-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MzpjS1nI4Arso2KXMexgmoTn6RRwqhh5vkLd1RadjNMBjx/RfHlyzypttkCJEBOs yk3M82QFJzzTmN5JHxYGgA== 0000912057-00-002941.txt : 20000203 0000912057-00-002941.hdr.sgml : 20000203 ACCESSION NUMBER: 0000912057-00-002941 CONFORMED SUBMISSION TYPE: SC 13E3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20000128 GROUP MEMBERS: KRF COMPANY, L.L.C. GROUP MEMBERS: KRF3 ACQUISITION COMPANY L.L.C. GROUP MEMBERS: KRUPP FAMILY LIMITED PARTNERSHIP 94 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: KRUPP REALTY FUND LTD III CENTRAL INDEX KEY: 0000702117 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 042763323 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3 SEC ACT: SEC FILE NUMBER: 005-46975 FILM NUMBER: 516883 BUSINESS ADDRESS: STREET 1: C/O BERKSHIRE REALTY AFFILIATES STREET 2: 470 ATLANTIC AVENUE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6174232233 MAIL ADDRESS: STREET 1: 470 ATLANTIC AVENUE STREET 2: C/O BERKSHIRE REALTY AFFILIATES CITY: BOSTON STATE: MA ZIP: 02210 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: KRUPP FAMILY LIMITED PARTNERSHIP 94 CENTRAL INDEX KEY: 0001086325 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13E3 BUSINESS ADDRESS: STREET 1: ONE BEACON ST STREET 2: STE 1500 CITY: BOSTON STATE: MA ZIP: 02108 MAIL ADDRESS: STREET 1: ONE BEACON ST STREET 2: STE 1500 CITY: BOSTON STATE: MA ZIP: 02108 SC 13E3 1 SC 13E3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------- SCHEDULE 13E-3 RULE 13E-3 TRANSACTION STATEMENT UNDER SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------------- KRUPP REALTY FUND, LTD. - III (Name of the Issuer) --------------------------- KRF3 ACQUISITION COMPANY, L.L.C. KRF COMPANY, L.L.C. THE KRUPP FAMILY LIMITED PARTNERSHIP - 94 (Name of Persons Filing Statement) --------------------------- LIMITED PARTNERSHIP UNITS (Title of Class of Securities) --------------------------- 501128 10 2 (CUSIP Number of Class of Securities) --------------------------- SCOTT D. SPELFOGEL, ESQ. THE BERKSHIRE GROUP ONE BEACON STREET BOSTON, MASSACHUSETTS 02108 (617) 574-8385 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of the Persons Filing Statement) --------------------------- WITH COPIES TO: JAMES M. DUBIN, ESQ. PAUL, WEISS, RIFKIND, WHARTON & GARRISON 1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019-6064 (212) 373-3000 This statement is filed in connection with (check appropriate box): a. |X| The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. |_| The filing of a registration statement under the Securities Act of 1933. c. |_| A tender offer. d. |_| None of the above. Check the following box if the soliciting materials or information statement referred to in checking box (a) are preliminary copies: |X| --------------------------- CALCULATION OF FILING FEE - -------------------------------------------------------------------------------- Transaction Valuation: $7,200,480 Amount of filing fee: $1,440.10 - -------------------------------------------------------------------------------- - - Transaction valuation assumes the purchase of 12,000.8 units Krupp Realty Fund, Ltd.-III at $600 in cash per Unit. The amount of the filing fee, calculated in accordance with Regulation 240.0-11 of the Securities Exchange Act of 1934, equals one fiftieth of one percentum of such transaction value. |_| CHECK BOX IF ANY PART OF THE FEE IS OFFSET BY RULE 0-11(a)(2) AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID. IDENTIFY THE PREVIOUS FILING BY EITHER A REGISTRATION STATEMENT NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS FILING. Amount Previously Paid: --- Form or Registration No.: Filing Parties: Date Filed: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This Rule 13E-3 Transaction Statement (the "Statement") is being filed by KRF3 Acquisition Company, L.L.C., a Delaware limited liability company ("KRF3" or the "Purchaser"), KRF Company, L.L.C., a Delaware limited liability company and KRF3's sole member (the "Parent"), and The Krupp Family Limited Partnership - 94, a Massachusetts limited partnership and the Parent's sole member (the "Family Partnership") with respect to the investor limited partnership interests ("Units") of Krupp Realty Fund, Ltd. - III, a Massachusetts limited partnership (the "Partnership"), that is subject to a Rule 13e-3 transaction. The general partners of the Partnership are submitting to Unit holders a proposal to approve (a) a merger agreement under which (1) KRF3 will merge with and into the Partnership and (2) each Unit holder other than certain Unit holders who have agreed to reinvest their Units in KRF3 will receive $600 in cash for each outstanding Unit that the Unit holder owns immediately before the effective time of the merger and (b) an amendment to the Partnership's partnership agreement allowing the Partnership to enter into the merger agreement and complete the merger with KRF3 (items (a) and (b) will be considered one proposal and referred to herein as the "Merger Proposal"). The Merger Proposal is upon the terms and subject to the conditions set forth in the Partnership's Preliminary Proxy Statement filed by the general partners of the Partnership with the Securities and Exchange Commission on January 21, 2000 (including all annexes and exhibits thereto, the "Proxy Statement") for the Partnership's special meeting scheduled to be held on , 2000. The information in the Proxy Statement, a copy of which is attached hereto as Exhibit A, is hereby expressly incorporated by reference in its entirety and the responses to each item are qualified in their entirety by the provisions of the Proxy Statement. The Proxy Statement will be completed and, if appropriate, amended prior to the time it is first sent or given to stockholders of the Company. This Statement will be amended to reflect such completion or amendment of the Proxy Statement. 2 1. SUMMARY TERM SHEET. The information set forth under the caption "Summary Term Sheet" in the Proxy Statement is incorporated herein by reference. ITEM 2. SUBJECT COMPANY INFORMATION. (a) The name of the issuer of the Units subject to the Rule 13e-3 transaction is Krupp Realty Fund, Ltd. - III, a limited partnership organized under the laws of Massachusetts, and the principal executive offices of the Partnership are located at One Beacon Street, Suite 1500, Boston, Massachusetts 02108. (b) According to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1999, as of such date, there were 25,000 Units of the Partnership outstanding held by approximately 588 holders. (c) The Units are not listed or traded on any exchange or quoted on the National Association of Securities Dealers Automated Quotation System. However, information regarding certain private transactions is set forth in under the caption "Special Factors--Determination of Merger Price--Recent Unit Sales; Tender Offer" in the Proxy Statement and is incorporated herein by reference. (d) The information set forth under the caption "Information About the Partnership, Its General Partners and Their Affiliates--Distributions" of the Proxy Statement is incorporated herein by reference. (e) Not applicable. (f) The information set forth in under the caption "Information About the Partnership, Its General Partners and Their Affiliates--Market for the Units" of the Proxy Statement is incorporated herein by reference. ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON. (a) - (b) The information set forth under the caption "Information Concerning the Purchaser and its Affiliates" of the Proxy Statement is incorporated herein by reference. (c)(1) The information set forth under the caption "Information Concerning the Partnership, Its General Partners and Their Affiliates--The General Partners" of the Proxy Statement is incorporated herein by reference. (c)(2) The information set forth under the caption "Information Concerning the Partnership, Its General Partners and Their Affiliates--The General Partners" of the Proxy Statement is incorporated herein by reference. (c)(3) During the last five years, neither the Purchaser, nor to the best of the knowledge of the Purchaser, any affiliate of the Purchaser has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (c)(4) During the last five years, neither the Purchaser, nor to the best of the knowledge of the Purchaser, any affiliate of the Purchaser was a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. (c)(5) Messrs. Douglas and George Krupp are both United States citizens. ITEM 4. TERMS OF THE TRANSACTION. (a)(1) Not applicable. (a)(2) The information set forth under the captions and "Special Factors--Effects of the Transaction" and "The Merger Agreement" of the Proxy Statement is incorporated herein by reference. (b) Excluded. (c) The information set forth under the caption "Related Agreements" is incorporated herein by reference. (d) None. (e) None. (f) Not applicable. ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS. (a)(1)-(a)(2) The information set forth under the caption "Information About the Partnership, Its General Partners and Their Affiliates--Related Party Transactions" of the Proxy Statement is incorporated herein by reference. (b) The information set forth under the captions "Special Factors--Background of the Mergers; Purpose of the Transaction" and "The Merger Agreement" of the Proxy Statement is incorporated herein by reference. (c) The information set forth under the captions "Special Factors--Background of the Merger; Purpose of the Transaction" and "Related Agreements" is incorporated herein by reference. (d) Excluded. (e) The information set forth under the captions "Special Factors--Background of the Merger; Purpose of the Transaction" and "Related Agreements" is incorporated herein by reference. ITEM 6. PURPOSES OF THE TRANSACTIONS AND PLANS OR PROPOSALS. (a) Excluded. (b) The information set forth under the captions "Special Factors--Effects of the Transaction," and "The Merger Agreement--The Effects of the Merger" in the Proxy Statement is incorporated herein by reference. (c)(1) - (c)(8) The information set forth under the captions "Summary Term Sheet," "Special Factors--Effects of the Transaction," "--Financing of the Merger--Source of Funds," "--Plans or Proposals by Partnership or Affiliates Following the Merger," "The Merger Agreement--The Surviving Entity" and "Information About the Partnership, Its General Partners and Their Affiliates--Distributions" in the Proxy Statement is incorporated herein by reference. ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS. (a) - (c) The information set forth under the captions "Summary Term Sheet," "Special Factors-- Background of the Merger; Purpose of the Transaction," "--Alternatives to the Merger," "--Fairness of the Merger," "--Disadvantage and Risks Associated with the Merger" and "--Conflicts of Interest" of the Proxy Statement is incorporated herein by reference. (d) The information set forth under the captions "Special Factors - --Background of the Merger; Purpose of the Transaction," "--Book Value," "--Effects of the Transaction," "--Plans or Proposals by Partnership or Affiliates Following the Merger" and "--Material Federal Income Tax Consequences" of the Proxy Statement is incorporated herein by reference. ITEM 8. FAIRNESS OF THE TRANSACTION. (a) and (b) The information set forth under the caption "Special Factors--Fairness of the Merger" and "--Liquidation Analysis; Determination of Merger Price" of the Proxy Statement is incorporated herein by reference. (c) The information set forth under the caption "The Special Meeting--Votes Required" of the Proxy Statement is incorporated herein by reference. (d) No unaffiliated representative has been retained to act solely on behalf of unaffiliated holders of Units for the purpose of negotiating the terms of the Merger Proposal and/or preparing a report concerning the fairness of the Merger Proposal. (e) The general partners of the Partnership approved the Merger Proposal. The information set forth under the captions "Special Factors--Conflicts of Interest" and "Information About the Partnership, Its General Partners and Their Affiliates--Related Party Transactions" of the Proxy Statement is incorporated herein by reference. (f) The information set forth under the captions "Special Factors--Recent Unit Sales; Tender Offer" of the Proxy Statement is incorporated herein by reference. ITEM 9. REPORTS, OPINIONS, APPRAISALS AND NEGOTIATIONS. (a) The Purchaser has not received any report, opinion or Appraisal from an outside party that is materially related to the Merger Proposal. (b) and (c) Not applicable. ITEM 10. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION. (a) The information set forth under the caption "Special Factors--Financing of the Merger--Source of Funds" of the Proxy Statement is incorporated herein by reference. (b) None. (c) The information set forth under the caption "Special Factors--Financing of the Merger--Source of Funds" of the Proxy Statement is incorporated herein by reference. (d) No loan agreement has yet been entered into. ITEM 11. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. (a) and (b) The information set forth under the captions "Information About the Partnership, Its General Partners and Their Affiliates--Ownership of the Units," "--Market for the Units" and "Information Concerning the Purchaser and Its Affiliates--Affiliates of the Purchaser" of the Proxy Statement is incorporated herein by reference. ITEM 12. THE SOLICITATION OR RECOMMENDATION. (a)-(c) Excluded. (d) The information set forth under the captions "Special Factors--Financing of the Merger--Source of Funds," "The Special Meeting--Votes Required" and "Related Agreements" of the Proxy Statement is incorporated herein by reference. (e) No. ITEM 13. FINANCIAL STATEMENTS. (a) The information set forth under the captions "Selected Financial Data" and "Index to Consolidated Financial Statements" of the Proxy Statement is incorporated herein by reference. (b) Not applicable. ITEM 14. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED. (a) and (b) The information set forth under the captions "Special Factors--Financing of the Merger--Costs Associated with the Merger" and "The Special Meeting--Solicitation Procedures" of the Proxy Statement is incorporated herein by reference. ITEM 15. ADDITIONAL INFORMATION. All of the information set forth in the Proxy Statement is incorporated herein by reference. ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION (a) Preliminary Proxy Statement (Exhibit A). (b) Not applicable. (c) Not applicable. (d)(1) Voting Agreement, dated January 6, 2000 (Exhibit D-1). (d)(2) Investment Agreement, dated January 6, 2000 (Exhibit D-2). (e) Excluded. (f) Not applicable. (g) Not applicable. (h) Excluded.
SIGNATURE After due inquiry and to the best of the undersigned's knowledge and belief, the undersigned certifies that the information set forth in this Statement is true, complete and correct. Dated as of: January 28, 2000 KRF3 Acquisition Company, L.L.C. By: KRF Company, L.L.C., its sole member By: The Krupp Family Limited Partnership - 94, its sole member By: /s/ Douglas Krupp ------------------------------- Name: Douglas Krupp Title: General Partner KRF Company, L.L.C. By: The Krupp Family Limited Partnership - 94, its sole member By: /s/ Douglas Krupp -------------------------- Name: Douglas Krupp Title: General Partner The Krupp Family Limited Partnership - 94 By: /s/ Douglas Krupp -------------------------- Name: Douglas Krupp Title: General Partner EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION (a) Preliminary Proxy Statement (Exhibit A). (b) Not applicable. (c) Not applicable. (d)(1) Voting Agreement, dated January 6, 2000 (Exhibit D-1). (d)(2) Investment Agreement, dated January 6, 2000 (Exhibit D-2). (e) Excluded. (f) Not applicable. (g) Not applicable. (h) Excluded.
EX-99.A 2 EXHIBIT 99.A EXHIBIT 99 (A) As filed with the Securities and Exchange Commission on January 28, 1999 - ------------------------------------------------------------------------------- PRELIMINARY COPY SCHEDULE 14A SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------------ Filed by the registrant [ ] Filed by a party other than the registrant [X] Check the appropriate box: /X/ Preliminary proxy statement / / Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)(2)) / / Definitive proxy statement / / Definitive additional materials / / Soliciting Material under Rule 14a-12 Krupp Realty Fund, Ltd. - III (Name of Registrant as Specified In Its Charter) -------------------------------------------------------------------------- KRF3 Acquisition Company, L.L.C. KRF Company, L.L.C. The Krupp Family Limited Partnership - 94 (Name of Persons Filing Proxy Statement, if Other Than the Registrant) -------------------------------------------------------------------------- Payment of Filing Fee (Check the appropriate box): / / No fee required. /X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: Investor Limited Partnership Interests ("Units") (2) Aggregate number of securities to which transaction applies: 12,000.8 Units (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11: $600 (4) Proposed maximum aggregate value of transaction: $7,200,480 (5) Total fee paid: $1,440.10 / / 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: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: - ------------------------------------------------------------------------------ N&PS KRUPP REALTY FUND, LTD. - III One Beacon Street Suite 1500 Boston, Massachusetts 02108 Dear Limited Partner: You are cordially invited to attend a special meeting of unitholders of Krupp Realty Fund, Ltd.-III, to be held on , 2000 at 10:00 a.m. at . At the special meeting you will be asked to consider and vote upon a proposed merger, described in the accompanying proxy statement, of Krupp Realty with and into KRF3 Acquisition Company, L.L.C., a Delaware limited liability company that is associated with the general partners. Under the terms of the merger, KRF3 is offering you $600 per unit in cash. The general partners of Krupp Realty have determined that the merger transaction is fair and in your interest and therefore recommend that you vote "FOR" the merger and the amendment. The proposed transaction will provide you with the opportunity to liquidate your investment in Krupp Realty for cash at a price and on terms that the general partners believe is fair to you. Although the merger, the related merger agreement and the per unit price to be paid to you have not been reviewed independently, the general partners believe that they are fair to you for the reasons set forth in this proxy statement. Unitholders representing a majority of the limited partnership units must approve the merger and the amendment to Krupp Realty's partnership agreement. Your vote is important no matter how many units you own. Please date, sign and promptly return the proxy card in the enclosed envelope or by facsimile as instructed in this proxy statement. If you plan to attend the special meeting in person, please check the appropriate box on the proxy card. You may change your vote in person, even if you have previously sent in a proxy. This proxy statement explains in detail the terms of the proposed merger and the related transactions. The date of this proxy statement is and was first mailed to unitholders of Krupp Realty on. KRUPP REALTY FUND, LTD. - III The Krupp Corporation GENERAL PARTNER By: ____________________________ Douglas Krupp, CO-CHAIRMAN OF THE BOARD OF DIRECTORS Boston, Massachusetts , 2000 - -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THE TRANSACTION, NOR UPON THE ACCURACY OR - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- KRUPP REALTY FUND, LTD. - III One Beacon Street Suite 1500 Boston, Massachusetts 02108 ---------------------------------------------------------- NOTICE OF SPECIAL MEETING OF UNITHOLDERS TO BE HELD , 2000 ---------------------------------------------------------- To Our Limited Partners: We are holding a special meeting of the holders of investor limited partnership units of Krupp Realty Fund, Ltd. - III on , 2000, at , local time, at , for the following purposes: o To consider and vote on a proposal to approve a merger agreement under which KRF3 Acquisition Company, L.L.C., a newly-formed company, will merge with and into Krupp Realty. Each Krupp Realty unitholder other than certain unitholders that have agreed to reinvest their units in KRF3 will receive $600 in cash for each outstanding investor limited partnership unit that the unitholder owns immediately before the effective time of the merger. A vote in favor of the merger agreement will also constitute a vote in favor of an amendment to Krupp Realty's partnership agreement allowing Krupp Realty to enter into the merger agreement and complete the merger with KRF3. Copies of the merger agreement and amendment are attached as Appendices A and B, respectively, and are described in the accompanying proxy statement. o To consider and act upon such other matters as may properly come before the special meeting or any adjournment of the meeting. Only unitholders of Krupp Realty's investor limited partnership interests at the close of business on the record date, , 2000, will be entitled to notice of, and to vote at, the special meeting or any adjournment of the meeting. KRUPP REALTY FUND, LTD. - III The Krupp Corporation GENERAL PARTNER By:______________________ Scott D. Spelfogel SECRETARY Boston, Massachusetts , 2000 SUMMARY TERM SHEET This summary term sheet highlights selected information included in this proxy statement, and is qualified by reference to the detailed information appearing elsewhere in this proxy statement and the attached appendices. Please carefully review all of the information provided in this proxy statement. PURPOSE OF THE SPECIAL MEETING o To approve a merger agreement and related amendment to the partnership agreement of Krupp Realty Fund, Ltd.-III which allows for the merger to occur. WHAT YOU WILL RECEIVE IN THE MERGER o $600 for each unit you own. o This price is based on the analysis conducted by the proposed purchaser of the partnership, KRF3 Acquisition Company, L.L.C. o You will no longer have any interest in the partnership after the merger. See "Special Factors--Liquidation Analysis; Determination of Merger Price." PURPOSES OF AND REASONS FOR THE MERGER o Acquiring all of the outstanding units. o Providing liquidity to you. o Eliminating current and future market risk from the partnership's properties related to competition from newly built and renovated properties. o Eliminating uncertainties relating to the price and timing of any disposition of the properties owned by the partnership. o Eliminating the annual filing and reporting of tax information by you. FAIRNESS OF THE MERGER Based on the liquidation analysis conducted by the purchaser in connection with the proposed merger, the general partners of the partnership believe that the merger is fair and in your best interest and recommend that you vote for the approval of the merger. See "Special Factors--Fairness of the Merger." PRIMARY POTENTIAL DISADVANTAGES OF THE MERGER o You may suffer a potential loss of benefits resulting from any improvements in economic and market conditions. o The purchaser established the terms and the per unit merger price based on the analyses described below, and not as the result of arm's-length negotiations with the partnership. o No independent person has evaluated or rendered any opinion with respect to the fairness of the merger and merger price to you. See "Special Factors--Disadvantages and Risks Associated with the Merger." CONFLICTS OF INTEREST o The general partners of the partnership have economic and other interests that conflict with your 1 interests. o The purchaser is associated with the general partners and desires to pay you a lower price for your units while you wish to receive a higher price for your units. o If the partnership's assets were sold outright, the general partners and their associates would no longer receive the distributions and fees that they now receive. See "Special Factors--Conflicts of Interest." THE AMENDMENT o The partnership agreement currently prohibits the general partners of the partnership from entering into agreements on behalf of the partnership with associates, or "affiliates," of the general partners, except as expressly permitted. o Because the purchaser is associated with the general partners, you are being asked to consent to an amendment to the partnership agreement to allow the partnership to enter into the merger agreement. o If the amendment is not approved, the merger will not be completed even if you approve the merger; conse- quently, a vote for the merger will automatically constitute a vote in favor of the amendment. See "The Amendment to the Partnership Agreement." VOTE REQUIRED o Unitholders representing a majority of the units must approve the merger and the related amendment. o The purchaser owns and controls approximately 45.9% of the units. o Other unitholders representing approximately 8.7% of the units have agreed to vote for the merger and the amendment. o Consequently, together with these unitholders, the purchaser controls, in total, approximately, 54.6% of the voting units of the partnership. See "The Special Meeting--Votes Required." FINANCING OF THE MERGER The purchaser expects to finance the merger through capital contributions from an affiliate and the anticipated refinancing of mortgage indebtedness of the partnership. See "Special Factors--Financing of the Merger--Source of Funds." MATERIAL FEDERAL INCOME TAX CONSEQUENCES Sales of units under the merger will be taxable transactions for federal income tax purposes. On a sale of units under the merger, you will recognize gain or loss equal to the difference between: o your "amount realized" on the sale; and o your adjusted tax basis in the units sold. Your "amount realized" will equal the sum of: o the amount of cash you receive; and o the amount of partnership liabilities allocable to your units. Your adjusted tax basis in the units sold will depend upon the facts of your situation. The character of any gain or loss you recognize may be partially capital and partially ordinary. THE PRECISE TAX CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND UPON THE FACTS OF YOUR SITUATION. YOU SHOULD CONSULT YOUR TAX 2 ADVISOR. See "Special Factors--Material Federal Income Tax Consequences." MARKET INFORMATION o In December 1999 and January 2000, the purchaser acquired a total of 1,121.2 units from two investment management professionals at a price of $600 per unit. o According to The Partnership Spectrum, an independent third-party industry publication, for the period between October 1, 1999 and November 30, 1999, ten units traded at $450 per unit. o In a tender offer completed in June 1999, the purchaser acquired approximately 41.2% of the outstanding units at $550 per unit, while in April 1999 a third party had offered $425 per unit. See "Information About the Partnership, Its General Partners and Their Affiliates--Market for the Units." RIGHTS OF APPRAISAL Neither Massachusetts law nor the partnership agreement grants you appraisal rights, without regard to how you vote (or abstain) at the special meeting. See "The Special Meeting--Appraisal Rights." INFORMATION ON VOTING PLEASE READ THIS DOCUMENT IN FULL o Carefully read and consider the information contained in this document. o Indicate on your proxy card how you want to vote and mail your signed and dated proxy cared in the enclosed return envelope as soon as possible. o You may also fax your completed proxy card to Krupp Funds Group at (617) 423-8919. IF YOU WANT TO CHANGE YOUR VOTE Send in a later-dated, signed voting form to Krupp Funds Group before the special meeting or attend the meeting in person and vote. IF YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON o You should send in your proxy card in any event. o You may request a ticket for admission to the special meeting by marking the appropriate box on the proxy card and returning it no later than , 2000. 3 WHO CAN HELP ANSWER YOUR QUESTIONS After reading through this proxy statement, if you have more questions about the merger, you should contact: KRUPP FUNDS GROUP One Beacon Street Suite 1500 Boston, Massachusetts 02108 Attention: Investor Services Phone: 1-800-25-KRUPP (1-800-255-7877) Fax: (617) 423-8919 4 SPECIAL FACTORS BACKGROUND OF THE MERGER; PURPOSE OF THE TRANSACTION The general partners believe that most unitholders have held their investment in the partnership for longer than their anticipated holding period. While the partnership currently provides investors with a $31.72 annual distribution, other investment opportunities may offer a rate of return that is as good or better than that offered by the partnership. The units are not listed or traded on an exchange or quoted on the National Association of Securities Dealers Automated Quotation System, and no active trading market in the units has developed. Because of the limited trading market for the units, unitholders who wish to sell units may have difficulty doing so, and from time to time, the general partners have been asked by unitholders to provide a means of disposing of their units at a fair price. On April 21, 1999, Madison Liquidity Investors 104, LLC announced an offer to purchase up to five percent of the outstanding units for $425 per Unit, less a $50 transfer fee charged by the partnership and any cash distributions made after April 21, 1999. The Madison offer, together with uncertainties regarding the partnership's properties described below, caused affiliates of the general partners to decide to seek to acquire the units at this time. On May 14, 1999, the purchaser commenced a tender offer to purchase all of the outstanding units for $550 per unit, less any cash distributions made after May 14, 1999. The purchaser chose to make this offer because (a) it was willing to pay a higher price for the units than that offered by Madison, (b) it could offer unitholders the opportunity to benefit from immediate liquidity for all units tendered, (c) it believed it could offer a price that was fair to unitholders and (d) as noted below, it, through its affiliates, is engaged in the business of utilizing capital to, among other things, renovate residential real estate properties. On June 23, 1999, the purchaser completed its tender offer and purchased units representing approximately 41.2% of the outstanding units. In November 1999, representatives of the purchaser decided to continue to proceed with its merger proposal in order to acquire the remaining outstanding units. In December 1999 and January 2000, the purchaser purchased an additional 472 and 649.2 units, respectively, from two investment management professionals, increasing its ownership to approximately 45.9% of the outstanding units. In November 1999, representatives of the purchaser contacted representatives of investment funds affiliated with Equity Resources Group, Inc., the holders of approximately 6.1% of the outstanding units, regarding the possibility of forming a joint venture to acquire the remaining outstanding units. Equity Resources was approached because of its considerable experience in evaluating the benefits and risks associated with continued ownership of the partnership's properties. During November and December 1999, representatives of the purchaser and Equity Resources negotiated the terms of their joint venture, and on January 6, 2000, executed an investment agreement setting forth the terms of their agreements regarding the merger and the operation of the partnership's properties following the merger. See "Related Agreements." In connection with the execution of these agreements, Equity Resources agreed to vote in favor of the merger and the amendment to the partnership's partnership agreement allowing the partnership to complete the merger with the purchaser. Equity Resources also agreed to reinvest their outstanding units as a capital contribution to the purchaser. The purchaser has contacted other unitholders who are engaged in the business of real estate management and development regarding their interest in reinvesting units in the purchaser on the same terms as Equity Resources, but has reached no understandings or agreements. 5 The purpose of the merger is for the purchaser to acquire all of the outstanding units, while providing unitholders with the opportunity to liquidate their investment in the partnership for cash at a fair price. ALTERNATIVES TO THE MERGER The general partners considered two primary alternatives to the merger: (1) the continued ownership of the properties by the partnership and (2) the sale of one or more of the properties by the partnership and the distribution of the net proceeds of the sales to the unitholders. CONTINUATION OF THE PARTNERSHIP The partnership owns and operates the Brookeville apartments in Columbus, Ohio and the Hannibal Grove apartments and Dorsey's Forge apartments in Columbia, Maryland. The Brookeville apartments, the Hannibal Grove apartments and the Dorsey's Forge apartments were constructed in 1972, 1970 and 1970, respectively, and, except for a partial interior renovation of the Brookeville apartments completed in 1998, have not undergone significant renovation. For a description of these properties, see "Information About the Partnership, Its General Partners and Their Affiliates--Description of the Assets." The managing agent of the properties, an affiliate of the general partners and the purchasers, believes that increased competition resulting from newly constructed or renovated housing entering the markets served by the properties is expected to continue over the next several years. In Columbus, Ohio, for example, market research reports state that approximately 10,000 new units are under construction and an additional 16,000 units are proposed. In Columbia, Maryland, approximately 200 new units have entered the market in the past year, with approximately 2,300 units currently undergoing renovation. In March 1999, the managing agent prepared a five-year capital improvement plan setting forth capital improvements that it believed a third-party purchaser of the properties would regard as necessary to maintain the properties' current occupancy and rent levels, subject to inflationary increases, in light of the increased competition in the markets served by the partnership. These capital improvements include interior rehabilitation, replacement of windows, roofs, appliances, piping and HVAC systems, as well as improvements to parking lots, fences and exterior painting. The managing agent originally estimated the aggregate cost of implementing this five-year capital plan to be $10.0 million. However, after re-evaluating the capital plan and in light of the current market and economic conditions, the aggregate cost of implementing the five-year capital plan is currently estimated to be approximately $7.0 million. The managing agent advised the purchaser that in view of the new or newly renovated housing alternatives in the areas served by the properties, the current occupancy rates enjoyed by the partnership might not be sustained unless the capital plan is implemented, particularly since many of the newer residential units will have amenities such as fitness centers, tennis courts and swimming pools that the two Columbia properties do not. The general partners are presently implementing the capital plan, which they expect to complete over a five-year period. Implementation of the capital plan will require the investment of additional equity capital, additional borrowings and/or the reduction of future cash distributions from the partnership. As noted above, the general partners believe that the duration of most unitholders' investments in the partnership's properties has exceeded their initial estimated holding periods, and that providing 6 a means for unitholders to liquidate their investment is consistent with the desire of many of the unitholders, particularly in light of the limited and sporadic secondary market for the units. SALE OF THE PARTNERSHIP'S PROPERTIES The general partners believe that a sale of the properties owned by the partnership through a solicitation of third-party bids or an auction would not necessarily result in a more favorable transaction for unitholders. A third-party transaction could require the payment of transaction costs far in excess of costs incurred by the partnership in the merger, all of which would be borne by the partnership, and these costs would reduce the amount received by each unitholder in respect of his or her units. The partnership would likely be required to retain a portion of the proceeds of a third-party sale to cover the expenses related to ongoing administration of the partnership and to fund possible post-closing liabilities to a third-party purchaser. Under the terms of the proposed merger agreement, the partnership will not make any representations regarding its properties, and following the completion of the merger, unitholders' proceeds will not be reduced by claims relating to contingent liabilities of the properties. Although the general partners do not believe that the solicitation of third-party bids would necessarily result in a more favorable transaction for unitholders, there is no assurance that unitholders would not ultimately receive more for their units as a result of the sale of the properties to a third party who was able to consummate this type of a transaction. TENDER OFFER From time to time, unitholders have been approached by investors seeking to acquire units. Based on analyses of the proposals and general market information, the general partners have concluded that these offers are generally made at prices that are significantly less than the fair value per unit. For instance, in the Madison tender offer described above, unitholders were offered a price of $425 per unit, approximately 41.2% less than the merger price offered by the purchaser. The general partners recommended that unitholders decline this offer. FAIRNESS OF THE MERGER THE GENERAL PARTNERS RECOMMEND THAT UNITHOLDERS VOTE FOR THE MERGER AND THE RELATED TRANSACTIONS. Although the amount to be paid to unitholders following the merger is not the result of arm's-length negotiations between the purchaser and the partnership and is subject to conflicts of interest, the general partners believe that the per unit merger price and the other terms of the merger are fair to unitholders. Therefore, the general partners recommend that unitholders vote "FOR" the merger. The general partners based their conclusion on the following: o The merger price is based on the analyses conducted by the purchaser, employing varying assumptions that the purchaser believes are reasonable in light of the general economic conditions, condition of the partnership's properties and the markets in which the properties are located. o Implementation of the capital plan described above will require the investment of additional equity capital, additional borrowings and/or the reduction of future cash distributions from the partnership. This may result in the partnership increasing the amount of debt it maintains relative to its assets and equity, thereby presenting an increased financial risk to unitholders that is higher than what they have assumed previously. 7 o The purchaser's belief that changing market conditions, including as a result of new construction or renovations to existing properties competing with the properties, may adversely affect the future cash flows generated by the properties unless capital improvements are effected. o The purchaser recently acquired a total of 1,121.2 units at $600 per unit from two investment management professionals, which may be an indication of the current market value of the units. o The fact that the $600 per unit merger price is $175, or 41.2%, higher than the $425 per unit price offered by Madison in its April 1999 tender offer. The per unit merger price is also $50 per unit, or nine percent, higher than the $550 per unit price offered by the purchaser in its May 1999 tender offer. See "--Recent Unit Sales; Tender Offer." o The merger will eliminate the uncertainties relating to the amount and timing of any liquidation of the partnership following the sale of its properties, which will depend upon the then-current markets for the properties, as well as upon amounts that would be required to be reserved to satisfy contingent liabilities associated with these sales. Furthermore, by transferring their units for cash now, unitholders will have the opportunity to redeploy investment assets into alternative and potentially more liquid investments. o Because there is no formal trading market for the units, they can be difficult to sell. The merger provides unitholders with the opportunity to immediately sell their units for what the general partners believe is a fair price without the commissions or broker's fee of a secondary market sale and without any transfer fees. o The merger price will be paid in cash, and will not be reduced by the amount of any distribution made or declared by the partnership before completing the merger. o Because the transaction is structured as a merger, cash proceeds will be paid directly to unitholders by the purchaser and all of the assets and liabilities of the partnership will be transferred to the purchaser immediately upon the merger. As a result, the partnership is not required to continue operations or to escrow funds to fund possible post-closing liabilities. A sale of the properties, as opposed to a merger, would require the partnership to continue operating for an uncertain time period before distributing the cash consideration received to the unitholders. Additionally, it would be difficult to predict with any precision the amount ultimately realized by unitholders, as the amount of post-closing liabilities is difficult to determine. o Although the partnership's properties are in good condition, they are now more than 27 years old and will require refurbishing in the future. o The merger is not subject to a financing contingency, which increases the likelihood that unitholders who desire to realize liquidity will be able to do so. o As a result of the purchaser's affiliation with the general partners, the purchaser is familiar with the condition of the partnership's properties and thus is willing to assume all of the assets and liabilities of the partnership on terms and conditions that would be extremely uncommon for a third-party purchaser, including the absence of representations and warranties about the properties, the absence of any indemnification protection and the lack 8 of any financing contingency. If the partnership were to sell the properties to a third party, a portion of the proceeds would have to be retained to fund contingent liabilities, thereby delaying unitholders' ability to realize the full value of the sale. In determining the fairness of the merger price to unitholders, and related terms to unitholders, the general partners did not find it practicable to quantify or otherwise attach relative weights to the specific factors described above. DISADVANTAGES AND RISKS ASSOCIATED WITH THE MERGER Unitholders should note that the affiliates of the general partners may benefit from the merger. This is most likely to occur if the properties are ultimately sold by the purchaser for an amount greater than the per unit price being offered to unitholders. The general partners considered the following potential disadvantages and risks to the unitholders if the merger is completed: o Continued ownership of the units could be more economically beneficial to unitholders than the merger if the value of the properties were to increase. o A more favorable transaction might be available from a third-party purchaser of the partnership's properties now or in the future. o No independent committee or entity negotiated, reviewed or evaluated the merger consideration offered by the purchaser. o The purchaser already has sufficient voting power to approve the merger proposal without the consent of any other unitholder. o Unitholders will not be offered appraisal rights or dissenters' rights in connection with the merger. o Unitholders may incur tax liabilities as a result of the merger. CONFLICTS OF INTEREST The general partners faced conflicts of interest with respect to the merger that may be in conflict with the economic interest of the unitholders. Specifically, there is a conflict between the desire of the purchaser, an affiliate of the general partners, to pay unaffiliated unitholders a lower price in exchange for units cancelled in the merger and the desire of unaffiliated unitholders to receive a higher price in exchange for their units. The general partners also have an indirect economic interest in completing the merger, as opposed to a sale or liquidation of the partnership's assets to a third party, because a third-party sale or liquidation would eliminate (a) the distributions received by the general partners in respect of their indirect interests in the partnership's properties and (b) the fees paid to their affiliates for services provided to the partnership. See "Information About the Partnership, Its General Partners and Their Affiliates--Related Party Transactions." Unitholders were not independently represented in the negotiation of the merger agreement and no independent person or committee has evaluated or rendered any opinion with respect to the fairness of the per unit price to be paid to unitholders. 9 LIQUIDATION ANALYSIS; DETERMINATION OF MERGER PRICE The purchaser determined that the fair value of each unit falls within a range of $573 to $634 based upon the liquidation analysis described below. The purchaser calculated this range on the basis of its estimate of the proceeds that could be realized from the sale of the partnership's properties and the partnership's other assets, less mortgage debt and other liabilities. To determine the prices at which the properties could be sold by the partnership, the purchaser applied capitalization rates between 9.45% and 9.85% to varying projections of the net cash flow expected to be generated by the properties in 2000, adjusted to reflect factors that a third-party purchaser would consider relevant in evaluating the purchase of the properties, and then subtracted amounts related to implement the capital improvements plan discussed above under "--Alternatives to the Merger--Continuation of the Partnership" and transaction costs associated with the purchase of the properties. In deriving the net cash flow attributable to the properties, the purchaser made the following adjustments to and estimates of cash flow: (a) an increase to net operating income to reflect varying growth rates between 1.5% and 5.5% per annum over 1999 levels, offset by vacancy at a rate of 7.0%; and (b) adjustments to expenses associated with the properties following a sale to a third party, including insurance costs, replacement reserves and management fees. This resulted in estimated aggregate cash flows for the properties between $3.85 million and $4.0 million, against which the purchaser applied capitalization rates between 9.45% and 9.85% and deducted (a) estimated closing costs associated with the sales of 3% and (b) the estimated cost of capital improvements of approximately $7.0 million to arrive at an aggregate gross value of the properties between $32.0 million and $33.47 million. The addition of approximately $1.8 million of cash and other assets of the partnerships less $18.3 million of mortgage debt, $330,000 of expected prepayment penalties and $705,000 of other liabilities associated with the partnership, resulted in a value range for the units between $573 and $634. Projections are by their nature speculative and no assurance can be given that a projection will accurately reflect the rental income actually achieved. A capitalization rate is a rate of return commonly applied by buyers of real estate to property income to determine the present value of property income. The choice of capitalization rate is subjective and based on, among other things, a buyer's evaluation of a property's location and condition. The lower the capitalization rate utilized, the higher the value produced, and the higher the capitalization rate utilized, the lower the value produced. The purchaser utilized capitalization rates between 9.45% and 9.85% to determine the value of the partnership's properties. The Madison offer described above utilized a capitalization rate of 12.43%, which Madison at the time stated was within the range of capitalization rates employed in the marketplace for apartment buildings of the properties' age and quality. In connection with a third-party tender offer in 1996, the general partners estimated the value of a unit at $661. This valuation was based on market and other conditions at the time, and did not reflect the current market conditions and the expenditures that would be required to implement the capital improvements plan. Although the purchaser believes that the values calculated utilizing the method described above fairly represent the value of the partnership's properties and the value of the units, an actual sale of the properties at this time or in the future might generate a sale price either higher or lower than the range of values calculated above. Further, the purchaser believes that the per unit proceeds which would be realized by unitholders upon a liquidation of the properties would be further reduced by contingent liabilities associated with the properties. The range of values estimated above does not take into account timing considerations, market uncertainties and legal and other expenses that would be incurred in 10 connection with a liquidation of the partnership. An actual liquidation of the partnership now, or in the future, might generate a higher or lower value for each unit. The general partners have not yet determined how the partnership would respond to the market developments described above in the event the proposed merger and the transactions contemplated by it are not completed. However, in the event the general partners determine to sell the properties in the future, the proceeds of a sale would be subject to uncertainties in the real estate and financing markets at the time, as well as to possible adverse effects upon the cash flows generated by the properties by the additions to the housing base in the markets served by the properties. In view of the developments occurring in the markets described above and the expenditures required by the capital improvements plan, the purchaser believes that the liquidation analysis described above is the most appropriate valuation methodology. BOOK VALUE Because the partnership's principal assets, its real estate properties, are carried on the partnership's balance sheet at their historical cost and have been depreciated over the sixteen years of the partnership's existence, the net book value of a unit is a negative number, and therefore the purchaser does not believe net book value is meaningful in determining the fairness of the merger price. RECENT UNIT SALES; TENDER OFFER The $600 per unit price to be paid to unitholders in the merger is almost double the $315 per unit tender offer made by Krescent Partners L.L.C. on November 26, 1996 and $175, or 41.2%, higher than the Madison offer. In addition, the merger price is $50 per Unit higher than the $550 per unit price offered by the purchaser in its May 1999 tender offer and to Smithtown Bay, L.L.C. a professional investor which sold 472 units to the purchaser in December 1999 at the $550 per Unit price. In January 2000, the purchaser bought 649.2 units from Krescent Partners at a price of $600 per unit. In addition, Smithtown Bay is entitled to receive an additional $50 per unit for the units it previously sold to the purchaser (the difference between the $600 per unit merger price and the $550 per unit price Smithtown Bay received for its units). EFFECTS OF THE TRANSACTION EFFECT ON THE PARTNERSHIP If the merger is approved and the remaining conditions to the merger are met or waived, the merger will be effected by filing certificates of merger with the Delaware Secretary of State and the Massachusetts Secretary of State. As a result, the assets and liabilities of the partnership will be transferred to the purchaser as the surviving entity in the merger and the partnership will cease to exist. The benefits and risks associated with ownership of the properties will then rest solely with the purchaser. Following the merger, the partnership will cease to be a public company and will not file reports under the Securities Exchange Act of 1934 or be subject to the rules under it. 11 EFFECTS ON THE UNITHOLDERS As a result of the merger, each unit of the unaffiliated unitholders will be cancelled in exchange for a $600 cash payment, without interest, payable by the purchaser to the unitholder upon receipt by the purchaser of the appropriate forms from the unitholder. Following the completion of the merger, the unitholders will cease to be owners of the partnership and will no longer have the potential benefits and risks associated with ownership. Unitholders will forego the opportunity to continue to participate as investors in the partnership, including the right to distributions and potential appreciation of its assets over time. Unitholders will recognize a gain or loss on the conversion of units into cash in the merger to the extent of the difference between the amount realized and the unitholder's adjusted basis in the units sold. See "--Material Federal Income Tax Consequences." EFFECTS ON THE GENERAL PARTNERS AND THE PURCHASER The general partners will not receive any payment in exchange for the redemption of their general partnership or original limited partnership interests nor will they receive any fees from the partnership in connection with the merger. Following the merger, the purchaser will continue to pay management fees to an affiliate of the general partner as described below under "Information About the Partnership, Its General Partners and Their Affiliates--Related Party Transactions." An affiliate of the general partners will manage and control and have an approximate 89% ownership interest in the purchaser and thus will benefit from any returns the purchaser receives from its investment in the partnership's properties, whether from operating the properties, selling the properties or otherwise. FAILURE TO APPROVE THE MERGER If the merger is not approved by unitholders, the general partners will continue to operate the partnership in accordance with the terms of the partnership agreement and in fulfillment of their fiduciary duties. The partnership may (1) continue to hold the partnership's properties, (2) refinance any or all of the properties and utilize the proceeds of the refinancing to implement the capital improvements plan, (3) solicit offers from potential purchasers to acquire any or all of the properties, through bid solicitation, auction or otherwise or (4) pursue other strategies intended to enhance the value of the unitholders' investment in the partnership. PLANS OR PROPOSALS BY PARTNERSHIP OR AFFILIATES FOLLOWING THE MERGER Following the completion of the merger, the purchaser intends to review the partnership and its assets, the capital improvements plan, distribution policy, capitalization, operations, properties, policies, management and personnel and consider what further changes, if any, would be desirable in light of the circumstances which then exist. Based on its evaluation, the purchaser may finance all or a portion of the capital improvements by the following means, alone or in combination: (a) an equity or capital contribution to the partnership, (b) a refinancing of the properties or (c) a sale of a portion of the partnership's assets. The purchaser reserves the right to accelerate, extend or amend the capital improvements plan, and may elect not to implement the improvements or any portion of them. The purchaser's determinations will depend on, among other things, general economic conditions, the conditions of the real estate markets in which the properties are located, the physical condition of the partnership's properties at the time the proposed merger is completed, the properties' vacancy rates at the time the proposed merger is completed, prepayment penalties 12 associated with each of the respective loan facilities encumbering the properties and the terms available to the partnership for new financing arrangements. The purchaser intends to review the partnership's policy with respect to distributions and may, based on its assessment, reduce or eliminate the distributions paid by the partnership. The purchaser does not have any specific plans for the sale or disposition of the properties or any material change in the business of the partnership following the merger. The purchaser will, however, evaluate any proposals and may sell or dispose of its assets if attractive terms are offered. Presently, there are no arrangements or proposals to do so. Following the completion of the proposed merger, the purchaser presently intends to conduct the business and operations of the partnership substantially as they are currently conducted. Under the agreements entered into in connection with the merger, Equity Resources, which following the merger will own approximately 11% of the purchaser, may require the managing members of the purchaser to cause the purchaser to attempt to sell the partnership's properties at any time during the six-month period following the fifth anniversary of the completion of the merger. See "Related Agreements." FINANCING OF THE MERGER SOURCE OF FUNDS The aggregate consideration to be paid to unitholders is approximately $7.2 million. Of this amount, up to $1.0 million will be in the form of a capital contribution from KRF Company, L.L.C. to the purchaser and the remainder will be obtained from the anticipated refinancing of existing mortgage indebtedness, to approximately 75% to 85% leverage, of the partnership. The purchaser has had discussions with several lenders regarding such mortgage indebtedness, but no financing commitments have been obtained from any lender. KRF Company has previously contributed 10,826 units as a capital contribution to the purchaser while Equity Resources will contribute 1,524 units currently held by them in the partnership as a capital contribution to the purchaser. KRF Company will finance its capital contributions to the purchaser through capital contributions from an affiliate of the general partners which has available sufficient amounts of liquid capital necessary to fund the obligations of KRF Company to the purchaser in respect of the merger consideration. COSTS ASSOCIATED WITH THE MERGER It is expected that approximately $7.2 million will be required to finance the merger, and approximately $172,500 will be required to pay related fees and expenses. The following is an itemized statement of the approximate amount of all expenses incurred or to be incurred in connection with the merger: Legal fees............................................. $ 50,000 Printing and mailing costs............................. 15,000 Accounting............................................. 10,000 Title, survey and environmental reports................ 27,000 Title insurance........................................ 46,000 Proxy solicitation fees................................ 22,000
13 Other, including filing fees........................... 2,500 --------- Total.................................................. $ 172,500 =========
MATERIAL FEDERAL INCOME TAX CONSEQUENCES The following summary is a general discussion of material federal income tax consequences of a sale of units under the merger assuming that the partnership is a partnership for federal income tax purposes and that it is not a "publicly traded partnership" as defined in Section 7704 of the Internal Revenue Code of 1986. This summary is based on the Internal Revenue Code, applicable Treasury Regulations under it, administrative rulings, practice and procedures and judicial authority as of the date of this proxy statement. All of the foregoing are subject to change, and any change could affect the continuing accuracy of this summary. This summary does not discuss all aspects of federal income taxation that may be relevant to a particular unitholder in light of the unitholder's specific circumstances or to specific types of unitholders subject to special treatment under the federal income tax laws, for example, foreign persons, dealers in securities, banks, insurance companies and tax-exempt organizations. This summary also does not discuss any aspect of state, local, foreign or other tax laws. Sales of units under the merger will be taxable transactions for federal income tax purposes and may also be taxable transactions under applicable state, local, foreign and other tax laws. EACH UNITHOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO THE UNITHOLDER OF SELLING UNITS UNDER THE MERGER. CONSEQUENCES TO UNITHOLDERS A unitholder will recognize gain or loss on a sale of units under the merger equal to the difference between (1) the unitholder's "amount realized" on the sale and (2) the unitholder's adjusted tax basis in the units sold. The "amount realized" with respect to units sold under the merger will be a sum equal to the amount of cash received by the unitholder for the units plus the amount of partnership liabilities allocable to the units, as determined under Internal Revenue Code Section 752. A unitholder's adjusted tax basis in units sold under the merger will vary depending upon the unitholder's particular circumstances, and will be affected by allocations of partnership income, gain or loss, and by any cash distributions made by the partnership to a unitholder with respect to its units. In this regard, unitholders will be allocated a pro rata share of the partnership's taxable income or loss with respect to units sold under the merger through the effective date of the sale. In general, the character, as capital or ordinary, of a unitholder's gain or loss on a sale of units under the merger will be determined by allocating the unitholder's amount realized on the sale and the unitholder's adjusted tax basis in the units sold between "Section 751 items," which are "inventory items" and "unrealized receivables" (including depreciation recapture) as defined in Internal Revenue Code Section 751, and non-Section 751 items. The difference between the portion of the unitholder's amount realized that is allocable to Section 751 items and the portion of the unitholder's adjusted tax basis in the units sold that is so allocable will be treated as ordinary income or loss. The difference between the unitholder's remaining amount realized and remaining adjusted tax basis will be treated as capital gain or loss assuming the units were held by the unitholder as capital assets. A unitholder's capital gain or loss, if any, on a sale of units under the merger will be treated as long-term capital gain or loss if the unitholder's holding period for the units exceeds one year. 14 Under current law, which is subject to change, long-term capital gains of individuals and other non-corporate taxpayers generally are taxed at a maximum marginal federal income tax rate of 20%, or 25% on recapture of the amount of accelerated depreciation on real property, whereas the maximum marginal federal income tax rate for other income of these persons is 39.6%. Capital losses are deductible only to the extent of capital gains, except that non-corporate taxpayers may deduct up to $3,000 of capital losses in excess of the amount of their capital gains against ordinary income. Excess capital losses generally can be carried forward to succeeding years - a corporation's carryforward period is five years and a non-corporate taxpayer can carry forward such losses indefinitely; in addition, corporations, but not non-corporate taxpayers, are generally allowed to carry back excess capital losses to the three preceding taxable years. Under Internal Revenue Code Section 469, a non-corporate taxpayer or personal service corporation can deduct passive activity losses in any year, other than the year in which the taxpayer's entire interest in the activity is disposed of, only to the extent of such person's passive activity income for such year, and closely held corporations may not offset these losses against so-called "portfolio" income. A unitholder with "suspended" passive activity losses, i.e., net tax losses in excess of statutorily provided "phase-in" amounts, from the partnership generally will be entitled to offset these losses against any income or gain recognized by the unitholder on a sale of his units under the merger. Gain realized by a foreign unitholder on a sale of a unit under the merger will be subject to federal income tax. Under Section 1445 of the Internal Revenue Code, the transferee of a partnership interest held by a foreign person generally is required to deduct and withhold a tax equal to 10% of the amount realized on the disposition. The purchaser will withhold 10% of the amount realized by a foreign unitholder from the price payable to the foreign unitholder. Amounts withheld would be creditable against a foreign unitholder's federal income tax liability and, if in excess of the liability, a refund could be obtained from the Internal Revenue Service by filing a U.S. income tax return. Unless an exemption applies under applicable law and regulations concerning "backup withholding" of U.S. federal income tax, the purchaser will be required to withhold, and will withhold, 31% of the gross proceeds otherwise payable to a unitholder or other payee pursuant to the merger unless the unitholder or other payee provides its taxpayer identification number (social security number or employee identification number) and certifies that this number is correct, or certifies that it is awaiting a taxpayer identification number. To prevent the imposition of backup federal income tax withholding on payments made to certain unitholders with respect to the purchase price of units purchased under the merger, a tendering unitholder must provide the purchaser with the holder's correct taxpayer identification number and certify that the unitholder is not subject to backup federal income tax withholding by completing the Substitute Form W-9 included in the letter of transmittal. THE SPECIAL MEETING SPECIAL MEETING; RECORD DATE Under Massachusetts partnership law and the partnership agreement, the merger and the amendment requires approval of a majority of the holders of outstanding units. A special meeting of the unitholders will be held on , 2000, at , at local time, to consider and vote upon the merger and the amendment to the partnership's partnership agreement. In accordance with the partnership agreement, the close of business on , 2000 has been established as the record date 15 for the special meeting. Under the terms of the partnership agreement, only the unitholders of record on the record date are eligible to vote those units on the proposals set forth in this proxy statement. A unitholder of record as of the record date will retain the right to vote on the proposals set forth in this document even if the unitholder sells or transfers its units after the record date. As of the record date, the partnership had 25,000 units outstanding and entitled to vote, held of record by 588 unitholders. A list of the unitholders entitled to vote at the special meeting will be available for inspection at the executive offices of the partnership at One Beacon Street, Suite 1500, Boston, Massachusetts 02108. Under the partnership agreement, valid voting requires a quorum constituted by a majority in interest of the unitholders voting at the special meeting in person or by proxy. Even if a unitholder intends to attend the special meeting in person, they are requested to complete and return the enclosed proxy card promptly. PROCEDURES FOR COMPLETING PROXIES Accompanying this proxy statement is a proxy card solicited by the general partners for use at the special meeting. When a proxy card is returned, properly executed, the units represented by it will be voted at the special meeting by the general partners in the manner specified on the proxy card. It is important that unitholders mark, sign and date their proxy card and return it either in the enclosed, postage-prepaid envelope or by facsimile as instructed below to Krupp Funds Group as soon as possible. When voting a proxy by facsimile, both sides of the proxy must be transmitted. Delivery of a proxy does not prohibit unitholders from attending the special meeting. To be properly executed, the proxy card must be signed by and bear the date of signature of the unitholder voting the units represented by the card. All questions as to the form of documents and the validity of consents will be determined by the general partners, which determinations shall be final and binding. The general partners reserve the right to waive any defects or irregularities in any proxy. Each unit entitles the holder thereof to one vote with respect to the proxies solicited by this document. Only unitholders of record on the record date may grant a proxy with respect to their units. IF UNITS STAND OF RECORD IN THE NAMES OF TWO OR MORE PERSONS, ALL PERSONS MUST SIGN THE PROXY CARD. WHEN SIGNING AS AN ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE THE FULL TITLE OF THE POSITION HELD. IF A CORPORATION, THE PROXY SHOULD BE SIGNED BY THE PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN THE PARTNERSHIP'S NAME BY AN AUTHORIZED PERSON. IF A UNITHOLDER'S UNITS ARE HELD IN THE NAME OF A BROKERAGE FIRM, BANK, NOMINEE OR OTHER INSTITUTION, ONLY THIS INSTITUTION CAN SIGN A PROXY WITH RESPECT TO THE UNITS AND CAN DO SO ONLY AT THE UNITHOLDER'S DIRECTION. ACCORDINGLY, IF ANY UNITS ARE SO HELD, UNITHOLDERS SHOULD CONTACT THEIR ACCOUNT REPRESENTATIVE AND GIVE INSTRUCTIONS FOR A PROXY TO BE SIGNED WITH RESPECT TO THEIR UNITS. A unitholder in favor of the merger and the amendment to the partnership's partnership agreement should mark the "for" box on the enclosed proxy card, date and sign the proxy and either mail it promptly in the enclosed postage-prepaid envelope or fax a copy to Krupp Funds Group as instructed below. If a proxy card is executed but no indication is made as to what action is to be taken, it will be deemed to constitute a vote "for" the merger and "for" the amendment. By consenting to the merger and the amendment, the unitholders irrevocably appoint the general partners, or their designee, as their attorney-in-fact to execute and deliver those documents as are necessary to effect the merger and the amendment. 16 Questions and requests for assistance or for additional copies of this proxy statement and the proxy card may be directed to the partnership's solicitation agent, Krupp Funds Group, One Beacon Street, Suite 1500, Boston, Massachusetts 02108, Attention: Investor Services, or by telephone at 1- 800-25-KRUPP or facsimile at 617-423-8919. Unitholders should also use this fax number for delivery of their completed proxy cards. In addition to soliciting proxies by mail, proxies may be solicited in person and by telephone or telegraph. Unitholders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the proxy solicitation. VOTES REQUIRED Under the terms of the partnership agreement, the vote of the unitholders owning a majority of the units is necessary to approve the amendment to the partnership agreement. Under Massachusetts law, the vote of the unitholders owning a majority of the units is necessary to approve the merger. Each unit entitles the holder thereof to one vote on each matter submitted to a vote of the unitholders. If a majority in interest of the unitholders consent to the merger and the amendment and certain other conditions are met, the merger will be completed. If both the merger and the amendment are not approved by the unitholders owning a majority of the units, the merger will not be completed. The purchaser owns approximately 45.9% of the outstanding units, while Equity Resources, which holds approximately 6.1% of the partnership's outstanding units, has agreed to vote for the approval of the merger and the amendment to the partnership's partnership agreement. Moreover, because one of the general partners has entered into agreements with the holders of approximately 1,265 units which would require them to vote their units in proportion to the votes of all other unitholders who vote on a matter, the purchaser together with Equity Resources has voting power over approximately 54.6% of the outstanding units. Units held by Krupp LP, as a limited partner of the partnership, will not be voted at the special meeting or included in the determination of whether a quorum exists. The consent of the unitholders holding a majority in interest of the outstanding units is necessary to complete the proposed merger and to adopt the amendment. Failure to return a proxy in a timely manner or to vote at the special meeting, abstention from voting or a broker non-vote will each have the same effect as a vote "against" the merger and "against" the amendment. Therefore, unitholders are asked to please date, sign and promptly return their proxy cards. SOLICITATION PROCEDURES The Partnership has retained Krupp Funds Group to act as solicitation agent and for advisory services in connection with this proxy statement. In connection therewith, Krupp Funds Group will be paid reasonable and customary compensation and will be reimbursed for their reasonable out-of-pocket expenses, as described above under "Special Factors--Financing of the Merger--Costs Associated with the Merger." The partnership has also agreed to indemnify Krupp Funds Group against specified liabilities and expenses including liabilities and expenses under federal securities laws. The partnership will not pay any fees or commissions to any broker or dealer or other person, other than to Krupp Funds Group, for soliciting proxies in this solicitation. Banks, brokerage houses and other custodians, nominees and fiduciaries will be requested to forward the solicitation materials to the customers for whom they hold units, and the partnership will reimburse them for reasonable mailing and handling expenses incurred by them in forwarding proxy materials to their customers. 17 REVOCATION OF PROXIES A proxy executed and delivered by a unitholder may subsequently be revoked by submitting written notice of revocation to the partnership. A revocation may be in any written form, including a later-dated proxy card, validly signed by a unitholder as long as it clearly states that the unitholder's proxy previously given is no longer effective. To prevent confusion, the notice of revocation must be dated. Notices of revocation should be delivered to Krupp Funds Group at the address or by facsimile as listed above. A unitholder may also revoke its proxy by attending the special meeting and voting in person. If a unitholder signs, dates and delivers a proxy to the partnership and, thereafter, on one or more occasions, signs and delivers a later-dated proxy, the latest-dated proxy card is controlling as to the instructions indicated in that proxy and supersedes the unitholder's prior proxy as embodied in any previously submitted proxy card. APPRAISAL RIGHTS Neither the partnership agreement nor Massachusetts law provides rights of appraisal or similar rights to unitholders whether or not unitholders abstain or vote for or against the merger. As a result, if unitholders holding a majority of the units approve the merger and if the merger is completed, the partnership will be merged with and into the purchaser and all unaffiliated unitholders, including those who do not approve the merger, will receive the $600 per unit merger price for each of their units in accordance with the terms of the merger agreement. THE MERGER AGREEMENT The merger agreement between the partnership and the purchaser will be entered into only if the unitholders approve the amendment to the partnership's partnership agreement. Under the merger agreement, the merger of the partnership with and into the purchaser will not take place unless the unitholders approve the merger. If the merger is approved at the special meeting, the general partners on behalf of the partnership intend to enter into an agreement substantially in the form of the merger agreement. The material provisions of the merger agreement are summarized below. Although complete in all material respects, this summary is qualified by reference to the full text of the merger agreement attached to this proxy statement as Annex A. Unitholders are encouraged to read the merger agreement carefully. If all of the conditions in the merger agreement are met, principally the approval by the unitholders of the merger, at the effective time of the merger, the partnership will be merged with and into the purchaser, with the purchaser continuing as the surviving entity. The purchaser, as the surviving entity, will succeed to and possess all of the rights, privileges and powers of the partnership, whose assets shall vest in the purchaser, and who will then be liable for all of the liabilities and obligations of or any claims or judgments against the partnership. CLOSING DATE; EFFECTIVE TIME OF THE MERGER The merger will become effective at 5:00 p.m. on the date on which the latter of (1) the filing of the certificate of merger with the Office of the Secretary of State of Delaware and (2) the filing of the certificate of merger with the Secretary of State of the Commonwealth of Massachusetts. EFFECTS OF THE MERGER At the effective time, by virtue of the merger, and without any further action on the part of anyone, all partnership interest outstanding immediately beforehand, including units, general 18 partnership interests and original limited partnership interests, will be cancelled. Each unit owned by the unitholders, other than Equity Resources, or those who are not affiliates of the purchaser or the general partners, will be automatically converted into a right to receive, in exchange for each unit, $600 in cash, without interest. Immediately before the effective time, 1,524 partnership interests (whether general or limited) will be contributed to the purchaser for membership interests in the purchaser. PAYMENT The merger price will be paid to unaffiliated unitholders by the purchaser promptly after the effective time. Interest will not accrue on amounts owed to unaffiliated unitholders. Payments will be made only to the unaffiliated unitholder in whose name units are registered on the books of the partnership at the effective time. Neither the purchaser nor any other party will be liable to any unitholder for any merger consideration or other payments made to a public official under applicable abandoned property laws. The purchaser will be entitled to deduct and withhold from the merger consideration paid to a unitholder any taxes or other amounts required by law, including Sections 3406 and 1445 of the Internal Revenue Code of 1986. Under federal law, to the extent that amounts are withheld, these amounts will be treated as having been paid to a unitholder for purposes of the merger agreement. Beginning at the effective time, there will be no further transfers of any units on the books of the partnership. Each unitholder whose units were converted and cancelled will be deemed to have withdrawn as a limited partner of the partnership. Unitholders will then have no further interest in the partnership or the purchaser, including any allocations or distributions of income, property or otherwise, other than the right to receive the merger price per unit. Following the effective time, the officers of the purchaser, as the surviving entity in the merger, will terminate the partnership's reporting obligations with the Securities and Exchange Commission. AUTHORITY AND CONSENT OF THE PURCHASER The purchaser has informed the partnership that the execution, delivery and performance of the merger agreement by the purchaser and the completion of the transactions contemplated by it have been duly authorized by the purchaser's members as necessary. REPRESENTATIONS AND WARRANTIES OF THE PARTIES The merger agreement contains no representations and warranties. CONDITIONS TO THE MERGER Before the merger is completed, the following must occur: o the holders of a majority of the outstanding units must approve the amendment in accordance with the partnership agreement; o the holders of a majority of the outstanding units must approve the merger agreement in accordance with the partnership agreement and Massachusetts law; and o any consent, approval or waiver of any third party required in order for the purchaser or the partnership to complete the merger must be obtained. 19 In addition, unless the relevant condition is waived by the purchaser and the partnership, the merger will not be completed if any of the following occur: o the enactment, promulgation or enforcement by any governmental entity of a statute, regulation or injunction which prohibits or restrains the merger or subjects any party to substantial damage as a result of the merger; and o a change or event which has or could be reasonably expected to either (a) cause a material adverse effect to the business, condition, financial or otherwise, or result of operations of the partnership or (b) prevent or cause a material delay in the completion of the merger or the performance of the merger agreement by the purchaser or the partnership. TERMINATION The merger agreement may be terminated by the mutual agreement of the purchaser and the general partners at any time before the filing of the certificates of merger. AMENDMENT At any time before the filing of the certificates of merger, the merger agreement may be amended by the joint determination in writing of the purchaser and the general partners. No amendment may be made which would change any term of the certificate of formation or operating agreement of the surviving entity in the merger. WAIVER At any time before the effective time of the merger, whether before or after this proxy statement is mailed, any party may waive compliance with any of the agreements of the other party or conditions to its own obligations contained in the merger agreement. THE SURVIVING ENTITY The certificate of formation, operating agreement and managers and officers of the purchaser will be the certificate of formation, operating agreement and managers and officers utilized by or employed by the purchaser before the merger. RELATED AGREEMENTS In connection with the merger, the purchaser and its sole member, KRF Company, have entered into an investment agreement and voting agreement, each dated as of January 6, 2000, with the investment funds affiliated with Equity Resources. Under the investment agreement, Equity Resources has agreed to reinvest their units in the purchaser as a capital contribution. KRF Company, on the other hand, has previously contributed 10,826 units as a capital contribution and will make a cash contribution to the purchaser of up to $1.0 million. The purchaser and KRF Company, on the one hand, and Equity Resources, on the other hand, further agreed to indemnify the other in connection with any liability arising out of a breach of the investment agreement, while the purchaser agreed to indemnify the parties in connection with any liabilities arising out of any unitholder litigation relating to the merger. To the extent that the indemnification provisions are unenforceable, the parties agreed to contribute additional amounts in satisfaction of any losses to the extent legally permissible. 20 The purchaser may terminate the investment agreement at any time. The investment agreement will terminate automatically if the merger is not completed by August 1, 2000, or, if the members of the purchaser do not make their capital contributions before the parties complete the merger. Under the voting agreement, Equity Resources, which owns approximately 6.1% of the outstanding units, has agreed that at any meeting of the partners of the partnership, however called, and in any action by consent of the limited partners of the partnership, Equity Resources will vote, or cause to be voted, the units held of record or beneficially owned by it in favor of the merger and the amendment to the partnership agreement. Equity Resources further agreed that at any meeting of the partners of the partnership, however called, and in any action by consent of the limited partners of the partnership, Equity Resources will vote, or cause to be voted, in person or by proxy, the units held of record or beneficially owned by it against approval of any proposal made in opposition to or in competition with the merger. In addition, Equity Resources further agreed that, without the consent of the purchaser and KRF Company, Equity Resources would not, either directly or indirectly, offer or otherwise agree to sell, assign, pledge, transfer, exchange or dispose of any units or options, warrants or other convertible securities to acquire or purchase units, whether now or later acquired. Under the terms of the voting agreement, if Equity Resources acquires any additional units, the voting agreement will be applicable to the additional units. In addition, under the terms of the purchaser's organizational documents, upon the request of Equity Resources, the managing members of the purchaser have agreed to cause the purchaser to attempt to sell the partnership's properties at any time during the six-month period following the fifth anniversary of the completion of the merger. THE AMENDMENT TO THE PARTNERSHIP AGREEMENT PURPOSE The purpose of the amendment is to amend the partnership's partnership agreement to permit the partnership to enter into the merger agreement with the purchaser. Except for specifically enumerated transactions, the partnership agreement prohibits the partnership from selling any property to, or entering into any agreement or arrangement with, a general partner or an affiliate of a general partner. Because the purchaser is an affiliate of the general partners and the merger agreement is an agreement which may be considered to be an indirect sale of the partnership's properties, these prohibitions prevent the partnership from entering into the merger agreement with the purchaser. THE AMENDMENT The description of the amendment to the partnership agreement summarized above is qualified in its entirety by reference to the text of the amendment attached to this proxy statement as Appendix B. Unitholders are encouraged to read the annexed amendment carefully. In accordance with the amendment, the parties must enter into the merger agreement after February 1, 2000 and before August 1, 2000. The amendment adds the merger agreement to the list of the transactions which the partnership is permitted to complete with an affiliate of the general partners; otherwise, the amendment does not alter the partnership agreement. 21 INFORMATION ABOUT THE PARTNERSHIP, ITS GENERAL PARTNERS AND THEIR AFFILIATES THE PARTNERSHIP The partnership was organized on April 3, 1982 as a limited partnership under Massachusetts law. The partnership is governed by its partnership agreement, which vests exclusive management and control over the partnership in the general partners, subject to the rights of the unitholders to vote on limited matters. The address of the partnership's principal executive office is at One Beacon Street, Suite 1500, Boston, Massachusetts 02108, and the telephone number is (617) 523-7722. The primary business of the partnership is to acquire, operate and ultimately dispose of its properties. The partnership issued all of its general partner interests to its two general partners, Krupp Corp and Krupp LP. The partnership also issued its original limited partner interests to Krupp LP. On June 4, 1982, the partnership commenced an offering of up to 25,000 units at the price of $1,000 per unit. As of September 29, 1982, the partnership received subscriptions for all 25,000 units and, therefore, the public offering was successfully completed on that date. THE GENERAL PARTNERS The principal business address of each of the general partners is at One Beacon Street, Suite 1500, Boston, Massachusetts 02108. The principal business of each of the general partners is to act as a general partner of the partnership. The directors and principal executive officers of Krupp Corp are Douglas Krupp, George Krupp and David Quade, and the sole shareholders of Krupp Corp are Douglas Krupp and George Krupp. The general partners of Krupp LP are Douglas Krupp, George Krupp and Krupp Corp. Krupp LP owns all of the original limited partnership interests in the partnership. Douglas Krupp co-founded and serves as Co-Chairman and Chief Executive Officer of The Berkshire Companies Limited Partnership, an integrated real estate financial services firm engaged in real estate acquisitions, mortgage banking, investment sponsorship, venture capital investing, financial management, commercial laundry and linen services, and furniture manufacturing and sales. Mr. Krupp has held the position of Co-Chairman since The Berkshire Companies was established as The Krupp Companies in 1969 and he has served as the Chief Executive Officer since 1992. Mr. Krupp serves as a Director of Krupp Government Income Trust and Krupp Government Income Trust-II and he is also a member of the Board of Trustees at Brigham & Women's Hospital. He is a graduate of Bryant College where he received an honorary Doctor of Science in Business Administration in 1989 and was elected trustee in 1990. Mr. Krupp's address is at One Beacon Street, Suite 1500, Boston, Massachusetts 02108. George Krupp is actively involved in the management of The Berkshire Companies and affiliated entities. Mr. Krupp has been an instructor of history at the New Jewish High School in Waltham, Massachusetts since September of 1997. Mr. Krupp attended the University of Pennsylvania and Harvard University and holds a master's degree in History from Brown University. Mr. Krupp's address is at One Beacon Street, Suite 1500, Boston, Massachusetts 02108. David Quade is Executive Vice President and Chief Financial Officer of The Berkshire Group. Prior to joining The Berkshire Group, Mr. Quade was a principal and Chief Financial Officer for 22 eighteen years at Leggat McCall Properties. He received a P.A.P. from Northwestern University Graduate Business School and an M.B.A. and a B.S. from Central Michigan University. DESCRIPTION OF THE ASSETS GENERAL The partnership currently indirectly owns three multi-family apartment complexes--the Brookeville apartments, the Dorsey's Forge apartments and the Hannibal Grove apartments having an aggregate of 990 units. The partnership considers itself to be engaged only in the industry segment of investment in real estate. The partnership's real estate investments are subject to seasonal fluctuations due to changes in utility consumption and seasonal maintenance expenditures. However, the future performance of the partnership will depend upon factors that cannot be predicted. A summary of the partnership's real estate investments is presented below.
Occupancy --------- Average Occupancy For Occupancy as of The Year Ended December 31, Year Total September 30, ----------------------------------- Acquired Units 1999 1998 1997 1996 1995 1994 -------- ----- ---- ---- ---- ---- ---- ---- Brookeville apartments; Columbus, Ohio 1983 424 97% 99% 98% 95% 94% 94% Hannibal Grove apartments; Columbia, Maryland 1983 316 98% 100% 100% 94% 93% 94% Dorsey's Forge apartments; Columbia, Maryland 1983 250 98% 100% 99% 94% 94% 95%
Mortgage notes payable collateralized by the partnership's properties consisted of the following as at September 30, 1999 and December 31, 1998. MORTGAGE NOTES
Principal --------- September 30, Interest Maturity Property 1999 1998 1997 Rate Date -------- ---- ---- ---- ---- ---- Brookeville apartments $ 8,371,635 $ 8,428,579 $ 8,499,549 7.75 1-Aug-28 Dorsey's Forge apartments $ 4,250,379 $ 4,363,601 $ 4,502,891 9.25 3-May-00 Hannibal Grove apartments $ 5,780,516 $ 5,934,497 $ 6,123,931 9.25 3-May-00 ----------- ----------- ----------- Total $18,402,530 $18,726,677 $19,126,371 =========== =========== ===========
BROOKEVILLE APARTMENTS The property is subject to a non-recourse mortgage note in the original amount of $8,755,000, payable to the Department of Housing and Urban Development. The 23 mortgage note requires monthly payments of $60,600 consisting of principal and interest at the rate of 7.75% per annum. In addition, the partnership is required to fund a monthly deposit of $5,158 to an escrow account to be used for future property replacements and improvements and a mortgage insurance premium deposit equal to 0.5% per annum of the outstanding principal balance. The note matures on August 1, 2028. In accordance with HUD regulations, distributions are limited to the extent of surplus cash, as defined by the Regulatory Agreement for Multifamily Housing Projects, dated July 20, 1993 between Brookeville Apartments Limited Partnership and the Secretary of Housing and Urban Development as recorded in the Franklin County Recorder Volume 23319, page J05. The mortgage note payable is collateralized by the property and may be prepaid during the five years beginning August 1, 1998, subject to an annual declining prepayment penalty of 5% to 1%, respectively. After August 1, 2003, there is no prepayment penalty. Based on the borrowing rates currently available to the partnership for bank loans with similar terms and average maturities, the fair value of long-term debt was approximately $9,446,000 at December 31, 1998. HANNIBAL GROVE AND DORSEY'S FORGE APARTMENTS The properties are subject to non-recourse mortgage notes for the Hannibal Grove apartments and Dorsey's Forge apartments in the original amounts of $6,800,000 and $5,000,000, respectively, payable at a rate of 9.25% per annum. Monthly principal and interest payments are $62,333 for Hannibal Grove apartments and $45,833 for the Dorsey's Forge apartments. The notes mature on May 3, 2000 at which time all unpaid principal, $5,653,175, in the case of the Hannibal Grove apartments, and $4,156,746, in the case of the Dorsey's Forge apartments, and any accrued interest are due. The mortgage notes payable are collateralized by the respective properties and may be prepaid. Based on the borrowing rates currently available to the partnership for bank loans with similar terms and average maturities, the fair value of long-term debt for Hannibal Grove apartments and Dorsey's Forge apartments, the fair market value was approximately $6,118,000 and $4,449,000, respectively, at December 31, 1998. Due to restrictions on transfers and prepayment, the partnership may be unable to refinance certain mortgage notes payable at such calculated fair value. The aggregate scheduled principal amounts of long-term borrowings due during the five years ending December 31, 2003 are $437,124, $10,020,473, $89,480, $96,667 and $104,430. During 1998, 1997 and 1996 the partnership paid $1,625,506, $1,659,719 and $1,690,992 of interest, respectively, on its mortgage notes. The partnership is implementing its capital improvements plan in light of the competition in the markets served by the partnership. See "Special Factors--Alternatives to the Merger--Continuation of the Partnership." 24 DISTRIBUTIONS The table below sets forth the distribution made by the partnership to its partners for the nine months ended September 30, 1999 and during the years ended December 31, 1998 and 1997.
Year Ended December 31, Nine Months Ended ----------------------------------------- September 30, 1999 1998 1997 ------------------ ------------------ ------------------- Amount Per Unit Amount Per Unit Amount Per Unit ------ -------- ------ -------- ------ -------- Limited Partners: Investor Limited Partners (25,000 Units outstanding) $793,043 $ 31.72 $594,752 $ 23.79 $396,500 $ 15.86 Original Limited Partner 33,391 25,045 16,697 General Partner 8,348 6,261 4,174 -------- -------- -------- TOTAL $834,782 $626,058 $417,371 ======== ======== ========
Future distributions will be at the discretion of the partnership and will be determined after consideration of a number of factors including, among others, the partnership's financial condition, cash flows and current and anticipated cash needs. OWNERSHIP OF UNITS The number of unitholders as of September 30, 1999 was approximately 588. As of January 28, 2000, the purchaser owned 11,475.2 units, or 45.9 % of the outstanding units. The Krupp Family Limited Partnership-94, KRF Company, the purchaser and the general partners are under the common control of Douglas and George Krupp. As a result of the voting and investment agreements entered into among Equity Resources, the purchaser, the Krupp Family Limited Partnership, KRF Company, Douglas Krupp and George Krupp may also be deemed to each beneficially own indirectly 1,524 units, which is approximately 6.1% of the total number of units. The table below sets forth the beneficial ownership interests in the units held by the investment entities comprising the Equity Resources funds. 25
NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF OF OF TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNER CLASS - -------------- ---------------- ---------------- ----- Investor Limited Partner Units Equity Resource Fund XIX L.P. 413.00 Units 1.65% 14 Story Street Cambridge, MA 02138 Investor Limited Partner Units Equity Resources Bridge Fund 30.00 Units 0.12% 14 Story Street Cambridge, MA 02138 Investor Limited Partner Units Equity Resource General Fund L.P. 40.00 Units 0.16% 14 Story Street Cambridge, MA 02138 Investor Limited Partner Units Equity Resource Fund XVI L.P. 916.00 Units 3.66% 14 Story Street Cambridge, MA 02138 Investor Limited Partner Units Equity Resource Brattle Fund 30.00 Units 0.12% 14 Story Street Cambridge, MA 02138 Investor Limited Partner Units Equity Resource Cambridge Fund 95.00 Units 0.38% 14 Story Street Cambridge, MA 02138 TOTAL 1,524.00 Units 6.1%
MARKET FOR THE UNITS The units are not traded on any established trading market and no market of this type is expected to develop. Thus, limited information is available as to high and low bid quotations or sales prices. In a tender offer completed in June 1999, the purchaser acquired approximately 41.2% of the outstanding units at $550 per unit, while in April 1999 a third party had offered $425 per unit. In December 1999, the purchaser acquired 472 units from Smithtown Bay L.L.C. at the $550 per unit price and, in January 2000, it acquired 649.2 units from Krescent Partners L.L.C. at $600 per unit. Smithtown Bay is entitled to receive an additional $50 per unit for the units it previously sold to the purchaser (the difference between the $600 per unit merger price and the $550 per unit price Smithtown Bay received for its units). According to The Partnership Spectrum, an independent third-party industry publication, for the period between October 1, 1999 and November 30, 1999, a total of ten units traded at $450 per unit. Unitholders are advised that the gross sales prices reported by The Partnership Spectrum do not necessarily reflect the net sales proceeds received by sellers of units, which typically are reduced by commissions and other secondary market transaction costs to amounts less than the reported prices. In addition, other measures of the value of the units may be relevant to unitholders. 26 RELATED PARTY TRANSACTIONS Pursuant to the partnership's partnership agreement, the general partners are entitled to cash distributions in respect of their interests in the partnership. The general partners have received aggregate cash distributions in respect of these interests of $4,174, $4,174 and $6,261 for the years ended December 31, 1996, 1997 and 1998, respectively, and $8,348 for the nine months ended September 30, 1999. Pursuant to certain management agreements, the managing agent of the partnership's properties, an affiliate of the general partners, receives property management fees in return for its management of the properties. The management agreements provide for the payment of monthly management fees payable at the rate of up to 5% of rents and other income actually received by the partnership. In addition, although the general partners and their affiliates do not receive any fees from the partnership for the partnership administration services provided to the partnership, the managing agent and other affiliates of the general partners are reimbursed by the partnership for expenses incurred in connection with the provision of services including accounting, computer, insurance, travel, payroll, and legal services and the preparation and mailing of reports and other communication to unitholders. For the three years ended December 31, 1996, 1997 and 1998, and for the three months ended September 30, 1999, the partnership paid such affiliate property management fees and reimbursement of expenses aggregating $499,495, $536,798, $540,461 and $414,678, respectively. SELECTED FINANCIAL DATA The following table sets forth selected financial information regarding the partnership's results of operations and financial position. This information should be read in conjunction with the Consolidated Financial Statements and Notes to those statements and other financial information included or incorporated by reference in this document. The historical financial data as of and for the quarters ended September 30, 1999 and 1998 have been derived from the unaudited financial statements included in the partnership's Quarterly Report on Form 10-Q for the quarters ended September 30, 1999 and 1998, respectively. The historical financial data for the years ended December 31, 1998, 1997 , 1996, 1995 and 1994 have been derived from audited financial states included in the partnership's Annual Report on Form 10-K for the year ended December 31, 1998. See "Where You Can Find More Information."
NINE MONTHS ENDED, SEPTEMBER 30 YEAR ENDED DECEMBER 31, ------------------- ----------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- Unaudited Total revenues $ 5,872,518 $ 5,674,940 $ 7,608,315 $ 7,280,181 $ 6,628,658 $ 6,352,337 $ 6,215,466 Net income (loss) 439,247 432,967 536,483 (23,224) (446,360) (547,893) (453,031) Net income (loss) allocated to:
27 Investor Limited Partners 417,285 411,318 509,659 (22,063) (424,042) (520,498) (430,380) Per Unit 16.69 16.45 20.39 (0.88) (16.96) (20.82) (17.22) Original Limited Partner 17,570 17,319 21,459 (929) 0 0 (18,121) Net income (loss) allocated to: General partners 4,392 4,330 5,365 (232) (22,318) (27,395) (4,530) Total assets 11,148,667 11,789,516 11,982,905 12,354,768 13,224,310 14,384,144 15,702,150 Long-term obligations 8,259,781 18,405,225 18,289,553 18,726,677 19,126,371 19,491,853 19,827,968 DISTRIBUTIONS: Investor Limited Partners $ 793,043 $ 594,752 $ 594,752 $ 396,500 $ 396,500 $ 297,495 $ 99,132 Per Unit 31.72 23.79 23.79 15.86 15.86 11.90 3.97 Original Limited Partner 33,391 25,045 25,045 16,697 16,697 12,526 4,174 General partners 8,348 6,261 6,261 4,174 4,174 3,132 1,043
The historical performance of the partnership is not necessarily indicative of its future operations. 28 INFORMATION CONCERNING THE PURCHASER AND ITS AFFILIATES THE PURCHASER The purchaser, KRF3 Acquisition Company, L.L.C., is a wholly owned subsidiary of KRF Company whose principal business is to hold limited partnership interests in Krupp Realty Fund, Ltd.-III. The purchaser was initially organized for the purpose of effecting a tender offer for the units of the partnership. In June 1999, the purchaser completed its tender offer and purchased units representing approximately 41.2% of the outstanding units. Since that time, the purchaser has not carried on any activities to date other than those incident to its formation and the transactions contemplated by the merger agreement. The purchaser has no assets and liabilities. The principal office and place of business of the purchaser is One Beacon Street, Suite 1500, Boston, Massachusetts 02108. AFFILIATES OF THE PURCHASER KRF Company was organized to conduct the business and the operations of the purchaser. The principal office and place of business of KRF Company is One Beacon Street, Suite 1500, Boston, Massachusetts 02108. The sole member of KRF Company is The Krupp Family Limited Partnership-94. The Krupp Family Limited Partnership was formed to hold and manage investments for its partners. The general partners of The Krupp Family Limited Partnership are Douglas Krupp and George Krupp. See "Information About The Partnership, Its General Partners and Their Affiliates--The General Partners." The Krupp Family Limited Partnership, KRF Company, the purchaser and the general partners are under the common control of Douglas Krupp and George Krupp. As a result of the voting and investment agreements entered into among Equity Resources, the purchaser, KRF Company, The Krupp Family Limited Partnership, Douglas Krupp and George Krupp may be deemed to each beneficially own indirectly 1,524 units, which is 6.1% of the total number of units. All information contained in this proxy statement concerning the purchaser is based upon statements and representations made by the purchaser or its representatives to the partnership or its representatives. WHERE YOU CAN FIND MORE INFORMATION GENERAL 29 The partnership files reports with the Securities and Exchange Commission on a regular basis. Unitholders may read or copy any document that the partnership files with the Commission at the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Unitholders may obtain information about the Public Reference Room by calling the Commission for further information at 1-800-SEC-0330. The partnership's Commission filings are also available from the Commission's web site at www.sec.gov. The following documents previously filed by the partnership with the Securities and Exchange Commission are incorporated in this proxy statement by reference: (a) Annual Report on Form 10-K for the year ended December 31, 1998 as filed on March 31, 1999; and (b) Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 as filed on November 15, 1999. All documents filed by the partnership pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 after the date of this document and before the date of the special meeting or any adjournment or postponement of the meeting will be deemed to be incorporated by reference and made a part of this document from the date of the filing of these documents. Any statement contained in a document incorporated or deemed to be incorporated by reference in this document will be deemed to be modified or superseded for purposes of this proxy statement to the extent that a statement contained in this document or in any other document subsequently filed with the Commission which also is deemed to be incorporated by reference in this document modified or supersedes the statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement. The purchaser, KRF Company and The Krupp Family Limited Partnership are affiliates of the partnership. Accordingly, they have jointly filed with the Commission a Schedule 13E-3. This proxy statement does not contain all of the information contained in the Schedule 13E-3, some of which is omitted as permitted by Commission rules. Statements made in this proxy statement, while complete in all material respects, are qualified by reference to documents filed as exhibits to the Schedule 13E-3. The Schedule 13E-3, including exhibits, is available for inspection and copying at the Commission as described above. The purchaser and the general partners are not public companies and are not required to file reports of any type with the Commission. INDEPENDENT ACCOUNTS 30 The consolidated financial statements and financial statement schedule of the partnership appearing in this proxy statement have been audited by PricewaterhouseCoopers LLP, independent auditors, as set forth in their report included in this document. These consolidated financial statements and financial statement schedule are included in this document and incorporated in this document by reference. It is expected that representatives of PricewaterhouseCoopers LLP will be present at the special meeting, both to respond to appropriate questions of unitholders and to make a statement if they so desire. 31 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants F-2 Consolidated Balance Sheets for December 31, 1998 and December 31, 1997 F-3 Consolidated Statements of Operations For the Years Ended December 31, 1998, 1997 and 1996 F-4 Consolidated Statements of Changes in Partners' Deficit For the Years Ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows For the Years Ended December 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7-F-15 Schedule III - Real Estate and Accumulated Depreciation F-16-F-17
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Krupp Realty Fund, Ltd.-III and Subsidiary: In our opinion, the consolidated financial statements and the financial statement schedule listed in the index on page F-1 present fairly, in all material respects, the financial position of Krupp Realty Fund, Ltd.-III and its Subsidiary (the "Partnership") at December 31, 1998 and December 31, 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements and financial statement schedule are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 10, 1999 F-2 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
1998 1997 ------------ ------------ ASSETS Multi-family apartment complexes, net of accumulated depreciation of $21,977,268 and $20,216,642, respectively (Note D) $ 9,784,836 $ 10,519,769 Cash and cash equivalents (Note C) 932,065 552,221 Replacement reserve escrow (Note D) 160,954 177,778 Cash restricted for tenant security deposits 229,416 202,691 Prepaid expenses and other assets 614,911 595,696 Deferred expenses, net of accumulated amortization of $258,861 and $212,971, respectively 260,723 306,613 ------------ ------------ Total assets $ 11,982,905 $ 12,354,768 ============ ============ LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable (Note D) $ 18,726,677 $ 19,126,371 Accrued expenses and other liabilities (Note E) 601,319 683,413 Due to affiliates (Note G) 199,500 -- ------------ ------------ Total liabilities 19,527,496 19,809,784 ============ ============ Commitment (Note F) Partners' deficit (Note F): Investor Limited Partners (25,000 Units outstanding) (6,305,460) (6,220,367) Original Limited Partner (909,737) (906,151) General Partners (329,394) (328,498) ------------ ------------ Total Partners' deficit (7,544,591) (7,455,016) ------------ ------------ Total liabilities and Partners' deficit $ 11,982,905 $ 12,354,768 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-3 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---------- ---------- ---------- Revenue: Rental ............................ $ 7,541,280 $ 7,224,085 $ 6,568,309 Other income ...................... 67,035 56,096 60,349 ----------- ----------- ----------- Total revenue .............. 7,608,315 7,280,181 6,628,658 ----------- ----------- ----------- Expenses: Operating (Note G) ................ 2,004,219 2,041,820 1,991,923 Maintenance ....................... 591,235 578,869 556,909 Real estate taxes ................. 559,440 539,978 504,867 General and administrative (Note G) 66,012 101,687 93,995 Management fees (Note G) .......... 376,570 357,766 326,363 Depreciation and amortization ..... 1,806,516 1,980,892 1,866,979 Interest (Note D) ................. 1,667,840 1,702,393 1,733,982 ----------- ----------- ----------- Total expenses ............. 7,071,832 7,303,405 7,075,018 ----------- ----------- ----------- Net income (loss) (Note H) .............. $ 536,483 $ (23,224) $ (446,360) =========== =========== =========== Allocation of net income (loss) (Note F): Investor Limited Partners (25,000 Units outstanding) ........ $ 509,659 $ (22,063) $ (424,042) =========== =========== =========== Investor Limited Partners Per Unit ................... $ 20.39 $ (.88) $ (16.96) =========== =========== =========== Original Limited Partner .......... $ 21,459 $ (929) $ -- =========== =========== =========== General Partners .................. $ 5,365 $ (232) $ (22,318) =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT For the Years Ended December 31, 1998, 1997 and 1996
Investor Original Total Limited Limited General Partners' Partners Partner Partners Deficit -------- ------- -------- ------- Balance at December 31, 1995 $(4,981,262) $ (871,828) $ (297,600) $(6,150,690) Net loss (424,042) -- (22,318) (446,360) Distributions (396,500) (16,697) (4,174) (417,371) ----------- ----------- ----------- ----------- Balance at December 31, 1996 (5,801,804) (888,525) (324,092) (7,014,421) Net loss (22,063) (929) (232) (23,224) Distributions (396,500) (16,697) (4,174) (417,371) ----------- ----------- ----------- ----------- Balance at December 31, 1997 (6,220,367) (906,151) (328,498) (7,455,016) Net income (Note F) 509,659 21,459 5,365 536,483 Distributions (Note F) (594,752) (25,045) (6,261) (626,058) ----------- ----------- ----------- ----------- Balance at December 31, 1998 $(6,305,460) $ (909,737) $ (329,394) $(7,544,591) =========== =========== =========== ===========
The per Unit distribution for the years ended December 31, 1998, 1997 and 1996 were $23.79, $15.86 and $15.86, respectively, none of which represented a return of capital. The accompanying notes are an integral part of the consolidated financial statements. F-5 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss) $ 536,483 $ (23,224) $ (446,360) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,806,516 1,980,892 1,866,979 Interest earned on replacement reserve escrow (7,392) (4,889) -- Changes in assets and liabilities: Decrease (increase) in cash restricted for tenant security deposits (26,725) (18,933) 19,192 Decrease (increase) in prepaid expenses and other assets (19,215) 7,394 (6,836) Increase (decrease) in due to affiliates 199,500 -- (10,790) Increase (decrease) in accrued expenses and other liabilities (82,094) (54,465) 39,895 ----------- ----------- ----------- Net cash provided by operating activities 2,407,073 1,886,775 1,462,080 =========== =========== =========== Cash flows from investing activities: Additions to fixed assets (1,025,693) (949,541) (996,817) Increase (decrease) in accrued expenses and other liabilities related to fixed asset additions -- (9,000) 9,000 Withdrawals from replacement reserve escrow 86,111 -- 153,250 Deposits to replacement reserve escrow (61,895) (61,895) (61,895) ----------- ----------- ----------- Net cash used in investing activities (1,001,477) (1,020,436) (896,462) ----------- ----------- ----------- Cash flows from financing activities: Principal payments on mortgage notes payable (399,694) (365,482) (334,208) Distributions (626,058) (417,371) (417,371) ----------- ----------- ----------- Net cash used in financing activities (1,025,752) (782,853) (751,579) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 379,844 83,486 (185,961) Cash and cash equivalents, beginning of the year 552,221 468,735 654,696 ----------- ----------- ----------- Cash and cash equivalents, end of the year $ 932,065 $ 552,221 $ 468,735 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-6 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. ORGANIZATION Krupp Realty Fund, Ltd.-III ("KRF-III") was formed on April 23, 1982 by filing a Certificate of Limited Partnership in The Commonwealth of Massachusetts. KRF-III terminates on December 31, 2020, unless earlier terminated upon the sale of the last of KRF-III's properties or the occurrence of certain other events as set forth in the Partnership Agreement. KRF-III issued all of the General Partner Interests to The Krupp Company, a Massachusetts limited partnership, and The Krupp Corporation, a Massachusetts corporation, in exchange for capital contributions aggregating $1,000. Except under certain limited circumstances upon termination of KRF-III, the General Partners are not required to make any additional capital contributions. KRF-III also issued all of the Original Limited Partner Interests to The Krupp Company in exchange for a capital contribution of $4,000. The Original Limited Partner is not required to make any additional capital contributions to KRF-III. On June 4, 1982, KRF-III commenced an offering of up to 25,000 units of Investor Limited Partner Interests (the "Units") for $1,000 per Unit. As of September 29, 1982, KRF-III received subscriptions for all 25,000 Units and therefore, the public offering was successfully completed on that date. In 1993, the General Partners formed Brookeville Apartments Limited Partnership ("Brookeville L.P.") as a prerequisite for the refinancing of Brookeville Apartments ("Brookeville") with the Department of Housing and Urban Development ("HUD"). At the same time, the General Partners transferred ownership of Brookeville to Brookeville L.P. The General Partner of Brookeville L.P. is the Westcop Corporation ("Westcop") and KRF-III is the Limited Partner in Brookeville L.P. Westcop has beneficially assigned its interest in Brookeville L.P. to KRF-III. KRF-III and Brookeville L.P. are collectively known as Krupp Realty Fund, Ltd.-III and Subsidiary (the "Partnership"). B. SIGNIFICANT ACCOUNTING POLICIES The Partnership uses the following accounting policies for financial reporting purposes, which may differ in certain respects from those used for federal income tax purposes (see Note H). BASIS OF PRESENTATION The consolidated financial statements present the consolidated assets, liabilities and operations of the Partnership. All intercompany balances and transactions have been eliminated. RISKS AND UNCERTAINTIES The Partnership invests its cash primarily in deposits and money market funds with commercial banks. The Partnership has not experienced any losses to date on its invested cash. Continued F-7 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued B. SIGNIFICANT ACCOUNTING POLICIES, Continued The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities and revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Partnership includes all short-term investments with maturities of three months or less from the date of acquisition in cash and cash equivalents. The cash investments are recorded at cost, which approximates current market values. RENTAL REVENUES Leases require the payment of rent monthly in advance. Rental revenues are recorded on the accrual basis. DEPRECIATION Depreciation is provided for by the use of the straight-line method over estimated useful lives as follows: Buildings and improvements 5 to 25 years Appliances, carpeting and equipment 3 to 8 years
IMPAIRMENT OF LONG-LIVED ASSETS Real estate assets and equipment are stated at depreciated cost. Pursuant to Statement of Financial Accounting Standards Opinion No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", impairment losses are recorded on long-lived assets used in operations on a property by property basis, when events and circumstances indicate that the assets might be impaired and the estimated undiscounted cash flows to be generated by those assets are less than the carrying amount of those assets. Upon determination that an impairment has occurred, those assets shall be reduced to fair value. Continued F-8 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued B. SIGNIFICANT ACCOUNTING POLICIES, Continued DEFERRED EXPENSES Costs of obtaining and recording mortgages are amortized over the life of the related mortgage notes using the straight-line method which approximates the effective interest method. INCOME TAXES The Partnership is not liable for federal or state income taxes as Partnership income or loss is allocated to the Partners for income tax purposes. In the event the Partnership's tax returns are examined by the Internal Revenue Service or state taxing authority and the examination results in a change in Partnership taxable income or loss, such change will be reported to the Partners. DESCRIPTIVE INFORMATION ABOUT REPORTABLE SEGMENTS During the fourth quarter of 1998, the Partnership adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("Statement No. 131"). Statement No. 131 superseded FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise". Statement No. 131 establishes standards for the way that public business enterprises report information regarding reportable operating segments. The adoption of Statement No. 131 did not affect the results of operations or financial position of the Partnership. The Partnership operates and develops apartment communities which generate rental and other income through the leasing of apartment units. The General Partners separately evaluate the performance of each of the Partnership's apartment communities. However, because each of the apartment communities have similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single dominant apartment communities segment. All revenues are from external customers and no revenues are generated from transactions with other segments. There are no tenants which contributed 10% or more of the Partnership's total revenue during 1998, 1997 or 1996. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform with current year consolidated financial statement presentation. Continued F-9 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued C. CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of the following:
DECEMBER 31, ------------ 1998 1997 -------- -------- Cash and money market accounts $682,656 $402,783 Commercial paper 249,409 149,438 -------- -------- $932,065 $552,221 ======== ========
The properties owned by the Partnership are pledged as collateral for the non-recourse mortgage notes outstanding at December 31, 1998 and 1997. Mortgage notes payable consisted of the following:
Annual Principal Interest Property 1998 1997 Rate Maturity Date --------------------------- ----------- ----------- ------ -------------- Brookeville Apartments $ 8,428,579 $ 8,499,549 7.75% August 1, 2028 Dorsey's Forge Apartments and Oakland Meadows Apartments 4,363,601 4,502,891 9.25% May 3, 2000 Hannibal Grove Apartments 5,934,497 6,123,931 9.25% May 3, 2000 --------- --------- Total $18,726,677 $19,126,371 =========== ===========
Continued F-10 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued D. MORTGAGE NOTES PAYABLE BROOKEVILLE APARTMENTS The property is subject to a non-recourse mortgage note in the original amount of $8,755,000, payable to the Department of Housing and Urban Development ("HUD"). The mortgage note requires monthly payments of $60,600 consisting of principal and interest at the rate of 7.75% per annum. In addition, the Partnership is required to fund a monthly deposit of $5,158 to an escrow account to be used for future property replacements and improvements and a mortgage insurance premium deposit equal to .5% per annum of the outstanding principal balance. The note matures on August 1, 2028. In accordance with HUD regulations, distributions are limited to the extent of Surplus Cash, as defined by the Regulatory Agreement. The mortgage note payable is collateralized by the property and may be prepaid during the five years beginning August 1, 1998, subject to an annual declining prepayment penalty of 5% to 1%, respectively. After August 1, 2003, there is no prepayment penalty. Based on the borrowing rates currently available to the Partnership for bank loans with similar terms and average maturities, the fair value of long-term debt is approximately $9,446,000 at December 31, 1998. At December 31, 1997, the fair market value could not be determined since the mortgage note could not be prepaid. HANNIBAL GROVE APARTMENTS ("HANNIBAL") AND DORSEY'S FORGE AND OAKLAND MEADOWS APARTMENTS ("DORSEY'S") The properties are subject to non-recourse mortgage notes for Hannibal and Dorsey's in the original amounts of $6,800,000 and $5,000,000, respectively, payable at a rate of 9.25% per annum. Monthly principal and interest payments are $62,333 for Hannibal and $45,833 for Dorsey's. The notes mature on May 3, 2000 at which time all unpaid principal, $5,653,175 (Hannibal) and $4,156,746 (Dorsey's), and any accrued interest are due. The mortgage notes payable are collateralized by the respective properties and may be prepaid subject to a prepayment penalty. The prepayment penalty will be the greater of 1) the principal balance multiplied by the difference between 9.4301% and the yield rate on publicly traded U.S. Treasury Securities having the closest matching maturity date as reported in the Wall Street Journal, or 2) one percent of the then outstanding principal. Based on the borrowing rates currently available to the Partnership for bank loans with similar terms and average maturities, the fair value of long-term debt for Hannibal and Dorsey's is approximately $6,118,000 and $4,449,000, respectively at December 31, 1998. At December 31, 1997, the fair market value could not be determined since the mortgage notes could not be prepaid. Continued F-11 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued D. MORTGAGE NOTE PAYABLE, continued HANNIBAL GROVE APARTMENTS, continued Due to restrictions on transfers and prepayment, the Partnership may be unable to refinance certain mortgage notes payable at such calculated fair value. The aggregate scheduled principal amounts of long-term borrowings due during the five years ending December 31, 2003 are $437,124, $10,020,473, $89,480, $96,667 and $104,430. During 1998, 1997 and 1996 the Partnership paid $1,625,506, $1,659,719 and $1,690,992 of interest, respectively, on its mortgage notes. E. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consisted of the following at December 31, 1998 and 1997:
1998 1997 -------- -------- Accounts payable $ 1,016 $ -- Accrued real estate taxes 161,258 162,030 Other liabilities 191,934 288,703 Tenant security deposits 219,272 186,065 Prepaid rent 27,839 46,615 -------- -------- $601,319 $683,413 ======== ========
F. PARTNERS' DEFICIT Under the terms of the Partnership Agreement, profits and losses from operations are allocated 95% to the Investor Limited Partners, 4% to the Original Limited Partner and 1% to the General Partners until such time that the Investor Limited Partners have received a return of their total invested capital plus a 9% per annum Cumulative Return on Investment thereon and thereafter, 65% to the Investor Limited Partners, 28% to the Original Limited Partner and 7% to the General Partners. Also, under the Partnership Agreement, cash distributions from operations are generally made on the same basis as the allocations of profits and losses described above. Net cash proceeds, as determined by the General Partners, resulting from transactions such as refinancing or sale of a property, are to be distributed as follows: 1) to the Investor Limited Partners until they have received a return of their total Invested Continued F-12 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued F. PARTNERS' DEFICIT, Continued Capital; 2) to the Investor Limited Partners until they have received an amount equal to their Cumulative Return on Investment in respect of all fiscal years of the Partnership; 3) to the Original Limited Partner and General Partners until they have received a return of their total Invested Capital; 4) to an unaffiliated brokerage firm to the extent of any subordinated Financial Consulting Fee then due, and; 5) any remaining Cash Proceeds shall be distributed 65% to the Investor Limited Partners, 28% to the Original Limited Partner and 7% to the General Partners. Notwithstanding anything above, the General Partners shall, under all circumstances, receive at least 1% of all distributions of net cash proceeds from a capital transaction. Per the Partnership Agreement, profits from capital transactions are to be allocated to the extent of cash distributions described above, first to the Investor Limited Partners until they have received a return of their total Invested Capital. Losses from capital transactions are to be allocated to the extent of cash distributions described above, first to the Investor Limited Partners until they have received a return of their total Invested Capital plus their Cumulative Return on Investment. Thereafter, profits and losses from capital transactions are to be allocated in accordance with the Partnership Agreement. Notwithstanding anything above, the General Partners shall be allocated, under all circumstances, at least 1% of all profits and losses from capital transactions. For income tax purposes, the allocation of Partnership items is determined according to the Partnership Agreement, to the extent that each allocation has "substantial economic effect" pursuant to the Internal Revenue Code, Section 704. In the event that an allocation does not meet these statutory requirements, Partnership items will be reallocated according to these provisions. For 1996, reallocation was necessary. The consolidated financial statements presented herein reflect the allocation of net loss in accordance with the rules of the Internal Revenue Code for the year ended December 31, 1996. Continued F-13 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued F. PARTNERS' DEFICIT, Continued As of December 31, 1998, the following cumulative partner contributions and allocations have been made since the inception of the Partnership:
Investor Original Limited Limited General Partners Partner Partners Total -------- ------- -------- ----- Capital contributions $ 25,000,000 $ 4,000 $ 1,000 $ 25,005,000 Syndication costs (3,486,600) -- -- (3,486,600) Cash distributions from operations (10,706,873) (450,813) (112,701) (11,270,387) Cash distributions from refinancing proceeds (5,173,000) -- (52,252) (5,225,252) Net loss from operations (21,341,654) (858,825) (264,417) (22,464,896) Net income from capital transaction 9,402,667 395,901 98,976 9,897,544 ------------ ------------ ------------ ------------ Balance at December 31, 1998 $ (6,305,460) $ (909,737) $ (329,394) $ (7,544,591) ============ ============ ============ ============
G. RELATED PARTY TRANSACTIONS The Partnership pays property management fees to an affiliate of the General Partners for management services. Pursuant to the management agreements, management fees are payable monthly at a rate of 5% of the gross receipts from the properties under management. The Partnership also reimburses affiliates of the General Partners for certain expenses incurred in connection with the operation of the Partnership and its properties, including administrative expenses. Amounts paid to the General Partners' affiliates during the years ended December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996 ------ ------ ------ Property management fees $376,570 $357,766 $326,363 Expense reimbursements 163,891 179,032 173,132 -------- ------- ------- Charged to operations $540,461 $536,798 $499,495 ======== ======== ========
Due to affiliates consisted of expense reimbursements of $199,500 at December 31, 1998. F-14 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued H. FEDERAL INCOME TAXES For federal income tax purposes, the Partnership is depreciating property under the Accelerated Cost Recovery System ("ACRS") and the Modified Accelerated Cost Recovery System ("MACRS"), depending on which is applicable. The reconciliation of the net income (loss) reported in the accompanying Consolidated Statement of Operations with the net loss reported in the Partnership's 1998, 1997 and 1996 federal income tax returns is as follows:
1998 1997 1996 ---------- ---------- ---------- Net income (loss) per Consolidated Statement of Operations $ 536,483 $ (23,224) $ (446,360) Difference in book to tax depreciation and amortization 1,164,574 557,885 221,435 ---------- ---------- ---------- Net income (loss) for federal income tax purposes $1,701,057 $ 534,661 $ (224,925) ========== ========== ==========
The allocation of the net income for federal income tax purposes for the year ended December 31, 1998 is as follows:
Portfolio Passive Income Income Total ---------- ---------- ---------- Investor Limited Partners $ 63,141 $1,552,863 $1,616,004 Original Limited Partner 2,658 65,384 68,042 General Partners 665 16,346 17,011 ---------- ---------- ---------- $ 66,464 $1,634,593 $1,701,057 ========== ========== ==========
During the years ended December 31, 1998, 1997 and 1996 the per Unit net income (loss) to the Investor Limited Partners for federal income tax purposes was $64.64, $21.17 and $(8.55), respectively. The basis of the Partnership's assets for financial reporting purposes exceeds its tax basis by approximately $2,288,000 and $3,451,000 at December 31, 1998 and 1997, respectively. The tax and book basis of the Partnership's liabilities are the same. F-15 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Costs Capitalized Subsequent to Initial Costs to Partnership Acquisition ---------------------------- ----------- Buildings Buildings and and Depreciable Description Encumbrances Land Improvements Improvements Life ----------- ------------ ---- ------------ ------------ ---- Brookeville Apartments Columbus, OH $ 8,428,579 $ 623,126 $ 8,312,134 $ 4,158,128 3 to 25 years Hannibal Grove Apartments Columbia, MD 5,934,497 518,519 6,883,945 4,198,244 3 to 25 years Dorsey's Forge & Oakland Meadows Apartments Columbia, MD 4,363,601 340,956 4,521,895 2,205,157 3 to 25 years ----------- ----------- ----------- ----------- Total $18,726,677 $ 1,482,601 $19,717,974 $10,561,529 =========== =========== =========== ===========
Gross Amounts Carried At End of Year ------------------------ Buildings Year and Accumulated Year Construction Description Land Improvements Total Depreciation Acquired Completed - --------------- ---------- ------------ ----------- ------------ -------- ------------ Brookeville Apartments Columbus, OH $ 623,126 $12,470,262 $13,093,388 $ 9,015,376 1983 1975 Hannibal Grove Apartments Columbia, MD 518,519 11,082,189 11,600,708 8,213,191 1983 1970 Dorsey's Forge & Oakland Meadows Apartments Columbia, MD 340,956 6,727,052 7,068,008 4,748,701 1983 1970 ----------- ----------- ----------- ----------- Total $ 1,482,601 $30,279,503 $31,762,104 $21,977,268 =========== =========== =========== ===========
Continued F-16 KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION, Continued December 31, 1998 Reconciliation of Real Estate and Accumulated Depreciation for each of the three years in the period ended December 31, 1998:
REAL ESTATE 1998 1997 1996 ----------- ----------- ----------- ----------- Balance at beginning of year $30,736,411 $29,786,870 $28,790,053 Acquisition and improvements 1,025,693 949,541 996,817 ----------- ----------- ----------- Balance at end of year $31,762,104 $30,736,411 $29,786,870 =========== =========== ===========
ACCUMULATED DEPRECIATION 1998 1997 1996 ---------------------------- ----------- ----------- ----------- Balance at beginning of year $20,216,642 $18,281,640 $16,460,550 Depreciation expense 1,760,626 1,935,002 1,821,090 ----------- ----------- ----------- Balance at end of year $21,977,268 $20,216,642 $18,281,640 =========== =========== ===========
Note: The Partnership uses the cost basis for property valuation for both income tax and financial statement purposes. The aggregate cost for federal income tax purposes at December 31, 1998 is $31,775,676, and the aggregate accumulated depreciation for federal income tax purposes is $24,267,669. F-17 INDEX TO CONSOLIDATED QUARTERLY (UNAUDITED) FINANCIAL STATEMENTS
Page ---- Consolidated Balance Sheets at September 30, 1999 (unaudited) and December 31, 1998 F-19 Consolidated Statements of Operations (unaudited) for the three months ended September 30, 1999 and September 30, 1998; and for the nine months ended September 30, 1999 and September 30, 1998 F-20 Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 1999 and September 30, 1998 F-21 Notes to Consolidated Financial Statements (unaudited) F-22-23 Management's Discussion and Analysis of Financial Condition and Results of Operations F-24-F-26
F-18 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
(Unaudited) September 30, December 31, 1999 1998 ------------ ------------ ASSETS Multi-family apartment complexes, net of accumulated depreciation of $23,243,661 and $21,977,268, respectively $ 9,277,242 $ 9,784,836 Cash and cash equivalents 435,454 932,065 Replacement reserve escrow 211,780 160,954 Cash restricted for tenant security deposits 234,386 229,416 Prepaid expenses and other assets 763,499 614,911 Deferred expenses, net of accumulated amortization of $293,278 and $258,861, respectively 226,306 260,723 ------------ ------------ Total assets $ 11,148,667 $ 11,982,905 ============ ============ LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable $ 18,402,530 $ 18,726,677 Accrued expenses and other liabilities 686,263 601,319 Due to affiliates (Note 3) -- 199,500 ------------ ------------ Total liabilities 19,088,793 19,527,496 ------------ ------------ Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (6,681,218) (6,305,460) Original Limited Partner (925,558) (909,737) General Partners (333,350) (329,394) ------------ ------------ Total Partners' deficit (7,940,126) (7,544,591) ------------ ------------ Total liabilities and Partners' deficit 11,148,667 11,982,905 ============ ===========
The accompanying notes are an integral part of the consolidated financial statements. F-19 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenue: Rental $2,004,789 $1,878,976 $5,828,192 $5,625,386 Other income 12,636 19,141 44,326 49,554 ---------- ---------- ---------- ---------- Total revenue 2,017,425 1,898,117 5,872,518 5,674,940 ---------- ---------- ---------- ---------- Expenses: Operating (Note 3) 551,992 479,416 1,604,862 1,493,016 Maintenance 165,240 178,257 475,110 415,508 Real estate taxes 136,443 139,657 421,254 416,842 General and administrative (Note 3) 19,357 16,649 114,705 52,837 Management fees (Note 3) 97,416 94,529 289,737 281,469 Depreciation and amortization 444,333 507,842 1,300,811 1,327,983 Interest 406,315 415,868 1,226,792 1,254,318 ---------- ---------- ---------- ---------- Total expenses 1,821,096 1,832,218 5,433,271 5,241,973 ---------- ---------- ---------- ---------- Net income $ 196,329 $ 65,899 $ 439,247 $ 432,967 ========== ========== ========== ========== Allocation of net income (Note 2): Investor Limited Partners (25,000 Units outstanding) $ 186,513 $ 62,603 $ 417,285 $ 411,318 ========== ========== ========== ========== Investor Limited Partners Per Unit $ 7.46 $ 2.50 $ 16.69 $ 16.45 ========== ========== ========== ========== Original Limited Partner $ 7,853 $ 2,636 $ 17,570 $ 17,319 ========== ========== ========== ========== General Partners $ 1,963 $ 660 $ 4,392 $ 4,330 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-20 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, ---------------------- 1999 1998 ----------- ----------- Cash flows from operating activities: Net income $ 439,247 $ 432,967 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,300,811 1,327,983 Interest earned on replacement reserve escrow (4,405) (2,624) Changes in assets and liabilities: Increase in cash restricted for tenant security deposits (4,970) (4,696) Increase in prepaid expenses and other assets (148,588) (22,228) Decrease in due to affiliates (199,500) -- Increase (decrease) in accrued expenses and other liabilities 84,944 (75,769) ----------- ----------- Net cash provided by operating activities 1,467,539 1,655,633 ----------- ----------- Cash flows from investing activities: Additions to fixed assets (758,800) (738,948) Deposits to replacement reserve escrow (46,421) (46,421) Withdrawals from replacement reserve escrow -- 86,111 ----------- ----------- Net cash used in investing activities (805,221) (699,258) ----------- ----------- Cash flows from financing activities: Distributions (834,782) (626,058) Principal payments on mortgage notes payable (324,147) (296,392) ----------- ----------- Net cash used in financing activities (1,158,929) (922,450) ----------- ----------- Net (decrease)increase in cash and cash equivalents (496,611) 33,925 Cash and cash equivalents, beginning of period 932,065 552,221 ----------- ----------- Cash and cash equivalents, end of period $ 435,454 $ 586,146 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-21 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ACCOUNTING POLICIES Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. In the opinion of the General Partners of Krupp Realty Fund, Ltd.-III and Subsidiary (the "Partnership"), the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to Consolidated Financial Statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1998 for additional information relevant to significant accounting policies followed by the Partnership. In the opinion of the General Partners of the Partnership, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Partnership's consolidated financial position as of September 30, 1999, its results of operations for the three and nine months ended September 30, 1999 and 1998, and its cash flows for nine months ended September 30, 1999 and 1998. Certain prior period balances have been reclassified to conform with current period consolidated financial statement presentation. The results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. (2) CHANGES IN PARTNERS' DEFICIT A summary of changes in Partners' deficit for the nine months ended September 30, 1999 is as follows:
Investor Original Total Limited Limited General Partners' Partners Partner Partners Deficit ----------- ----------- ----------- ----------- Balance at December 31, 1998 $(6,305,460) $ (909,737) $ (329,394) $(7,544,591) Net income 417,285 17,570 4,392 439,247 Distributions (793,043) (33,391) (8,348) (834,782) ----------- ----------- ----------- ----------- Balance at September 30, 1999 $(6,681,218) $ (925,558) $ (333,350) $(7,940,126) =========== =========== =========== ===========
F-22 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (3) RELATED PARTY TRANSACTIONS The Partnership pays property management fees to an affiliate of the General Partners for management services. Pursuant to the management agreements, management fees are payable monthly at a rate of 5% of the gross receipts from the properties under management. The Partnership also reimburses affiliates of the General Partners for certain expenses incurred in connection with the operation of the Partnership and its properties, including administrative expenses. Amounts accrued or paid to the General Partners' affiliates were as follows:
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Property management fees $ 97,416 $ 94,529 $289,737 $281,469 Expense reimbursements 40,702 41,522 124,941 102,989 -------- -------- -------- -------- Charged to operations $138,118 $136,051 $414,678 $384,458 ======== ======== ======== ========
Expense reimbursements of $25,580 are included in prepaid expenses and other assets at September 30, 1999 and $199,500 are included in due to affiliates at December 31, 1998. F-23 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management's expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. LIQUIDITY AND CAPITAL RESOURCES The Partnership's ability to generate cash adequate to meet its needs is dependent primarily upon the operations of its real estate investments. Such ability is also dependent upon the future availability of bank borrowings and the potential refinancing and sale of the Partnership's remaining real estate investments. These sources of liquidity will be used by the Partnership for payment of expenses related to real estate operations, capital expenditures, debt service and expenses. Cash Flow, if any, as calculated under Section 8.2(a) of the Partnership Agreement, will then be available for distribution to the Partners. The General Partners, on an ongoing basis, assess the current and future liquidity needs in determining the levels of working capital reserves the Partnership should maintain. Adjustments to distributions are made when appropriate to reflect such assessments. The current annual distribution rate is $31.72 per Unit, and is paid semiannually in February and August. In the third quarter of 1999, occupancy rates for the Partnership's properties ("Properties") remained below the historically high levels achieved in 1998 of between 99% and 100% as of December 31, 1998 with rates of approximately 98% (in the case of the Hannibal Grove Apartments), 97% (in the case of the Brookeville Apartments) and 98% (in the case of the Dorsey's Forge Apartments) as of September 30, 1999. In March 1999, the Property Manager prepared a five year capital improvement plan (the "Capital Plan") setting forth capital improvements that it believes a third party purchaser of the Properties would regard as necessary to maintain the Properties' current occupancy and rent levels (subject to inflationary increases), in light of the increased competition in the markets served by the Partnership. The aggregate cost of implementing the five year Capital Plan is estimated to be approximately $10,000,000. The General Partners are in the process of finalizing the Capital Plan, which may not be practicable for the Partnership to implement promptly and fully because of the possible need for additional investment of capital, additional borrowings and/or the discontinuation of future cash distributions from the Partnership. However, the General Partners believe additional capital improvements will be needed in the future and may be over and above historical levels. F-24 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY YEAR 2000 The General Partners of the Partnership conducted an assessment of the Partnership's core internal and external computer information systems and have taken the necessary steps to understand the nature and extent of the work required to make its systems Year 2000 ready in those situations in which it is required to do so. The Year 2000 readiness issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and organizations. In this regard, the General Partners of the Partnership, along with certain affiliates, began a computer systems project in 1997 to significantly upgrade its existing hardware and software. The General Partners completed the testing and conversion of the financial accounting operating systems in February 1998. As a result, the General Partners have generated operating efficiencies and believe their financial accounting operating systems are Year 2000 ready. The General Partners incurred hardware costs as well as consulting and other expenses related to the infrastructure and facilities enhancements necessary to complete the upgrade and prepare for the Year 2000. There are no other significant internal systems or software that the Partnership is using at the present time. The General Partners of the Partnership have evaluated Year 2000 compliance issues with respect to its non-financial systems, such as computer controlled elevators, boilers, chillers and other miscellaneous systems. The General Partners do not anticipate any problems in its non-financial systems. The General Partners of the Partnership surveyed the Partnership's material third-party service providers (including but not limited to its banks and telecommunications providers) and significant vendors and received assurances that such providers and vendors are to be Year 2000 ready. The General Partners do not anticipate any problems with such providers and vendors that would materially impact its results of operations, liquidity or capital resources. In addition, the Partnership is also subject to external forces that might generally affect industry and commerce, such as utility and transportation company Year 2000 readiness failures and related service interruptions. However, the General Partners do not anticipate these would materially impact its results of operations, liquidity or capital resources. To date, the Partnership has not incurred, and does not expect to incur, any significant cost associated with being Year 2000 ready. F-25 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY OPERATIONS Net income increased for the three and nine months ended September 30, 1999, as compared to the three and nine months ended September 30, 1998, as expenses for the three months ended September 30, 1999 remained relatively stable while total revenue for the period increased and the increase in expenses for the nine months ended September 30, 1999 was less than the increase in total revenue for the period. Total revenue increased for the three and nine months ended September 30, 1999, as compared to the three and nine months ended September 30, 1998, primarily due to rental rate increases implemented at all the Partnership's properties. Total expenses remained stable for the three months ended September 30, 1999, as compared to the same period in 1998 as increases in operating expenses were offset by decreases in depreciation and amortization. Operating expense increased in 1999 as a result of an increase in workmen's compensation expense due to an adjustment to the workmen's compensation reserve in 1998 as well as increases in utility expenses. Depreciation and amortization expense decreased as previously purchased fixed assets became fully depreciated. Total expenses increased for the nine months ended September 30, 1999 as compared to the same period in 1998 as a result of increases in operating, general and administration and maintenance expenses. Operating expense increased in 1999 as a result of an increase in workmen's compensation expense due to an adjustment to the workmen's compensation reserve in 1998 as well as increases in payroll and utility expenses. General and administrative expenses increased as a result of increases in legal costs primarily associated with the Partnership's response to the tender offer made by Madison Liquidity Investors 104, LLC to purchase Partnership units during the second quarter. Maintenance increased due to increases in snow removal expenses at all properties during the first quarter, increases in landscaping expenses at Dorsey's Forge and Brookeville and increases in plumbing expenses at Dorsey's Forge and Hannibal Grove. F-26 TABLE OF CONTENTS
Page ---- SUMMARY TERM SHEET ..................................................... 1 Purpose of the special meeting .................................... 1 What you will receive in the merger ............................... 1 Purposes of and reasons for the merger ............................ 1 Fairness of the merger ............................................ 1 Primary potential disadvantages of the merger ..................... 1 Conflicts of Interest ............................................. 1 The amendment...................................................... 2 Vote required ..................................................... 2 Financing of the merger ........................................... 2 Material federal income tax consequences .......................... 2 Market information ................................................ 3 Rights of appraisal ............................................... 3 Information on Voting.............................................. 3 Who can help answer your questions ................................ 4 SPECIAL FACTORS ........................................................ 5 Background of the Merger; Purpose of the Transaction .............. 5 Alternatives to the Merger ........................................ 6 Fairness of the Merger ............................................ 7 Disadvantages and Risks Associated with the Merger ................ 9 Conflicts of Interest ............................................. 9 Liquidation Analysis; Determination of Merger Price ............... 10 Book Value ........................................................ 11 Recent Unit Sales; Tender Offer ................................... 11 Effects of the Transaction ........................................ 11 Failure to Approve the Merger ..................................... 12 Plans or Proposals by Partnership or Affiliates Following the Merger............................................. 12 Financing of the Merger ........................................... 13 Material Federal Income Tax Consequences .......................... 14 THE SPECIAL MEETING .................................................... 16 Special Meeting; Record Date ...................................... 16 Procedures for Completing Proxies ................................. 16 Votes Required .................................................... 17 Solicitation Procedures ........................................... 17 Revocation of Proxies ............................................. 18 Appraisal Rights .................................................. 18 THE MERGER AGREEMENT ................................................... 18 Closing Date; Effective Time of the Merger ........................ 19 Effects of the Merger ............................................. 19
Payment ........................................................... 19 Authority and Consent of the Purchaser ............................ 19 Representations And Warranties of the Parties ..................... 20 Conditions to the Merger .......................................... 20 Termination ....................................................... 20 Amendment ......................................................... 20 Waiver ............................................................ 20 The Surviving Entity .............................................. 20 RELATED AGREEMENTS ..................................................... 20 THE AMENDMENT TO THE PARTNERSHIP AGREEMENT ............................. 21 Purpose ........................................................... 21 The Amendment ..................................................... 21 INFORMATION ABOUT THE PARTNERSHIP, ITS GENERAL PARTNERS AND THEIR AFFILIATES .............................. 22 The Partnership ................................................... 22 The General Partners .............................................. 22 Description of the Assets ......................................... 23 Distributions ..................................................... 25 Ownership of Units ................................................ 25 Market for the Units .............................................. 26 Related Party Transactions ........................................ 27 SELECTED FINANCIAL DATA ................................................ 27 INFORMATION CONCERNING THE PURCHASER AND ITS AFFILIATES ..................................................... 29 The Purchaser ..................................................... 29 Affiliates of the Purchaser ....................................... 29 WHERE YOU CAN FIND MORE INFORMATION .................................... 29 General............................................................ 29 Independent Accountants............................................ 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ............................. F-1 INDEX TO CONSOLIDATED QUARTERLY (UNAUDITED) FINANCIAL STATEMENTS........ F-18 APPENDIX A - THE MERGER AGREEMENT APPENDIX B - AMENDMENT NO. 1 TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP OF KRUPP REALTY FUND, LTD. - III APPENDIX C - FORM OF PROXY CARD
APPENDIX A AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into as of ______________, 2000 by and between KRF3 Acquisition Company, L.L.C., a Delaware limited liability company (the "Company" or, after the Effective Time (as defined in Article V hereof), the "Surviving Entity"), and Krupp Realty Fund, Ltd.-III, a Massachusetts limited partnership (the "Partnership"). W I T N E S S E T H: WHEREAS, the Company is a limited liability company duly formed and validly existing under the laws of the State of Delaware; WHEREAS, the Partnership is a limited partnership duly formed and validly existing under the laws of the Commonwealth of Massachusetts; WHEREAS, the Massachusetts Revised Uniform Limited Partnership Act, Mass. Gen. Laws Ann. ch. 109, (Section) 1-62 (the "Massachusetts LP Act"), and the Delaware Limited Liability Company Act, 6 Del. C. (Section)18-101 et seq. (the "Delaware LLC Act"), each permits a limited partnership formed and existing under the Massachusetts LP Act to merge with and into a limited liability company formed and existing under the Delaware LLC Act; WHEREAS, the members of the Company have authorized and the general partners and limited partners of the Partnership have duly authorized the merger of the Partnership with and into the Company pursuant to the terms of this Agreement; and WHEREAS, the holders of limited partnership interests of Fund III have approved an amendment to the Amended Agreement of Limited Partnership, dated June 1, 1982, authorizing the Partnership to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed that, in accordance with the applicable statutes of the State of Delaware and the Commonwealth of Massachusetts, and subject to the conditions precedent contained herein, the Partnership shall be at the Effective Time, merged with and into the Company (the "Merger"), with the Company to be the Surviving Entity. The mode of carrying the Merger into effect shall be as follows: I. MERGER At the Effective Time, the Partnership shall be merged with and into the Company, the separate existence of the Partnership shall cease, the Company shall continue in existence and the Merger shall in all respects have the effects provided for by the Massachusetts LP Act and the Delaware LLC Act. Prior to the Effective Time, the Company and the Partnership shall take all such action as shall be necessary or appropriate in order to effectuate the Merger. If at any time after the Effective Time, the Company shall consider or be advised that any further assignments, conveyances or assurances in law are necessary or desirable to carry out the provisions hereof, the proper members, managers, officers or other agents of the Company, as authorized agents and attorneys-in-fact for the Partnership (and acting in the name of the Company or the Partnership), shall execute and deliver any and all proper deeds, assignments, and assurances in law, and do all such additional things necessary or proper to carry out the provisions hereof. II. TERMS OF TRANSACTION At the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof, (i) the partnership interests in the Partnership outstanding immediately prior to the Effective Time, held by (a) the general partners of the Partnership (the "General Partners"), (b) the "Original Limited Partners" (as defined in the Partnership's Amended Agreement of Limited Partnership, dated as of June 1, 1982, as amended from time to time (the "Partnership Agreement")) and (c) the limited partners of the Partnership who are, at the Effective Time, directly or indirectly controlling, controlled by or under common control with the Company, Equity Resources Group Incorporated or the General Partners ("the Affiliate Limited Partners"), shall be canceled and retired and shall cease to exist, (ii) the partnership interests of limited partners of the Partnership who are not Affiliate Limited Partners (the "Unaffiliated Limited Partners") outstanding immediately prior to the Effective Time shall be canceled and converted into and represent the right to receive in exchange therefor $[_____] per "Unit" (as defined in the Partnership Agreement), without interest thereon, payable by the Surviving Entity to the holder of such Unit (as reflected on the records of the Partnership at the Effective Time) upon receipt by the Surviving Entity of the Proof of Ownership Form hereto, a Substitute Form W-9 and any other additional documentation necessary or desirable to complete the conversion of the Units required which the Surviving Entity shall reasonably request from the holder, (iii) the limited liability company interests held by the members of the Company outstanding immediately prior to the Effective Time shall remain the outstanding limited liability company interests of such members of the Company, and such members shall continue as the members of the Surviving Entity. Neither the Surviving Entity nor any other party hereto shall be liable to a holder of Units for any payments made to a public official pursuant to applicable abandoned property laws. The Surviving Company shall be entitled to deduct and withhold from the amounts otherwise payable to a holder of Units pursuant to the Merger any taxes or other amounts as are required by applicable law, including without limitation Sections 3406 and 1445 of the Internal Revenue Code of 1986, as amended. To the extent that amounts are so withheld by the Surviving Entity, they shall be treated for all purposes of this Agreement as having been paid to the holder of the Units in respect of which such deduction and withholding was made. After the Effective Time, the transfer books of the Partnership shall be closed and there shall be no further registration of transfers on the records of the Partnership of the Units that were outstanding immediately prior to the Effective Time. As of the Effective Time, each holder of a Unit which was converted into the right to receive cash pursuant to Article II hereof shall be deemed to have withdrawn as a limited partner and shall have no further interest in the Partnership or the Surviving Entity or any allocations or distributions of income, property or otherwise, other than the right to receive the amount as provided in this Article II. No appraisal rights shall be available to holders of Units in connection with the Merger. III. CERTIFICATE OF FORMATION AND LIMITED LIABILITY COMPANY AGREEMENT From and after the Effective Time, and until thereafter amended as provided by law, the Certificate of Formation and Limited Liability Company Agreement of the Company as in effect immediately prior to the Effective Time shall be the Certificate of Formation and Limited Liability Company Agreement of the Surviving Entity. IV. MANAGERS AND OFFICERS From and after the Effective Time, and until their successors are duly elected or appointed, or until their earlier death, resignation or removal, the managers and officers of the Surviving Entity shall be the same as the managers and officers of the Company immediately prior to the Effective Time. V. EFFECTIVE TIME Certificates of merger evidencing the Merger ("Certificates of Merger") substantially in the form of Exhibit A attached hereto shall be filed by the General Partners and the Company with the Secretary of State of the State of Delaware and the Secretary of State of the Commonwealth of Massachusetts pursuant to the applicable requirements of the Delaware LLC Act and the Massachusetts LP Act. The Merger shall become effective upon the later of the filing of the Certificates of Merger with the Secretary of State of the Commonwealth of Massachusetts and the Secretary of State of the State of Delaware or such other time as shall be agreed by the parties and set forth in the Certificates of Merger and in accordance with the Massachusetts LP Act and the Delaware LLC Act (such time of effectiveness, the "Effective Time"). VI. TERMINATION This Agreement may be terminated at any time prior to the Effective Time: (i) by mutual written consent of the Company and the General Partners; (ii) by either the Company or the General Partners if the Merger shall not have been consummated by [_______________]; provided, however, that the right to terminate this Agreement pursuant to this clause (ii) of Article VI shall not be available to any party whose failure to perform any of its obligations under this Agreement has been the cause of, or resulted in, the failure of the Merger to occur on or before such date. In the event of a termination of this Agreement by either the Company or the General Partners, as provided in this Article VI, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of the Company or the General Partners or their respective managers or officers, except with respect to Article IX and this second paragraph of Article VI. Nothing herein shall relieve any party of liability with respect to any fraud or intentional breach by any party hereto of this Agreement. VII. AMENDMENTS At any time prior to the Effective Time, the Company and the General Partners may amend, modify or supplement this Agreement in such manner as they jointly may determine; provided, however, that, such amendment must be executed in writing by all parties hereto and provided further, that no such amendment, modification, or supplement shall reduce the amount or change the type of consideration into which each Unit shall be converted upon consummation of the Merger or alter or change any term of the Certificate of Formation or Limited Liability Company Agreement of the Surviving Entity. VIII. CONDITIONS TO CONSUMMATION OF THE MERGER The respective obligations of each party hereto to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (i) this Agreement shall have been approved and adopted by the partners of the Partnership in accordance with the Massachusetts LP Act and the Partnership Agreement; (ii) this Agreement shall have been approved and adopted by the members of the Company in accordance with the Delaware LLC Act and the Limited Liability Company Agreement of the Company; (iii) no statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, promulgated or enforced by any governmental entity, and no action, suit, claim or legal, administrative or arbitral proceeding or investigation shall be pending before any governmental entity which seeks to prohibit, restrain, enjoin or restrict the consummation of the transactions contemplated by this Agreement or which seeks to subject any party to substantial damages as a result of the consummation of the transactions contemplated by this Agreement; (iv) each of the parties shall have obtained the consent, approval or waiver of each non-governmental person whose consent, approval or waiver shall be required in order for such party to consummate the transactions contemplated by this Agreement; (v) since June 30, 1999, no change or event shall have occurred which has had or could reasonably be expected to result in a Material Adverse Effect. For purposes of this Agreement, "Material Adverse Effect" means any change, event or effect (a) in, on or relating to the business of the Partnership that is, or is reasonably likely to be, materially adverse to the business, assets (including intangible assets), liabilities (contingent or otherwise), condition (financial or otherwise), prospects or results of operations of the Partnership and its subsidiaries taken as a whole, or (b) that may prevent or materially delay the performance of this Agreement by the Company or the Partnership or the consummation of the transactions contemplated hereby. IX. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Delaware without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. X. MISCELLANEOUS This Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the day and year first above written. KRF3 ACQUISITION COMPANY, L.L.C. By: KRF Company, L.L.C., its managing member By: The Krupp Family Limited Partnership-94, its sole member By: --------------------------------------- Douglas Krupp General Partner KRUPP REALTY FUND, LTD.-III By: The Krupp Corporation, its general partner By: --------------------------------------- Douglas Krupp Co-Chairman of the Board of Directors EXHIBIT A CERTIFICATE OF MERGER MERGING KRUPP REALTY FUND, LTD. - III INTO KRF3 ACQUISITION COMPANY, L.L.C. The undersigned, being respectively, an authorized person of KRF3 Acquisition Company, L.L.C., a Delaware limited liability company and the general partners of Krupp Realty Fund, Ltd. - III, a Massachusetts limited partnership, do hereby certify for and on behalf of such entities. FIRST: The name and jurisdiction of formation of each of the constituent entities in the merger are as follows: NAME JURISDICTION OF FORMATION - ---- ------------------------- Krupp Realty Fund, Ltd. - III Massachusetts KRF3 Acquisition Company, L.L.C. Delaware SECOND: An Agreement and Plan of Merger between the parties to the merger has been approved, adopted, certified, executed and/or acknowledged by each of the constituent entities in accordance with the requirements of Section 16A of the Massachusetts Revised Uniform Limited Partnership Act and Section 18-209 of the Delaware Limited Liability Company Act. THIRD: The name of the surviving limited liability company is KRF3 Acquisition Company, L.L.C. FOURTH: The merger shall be effective at 5:00 p.m. on the date on which the latter of (a) the filing of this Certificate of Merger in the Office of the Secretary of State of the State of Delaware and (b) the filing of this Certificate of Merger in the Office of the Secretary of State of the Commonwealth of Massachusetts, occurs. FIFTH: The executed Agreement and Plan of Merger is on file at a place of business of the surviving limited liability company. The address of such place of business is: KRF3 Acquisition Company, L.L.C., One Beacon Street, Suite 1500, Boston, Massachusetts 02108. SIXTH: A copy of the Agreement and Plan of Merger will be furnished by the surviving limited liability company, on request and without cost, to any partner of the constituent limited partnership and any member of the constituent limited liability company. SEVENTH: The surviving limited liability company shall accept service of process at its offices at One Beacon Street, Suite 1500, Boston, Massachusetts 02108. IN WITNESS WHEREOF, the undersigned have duly executed this Certificate of Merger as of _________________, 2000. KRF3 ACQUISITION COMPANY, L.L.C. By:______________________________ Name: Title: APPENDIX B Amendment No. 1 to the Amended Agreement of Limited Partnership of Krupp Realty Fund, Ltd. - III THIS AMENDMENT NO. 1 TO THE AMENDED AGREEMENT OF LIMITED PARTNERSHIP, dated as of June 1, 1982 (the "Partnership Agreement"), OF KRUPP REALTY FUND, LTD. - III, a Massachusetts limited partnership (the "Partnership"), by and among The Krupp Corporation, a Massachusetts corporation, and The Krupp Company Limited Partnership - II, a Massachusetts limited partnership, as General Partners (together, the "General Partners"), The Krupp Company Limited Partnership-II, as the Original Limited Partner, and those persons admitted to the Partnership as Investor Limited Partners and providing their Consent hereto is made as of , 2000, in accordance with the procedures of Section 14(a) of the Partnership Agreement. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Partnership Agreement. 1. The Partnership Agreement is amended by adding the following prior to the last sentence of Section 6.2(b) thereof: "At any time after February 1, 2000, the Partnership may enter into a merger agreement with an Affiliate of the General Partner substantially in the form of the agreement attached hereto as Annex A and provided that such merger agreement is executed prior to August 1, 2000. 2. The Partnership Agreement is supplemented by adding the attached Annex A as Annex A thereto. 3. In all other respects the Partnership Agreement shall remain in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized persons as of the date first above written. The Krupp Corporation, General Partner By: ----------------------------- Name: Douglas Krupp Title: Co-Chairman of the Board of Directors The Krupp Company Limited Partnership-II, General Partner and Original Limited Partner By: The Krupp Corporation, General Partner By: ---------------------------- Name: Douglas Krupp Title: Co-Chairman of the Board of Directors APPENDIX C FORM OF PROXY CARD Krupp Realty Fund, Ltd. - III One Beacon Street Suite 1500 Boston, Massachusetts 02108 Solicited by the General Partners for the Special Meeting of Unitholders to be held on , 2000 The undersigned hereby appoints , or any of them, each with full power of substitution, as proxies or proxy of the undersigned and hereby authorizes them to represent and vote as designated below all investor limited partnership units of Krupp Realty Fund, Ltd. - III Units (the "Partnership") held of record by the undersigned at the close of business on , 2000 at the Special Meeting of Unitholders (the "Special Meeting") to be held on , 2000 at the Partnership's principal executive offices located at One Beacon Street, Suite 1500, Boston, Massachusetts, 02108, or any adjournment or postponement thereof, and, in their discretion, upon all matters incident to the conduct of the Special Meeting and such other matters as may properly be brought before the Special Meeting. This signed Voting Form revokes all proxies previously given by the undersigned to vote at the Special Meeting of Unitholders or any adjournment or postponement thereof. The undersigned hereby acknowledges receipt of the Notice of Special Meeting of Unitholders and the Proxy Statement/ Prospectus relating to the Special Meeting. THE GENERAL PARTNERS RECOMMEND A VOTE FOR THE FOLLOWING PROPOSAL. To approve the Agreement and Plan of Merger between KRF3 Acquisition Company, L.L.C. and the Partnership and the amendment to the Partnership's Amended Agreement of Limited Partnership, dated as of June 1, 1982, allowing the Partnership to enter into the merger agreement and complete the merger with KRF3 Acquisition Company, L.L.C. / / FOR / / AGAINST / / ABSTAIN WHEN PROPERLY EXECUTED, THIS VOTING FORM WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS GIVEN, THIS VOTING FORM WILL BE VOTED FOR THE FOREGOING PROPOSAL. PLEASE SIGN EXACTLY AS NAME APPEARS BELOW. Dated 2000 ----------------------------------- -------------------------------------------- Signature -------------------------------------------- Signature, if held jointly Please sign exactly as your name appears on this Voting Form. If units are registered in more than one name, the signatures of all such persons are required. A corporation should sign in its full corporate name by a duly authorized officer, stating such officer's title. Trustees, guardians, executors and administrators should sign in their official capacity giving their full title as such. A partnership should sign in the partnership name by an authorized person, stating such person's title and relationship to the partnership. PLEASE COMPLETE, DATE, SIGN AND RETURN THIS VOTING FORM PROMPTLY, USING THE ENCLOSED ENVELOPE. ALTERNATIVELY, PLEASE FORWARD BOTH SIDES OF THE COMPLETED VOTING FORM BY FACSIMILE TO KRUPP FUNDS GROUP LIMITED PARTNERSHIP AT 617-423-8919. / / I HAVE READ THE ABOVE AND WOULD LIKE TO ATTEND THE SPECIAL MEETING IN PERSON. PLEASE SEND ME A TICKET FOR ADMISSION TO THE MEETING. EX-99.D(1) 3 EXHIBIT 99.D(1) VOTING AGREEMENT VOTING AGREEMENT, dated as of January 6, 2000 (this "AGREEMENT"), by and among KRF Company, L.L.C., a Delaware limited liability company ("BERKSHIRE"), KRF3 Acquisition Company, L.L.C., a Delaware limited liability company (the "COMPANY"), and certain investment funds affiliated with Equity Resources Group Incorporated (collectively referred to as "EQUITY RESOURCES"), listed on Schedule I hereto (each, a "UNITHOLDER" and, collectively, the "UNITHOLDERS"). WHEREAS, the Company, Berkshire and Equity Resources propose to enter into an Investment Agreement, dated as of the date hereof (the "INVESTMENT AGREEMENT") which contemplates, among other things, (i) the investment by each of Berkshire and Equity Resources in the Company; and (ii) the merger of the Company with Krupp Realty Fund Ltd.-III with and into the Company, a Massachusetts limited partnership (the "PARTNERSHIP") (the "MERGER") pursuant to a Merger Agreement (the "MERGER AGREEMENT") substantially in the form attached as Exhibit C to the Investment Agreement; and (iii) the amendment of the Amended Agreement of Limited Partnership of the Partnership, dated as of June 1, 1982, as amended from time to time (the "FUND III AGREEMENT") to permit the Company to enter into the Merger Agreement and consummate the transactions contemplated thereby (the "AMENDMENT"). WHEREAS, as of the date hereof, the Unitholders are holders of record or Beneficially Own (as defined herein) an aggregate amount of 1,524 limited partnership units of the Partnership listed opposite the name of each such Unitholder on Schedule I hereto; and WHEREAS, in order to induce Berkshire and the Company to enter into the Investment Agreement, each Unitholder has agreed to enter into this Agreement with respect to all of the investor limited partnership interests of the Partnership now held of record or Beneficially Owned and which may hereafter be acquired by such Unitholders (the "UNITS"). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, the parties hereto hereby agree as follows: 2 ARTICLE I CERTAIN DEFINITIONS Section 1.1 GENERAL. Capitalized terms used and not defined herein have the respective meanings ascribed to them in the Investment Agreement. Section 1.2 BENEFICIAL OWNERSHIP. For purposes of this Agreement, "BENEFICIALLY OWN" or "BENEFICIAL OWNERSHIP" with respect to any securities shall mean "beneficial ownership" of such securities (as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")), including pursuant to any agreement, arrangement or understanding, whether or not in writing. ARTICLE II Section 2.1 VOTING AGREEMENT. Each of the Unitholders hereby agrees as follows: (a) to appear, or cause the holder of record on any applicable record date with respect to any Units owned by such Unitholder to appear, in person or by proxy, for the purpose of obtaining a quorum at any annual or special meeting of the partners of the Partnership and at any adjournment thereof, at which matters relating to the Merger, the Amendment or any transaction contemplated thereby are considered; and (b) at any meeting of the partners of the Partnership, however called, and in any action by consent of the limited partners of the Partnership, to vote, or cause to be voted by the Unitholders, in person or by proxy, the Units held of record or Beneficially Owned by such Unitholder in favor of the Merger, the Merger Agreement (as amended from time to time), the Amendment and the transactions contemplated by the Merger Agreement; and (c) at any meeting of the Partners of the Partnership, however called, and in any action by consent of the limited partners of the Partnership, to vote, or cause to be voted by the Unitholders, in person or by proxy, the Units held of record or Beneficially Owned by such Unitholder against approval of any proposal made in opposition to or in competition with the Merger or any of the other transactions contemplated by the Merger Agreement, and any other action that may reasonably be expected to impede, interfere with, delay, postpone or attempt to discourage the Merger or the other transactions contemplated by the Merger Agreement which would materially and adversely affect the Partnership or its ability to consummate the transactions contemplated by the Merger Agreement. Section 2.2 NO OWNERSHIP INTEREST. Nothing contained in this Voting Agreement shall be deemed to vest in the Company or Berkshire any direct or indirect ownership or incidence of ownership of or with respect to any Units. All rights, ownership and economic benefits of and relating to the Units shall remain and belong to the Unitholders. 3 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE UNITHOLDERS Each of the Unitholders hereby represents and warrants, severally and not jointly, to the Company and Berkshire as follows: Section 3.1 AUTHORITY RELATIVE TO THIS AGREEMENT. Such Unitholder has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. Where such Unitholder is a corporation, partnership or other entity, the execution and delivery of this Agreement by such Unitholder and the consummation by such Unitholder of the transactions contemplated hereby have been duly and validly authorized by the board of directors or other governing body of such Unitholder, and no other proceedings on the part of such Unitholder are necessary to authorize this Agreement or to consummate such transactions. This Agreement has been duly and validly executed and delivered by such Unitholder and constitutes a legal, valid and binding obligation of such Unitholder, enforceable against such Unitholder in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors' rights generally or by general principles governing the availability of equitable remedies. Section 3.2 NO CONFLICT. (a) The execution and delivery of this Agreement by such Unitholder does not, and the performance of this Agreement by such Unitholder shall not, (i) where such Unitholder is a corporation, partnership or other entity, conflict with or violate the organizational documents of such Unitholder, (ii) conflict with or violate any agreement, arrangement, law, rule, regulation, order, judgment or decree to which such Unitholder is a party or by which such Unitholder (or the Units held of record or Beneficially Owned by such Unitholder) is bound or affected or (iii) result in any breach of or constitute a default (or an event that with notice or lapse or time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the Units held of record or Beneficially Owned by such Unitholder pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which such Unitholder is a party or by which such Unitholder (or the Units held of record or Beneficially Owned by such Unitholder) is bound or affected, except, in the case of clauses (ii) and (iii) of this Section 3.2, for any such conflicts, violations, breaches, defaults or other occurrences which would not prevent the performance by such Unitholder of its material obligations under this Agreement. (b) The execution and delivery of this Agreement by such Unitholder does not, and the performance of this Agreement by such Unitholder shall 4 not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental entity except for applicable requirements, if any, of federal or state securities and antitrust laws and except where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent the performance by such Unitholder of its material obligations under this Agreement. Section 3.3 TITLE TO THE UNITS. As of the date hereof, such Unitholder is the record or Beneficial Owner of the Units listed opposite the name of such Unitholder on Schedule I hereto. The Units listed opposite the name of such Unitholder on Schedule I hereto are all the securities of the Partnership either held of record or Beneficially Owned by such Unitholder. Such Unitholder has not appointed or granted any proxy, which appointment or grant is still effective, with respect to the Units held of record or Beneficially Owned by such Unitholder. The Units listed opposite the name of such Unitholder on Schedule I hereto are owned free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, limitations on such Unitholder's voting rights, charges and other encumbrances of any nature whatsoever other than liens under applicable law. ARTICLE IV COVENANTS OF THE UNITHOLDER Section 4.1 NO INCONSISTENT AGREEMENTS. Each Unitholder hereby represents, warrants, covenants and agrees that, except as contemplated by this Agreement and the Investment Agreement, such Unitholder has not and shall not, and will use its reasonable best efforts to not permit any Person under such Unitholder's control to, enter into any voting agreement or grant a proxy or power of attorney with respect to the Units held of record or Beneficially Owned by such Unitholder which, in either case, is inconsistent with this Agreement. Section 4.2 TRANSFER OF TITLE. Each Unitholder hereby covenants and agrees that such Unitholder will not, prior to the termination of this Agreement, either directly or indirectly, offer or otherwise agree to sell, assign, pledge, hypothecate, transfer, exchange, or dispose of any Units or options, warrants or other convertible securities to acquire or purchase units of the Partnership or any other securities or rights convertible into or exchangeable for units of the Partnership, owned either directly or indirectly by such Unitholder or with respect to which such Unitholder has the power of disposition, whether now or hereafter acquired, without the prior written consent of the Company and Berkshire. Each Unitholder hereby agrees and consents to the entry of stop transfer instructions by the Partnership against the transfer of any Units inconsistent with the terms of this Section 4.2. 5 ARTICLE V MISCELLANEOUS Section 5.1 TERMINATION. This Agreement shall terminate unless extended by agreement of each of the parties hereto on August 1, 2000. Upon such termination, no party shall have any further obligations or liabilities hereunder; PROVIDED, HOWEVER, that nothing in this Agreement shall relieve any party from liability for the breach of any of its representations, warranties, covenants and agreements set forth in this Agreement prior to such termination. Section 5.2 ADDITIONAL UNITS. If, after the date hereof, a Unitholder acquires the right to vote any additional partnership interests of the Partnership (any such partnership interests shall be referred to herein as "ADDITIONAL UNITS"), the provisions of this Agreement applicable to the Units shall be applicable to such Additional Units as if such Additional Units had been Units held by the Unitholders as of the date hereof. The provisions of the immediately preceding sentence shall be effective with respect to Additional Units without action by any Person immediately upon the acquisition by a Unitholder of the right to vote such Additional Units. Section 5.3 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. Section 5.4 ENTIRE AGREEMENT. This Agreement and the Investment Agreement constitute the entire agreement between Berkshire, the Company and the Unitholders with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between Berkshire, the Company and the Unitholders with respect to the subject matter hereof; PROVIDED that, to the extent not inconsistent with the terms hereof, the Settlement Agreement and Release, dated as of July 17, 1995, among Equity Resources and the parties named therein shall continue in full force and effect. Section 5.5 AMENDMENT. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. Section 5.6 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule or law, or public policy, all other conditions and provisions of this Agreement shall nevertheless 6 remain in full force and effect so long as the economic or legal substance of this Agreement is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereby shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in a mutually acceptable manner in order that the terms of this Agreement remain as originally contemplated. Section 5.7 NOTICES. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made and shall be effective upon receipt, if delivered personally, upon receipt of a transmission confirmation if sent by facsimile (with a confirming copy sent by overnight courier) and on the next business day if sent by Federal Express, United Parcel Service, Express Mail or other reputable overnight courier to the parties at the following addresses (or at such other address for a party as shall be specified by notice): If to a Unitholder: c/o Equity Resources Group, Inc. 14 Story Street Cambridge, Massachusetts 02138 Attention: Mr. Eggert Dagbjartsson with a copy to: Holland & Knight, LLP One Beacon Street Boston, Massachusetts 02108 If to the Company or Berkshire, to: c/o The Berkshire Group One Beacon Street, Suite 1500 Boston, Massachusetts 02108 Attention: David Quade 7 with copies to: The Berkshire Group One Beacon Street, Suite 1500 Boston, Massachusetts 02108 Attention: Scott Spelfogel, Esq. Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019 Attention: James M. Dubin Section 5.8 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed entirely within such state without giving effect to the provisions thereof relating to conflicts of law. Section 5.9 OBLIGATIONS OF UNITHOLDERS. The obligations of the Unitholders hereunder shall be "joint and several." Section 5.10 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which, when taken together, shall constitute one and the same instrument. 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized persons on the date first above written. KRF3 ACQUISITION COMPANY, L.L.C. By: KRF Company, L.L.C., its sole member By: The Krupp Family Limited Partnership-94, its sole member By: /s/ Douglas Krupp ------------------------------------------------------- Douglas Krupp General Partner KRF COMPANY, L.L.C. By: The Krupp Family Limited Partnership-94, its sole member By: /s/ Douglas Krupp ------------------------------------------------------- Douglas Krupp General Partner 9 EQUITY RESOURCE BRATTLE FUND LIMITED PARTNERSHIP, EQUITY RESOURCE CAMBRIDGE FUND LIMITED PARTNERSHIP EQUITY RESOURCE GENERAL FUND LIMITED PARTNERSHIP, EQUITY RESOURCE FUND XVI LIMITED PARTNERSHIP, EQUITY RESOURCE FUND XIX LIMITED PARTNERSHIP, EQUITY RESOURCE BRIDGE FUND LIMITED PARTNERSHIP By: EQUITY RESOURCES GROUP, INCORPORATED, as general partner of each of the foregoing /s/ Eggert Dagbjartsson -------------------------------------------------- By: Eggert Dagbjartsson Executive Vice President SCHEDULE I
Unitholder: Number of Units: Address: ---------- --------------- ------- Equity Resource Fund 916.00 c/o Equity Resources Group, Inc. XVI Limited Partnership 14 Story Street Cambridge, Massachusetts 02138 Attention: Mr. Eggert Dagbjartsson Equity Resource Fund 413.00 c/o Equity Resources Group, Inc. XIX Limited Partnership 14 Story Street Cambridge, Massachusetts 02138 Attention: Mr. Eggert Dagbjartsson Equity Resource General 40.00 c/o Equity Resources Group, Inc. Fund Limited Partnership 14 Story Street Cambridge, Massachusetts 02138 Attention: Mr. Eggert Dagbjartsson Equity Resource 95.00 c/o Equity Resources Group, Inc. Cambridge Fund Limited 14 Story Street Partnership Cambridge, Massachusetts 02138 Attention: Mr. Eggert Dagbjartsson Equity Resource Brattle 30.00 c/o Equity Resources Group, Inc. Fund Limited Partnership 14 Story Street Cambridge, Massachusetts 02138 Attention: Mr. Eggert Dagbjartsson Equity Resource Bridge 30.00 c/o Equity Resources Group, Inc. Fund Limited Partnership 14 Story Street Cambridge, Massachusetts 02138 Attention: Mr. Eggert Dagbjartsson
[EXECUTION COPY] VOTING AGREEMENT among EQUITY RESOURCE BRATTLE FUND LIMITED PARTNERSHIP, EQUITY RESOURCE CAMBRIDGE FUND LIMITED PARTNERSHIP, EQUITY RESOURCE GENERAL FUND LIMITED PARTNERSHIP, EQUITY RESOURCE FUND XVI LIMITED PARTNERSHIP, EQUITY RESOURCE FUND XIX LIMITED PARTNERSHIP EQUITY RESOURCE BRIDGE FUND LIMITED PARTNERSHIP KRF COMPANY, L.L.C., and KRF3 ACQUISITION COMPANY, L.L.C. ------------------------------ Dated as of January 6, 2000 ------------------------------ EX-99.D(2) 4 EXHIBIT 99.D(2) [EXECUTION COPY] INVESTMENT AGREEMENT among EQUITY RESOURCE CAMBRIDGE FUND LIMITED PARTNERSHIP, EQUITY RESOURCE GENERAL FUND LIMITED PARTNERSHIP, EQUITY RESOURCE FUND XVI LIMITED PARTNERSHIP, EQUITY RESOURCE FUND XIX LIMITED PARTNERSHIP, EQUITY RESOURCE BRATTLE FUND LIMITED PARTNERSHIP EQUITY RESOURCE BRIDGE FUND LIMITED PARTNERSHIP KRF COMPANY, L.L.C., and KRF3 ACQUISITION COMPANY, L.L.C. ------------------------------ Dated: January 6, 2000 ------------------------------
TABLE OF CONTENTS PAGE ARTICLE 1 DEFINITIONS............................................................................2 ARTICLE 2 VOTING AGREEMENT, CLOSING DATE TRANSACTIONS AND USE OF PROCEEDS.......................................................5 2.1 Voting Agreement.......................................................................5 2.2 Closing Date Transactions..............................................................5 2.2.1 LLC Agreement...................................................................5 2.2.2 Capital Contributions...........................................................5 2.2.3 Issuance of LLC Interests.......................................................5 2.3 Use of Proceeds........................................................................5 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................................................5 3.1 Existence and Power....................................................................5 3.2 Authorization; No Contravention........................................................6 3.3 Governmental Authorization; Third Party Consents.......................................6 3.4 Binding Effect.........................................................................6 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS AND BERKSHIRE..............................................6 4.1 Existence and Power....................................................................6 4.2 Authorization; No Contravention........................................................7 4.3 Governmental Authorization; Third Party Consents.......................................7 4.4 Binding Effect.........................................................................7 4.5 Purchase for Own Account...............................................................7 4.6 Investment Experience; Economic Risk; Accredited Investor..............................7 ARTICLE 5 INDEMNIFICATION........................................................................8 5.1 Indemnification........................................................................8 5.2 Notification...........................................................................8 5.3 Contribution...........................................................................9 ARTICLE 6 CONDITIONS............................................................................10 6.1 Notice of the Closing Date............................................................10 6.2 Merger Agreement Conditions...........................................................10 6.3 Compliance with this Agreement........................................................10
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PAGE ARTICLE 7 TERMINATION...........................................................................10 ARTICLE 8 MISCELLANEOUS.........................................................................10 8.1 Survival of Representations and Warranties............................................10 8.2 Notices...............................................................................11 8.3 Successors and Assigns................................................................11 8.4 Amendment and Waiver..................................................................12 8.5 Counterparts..........................................................................12 8.6 Headings..............................................................................12 8.7 Governing Law; Arbitration............................................................12 8.8 Severability..........................................................................13 8.9 Entire Agreement......................................................................13 8.10 No Third Party Beneficiaries..........................................................13 8.11 Further Assurances....................................................................13
EXHIBITS EXHIBIT A Amended and Restated Limited Liability Company Agreement of KRF3 Acquisition Company, L.L.C. EXHIBIT B Merger Agreement ii INVESTMENT AGREEMENT INVESTMENT AGREEMENT, dated as of January 6, 2000 (this "AGREEMENT"), among Equity Resource Fund XVI Limited Partnership, Equity Resource Fund XIX Limited Partnership, Equity Resource General Fund Limited Partnership, Equity Resource Cambridge Fund Limited Partnership, Equity Resource Brattle Fund Limited Partnership, Equity Resource Bridge Fund Limited Partnership, all Massachusetts limited partnerships (each, an "INVESTOR" and collectively, the "INVESTORS"), KRF Company, L.L.C., a Delaware limited liability company ("BERKSHIRE") and KRF3 Acquisition Company, L.L.C., a Delaware limited liability company (the "COMPANY"); WHEREAS, subject to the terms and conditions contained herein, Berkshire and the Investors wish to enter into the Amended and Restated Limited Liability Company Agreement of the Company in the form attached hereto as EXHIBIT A (the "LLC AGREEMENT"); WHEREAS, prior to the date hereof, Berkshire has caused to be contributed to the capital of the Company 10,826 investor limited partnership interests of Fund III (as defined below) (the "EXISTING BERKSHIRE CONTRIBUTION"); WHEREAS, Berkshire and the Investors wish to make the capital contributions to the Company pursuant to Section 3.1 (Capital Contributions) of the LLC Agreement; WHEREAS, to evidence such capital contributions, the Company wishes to issue and sell to the Investors and Berkshire, and the Investors and Berkshire wish to purchase from the Company, the LLC Interests (as defined herein), having the terms and conditions set forth in the LLC Agreement. WHEREAS, the Company intends to utilize the proceeds of the issuance of the LLC Interests to consummate a merger with Krupp Realty Fund Ltd.-III, a Massachusetts limited partnership ("FUND III") upon terms and conditions substantially similar to the terms and conditions set forth in the form attached hereto as EXHIBIT B (the "MERGER AGREEMENT"). NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 2 ARTICLE 1 DEFINITIONS As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "AFFILIATE" shall mean, with respect to any Person, (i) any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person, (ii) any Person that is an officer of, member of, partner in, or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, member, partner or trustee, or with respect to which the specified Person serves in a similar capacity, (iii) any Person that, directly or indirectly, is the beneficial owner of 10% or more of any class of equity securities of, or otherwise has a substantial beneficial interest in, the specified Person or of which the specified Person is directly or indirectly the owner of 10% or more of any class of equity securities or in which the specified Person has a substantial beneficial interest, (iv) any Immediate Family Member of the specified Person and (v) any Affiliate of a Person described in subsections (i)-(iv). For the purposes of this definition, "control" shall mean, as to any Person, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "AGREEMENT" means this Investment Agreement as the same may be amended, supplemented or modified in accordance with the terms hereof. "AMENDMENT" means the amendment to the Fund III Agreement to permit the Company to enter into the Merger Agreement. "BERKSHIRE" has the meaning set forth in the preamble to this Agreement. "BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which commercial banks in the State of New York or the Commonwealth of Massachusetts are authorized or required by law or executive order to close. "CAPITAL CONTRIBUTION" has the meaning set forth in the LLC Agreement. In the case of the Investors, the Capital Contribution shall mean all of the Units owned by them on the Closing Date. In the case of Berkshire, the Capital Contribution shall mean the sum of (a) the Existing Berkshire Contribution and (b) $954,810 in cash, subject to increase in the sole discretion of Berkshire. "CERTIFICATE OF FORMATION" means the certificate of formation of the Company, duly filed with the Secretary of State of the State of Delaware. 3 "CLOSING DATE" means a Business Day following the Meeting Date designated by the Company as the Closing Date. "COMMISSION" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "COMPANY" has the meaning set forth in the preamble to this Agreement. "CONTRACTUAL OBLIGATIONS" means as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such Person is a party or by which it or any of its property is bound. "EXISTING BERKSHIRE CONTRIBUTION" has the meaning set forth in the preamble to this Agreement. "FUND III" has the meaning set forth in the preamble to this Agreement. "FUND III AGREEMENT" means the Amended Agreement of Limited Partnership of Fund III, dated as of June 1, 1982, as amended from time to time. "GOVERNMENTAL AUTHORITY" means the government of any country, state, city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "IMMEDIATE FAMILY MEMBER" means with respect to any person, such person's spouse, parent, parent-in-law, issue, brother, sister, brother-in-law, sister-in-law, or child-in-law. "INDEMNIFIED PARTY" and "INDEMNIFIED PARTIES" have the meanings set forth in Section 5.2 (Notification). "INVESTOR" or "INVESTORS" has the meaning set forth in the preamble to this Agreement. "INVESTOR REPRESENTATIVE" has the meaning set forth in Section 8.7(b) to this Agreement (Governing Law; Arbitration). "LIEN" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or preference, priority, right or other security interest or preferential arrangement of any kind or nature whatsoever. "LLC AGREEMENT" has the meaning set forth in the preamble to this Agreement. 4 "LLC INTERESTS" means the limited liability company interests in the Company, having the terms and conditions set forth in the LLC Agreement. "LOSSES" has the meaning set forth in Section 5.1 (Indemnification). "MEETING DATE" means the date of the special meeting of the partners of Fund III at which the Amendment and Merger Agreement and the transactions contemplated thereby are considered and voted upon. "MEMBER" has the meaning set forth in Section 1.1 (Definitions) of the LLC Agreement. "MERGER AGREEMENT" has the meaning set forth in the preamble to this Agreement. "PERSON" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "PURCHASED INTERESTS" means the LLC Interests purchased on the Closing Date pursuant to Article 2 (Voting Agreement, Closing Date Transactions and Use of Proceeds) of this Agreement. "REQUIREMENTS OF LAW" means as to any Person, any law, treaty, rule, regulation, right, privilege, qualification, license or franchise or determination of an arbitrator or a court or other Governmental Authority, in each case applicable or binding upon such Person or any of its property or to which such Person or any of its property is subject or pertaining to any or all of the transactions contemplated or referred to herein. "SEC" has the meaning set forth in Section 3.3 of this Agreement. "SECURITIES ACT" means the Securities Act of 1933, as amended (or any successor statute thereto), and the rules and regulations of the Commission promulgated thereunder. "TRANSACTION DOCUMENTS" means collectively, this Agreement, the LLC Agreement and the Voting Agreement. 5 "UNITS" has the meaning set forth in the Fund III Agreement. "VOTING AGREEMENT" means the Voting Agreement, dated the date hereof, among the parties hereto. ARTICLE 2 VOTING AGREEMENT, CLOSING DATE TRANSACTIONS AND USE OF PROCEEDS 2.1 VOTING AGREEMENT. Simultaneously with the execution hereof, each of the Investors has executed the Voting Agreement relating to the approval of the Amendment and the merger contemplated by the Merger Agreement and the consummation of the transactions contemplated thereby. 2.2 CLOSING DATE TRANSACTIONS. Subject to the conditions set forth in Article 6 (Conditions), the parties hereto covenant and agree that on the Closing Date the following shall occur simultaneously: 2.2.1 LLC AGREEMENT. Each of the Investors and Berkshire shall execute and deliver the LLC Agreement; 2.2.2 CAPITAL CONTRIBUTIONS. Each of the Investors and Berkshire shall make their respective Capital Contributions as provided in Section 3.1 (Capital Contributions) of the LLC Agreement and Exhibit A thereto; PROVIDED, that, Berkshire shall not be required to contribute more than $954,810 in addition to the Existing Berkshire Contribution; and 2.2.3 ISSUANCE OF LLC INTERESTS. The Company shall issue LLC Interests to each Investor and Berkshire in respect of the Capital Contributions made by it as of such date. 2.3 USE OF PROCEEDS. As soon as practicable following the Closing Date, the Company shall use the proceeds from the sale of the Purchased Interests, together with other available funds, to consummate the merger of the Company and Fund III upon terms and conditions substantially similar to the terms and conditions set forth in the Merger Agreement, and as otherwise may be required in connection with the ownership and management of the properties acquired thereby and for other limited liability company purposes. 6 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Investors and Berkshire as follows: 3.1 EXISTENCE AND POWER. The Company (i) is a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and (ii) has the requisite power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents to which it is a party. 3.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and each of the other Transaction Documents to which it is a party and the transactions contemplated hereby and thereby, including, without limitation, the sale, issuance and delivery of the LLC Interests (a) have been duly authorized by all necessary action of the Company, (b) do not contravene the terms of the Certificate of Formation or the LLC Agreement of the Company and (c) do not violate, conflict with or result in any breach or contravention of or the creation of any Lien under, any Contractual Obligation of the Company, or any Requirements of Law applicable to the Company. The Company is not a party to or bound by any agreement which is currently in effect, granting any rights to any Person which are inconsistent with the rights to be granted to the Investors or Berkshire by the Company in the LLC Agreement. 3.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. Except for filings to be made with the Securities and Exchange Commission (the "SEC") and the approval of the Amendment and the merger by the holders of Units of Fund III, no approval, consent, compliance, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person, and no lapse of a waiting period under any Requirement of Law, is necessary or required to be obtained by the Company in connection with the execution, delivery or performance (including, without limitation, the sale, issuance and delivery of the LLC Interests) by the Company or of any of the Transaction Documents to which it is a party. 3.4 BINDING EFFECT. This Agreement and each of the other Transaction Documents to which the Company is a party have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforce ment of creditors' rights generally and by general principles of equity relating to 7 enforceability (regardless of whether considered in a proceeding at law or in equity). ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS AND BERKSHIRE Each Investor and Berkshire hereby represents and warrants (severally as to itself and not jointly) to the Company as follows: 4.1 EXISTENCE AND POWER. Such Person (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and (b) has the requisite power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents to which it is a party. 4.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by such Person of this Agreement and each of the other Transaction Documents to which it is a party and the transactions contemplated hereby and thereby, including, without limitation, the purchase of the Purchased Interests, (a) have been duly authorized by all necessary action by such Person, (b) do not contravene the terms of the organizational documents of such Person, and (c) do not violate, conflict with or result in any breach or contravention of or the creation of any Lien under, any Contractual Obligation of such Person, or any Requirement of Law applicable to such Person, except for such violation, conflict, breach, contravention or Lien which would not have a material adverse effect on the ability of such Person to consummate the transactions contemplated by the Transaction Documents. 4.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. Except for filings to be made with the SEC, no approval, consent, compliance, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person and no lapse of a waiting period under a Requirement of Law, is necessary or required to be obtained by such Person in connection with the execution, delivery or performance (including, without limitation, the purchase of the Purchased Interests) by such Person. 4.4 BINDING EFFECT. This Agreement and each of the other Transaction Documents to which such Person is a party have been duly executed and delivered by such Person and constitute the legal, valid and binding obligations of such Person, enforceable against it in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforce ment of creditors' rights generally or by equitable principles relating to enforceability (regardless of whether considered in a proceeding at law or in equity). 8 4.5 PURCHASE FOR OWN ACCOUNT. The LLC Interests to be acquired by such Person pursuant to this Agreement are being or will be acquired for its own account and with no intention of distributing or reselling such LLC Interests or any part thereof in any transaction that would be in violation of the securities laws of the United States of America, or any state. Such Person understands and agrees that any sale or other disposition of LLC Interests may be made only in compliance with the Securities Act and applicable state securities laws, as then in effect, and the LLC Agreement. 4.6 INVESTMENT EXPERIENCE; ECONOMIC RISK; ACCREDITED INVESTOR. Such Person has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risk of an investment in the Purchased Interests hereunder. Such Person understands that it must bear the economic risk of an investment in the Purchased Interests for an indefinite length of time because the Purchased Interests have not been registered under the Securities Act or any applicable state securities laws. Such Person further understands that the purchase of the Purchased Interests involves a high degree of risk, and that such Person has been given the opportunity to ask questions of and receive answers from the Company regarding the Purchased Interests. ARTICLE 5 INDEMNIFICATION 5.1 INDEMNIFICATION. (a) Except as otherwise provided in this Article 5, Berkshire and the Company, severally and not jointly, agree to indemnify, defend and hold harmless the Investors and their Affiliates and their respective offi cers, directors, agents, employees, subsidiaries, partners, members and controlling persons to the fullest extent permitted by law from and against any and all claims, losses, liabilities, damages, deficiencies, judgements, assessments, fines, settlements, costs or expenses (including interest, penalties and reasonable fees, disbursements and other charges of counsel) (collectively, "LOSSES") based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation, warranty, covenant or agreement of Berkshire or the Company contained in this Agreement. (b) Except as otherwise provided in this Article 5, each Investor agrees to indemnify, defend and hold harmless the Company, Berkshire, and their Affiliates and their respective officers, directors, agents, employees, subsidiaries, partners, members and controlling persons to the fullest extent permitted by law from and against any Losses based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation, warranty, covenant or agreement of such Investor contained in this Agreement. (c) Except as otherwise provided in this Article 5, the Company agrees to indemnify, defend and hold harmless Berkshire, the Investors and 9 their respective Affiliates, officers, directors, agents, employees, subsidiaries, partners, members and controlling persons to the fullest extent permitted by law from and against any Losses based upon or arising out of or otherwise in respect of any litigation commenced by or on behalf of Unitholders relating to the Merger and the transactions contemplated thereby; PROVIDED that the Company shall not have any liability to any of the foregoing parties to the extent that any such Loss arises out of or is based upon such parties' fraud, gross negligence, willful malfeasance or conduct that is the subject of a criminal proceeding (where such party has a reasonable cause to believe that such conduct was unlawful). Berkshire shall make capital contributions to the Company in the event the Company is otherwise unable to satisfy such indemnity obligations, which shall constitute additional Capital Contributions of the Managing Member pursuant to Section 3.1(b)(i) of the LLC Agreement. 5.2 NOTIFICATION. Each Person entitled to indemnification under this Article 5 (an "INDEMNIFIED PARTY") shall, promptly after the receipt of notice of the commencement of any action, investigation, claim or other proceeding against such Indemnified Party in respect of which indemnity may be sought from the indemnifying parties under this Article 5 (the "INDEMNIFYING PARTIES"), notify the Indemnifying Parties in writing of the commencement thereof. The failure of any Indemnified Party to so notify the Indemnifying Parties of any such action shall not relieve the Indemnifying Parties from any liability which it may have to such Indemnified Party (a) other than pursuant to this Article 5 or (b) under this Article 5 unless, and only to the extent that, such failure results in the Indemnifying Parties' forfeiture of substantial rights or defenses. In case any such action, claim or other proceeding shall be brought against any Indemnified Party, and it shall notify the Indemnifying Parties of the commencement thereof, the Indemnifying Parties shall be entitled to assume the defense thereof at their own expense, with counsel reasonably satisfactory to such Indemnified Party in its reasonable judgment; PROVIDED, HOWEVER, that any Indemnified Party may, at its own expense, retain separate counsel to participate in such defense at its own expense. Notwithstanding the foregoing, in any action, claim or proceeding in which both the Indemnifying Parties, on the one hand, and an Indemnified Party, on the other hand, are, or are reasonably likely to become, a party, such Indemnified Party shall have the right to employ separate counsel at the expense of the Indemnifying Parties and to control its own defense of such action, claim or proceeding if, in the reasonable opinion of counsel to such Indemnified Party, a conflict or potential conflict exists between the Indemnifying Parties, on the one hand, and such Indemnified Party, on the other hand, that would make such separate representation advisable; PROVIDED, HOWEVER, that the Indemnifying Parties shall not be liable for the fees and expenses of more than one counsel to all Indemnified Parties. Each Indemnifying Party agrees that it will not, without the prior written consent of the Indemnified Party, settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated hereby (if any Indemnified Party is a party thereto or has been actually threatened to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of the Indemnified Party from all liability arising or that may arise out of such claim, action or proceeding. The Indemnifying Parties shall not be liable for any 10 settlement of any claim, action or proceeding effected against an Indemnified Party without its written consent. Notwithstanding the foregoing or anything to the contrary contained in this Agreement, nothing in this Article 5 shall restrict or limit any rights that any Indemnified Party may have to seek equitable relief. 5.3 CONTRIBUTION. If and to the extent that the indemnification provided for in Section 5.1 (Indemnification) is unenforceable for any reason, each Indemnifying Party shall make the maximum contribution to the payment and satisfaction of amounts with respect to such Losses that such Indemnifying Party would otherwise be obligated to provide indemnification for pursuant to this Article 5 as shall be permissible under applicable laws. ARTICLE 6 CONDITIONS The obligations of the parties to perform the obligations set forth in Sections 2.2 (Closing Date Transactions) and 2.3 (Use of Proceeds) are subject to the fulfillment prior to or on the Closing Date of the following conditions: 6.1 NOTICE OF THE CLOSING DATE. The Company shall have provided at least two (2) Business Days' prior written notice to Berkshire and the Investors of the Closing Date. 6.2 MERGER AGREEMENT CONDITIONS. The conditions set forth in Article VIII of the Merger Agreement shall have been fulfilled or waived by the parties thereto. 6.3 COMPLIANCE WITH THIS AGREEMENT. The Company, the Investors and Berkshire shall have performed and complied with all of their agreements and conditions set forth or contemplated herein that are required to be performed or complied with by the Company, the Investors and Berkshire on or before the Closing Date. 11 ARTICLE 7 TERMINATION Notwithstanding anything to the contrary contained herein, if the Closing Date shall not have occurred on or prior to August 1, 2000 or Capital Contributions for each Member, as contemplated by the LLC Agreement, are not made by each of the Members of the Company by the close of business on the Closing Date, New York City time, then this Agreement shall terminate and the parties hereto shall have no further obligations hereunder. This Agreement may be terminated by the Berkshire at any time. Notwithstanding the foregoing, no termination of this Agreement shall relieve a party that has breached a representation, warranty or covenant contained herein from liability therefor or from any indemnity obligation arising under Article 5 hereof prior to the date of termination. ARTICLE 8 MISCELLANEOUS 8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations, warranties and covenants made herein shall survive the execution and delivery of this Agreement, acceptance of the Purchased Interests and payment therefor. 8.2 NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by telecopier, courier service, overnight mail or personal delivery: (a) if to an Investor: c/o Equity Resources Group, Inc. 14 Story Street Cambridge, Massachusetts 02138 Attention: Eggert Dagbjartsson with a copy to: Holland & Knight LLP One Beacon Place Boston, Massachusetts 02108 Attention: Benjamin Volinski, Esq. 12 (b) if to the Company or Berkshire: c/o The Berkshire Group One Beacon Street, Suite 1500 Boston, Massachusetts 02108 Attention: David Quade with copies to: The Berkshire Group One Beacon Street, Suite 1500 Boston, Massachusetts 02108 Attention: Scott Spelfogel, Esq. Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019 Attention: James M. Dubin All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. 8.3 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. Neither the Company, Berkshire nor the Investors may assign any of their respective rights under this Agreement, without the written consent of the other parties. 8.4 AMENDMENT AND WAIVER. (a) AMENDMENT. Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Investors from the terms of any provision of this Agreement, shall be effective (i) only if it is made or given in writing and signed by the Company, Berkshire and the Investors, and (ii) only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. (b) WAIVER. No failure or delay on the part of the Company or the Investors in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or the Investors at law, in equity or otherwise. 8.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 8.6 HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 8.7 GOVERNING LAW; ARBITRATION. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of law thereof. (b) Any dispute arising hereunder shall be settled by arbitration in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association (the "AAA RULES") by a single arbitrator who is mutually agreeable to Berkshire and the Investors (who shall be represented by Equity Resources Group, Incorporated (the "INVESTORS' REPRESENTATIVE"). If Berkshire and the Investors' Representative are unable to agree upon an arbitrator, an arbitrator shall be selected in accordance with the AAA Rules. Any judgment upon the award rendered by such arbitrator may be entered in any court of competent jurisdiction. All proceedings in any such arbitration shall be conducted in Boston, Massachusetts. Jurisdiction of such arbitrator shall be exclusive as to disputes between Berkshire and the Investors relating to this Agreement, and Berkshire and the Investors agree that this agreement to arbitrate shall be specifically enforceable under the laws of Delaware. Neither Berkshire nor any Investor (including the Investors' Representative) shall have the right to appeal the arbitrator's decision or otherwise to submit a dispute relating to this Agreement to a court of law. With respect to matters submitted to arbitration, each of Berkshire and the Investors shall bear its own respective costs, fees and expenses (including reasonable fees, expenses and disbursements of attorneys) in connection with such arbitration. Berkshire, on the one hand, and the Investors, collectively, on the other hand, shall each pay one-half of the total costs, fees and expenses of the arbitrator. 8.8 SEVERABILITY. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 8.9 ENTIRE AGREEMENT. This Agreement, the LLC Agreement and the Voting Agreement, together with the exhibits hereto or thereto, are intended by the 13 parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. This Agreement, the LLC Agreement and the Voting Agreement together with the exhibits attached hereto or thereto, supersede all prior agreements and understandings between the parties with respect to such subject matter. 8.10 NO THIRD PARTY BENEFICIARIES. Nothing contained in this Agreement (other than the provisions of Article 5 (Indemnification)) express or implied, is intended to or shall confer upon anyone other than the parties (and their successors and permitted assigns) any right, benefit or remedy of any nature whatsoever under or by reason of any Transaction Documents. 8.11 FURTHER ASSURANCES. Each of the parties shall execute such documents and perform such further acts (including, without limitation, obtaining any consents, exemptions, authorizations or other actions by, or giving any notices to, or making any filings with, any Governmental Authority or any other Person) as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. Remainder of Page Intentionally Left Blank 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective duly authorized persons on the date first above written. KRF3 ACQUISITION COMPANY, L.L.C. By: KRF Company, L.L.C., its managing member By: The Krupp Family Limited Partnership-94, its sole member By: /s/ Douglas Krupp ------------------------------------------- Douglas Krupp General Partner KRF COMPANY, L.L.C. By: The Krupp Family Limited Partnership-94, its sole member By: /s/ Douglas Krupp ------------------------------------------- Douglas Krupp General Partner 15 EQUITY RESOURCE CAMBRIDGE FUND LIMITED PARTNERSHIP EQUITY RESOURCE GENERAL FUND LIMITED PARTNERSHIP EQUITY RESOURCE FUND XVI LIMITED PARTNERSHIP EQUITY RESOURCE FUND XIX LIMITED PARTNERSHIP EQUITY RESOURCE BRATTLE FUND LIMITED PARTNERSHIP EQUITY RESOURCE BRIDGE FUND LIMITED PARTNERSHIP By: EQUITY RESOURCES GROUP, INCORPORATED, as general partner of each of the foregoing By: /s/ Eggert Dagbjartsson --------------------------------------- Eggert Dagbjartsson Executive Vice President EXHIBIT A -------------------------------- AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF KRF3 ACQUISITION COMPANY, L.L.C. (A DELAWARE LIMITED LIABILITY COMPANY) DATED AS OF [________], 2000 -------------------------------- Page ---- KRF3 ACQUISITION COMPANY, L.L.C. AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT Table of Contents
Page ---- ARTICLE 1 GENERAL PROVISIONS.................................................................1 1.1 Definitions........................................................................1 1.2 Name...............................................................................9 1.3 Principal Office...................................................................9 1.4 Registered Office and Registered Agent.............................................9 1.5 Term...............................................................................9 1.6 Purpose and Power..................................................................9 ARTICLE 2 MANAGEMENT; LIABILITY OF MEMBERS; EXPENSES..........................................................................10 2.1 Rights and Duties of the Managing Member..........................................10 2.2 Rights and Duties of the Additional Members.......................................12 2.3 Expenses..........................................................................13 2.4 Officers..........................................................................13 ARTICLE 3 CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; DISTRIBUTIONS; ALLOCATIONS........................................................13 3.1 Capital Contributions.............................................................13 3.2 Capital Accounts..................................................................15 3.3 Distributions.....................................................................16 3.4 Allocations.......................................................................17 3.5 Special Allocations...............................................................18 3.6 Tax Withholding; Withholding Advances.............................................20
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Page ---- ARTICLE 4 LIABILITY; INDEMNIFICATION........................................................21 4.1 Limited Liability of Members......................................................21 4.2 Qualification.....................................................................22 4.3 Liability to Members..............................................................22 4.4 Indemnification...................................................................22 ARTICLE 5 CONSENTS; VOTING; MEETINGS........................................................24 5.1 Method of Giving Consent..........................................................24 5.2 Meetings..........................................................................24 5.3 Quarterly Meetings................................................................24 ARTICLE 6 REPORTS TO MEMBERS; CONFIDENTIALITY...............................................24 6.1 Books of Account..................................................................24 6.2 Reports...........................................................................25 6.3 Accounting Basis..................................................................25 6.4 Tax Matters.......................................................................25 6.5 Confidentiality...................................................................25 ARTICLE 7 ADDITIONAL MEMBERS; TRANSFER; WITHDRAWAL........................................................................26 7.1 Additional Members................................................................26 7.2 Transfer..........................................................................26 7.3 Death, Incompetence, Bankruptcy or Liquidation of an Additional Member.................................................................27 7.4 Withdrawals.......................................................................27 7.5 Continuation......................................................................27 ARTICLE 8 DISSOLUTION; WINDING UP; TERMINATION..............................................27 8.1 Dissolution.......................................................................27 8.2 Winding Up and Termination........................................................28 8.3 Assets Reserved and Pending Claims................................................30 ARTICLE 9 AMENDMENTS; WAIVER; POWER OF ATTORNEY.............................................31 9.1 Amendments; Waiver................................................................31 9.2 Power of Attorney.................................................................32 ARTICLE 10 MISCELLANEOUS.....................................................................33 10.1 Investment Representations........................................................33 10.2 Successors and Assigns............................................................34 10.3 No Waiver.........................................................................34 10.4 Survival of Certain Provisions....................................................34
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Page ---- 10.5 Notices...........................................................................34 10.6 Severability......................................................................35 10.7 Counterparts......................................................................35 10.8 Headings, Etc.....................................................................35 10.9 Gender............................................................................35 10.10 No Right to Partition.............................................................35 10.11 No Third Party Rights.............................................................35 10.12 Entire Agreement..................................................................35 10.13 Rule of Construction..............................................................35 10.14 Authority.........................................................................36 10.15 Reliance..........................................................................36 10.16 Applicable Law....................................................................36
EXHIBITS Exhibit A Members of KRF3 Acquisition Company, L.L.C. iii EXHIBIT A KRF3 ACQUISITION COMPANY, L.L.C. AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (the "AGREEMENT"), dated as of [________], 2000 of KRF3 ACQUISITION COMPANY, L.L.C. (the "COMPANY") by and among KRF Company, L.L.C., a Delaware limited liability company, as the managing member of the Company (the "MANAGING MEMBER"), and those Persons (as defined herein) who have executed this Agreement as additional members of the Company (each, an "ADDITIONAL MEMBER" and together with the Managing Member, the "MEMBERS"). WHEREAS, the Company has heretofore been formed as a limited liability company under the Delaware Act (as defined herein) by the filing by the Managing Member of a Certificate of Formation on behalf of the Company (the "CERTIFICATE") with the Secretary of State of the State of Delaware on May 10, 1999; WHEREAS, the Managing Member entered into a limited liability company agreement for the Company dated as of May 10, 1999 (the "INITIAL AGREEMENT"); and WHEREAS, the Persons listed on Exhibit A hereto under the heading "Additional Members" will be admitted to the Company as Additional Members as of the date hereof and the Members wish to amend and restate the Initial Agreement in its entirety; NOW, THEREFORE, the Managing Member and the Additional Members, in consideration of their mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, mutually covenant and agree as follows: ARTICLE 1 GENERAL PROVISIONS 1.1 DEFINITIONS. For the purpose of this Agreement, the following terms shall have the following meanings: "ADDITIONAL CASH DETERMINATION" shall have the meaning set forth in Section 3.1(b)(ii) (Additional Capital Contributions). "ADDITIONAL MEMBERS" shall mean each Person whose name is listed on Exhibit A hereto under the heading "Additional Members," and any Additional Members and any substituted Members admitted to the Company in accordance with Section 7.1 (Additional Members) and 7.2(a) (Conditions to Transfer). "AFFILIATE" shall mean, with respect to any Person, (i) any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person, (ii) any Person that is an officer of, member of, partner in, or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, member, partner or trustee, or with respect to which the specified Person serves in a similar capacity, (iii) any Person that, directly or indirectly, is the beneficial owner of 10% or more of any class of equity securities of, or otherwise has a substantial beneficial interest in, the specified Person or of which the specified Person is directly or indirectly the owner of 10% or more of any class of equity securities or in which the specified Person has a substantial beneficial interest, (iv) any Immediate Family Member of the specified Person and (v) any Affiliate of a Person described in subsections (i)-(iv). For the purposes of this definition, "control" shall mean, as to any Person, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "AGREEMENT" shall mean this Amended and Restated Limited Liability Company Agreement, as amended from time to time. "AVAILABLE CASH" shall mean, for any quarterly period or such other period for which computation may be appropriate, the excess, if any, of: (a) the sum of (i) the amount of all of the cash receipts of the Company during such period from whatever source; and (ii) any cash reserves of the Company existing at the start of such period; reduced by (b) the sum of (i) all cash amounts paid or payable (without duplication) in such period on account of expenses and capital expenditures incurred in 2 connection with the Company's business and approved in accordance with the provisions of this Agreement (including, without limitation, general operating expenses, taxes, amortization or interest on any debt of the Company; and (ii) such cash reserves as may be required for capital expenditures, working capital and future needs of the Company in an amount reasonably determined by the Managing Member. "BANKRUPTCY" shall mean the occurrence of any event specified in Section 8.1(g) (Dissolution) with respect to the Managing Member. "CAPITAL ACCOUNT" shall have the meaning set forth in Section 3.2(a) (Maintenance of Capital Accounts). "CAPITAL CONTRIBUTION" shall mean, with respect to each Member, the amount of cash or other property contributed (or deemed to be contributed) by such Member to the capital of the Company from time to time pursuant to Section 3.1 (Capital Contributions). "CERTIFICATE" shall have the meaning set forth in the recitals. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COMPANY" shall mean KRF3 Acquisition Company, L.L.C., a Delaware limited liability company. "COMPANY MINIMUM GAIN" shall mean "partnership minimum gain" as such term is defined in Regulation section 1.704-2(b)(2) and 1.704-2(d). "CONFIDENTIAL INFORMATION" shall have the meaning set forth in Section 6.5 (Confidentiality). "CONSENTING MEMBER" shall have the meaning set forth in Section 5.1(a) (Written Approval). "DELAWARE ACT" shall mean the Delaware Limited Liability Company Act (Del. Code Ann. tit. 6 Section 18-101 ET seq.), as amended from time to time, and any successor to such Act. "DEPRECIATION" shall mean, with respect to any Fiscal Year, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with 3 respect to an asset for U.S. federal income tax purposes, except that if the Gross Asset Value of the asset differs from its adjusted tax basis, Depreciation shall be determined in accordance with the methods used for U.S. federal income tax purposes and shall equal the amount that bears the same ratio to the Gross Asset Value of such asset as the depreciation, amortization or other cost recovery deduction computed for U.S. federal income tax purposes with respect to such asset bears to the adjusted U.S. federal income tax basis of such asset; PROVIDED, HOWEVER, that if any such asset that is depreciable or amortizable has an adjusted tax basis of zero, the rate of Depreciation shall be as determined by the Managing Member. "DISSOLUTION EVENT" shall have the meaning set forth in Section 8.1 (Dissolution). "EXISTING MANAGING MEMBER CONTRIBUTION" shall have the meaning set forth in Section 3.1(a). "FINANCING" shall mean the loan facilities available to the Company, obtained by the Managing Member or its Affiliates, in the amount necessary to finance, together with the Capital Contributions of the Members hereto, the Merger contemplated by the Merger Agreement and to refinance the indebtedness of Fund III. "FISCAL YEAR" shall mean each fiscal year of the Company (or portion thereof), which shall end on December 31; PROVIDED, HOWEVER, that upon Termination of the Company, "FISCAL YEAR" shall mean the period from the January 1 immediately preceding such Termination to the date of such Termination. "FUND III" shall have the meaning set forth in Section 1.6 (Purpose and Power). "FUND III AGREEMENT" shall mean the Amended Agreement of Limited Partnership of Fund III, dated as of June 1, 1982, as amended from time to time. "GROSS ASSET VALUE" shall mean, with respect to any asset, the asset's adjusted basis for U.S. federal income tax purposes, except that (i) the Gross Asset Value of any asset contributed to the Company shall be its gross fair market value (as determined by the Managing Member) at the time such asset is contributed or deemed contributed for purposes of computing Capital Accounts; (ii) upon a contribution of money or other property to the Company by a new or existing Member as consideration for an interest in the 4 Company and upon a distribution of money or other property to a retiring or continuing Member as consideration for an interest in the Company, the Gross Asset Value of all of the assets of the Company shall be adjusted to equal their respective gross fair market values (as determined by the Managing Member), to the extent such adjustment is determined by the Managing Member to be necessary or appropriate to reflect the Members' relative Interests in the Company; (iii) the Gross Asset Value of any asset distributed in kind to any Member shall be the gross fair market value of such asset (as determined by the Managing Member) on the date of such distribution; and (iv) the Gross Asset Value of any asset determined pursuant to clauses (i) or (ii) above shall thereafter be adjusted from time to time by the Depreciation taken into account with respect to such asset for purposes of determining Net Income or Net Loss. "IMMEDIATE FAMILY MEMBER" means with respect to any person, such person's spouse, parent, parent-in-law, issue, brother, sister, brother-in-law, sister-in-law, or child-in-law. "INITIAL AGREEMENT" shall have the meaning set forth in the preamble to this Agreement. "INTEREST" shall mean, with respect to any Member, as of any date, the fraction, expressed as a percentage, the numerator of which is such Member's Capital Contributions and the denominator of which is the sum of the Capital Contributions of all Members. "INVESTMENT AGREEMENT" shall mean the Investment Agreement among the Company, Equity Resource Fund XVI Limited Partnership, Equity Resource Fund XIX Limited Partnership, Equity Resource General Fund Limited Partnership, Equity Resource Cambridge Fund Limited Partnership, Equity Resource Brattle Fund Limited Partnership, Equity Resource Bridge Fund Limited Partnership and KRF Company, L.L.C., dated as of January 6, 2000. "INVESTOR LIMITED PARTNER" shall have the meaning set forth in the Fund III Agreement. "LIABILITIES" shall have the meaning set forth in Section 4.4(a) (Indemnification of Protected Persons). 5 "MANAGING MEMBER" shall have the meaning set forth in the preamble to this Agreement. "MEMBER NONRECOURSE DEBT" shall mean "partner nonrecourse debt" as such term is defined in Regulation section 1.704-2(b)(4). "MEMBER NONRECOURSE DEBT MINIMUM GAIN" shall mean an amount with respect to each Member Nonrecourse Debt equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a nonrecourse liability (as defined in Regulation section 1.752-1(a)(2)) determined in accordance with Regulation section 1.704-2(i)(3). "MEMBER NONRECOURSE DEDUCTION" shall mean "partner nonrecourse deduction" as such term is defined in Regulation section 1.704-2(i)(2). "MEMBERS" shall mean the Managing Member and the Additional Members, and "Member" shall mean any of the Members. "MERGER" shall mean the merger of the Company and Fund III under the Merger Agreement. "MERGER AGREEMENT" shall mean the Agreement and Plan of Merger to be executed by the Company and Fund III substantially in the form of Exhibit C to the Investment Agreement. "NET INCOME" or "NET LOSS" shall mean, for any Fiscal Year (or portion thereof), the net income, gain or loss of the Company during such Fiscal Year (or portion thereof), as determined for United States federal income tax purposes, with the following adjustments: (i) Such taxable income or loss shall be increased by the amount, if any, of tax-exempt income received or accrued by the Company; (ii) Such taxable income or loss shall be reduced by the amount, if any, of all expenditures of the Company described in Section 705(a)(2)(B) of the Code, including expenditures treated as described therein under Regulations section 1.704(b)(2)(iv)(i); (iii) If the Gross Asset Value of any asset is adjusted pursuant to clause (ii) or (iii) of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account, immediately prior to the event giving 6 rise to such adjustment, as gain or loss from the disposition of such asset for purposes of computing Net Income or Net Loss; (iv) Gain or loss resulting from any disposition of any asset with respect to which gain or loss is recognized for U.S. federal income tax purposes shall be computed by reference to the Gross Asset Value of the asset disposed of, notwithstanding that such Gross Asset Value differs from the adjusted tax basis of such asset; and (v) In lieu of the depreciation, amortization, or other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year. "NONRECOURSE DEDUCTIONS" shall have the meaning set forth in Regulation section 1.704-2(b). "PERSON" shall mean an individual, a corporation, a company, a voluntary association, a partnership, a joint venture, a limited liability company, a trust, an estate, an unincorporated organization, a governmental authority or other entity. "PRIME RATE" shall mean the rate of interest published from time to time in The Wall Street Journal, Eastern Edition and designated as the prime rate. "PROPERTIES" means any real estate, buildings, improvements, fixtures and related personal property acquired by the Company in connection with the Merger or otherwise. "PROPERTY MANAGEMENT AGREEMENT" shall mean the Property Management Agreements in effect on the date hereof between Fund III and BRI OP Limited Partnership. "PROPOSED TRANSFER" shall have the meaning set forth in Section 6.5 (Confidentiality). "PROTECTED PERSON" shall mean: (i) the Managing Member, any Additional Member and their respective members, board members and officers; (ii) any officer, director, partner, member, employee, stockholder or Specified Agent of the Managing Member or any Additional Member; and (iii) any Person who serves at the request of the Managing Member hereunder on behalf of the Company as an officer, director, partner, member or employee of any other Person. 7 "RATE OF RETURN"shall mean, with respect to any interest in the Company held by any Member, a cumulative, semiannually compounded return on all Capital Contributions made or deemed to have been made by such Member with respect to such Member's interest in the Company (and accrued but unpaid return at the specified rate outstanding from time to time) at a rate per annum as specified. A Member shall be deemed to have received a specified Rate of Return with respect to such Member's interest in the Company when such Member has received an amount equal to an annual return on the total Capital Contributions made from time to time by such Member in respect of such Member's interest in the Company equal to the specified percentage calculated commencing on the date such Capital Contributions are made or are deemed to have been made and compounded semiannually to the extent not paid on a current basis, taking into account the timing and amounts of all previous distributions by the Company to such Member. For purposes of computing such Rate of Return, distributed amounts shall be applied in accordance with Section 3.3(a)(ii) (Distributions -- General). "REGULATIONS" shall mean the regulations promulgated under the Code. "REGULATORY ALLOCATIONS" shall have the meaning set forth in Section 3.5(g)(i) (Curative Allocations). "REPRESENTATIVES" shall have the meaning set forth in Section 6.5 (Confidentiality). "REQUIRED ADDITIONAL MEMBERS" shall mean Additional Members holding at least 51% of the aggregate Interests held by all Additional Members. "SECURITIES ACT" shall have the meaning set forth in Section 10.1 (Investment Representations). "SPECIFIED AGENT" shall mean any agent of any Person that is designated in writing by the Managing Member as a "Specified Agent" of the Company entitled to the protection of Sections 4.3 (Liability to Members) and 4.4 (Indemnification). "TERMINATION" shall mean the date of the cancellation or withdrawal of the Certificate following the end of the Winding Up Period by the filing of a Certificate of Cancellation of the Company in the Office of the Secretary of State of the State of Delaware. "TRANSFER" shall have the meaning set forth in Section 7.2(a). "UNITS" shall mean investor limited partnership interests in Fund III. 8 "WINDING UP PERIOD" shall mean the period from the Dissolution Event to the Termination of the Company. "WITHHOLDING ADVANCES" shall have the meaning set forth in Section 3.6(b) (Withholding Advances--General). 1.2 NAME. The name of the Company is "KRF3 Acquisition Company, L.L.C." The Company's business may be conducted under any other name or names deemed advisable by the Managing Member; PROVIDED, HOWEVER, that (a) the words "Limited Liability Company" or the abbreviation "L.L.C." or "LLC" shall be included in the name where necessary to comply with the laws of any jurisdiction that so requires and (b) the name shall not contain any word or phrase indicating or implying that it is organized other than for a purpose stated herein. The Managing Member shall give prompt notice of any name change to each Additional Member. 1.3 PRINCIPAL OFFICE. The principal office of the Company is at One Beacon Street, Suite 1500, Boston, Massachusetts, 02108, or such other place in the United States as may from time to time be designated by the Managing Member. The Company shall keep its books and records at its principal office. The Managing Member shall give prompt notice to each Additional Member of any change in the location of the Company's principal office. 1.4 REGISTERED OFFICE AND REGISTERED AGENT. The street address of the registered office of the Company in the State of Delaware is at 1013 Centre Road, Wilmington, Delaware 19805 or such other place in the State of Delaware as may from time to time be designated by the Managing Member in accordance with the Delaware Act, and the Company's registered agent at such address is Corporation Service Company. 1.5 TERM. The Company was formed on May 10, 1999 and shall continue its regular business activities until the occurrence of a Dissolution Event as described in Section 8.1 (Dissolution). 1.6 PURPOSE AND POWER. (a) PURPOSE. The Company is organized for the purposes of (i) merging with Krupp Realty Fund Ltd.-III, a Massachusetts limited partnership ("FUND III"); (ii) investing in, maintaining, operating, leasing, improving, holding, encumbering, selling, managing and otherwise dealing with the Properties; (iii) sharing the profits and losses therefrom; (iv) engaging in activities incidental or ancillary thereto; and (v) carrying on any lawful business, purpose or activity permitted under the Delaware Act. Without the consent of all the Members, the Company shall not engage in any business other than those described in clauses (i), (ii), (iii) and (iv) above. 9 (b) POWER. The Company shall have the power to do any and all acts necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purposes and business described herein and for the protection and benefit of the Company, and shall have, without limitation, any and all of the powers that may be exercised on behalf of the Company by the Managing Member pursuant to this Agreement, including, without limitation, those powers set forth in Section 2.1 (Rights and Duties of the Managing Member). The Company, or the Managing Member on behalf of the Company, may enter into and perform agreements relating to the organization of the Company, without any further act, vote or approval of any Additional Member, notwithstanding any other provision of this Agreement. ARTICLE 2 MANAGEMENT; LIABILITY OF MEMBERS; EXPENSES 2.1 RIGHTS AND DUTIES OF THE MANAGING MEMBER. Except as otherwise expressly provided herein, the management and operation of the Company shall be vested exclusively in the Managing Member, who shall have the power on behalf of and in the name of the Company to carry out any and all of the purposes of the Company and to perform all acts and enter into and perform all contracts and other undertakings that it may deem necessary, appropriate, proper, advisable, incidental or convenient thereto. Except as otherwise expressly provided herein, the Managing Member shall have, and shall have full authority in its discretion to exercise, on behalf of and in the name of the Company, all rights and powers of a manager of a limited liability company under the Delaware Act necessary or convenient to carry out the purposes of the Company. Without limiting the foregoing, and except as otherwise expressly provided in this Agreement, the Managing Member is hereby authorized and empowered in the name of and on behalf of the Company: (a) to acquire, improve, mortgage, hold, sell, exchange, divide, combine and otherwise transact business with respect to the Properties and to engage in activities incidental or ancillary to such transactions; and to execute and deliver in the name of the Company any and all instruments necessary or desirable to effectuate such transactions; (b) to make temporary investments of the funds of the Company in all types of securities, including, without limitation, United States government and agency securities, interest-bearing deposits in United States banks, certificates of deposit, securities issued by or on behalf of states, municipalities and their instrumentalities (the interest from which is exempt from federal income tax), prime-grade commercial paper, 10 repurchase agreements with respect to any of the foregoing, prior to long-term investment or pending cash distributions to the Members; (c) to employ, retain or consult, or terminate the services of, such Persons as it shall deem advisable, including, without limitation, brokers, attorneys, accountants, actuaries or specialists in any field of endeavor whatsoever, including, without limitation, engineers, contractors, appraisers, consultants, advisors, artisans and workmen; (d) to deposit and withdraw the funds of the Company in the name of the Company in any bank or trust company and to entrust to such bank or trust company any of the investments, monies, documents and papers belonging to or relating to the Company; to deposit in and entrust to any brokerage firm that is a member of any national securities exchange any of said funds, investments, monies, documents and papers belonging to or relating to the Company; or to enter into custodial arrangements with any Person with respect to the assets of the Company; (e) to invest, pay, retain and distribute the Company's funds in a manner consistent with the provisions of this Agreement, including, without limitation, to make distributions to the Members in cash, in kind or otherwise; (f) to borrow monies and incur liabilities on behalf of the Company to the extent permitted by this Agreement (including, without limitation, pursuant to 3.1(b) hereof) and in connection therewith to issue, accept, endorse and execute promissory notes, guarantees, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebted ness, and to secure the payment of any of the foregoing by pledge, conveyance or assignment in trust of the whole or any part of the property of the Company whether at the time owned or thereafter acquired, and to pay or prepay any such obligations; (g) to set aside funds for reasonable reserves, reasonably anticipated contingencies and reasonable working capital, including, without limitation, for normal repairs and replacements related to the Properties; (h) to make such elections under the Code and other relevant tax laws as to the treatment of items of Company income, gain, loss and deduction, and as to all other relevant matters, as the Managing Member deems necessary, appropriate or advisable, including, without limitation, elections referred to in Section 754 of the Code, determination of which items of cash outlay are to be capitalized or treated as current expenses, and selection of the method of accounting and bookkeeping procedures to be used by the Company; 11 (i) to sue, prosecute, settle or compromise all claims against third parties, to compromise, settle or accept judgment in respect of claims against the Company and to execute all documents and make all representations, admissions and waivers in connection therewith; (j) to enter into, make and perform all contracts, agreements, instruments, including the Merger Agreement, and other undertakings as the Managing Member may determine to be necessary, advisable or incidental to the carrying out of the foregoing objects and purposes, including, without limitation, deeds, mortgages, leases and other documents of title or conveyance; (k) to admit Additional Members to the Company in accordance with Section 7.1 (Additional Members); and (l) to take all actions that may be necessary or appropriate in furtherance of any of the foregoing or for the continuation of the Company's valid existence as a limited liability company under the Delaware Act and of each other jurisdiction in which such action is necessary to protect the limited liability of the Additional Members or to enable the Company to conduct the business in which it is engaged. 2.2 RIGHTS AND DUTIES OF THE ADDITIONAL MEMBERS. (a) GENERAL. The Additional Members shall have no right to, and shall not, take part in the management or control of the Company's business or act for or bind the Company; PROVIDED, that the Additional Members shall have all of the rights, powers and privileges granted to the Additional Members in this Agreement and, where not inconsistent with the terms of this Agreement, under the Delaware Act. (b) PROPERTY MANAGEMENT AGREEMENT. The Managing Member shall not consent to any amendment to the Property Management Agreement that materially increases the liabilities or obligations of the Company without the consent of the Required Additional Members. (c) RIGHT TO FORCE SALE OF PROPERTIES. Upon the written request of the Required Additional Members delivered to the Managing Member during the period commencing on the fifth anniversary of the Merger and ending on the 180th day after such anniversary, the Managing Member shall use its good faith efforts to sell all of the Properties then owned by the Company at their fair market value within a reasonable period of time from receipt of such request Property. 12 (d) MERGER AGREEMENT. Notwithstanding any other provision of this Agreement, the Additional Members are deemed to have consented to the Merger Agreement by execution of this Agreement or appropriate supplement. 2.3 EXPENSES. The Company shall pay or reimburse the Managing Member for its payment of (i) any and all costs and expenses incurred by the Managing Member, its members and agents in connection with the management of the Company and its assets, including, but not limited to, an annual fee of $100,000, payable in advance, for time devoted to the management of the Company and its assets by employees of the Managing Member or its Affiliates (such fee to be (A) equitably adjusted in the event the Properties are sold by the Company and (B) in addition to all amounts payable under the Property Management Agreement); (ii) a fee equal to 0.25% of the gross amount of any proceeds from the financing, refinancing or sale of the Properties or similar extraordinary transaction; (iii) any and all taxes and governmental charges that may be incurred or payable by the Company; (iv) any and all insurance premiums or expenses incurred by the Company in connection with the activities of the Company; (v) any and all expenses (including legal fees and expenses) incurred to enable the Company to comply with any law or regulation related to the activities of the Company or incurred in connection with any litigation or governmental inquiry, investigation or proceeding involving the Company, including the amount of any judgments, settlements or fines paid in connection therewith, except, however, to the extent such expenses or amounts have been determined to be excluded from the indemnification provided for in Section 4.4 (Indemnification); and (vi) any and all expenses related to the Company's indemnification obligations pursuant to Section 4.4 (Indemnification). Nothing in this Section 2.3 (Expenses) shall require the Managing Member to make any payment described above on behalf of the Company. 2.4 OFFICERS. The day-to-day operations of the Company shall be the responsibility of the officers of the Company, who shall be designated and appointed by, and shall have the powers delegated to it by, the Managing Member. ARTICLE 3 CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; DISTRIBUTIONS; ALLOCATIONS 3.1 CAPITAL CONTRIBUTIONS. (a) INITIAL CAPITAL CONTRIBUTION. As of the date hereof, the Managing Member has caused to be contributed 10,826 Units, constituting all of the Units owned by the Company (the "Existing Managing Member Contribution") to the capital of the Company. On the date hereof or such later date as determined by the Managing 13 Member, (i) the Managing Member shall have contributed (or shall have caused to have been contributed) $954,810 in cash to the capital of the Company, or such lesser amount, when added to the Financing, the Existing Managing Member Contribution and the Capital Contributions of the Additional Members, as is sufficient to consummate the Merger and to refinance the indebtedness of Fund III, and (ii) the Additional Members shall have contributed to the Company all of the Units owned by them. In the event that an amount in excess of $954,810 is necessary to consummate the Merger and to refinance the indebtedness of Fund III, the Managing Member shall have the right, but shall not be required, to contribute such additional amount. Set forth on Exhibit A opposite each Member's name as such Member's initial Capital Contribution is (i) in the case of the Managing Member, (A) the Existing Managing Member Contribution (the value of which shall be equal to the product of the number of Units previously contributed by the Managing Member and the per Unit consideration paid to the holders in the Merger) and (B) the amount of cash to be contributed by the Managing Member on the date hereof, and (ii) in the case of each Additional Member, the number of Units to be contributed by such Additional Member on the date hereof and the contribution value per Unit, which value shall be equal to the consideration paid to the holders of Units in the Merger. (b) ADDITIONAL CAPITAL CONTRIBUTIONS; LOANS. (i) The Managing Member shall pay any and all costs and expenses incurred on behalf of the Company in connection with (A) the organization of the Company and the preparation of this Agreement and the Investment Agreement, including, without limitation, fees, costs and expenses payable to attorneys, accountants, consultants and custodians; (B) the proxy solicitation; (C) the meeting of Unitholders to consider the Merger and (D) satisfaction of the Company's indemnification obligations pursuant to Section 4.4(iv). All such payments shall constitute additional Capital Contributions of the Managing Member and the Members' Interests shall be adjusted to reflect the changes in relative Capital Contributions of the Members resulting from such payments. (ii) The Members shall not be obligated to make additional capital contributions to the Company except as provided in Section 4.1(b) (Return of Previously Distributed Amounts) and, with respect to the Managing Member, except as also provided in Section 3.1(b)(i). Upon a determination by the Managing Member that additional cash is required by the Company for capital improvements to, or rehabilitation of, the Properties (an "ADDITIONAL CASH DETERMINATION"), the Managing Member shall use good faith efforts to satisfy such cash requirements utilizing available cash of the Company and/or with the proceeds from a refinancing of the Properties. In the event such actions are not reasonably likely to meet the Company's cash requirements, each 14 Member shall have the right to make an additional Capital Contribution in an amount equal to (but not less than) its proportionate share (determined by reference to the ratio of such Member's Interests to the Interests of all Members who actually make such additional Capital Contribution) of any such additional cash requirement. With respect to each Additional Cash Determination, if any Member declines to make such an additional Capital Contribution, (A) the other Members may elect to make a Capital Contribution equal to the unfunded amount (determined on a PRO RATA basis) thereof and (B) the Members' Interests shall be adjusted to reflect the changes in the relative Capital Contributions of Members resulting from such Capital Contributions. (iii) With respect to any Additional Cash Determination not funded pursuant to Section 3.1(b)(ii) above, the Managing Member may elect to lend funds to the Company in the amount of such deficiency with the consent of the Required Additional Members (which consent shall not unreasonably be withheld). Any loans to the Company pursuant to this Section (b)(iii) shall not constitute a Capital Contribution to the Company and shall not affect a Member's Interest in the Company. Any loans to the Company authorized in accordance with this Section 3.1(b)(iii) shall be evidenced by a promissory note and shall be payable to the lender at an interest rate of twelve percent (12%) per annum, compounded quarterly and shall have such other terms as determined by the Managing Member, in its sole discretion. (c) INTERESTS OF THE MEMBERS. The initial Interest of each Member of the Company shall be the percentage set forth opposite such Member's name on Exhibit A. Exhibit A shall be promptly amended to reflect changes of Interests resulting from any additional capital contributions in accordance with Section 3.1(b) (Additional Capital Contributions) or the admission or substitution of any Additional Members to the Company in accordance with Sections 7.1 (Additional Members) and 7.2 (Transfer), respectively. (d) NO WITHDRAWAL; RETURN OF CONTRIBUTIONS. Except as otherwise expressly provided in this Agreement, no Member shall have the right to withdraw capital from the Company, to receive interest on such Member's Capital Contributions or to receive any distribution or return of such Member's Capital Contributions. 3.2 CAPITAL ACCOUNTS. (a) MAINTENANCE OF CAPITAL ACCOUNTS. The Company shall maintain a "CAPITAL ACCOUNT" for each Member on the books of the Company in accordance with the following provisions: 15 (i) Each Member's Capital Account shall be increased by the amount of: (A) such Member's Capital Contributions pursuant to Section 3.1 (Capital Contributions); (B) any Net Income or other item of income or gain allocated to such Member pursuant to Section 3.4 (Allocations) or Section 3.5 (Special Allocations); and (C) Company liabilities, if any, assumed by such Member or secured, in whole or in part, by any Company assets that are distributed to such Member. (ii) Each Member's Capital Account shall be decreased by the amount of: (A) cash and the fair market value on the date of distribution of any other Company property distributed to such Member pursuant to Section 3.3 (Distributions) and Section 8.2 (Winding Up and Termination); (B) any Net Loss or other item of loss or deduction allocated to such Member pursuant to Section 3.4 (Allocations) or Section 3.5 (Special Allocations); and (C) liabilities, if any, of such Member assumed by the Company, other than liabilities for which the Company is required to reimburse such Member hereunder or otherwise. (b) SUCCESSION TO CAPITAL ACCOUNTS. In the event any Person becomes a substituted Member in accordance with the provisions of Section 7.2(a) (Conditions to Transfer), such substituted Member shall succeed to the Capital Account of the transferor Member to the extent such Capital Account relates to the transferred interest (or portion thereof). 3.3 DISTRIBUTIONS. (a) GENERAL. (i) Distributions shall be made in cash. The Managing Member shall establish reserves for working capital, contingencies or other items and for the satisfaction of liabilities (including contingent liabilities) of the Company. Subject to such reserves, distributions of Available Cash (subject to all restrictions in the definitions of such term) shall be made to the Members by the Managing Member on behalf of the Company in accordance with clause (ii) below. (ii) Available Cash to be distributed to the Members pursuant to this Section 3.3(a)(ii) (Distributions -- General) shall be apportioned among the Members in accordance with their respective Interests. Amounts so apportioned to the Managing Member shall be distributed to the Managing Member. Amounts so apportioned to each Additional Member shall be allocated between such Additional Member and the Managing Member and distributed as follows (and the calculations described in the following clauses shall be made as 16 of the date of each distribution, on a cumulative basis), subject to the other terms of this Article 3: (A) First, to such Additional Member until such Member has received, taking into account the amount and timing of all prior distributions under this Section 3.3(a)(ii) (Distributions -- General) and all prior Capital Contributions made pursuant to Section 3.1 (Capital Contributions) by such Additional Member, a Rate of Return on its aggregate Capital Contributions compounded semiannually to the extent not paid on a semiannual basis, equal to twelve percent (12%) per annum; (B) Next, to such Additional Member until such Additional Member has received an amount equal to its aggregate Capital Contributions; and (C) Thereafter, twenty percent (20%) to the Managing Member and eighty percent (80%) to such Additional Member. (b) TIMING. Distributions shall be made within 45 days after the completion of the first half of each Fiscal Year. Within 90 days after the end of each Fiscal Year, the Company's profits/income for the year shall be determined and after giving effect to the amount of profits/income previously distributed, the remainder will then be distributed in accordance with Section 3.3(a) (Distributions -- General) above. (c) DISTRIBUTIONS TO PERSONS ON COMPANY RECORDS. Any distribution by the Company pursuant to the terms of this Section 3.3 or Section 8.2 (Winding Up and Termination) to the Person shown on the Company's records as a Member or to its legal representatives, or to the assignee to the right to receive such distributions as provided herein, shall acquit the Company and the Managing Member of all liability to any other Person who may be interested in such distribution by reason of any other assignment or transfer of such Member's interest in the Company for any reason (including an assignment or transfer thereof by reason of death, incompetence, bankruptcy or liquidation of such Member). 3.4 ALLOCATIONS. (a) NET INCOME. Net Income for each Fiscal Year (or portion thereof) shall be allocated among the Members (after giving effect to the allocations contained in Sections 3.4(c) (Tax Allocations) and 3.5(c) (Gross Income Allocation) first to the extent Net Loss has been allocated to the Members pursuant to Section 3.4(b) (Net Loss) and thereafter as nearly as possible in the manner that distributions would be made pursuant to Section 3.3(a) (Distributions -- General) (other than returns of capital)). 17 (b) NET LOSS. The Company shall allocate Net Loss first to offset previous allocations of Net Income in respect of income that has not yet been distributed, and then among the Members in accordance with their respective Interests. (c) TAX ALLOCATIONS. For United States federal, state and local income tax purposes, items of income, gain, loss, deduction and credit shall be allocated to the Members in accordance with the allocations of the corresponding items for Capital Account purposes under Sections 3.4 (Allocations) and 3.5 (Special Allocations), except that items with respect to which there is a difference between tax and book basis will be allocated in accordance with section 704(c) of the Code, the Regulations thereunder and Regulation section 1.704-1(b)(4)(i). 3.5 SPECIAL ALLOCATIONS. (a) MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of Section 3.4 (Allocations), if there is a net decrease in Company Minimum Gain or Member Nonrecourse Debt Minimum Gain (determined in accordance with the principles of Regulation sections 1.704-2(d) and 1.704-2(i)) during any Company taxable year, the Members shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to their respective shares of such net decrease during such year, determined pursuant to Regulation sections 1.704-2(g) and 1.704-2(i)(5). The items to be so allocated shall be determined in accordance with Regulation section 1.704-2(f). This Section 3.5(a) is intended to comply with the minimum gain chargeback requirements in such Regulation sections and shall be interpreted consistently therewith; including that no chargeback shall be required to the extent of the exceptions provided in Regulation sections 1.704-2(f) and 1.704- 2(i)(4). (b) QUALIFIED INCOME OFFSET. In the event any Member unexpectedly received any adjustments, allocations, or distributions described in Regulation section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate the deficit balance in its Capital Account in excess of the sum of (i) the amount such Member is obligated to restore, if any, pursuant to any provision of this Agreement, and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Regulation sections 1.704-2(g)(1) and 1.704-2(i)(5) created by such adjustments, allocations or distributions as promptly as possible. This Sec tion 3.5(b) is intended to comply with the "qualified income offset" requirement in such Regulation section and shall be interpreted consistently therewith. (c) GROSS INCOME ALLOCATION. In the event any Member has a deficit Capital Account at the end of any Fiscal Year which is in excess of the sum of (i) the amount such Member is obligated to restore, if any, pursuant to any provision of 18 this Agreement, and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Regulation section 1.704-2(g)(1) and 1.704- 2(i)(5), each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, PROVIDED that an allocation pursuant to this Section 3.5(c) shall be made only if and to the extent that a Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in Section 3.4 (Allocations) and this Section 3.5 have been tentatively made as if Section 3.5(b) (Qualified Income Offset) and this Section 3.5(c) were not in this Agreement. (d) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions shall be allocated to the Members in proportion to their Interests. (e) MEMBER NONRECOURSE DEDUCTIONS. Member Nonrecourse Deductions for any taxable period shall be allocated to the Member who bears the economic risk of loss with respect to the liability to which such Member Nonrecourse Deductions are attributable in accordance with Regulation section 1.704-2(j). (f) REGULATORY COMPLIANCE. The provisions of Sections 3.2 (Capital Accounts), 3.3 (Distributions), 3.4 (Allocations), this Section 3.5 and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulation section 1.704-1(b) and shall be interpreted and applied in a manner consistent with such Regulation. The Managing Member shall be authorized to make appropriate amendments to the allocations of items pursuant to Section 3.4 (Allocations) if necessary in order to comply with Section 704 of the Code or applicable Regulations thereunder; PROVIDED, that no such change shall have an adverse effect upon the amount distributable to any Member pursuant to this Agreement. (g) CURATIVE ALLOCATIONS. (i) The allocations set forth in Sections 3.5(a) (Minimum Gain Chargeback), 3.5(b) (Qualified Income Offset), 3.5(c) (Gross Income Allocation), 3.5(d) (Nonrecourse Deductions) and 3.5(e) (Member Nonrecourse Deductions) of this Agreement (the "REGULATORY ALLOCATIONS") are intended to comply with certain requirements of the Regulations. The Managing Member is authorized to offset all Regulatory Allocations either with other Regulatory Allocations or with special allocations of income, gain, loss or deductions pursuant to this Section 3.5(g) in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of this Agreement and all items of income, gain, loss or deduction were allocated pursuant to Section 3.4 19 (Allocations). In exercising its discretion under this Section 3.5(g), the Managing Member shall take into account future Regulatory Allocations under Section 3.5(a) (Minimum Gain Chargeback) that, although not yet made, are likely to offset other Regulatory Allocations made under Sections 3.5(d) (Nonrecourse Deductions) and 3.5(e) (Member Nonrecourse Deductions). (ii) In the event that there are any changes after the date of this Agreement in applicable tax law, regulations or interpretation, or any errors, ambiguities, inconsistencies or omissions in this Agreement with respect to allocations to be made to Capital Accounts, which would, individually or in the aggregate, cause the Members not to achieve in any material respect the economic objectives underlying this Agreement, the Managing Member may in its discretion make appropriate adjustments to such allocations in order to achieve or approximate such economic objectives. (h) ADJUSTMENTS OF CAPITAL ACCOUNTS. The Capital Accounts of the Members may at the discretion of the Managing Member, be adjusted in accordance with Regulation section 1.704-1(b)(2)(iv)(f), and thereafter maintained in accordance with Regulation section 1.704-1(b)(2)(iv)(g), to reflect the fair market value of Company property whenever an interest in the Company is relinquished to the Company, whenever an Additional Member is admitted to the Company and the amount of capital contributed by such Member upon its admission is more than de minimis and reflects changes in the value of Company assets, and upon a liquidation of the Company, and shall be adjusted in accordance with Regulation section 1.704-1(b)(2)(iv)(e) in the case of a distribution of more than a de minimis amount of property (other than cash). 3.6 TAX WITHHOLDING; WITHHOLDING ADVANCES. (a) TAX WITHHOLDING. If requested by the Managing Member, each Additional Member shall, if able to do so, deliver to the Company: (i) an affidavit in form satisfactory to the Managing Member that the applicable Additional Member is not subject to withholding under the provisions of any federal, state, local, foreign or other law; (ii) any certificate that the Managing Member may reasonably request with respect to any such laws; (iii) any other form or instrument reasonably requested by the Managing Member relating to any Additional Member's status under such law; and/or (iv) a copy of any tax return or similar document of the applicable Additional Member that the Managing Member may reasonably request with respect to any such law. In the event that an Additional Member fails or is unable to deliver to the Managing Member an affidavit described in clause (i) of this Section 3.6(a), the Managing Member may withhold amounts from such Additional Member in accordance with Section 3.6(b) (Withholding Advances -- General). 20 (b) WITHHOLDING ADVANCES--GENERAL. To the extent the Company is required by law to withhold or to make tax payments on behalf of or with respect to any Member (E.G., backup withholding), the Managing Member may withhold such amounts and make such tax payments as so required. Tax payments shall constitute "WITHHOLDING ADVANCES" to the extent such tax payments are not satisfied from amounts otherwise distributable to such Member at the time such tax payment is made. (c) REPAYMENT OF WITHHOLDING ADVANCES. All Withholding Advances made on behalf of a Member, plus interest thereon (unless waived by the Managing Member) at a rate equal to the Prime Rate as of the date of such Withholding Advances plus 2.0% per annum, shall (i) be paid on demand by the Member on whose behalf such Withholding Advances were made (it being understood that no such payment shall increase such Member's Capital Contribution), or (ii) with the consent of the Managing Member, in its discretion, be repaid by reducing the amount of the current or next succeeding distribution or distributions which would otherwise have been made to such Member or, if such distributions are not sufficient for that purpose, by so reducing the proceeds of liquidation otherwise payable to such Member. Whenever repayment of a Withholding Advance by a Member is made as described in clause (ii) above, for all other purposes of this Agreement such Member shall be treated as having received all distributions (whether before or upon Termination) unreduced by the amount of such Withholding Advance and interest thereon. (d) REIMBURSEMENT OF LIABILITIES. Each Member hereby agrees to reimburse the Company and the Managing Member for any liability with respect to Withholding Advances (including interest thereon) required or made on behalf of or with respect to such Member (including penalties imposed with respect thereto). ARTICLE 4 LIABILITY; INDEMNIFICATION 4.1 LIMITED LIABILITY OF MEMBERS. (a) LIMITED LIABILITY OF MEMBERS. The liability of the Members shall be limited as provided in the Delaware Act and as set forth in this Agreement. Neither the Managing Member nor any Additional Member shall be obligated to restore by way of capital contribution or otherwise any deficits in its Capital Account or the Capital Account of any other Member (if such deficits occur). (b) RETURN OF PREVIOUSLY DISTRIBUTED AMOUNTS. In accordance with the Delaware Act, a member of a limited liability company may, under certain 21 circumstances, be required to return to such limited liability company, for the benefit of limited liability company creditors, amounts previously distributed to such member. To the extent that an Additional Member may be required to return capital to the Company under the Delaware Act, it is the intent of the Managing Member that any obligation to return any such distributions pursuant to Section 3.3 (Distributions) or Article 8 (Dissolution; Winding Up; Termination) shall be deemed to be compromised by the consent of all Members and the Additional Member to whom any money or property is distributed shall not be required to return any such money or property to the Company or any creditor of the Company. However, if any court of competent jurisdiction or regulatory body with jurisdiction over the matter holds that, notwithstanding the provisions of this Agreement, any Additional Member is obligated to return to the Company any amounts previously distributed to such Additional Member, such obligation shall be the obligation of such Additional Member and not of the Managing Member. 4.2 QUALIFICATION. The Managing Member shall use its reasonable efforts to qualify the Company to do business or become licensed in each jurisdiction where the activities of the Company make such qualification or licensing necessary or where failure to so qualify or become licensed would have an adverse effect on the limited liability of the Additional Members. 4.3 LIABILITY TO MEMBERS. No Protected Person shall be liable to the Company or any Member for any action taken or omitted to be taken by it or by any other Member or other Person with respect to the Company, including, without limitation, any negligent act or failure to act, except in the case of a liability resulting from such Protected Person's own fraud, gross negligence, willful malfeasance, intentional and material breach of this Agreement or conduct that is the subject of a criminal proceeding (where such Protected Person has a reasonable cause to believe that such conduct was unlawful). Any Protected Person may consult with legal counsel and accountants with respect to Company affairs (including interpretations of this Agreement) and shall be fully protected and justified in any action or inaction which is taken or omitted in good faith, in reliance upon and in accordance with the opinion or advice of such counsel or accountants. In determining whether a Protected Person acted with the requisite degree of care, such Protected Person shall be entitled to rely on written or oral reports, opinions, certificates and other statements of the directors, officers, employees, consultants, attorneys, accountants and professional advisors of the Company or the Managing Member selected and monitored with reasonable care; PROVIDED, that no such Protected Person may rely upon such statements if it believed that such statements were materially false. 22 4.4 INDEMNIFICATION. (a) INDEMNIFICATION OF PROTECTED PERSONS. To the fullest extent permitted by law, the Company shall indemnify, hold harmless, protect and defend each Protected Person against any losses, claims, damages or liabilities, including without limitation reasonable legal fees or other expenses incurred in investigating or defending against any such losses, claims, damages or liabilities, and any amounts expended in settlement of any claims approved by the Managing Member (collectively, "LIABILITIES"), to which any Protected Person may become subject: (i) by reason of any act or omission or alleged act or omission (even if negligent) performed or omitted to be performed in connection with the activities of the Company; (ii) by reason of the fact that it is or was acting in connection with the activities of the Company in any capacity or that it is or was serving at the request of the Company as a partner, stockholder, member, director, officer, employee or Specified Agent of any Person; (iii) by reason of any other act or omission or alleged act or omission (even if negligent) arising out of or in connection with the activities of the Company; or (iv) based upon or arising out of any litigation commenced by or on behalf of Unitholders relating to the Merger and the transactions contemplated hereby. unless such Liability results from such Protected Person's own fraud, gross negligence, willful malfeasance, intentional and material breach of this Agreement or conduct that is the subject of a criminal proceeding (where such Protected Person has a reasonable cause to believe that such conduct was unlawful). (b) REIMBURSEMENT OF EXPENSES. The Company shall promptly reimburse (and/or advance to the extent reasonably required) each Protected Person for reasonable legal or other expenses (as incurred) of each Protected Person in connection with investigating, preparing to defend or defending any claim, lawsuit or other proceeding relating to any Liabilities for which the Protected Person may be indemnified pursuant to this Section 4.4; PROVIDED, that such Protected Person executes a written undertaking to repay the Company for such reimbursed or advanced expenses if it is finally judicially determined that such Protected Person is not entitled to the indemnification provided by this Section 4.4. 23 (c) SURVIVAL OF PROTECTION. The provisions of this Section 4.4 shall continue to afford protection to each Protected Person regardless of whether such Protected Person remains in the position or capacity pursuant to which such Protected Person became entitled to indemnification under this Section 4.4 and regardless of any subsequent amendment to this Agreement; PROVIDED, that no such amendment shall reduce or restrict the extent to which these indemnification provisions apply to actions taken or omissions made prior to the date of such amendment. (d) LIMITATION ON RECOVERY. Any indemnification under this Section 4.4 or otherwise shall be paid out of and to the extent of the Company's assets only. ARTICLE 5 CONSENTS; VOTING; MEETINGS 5.1 METHOD OF GIVING CONSENT. Any approval required by this Agreement may be given as follows: (a) WRITTEN APPROVAL. By a written approval given by the Member whose approval is solicited and obtained (the "CONSENTING MEMBER") prior to or after the doing of the act or thing for which the approval is solicited; or (b) APPROVAL AT MEETING. By the affirmative vote of the Consenting Member to the doing of the act or thing for which the approval is solicited or obtained at any meeting called and held to consider the doing of such act or thing; PROVIDED, that, if a proxy is obtained from a Consenting Member prior to any meeting, such proxy may be revoked at a meeting held to consider the doing of such act or thing. 5.2 MEETINGS. Any matter requiring the approval of any or all of the Members pursuant to this Agreement may be considered at a meeting of Members. Meetings of the Members may be held by telephone or other electronic device. 5.3 QUARTERLY MEETINGS. Upon the written request of the Required Additional Members, the Managing Member shall cause a meeting of the Members to be held, PROVIDED, that no meeting of the Company shall be required to be held more than once each fiscal quarter. 24 ARTICLE 6 REPORTS TO MEMBERS; CONFIDENTIALITY 6.1 BOOKS OF ACCOUNT. Appropriate records and books of account of the Company shall be kept by the Company at the principal place of business of the Managing Member of the Company. Such records and books of account shall be subject to inspection and copying by any Member at the reasonable request, and at the expense, of such Member during normal business hours, upon reasonable notice to the Company. 6.2 REPORTS. (a) REPORTS TO MEMBERS. The Company shall furnish to each Member financial statements of the Company for each calendar quarter during the term of the Company, commencing with the first full calendar quarter following the date hereof. (b) TAX INFORMATION. Within 120 days after the end of each Fiscal Year, or as soon as reasonably practicable thereafter, the Managing Member shall furnish to each Member such information regarding the amount of such Member's share in the Company's taxable income or loss for such year, in sufficient detail to enable such Member to prepare its United States federal, state and other tax returns. 6.3 ACCOUNTING BASIS. The books and records and financial statements and reports of the Company shall be kept on an accrual basis. Additional determinations with respect to accounting principles shall be made by the Managing Member. 6.4 TAX MATTERS. Unless otherwise required by law, the Managing Member shall be the "tax matters partner" of the Company within the meaning of Section 6231(a)(7) of the Code. Prompt notice shall be given to the Members upon receipt of advice that the Internal Revenue Service or other taxing authority intends to examine any income tax return or record or books of the Company. 6.5 CONFIDENTIALITY. Each of the Additional Members shall, and shall direct those of its attorneys, accountants, consultants and advisors (the "REPRESENTATIVES") who have access to Confidential Information to keep confidential and not disclose any Confidential Information without the express consent, in the case of Confidential Information acquired from the Company, of the Company or, in the case of Confidential Information acquired from another Additional Member or the Managing Member, such Member, unless (subject in all cases to any more stringent restrictions imposed on the Company) (a) such disclosure shall be required by applicable law, governmental rule or regulation, court order, administrative or arbitral proceeding, (b) such disclosure is reasonably required in connection with any litigation against or involving the Company, 25 the Managing Member or any Additional Member, or (c) such disclosure is reasonably required in connection with any proposed assignment, sale or other disposition of all or any part of an Additional Member's interest or a participation in the Company (a "PROPOSED TRANSFER"); PROVIDED, that with respect to the use of any Confidential Information in any Proposed Transfer, the consent of the Managing Member, in its sole discretion, shall be necessary prior to such use and the Managing Member may require any Proposed Transferee to enter into a confidentiality agreement with terms substantially similar to the terms of this Section 6.5. "CONFIDENTIAL INFORMATION" shall mean information concerning the Managing Member, its members, board members and officers and any information, including the identity of any Additional Member, that an Additional Member may acquire from the Company, or as a consequence of being an Additional Member of the Company, from another Additional Member other than information that (i) is already available through publicly available sources of information (other than as a result of disclosure by such Additional Member), (ii) was available to an Additional Member on a non-confidential basis prior to its disclosure to such Additional Member by the Company, or (iii) becomes available to an Additional Member on a non- confidential basis from a third party, provided such third party is not known by such Additional Member to be bound by this Agreement or another confidentiality agreement with the Company. Notwithstanding the foregoing, the Managing Member may disclose the identity of the Additional Members to the extent reasonably calculated to advance or protect the interests of the Company. ARTICLE 7 ADDITIONAL MEMBERS; TRANSFER; WITHDRAWAL 7.1 ADDITIONAL MEMBERS. The Managing Member, with the consent of the Required Additional Members (which consent shall not be unreasonably withheld), may admit Additional Members to the Company; PROVIDED, that each such Additional Member shall execute such instruments as the Managing Member may reasonably deem necessary or desirable to admit such party as an Additional Member, pursuant to which such Additional Member shall agree to be bound by and comply with all of the terms and provisions hereof. 7.2 TRANSFER. (a) CONDITIONS TO TRANSFER. No direct or indirect sale, exchange, transfer, assignment or other disposition (collectively referred to as a "TRANSFER") of all or any fraction of an Additional Member's interest in the Company may be made without the prior written consent of the Managing Member, which consent shall not be unreasonably withheld. A Person shall be deemed admitted as a Member at the time that 26 such Person: (i) executes an amendment, counterpart or supplement to this Agreement and such other instruments as the Managing Member may reasonably deem necessary or desirable to evidence such Person's agreement to be bound by and to comply with the terms and provisions hereof; and (ii) is named on the books and records of the Company. (b) NULL AND VOID TRANSFER. Unless waived by the Managing Member, any purported Transfer by any Additional Member (including transferees thereof or substituted members therefor) of any interest in the Company not made strictly in accordance with the provisions of this Section 7.2 or otherwise not permitted by this Agreement shall be entirely null and void. 7.3 DEATH, INCOMPETENCE, BANKRUPTCY OR LIQUIDATION OF AN ADDITIONAL MEMBER. In the event of the death, incompetence or bankruptcy of an Additional Member, or the bankruptcy, termination, liquidation or dissolution of any partnership, trust, corporation or other entity which is an Additional Member, (a) no Dissolution Event and Winding Up Period of the Company shall be effected thereby and the Company and its business shall be continued until the Termination of the Company as provided for in this Agreement, and (b) upon satisfaction of the conditions of Sections 7.2 (Transfer), the estate or successor in interest in the Company of such deceased, incompetent, bankrupt, terminated, liquidated or dissolved Additional Member shall succeed to the interest of such Additional Member and shall be deemed a Member for any and all purposes hereunder. 7.4 WITHDRAWALS. Prior to the Termination of the Company, except in connection with a Transfer permitted by Section 7.2 (Transfer), no Member may withdraw from the Company. Withdrawals by any Member of its Capital Account or any portion thereof shall not be permitted. 7.5 CONTINUATION. Notwithstanding the provisions of Sections 8.1(e) and (g) (Dissolution), the Company shall not commence its winding up upon the dissolution of the Managing Member or the Bankruptcy of the Managing Member if, within 90 days following such occurrence, the Additional Members shall agree in writing to the continuation of the Company and to the appointment, effective as of the date of such occurrence, of a successor to the Managing Member. If such a successor is appointed prior to or as of such effective date, the business of the Company shall be continued as a limited liability company, subject to and upon the terms and conditions set forth in this Agreement and, if required, any documents necessary to reflect the continued existence of the Company as a limited liability company shall be executed by the Members. 27 ARTICLE 8 DISSOLUTION; WINDING UP; TERMINATION 8.1 DISSOLUTION. The Company shall commence its winding up upon the first to occur of the following (the "DISSOLUTION EVENT"): (a) at any time after the tenth anniversary of the date hereof; (b) the expiration of 60 days after the assignment, sale, transfer or other disposition of all or all of the assets, properties and business of the Company; (c) at the election of the Managing Member with the consent of the Required Additional Members at any time; (d) upon the dissolution of the Managing Member (unless the Company is continued pursuant to Section 7.5 (Continuation)); (e) within 180 days of the execution of this Agreement, if the Merger has not been consummated; and (f) unless the Company is continued pursuant to Section 7.5 (Continuation), (i) upon the commencement by the Managing Member of any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets; (ii) upon the Managing Member making a general assignment for the benefit of its creditors; (iii) at such time as any case, proceeding or other action of a nature referred to in clause (i) above against the Managing Member results in the entry of an order for relief or any such adjudication or appointment, or remains undismissed, undischarged or unbonded for a period of 120 days; (iv) at such time as any case, proceeding or other action seeking issuance of a warrant of attachment, execution or similar process against all or any substantial part of the Managing Member's assets results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 120 days from the entry thereof; (v) upon the Managing Member's consent to, approval of, or acquiescence in, any of the acts or relief described in clause (i), (ii), (iii) or (iv) above; or (vi) upon the Managing Member generally not paying, or being unable to pay, or admitting in writing its inability to pay, its debts as they become due. 28 The Dissolution Event shall be effective on the day on which such event occurs and immediately thereafter the Company shall commence the Winding Up Period during which its affairs shall be wound up in accordance with Sections 8.2 (Winding Up and Termination) and 8.3 (Assets Reserved and Pending Claims). 8.2 WINDING UP AND TERMINATION. (a) WINDING UP. Upon the occurrence of the Dissolution Event, the property and business of the Company shall be wound up by the Managing Member, or, in the event of the unavailability of the Managing Member, by a Person designated as a liquidating trustee by the Additional Members. Subject to the requirements of applicable law and the further provisions of this Section 8.2, the Managing Member (or any other Person conducting the winding up of the Company's affairs) shall have discretion in determining whether to sell or otherwise dispose of Company assets, except upon a Dissolution Event described in Section 8.1(c) (Dissolution), or to distribute the same in kind and the timing and manner of such disposition or distribution. While the Company continues to hold assets, the Managing Member shall as a general matter seek to maximize the value of such assets and may in its discretion expend funds, acquire additional assets and borrow funds. The Managing Member may also authorize the payment of fees and expenses reasonably required in connection with the winding up of the Company. (b) DISTRIBUTIONS UPON WINDING UP. Within a reasonable period of time following the occurrence of the Dissolution Event, after allocating all Net Income, Net Loss and other items of income, gain, loss or deduction pursuant to Sections 3.4 (Allocation) and 3.5 (Special Allocations), the Company's assets (except for assets reserved pursuant to Section 8.3 (Assets Reserved and Pending Claims)) shall be applied and distributed in the following manner and order of priority: (i) the claims of all creditors of the Company (including Members except to the extent not permitted by law) shall be paid and discharged other than liabilities for which reasonable provision for payment has been made; (ii) to the Members in accordance with the positive balances of their respective Capital Accounts; and (iii) thereafter, to the Members in accordance with Section 3.3(a) (Distributions -- General). Notwithstanding anything to the contrary in this Agreement, liquidating distributions shall be made no later than the last to occur of (x) 90 days after the date of disposition (including pursuant to Section 8.3 (Assets Reserved and Pending Claims)) of the last remaining asset of the Company and (y) the end of the Company's taxable year in which 29 the disposition referred to in clause (x) above shall occur. This Section 8.2(b) is intended to comply with, and shall be interpreted consistently with, the requirements of Regulation section 1.704-1(b)(2)(ii)(b)(2). (c) DISTRIBUTIONS IN KIND. The Managing Member, in its sole discretion, may allocate securities for distribution in kind to the Additional Members. Notwithstanding any other provision of this Agreement, the amount by which the fair market value of any property to be distributed in kind to the Members (including property distributed in liquidation, and property distributed pursuant to Section 3.3 (Distributions)) exceeds or is less than the adjusted basis of such property shall, to the extent not otherwise recognized by the Company, be taken into account in computing income, gains and losses of the Company for purposes of crediting or charging the Capital Accounts of, and distributing proceeds to, the Members, pursuant to this Agreement. (d) TERMINATION. When the Managing Member or a liquidating trustee appointed pursuant to Section 8.2(a) (Winding Up) has completed the winding up described in this Section 8.2, the Managing Member or the liquidating trustee shall cause the Termination of the Company. 8.3 ASSETS RESERVED AND PENDING CLAIMS. (a) ASSETS RESERVED. If, upon a Dissolution Event, there are any assets that, in the judgment of the Managing Member, cannot be sold or distributed in kind without sacrificing a significant portion of the value thereof or where such sale or distribution is otherwise impractical at the time of the Dissolution Event, such assets may be retained by the Company, except upon a Dissolution Event described in Section 8.1(c) (Dissolution), if the Managing Member determines that the retention of such assets is in the best interests of the Additional Members. Upon the sale of such assets or a determination by the Managing Member that circumstances no longer require their retention, such assets (at their fair market value) or the proceeds of their sale shall be taken into account in computing Capital Accounts on winding up and amounts distributable pursuant to Section 8.2(b) (Distributions Upon Winding Up), and distributed in accordance with such value. (b) PENDING CLAIMS. If there are any claims or potential claims (including potential Company expenses in connection therewith) against the Company (either directly or indirectly, including potential claims for which the Company might have an indemnification obligation) for which the possible loss cannot, in the judgment of the Managing Member, be definitively ascertained, then such claims shall initially be taken into account in computing Capital Accounts upon winding up and distributions pursuant to Section 8.2(b) (Distributions Upon Winding Up) at an amount estimated by the Managing Member to be sufficient to cover any potential loss or liability on account of 30 such claims (including such potential Company expenses), and the Company shall retain funds (or assets) determined by the Managing Member in its discretion as a reserve against such potential losses and liabilities, including expenses associated therewith. The Managing Member may in its discretion obtain insurance or create escrow accounts or make other similar arrangements with respect to such losses and liabilities. Upon final settlement of such claims (including such potential Company expenses) or a determination by the Managing Member that the probable loss therefrom can be definitively ascertained, such claims (including such potential Company expenses) shall be taken into account in the amount at which they were settled or in the amount of the probable loss therefrom in computing Capital Accounts on winding up and amounts distributable pursuant to Section 8.2(b) (Distributions Upon Winding Up), and any excess funds retained shall be distributed. ARTICLE 9 AMENDMENTS; WAIVER; POWER OF ATTORNEY 9.1 AMENDMENTS; WAIVER. (a) AMENDMENT OR WAIVER BY MANAGING MEMBER AND ADDITIONAL MEMBERS. Except as otherwise expressly provided in this Agreement, any provision of this Agreement (other than this Section 9.1) may be amended or waived by an instrument in writing executed by the Managing Member and the Required Additional Members; PROVIDED, HOWEVER, that: (i) any amendment to or waiver of any provision of this Agreement that would increase or reduce the Capital Contributions, the Interests or otherwise increase the liabilities or obligations of any Additional Member shall require the written consent of such Additional Member; (ii) subject to Section 3.5(g) (Curative Allocations), any amendment to or waiver of any provision that would alter the allocations to Capital Accounts, or the distributions from the Company, shall require the written consent of each Additional Member who would be adversely affected by such amendment; and (iii) any amendment to or waiver of any provision which discriminates against any Additional Member in relation to the other Additional Members shall require the written consent of such Additional Member. 31 Notwithstanding the foregoing, the Managing Member, without the consent of any Additional Member, may amend this Agreement (including Exhibit A hereto) as necessary to reflect the admission or substitution of Additional Members admitted to the Company pursuant to Sections 7.1(b) (Additional Members) or 7.2 (Transfer), respectively, or to reflect additional Capital Contributions made pursuant to Section 3.1(b) (Additional Capital Contributions). (b) AMENDMENT OR WAIVER BY THE MANAGING MEMBER. Notwithstanding the foregoing, the Managing Member, without the consent of any Additional Member, may amend or waive any provision of this Agreement (unless such amendment or waiver would have a material adverse effect on any of the Additional Members) to reflect: (i) a change in the name of the Company or the location of the principal place of business or the registered office of the Company; (ii) a change that is necessary to qualify the Company as a limited liability company in which the Additional Members have limited liability under the laws of any jurisdiction or that is necessary or advisable in the opinion of the Managing Member to ensure that the Company will not be taxable other than as a partnership under the Code and Regulations; (iii) a change that is (x) of an inconsequential nature or (y) necessary or desirable to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or contained in any federal or state statute; (iv) a change in any provision of this Agreement that requires any action to be taken by or on behalf of the Managing Member or the Company pursuant to the requirements of the Delaware Act if the provisions of the Delaware Act are amended, modified or revoked so that the taking of such action is no longer required; (v) a change to add to the duties or obligations of the Managing Member; (vi) a change that, in the reasonable opinion of the Managing Member, does not adversely affect the rights of the Additional Members in any material respect; and (vii) a change clarifying any ambiguity, defect or inconsistency in this Agreement. 32 Within a reasonable period after any change or amendment or waiver in accordance with the preceding sentence, the Managing Member shall send a written notice to each Additional Member describing such change or amendment or waiver in reasonable detail. 9.2 POWER OF ATTORNEY. (a) APPOINTMENT OF POWER OF ATTORNEY. Each Additional Member by its execution of this Agreement irrevocably makes, constitutes and appoints the Managing Member as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead, to make, execute, sign, acknowledge, swear to, record and file: (i) any amendment or waiver of any provision of this Agreement that has been adopted or made as herein provided; (ii) all certificates and other instruments deemed advisable by the Managing Member to comply with the provisions of this Agreement and applicable law or to permit the Company to become or to continue as a limited liability company or other entity wherein the Additional Members have limited liability in each jurisdiction where the Company may be doing business; (iii) all instruments that the Managing Member deems appropriate to reflect a change or modification of this Agreement or the Company in accordance with this Agreement; (iv) all conveyances and other instruments or papers deemed advisable by the Managing Member, to effect the dissolution, winding up and termination of the Company pursuant to the provisions of this Agreement; (v) all fictitious or assumed name certificates required or permitted to be filed on behalf of the Company; and (vi) all other instruments or papers not inconsistent with the terms of this Agreement which may be required by law to be filed on behalf of the Company. (b) NATURE AND EXERCISE OF POWER OF ATTORNEY. With respect to each Additional Member, the foregoing power of attorney: (i) is coupled with an interest, shall be irrevocable and shall survive the incapacity or bankruptcy of such Additional Member; (ii) may be exercised by the Managing Member either by signing separately as attorney-in-fact for such Additional Member or, after listing all of the Additional Members executing an instrument, by a single signature of the Managing Member acting as attorney-in-fact for all of them; and (iii) shall survive the delivery of an assignment by such Additional Member of the whole or any fraction of its interest; except that, where the assignee of the whole of such Additional Member's interest has been approved by the Managing Member for admission to the Company, the power of attorney of the assignor shall survive the delivery of such assignment for the sole purpose of 33 enabling the Managing Member to execute, swear to, acknowledge and file any instrument necessary or appropriate to effect such substitution. ARTICLE 10 MISCELLANEOUS 10.1 INVESTMENT REPRESENTATIONS. Each Additional Member hereby represents and warrants to the Company that: (a) the limited liability company interest of the Additional Member is being acquired for investment purposes only for its own account and not with a view to or in connection with any distribution, re-offer, resale, or other disposition not in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "SECURITIES ACT") and applicable state securities laws; (b) the Additional Member possesses such expertise, knowledge, and sophistication in financial and business matters generally, and in the type of transactions in which the Company proposes to engage in particular, that it is capable of evaluating the merits and economic risks of acquiring and holding its limited liability company interest, and it is able to bear all such economic risks now and in the future; (c) the Additional Member has had access to all of the information with respect to its limited liability company interest that it deems necessary to make a complete evaluation thereof and has had the opportunity to question the Company concerning such limited liability company interest; (d) the Additional Member's decision to acquire its limited liability company interest for investment has been based solely upon the evaluation made by it; (e) the Additional Member is aware that it must bear the economic risk of its investment in the Company for an indefinite period of time because limited liability company interests in the Company (i) have not been registered under the Securities Act or under the securities laws of various states, and, therefore, cannot be sold unless the limited liability company interests are subsequently registered under the Securities Act and any applicable state securities laws or an exemption from registration is available and (ii) are subject to this Agreement, which prohibits the transfer of such interests without the consent of the Managing Member and prohibits the withdrawal of Additional Members; (f) the Additional Member is aware that the Additional Member's tax liability with respect to such Additional Member's interest in the Company may exceed any distributions made to such Additional Member and that the Company is under no obligation to make any such distributions to such Additional Member to pay any related taxes; and (g) the Additional Member has not relied upon the Managing Member, or its members, board members or officers or any other Additional Member or agent or counsel thereof for any tax or securities law advice with respect to such Additional Member's interest in the Company. 10.2 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of, and shall be binding upon, the successors and permitted assigns of the Members. 34 10.3 NO WAIVER. The failure of any Member to seek redress for violation, or to insist on strict performance, of any covenant or condition of this Agreement shall not prevent a subsequent act which would have constituted a violation from having the effect of an original violation. 10.4 SURVIVAL OF CERTAIN PROVISIONS. Each of the Members agrees that the covenants and agreements set forth in Sections 4.1 (Liability of Additional Members), 4.3 (Liability to Members), 4.4 (Indemnification) and 6.5 (Confidentiality) shall survive the Termination of the Company. 10.5 NOTICES. All notices hereunder shall be in writing and shall be given by personal delivery, mailed by registered or certified mail, Federal Express, U.S. overnight mail or international air courier service, or sent by telecopy or other electronic means, and addressed: if to the Company, at its principal office and, if to a Member, to such Member at its last known address as disclosed on the records of the Company. Notices shall be deemed to have been given as of the date delivered (upon confirmed receipt by the delivery service) or telecopied (upon confirmed receipt). The Company and any Member may change the address for notices by delivering or mailing as aforesaid, a notice stating the change and setting forth the changed address. 10.6 SEVERABILITY. In case any provision in this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired hereby. 10.7 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 10.8 HEADINGS, ETC. The headings in this Agreement are inserted for convenience of reference only and shall not affect the interpretation of this Agreement. 10.9 GENDER. As used herein, masculine pronouns shall include the feminine and neuter, neuter pronouns shall include the masculine and the feminine, and the singular shall be deemed to include the plural. 10.10 NO RIGHT TO PARTITION. The Members, on behalf of themselves and their shareholders, partners, members, successors and assigns, if any, hereby specifically renounce, waive and forfeit all rights, whether arising under contract or statute or by operation of law, except as otherwise expressly provided in this Agreement, to seek, bring or maintain any action in any court of law or equity for partition of the Company or any asset of the Company, or any interest which is considered to be Company property, regardless of the manner in which title to such property may be held. 35 10.11 NO THIRD PARTY RIGHTS. Except as expressly provided in this Agreement, this Agreement is intended solely for the benefit of the parties hereto and is not intended to confer any benefits upon, or create any rights in favor of, any Person other than the parties hereto. 10.12 ENTIRE AGREEMENT. This Agreement and the Investment Agreement, together with the exhibits attached hereto or thereto, are intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. This Agreement and the Investment Agreement, together with the exhibits attached hereto or thereto, supersede all prior agreements and understandings between the parties with respect to such subject matter. 10.13 RULE OF CONSTRUCTION. The general rule of construction for interpreting a contract, which provides that the provisions of a contract should be construed against the party preparing the contract, is waived by the parties hereto. Each party acknowledges that such party was represented by separate legal counsel in this matter who participated in the preparation of this Agreement or such party had the opportunity to retain counsel to participate in the preparation of this Agreement but elected not to do so. 10.14 AUTHORITY. Whenever in this Agreement or elsewhere it is provided that consent is required of, or a demand shall be made by, or an act or thing shall be done by or at the direction of, the Company, or whenever any words of like import are used, all such consents, demands, acts and things are to be made, given or done by the consent of the Managing Member or Person acting under the authority of the Managing Member, unless a contrary intention is expressly indicated. 10.15 RELIANCE. No Person dealing with the Company, or its assets, whether as lender, assignee, purchaser, lessee, grantee, or otherwise, shall be required to investigate the authority of the Managing Member in dealing with the Company or any of its assets, nor shall any Person entering into a contract with the Company or relying on any such contract or agreement be required to inquire as to whether such contract or agreement was properly approved by the Managing Member. Any such Person may conclusively rely on a certificate of authority signed by the Managing Member and may conclusively rely on the due authorization of any instrument signed by the Managing Member in the name and on behalf of the Company or the Managing Member. 10.16 APPLICABLE LAW. (A) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. 36 (b) Any dispute arising hereunder shall be settled by arbitration in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association (the "AAA RULES") by a single arbitrator who is mutually agreeable to the Managing Member and the Additional Members (who shall be represented by Equity Resources Group, Incorporated (the "REPRESENTATIVE"). If the Managing Member and the Representative are unable to agree upon an arbitrator, an arbitrator shall be selected in accordance with the AAA Rules. Any judgment upon the award rendered by such arbitrator may be entered in any court of competent jurisdiction. All proceedings in any such arbitration shall be conducted in Boston, Massachusetts. Jurisdiction of such arbitrator shall be exclusive as to disputes between the Managing Member and the Representative relating to this Agreement, and the Managing Member and the Investors agree that this agreement to arbitrate shall be specifically enforceable under the laws of Delaware. Neither the Managing Member nor any Additional Member (including the Representative) shall have the right to appeal the arbitration decision or otherwise to submit a dispute relating to this Agreement to a court of law. With respect to matters submitted to arbitration, each of the Managing Member and the Additional Members shall bear its own respective costs, fees and expenses (including reasonable fees, expenses and disbursements of attorneys) in connection with such arbitration. The Managing Member, on the one hand, and the Additional Members, collectively, on the other hand, shall each pay one-half of the total costs, fees and expenses of the arbitrator. [Remainder of Page Intentionally Left Blank] 37 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. MANAGING MEMBER: KRF COMPANY, L.L.C. By: The Krupp Family Limited Partnership-94, its sole member By: ___________________________________________ Douglas Krupp General Partner ADDITIONAL MEMBERS: EQUITY RESOURCE FUND XVI LIMITED PARTNERSHIP EQUITY RESOURCE FUND XIX LIMITED PARTNERSHIP EQUITY RESOURCE GENERAL FUND LIMITED PARTNERSHIP EQUITY RESOURCE CAMBRIDGE FUND LIMITED PARTNERSHIP EQUITY RESOURCE BRATTLE FUND LIMITED PARTNERSHIP EQUITY RESOURCE BRIDGE FUND LIMITED PARTNERSHIP By: EQUITY RESOURCES GROUP, INCORPORATED as general partner of each of the foregoing By:____________________________________ Eggert Dagjartsson Executive Vice President 38 EXHIBIT A MEMBERS OF KRF3 ACQUISITION COMPANY, L.L.C.
CAPITAL CONTRIBUTION INTEREST MANAGING MEMBER KRF COMPANY, L.L.C. Existing Managing Member Contribution 10,826 Units @ $____/Unit Cash Contribution ($______________) ($______________) ____% ADDITIONAL MEMBERS EQUITY RESOURCE CAMBRIDGE FUND 95 Units @ $____/Unit ____% ($______________) EQUITY RESOURCE BRATTLE FUND 30 Units @ $____/Unit ($______________) EQUITY RESOURCE GENERAL FUND 40 Units @$____/Unit ____% ($______________) EQUITY RESOURCE FUND XIX 413 Units @$____/Unit ____% ($______________) EQUITY RESOURCE FUND XVI 916 Units @$____/Unit ($______________) EQUITY RESOURCE BRIDGE FUND 30 Units @$____/Unit ____% ($______________) EQUITY RESOURCE TOTAL $ 100.00% ================== ======
EXHIBIT B AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is made and entered into as of ______________, 2000 by and between KRF3 Acquisition Company, L.L.C., a Delaware limited liability company (the "COMPANY" or, after the Effective Time (as defined in Article V hereof), the "SURVIVING ENTITY"), and Krupp Realty Fund, Ltd.-III, a Massachusetts limited partnership (the "PARTNERSHIP"). W I T N E S S E T H: WHEREAS, the Company is a limited liability company duly formed and validly existing under the laws of the State of Delaware; WHEREAS, the Partnership is a limited partnership duly formed and validly existing under the laws of the Commonwealth of Massachusetts; WHEREAS, the Massachusetts Revised Uniform Limited Partnership Act, Mass. Gen. Laws Ann. ch. 109, Sections 1-62 (THE "MASSACHUSETTs LP Act"), and the Delaware Limited Liability Company Act, 6 DEL. C. Sections 18-101 et seq. (the "DELAWARE LLC ACT"), each permits a limited partnership formed and existing under the Massachusetts LP Act to merge with and into a limited liability company formed and existing under the Delaware LLC Act; WHEREAS, the members of the Company have authorized and the general partners and limited partners of the Partnership have duly authorized the merger of the Partnership with and into the Company pursuant to the terms of this Agreement; and WHEREAS, the holders of limited partnership interests of Fund III have approved an amendment to the Amended Agreement of Limited Partnership, dated June 1, 1982, authorizing the Partnership to enter into this Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed that, in accordance with the applicable statutes of the State of Delaware and the Commonwealth of Massachusetts, and subject to the conditions precedent contained herein, the Partnership shall be at the Effective Time, merged with and into the Company (the "MERGER"), with the Company to be the Surviving Entity. The mode of carrying the Merger into effect shall be as follows: I. MERGER At the Effective Time, the Partnership shall be merged with and into the Company, the separate existence of the Partnership shall cease, the Company shall continue in existence and the Merger shall in all respects have the effects provided for by the Massachusetts LP Act and the Delaware LLC Act. Prior to the Effective Time, the Company and the Partnership shall take all such action as shall be necessary or appropriate in order to effectuate the Merger. If at any time after the Effective Time, the Company shall consider or be advised that any further assignments, conveyances or assurances in law are necessary or desirable to carry out the provisions hereof, the proper members, managers, officers or other agents of the Company, as authorized agents and attorneys-in-fact for the Partnership (and acting in the name of the Company or the Partnership), shall execute and deliver any and all proper deeds, assignments, and assurances in law, and do all such additional things necessary or proper to carry out the provisions hereof. II. TERMS OF TRANSACTION At the Effective Time, by virtue of the Merger and without any action on the part of the holders thereof, (i) the partnership interests in the Partnership outstanding immediately prior to the Effective Time, held by (a) the general partners of the Partnership (the "GENERAL PARTNERS"), (b) the "ORIGINAL LIMITED PARTNERS" (as defined in the Partnership's Amended Agreement of Limited Partnership, dated as of June 1, 1982, as amended from time to time (the "PARTNERSHIP AGREEMENT")) and (c) the limited partners of the Partnership who are, at the Effective Time, directly or indirectly controlling, controlled by or under common control with the Company, Equity Resources Group Incorporated or the General Partners ("the AFFILIATE LIMITED PARTNERS"), shall be canceled and retired and shall cease to exist, (ii) the partnership interests of limited partners of the Partnership who are not Affiliate Limited Partners (the "UNAFFILIATED LIMITED PARTNERS") outstanding immediately prior to the Effective Time shall be canceled and converted into and represent the right to receive in exchange therefor $[_____] per "UNIT" (as defined in the Partnership Agreement), without interest thereon, payable by the Surviving Entity to the holder of such Unit (as reflected on the records of the Partnership at the Effective Time) upon receipt by the Surviving Entity of the Proof of Ownership Form hereto, a Substitute Form W-9 and any other additional documentation necessary or desirable to complete the conversion of the Units required which the Surviving Entity shall reasonably request from the holder, (iii) the limited liability company interests held by the members of the Company outstanding immediately prior to the Effective Time shall remain the outstanding limited liability company interests of such members of the Company, and such members shall continue as the members of the Surviving Entity. Neither the Surviving Entity nor any other party hereto shall be liable to a holder of Units for any payments made to a public official pursuant to applicable abandoned property laws. The Surviving Company shall be entitled to deduct and withhold from the amounts otherwise payable to a holder of Units pursuant to the Merger any taxes or other amounts as are required by applicable law, including without limitation Sections 3406 and 1445 of the Internal Revenue Code of 1986, as amended. To the extent that amounts are so withheld by the Surviving Entity, they shall be treated for all purposes of this Agreement as having been paid to the holder of the Units in respect of which such deduction and withholding was made. After the Effective Time, the transfer books of the Partnership shall be closed and there shall be no further registration of transfers on the records of the Partnership of the Units that were outstanding immediately prior to the Effective Time. As of the Effective Time, each holder of a Unit which was converted into the right to receive cash pursuant to Article II hereof shall be deemed to have withdrawn as a limited partner and shall have no further interest in the Partnership or the Surviving Entity or any allocations or distributions of income, property or otherwise, other than the right to receive the amount as provided in this Article II. No appraisal rights shall be available to holders of Units in connection with the Merger. III. CERTIFICATE OF FORMATION AND LIMITED LIABILITY COMPANY AGREEMENT From and after the Effective Time, and until thereafter amended as provided by law, the Certificate of Formation and Limited Liability Company Agreement of the Company as in effect immediately prior to the Effective Time shall be the Certificate of Formation and Limited Liability Company Agreement of the Surviving Entity. IV. MANAGERS AND OFFICERS From and after the Effective Time, and until their successors are duly elected or appointed, or until their earlier death, resignation or removal, the managers and officers of the Surviving Entity shall be the same as the managers and officers of the Company immediately prior to the Effective Time. V. EFFECTIVE TIME Certificates of merger evidencing the Merger ("CERTIFICATES OF MERGER") substantially in the form of EXHIBIT A attached hereto shall be filed by the General Partners and the Company with the Secretary of State of the State of Delaware and the Secretary of State of the Commonwealth of Massachusetts pursuant to the applicable requirements of the Delaware LLC Act and the Massachusetts LP Act. The Merger shall become effective upon the later of the filing of the Certificates of Merger with the Secretary of State of the Commonwealth of Massachusetts and the Secretary of State of the State of Delaware or such other time as shall be agreed by the parties and set forth in the Certificates of Merger and in accordance with the Massachusetts LP Act and the Delaware LLC Act (such time of effectiveness, the "EFFECTIVE TIME"). VI. TERMINATION This Agreement may be terminated at any time prior to the Effective Time: (i) by mutual written consent of the Company and the General Partners; (ii) by either the Company or the General Partners if the Merger shall not have been consummated by [_______________]; PROVIDED, HOWEVER, that the right to terminate this Agreement pursuant to this clause (ii) of Article VI shall not be available to any party whose failure to perform any of its obligations under this Agreement has been the cause of, or resulted in, the failure of the Merger to occur on or before such date. In the event of a termination of this Agreement by either the Company or the General Partners, as provided in this Article VI, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of the Company or the General Partners or their respective managers or officers, except with respect to Article IX and this second paragraph of Article VI. Nothing herein shall relieve any party of liability with respect to any fraud or intentional breach by any party hereto of this Agreement. VII. AMENDMENTS At any time prior to the Effective Time, the Company and the General Partners may amend, modify or supplement this Agreement in such manner as they jointly may determine; PROVIDED, HOWEVER, that, such amendment must be executed in writing by all parties hereto and PROVIDED FURTHER, that no such amendment, modification, or supplement shall reduce the amount or change the type of consideration into which each Unit shall be converted upon consummation of the Merger or alter or change any term of the Certificate of Formation or Limited Liability Company Agreement of the Surviving Entity. VIII. CONDITIONS TO CONSUMMATION OF THE MERGER The respective obligations of each party hereto to effect the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (i) this Agreement shall have been approved and adopted by the partners of the Partnership in accordance with the Massachusetts LP Act and the Partnership Agreement; (ii) this Agreement shall have been approved and adopted by the members of the Company in accordance with the Delaware LLC Act and the Limited Liability Company Agreement of the Company; (iii) no statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, promulgated or enforced by any governmental entity, and no action, suit, claim or legal, administrative or arbitral proceeding or investigation shall be pending before any governmental entity which seeks to prohibit, restrain, enjoin or restrict the consummation of the transactions contemplated by this Agreement or which seeks to subject any party to substantial damages as a result of the consummation of the transactions contemplated by this Agreement; (iv) each of the parties shall have obtained the consent, approval or waiver of each non-governmental person whose consent, approval or waiver shall be required in order for such party to consummate the transactions contemplated by this Agreement; (v) since June 30, 1999, no change or event shall have occurred which has had or could reasonably be expected to result in a Material Adverse Effect. For purposes of this Agreement, "MATERIAL ADVERSE EFFECT" means any change, event or effect (a) in, on or relating to the business of the Partnership that is, or is reasonably likely to be, materially adverse to the business, assets (including intangible assets), liabilities (contingent or otherwise), condition (financial or otherwise), prospects or results of operations of the Partnership and its subsidiaries taken as a whole, or (b) that may prevent or materially delay the performance of this Agreement by the Company or the Partnership or the consummation of the transactions contemplated hereby. IX. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Delaware without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. X. MISCELLANEOUS This Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the day and year first above written. KRF3 ACQUISITION COMPANY, L.L.C. By: KRF Company, L.L.C., its managing member By: The Krupp Family Limited Partnership-94, its sole member By: ____________________________ Douglas Krupp General Partner KRUPP REALTY FUND, LTD.-III By: The Krupp Corporation, its general partner By: ____________________________ Douglas Krupp Co-Chairman of the Board of Directors EXHIBIT A CERTIFICATE OF MERGER MERGING KRUPP REALTY FUND, LTD. - III INTO KRF3 ACQUISITION COMPANY, L.L.C. The undersigned, being respectively, an authorized person of KRF3 Acquisition Company, L.L.C., a Delaware limited liability company and the general partners of Krupp Realty Fund, Ltd. - III, a Massachusetts limited partnership, do hereby certify for and on behalf of such entities. FIRST: The name and jurisdiction of formation of each of the constituent entities in the merger are as follows: NAME JURISDICTION OF FORMATION - ---- ------------------------- Krupp Realty Fund, Ltd. - III Massachusetts KRF3 Acquisition Company, L.L.C. Delaware SECOND: An Agreement and Plan of Merger between the parties to the merger has been approved, adopted, certified, executed and/or acknowledged by each of the constituent entities in accordance with the requirements of Section 16A of the Massachusetts Revised Uniform Limited Partnership Act and Section 18-209 of the Delaware Limited Liability Company Act. THIRD: The name of the surviving limited liability company is KRF3 Acquisition Company, L.L.C. FOURTH: The merger shall be effective at 5:00 p.m. on the date on which the latter of (a) the filing of this Certificate of Merger in the Office of the Secretary of State of the State of Delaware and (b) the filing of this Certificate of Merger in the Office of the Secretary of State of the Commonwealth of Massachusetts, occurs. FIFTH: The executed Agreement and Plan of Merger is on file at a place of business of the surviving limited liability company. The address of such place of business is: KRF3 Acquisition Company, L.L.C., One Beacon Street, Suite 1500, Boston, Massachusetts 02108. SIXTH: A copy of the Agreement and Plan of Merger will be furnished by the surviving limited liability company, on request and without cost, to any partner of the constituent limited partnership and any member of the constituent limited liability company. SEVENTH: The surviving limited liability company shall accept service of process at its offices at One Beacon Street, Suite 1500, Boston, Massachusetts 02108. IN WITNESS WHEREOF, the undersigned have duly executed this Certificate of Merger as of _________________, 1999. KRF3 ACQUISITION COMPANY, L.L.C. By:______________________________ Name: Title: KRUPP REALTY FUND, LTD. - III By: The Krupp Corporation, its general partner By:_________________________________ Name: Douglas Krupp Title: Co-chairman of the Board of Directors and By: The Krupp Company Limited Partnership II, its general partner By:_________________________________ Name: George Krupp Title: a general partner -----END PRIVACY-ENHANCED MESSAGE-----