insured II on the disposition of the
properties will be allocated among the Company and the Advisor in accordance
with their respective percentage interests therein.
The Company's gain, and the Company's share of any gain realized by Insured
I and Insured II, on the sale of any property held by the Company or by Insured
I and Insured II as inventory or other property held primarily for sale to
customers in the ordinary course of a trade or business, however, will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See "--Taxation of the Company Requirements for Qualification" and
"--Income Tests." Such prohibited transaction income also will have an adverse
effect upon the Company's ability to satisfy the income tests for REIT status.
See "--Taxation of the Company--Requirements for Qualification" and "--Income
Tests" above.
Taxation of Taxable Domestic Stockholders
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the Stockholder has held its stock.
However, corporate Stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a Stockholder to the
extent that they do not exceed the adjusted basis of the Stockholder's shares.
To the extent that such distributions exceed the adjusted basis of a
Stockholder's shares they will be included in income as long-term capital gain
(or short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the Stockholder. In
addition, any dividend declared by the Company in October, November or December
of any year payable to a Stockholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
Stockholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year. Stockholders
may not include in their income tax returns any net losses or capital losses of
the Company.
Taxation of Stockholders on the Disposition of the Common Stock
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a Stockholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a Stockholder who has held such
stock for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent of distributions from the
Company required to be treated by such Stockholder as long-term capital gain.
All or a portion of any loss realized upon a taxable disposition of the Common
Stock may be disallowed if other shares of the Common Stock are purchased within
30 days before or after the disposition.
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. Capital losses not offset by capital gains may be deducted
against an individual's ordinary income only up to a maximum annual deduction of
$3,000. Unused capital losses may be carried forward. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
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Backup Withholding
The Company will report to its Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a Stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A Stockholder that does not provide the Company with his or her correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the Stockholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any Stockholders who fail to certify
their non-foreign status to the Company. See "--Taxation of Foreign
Stockholders."
Taxation of Tax-Exempt Stockholders
In Revenue Ruling 66-106, 1966-1 C.B. 151, the IRS ruled that distributions
by a REIT to a tax-exempt employees' pension trust did not constitute UBTI.
Revenue rulings are interpretive in nature and subject to revocation or
modifications by the IRS. However, based upon Revenue Ruling 66-106 and the
analysis therein, distributions by the Company to a Stockholder that is a
tax-exempt entity (other than an entity described in Sections 501(c)(7),
501(c)(9), 501(c)(17) or 501(c)(20) of the Code) also will not constitute UBTI,
provided that the Shares are not subject to "acquisition indebtedness" within
the meaning of the Code. Acquisition indebtedness would include, among other
things, any debt incurred by a Stockholder which is a tax-exempt person in
connection with the acquisition of its Common Stock. The foregoing opinions do
not apply to tax-exempt investors described in Section 501(c)(7), 501(c)(9),
501(c)(17) or 501(c)(20) of the Code. Any such persons should consult their own
tax advisors regarding the ownership of the Common Stock.
In the case of a "qualified trust" (generally, a pension or profit-sharing
trust) holding shares in a REIT, the beneficiaries of such a trust are treated
as holding shares in the REIT in proportion to their actuarial interests in the
qualified trust, instead of treating the qualified trust as a single individual
(the "look-through exception"). A qualified trust that holds more than 10% of
the shares of a REIT is required to treat a percentage of REIT dividends as UBTI
if the REIT incurs debt to acquire or improve real property. However, this rule
applies only if (i) the qualification of the REIT depends upon the application
of the "look-through" exception (described above) to the restriction on REIT
shareholdings by five or fewer individuals, including qualified trusts (see
"Description of Common Stock--Restrictions on Ownership and Transfer") and (ii)
the REIT is "predominantly held" by qualified trusts; i.e., if either (x) a
single qualified trust held more than 25% by value of the interests in the REIT
or (y) one or more qualified trusts, each owning more than 10% by value, held in
the aggregate more than 50% of the interests in the REIT (a "pension-held
REIT"). The percentage of any dividend paid (or treated as paid) by a
pension-held REIT to such a qualified trust that is treated as UBTI is equal to
the amount of modified gross income (gross income less directly connected
expenses) from the unrelated trade or business of the REIT (treating the REIT as
if it were a qualified trust), divided by the total modified gross income of the
REIT. A de minimis exception applies where the percentage is less than 5%.
Taxation of Foreign Stockholders
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to an
investment in shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
the Company, Insured I or Insured II, of United States real property interests
and not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions, ordinarily,
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in Common Stock is treated as effectively
connected with the Non-U.S. Stockholder's conduct of a United States trade or
business, the Non-U.S. Stockholder generally will be subject to a tax at
graduated rates, in the same manner as U.S. Stockholders are taxed with respect
to such distributions (and may also be subject to the 30% branch profits tax in
the case of a Stockholder that is a foreign corporation). The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends made to a Non-U.S. Stockholder unless (i) a lower treaty rate
applies or (ii) the Non-U.S. Stockholder files an IRS Form 4224, Exemption From
Withholding of Tax on Income Effectively Connected With the Conduct of a Trade
or Business in the United States, with the Company, claiming that the
distribution is effectively connected income. Distributions in excess of current
and accumulated earnings and profits of the Company will not be taxable to a
Stockholder to the extent that they do not exceed the adjusted basis of the
Stockholder's shares, but rather will reduce the adjusted basis of such shares.
To the extent that such distributions exceed the adjusted basis of a Non-U.S.
Stockholder's shares, they will give rise to tax liability if the Non-U.S.
Stockholder would otherwise be subject to tax on any gain from the sale or
disposition of his or her shares in the Company, as described below. If it
cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distribution will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
233
<PAGE>
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchange by the Company of United States
real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a United States
business. Non-U.S. Stockholders would thus be taxed at the normal capital gain
rates applicable to U.S. Stockholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate Stockholder not entitled
to treaty exemption. The Company is required by applicable Treasury Regulations
to withhold 35% of any distribution that could be designated by the Company as a
capital gains dividend. This amount is creditable against the Non-U.S.
Stockholder FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It is currently anticipated that the Company will
be a "domestically controlled REIT," and therefore the sale of shares will not
be subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Stockholder if (a) investment in the shares is effectively
connected with the Non-U.S. Stockholder's United States trade or business, in
which case the Non-U.S. Stockholder will be subject to the same treatment as
U.S. Stockholders with respect to such gain (except that corporate stockholders
may be subject to the branch profits tax), or (b) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, in
which case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of shares were to be subject
to taxation under FIRPTA, the Non-U.S. Stockholder will be subject to the same
treatment as U.S. Stockholders with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals).
State Tax Consequences and Withholding
The Company and its Stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its Stockholders may not conform to the federal income tax consequences
discussed above. Several states in which the Company may conduct business treat
REITs as ordinary corporations. The Company does not believe, however, that
Stockholders will be required to file state tax returns, other than in their
respective states of residence, as a result of the ownership of Common Stock.
Participating BUC$holders may be required to recognize gain attributable to
states other than their states of residence as a result of the Consolidation,
and such states may impose withholding upon such Participating BUC$holders.
Consequently, prospective Stockholders should consult their own tax advisors
regarding the effect of state and local tax laws on the Consolidation and an
investment in the Company.
EACH BUC$HOLDER IS ADVISED TO CONSULT WITH HIS OR HER TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE CONSOLIDATION AND THE
OWNERSHIP AND SALE OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE, AND OF POTENTIAL CHANGES
IN APPLICABLE TAX LAWS.
234
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
Based on information available to the Company as of the date of this
Solicitation Statement, there are no persons (including any "group" as that term
is used in Section 13(d)(3) of the Exchange Act) known to the Company to be the
beneficial owner of more than five percent of the Company's Common Stock.
Class Counsel. As part of the Equitable Settlement, Class Counsel will have
the right to petition the Court for additional attorneys' fees in an amount to
be determined in the Court's sole discretion but which will be proposed to be
25% of the increase in the value of the Company, if any, as of the Anniversary
Date in the capitalization of the Company, based upon (i) the difference between
the trading prices of the Company's Shares on the Anniversary Date and (ii) the
trading prices of the Units and asset values of the Partnerships prior to the
Effective Date. One-half of such fees, if any, will be paid in the form of
Restricted Securities (restricted only with respect to transfer of such
securities) and the remaining one-half of such fees will be paid in the form of
unrestricted securities. The number of Counsel's Fee Shares issued shall be
subject to a maximum amount not to exceed 3.95% of the total number of shares of
the Company's outstanding Common Stock on the Anniversary Date. The Counsel's
Fee Shares will be distributed to Class Counsel quarterly in eight equal
installments, commencing thirty days after the Anniversary Date, subject to
acceleration under certain circumstances, including in the event of a change of
control, fundamental change in the nature of the business, sale or liquidation
of the Advisor. Restrictions on the Restricted Securities expire one year from
the date of issuance.
Security Ownership of Management
The following table sets forth information concerning the Shares that are
expected to be beneficially owned, assuming 100% Participation in the
Consolidation, by each of the directors and each of the executive officers of
the Company and by all directors and executive officers as a group. The Share
ownership amounts set forth below are based on the number of Units beneficially
owned by such persons as of the Record Date. No officer or director beneficially
owns any Units in any of the Partnerships.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name of Beneficial Owner Beneficially Ownership(1) of Class
- ------------------------------------------- --------------------------- ---------
<S> <C> <C>
J. Michael Fried 90,925(2) 1.1%
Peter T. Allen --(3) --
Arthur P. Fisch --(3) --
Arthur G. Hatzopoulos -- --
Stuart J. Boesky 90,925(2) 1.1%
Alan P. Hirmes 90,925(2) 1.1%
Bruce H. Brown -- --
Mark J. Schlacter -- --
Denise L. Kiley -- --
Marc D. Schnitzer -- --
Richard A. Palermo -- --
Lynn A. McMahon -- --
---------- ----
All directors and executive officers as a
group (12 persons) 90,925 1.1%
========== ====
</TABLE>
- --------------
(1) All amounts are directly owned unless stated otherwise.
(2) Represents Shares owned directly by the Advisor and the Related General
Partners for which each such party serves as a director or executive
officer. Each such party disclaims beneficial ownership of the Shares owned
by the Advisor and the Related General Partners.
(3) Independent Directors will receive annually Shares valued at $10,000 as
partial consideration for services as a director, payable in arrears.
235
<PAGE>
MANAGEMENT
The Board of Directors will direct the management of the business and
affairs of the Company but will retain the Advisor to manage the Company's
day-to-day affairs and the Board of Directors intends to delegate to the Advisor
responsibilities with respect to, among other things, overseeing the portfolio
of assets of the Company and the acquisition or disposition of investments.
The Charter will provide for not less than three nor more than nine
Directors, at least one-third of whom must be Independent Directors.
Initially, the Board of Directors will be comprised of five Directors, two
of whom will be Independent Directors. The Board of Directors will establish
written policies on investments and borrowings and will monitor the
administrative procedures, investment operations and performance of the Company
and the Advisor to assure that such policies are carried out. Until modified by
the Directors, the Company will follow the policies on investments and
borrowings set forth in this Solicitation Statement. The Independent Directors
will be responsible for reviewing the investment policies of the Company not
less often than annually and with sufficient frequency to determine that the
policies being followed are in the best interests of the Stockholders.
A vacancy in the Board of Directors created by the death, resignation, or
incapacity of a Director or by an increase in the number of Directors (within
the limits referred to above) may be filled by the vote of a majority of the
remaining Directors (with respect to a vacancy created by the death,
resignation, or incapacity of an Independent Director, the remaining Independent
Directors or other Directors shall nominate a replacement). A Director may
resign at any time and may be removed by the Majority Vote of Stockholders only
for Cause prior to the fourth anniversary of the Effective Date, and with or
without Cause after such anniversary.
Members of the Board of Directors who are not Independent Directors will
not receive any cash compensation for serving as a member of the Board of
Directors and likewise will not receive any compensation for attending meetings
or for serving on any committees of the Board of Directors; however, members of
the Board of Directors will receive reimbursement of travel and other expenses
and other out-of-pocket disbursements incurred in connection with attending any
meetings.
Independent Directors will be entitled to receive compensation for serving
as directors at the rate of $5,000 per year in cash and shares of Common Stock
having an aggregate value of $10,000, based on the fair market value at the date
of issuance, in addition to the expense reimbursement for attending meetings
described above. At the discretion of the Board of Directors, Independent
Directors may be granted additional cash compensation for serving on a committee
of the Board of Directors.
Pursuant to the terms of the Incentive Stock Option Plan, the Compensation
Committee may, subject to certain restrictions, grant options to members of the
Board of Directors to purchase Common Stock of the Company. See
"MANAGEMENT--Description of Incentive Stock Option Plan." To date, no such
member of the Board of Directors has received any options pursuant to the
Incentive Stock Option Plan.
Pursuant to the Charter, the Company's five member Board of Directors will
be divided into three (3) classes. All of the Initial Directors will be
designated by the Related General Partners (with the two Independent Directors
having been approved by Class Counsel) and, after consummation of the
Consolidation, by Stockholders of the Company. The Class I and Class II
Directors will each consist of two Directors, one of whom in each class will be
an Independent Director. The Class III Directors will consist of one Director.
The term of the initial Class I Directors will terminate on the date of the
1998 annual meeting of Stockholders; the term of the initial Class II Directors
will terminate on the date of the 1999 annual meeting of Stockholders and the
term of the initial Class III Directors will terminate on the date of the 2000
annual meeting of stockholders. At each annual meeting of Stockholders,
Directors of the Class to be elected shall be elected for a three-year term.
Directors will hold office until the annual meeting for the year in which their
terms expire and until their successors shall be elected and qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. The terms of the Initial Directors will commence on the Effective
Date.
Directors and Executive Officers of the Company
As of the Effective Date, the Directors and Executive Officers of the
Company will be as follows:
Name Age Offices Held
- ------------------- ----- -------------------------------------------
J. Michael Fried 51 Director, President, Chairman of the Board
Peter T. Allen 51 Director
Arthur P. Fisch 54 Director
Stuart J. Boesky 40 Director, Executive Vice President and
Chief Operating Officer
Alan P. Hirmes 41 Director, Senior Vice President and Chief
Financial Officer
Bruce H. Brown 43 Senior Vice President
Mark J. Schlacter 45 Senior Vice President
236
<PAGE>
Name Age Offices Held
- ----------------------- ----- ------------------------
Arthur G. Hatzopoulos 42 Vice President
Denise L. Kiley 37 Vice President
Marc D. Schnitzer 36 Vice President
Richard A. Palermo 36 Treasurer
Lynn A. McMahon 40 Secretary
J. Michael Fried is Chief Executive Officer and a member of the Advisor.
Mr. Fried is the sole stockholder of one of the general partners of Related,
the real estate finance affiliate of The Related Companies, L.P. In that
capacity, he is generally responsible for all of syndication, finance,
acquisition and investor reporting activities of Related and its affiliates.
Mr. Fried is also the President and a Director of the Advisor. Mr. Fried
practiced corporate law in New York City with the law firm of Proskauer Rose
Goetz & Mendelsohn from 1974 until he joined Related in 1979. Mr. Fried
graduated from Brooklyn Law School with a Juris Doctor Degree, magna cum laude;
from Long Island University Graduate School with a Master of Science degree in
Psychology; and from Michigan State University with a Bachelor of Arts degree
in History.
Peter T. Allen is President of Peter Allen & Associates, Inc., a real
estate development and management firm, in which capacity he has been
responsible for the leasing, refinancing and development of major commercial
properties. Mr. Allen has also been an Adjunct Professor of the Graduate School
of Business at the University of Michigan since 1981. Mr. Allen received a
Bachelor of Arts Degree in history/economics from DePauw University and a
Masters Degree in Business Administration with Distinction from the University
of Michigan. Mr. Allen is an Independent Director.
Arthur P. Fisch has been an attorney in private practice specializing in
real property and securities law since October 1987, with Arthur P. Fisch, P.C.
and Fisch & Kaufman. From 1975-1987, Mr. Fisch was employed by E.F. Hutton &
Company, serving as First Vice President in the Direct Investment Department
from 1981-1987 and associate general counsel from 1975-1980 in the legal
department. As First Vice President, he was responsible for the syndication and
acquisition of millions of dollars in residential real estate. Mr. Fisch was
the Corporate General Partner in four public real estate funds and responsible
for the acquisition of several thousand apartment units. He was also in charge
of the Subsidized Housing and Cable TV groups at E.F. Hutton's Direct
Investment Department. Mr. Fisch received a B.B.A. from Bernard Baruch College
of the City University of New York and a Juris Doctor degree from New York Law
School. Mr. Fisch is admitted to practice law in New York and Pennsylvania. Mr.
Fisch is an Independent Director.
Stuart J. Boesky is Executive Vice President and a member of the Advisor.
Mr. Boesky practiced real estate and tax law in New York City with the law firm
of Shipley & Rothstein from 1984 until February 1986 when he joined Related.
From 1983 to 1984 Mr. Boesky practiced law with the Boston law firm of Kaye,
Fialkow, Richmond & Rothstein (which subsequently merged with Strook & Strook &
Lavan) and from 1978 to 1980 was a consultant specializing in real estate at the
accounting firm of Laventhol & Horwath. Mr. Boesky is the sole stockholder of
one of the general partners of Related. Mr. Boesky graduated from Michigan State
University with a Bachelor of Arts degree and from Wayne State School of Law
with a Juris Doctor degree. He then received a Master of Laws degree in Taxation
from Boston University School of Law.
Alan P. Hirmes is a Senior Vice President, Chief Financial Officer and a
member of the Advisor. Mr. Hirmes has been a Certified Public Accountant in New
York since 1978. Prior to joining Related in October 1983, Mr. Hirmes was
employed by Wiener & Co., certified public accountants. Mr. Hirmes is also the
sole stockholder of one of the general partners of Related. Mr. Hirmes
graduated from Hofstra University with a Bachelor of Arts degree.
Arthur G. Hatzopoulos is a Senior Vice President of the Advisor and of
Related, where he directs the mortgage acquisition group. Mr. Hatzopoulos has
been with Related since August 1992. Prior to joining Related, Mr. Hatzopoulos
was a First Vice President and Portfolio Manager for First Nationwide Bank,
where he was responsible for debt restructuring, special lending relationships
and asset sales. He has also been associated with an investment banking firm
where he was responsible for monitoring a national portfolio of multifamily
revenue bond projects. From 1981 to 1985 he served as Deputy Director of the
Jersey City Department of Housing and Economic Development. Mr. Hatzopoulos
graduated from Columbia University with a Bachelor of Arts degree. He also holds
a Masters in City and Regional Planning from Harvard University, Kennedy School
of Government.
Bruce H. Brown is a Senior Vice President of the Advisor and Related and a
director of Related's Portfolio Management Group. He is responsible for
overseeing the administration of the firm's public debt and equity partnerships
encompassing the monitoring of the performance of each partnership and each
investment. He is also responsible for Related's loan servicing activities with
respect to the firm's $600 million portfolio of tax exempt first mortgage bonds
and FNMA/GNMA insured and co-insured loan portfolio. Prior to joining Related in
1987, Mr. Brown was a real estate lending officer at the United States Trust
Company of New York and previously held management positions in the hotel and
resort industry with Helmsley-Spear and Westin Hotels. Mr. Brown graduated from
Colgate University with a Bachelor of Arts degree.
Mark J. Schlacter is a Vice President of the Advisor. Mr. Schlacter is a
Vice President of mortgage acquisitions of Related, and has been with Related
since June 1989. Mr. Schlacter is responsible for the origination of Related's
taxable participating debt programs
237
<PAGE>
and low-income housing tax credit debt programs. Prior to joining Related, Mr.
Schlacter garnered 16 years of direct real estate experience covering commercial
and residential construction, single and multifamily mortgage origination and
servicing, commercial mortgage origination and servicing, multifamily property
acquisition and financing, and multifamily mortgage lending program underwriting
and development. He was a Vice President with Bankers Trust Company from 1986 to
June 1989, and held prior positions with Citibank, Anchor Savings Bank and the
Pyramid Companies covering the 1972-1986 period. Mr. Schlacter holds a Bachelor
of Arts degree in Political Science from Pennsylvania State University and
periodically teaches multifamily underwriting at the New York University School
of Continuing Education, Real Estate Institute.
Denise L. Kiley is a Vice President of the Advisor and is also an Executive
Vice President and Chief Underwriter for Related, responsible for overseeing the
investment underwriting and approval of all multifamily residential properties
invested in Related sponsored corporate, public and private equity and debt
funds. Ms. Kiley is also responsible for the strategic planning and
implementation of the firm's mortgage financing programs. Prior to joining
Related in 1990, Ms. Kiley had experience acquiring, financing, and managing the
assets of multifamily residential properties. From 1981 through 1985 she was an
auditor with a national accounting firm. Ms. Kiley holds a Bachelor of Science
in Accounting from Boston College and is a Member of the Affordable Housing
Roundtable.
Marc D. Schnitzer is a Vice President of the Advisor. Mr. Schnitzer is an
Executive Vice President of Related and Director of the firm's Tax Credit
Acquisitions Group. Mr. Schnitzer received a Master of Business Administration
degree from The Wharton School of The University of Pennsylvania in December
1987, and joined Related in January, 1988. From 1983 to 1986, Mr. Schnitzer was
a Financial Analyst in the Fixed Income Research department of The First Boston
Corporation in New York. Mr. Schnitzer received a Bachelor of Science degree,
summa cum laude, in Business Administration from the School of Management at
Boston University.
Richard A. Palermo is the Treasurer of the Advisor. Mr. Palermo has been a
Certified Public Accountant in New York since 1985. Prior to joining Related in
September 1993, Mr. Palermo was employed by Sterling Grace Capital Management
from October 1990 to September 1993, Integrated Resources, Inc. from October
1988 to October 1990 and E.F. Hutton & Company, Inc. from June 1986 to October
1988. From October 1982 to June 1986, Mr. Palermo was employed by Marks Shron &
Company and Mann Judd Landau, certified public accountants. Mr. Palermo
graduated from Adelphi University with a Bachelor of Business Administration
degree.
Lynn A. McMahon is the Secretary of the Advisor. She has served since 1983
as assistant to J. Michael Fried. From 1978 to 1983, she was employed at Sony
Corporation of America in the Government Relations Department.
Committees of the Board of Directors
Audit Committee. The Company will have an Audit Committee comprised of
Messrs. Peter T. Allen, Arthur P. Fisch and Stuart J. Boesky. The Audit
Committee's duties include the review and oversight of all transactions between
the Company and its directors, officers, holders of 5% or more of its Shares or
any affiliates, periodic review of the Company's financial statements and
meetings with the Company's independent auditors. At the discretion of the Board
of Directors, Members of the Audit Committee may receive additional compensation
for serving on such committee, but there is presently no intention that it will
do so.
Compensation Committee. The Company will have a Compensation Committee (the
"Compensation Committee") comprised of Peter T. Allen and Arthur P. Fisch. The
duties of the Compensation Committee include determining the compensation of the
Company's executive officers and the administration of the Company's Incentive
Stock Option Plan. The Compensation Committee must have at least two members and
only Independent Directors may be members of the Compensation Committee. At the
discretion of the Board of Directors, Members of the Compensation Committee may
receive additional compensation for serving on such committee, but there is
presently no intention that it will do so.
The Advisor
The Advisor is a Delaware limited liability company, formed in August 1996,
that is owned and controlled by the partners of Related. The services of the
Advisor include managing the Company's day-to-day affairs and overseeing the
acquisition or disposition of investments, and managing the assets of the
Company. The Advisor has a fiduciary duty to the Stockholders and the Company.
The members and officers of the Advisor are set forth below. The officers
of the Advisor may also provide services to the Company on behalf of the
Advisor.
Name Age Offices Held
- ------------------- ----- -------------------------------------------------
J. Michael Fried 51 Member, President, and Chief Executive Officer
Stuart J. Boesky 40 Member, Executive Vice President and Chief
Operating Officer
Alan P. Hirmes 41 Member, Senior Vice President and Chief Financial
Officer
Stephen M. Ross 56 Member
Bruce H. Brown 43 Senior Vice President
Mark J. Schlacter 45 Senior Vice President
238
<PAGE>
Name Age Offices Held
- ----------------------- ----- ------------------------
Arthur G. Hatzopoulos 42 Vice President
Denise L. Kiley 37 Vice President
Marc D. Schnitzer 36 Vice President
Richard A. Palermo 36 Treasurer
Lynn A. McMahon 40 Secretary
Biographical information with respect to Messrs. Fried, Boesky,
Hatzopoulos, Hirmes, Brown, Schlacter, Palermo and Ms. McMahon is set forth
above.
Stephen M. Ross is a member of the Advisor. Mr. Ross is also president,
director and shareholder of The Related Realty Group, Inc., the general partner
of The Related Companies, L.P. He graduated from the University of Michigan
School of Business Administration with a Bachelor of Science degree and from
Wayne State University School of Law with a Juris Doctor degree. Mr. Ross then
received a Master of Laws degree in taxation from New York University School of
Law. He joined the accounting firm of Coopers & Lybrand in Detroit as a tax
specialist and later moved to New York, where he worked for two large Wall
Street investment banking firms in their real estate and corporate finance
departments. Mr. Ross formed the predecessor of The Related Companies, L.P. in
1972 to develop, manage, finance and acquire subsidized and conventional
apartment developments.
Summary of the Advisory Agreement
The Company (and Insured I and Insured II) will enter into the Advisory
Agreement pursuant to which the Advisor is obligated to use its best efforts to
seek out and present to the Company, whether through its own efforts or those of
third parties retained by it, suitable and a sufficient number of investment
opportunities which are consistent with the investment policies and objectives
of the Company and consistent with such investment programs as the Directors may
adopt from time to time in conformity with the Charter. It is anticipated that
the Advisor will retain affiliates of Related to provide the services which it
is required to provide to the Company under the Advisory Agreement.
Although the Directors have continuing exclusive authority over the
management of the Company, the conduct of its affairs and the management and
disposition of the Company's assets, the Directors have initially delegated to
the Advisor, subject to the supervision and review of the Board of Directors and
consistent with the provisions of the Charter, the power and duty to: (i) manage
the day-to-day operations of the Company; (ii) acquire, retain or sell the
Company's assets; (iii) seek out, present and recommend investment opportunities
consistent with the Company's investment policies and objectives, and negotiate
on behalf of the Company with respect to potential investments or the
disposition thereof; (iv) when appropriate, cause an affiliate to serve as the
mortgagee of record for mortgage investments of the Company and in that capacity
hold escrows on behalf of mortgagors in connection with the servicing of
mortgages; (v) obtain for the Company such services as may be required in
acquiring and disposing of investments, disbursing and collecting the funds of
the Company, paying the debts and fulfilling the obligations of the Company, and
handling, prosecuting and settling any claims of the Company, including
foreclosing and otherwise enforcing mortgages and other liens securing
investments; (vi) obtain for the Company such services as may be required for
property management, mortgage brokerage and servicing, and other activities
relating to the investment portfolio of the Company; (vii) evaluate, structure
and negotiate prepayments or sales of the Company's mortgage investments and
mortgage securities; (viii) monitor operations and expenses of the Company; and
(ix) from time to time, or as requested by the Directors, make reports to the
Company as to its performance of the foregoing services.
The original term of the Advisory Agreement will terminate on the fourth
anniversary of the Effective Date (i.e., the date of the consummation of the
Consolidation). Thereafter, the Advisory Agreement may be renewed annually by
the Company, subject to an evaluation of the performance of the Advisor by the
Directors. The Advisory Agreement may be terminated (i) without Cause by the
Advisor or (ii) for Cause by a majority of the Independent Directors, each
without penalty, and each upon 60 days' prior written notice to the
non-terminating party.
Pursuant to the terms of the Advisory Agreement, the Advisor will be
entitled to receive the fees and other compensation set forth below:
<TABLE>
<CAPTION>
Fee/Compensation(1) Amount
- ------------------------ --------------------------------------------------------------------------------------------------
<S> <C>
Acquisition Fee 3.75 % of the acquisition price of each property acquired by the Company, Insured I and Insured II
Mortgage Selection Fee 3.0 % of the principal amount of each mortgage loan originated or acquired by the Company
Mortgage Placement Fee .75% of the principal amount of each mortgage loan originated or acquired by the Company (payable by the
borrower, and not the Company)
Asset Management Fee/ 0.375% per annum of Total Invested Assets of the Company, Insured I and Insured II
Special Distribution
</TABLE>
239
<PAGE>
<TABLE>
<CAPTION>
Fee/Compensation(1) Amount
- ------------------------- ---------------------------------------------------------------------------------------------------
<S> <C>
Stockholder/Insured LP Advisor will be entitled to receive distributions from the Company, Insured I and Insured II in
Interest Distributions respect of any Shares/Insured LP Interests it holds
Operating Expense For direct expenses incurred by the Advisor in an amount not to exceed $200,000 per annum (subject to
Reimbursement increases based on increases in the Company's assets and to annual increases based upon increases in the
Consumer Price Index)
Incentive Stock Options Advisor may receive options to acquire additional Shares pursuant to the Company's Incentive Stock Option
Plan only if the Company's distributions in any year exceed $0.9869 per Share (i.e., the 1996 pro forma
distributions set forth in this Solicitation Statement), and the Compensation Committee of the Board of
Directors determines to grant such options
Liquidation Fee 1.50% of the gross sales price of the assets sold by the Company in connection with a liquidation of the
Company's assets supervised by the Advisor
</TABLE>
- --------------
(1) The Partnership Agreements permit the General Partners to receive
miscellaneous compensation from the Partnerships and third parties. The
Advisor will also be permitted to earn such miscellaneous compensation which
may include, without limitation, construction fees, escrow interest,
property management fees, leasing commissions and insurance brokerage fees.
The payment of any such compensation is subject to restrictions similar to
those set forth in the Partnership Agreements with any amounts payable to
the Advisor by the Company generally being limited to the competitive rate
for the services being performed.
The Advisor may engage in other business activities related to real estate,
mortgage investments or other investments whether similar or dissimilar to those
made by the Company or act as advisor to any other person or entity having
investment policies whether similar or dissimilar to those of the Company
(including other REITs). However, except for the allocation of investments
between the Company and other Affiliated Programs as described under the caption
"CONFLICTS OF INTEREST--Conflicts of Interest of the Company Future Dealings
with Related General Partners and Affiliates," before the Advisor, the officers
and directors of the Advisor and all persons controlled by the Advisor and its
officers and directors may take advantage of an opportunity for their own
account or present or recommend it to others, they are obligated to present an
investment opportunity to the Company if (i) such opportunity is of a character
which could be taken by the Company, (ii) such opportunity is compatible with
the Company's investment objectives and policies and (iii) the Company has the
financial resources to take advantage of such opportunity.
The Advisory Agreement cannot be terminated by the Company prior to the
fourth anniversary of the Effective Date, other than for Cause. "Cause" is
defined as gross negligence or wilful misconduct of the Advisor. The Company
cannot liquidate prior to such anniversary date except upon a recommendation of
the Advisor and the Majority Vote of the Stockholders. After the fourth
anniversary of the Effective Date, the vote of the holders of 66-2/3% of the
Company's then outstanding shares of Common Stock is required to approve a
liquidation of the Company that is not recommended by the Advisor and the
Majority Vote of the Stockholders is required to approve a liquidation of the
Company recommended by the Advisor. If for any reason, whether prior to or after
the fourth anniversary of the Effective Date, the Advisory Agreement is
terminated in accordance with its terms, the Company may liquidate upon the
Majority Vote of the Stockholders.
Description of Incentive Stock Option Plan
The following description of the Incentive Stock Option Plan does not
purport to be complete and is qualified in its entirety by reference to the
Incentive Stock Option Plan.
On the Effective Date, the Board of Directors will adopt the Incentive
Stock Option Plan, the purpose of which is to (i) attract and retain qualified
persons as directors, officers and employees and (ii) to incentivize and more
closely align the financial interests of the Advisor with the interests of the
Stockholders by providing the Advisor with substantial financial interest in the
Company's success (each, a "Potential Optionee", and collectively, "Potential
Optionees"). The Compensation Committee (which is comprised of only two or more
Independent Directors) shall be authorized and directed to administer the
Incentive Stock Option Plan. Pursuant to the Incentive Stock Option Plan, if the
Company's distributions per share of Common Stock in the immediately preceding
calendar year exceed $0.9869 per Share (i.e., the 1996 pro forma annual per
share distribution set forth in this Solicitation Statement) in any calendar
year, the Compensation Committee will have the authority to issue options to
purchase, in the aggregate, that number of shares of Common Stock which is equal
to three percent (3%) of the Shares outstanding as of December 31 of the
immediately preceding calendar year (or, in the initial year, as of the
Effective Date), provided, that the Compensation Committee may only issue, in
the aggregate, options to purchase a maximum number of shares of Common Stock
over the life of the Incentive Stock Option Plan equal to 10% of the Shares
outstanding on the Effective Date.
Subject to the limitations described in the preceding paragraph, if the
Compensation Committee does not grant the maximum number of options in any year,
then the excess of the number of authorized options over the number of options
granted in such year will be added to the number of authorized options in the
next succeeding year and will be available for grant to Potential Optionees by
the Compensation Committee in such succeeding year.
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Pursuant to the Incentive Stock Option Plan, the Compensation Committee
will not be authorized to grant any options until six months after the Common
Stock has been listed on the American Stock Exchange. All options granted by the
Compensation Committee will have an exercise price equal to or greater than the
fair market value of the Shares of Common Stock on the date of the grant. The
maximum option term to be established by the Compensation Committee will be ten
(10) years from the date of grant. All stock options granted pursuant to the
Incentive Stock Option Plan will vest immediately upon issuance.
If the holder of an option ceases to serve as a director, officer or
employee of, or Advisor to, the Company for any reason (other than removal for
Cause) options that have been previously granted to such holder and that are
vested as of the date such holder ceases to serve as a director, officer,
employee or Advisor may be exercised by such holder or such holder's legal
representative in accordance with and subject to the Incentive Stock Option
Plan. If the holder of an option is removed as a director, officer or employee
or Advisor of the Company for Cause, options that have been previously granted
to such holder and that have not been vested will be forfeited and options that
are vested as of the date of such cessation may be exercised by such holder in
accordance with and subject to the Incentive Stock Option Plan.
The Company intends to file with the Securities and Exchange Commission, on
or before 180 days after the Effective Date, a Registration Statement on Form
S-8 with respect to the shares of Common Stock to be issued pursuant to the
Incentive Stock Option Plan. Shares of Common Stock, if any, issued pursuant to
the Incentive Stock Option Plan prior to the date on which the Company's
Registration Statement on Form S-8 becomes effective will be restricted
securities in the hands of the holders thereof. Shares of Common Stock to be
issued pursuant to the Incentive Stock Option Plan after the date on which the
Company's Registration Statement on Form S-8 becomes effective, will be
registered under the Securities Act pursuant to such Form S-8.
EXECUTIVE COMPENSATION
Executive Officers of the Company
The executive officers of the Company will receive no cash compensation for
serving as an executive officer of the Company; however, pursuant to the terms
of the Incentive Stock Option Plan, the Compensation Committee may, subject to
certain restrictions, grant options to the executive officers to purchase Common
Stock of the Company. See "MANAGEMENT--Description of Incentive Stock Option
Plan." To date, no executive officer of the Company has received any options
pursuant to the Incentive Stock Option Plan.
Directors
Members of the Board of Directors who are not Independent Directors will
not receive any cash compensation for serving as a member of the Board of
Directors and likewise will not receive any compensation for attending meetings
or for serving on any committees of the Board of Directors; however, members of
the Board of Directors will receive reimbursement of travel and other expenses
and other out-of-pocket disbursements incurred in connection with attending any
meetings.
Independent Directors will be entitled to receive compensation for serving
as directors at the rate of $5,000 per year in cash and shares of Common Stock
having an aggregate value of $10,000, based on the fair market value at the date
of issuance, in addition to the expense reimbursement for attending meetings
described above. At the discretion of the Board of Directors, Independent
Directors may be granted additional cash compensation for serving on a committee
of the Board of Directors.
Pursuant to the terms of the Incentive Stock Option Plan, the Compensation
Committee may, subject to certain restrictions, grant options to members of the
Board of Directors to purchase Common Stock of the Company. See
"MANAGEMENT--Description of Incentive Stock Option Plan." To date, no such
member of the Board of Directors has received any options pursuant to the
Incentive Stock Option Plan.
INDEPENDENT AUDITORS
The financial statements of Insured I, Insured II, Summit Preferred and
Eagle as of December 31, 1996 and 1995 and for each of the three years in the
period ended December 31, 1996, and the balance sheet of the Company and of the
Advisor as of December 31, 1996, included herein, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports included therein.
LEGAL MATTERS
The law firm of Battle Fowler LLP ("Counsel") will deliver an opinion to
the effect that the Shares of Common Stock offered pursuant to this Solicitation
Statement will be validly issued, fully paid and nonassessable. Counsel has
relied on the law firm of Ballard Spahr Andrews & Ingersoll as to certain
matters of Maryland law. Counsel will also deliver an opinion as to the status
of the Company as a REIT and to the effect that the discussion under "FEDERAL
INCOME TAX CONSIDERATIONS" fairly summarizes all of the material federal income
tax considerations for a BUC$holder who participates in the Consolidation.
Counsel has previously performed certain legal services on behalf of the
Partnerships, the Related General Partners and their affiliates.
The opinions of Counsel are not attached as an appendix to this
Solicitation Statement, however, upon receipt of a written request by a
BUC$holder or representative so designated in writing, a copy of such opinion
will be sent by the Related General Partners. All such requests should be
directed to Related Capital Company, 625 Madison Avenue, New York, N.Y. 10022;
Attention: Investor Services Department.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Solicitation
Statement:
"100% Participation" means participation in the Consolidation by all of
the Partnerships.
"ACMs" means asbestos-containing materials.
"ADA" means the Americans With Disabilities Act.
"AMIT" means American Mortgage Investment Trust, a real estate investment
trust sponsored by affiliates of Related.
"Acquisition Fee" means the fee payable by the Company, Insured I and
Insured II, as applicable, to the Advisor as compensation for services rendered
in an amount equal to 3.75% of the acquisition price of each property acquired
by the Company, Insured I and Insured II, respectively.
"Adjusted Net Asset Value" means, (a) with respect to each Partnership, the
value utilized by the Related General Partners to determine the allocation of
Shares among the Partnerships calculated as described under the heading
"ALLOCATION OF SHARES--Determination of Adjusted Net Asset Value--Valuations"
and (b) with respect to the Company, the aggregate Adjusted Net Asset Values of
all of the Participating Partnerships.
"Advisor" means Related Aegis LLC, or any successor thereto, which will (i)
manage the Company's diversified portfolio of retail and residential properties
and participating FHA insured and co-insured mortgages, and (ii) acquire the P-B
Interests in each of the Partnerships pursuant to the P-B Purchase Agreement.
"Advisory Agreement" means the agreement between the Company (and Insured I
and Insured II) and the Advisor.
"Amendments" means the proposed amendments to the Partnership Agreements.
"Anniversary Date" means the first anniversary of the date the Shares are
first publicly traded.
"Appraisals" means the appraisals of the real properties in which the
Partnerships have a direct or indirect interest and which were prepared by JLW
USA utilizing the letter of value format which is the appraisal reporting format
designed to conform with the standards of a Restricted Report under the
departure provisions of the Uniform Standards of Professional Practice of the
Appraisal Foundation.
"Appraised Value" means the market value as of October 1, 1995 for each of
the properties comprising the portfolios of real properties in which the
Partnerships have a direct or indirect interest as established by JLW USA.
"Asset Management Fee" means the fee payable by the Company to the Advisor
as compensation for services rendered in an amount equal to 0.375% of Total
Invested Assets from and after the Effective Date, payable quarterly, in
arrears, at the end of each calendar quarter.
"Assignor Limited Partner" means, (i) Related Insured BUC$ Associates, or
its successor, with respect to Insured I and Insured II, (ii) Related BUC$
Associates, Inc., or its successor, with respect to Summit Preferred, and (iii)
Related FI BUC$ Associates, Inc., or its successor, with respect to Eagle.
"Bear Stearns" means Bear Stearns & Co., Inc.
"Board of Directors" means the board of directors of the Company.
"BUC$holder" or "BUC$holders" means any person who holds Units and who is
reflected as an assignee of record of limited partnership interests on the books
and records of each Partnership.
"Bylaws" means the bylaws of the Company, as the same may be amended from
time to time.
"Cause" means gross negligence or willful misconduct.
"Charitable Beneficiary" or "Charitable Beneficiaries" means the exclusive
beneficiary of all Shares transferred to the Trust.
"Charter" means the charter of the Company filed with the State Department
of Assessments and Taxation of Maryland, as the same may be amended from time to
time.
"Chateau Creste Partnership" means Dominion Totem Park Limited
Partnership.
"Chateau Creste Property" means the Chateau Crest Apartments, located in
Kirkland, Washington.
"Class Counsel" means counsel representing the BUC$holders in the
Litigation.
"Class Members" means the Equitable Class Members and the Monetary Class
Members.
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"Class Notices" means the notices distributed to the Class Members pursuant
to the Court's Order.
"CNA" means Continental Casualty Company.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value of $.01 per
share.
"Company" means Aegis Realty, Inc., a Maryland corporation.
"Comparable Diversified REITs" means Diversified REITs with asset
portfolios which are comparable to the assets to be owned by the Company and
which have equity market capitalizations ranging from $86 million to $197
million.
"Comparative Companies" means the sixteen publicly-traded REITs which focus
on ownership of retail properties, which were analyzed by Oppenheimer in
deriving ranges of values for the Shares upon consummation of the Consolidation.
"Compensation Committee" means a committee of the Board of Directors of the
Company which will determine the compensation of the Company's executive
officers and which will administer the Company's Incentive Stock Option Plan.
"Consolidated Complaint" means the complaint filed by the Executive
Committee of Plaintiffs' Counsel cases under MDL Docket No. 1005.
"Consolidation" means a transaction whereby the Units held by all
BUC$holders of a Participating Partnership will be exchanged for Shares.
"Consolidation Expenses" means the expenses related to the Consolidation.
"Consolidation REITs" means the data analyzed by the Related General
Partners regarding traded equity REITs which were formed through the
consolidation of real estate limited partnerships during the past three years.
"Constituent Action" means all of the transferred actions included in the
Constituent Complaints.
"Constituent Complaints" means the transferred actions and the constituent
complaints under MDL Docket No. 1005.
"Contribution Agreements" means one or more agreements which the
Participating Partnerships will enter into if the Consolidation is approved by
the Court pursuant to which the Participating Partnerships will effectively
merge with and into the Company.
"Control Shares" means shares acquired in a "control share acquisition" as
defined in the Maryland GCL.
"Conversion Option" means the option to convert Insured LP Interests into
Shares.
"Court" means the United States District Court for the Southern District
of New York.
"Counsel" means Battle Fowler LLP.
"Counsel's Fee Shares" means the Restricted Securities and the
Unrestricted Securities.
"Cross Creek Guarantee" means the personal guarantee of Stephen M. Ross,
who holds a majority interest in the Related General Partner, with respect to
the payment of the principal and interest on the Cross Creek Loan, subject to
certain conditions contained therein.
"Cross Creek Loan" means the funds advanced by Eagle in the form of a loan
to Walsh/Cross Creek L.P. to enable it to complete construction and to fund
operating deficits.
"DRO" means the deficit restoration obligation to which the General
Partners of each Partnership are subject and which requires that upon
liquidation of the respective Partnership or upon liquidation of a General
Partner's interest therein, each General Partner must contribute to the
Partnership the lesser of (i) the negative balance in its capital account, or
(ii) the excess of 1.01 percent of the total original contributions of the
Partnership over the total capital contributions of the General Partners.
"Delaware Partnership Law" means the Delaware Revised Uniform Limited
Partnership Act.
"Developments" means the multifamily residential rental properties which
secure the Mortgages.
"Eagle" means Eagle Insured L.P., a Delaware limited partnership.
"Effective Date" means the date the Consolidation is consummated.
"Equitable Class" or "Equitable Class Members" refers to the class
certified pursuant to Rule 23(b)(1) and (2) of the Federal Rules of Civil
Procedure for equitable relief in connection with the Litigation.
"Equitable Settlement" means the part of the Related Settlement in which
only the Equitable Class Members may participate.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Common Stock" means the shares of Common Stock in excess of the
Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempted Holder" means a person for whom the Board of Directors, in its
sole discretion, has exempted from the Ownership Limit.
"Fairness Hearing" means the fairness hearing at which all class members
will have an opportunity to be heard.
"Fairness Opinion" means the opinion of Oppenheimer as to the fairness of
the Consolidation from a financial point of view to BUC$holders.
"FHA" means the Federal Housing Administration.
"Final Order" means the Court's final order approving the Related
Settlement, including the Consolidation.
"FFO" means funds from operations.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Forecasted Cash Flow" means the estimated net operating income after
capital expenditures from future operations of the properties as forecast by the
Related General Partners and utilized by Oppenheimer in connection with its
Fairness Opinion.
"GAAP" means generally accepted accounting principles.
"G & A" means General and Administrative Expenses.
"General Partners" means, collectively, the Related General Partners and
P-B General Partner.
"Incentive Stock Options" means the options issued by the Company pursuant
to the Company's Incentive Stock Option Plan.
"Incentive Stock Option Plan" means the Company's Incentive Stock Plan to
be adopted by the Board of Directors as of the Effective Date.
"Independent Director" or "Independent Directors" means those members of
the Board of Directors of the Company who are not salaried employees of the
Company, Related or their respective affiliates.
"Solicitation Statement" means this information statement, which is to be
distributed to the Partnerships' BUC$holders.
"Initial Directors" means the five members of the Board of Directors that
will be initially designated by the Related General Partners.
"Insurance Policy" or "Insurance Policies" means the insurance policy(ies)
purchased by Insured I and Insured II from CNA.
"Insured I" means Summit Insured Equity L.P., a Delaware limited
partnership.
"Insured II" means Summit Insured Equity L.P. II., a Delaware limited
partnership.
"Insured LP Interests" means the limited partnership interests in Insured I
and Insured II held by the Related General Partners and the Advisor.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of the Company's Shares or an affiliate of the corporation
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation or an affiliate thereof.
"IRS" means Internal Revenue Service.
"JLW USA" means Jones Lang Wootton USA.
"Liquidation Fee" means, if the Company is dissolved, a fee payable to the
Advisor equal to 1.50% of the gross sales price of the assets sold by the
Company in connection with a liquidation of the Company's assets supervised by
the Advisor.
"Litigation" means the litigation captioned In re Prudential Securities
Incorporated Limited Partnerships Litigation.
"Loan Value" means, for each loan held by a Partnership, the amount which
the Partnership would receive under the terms of the loan (i.e., principal,
accrued and unpaid interest and participating interest) if (i) the property
which secures the loan were sold for an amount equal to its Appraised Value and
(ii) the net sale proceeds (i.e., after payment of third party expenses) were
applied first to repay the Partnership's loan(s).
"Majority Vote" means the affirmative vote of holders of not less than a
majority of then outstanding shares of Common Stock.
"MFP" means Multi-Family Program Manager Inc.
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"Maryland GCL" means the Maryland General Corporation Law, as amended.
"Minimum Participation" means participation in the Consolidation by Insured
I and either Insured II or Eagle.
"Monetary Class" means the class certified pursuant to Rule 23(b)(3) of the
Federal Rules of Civil Procedure for monetary relief in connection with the
Related Settlement.
"Monetary Class Members" means members of the Monetary Class.
"Monetary Settlement" means the part of the Related Settlement in which
only the Monetary Class Members may participate.
"Mortgage Placement Fee" means the fee payable to the Advisor equal to .75%
of the principal amount of each mortgage loan originated by the Company (payable
by the borrower under such mortgage, and not the Company).
"Mortgage Selection Fee" means the fee payable by the Company, Insured I
and Insured II, as applicable, to the Advisor as compensation for services
rendered in an amount equal to 3.00% of the principal amount of each mortgage
funded by the Company.
"Mortgages" means interests in first mortgage and equity loans.
"Non-Participating Partnership" means a Partnership that does not
participate in the Consolidation.
"Non-U.S. Stockholder" means any non-resident alien individual, foreign
corporations, foreign partnerships and other foreign stockholders.
"New York Life" means New York Life Insurance Company.
"Objection Deadline" means August 18, 1997, unless extended.
"Objection Notice" means the notice of objection set forth in Appendix D.
"100% Participation" means the participation of each of the Partnerships in
the Consolidation; to participate in the Consolidation, (i) BUC$holders holding
more than 33-1/3% of the Units of a Partnership must not object to the
participation of such Partnership in the Consolidation and (ii) the
Consolidation must be approved by the Court.
"Operating Partnerships" means the Pinehurst Partnership and the Chateau
Creste Partnership.
"Oppenheimer" means Oppenheimer & Co., Inc.
"Order" means the Court's order preliminarily approving the Settlement
Stipulation.
"Original Investment" means a BUC$holder's gross original cash investment
in a Partnership which for BUC$holders who bought Units in the initial offering
equalled $25 per Unit for each of Insured I and Insured II and $20 per Unit for
each of Summit Preferred and Eagle.
"Other Partnerships" means all other partnerships named as defendants in
the litigation that are sponsored by affiliates of Prudential and affiliates of
Related.
"Ownership Limit" means the restriction in the Charter providing that no
individual may own more than 9.9% of the value of the outstanding shares of the
Company's outstanding stock.
"Participating BUC$holders" means BUC$holders that participate in the
Consolidation.
"Participating Partnership(s)" means the partnership(s) which participate
in the Consolidation.
"Partnership(s)" means, collectively, Insured I, Insured II, Summit
Preferred and Eagle.
"Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of each Partnership.
"Partnership Base Value" means the average of (i) the liquidation value (as
described in this Solicitation Statement) multiplied by the number of
outstanding Units on the Effective Date; and (ii) the average of the high and
low secondary market price for each of the four most-recent complete quarterly
periods prior to the Effective Date multiplied by the number of outstanding
Units on the Effective Date.
"P-B Group" means, collectively, the P-B General Partner, P.B. Tax Credit
S.L.P., a Delaware limited partnership and Prudential-Bache Services II, Inc.,
a Delaware corporation.
"P-B General Partner" means Prudential-Bache Properties, Inc., a Delaware
corporation.
"P-B Interests" means the interests of the P-B General Partner in the
Partnerships which will be acquired by the Advisor.
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"P-B Purchase Agreement" means the Purchase Agreement dated as of December
19, 1996, among the P-B Group and Related, pursuant to which, among other
things, the where P-B General Partner agrees to withdraw as a general partner of
the Partnership and sell, assign or otherwise transfer its interests in the
Partnership to Related or an affiliate of Related.
"Phase I Reports" means the Phase I Environmental Assessments performed on
certain of the properties held by Insured I and Insured II.
"Pinehurst Partnership" means TCR Pinehurst Limited Partnership.
"Pinehurst Property" means the Pinehurst Apartment complex, a multi-family
residential garden apartment complex.
"Potential Optionee(s)" means each of the persons who qualify to receive
options under the Incentive Stock Option Plan.
"Pre-Consolidation Acquisitions" means the properties purchased by the
Partnerships prior to the Effective Date of the Consolidation and still owned by
such Partnerships.
"Preferred Equity Investments" means the all-cash equity interests held by
Summit Preferred to be acquired by the Company upon consummation of the
Consolidation.
"Preferred Equity Return" means the return on the equity investment in the
Preferred Equity Investments.
"Principal Mutual" means Principal Mutual Life Insurance Company.
"Prohibited Owner" means any transferee of Shares pursuant to a transfer
which, if effective, would result in any person beneficially or constructively
owning Shares in excess or in violation of the transfer or ownership limitations
set forth in the Company's Charter; in which case that number of Shares of the
Company, the beneficial or constructive ownership of which otherwise would cause
such person to violate such limitations (rounded to the nearest whole Share)
shall be automatically transferred to the Trust for the exclusive benefit of a
Charitable Beneficiary.
"Prudential" means, collectively, PSI and the P-B General Partner.
"PSI" means Prudential Securities Incorporated.
"Record Date" means December 24, 1996.
"REIT" means a qualified real estate investment trust under the Code.
"Related" means Related Capital Company, a New York general partnership.
"Related General Partners" means, collectively, RIDC II, L.P., Related
Federal Insured L.P., Related Equity Funding Inc., and Related Insured Equity
Associates.
"Related Party Tenant" means a tenant that is 10% owned, either directly or
constructively, by the Company or an owner of 10% or more of the Company.
"Related Settlement" refers to the settlement of the Litigation with
respect to the Related General Partners and its affiliates.
"Restricted Securities" means one-half of the Shares which may be issued by
the Company to Class Counsel at the sole discretion of the Court as additional
attorneys' fees based on the increase in value of the Company, if any, as of the
Anniversary Date, which Shares shall be restricted as to transferability.
"Restricted Shares" means Shares of Common Stock with respect to which
there are transfer restrictions under the securities laws.
"RICO" means the Racketeer Influenced and Corrupt Organizations Act.
"Romano" means the action entitled Romano v. Prudential Insurance Company
of America, No. 94 Civ. 3527.
"RPA" means RCC Property Advisors, Inc., an affiliate of the Related
General Partners.
"Securities Act" means the Securities Act of 1933, as amended.
"Settlement Amount" means the $2,058,333.00 which Related has agreed to pay
in settlement of the claims of the Monetary Class in the Consolidated Action.
"Settlement Stipulation" means the stipulation of settlement dated December
24, 1996 entered into by the parties to the Litigation.
"Shares" means the shares of Common Stock of the Company issuable in
connection with the Consolidation.
"Special Distribution" or "Special Distribution from Adjusted Cash Flow"
means the distribution payable to the Advisor and the Related General Partners
under the applicable provisions of the Partnership Agreements of Insured I and
Insured II after the Consolidation.
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"Stockholders" means all persons that own or will receive Shares, upon
consummation of the Consolidation.
"Summit Preferred" means Summit Preferred Equity L.P., a Delaware limited
partnership.
"Tail Indemnity" means the indemnity to be provided by the Company to the
P-B General Partner and the Related General Partners upon consummation of the
Consolidation to provide them with the same indemnity as that provided by the
Partnerships with respect to claims during the period in which they acted as a
general partners.
"Total Invested Assets" means the aggregate of (i) the original amount
invested from time to time in mortgage investments reduced, upon the receipt of
sales proceeds, FHA and other insurance or guarantee proceeds or prepayments, by
the original amount invested in the mortgage investment which is not reinvested,
except that in the case of a partial prepayment, Total Invested Assets shall be
reduced on a pro rata basis to the extent not reinvested; and (ii) the original
amount paid for the purchase from time to time of direct or indirect investments
in properties (including, with respect to Pre-Consolidation Acquisitions, the
initial working capital, acquisition fees and expenses allocable to such
investments).
"Total Market Value" means the greater of (i) the sum of (a) the aggregate
market value of the Company's outstanding Shares, assuming full exchange of the
Insured LP Interests and (b) the total debt of the Company and (ii) the
aggregate value of the Company's assets as determined by the Advisor based upon
third-party or management appraisals and other criteria as the Board of
Directors shall determine in its sole discretion.
"Trust" means the entity created by the Company which will (i)
automatically receive all Shares of the Company transferred in violation of the
transfer or Ownership Limit, and (ii) hold such Shares for the exclusive benefit
of a Charitable Beneficiary.
"Trustee" means the trustee of the Trust who shall have all voting rights
and rights to dividends and other distributions with respect to Shares held in
the Trust, which rights shall be exercised for the exclusive benefit of the
Charitable Beneficiary.
"UBTI" means unrelated business taxable income.
"Units" means the outstanding beneficial unit certificates representing
assignments of Partnership interests.
"Unrestricted Securities" means one-half of the Shares which may be issued
by the Company to Class Counsel at the sole discretion of the Court as
additional attorneys' fees based on the increase in value of the Company, if
any, as of the Anniversary Date, which are not subject to transfer restrictions.
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APPENDIX A
FAIRNESS OPINION
<PAGE>
Oppenheimer Tower
World Financial Center
New York, New York 10281
(212) 667-7000
[GRAPHIC OMITTED: Oppenheimer & Co., Inc. letterhead]
Investment Banking Group
September 20, 1996
Goodkind Labaton Rudoff & Sucharow LLP
100 Park Avenue
New York, New York 10017-5563
Gentlemen:
You have requested our opinion as to whether the proposed transaction
involving the business combination of Summit Insured Equity L.P. ("Insured I"),
Summit Insured Equity L.P. II ("Insured II"), Summit Preferred Equity L.P.
("Summit Preferred"), and Eagle Insured L.P. ("Eagle", and together with Insured
I, Insured II, and Summit Preferred, the "Partnerships") with a newly formed
real estate investment trust (the "Company"), including the allocation of shares
of common stock in the Company among the Partnerships, is fair to the beneficial
unit certificate holders (the "Unitholders") in such Partnerships, from a
financial point of view.
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. We have been
retained by Goodkind Labaton Rudoff & Sucharow LLP ("Counsel") for the purpose
of, and will receive a fee for, rendering this Fairness Opinion.
In connection with our Fairness Opinion, we have reviewed: the draft
Information Statement to be provided Limited Partners; the Prospectus dated
December 23, 1986 for Insured I; the Prospectus dated November 13, 1987 for
Insured II; the Prospectus dated August 6, 1987 for Summit Preferred; the
Prospectus dated December 11, 1987 for Eagle; audited financial statements for
each Partnership for calendar years 1994 and 1995; the Form 10-K for each
Partnership for the year ended December 31, 1995 and the Form 10-Q for each
Partnership for the quarter ended June 30, 1996; Letter of Value appraisals in a
summary format dated October 25, 1995 prepared by Jones Lang Wootton USA for
each property owned by a Partnership (Insured I and Insured II), or securing a
Partnership's investment interest in a property (Summit Preferred), or securing
a mortgage loan made by a Partnership (Eagle); the insurance policies issued by
Continental Casualty Company owned by Insured I and Insured II; audited
financial statements for calendar years 1994 and 1995 and unaudited financial
statements and other financial information for the period ending June 30, 1996,
for each of the properties owned by Insured I and Insured II, audited financial
statements for calendar years 1994 and 1995 and unaudited financial statements
and other financial information for the period ending June 30, 1996 for each of
the properties securing the Summit Preferred investments,
A-1
<PAGE>
and audited financial statements for calendar years 1994 and 1995 and unaudited
financial statements and other financial information for the period ending June
30, 1996 for each of the properties securing a mortgage loan made by Eagle; pro
forma financial statements of the Company for the year ended December 31, 1996
and as of and for the quarterly period ended March 31, 1996, assuming in each
case that the Consolidation occurred as of January 1, 1995; financial forecasts
of future operations of the Partnerships prepared by the Related General Partner
covering each of the years in the five year period ended June 30, 2001;
financial forecasts of future operations of the Company prepared by the Related
General Partner covering each of the years in the five year period ended June
30, 2001, assuming the Consolidation occurred as of June 30, 1996; a business
plan of the Company; and certain other financial and other information that was
publicly available or furnished to Oppenheimer by Counsel or the Related General
Partners.
In addition, Oppenheimer held discussions with representatives of Counsel
and the Related General Partners, inspected a representative number of the
properties either owned by a Partnership, or in which a Partnership had acquired
an interest or which secured a mortgage loan made by a Partnership, interviewed
property managers at the properties inspected, interviewed representatives of
Jones Lang Wootton USA and conducted such other investigations, financial
analyses and studies, and reviewed such other information and factors as it
deemed appropriate for the purposes of the Fairness Opinion. Oppenheimer's
Fairness Opinion is based upon analysis of the foregoing factors in light of our
assessment of general economic, financial and market conditions as they exist on
the date hereof. Events occurring after such date could materially affect the
assumptions and conclusions contained in the Fairness Opinion. We have
not been requested or engaged and did not undertake to reaffirm or revise our
Fairness Opinion or otherwise comment upon any events occurring after the date
thereof.
In rendering the Fairness Opinion, Oppenheimer relied, without assuming
responsibility for independent verification, on the accuracy and completeness of
all financial and operating data, financial analyses, reports and other
information that were publicly available, compiled or approved by or otherwise
furnished or communicated to Oppenheimer by or on behalf of the Related General
Partner or Counsel. With respect to the financial and operating forecasts
prepared by the Related General Partner and furnished to Oppenheimer,
Oppenheimer assumed, with Counsel's approval, that they reflected the best
current judgement of the Related General Partners as to future financial
performance, and that there was a reasonable probability that the projections
would prove to be substantially correct. Oppenheimer did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnerships.
Furthermore, Oppenheimer expresses no opinion as to the price or trading
range at which the shares of the Company's common stock would trade following
the completion of the Consolidation and the listing of the Shares on the Nasdaq
National Market.
A-2
<PAGE>
Oppenheimer was not requested to serve as financial advisor to Counsel, the
Related General Partners or the Partnerships or to assist in the structuring of
the proposed transaction. Additionally, Oppenheimer did not analyze the impact
of any federal, state or local income taxes to the Unitholders arising out of
the proposed transaction.
It is understood that this Fairness Opinion is not to be quoted, referred
to, excerpted or summarized in whole or in part, or used for any purpose,
without our written consent. The Fairness Opinion may be distributed to the
Unitholders in connection with the distribution by the Related General Partners
of an Information Statement describing the proposed transaction. We have been
engaged by Counsel for the purpose of rendering this Fairness Opinion, in
connection with which we will receive a fee payable in installments (i) upon
engagement and (ii) upon the rendering of the Fairness Opinion.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
proposed transaction involving the business combination of the Partnerships with
the Company, including the allocation of shares of common stock in the Company
among the Partnerships is fair, from a financial point of view, to the
Unitholders in such Partnerships.
Very truly yours,
[GRAPHIC OMITTED] /s/ Oppenheimer & Co., Inc.
Oppenheimer & Co., Inc.
A-3
<PAGE>
APPENDIX B
APPRAISAL SUMMARY
<PAGE>
[GRAPHIC OMITTED: James Lang Wootton USA letterhead]
101 East 52nd Street
New York, NY 10022
Tel: 212-688-8181
Fax: 212-308-5199
March 7, 1997
Related Capital Company
625 Madison Avenue
New York, NY 10022
Re: Summary of Appraisals
Summit Insured Equity LP I & II
Summit Preferred Equity LP
Eagle Insured Equity LP
Dear Gentlemen:
In accordance with your instructions contained within the engagement letter
dated February 19, 1997, we have summarized the analysis and methodology used
by Jones Lang Wootton USA (JLW) in rendering our Letters of Value as at
December 31, 1994 and October 1, 1995 of the properties included in the
above-referenced portfolios (the Properties). We understand that the purpose
of this summary is for inclusion in the Solicitation Statement for Aegis
Realty, Inc.
The Letters of Value are summarized as follows:
[bullet] In December, 1994 JLW was retained by Related Capital Company (the
'Client') to appraise the market value each of the 14 shopping center
properties within the portfolio of Summit Insured Equity LP and LPII as of
December 31, 1994. At that time JLW inspected each property, reviewed
financial information provided and made other inquiries as was deemed
appropriate. JLW's opinion of value was based upon an analysis of the
property's income through discounted cash flow and direct capitalization
techniques, supported where appropriate by comparable sales. A cost approach
was not undertaken.
[bullet] In September, 1995 JLW was retained by the Client to provide an
update of the valuations of the 14 shopping center properties within the
portfolio of Summit Insured Equity LP and LPII as at October 1, 1995. At our
Client's request, JLW reviewed the previous analysis used in preparing the
Letters of Value and analyzed updated rent rolls, recent leases, current
operating budgets and capital expenditures. JLW also interviewed property
management and updated their market research as well as their investment
sales transaction data base of capitalization rates and discount rates. The
valuation methodology was not changed from that which was used in December,
1994. These properties were not re-inspected.
B-1
<PAGE>
[bullet] Also in September, 1995 JLW was retained by the Client to appraise
the market value of each of the multi-family properties within the
portfolios of Summit Preferred Equity LP and Eagle Insured Equity LP as of
October 1, 1995. At that time, JLW performed inspections of each of the
residential properties and their surrounding neighborhoods. JLW analyzed
each property's rent roll, income and expense statement, as well as capital
budget. JLW then prepared a pro-forma income and expense statement for each
property. JLW's opinion of value was based upon an analysis of each of the
property's income through direct capitalization techniques, supported by
comparable sales. A cost approach was not undertaken.
[bullet] The purpose of the Letters of Value dated December 31, 1994 and
October 1, 1995 was to establish the market value of the Properties solely
for the internal use by the Client. The values were communicated in the form
of Letters of Value, and were not prepared for third party reliance.
[bullet] At the request of our Client for all of the Properties the reporting
format was a Letter of Value which is defined as a Restricted Report
prepared under the departure provision of the Uniform Standards of
Professional Practice of the Appraisal Foundation. This reporting format was
not intended for third party reliance.
[bullet] JLW's analyses, opinions and conclusions were prepared in conformity
with the requirements of the Code of Ethics and the Supplemental Standards
of Professional Practice of the Appraisal Institute and the Uniform
Standards of Professional Appraisal Practice (USPAP) of the Appraisal
Foundation, under the Departure Provision for a Limited Appraisal. In
preparing the Letters of Value dated October 1, 1995 of the Properties,
JLW inspected the Properties comprising Summit Preferred Equity LP and
Eagle Insured Equity LP at that time, but were not instructed to re-inspect
the shopping centres comprising Summit Insured Equity LP I & II. JLW made
relevant local inquiries and obtained such further information as
considered necessary and performed an analysis of each Property's highest
and best use.
[bullet] As at October 1, 1995 JLW was of the opinion that the highest and
best use for each of the Properties was its continued utilization.
[bullet] In accordance with your letter of instruction dated February 19, 1997
JLW has not updated the Letters of Value and therefore the Letters of Value
do not reflect any property or market changes or events that have occurred,
or conditions that may have changed, since October 1, 1995.
[bullet] A summary of the Letters of Value as at October 1, 1995 as conducted
by JLW is qualified in its entirety by reference to the original Letters of
Value which were previously delivered to you.
B-2
<PAGE>
Except as set forth in the engagement letter dated February 19, 1997
possession of this letter, or a copy thereof, does not carry with it the right
of publication.
Except as set forth in the engagement letter dated February 19, 1997, neither
all nor any part of the contents of this letter (especially any conclusions as
to value, the identity of the appraiser, or the firm with which the appraiser
is connected) shall be disseminated to the public through advertising, public
relations, news, sales, or other media without the prior written consent and
approval of JLW USA.
Do not hesitate to contact us if you have any questions or require additional
information.
Respectfully submitted,
/s/ James Lang Wooton USA
JONES LANG WOOTTON USA
cc Mark Schonberger, Esq
B-3
<PAGE>
Shopping Centers within the Portfolios of Summit Insured Equity LP and Summit
Insured Equity LP II
<TABLE>
<CAPTION>
Property Name/ Ownership Primary/
Property Municipal Address/ Percentage/ Square Secondary
# Portfolio City, State Type Footage Methodology
- ---------- ------------ ------------------------------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
1 Insured I Cactus Village 100% 72,578 Disc. Cash Flow
SWC 32nd Street Leased Direct
and Cactus Road Fee Capitalization
Phoenix, Arizona
2 Insured I Forest Park Plaza 100% 92,824 Disc. Cash Flow
693 Northland Leased Direct
Cincinnati, Ohio Fee Capitalization
3 Insured I Hickory Plaza 100% 67,336 Disc. Cash Flow
Nolensville Road Leased Direct
& Old Hickory Blvd Fee Capitalization
Nashville, Tennessee
4 Insured I Highland Fair 100% 74,764 Disc. Cash Flow
Highland Drive & Leased Direct
S.E. Powell Fee Capitalization
Gresham, Oregon
5 Insured I Kokomo Plaza 100% 89,546 Disc. Cash Flow
U.S. Highway 31 & Leased Direct
Carter Street Fee Capitalization
Kokomo, Indiana
6 Insured I Mountain View Village 100% 99,908 Disc. Cash Flow
Hwy 78 and Killian Road Leased Direct
Snellville, Georgia Fee Capitalization
7 Insured I Pablo Plaza 100% 140,922 Disc. Cash Flow
3rd Street and 20th Avenue Leased Direct
Jacksonville Beach, Florida Fee Capitalization
8 Insured I Southhaven 100% 83,750 Disc. Cash Flow
Stateline & Hamilton Roads Leased Direct
Southhaven, MS Fee Capitalization
9 Insured I Town West 100% 88,200 Disc. Cash Flow
1212-1236 West Kemper Leased Direct
Indianapolis, Indiana Fee Capitalization
10 Insured I Westbird 100% 100,087 Disc. Cash Flow
117th & SW 40th Streets Leased Direct
Miami, Florida Fee Capitalization
11 Insured I Winery Square 100% 121,950 Disc. Cash Flow
1955 West Texas Street Leased Sales
Fairfield, California Fee Comparison
12 Insured II Applewood Center 100% 101,130 Disc. Cash Flow
96th & Q Streets Leased Direct
Omaha, Nebraska Fee Capitalization
<CAPTION>
Date of Market Terminal Internal
Property Valuation Occupancy Last Value Market Value Indicated Capitalization Rate of
# Date 1-Oct-95 Inspection Estimate PSF Yield Rate Return
- ---------- ----------- ----------- ------------ ------------- -------------- ----------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Oct-95 85% Jan-95 $ 3,600,000 $48 10.20% 10.50% 12.50%
2 Oct-95 97% Oct-95 $ 6,600,000 $71 9.75% 9.50% 11.00%
3 Oct-95 100% Jan-95 $ 4,700,000 $70 9.80% 10.00% 11.50%
4 Oct-95 98% Jan-95 $ 5,400,000 $72 9.39% 10.00% 11.50%
5 Oct-95 84% Jan-95 $ 5,100,000 $57 10.09% 10.00% 11.50%
6 Oct-95 95% Dec-94 $ 7,100,000 $71 10.51% 10.00% 11.50%
7 Oct-95 88% Dec-94 $ 7,200,000 $51 8.59% 11.00% 12.50%
8 Oct-95 98% Jan-95 $ 5,500,000 $66 9.11% 10.00% 11.50%
9 Oct-95 93% Jan-95 $ 3,700,000 $42 11.08% 10.00% 11.50%
10 Oct-95 98% Dec-94 $ 8,100,000 $81 9.52% 10.00% 11.50%
11 Oct-95 93% Jan-95 $10,400,000 $89 8.88% 11.00% 11.50%
12 Oct-95 99% Jan-95 $ 6,600,000 $65 10.29% 9.50% 11.00%
B-4
<PAGE>
<CAPTION>
Property Name/ Ownership Primary/
Property Municipal Address/ Percentage/ Square Secondary
# Portfolio City, State Type Footage Methodology
- ---------- ------------ ------------------------------- ------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
13 Insured II Mountain Park Plaza 100% 77,686 Disc. Cash Flow
4750 Alabama Road Leased Direct
Roswell, Georgia Fee Capitalization
14 Insured II Rolling Hills Shopping Center 100% 98,887 Disc. Cash Flow
Golf Links and Kolb Leased Direct
Tucson, Arizona Fee Capitalization
<CAPTION>
Date of Market Terminal Internal
Property Valuation Occupancy Last Value Market Value Indicated Capitalization Rate of
# Date 1-Oct-95 Inspection Estimate PSF Yield Rate Return
- ---------- ----------- ----------- ------------ ------------- -------------- ----------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
13 Oct-95 97% Dec-94 $ 5,100,000 $66 9.63% 10.25% 12.50%
14 Oct-95 88% Jan-95 $ 5,100,000 $51 10.69% 10.25% 12.00%
</TABLE>
B-5
<PAGE>
Apartment Buildings within the Portfolios of Summit Preferred Equity LP and
Eagle Insured LP
<TABLE>
<CAPTION>
Property Name/ Ownership Total Total
Property Municipal Address/ Percentage/ Year Number Square
# Portfolio City/State Type Completed of Units Footage
- ---------- ----------- --------------------------- ------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 Summit Pinehurst Apartments 100% 1986 146 120,400
Preferred 500 NW 63rd Street Leased
Kansas City, Missouri Fee
2 Summit Chateau Creste Apartments 100% 1988 90 75,852
Preferred 12062 Slater Avenue NE Leased
Kirkland, Washington Fee
3 Eagle Cross Creek Apartments 100% 1989 420 411,960
2808 Cross Point Circle Leased
Matthews, North Carolina Fee
4 Eagle Weatherly Walk Apartments 100% 1988 194 193,384
100 Knight Way Leased
Fayetteville, Georgia Fee
5 Eagle Woodgate Manor Apartment 100% 1977 126 217,840
501 SW 75th Street Leased
Gainesville, Florida Fee
<CAPTION>
Average Market Direct
Primary/ Date of Unit Average Value Market Capital-
Property Secondary Valuation Last Size Monthly Occupancy As At Value ization
# Methodology Date Inspection (SqFt) Rent 1-Oct-95 1-Oct-95 Per Unit Rate
- ---------- --------------- ----------- ------------ --------- --------- ----------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Direct Oct-95 Sep-95 825 $551 97% $ 5,400,000 $36,986 9.25%
Capitalization
Sales
Comparison
2 Direct Oct-95 Oct-95 843 $667 95% $ 4,200,000 $46,667 9.25%
Capitalization
Sales
Comparison
3 Direct Oct-95 Oct-95 980 $618 99% $18,600,000 $44,286 9.25%
Capitalization
Sales
Comparison
4 Direct Oct-95 Sep-95 996 $643 100% $ 8,700,000 $44,845 9.25%
Capitalization
Sales
Comparison
5 Direct Oct-95 Oct-95 1,728 $737 99% $ 5,700,000 $45,238 9.50%
Capitalization
Sales
Comparison
</TABLE>
A Discounted Cash Flow was not utilized, therefore no Terminal
Capitalization Rates or Internal Rates of Return are listed.
B-6
<PAGE>
APPENDIX C
FINANCIAL FORECASTS OF PARTNERSHIP/COMPANY OPERATIONS
<PAGE>
Appendix C
Financial Forecasts of Partnership/Company Operations
1. Going Concern Analysis
[bullet] Summary of Going Concern Analysis C-2
[bullet] Summit Insured Equity L.P. Going Concern Analysis C-3
[bullet] Summit Insured Equity L.P. II Going Concern Analysis C-4
[bullet] Summit Preferred Equity L.P. Going Concern Analysis C-5
[bullet] Eagle Insured L.P. Going Concern Analysis C-6
[bullet] Management's Assumptions C-7
2. Consolidated Forecasts of Aegis Realty, Inc. on a Combined Basis
[bullet] Consolidated Forecasts C-8
[bullet] Management's Assumptions C-10
* These forecasts were prepared solely for internal use and for use by
Oppenheimer in connection with its Fairness Opinion and not with a view to
public disclosure or compliance with the published guidelines of the United
States Securities and Exchange Commission or the American Institute of Certified
Public Accountants regarding projections. The Company's independent accountants
have not examined, reviewed or compiled any of the projections presented below
or expressed any conclusion or provided any other form of assurance with respect
to such projections and accordingly assume no responsibility for them.
The forecasts have been included in this Solicitation Statement solely to
comply with disclosure requirements under certain governmental regulations.
While presented with numerical specificity, the forecasts are based on a variety
of assumptions relating to the future business of the Company, industry
performance, general business and economic conditions and other matters which
are subject to significant uncertainties and contingencies, many of which are
beyond the Company's control, and, therefore, such forecasts are inherently
imprecise and there can be no assurance that any projections will be realized.
Also, actual future results may vary materially from those shown in the
forecasts. Neither the Company nor the Related General Partners is under any
obligation to, or has any intention to, update these forecasts at any future
time.
<PAGE>
Aegis Realty, Inc.
Summary of Going Concern Analysis
<TABLE>
<CAPTION>
Projected Projected Projected Projected Projected
Year 1 Year 2 Year 3 Year 4 Year 5
--------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Summit Insured Equity, L.P.
Property Level NOI (1) 5,411,947 6,177,772 6,415,752 6,703,625 6,800,890
General & Administrative Expenses (556,643) (573,343) (590,543) (608,259) (626,507)
Other Expenses (2) (1,334,644) (1,339,676) (1,343,828) (1,309,104) (1,252,509)
----------- ----------- ----------- ----------- -----------
Sub-Totals 3,520,660 4,264,753 4,481,381 4,786,262 4,921,874
Summit Insured Equity L.P. II
Property Level NOI (1) 1,245,875 1,672,578 1,739,899 1,805,297 1,795,627
General & Administrative Expenses (136,992) (141,102) (145,335) (149,695) (154,186)
Other Expenses (2) (329,451) (332,066) (334,760) (337,535) (340,393)
----------- ----------- ----------- ----------- -----------
Sub-Totals 779,432 1,199,410 1,259,804 1,318,067 1,301,048
Summit Preferred Equity L.P.
Property Level NOI (1) 828,230 845,288 862,857 880,953 899,592
General & Administrative Expenses (51,437) (52,980) (54,570) (56,207) (57,893)
Other Expenses (2) (76,018) (77,556) (79,140) (80,772) (82,453)
----------- ----------- ----------- ----------- -----------
Sub-Totals 700,775 714,752 729,147 743,974 759,246
Eagle Insured L.P.
Property Level NOI (1) 2,785,658 2,867,946 2,952,703 3,037,402 3,113,665
General & Administrative Expenses (218,278) (224,826) (231,571) (238,518) (245,674)
Other Expenses (2) (236,718) (239,114) (241,582) (244,123) (246,741)
----------- ----------- ----------- ----------- -----------
Sub-Totals 2,330,662 2,404,006 2,479,550 2,554,761 2,621,250
Totals: 7,331,529 8,582,921 8,949,882 9,403,064 9,603,418
</TABLE>
(1) Represents property level net rental revenues less property level operating
expenses.
(2) Includes debt service payment, general & administrative expense
reimbursements and special distributions to affiliates.
C-2
<PAGE>
Summit Insured Equity, L.P.
Going Concern Analysis
<TABLE>
<CAPTION>
Projected Year 1 Projected Year 2
------------------ ------------------
Cash Flow Cash Flow
------------------ ------------------
<S> <C> <C>
Property
Forest Park Plaza 703,074 648,721
Kokomo Plaza 419,786 521,438
Mountain View Lake 645,179 692,729
Winery Square 733,371 959,086
Highland Fair 379,659 429,194
Cactus Village 370,190 385,793
Town West 380,111 395,579
Southaven 458,929 470,260
Hickory Plaza 449,275 423,526
Pablo Plaza 343,078 731,310
Westbird 529,295 520,136
---------- ----------
Sub-total 5,411,947 6,177,772
Less:
General & Administrative 556,643 573,342
Special Distributions 435,272 435,272
Sales Fees to Third Parties Upon
Liquidation/Sale (3%) 0 0
Incentive Fees to GP's upon Liquidation/
Sale 0 0
Annual Debt Service on Existing Loans 765,000 766,000
G&A Reimbursements to Affiliated Parties 134,372 138,404
---------- ----------
Distributable Cash Flow 3,520,660 4,264,754
<CAPTION>
Protected Year 3 Projected Year 4 Projected Year 5
------------------ ------------------ -----------------
Cash Flow Cash Flow Cash Flow
------------------ ------------------ -----------------
<S> <C> <C> <C>
Property
Forest Park Plaza 667,220 601,498 652,639
Kokomo Plaza 500,811 524,391 532,576
Mountain View Lake 701,409 736,152 727,753
Winery Square 1,004,612 1,036,423 994,439
Highland Fair 430,390 416,419 409,082
Cactus Village 395,388 381,171 367,662
Town West 364,977 400,605 405,115
Southaven 448,435 396,896 450,817
Hickory Plaza 448,934 445,055 452,040
Pablo Plaza 606,332 876,487 916,469
Westbird 847,243 888,528 892,308
---------- ---------- ----------
Sub-total 6,415,751 6,703,625 6,800,900
Less:
General & Administrative 590,543 608,259 626,507
Special Distributions 435,272 435,272 435,272
Sales Fees to Third Parties Upon
Liquidation/Sale (3%) 0 0 0
Incentive Fees to GP's upon Liquidation/
Sale 0 0 0
Annual Debt Service on Existing Loans 766,000 727,000 666,000
G&A Reimbursements to Affiliated Parties 142,556 146,832 151,237
---------- ---------- ----------
Distributable Cash Flow 4,481,380 4,786,262 4,921,884
</TABLE>
C-3
<PAGE>
Summit Insured Equity, L.P. II
Going Concern Analysis
<TABLE>
<CAPTION>
Projected Year 1 Projected Year 2
------------------ ------------------
Cash Flow Cash Flow
------------------ ------------------
<S> <C> <C>
Property
Applewood Center 565,734 617,117
Mountain Park Plaza 458,385 474,155
Rolling Hills 221,756 581,306
---------- ----------
Sub-total 1,245,875 1,672,578
Less:
General & Administrative 136,992 141,102
Special Distributions 110,072 110,072
Sales Fees to Third Parties Upon
Liquidation/Sale (3%) 0 0
Incentive Fees to GP's upon Liquidation/
Sale 0 0
Annual Debt Service on Existing Loans 132,200 132,200
G&A Reimbursements to Affiliated Parties 87,179 89,794
---------- ----------
Distributable Cash Flow 779,432 1,199,410
<CAPTION>
Projected Year 3 Projected Year 4 Projected Year 5
------------------ ------------------ -----------------
Cash Flow Cash Flow Cash Flow
------------------ ------------------ -----------------
<S> <C> <C> <C>
Property
Applewood Center 620,350 607,975 596,603
Mountain Park Plaza 467,540 518,902 519,101
Rolling Hills 652,009 678,420 679,923
---------- ---------- ----------
Sub-total 1,739,899 1,805,297 1,795,627
Less:
General & Administrative 145,335 149,695 154,186
Special Distributions 110,072 110,072 110,072
Sales Fees to Third Parties Upon
Liquidation/Sale (3%) 0 0 0
Incentive Fees to GP's upon Liquidation/
Sale 0 0 0
Annual Debt Service on Existing Loans 132,200 132,200 132,200
G&A Reimbursements to Affiliated Parties 92,488 95,263 98,121
---------- ---------- ----------
Distributable Cash Flow 1,259,804 1,318,067 1,301,049
</TABLE>
C-4
<PAGE>
Summit Preferred Equity L.P.
Going Concern Analysis
<TABLE>
<CAPTION>
Projected Year 1 Projected Year 2
------------------ ------------------
Cash Flow Cash Flow
------------------ ------------------
<S> <C> <C>
Property
Chateau Crest 401,392 405,644
Pinehurst 426,838 439,643
-------- --------
Sub-total 828,230 845,287
Less:
General & Administrative 51,437 52,980
Special Distributions 24,748 24,748
Incentive Fees to GP's upon Liquidation/
Sale 0 0
G&A Reimbursements to Affiliated Parties 51,270 52,808
-------- --------
Distributable Cash Flow 700,775 714,751
<CAPTION>
Projected Year 3 Projected Year 4 Projected Year 5
------------------ ------------------ -----------------
Cash Flow Cash Flow Cash Flow
------------------ ------------------ -----------------
<S> <C> <C> <C>
Property
Chateau Crest 410,024 414,536 419,182
Pinehurst 452,833 466,418 480,410
-------- -------- --------
Sub-total 862,857 880,954 899,592
Less:
General & Administrative 54,570 56,207 57,893
Special Distributions 24,748 24,748 24,748
Incentive Fees to GP's upon Liquidation/
Sale 0 0 0
G&A Reimbursements to Affiliated Parties 54,392 56,024 57,705
-------- -------- --------
Distributable Cash Flow 729,147 743,975 759,246
</TABLE>
C-5
<PAGE>
Eagle Insured L.P.
Going Concern Analysis
<TABLE>
<CAPTION>
Projected Year 1 Projected Year 2
------------------ ------------------
Cash Flow Cash Flow
------------------ ------------------
<S> <C> <C>
Property
Cross Creek 1,647,077 1,700,404
Weatherly Walk 774,313 799,324
Woodgate Manor 364,268 368,217
---------- ----------
Sub-total 2,785,658 2,867,945
Less:
General & Administrative 218,278 224,826
Special Distributions 156,857 156,857
Servicing & Other Fees 79,861 82,257
G&A Reimbursements to Affiliated Parties 0 0
---------- ----------
Distributable Cash Flow 2,330,662 2,404,005
<CAPTION>
Projected Year 3 Projected Year 4 Projected Year 5
------------------ ------------------ -----------------
Cash Flow Cash Flow Cash Flow
------------------ ------------------ -----------------
<S> <C> <C> <C>
Property
Cross Creek 1,755,332 1,811,906 1,870,179
Weatherly Walk 825,085 849,029 862,694
Woodgate Manor 372,286 376,476 380,792
---------- ---------- ----------
Sub-total 2,952,703 3,037,411 3,113,665
Less:
General & Administrative 231,571 238,518 245,674
Special Distributions 156,857 156,857 156,857
Servicing & Other Fees 84,725 87,266 89,884
G&A Reimbursements to Affiliated Parties 0 0 0
---------- ---------- ----------
Distributable Cash Flow 2,479,550 2,554,769 2,621,250
</TABLE>
C-6
<PAGE>
Management's Assumptions
Set forth below are management's assumptions in connection with the preparation
of the Going Concern Analysis. The purpose of this analysis was to make a
reasonable estimate of the Partnerships' income for a five year period.
Summit Insured Equity I and II: Management prepared income and expense forecasts
for each shopping center. It is assumed that for those leases that were in
effect at the time of this analysis, contractual rents and rent increases would
remain in tact throughout the contractual lease term. For that space which was
vacant at the time of this analysis, or which have tenants whose leases expired
during the projected period, it is assumed that the spaces remain vacant for six
months and then re-let at an assumed prevailing market rent, which is estimated
to increase at 4% annually. It is also assumed that under the terms of the
leases, the tenants pay their pro rata share of real estate taxes, insurance and
common area maintenance. The operating expenses of the shopping centers are
assumed to increase at a rate of 4%, in conjunction with the income. The assumed
income and expense figures for each center were then combined and the resulting
aggregate estimated net operating income became the anticipated total revenue of
the Partnership. This revenue was then reduced by the Partnerships' general and
administrative expenses, which were estimated to increase annually at a rate of
3%, and by Special Distributions paid to the General Partners, to determine the
amount of cash flow available for distribution to the partners of the
Partnerships.
Summit Preferred L.P.: Management prepared income and expense forecasts for each
apartment complex. The assumptions were based, in part, on the historical
operations of the assets and current market conditions. The occupancy rates are
forecasted to remain constant for any property which, at the time of this
analysis, was more than 95% occupied. For those properties that were less than
95% occupied, the assumption was that over a reasonable period of time the
occupancy would increase to a stabilized rate of 95% and remain constant at 95%
for the remainder of the projected period. It is also assumed that income and
expenses of the properties will grow annually at a rate of 3%. The difference
between the income and expense figures of the properties were then used to
estimate the amount of distributions that could be expected from each of the
partnerships owning the properties and estimated income of the Partnership. The
estimated income of the Partnership, was then reduced by general and
administrative expenses of the Partnership, which increase annually at a rate of
3%, and by the Special Distributions paid to the General Partners, to determine
the amount of cash flow available for distribution to the partners of the
Partnership.
Eagle Insured L.P.: Management prepared income and expense forecasts for each
apartment complex securing a Partnership Mortgage. The assumptions were based,
in part, on the historical operations of the assets and market conditions. The
occupancy rates are forecasted to remain constant for any property which, at the
time of this analysis, was more than 95% occupied. For those properties that
were less than 95% occupied, the assumption was that over a reasonable period of
time the occupancy would increase to a stabilized rate of 95% and remain
constant at 95% for the remainder of the projected period. It is also assumed
that income and expenses of the properties will grow annually at a rate of 3%.
The income and expense figures were then used to determine the amount of
interest income, including Additional Interest and principal payments, if any,
that the Partnership could expect to receive from each mortgage. This income was
then reduced by general and administrative expenses of the Partnership, which
are estimated to increase annually at a rate of 3%, and by the Special
Distributions paid to the General Partners. The net result determined the amount
of cash flow available for distribution to the partners of the Partnership.
C-7
<PAGE>
Aegis Realty, Inc.
Consolidated Forecasts of Aegis Realty, Inc. on a Combined Basis
Showing projected cash flows assuming use of leverage in acquiring new assets
<TABLE>
<CAPTION>
Projected Projected Projected Projected Projected Projected
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
------------- ------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Cash Flow-Summit Insured I L.P.(1) 5,411,947 6,177,772 6,415,752 6,703,625 6,800,890 7,004,917
Cash Flow-Summit Insured II L.P.(1) 1,245,875 1,672,578 1,739,899 1,805,297 1,795,627 1,849,496
Cash Flow-Summit Preferred L.P.(1) 828,230 845,288 862,857 880,953 899,592 918,791
Cash Flow-Eagle Insured L.P. 2,785,658 2,867,946 2,952,703 3,037,412 3,113,665 3,174,663
Interest Income 95,000 99,000 103,000 107,000 111,000 115,000
Interest from Temporary Investments 54,000 56,000 58,000 60,000 62,000 64,000
Other Income 173,710 178,921 184,289 189,817 195,512 201,377
----------- ----------- ----------- ----------- ----------- -----------
Total Income before Acquisitions 10,594,420 11,897,505 12,316,500 12,784,104 12,978,286 13,328,244
Year One Acquisitions(2) 9,095,625 10,005,188 11,005,706 11,335,877 11,675,954 12,026,232
Year Two Acquisitions(2) 0 2,021,250 2,223,375 2,445,713 2,519,084 2,594,656
Year Three Acquisitions(2) 0 0 2,021,250 2,223,375 2,445,713 2,519,084
----------- ----------- ----------- ----------- ----------- -----------
Total Income from Acquisitions 9,095,625 12,026,438 15,250,331 16,004,965 16,640,750 17,139,973
Total Income Available for Distributions 19,690,045 23,923,943 27,566,831 28,789,069 29,619,036 30,468,217
Expenses
Interest Expense
Interest Expense-Transaction Costs 108,450 108,450 108,450 108,450 108,450 108,450
Interest Expense-Summit Insured I 533,000 509,000 482,000 453,000 423,000 392,882
Interest Expense-Summit Insured II 122,000 121,900 121,800 121,700 121,600 121,500
Interest Expense-1997 Acquisitions 7,650,000 7,650,000 7,650,000 7,650,000 7,650,000 7,650,000
Interest Expense-1998 Acquisitions 0 1,700,000 1,700,000 1,700,000 1,700,000 1,700,000
Interest Expense-l999 Acquisitions 0 0 1,700,000 1,700,000 1,700,000 1,700,000
----------- ----------- ----------- ----------- ----------- -----------
Total Interest Expense 8,413,450 10,089,350 11,762,250 11,733,150 11,703,050 11,672,832
Acquisition Fee to Advisor 3,375,000 750,000 750,000 0 0 0
Special Distributions to Advisor
(Historical)(3) 563,786 563,786 563,786 563,786 563,786 563,786
Special Distributions to Advisor (New
Business)(4) 324,844 397,031 469,219 469,219 469,219 469,219
Overhead reimbursement to Advisor 208,000 216,300 225,000 234,000 243,400 253,136
Consolidated Projections of G&A
(Historical)(5) 1,210,804 1,252,410 1,295,528 1,340,078 1,386,275 1,434,101
Consolidated Projections of G&A (New
Business)(6) 45,478 60,132 76,252 80,025 83,204 85,700
----------- ----------- ----------- ----------- ----------- -----------
Total Expenses 14,141,362 13,329,009 15,142,035 14,420,258 14,448,934 14,478,774
Cash Available for Distribution 5,548,683 10,594,934 12,424,796 14,368,811 15,170,102 15,989,443
Add back Capital Expenditures(1) 1,132,429 752,425 666,296 551,964 556,735 1,005,957
Acquisition Fees to Advisor (Capitalized) 3,375,000 750,000 750,000 0 0 0
Funds from Operations 10,056,112 12,097,359 13,841,092 14,920,775 15,726,837 16,995,400
Funds from Operations Per Share(7) $ 1.24 $ 1.49 $ 1.71 $ 1.84 $ 1.94 $ 2.10
Total Market Capitalization(7) 100,309,717 120,671,149 138,064,897 148,834,749 156,875,210 169,529,109
Debt-to-Market Capitalization 49.77% 49.73% 50.24% 48.36% 47.05% 45.12%
</TABLE>
C-8
<PAGE>
(1) Cash flow, as presented in this table, is the net operating income net of
capital expenditures, that is provided to the Partnerships on a property by
property basis prior to consolidation, whereas, the proforma income
statements (contained elsewhere in the Solicitation Statement) are
consolidated prior to determining the net income.
(2) The Company is permitted to leverage up to 50% of Total Market Value.
This table utilizes the following assumptions:
Debt for new acquisitions (Less transaction fees):
Year 1: $90,000,000 Year 2: $20,000,000 Year 3: $20,000,000
Cost of capital: 8.5%
Initial acquisition Yield: 10.50%
Projected growth rate of asset income:
Years 2 to 3: 10.00% Thereafter: 3.00%
(3) Represents 0.375% of existing assets payable either as a Special
Distribution or Asset Management Fee, as applicable.
(4) Represents 0.375% of new acquisitions payable either as a Special
Distribution or Asset Management Fee, as applicable.
(5) Represents 0.5% of income from existing assets.
(6) Represents 0.5% of income from new acquisitions.
(7) Assumes the following:
Shares Outstanding: Insured I 4,071,745
Insured II 1,086,586
Preferred 615,144
Eagle 2,324,064
---------
Total 8,097,539
Assumed FFO Midpoint Yield: 10.025%
Year 1 Indicated Share Price: $ 12.39
Year 2 Indicated Share Price: $ 14.90
Year 3 Indicated Share Price: $ 17.05
Year 4 Indicated Share Price: $ 18.38
C-9
<PAGE>
Management's Assumptions
Set forth below are management's assumptions in connection with the preparation
of the consolidated forecasts of Aegis Realty, Inc. on a combined basis.
The consolidated forecasts of the Company on a combined basis show the assumed
cash flows of the Company giving effect to reduction in fees, certain savings
attendant with the Consolidation and assuming the use of leverage in acquiring
new assets. The forecasts assume that the Company will leverage approximately
fifty percent of its estimated Total Market Value estimated to be $90,000,000,
$20,000,000, and 20,000,000 in years 1, 2, and 3, respectively. It is assumed
that the Company will pay an annual rate of 8.5% as the cost of capital. The
income and expense analysis of the existing Partnerships, as described
previously on page C-7, were used to provide the income and expense from
existing assets of the consolidated Company.
The forecasted net rental income of the Company's new assets, which for this
purpose were assumed to be comprised solely of shopping centers, took into
account and gave effect to an overall plan to acquire underperforming assets in
good locations and to expend the effort and capital to make capital and tenant
improvements and re-lease the space which will produce a successful
repositioning of the shopping centers. Management anticipates the capital
improvements and willingness to expend leasing improvement funds or allowances
will result in better quality (credit) tenants which lead to increased traffic
and higher sales, which will make the centers more desirable, which in turn will
assist in leasing at market rents. All of these factors permit the assumption of
substantial growth in income during the first 24 to 36 months, after which
management assumes stabilized and level increases in income of 3% thereafter.
The consolidated income, from existing assets and new acquisitions, is then
reduced by general and administrative expenses of the Company, estimated to be
equal to one half of one percent of the income generated from the existing and
new assets, and by Special Distributions and Asset Management Fees payable to
the Advisor. The assumed payments toward capital expenditures of the
consolidated assets are then added back to determine the Funds From Operations.
C-10
<PAGE>
APPENDIX D
OBJECTION NOTICE
<PAGE>
FORM FOR OBJECTING TO CONSOLIDATION
IF YOU APPROVE OF THE PARTNERSHIPS IN WHICH YOU INVESTED PARTICIPATING IN
THE CONSOLIDATION, DO NOT COMPLETE AND SUBMIT THIS FORM.
YOU NEED DO NOTHING TO INDICATE YOUR APPROVAL. THIS FORM SHOULD BE USED
ONLY BY PERSONS WHO OBJECT TO ONE OR MORE OF THE PARTNERSHIPS IN WHICH THEY
HOLD UNITS PARTICIPATING IN THE CONSOLIDATION.
The undersigned hereby object(s) to the following partnership(s) in which
I/we hold units participating in the Consolidation pursuant to the Settlement by
the Related Defendants of the Class Actions pending under the caption In re
Prudential Securities Incorporated Limited Partnerships Securities Litigation,
MDL No. 1005 (S.D.N.Y.), as more fully described in the Solicitation Statement
dated June 18, 1997:
===============================================================================
Name of Partnership: ------------------------------------------------------
Number of Units held by objecting Unitholder: ----------------------------
State whether Units were purchased through the initial offering or
through the secondary market: -------------------------------------------
If purchased through the secondary market, state the dates on which the
Units were purchased (if more than one date, specify the number of
Units purchased on each date): ------------------------------------------
Was a certificate issued for these Units? -------------------------------
If "yes," what is the certificate number(s): ----------------------------
===============================================================================
Name of Partnership: ------------------------------------------------------
Number of Units held by objecting Unitholder: ----------------------------
State whether Units were purchased through the initial offering or
through the secondary market: -------------------------------------------
If purchased through the secondary market, state the dates on which the
Units were purchased (if more than one date, specify the number of
Units purchased on each date): ------------------------------------------
Was a certificate issued for these Units? -------------------------------
If "yes," what is the certificate number(s): ----------------------------
===============================================================================
Name of Partnership: ------------------------------------------------------
Number of Units held by objecting Unitholder: ----------------------------
State whether Units were purchased through the initial offering or
through the secondary market: -------------------------------------------
If purchased through the secondary market, state the dates on which the
Units were purchased (if more than one date, specify the number of
Units purchased on each date): ------------------------------------------
Was a certificate issued for these Units? -------------------------------
If "yes," what is the certificate number(s): ----------------------------
===============================================================================
(cut along dotted line)
<PAGE>
(cut along dotted line)
===============================================================================
Name of Partnership: ------------------------------------------------------
Number of Units held by objecting Unitholder: ----------------------------
State whether Units were purchased through the initial offering or
through the secondary market: -------------------------------------------
If purchased through the secondary market, state the dates on which the
Units were purchased (if more than one date, specify the number of
Units purchased on each date): ------------------------------------------
Was a certificate issued for these Units? -------------------------------
If "yes," what is the certificate number(s): ----------------------------
===============================================================================
Address of Unitholder: --------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
Social Security or Taxpayer Identification No. of Unitholder: -----------------
I/we hereby certify that the foregoing information is complete and accurate.
- -------------------------------------------------------------------------------
Print or type name of Unitholder(s) as it appears on partnership subscription
agreement
- -------------------------------------------------------------------------------
Signature of Unitholder Date
- -------------------------------------------------------------------------------
Signature of Co-Owner Date
YOU MUST PROVIDE ALL OF THE INFORMATION REQUESTED ABOVE IN ORDER TO SUBMIT
A VALID OBJECTION TO ANY PARTNERSHIP IN WHICH YOU OWN UNITS PARTICIPATING IN
THE CONSOLIDATION.
EQUITABLE CLASS MEMBERS MAY NOT INDIVIDUALLY OPT OUT OF THE EQUITABLE
SETTLEMENT OR THE CONSOLIDATION. IF, HOWEVER, EITHER (A) UNITHOLDERS HOLDING 1/3
OR MORE OF THE UNITS OF A PARTICULAR PARTNERSHIP OBJECT TO THAT PARTNERSHIP
PARTICIPATING IN THE CONSOLIDATION, OR (B) THE COURT DOES NOT APPROVE OF ANY
PARTICULAR PARTNERSHIP PARTICIPATING IN THE CONSOLIDATION, THEN THAT PARTNERSHIP
WILL NOT PARTICIPATE IN THE CONSOLIDATION.
YOU SHOULD NOTE THAT BY SUBMITTING THIS OBJECTION NOTICE YOU ARE NOT
OBJECTING TO THE ENTIRE RELATED DEFENDANTS' SETTLEMENT OR TO ANY ASPECT OF THE
RELATED DEFENDANTS' SETTLEMENT OTHER THAN TO THE PARTNERSHIP OR PARTNERSHIPS
LISTED ABOVE PARTICIPATING IN THE CONSOLIDATION. IF YOU WISH TO EXPRESS ANY
OTHER OBJECTIONS TO THE RELATED SETTLEMENT, YOU MUST FOLLOW THE PROCEDURE
SPECIFIED IN THE CLASS NOTICES.
The deadline for submission of this Objection Notice is August 18, 1997.
Objection Notices should be sent to:
Related Capital Company
625 Madison Avenue
New York, New York 10022
Attn: Investor Services Department
