-----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, L+7U/3aWz1yNIL5Hw64oYxlYHnviYoSIvSYeo2EBBOipF2b5Isx1f2gvBhtTfALf gKwaxyLGWcLvMeyBtPRTVg== 0000763049-97-000006.txt : 19970401 0000763049-97-000006.hdr.sgml : 19970401 ACCESSION NUMBER: 0000763049-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VMS NATIONAL PROPERTIES JOINT VENTURE CENTRAL INDEX KEY: 0000789089 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 363311347 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14194 FILM NUMBER: 97569000 BUSINESS ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLAZA STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 BUSINESS PHONE: 8032391000 MAIL ADDRESS: STREET 1: ONE INSIGNIA FINANCIAL PLAZA STREET 2: PO BOX 1089 CITY: GREENVILLE STATE: SC ZIP: 29602 10-K 1 FORM 10-K-ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period.........to......... Commission file number 0-14194 VMS NATIONAL PROPERTIES JOINT VENTURE (exact name of registrant as specified in its charter) Illinois 36-3311347 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 630 Dundee Road, Suite 220 Northbrook, Illinois 60062 (Address of principal executive offices) (Zip Code) Issuer's telephone number (847) 562-4537 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Units of Limited Partnership Interest (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting partnership interests held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the partnership interests were sold, or the average bid and asked prices of such partnership interests, as of December 31, 1996. Market value information for the Registrant's partnership interests is not available. PART I ITEM 1. BUSINESS General The Registrant, VMS National Properties Joint Venture (the "Venture"), of which the general partners are VMS National Residential Portfolio I ("Portfolio I") and VMS National Residential Portfolio II ("Portfolio II"), was formed in September 1984. Collectively, Portfolio I and Portfolio II are referred to as the "Partnerships". The Partnerships are limited partnerships formed in September 1984, under the Uniform Limited Partnership Act of the State of Illinois. The Managing General Partner of each of the Partnerships is VMS Realty Investment, Ltd. (formerly VMS Realty Partners), an Illinois limited partnership. (Effective as of January 1, 1987, Chicago Wheaton Partners assigned its ownership interests in the Partnerships to VMS Realty Investment, Ltd.). Prudential-Bache Properties, Inc. is also a minority general partner of Portfolio I. The Venture originally acquired 51 residential apartment complexes located throughout the United States. At December 31, 1996, 34 of the Venture's properties had been foreclosed and two had been sold. The Venture continues to own and operate the remaining 15 residential apartment complexes it originally acquired. However, as provided by the Plan, the Venture filed notices of abandonment on the 34 properties that have foreclosed. The Venture plans to continue to own and operate the remaining 15 retained properties. One of the remaining 15 properties is encumbered by financing insured by the Department of Housing and Urban Development ("HUD"). HUD does not provide rent or interest subsidies in connection with the property nor does it restrict rental rates from being at market rates. This property is owned by a separate subpartnership ("Subpartnership"), of which the Venture owns a 99% equity interest. The remaining 1% interest is owned by VMS Realty Investment, Ltd. From the period October 26, 1984, through June 16, 1985, the Partnerships sold 912 Limited Partnership Interests at a price of $150,000 per Limited Partnership Interest for a total of $136,800,000. The Interests of each Partnership were offered in reliance upon exemptions from registration under the Securities Act of 1933, as amended (the "ACT"), and Regulation D thereunder. The Venture is engaged solely in the business of real estate investment. A presentation of information about industry segments is not applicable and would not be material to an understanding of the Venture's business taken as a whole. As a result of financial difficulties, VMS National Properties Joint Venture filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court in the Central District of California on February 22, 1991 (see "Note 4" of the Notes to Combined Financial Statements). This voluntary filing encompassed the Venture's non-HUD properties only. In March 1993, the substance of the Venture's Plan of Reorganization was approved by the Bankruptcy Court and a Confirmation Order was entered (see "Note 5" of the Notes to Combined Financial Statements) and the Plan became effective on September 30, 1993. The participation interest in the Venture of Portfolio I and Portfolio II is approximately 71% and 29%, respectively. The Venture has no employees. The officers and employees of VMS Realty Partners and their affiliates performed all administrative and operational services, including all asset management functions, but excluding all property management functions, for the Venture's properties through September 30, 1993. Effective October 1, 1993, the Managing General Partner engaged Insignia Financial Group, Inc. ("Insignia") to provide asset management services to the Venture's retained complexes. Several nonaffiliated management companies had been retained by the Venture to manage, operate and maintain the Venture's HUD and non-HUD properties; however, they were replaced as the property manager by Insignia on all of the Venture's retained properties on January 1, 1994. The terms of transactions between the Venture and affiliates of the General Partners of the Venture are set forth in "Item 13 Certain Relationships and Related Transactions." Recent Developments - VMS Realty Partners and Affiliates PAST LIQUIDITY DIFFICULTIES As previously reported, VMS Realty Partners, an affiliate of VMS Realty Investment, Ltd. ("VMSRIL"), and certain of its affiliates had experienced severe liquidity problems. Because of VMS Realty Partners' inability to resolve the liquidity problems affecting it and its affiliates, VMS Realty Partners had generally suspended making payments relating to operating assets of it and its affiliates, other than payments generally necessary to maintain the operation of such assets and changed the business of VMS Realty Partners and its affiliates, eliminating the acquisition and development of real estate assets. However, VMSRIL and each of its affiliates that serve as general partners of the Syndicated Partnerships, as defined below, continued and are continuing to perform their responsibilities as general partners. On November 18, 1993, VMS Realty Partners assigned (without change in terms, including compensation) its asset management responsibilities for the Syndicated Partnerships, other than VMS National Properties Joint Venture, to Strategic Realty Advisers ("SRA"), a real estate company with primary emphasis on asset management and property management. SRA is wholly owned by Joel A. Stone, who is the sole shareholder of one of the corporate partners of VMSRIL. In the case of a number of the Syndicated Partnerships, including the Venture, SRA subsequently assigned such responsibilities to affiliates of Insignia Financial Group, Inc. ("Insignia"), a fully integrated real estate service organization. See "Insignia and MAE." SRA has retained, and is performing, such asset management responsibilities for Syndicated Partnerships owning hotels. VMS Realty Partners had previously assigned its asset management responsibilities for VMS National Properties Joint Venture directly to affiliates of Insignia. See "Insignia Transactions - Management." The "Syndicated Partnerships" are those partnerships, including the Venture, of which VMSRIL, one of the VMS Principal Entities (as defined below), or an affiliate thereof, is the managing general partner (or a general partner of a general partner) and as to which limited partnership interests were sold to investors through syndications. VMSRIL AGREEMENT AND CRA In response to the above-described liquidity problems, on March 25, 1992, VMSRIL, the managing general partner of the Partnerships, and an affiliate of (i.e., under common control with) the VMS Principal Entities, as defined below, entered into an agreement (the "VMSRIL Agreement") with its single major creditor, European American Bank, and one of its affiliates, EURAM (collectively "EAB"), which held a lien on all of VMSRIL's assets. The VMSRIL Agreement provided that for a 12-month period VMSRIL was prohibited from engaging in business activities or operations unrelated to the orderly liquidation of its existing assets, which liquidation was to be conducted consistent with its duties as the managing general partner of the Syndicated Partnerships. Notwithstanding the foregoing, the VMSRIL Agreement provided that VMSRIL was not prohibited from engaging in any activities with respect to the Syndicated Partnerships, including, but not limited to, the continuation of the Syndicated Partnerships' business operations. Under the VMSRIL Agreement, in order to facilitate VMSRIL's operation of its assets in a manner intended to preserve and, if possible, enhance the value of such assets prior to their disposition, EAB granted VMSRIL a moratorium on enforcement of all indebtedness owed to EAB by VMSRIL. EAB agreed that, during the one year term of the VMSRIL Agreement (assuming no default by VMSRIL in the performance of its obligations under the VMSRIL Agreement), EAB would not take any action which would materially adversely affect the interests of VMSRIL, including, without limitation, demanding payment of indebtedness and filing a petition to institute an involuntary bankruptcy proceeding against VMSRIL. Also in response to the above-described liquidity problems, on March 31, 1992, certain affiliates of VMSRIL, specifically VMS Realty Partners, Chicago Wheaton Partners, VMS Realty Investors, VMS Financial Services, VMS Financial Guarantee Limited Partnership and VMS Realty Guarantee Limited Partnership (the "VMS Principal Entities") entered into the VMS Creditor Repayment Agreement (the "CRA") with a number of parties including substantially all of the unsecured and undersecured creditors (other than trade creditors) of the VMS Principal Entities and certain of the unsecured or undersecured creditors (other than trade creditors) of their affiliates (collectively, the "Creditors"). Although VMSRIL is a party to the CRA, it is generally not considered a VMS Principal Entity thereunder. The CRA was intended to achieve a purpose comparable to that described above for the VMSRIL Agreement. In consideration of the benefits received by the Creditors under the CRA, the Creditors granted the VMS Principal Entities a moratorium similar to that contained in the VMSRIL Agreement. During the respective terms of, and under certain circumstances specified in, the VMSRIL Agreement and the CRA, VMS Realty Partners and certain of its affiliates, including VMSRIL, were required to pay certain sums derived from their operations and asset dispositions to be applied to their restructured debts; these sums were paid by VMS Realty Partners and its affiliates, including VMSRIL, as and when required under the terms of those agreements. Effective November 17, 1993, the VMS Principal Entities entered into the Fifth Amendment to the CRA, dated as of October 25, 1993, pursuant to which each VMS Principal Entity (and not VMSRIL) has transferred certain of its assets in lieu of foreclosure (other than general partnership interests in Syndicated Partnerships and assets that the Creditors chose not to acquire, based on their view of the value of such assets and concerns about possible liability associated with them) to separate trusts beneficially owned by the Creditors of each of the respective transferring VMS Principal Entities, subject to the liens of the applicable Creditors, in consideration of, among other things, the granting of covenants not to sue by the respective Creditors (and their successors and assigns) with respect to each of the VMS Principal Entities' liability for the indebtedness owed such Creditors. Such transactions have amicably concluded the debtor/creditor relationship between the VMS Principal Entities and the Creditors. Pursuant to the CRA and the Fifth Amendment thereto, and as an inducement to the VMS Principal Entities to engage in the deed in lieu transactions described above, substantial cash consideration was paid by the Creditors to SRA as advanced payment for future services to be performed by SRA for the benefit of the VMS Principal Entities. During the summer of 1993, EAB introduced VMSRIL to Insignia, which was engaged in discussions with EAB concerning the possible acquisition by an Insignia affiliate of VMSRIL's debt to EAB and the assets securing that debt, and the granting by that Insignia affiliate of a covenant not to sue VMSRIL. This transaction has now occurred, effectively resolving VMSRIL's financial difficulties with its single major creditor. See "Purchase of EAB and Creditor Assets and Granting of Covenants Not to Sue." Subsequently, Insignia entered into negotiations with VMSRIL that have resulted in the execution of the Insignia Letter of Intent and, thereafter, following consummation of certain transactions contemplated by the Insignia Letter of Intent, an agreement dated July 14, 1994 ("Insignia Agreement"), which terminated the Insignia Letter of Intent, and restructured certain of the then unconsummated transactions that had been contemplated by the Insignia Letter of Intent and provided for certain other agreements of the parties. See "Insignia Transactions." INSIGNIA TRANSACTIONS MANAGEMENT Effective November 16, 1993, the Insignia Letter of Intent was executed by VMSRIL and various of its affiliates, SRA, Insignia and a limited partnership ("ISLP").1 The Insignia Letter of Intent contemplated that VMSRIL and affiliates of VMSRIL serving as general partners of Syndicated Partnerships that do not own hotels ("Non-Hotel Syndicated Partnership") would withdraw as general partners and be replaced by MAERIL, Inc. ("MAERIL"), a single purpose affiliate of Metropolitan Asset Enhancement, L.P. ("MAE"). See "Settlement Agreement Proxies." MAE is a limited partnership in which Insignia owns a 19.13% limited partnership interest and the general partner of which is a corporation owned by Andrew L. Farkas, the Chairman and Chief Executive Officer of Insignia. Pursuant to the Insignia Agreement, MAERIL will become the substitute general partner of only the Selected Syndicated Partnerships,2 rather than all of the Non-Hotel Syndicated Partnerships as originally contemplated in the Insignia Letter of Intent. MAERIL has already become the substitute general partner of many of the Selected Syndicated Partnerships. 1 An affiliate of MAE, as defined below, is the sole general partner in ISLP, and an Insignia affiliate holds the limited partnership interests. 2 "Selected Syndicated Partnerships" means, collectively, the VMS National Realty Partners I, VMS National Realty Partners II, Boca Glades Associates, Ltd., Boca West Shopping Center Associates, Ltd., Four Quarters Habitat Apartments Associates, Ltd., Hearthwood Associates, Investors First-Staged Equity, L.P., Kendall Townhome Investors, Ltd., Lynnhaven Associates, Merrifields Apartments, Mount Regis Associates II, Pasadena Office Park Associates, Prudential-Bache VMS Realty Associates L.P. I, Scarlett Oaks Apartment Associates, Ltd., VMS Investors First-Staged Equity L.P. II, Woodlawn Associates and Yorktown Towers Associates. The Plan of Reorganization of the Venture requires that the consent of ContiTrade Service Corporation ("ContiTrade"), a creditor of the Venture, be obtained as a condition to the substitution of a new general partner, such consent not to be unreasonably withheld by ContiTrade. The parties are currently negotiating the terms of this consent, including a request by ContiTrade that Insignia and MAERIL acknowledge that ContiTrade has the right to consent to any future changes in control of the Venture, the Partnerships, MAERIL and Insignia. Pursuant to the terms of the Venture's secured loan obligations with respect to each of the Venture's properties, the substitution of MAERIL as general partner of the Venture also requires certain lender consents (including the FDIC and HUD), which have been requested but not received. The substitution of MAERIL, Inc. as the General Partner is expected and has been approved by the Bankruptcy Court and certain other creditors, but there is no assurance that the transaction will be consummated. Each property owned by the Venture as well as the other Selected Syndicated Partnerships, is subject to one or more secured project loans. The terms of each loan require lender consent for a change in (i) the general partner of the owner Non-Hotel Syndicated Partnership, (ii) such general partner's general partner or (iii) the general partner of any subpartnership which directly owns that particular property. Although VMSRIL has attempted to obtain such consents with respect to all such loans, it has been unsuccessful in obtaining any consents, and, in many cases, VMSRIL has not received any response to its request; however, none of the lenders have expressly rejected the proposed substitution. Although the Venture could contend that such consent was unreasonably withheld, or that a lender's failure to respond should constitute an implied consent (or waiver of its right to consent), it is possible that one or more lenders might seek to declare a default and attempt to foreclose on their respective collateral if the transfer of general partnership interests to MAERIL were to proceed without such lender's express consent. The substitution of MAERIL as general partner of the Selected Syndicated Partnerships will transpire upon the occurrence of certain events (including receiving certain of the above consents) as specified in the Insignia Agreement. Pursuant to the Insignia Letter of Intent, most of the Non-Hotel Syndicated Partnerships retained (to the extent permitted under applicable mortgages and other governing documents) Insignia affiliates to provide all management and asset management services to such Non-Hotel Syndicated Partnership for the maximum term permitted under the partnership agreement or other governing documents of such Non-Hotel Syndicated Partnerships. However, pursuant to the Insignia Agreement, Insignia terminated it and its affiliates' rights and obligations to provide management services to the following Syndicated Partnerships: Fort Lauderdale Office Park Associates, Garden City Plaza Associates, Ltd., Jacksonville/Windsong Apartments Associates, Natick Village Apartment Associates, Oak Brook International Office Center Associates, Ramblewood Associates, 1600 Arch Investors Ltd., 1600 Arch Limited Partnership, Valley View Associates, Valley View Associates II, Village Green - Townhome Associates, Woodmere Associates, Ltd. In addition, an Insignia affiliate will not provide management services with respect to Kendall Mall which was formerly owned by VMS Investors First-Staged Equity L.P. II but was foreclosed upon after execution of the Insignia Letter of Intent. The Insignia Letter of Intent had contemplated that the Insignia affiliate providing management services to the Syndicated Partnerships would retain SRA to assist it in the provision of such management services; however, pursuant to the Insignia Agreement, SRA has been retained to assist in the provision of management services only to the Venture and will not be retained to provide such services with respect to any of the other Syndicated Partnerships. In particular, Insignia, SRA, and the Venture have reached an agreement under which a subsidiary of Insignia is to become the asset manager of 15 apartment complexes owned by the Venture throughout the country, for a total fee to Insignia of $500,000 per year plus reimbursement of expenses of $200,000 per year. As a matter of comparison, the Bankruptcy Court allowed claims of a VMSRIL affiliate for $400,000 for asset management services for January 1993 through September 1993 (i.e., the date of the Venture's emergence from bankruptcy and on which Insignia assumed responsibility as the Venture's asset manager). The Venture has also entered into an agreement pursuant to which it has retained another subsidiary of Insignia to perform property management services (the "Property Management Services Agreement"). As consideration for its performance of property management services pursuant to the Property Management Services Agreement, the Insignia affiliate will receive a fee of 4% of collected revenues on each property. As a matter of comparison, the Venture's property management services prior to the effectiveness of the Property Management Services Agreement were performed by three different entities, none of which are affiliated with VMSRIL or Insignia. Harbour Realty Advisors, Inc. ("Harbour") provided property management services with respect to the Venture's non-HUD retained properties. For such services, Harbour received a fee of 4.0% of the rents actually collected per month on such properties. Republic Management Services, Inc. ("Republic") or FPI Management, Inc. ("FPI") managed all of the Venture's other properties. Republic received a management fee of 4% of effective gross income with respect to the properties it managed. The management agreements with FPI provided for management fee payments of 3.5% to 4.0% of effective gross income with respect to the properties it managed. As required, the Venture obtained the consent of the FDIC, ContiTrade and HUD to its entry into the Property Management Services Agreement. ContiTrade's consent (the "CT Consent"), however, was conditioned upon an agreement by Insignia that no payment, compensation or thing of value will be conveyed by Insignia to any VMSRP Related Entity, including SRA, in connection with the payment of the property management fee by the Venture. Pursuant to the CT Consent, although Insignia is not permitted to pay SRA a percentage of the property management fees it earns with respect to the venture's property as contemplated by the Insignia Letter of Intent, Insignia was permitted to perform its other obligations under the Insignia Letter of Intent; furthermore, Insignia is authorized to pay SRA compensation for property management services actually performed by SRA in a reasonable amount for such services based upon what an unrelated third-party in the market place would receive for rendering similar services. See "Insignia Transactions -- Compensation to VMSRIL Affiliate". PURCHASE OF EAB AND CREDITOR ASSETS AND GRANTING OF COVENANTS NOT TO SUE Pursuant to the Insignia Letter of Intent, ISLP purchased for an aggregate price paid to EAB of $1,500,000 all of the debt of VMSRIL (the "EAB Debt") and of VMSRP to VMSRIL's single major creditor, EAB. Subsequently, VMSRIL conveyed to ISLP in a transfer in lieu of foreclosure, all of the assets (the "EAB Assets") securing the EAB Debt. The EAB Assets constituted all of the assets owned by VMSRIL other than its rights to act as general partner of the Syndicated Partnerships in which it is a general partner. In connection with this conveyance, ISLP has covenanted (i) not to sue VMSRIL with respect to the EAB Debt, (ii) to look exclusively to the EAB Assets for payment of the EAB Debt and (iii) to repay (but only out of the proceeds realized from the EAB Assets acquired by ISLP) loans made to VMSRIL, of which approximately $845,000 was outstanding as of November 16, 1993 (including principal and unpaid interest). These loans which were originally made to VMSRIL in 1992 by certain of its principals to provide VMSRIL sufficient funds to permit it to meet its obligations under the VMSRIL Agreement, were repaid in full by ISLP as of December 31, 1993. Upon exercise of an option granted SRA pursuant to the Insignia Letter of Intent, SRA acquired from Insignia, without payment of separate consideration, all of the EAB assets relating to the Syndicated Partnerships that own hotels. Furthermore, the Insignia Agreement contemplates, as did the Insignia Letter of Intent, that ISLP may seek to purchase certain assets (the "Creditor Assets") conveyed to creditors of VMSRP pursuant to the Fifth Amendment to the CRA. Following any such purchase, ISLP will (i) covenant not to sue VMSRP with respect to debts associated with the Creditor Assets, and (ii) agree to look exclusively to the beneficial interest of the applicable creditors in the Creditor Assets for payment of such debts. INDEMNITIES GRANTED BY INSIGNIA Pursuant to the Insignia Letter of Intent, Insignia granted an indemnity to each of the individual partners of each of the VMS Principal Entities and each of their partners (the "Indemnified Partners") with respect to the Non-Hotel Syndicated Partnerships, including the Venture. Insignia agreed to indemnify the Indemnified Partners for up to $500,000 of claims of creditors in connection with (i) consummation of the transactions contemplated by the Insignia Letter of Intent, (ii) the Indemnified Partners' roles as general partners of, and service providers to, the Non-Hotel Syndicated Partnerships, and (iii) the EAB and Creditor Assets. This indemnification obligation will be funded solely through a cash reserve (the "Reserve") established by Insignia. The Reserve has been fully funded pursuant to the Insignia Agreement. In the event that the entire Reserve is not applied to the payment of Insignia indemnity obligations, all of the remaining funds in the Reserve will be paid over to SRA. Pursuant to the Insignia Agreement, Insignia also will indemnify the Indemnified Partners against all claims in connection with certain prospective actions which may be taken by Insignia, MAE, and/or MAERIL. The Reserve may not be used to pay Insignia's obligations with respect to this indemnity. COMPENSATION TO VMSRIL AFFILIATE The Insignia Letter of Intent also provided for certain business relationships between Insignia (and its affiliates) and SRA. Pursuant to the Insignia Letter of Intent, SRA was to perform certain services (the "Services") for Insignia and its affiliates including: (i) assisting Insignia and its affiliates in minimizing their indemnity obligation under the Letter of Intent; (ii) maximizing the return on ISLP's investment in the EAB and Creditor Assets; and (iii) assisting (a) Insignia or its affiliates in connection with the management and asset management of properties owned by the Non-Hotel Syndicated Partnerships and (b) MAERIL or its affiliates in fulfillment of their obligations as substitute general partners. As discussed below under the Insignia Agreement, SRA's right to provide the services and receive compensation therefore was bought-out by Insignia and SRA will not provide the services other than provision of asset management services to The Venture. For its provision of the Services, SRA was to receive a variety of forms of compensation, including a right to acquire a 48.5% limited partnership interest in ISLP for nominal consideration. SRA exercised this right on May 24, 1994, but, pursuant to the Insignia Agreement, subsequently revoked such exercise, and relinquished such right. Prior to its exercise of this right, SRA also received 48.5% of all amounts realized from the EAB Assets and the other assets purchased by ISLP pursuant to the Insignia Letter of Intent, net of certain specified deductions; such right to receive such payments was not revived, however, following SRA's revocation of the exercise of its acquisition right. The payments to SRA prior to its exercise of its acquisition right totalled $17,135. As further consideration, to the extent Insignia became the property manager or asset manager for Non-Hotel Syndicated Partnerships and retained SRA to assist it, Insignia was to pay SRA the SRA Management Fee consisting of (a) 28% of the management and asset management fees paid to Insignia affiliates by the Non- Hotel Syndicated Partnerships and (b) 28% of all net income received by MAERIL (including all fees and distributions) as a result of its acting as general partner of the Non-Hotel Syndicated Partnerships. With certain exceptions, the obligations of Insignia pursuant to the Insignia Letter of Intent were to be secured. Although Insignia and MAE desired to have MAERIL substituted as the general partner of the Selected Syndicated Partnerships, Insignia, MAE and ISLP determined that they did not require SRA's management and related services on a long-term basis. Accordingly, the Insignia Agreement effects, among other things, a buyout by Insignia of SRA's rights to provide the Services and to receive the compensation therefore discussed above. Pursuant to the Insignia Agreement, SRA's right to provide the Services was terminated, except that SRA is required to assist Insignia in performing asset management services for the Venture but none of the other Syndicated Partnerships. Furthermore, Insignia and SRA acknowledged that they no longer contemplate seeking to maintain any future or ongoing mutual business relationships (although such relationships had been contemplated by the Insignia Letter of Intent). Additionally, SRA will be owed no further fees or obligations pursuant to the Insignia Letter of Intent or on account of services it has provided or will provide, but in lieu thereof will receive the following: (a) $500,000 on closing; (b) $100,000 on both of the first and second anniversaries of closing; (c) $226,250 each calendar quarter for 6 years commencing in the calendar quarter beginning in July of 1994; (d) 28% of all fees and other payments received by (i) Insignia or its affiliates for the provision of management services to Boca West Center Associates, ltd. and (ii) MAERIL in its capacity of substitute general partner of such Syndicated Partnership or otherwise related to such Syndicated Partnership; (e) the first $1.2 million of all net proceeds ("Net Proceeds") in excess of the Calculation Amount3 derived by Insignia or ISLP from the sale of Creditor Assets and EAB Assets; and (f) 50% of Net Proceeds in excess of the sum of (i) the Calculation Amount plus (ii) $1.2 million. The payments pursuant to Clauses (a), (b), (e) and (f) of this paragraph are referred to herein as the "Aggregate Payments." All of the obligations specified in clauses (a) through (f) will be secured by a security interest in Insignia's 48.5% limited partnership interest in ISLP and Insignia's economic rights (but not obligations) pursuant to each of the property and asset management agreements between Insignia or its affiliates and the Non-Hotel Syndicated Partnerships. In order to further secure payment of such obligations, Insignia and MAERIL agreed that at such time and from time to time as MAERIL becomes substitute general partner of a Selected Syndicated Partnership, at the election of SRA either (i) Insignia and/or its affiliates owning 100% of the stock of MAERIL shall pledge such stock to SRA or (ii) MAERIL shall pledge to SRA 100% of its economic rights and entitlements of every kind and nature (but not obligations) as general partner of each of the Selected Syndicated Partnerships, including, but not limited to, rights to general partner distributions and fees. The Calculation Amount is equal to (x) $3.4 million plus (y) the aggregate cost of each of the Creditor Assets acquired by ISLP (including interest at a rate of 4% over Citibank's base rate from the date of acquisition of each of the respective Creditor Assets) plus (z) the sum of any amounts previously received by Insignia in repayment of its loan to ISLP to acquire the EAB Assets and the Creditor Assets, or by ISLP as proceeds of the sale, refinancing or disposition of any EAB Assets or Creditor Assets, which Insignia or ISLP has been required to disgorge by reason of a valid claim thereto asserted by an unaffiliated third party. In addition, pursuant to the Insignia Agreement, Insignia and its affiliates granted SRA a right of first refusal with respect to any proposed future sale by Insignia of EAB Assets and Creditor Assets to which Insignia or ISLP takes title by foreclosure, deed-in-lieu of foreclosure or otherwise. The consideration to be received by SRA pursuant to the Insignia Agreement, however, is limited by the terms of the Plan of Reorganization of the Venture and the CT Consent. The Plan, as modified by subsequent orders4, provides that subject to the exceptions set forth in the next two sentences, none of Insignia, its affiliates, any VMSRP Related Party, any person who is a partner in or in control of Insignia, nor any affiliate of any of the foregoing, may receive, directly or indirectly, any payments or other compensation relating to the Venture or its business except with respect to asset management functions or payments on account of the Stout Claim pursuant to the Plan and VMSRP's prefiling and administrative claims against the Venture. The Plan further provides that no VMSRP Related Party is to receive compensation for services related to the Venture without the prior written consent of ContiTrade. However, the Plan does permit Insignia or any wholly-owned subsidiary of Insignia to receive property management fees for management of the Venture's properties by Insignia or its subsidiary if Insignia or such subsidiary is approved pursuant to the Plan as a property manager and actually becomes a property manager of one or more of the Venture's properties. In addition, the Plan expressly authorizes Insignia to pay to VMSRP not more than 28% of Insignia's asset management fee and 28% of any fees Insignia receives for the provision of property management services to the Venture. In light of the foregoing restrictions and to permit SRA to provide property management services to Insignia with respect to the Venture's properties, SRA obtained ContiTrade's consent, pursuant to the CT Consent, to receive market rate compensation for property management services actually performed by SRA, and/or such other compensation to which ContiTrade in the future may consent. The Plan was modified by the Order Re Documents to Be Delivered under Second Amended and Restated Plan of Reorganization and Approving Modification of Plan (the "Modification Order"), which was entered by the Bankruptcy Court on October 6, 1993. The Modification Order incorporates by reference the Revised Restructured Amended and Restated Asset Management Agreement with Insignia Financial Group, Inc. (the "Insignia Asset Management Agreement"), by and between the Venture and Insignia. SETTLEMENT AGREEMENT PROXIES Under the terms of the Settlement Agreement (defined below), the holders of approximately 98% of the limited partnership interests in the Partnerships have given proxies to consent to an amendment of the partnership agreement of the Partnership permitting withdrawal of a general partner of the partnership and substitution of a replacement general partner if the withdrawing general partner reasonably determines that (x) the proposed withdrawal will not result in the reclassification of such Partnership as an association taxable as a corporation for Federal income tax purposes; and (y) any proposed substitute general partner has experience in real estate management and is reasonably capitalized to carry out its duties and obligations as general partner. Similar proxies have been used to facilitate the substitution of MAERIL as general partner in each of the Selected Syndicated Partnerships of which MAERIL has become the substitute general partner. DISPOSITION OF PROPERTIES Certain of the Syndicated Partnerships have entered into a contract to sell certain real estate assets. In addition, there are preliminary discussions and negotiations with third parties regarding the sale of assets owned by certain Syndicated Partnerships. There can be no assurance as to whether any such negotiations, letters of intent or contracts will result in the contemplated sales transactions. In addition, there can be no assurance as to the amount of net proceeds which may result from any one or all of such contemplated transactions. Since the CRA was entered into, Syndicated Partnerships have consummated a number of property dispositions involving sales, foreclosures, or deeds in lieu of foreclosure. In the case of those Syndicated Partnerships, including the Partnerships, covered by the Settlement Agreement, the disposition of properties owned by said partnerships is subject to the review of the Oversight Committee (as such term is defined in the Settlement Agreement). To date, of approximately 13 proposed property dispositions submitted to the Oversight Committee for approval, only two have been challenged by a member of the Oversight Committee. A proposed sale of the property owned by Lynnhaven Associates was challenged by Equity Resources Group, a former member of the Oversight Committee as to only those Settling Limited Partnerships in which it is a limited partner, including Lynnhaven Associates. Judge Zagel of the United States District Court for the Northern District of Illinois approved the sale of the Lynnhaven property over the objection of Equity Resources Group, in accordance with the terms of the Settlement Agreement. Equity Resources Group then appealed Judge Zagel's decision, which was subsequently affirmed by the United States Court of Appeals for the Seventh Circuit. The Oversight Committee also objected to a proposed transaction in which the mortgage loan on two office buildings owned by Eaton Canyon Partners was to be restructured. As a result of the objection, the restructuring was abandoned and the properties were foreclosed. INSPECTOR GENERAL AUDIT The Office of the Inspector General (OIG) for the Department of Housing and Urban Development (HUD) has completed an audit of the books and records of VMS Realty Management, Inc. relative to seven HUD projects which VMS Realty Management, Inc. managed from 1987 to 1991, the years which were the subject of the OIG audit. The OIG concluded that VMS Realty Management, Inc. did not comply with the terms and conditions for the HUD Regulatory Agreements and applicable HUD regulations and instructions relating to the financial and general management practices for six of the seven HUD projects reviewed. Specifically, the OIG audit concluded that VMS Realty Management, Inc. inappropriately disbursed approximately $6,366,000 from the projects' funds for partnership expenses from 1987 to 1991 when the projects were in a non-surplus cash position or lacked adequate surplus cash for the payments as the term "surplus cash" is defined pursuant to the HUD Regulatory Agreements. Approximately $735,000 of the $6,366,000 which the OIG has concluded to have been inappropriately disbursed in payment of partnership obligations relates to projects in which the Venture is a partner. These inappropriate disbursements included payments for second mortgages, asset management fees, notes payable and other partnership expenses. The OIG's Audit Report to HUD recommended that (1) the projects' owners reimburse $6,366,000 to the projects' accounts for the excess distributions and if the owners fail to comply, then HUD should initiate action for double damages remedy, (2) take action to debar VMS Realty Management, Inc. and the individuals which comprise it, and (3) require the appropriate HUD Regional/Field Offices to conduct reviews of the 13 remaining HUD projects which VMS Realty Management, Inc. previously managed which were not the subject of the OIG audit. The Venture, VMS Realty Management, Inc. and HUD entered into a Settlement Agreement dated December 9, 1996, which provided an aggregate payment of $550,000 to the Federal government. Of this amount, $102,000 was paid from available funds of the Venture, and the remainder of the settlement payment was paid by entities other than the Venture and its subpartnerships. INSIGNIA AND MAE Insignia is a publicly held fully integrated real estate service organization performing property management, asset management, investor services, partnership administration, mortgage banking, and real estate investment banking services for various ownership entities, including approximately 900 limited partnerships having approximately 360,000 limited partners. Based upon published industry surveys, Insignia is the largest manager of multifamily residential properties in the United States and is a significant manager of commercial property. Insignia commenced operations in December 1990 and since then has grown to provide property and/or asset management services for over 2,400 properties, which include approximately 260,000 residential units and approximately 110,000,000 square feet of commercial space, located in over 500 cities in 48 states. A primary method of growth for Insignia has been by acquiring, directly or through related entities (principally MAE), controlling positions in general partners of real estate limited partnerships. Many of the sellers of such assets, and in some cases the partnerships which own the properties, were financially distressed, but the partnerships own properties that Insignia in most cases believes to be fundamentally sound. Following each acquisition, Insignia takes steps to enhance the value and stability of the acquired properties, including a thorough analysis of each property's operations, develops a detailed marketing strategy, and, when appropriate, develops a program for restructuring its indebtedness. Insignia or MAE has, where consistent with its fiduciary obligations to the property owner, caused the controlled entity to retain Insignia to provide property management and other services for the property, and will continue to do so in the future. Insignia's services include property management, providing all of the day-to-day services necessary to operate a property, whether residential or commercial; asset management, including long-term financial planning, monitoring and implementing capital improvement plans, and development and execution of refinancings and dispositions; maintenance and construction services; marketing and advertising; investor reporting and accounting, including preparation of quarterly reports and annual K-1 tax reporting forms for limited partners as well as regular reporting under the Securities Exchange Act of 1934 where applicable; investment banking, including assistance in workouts and restructurings, mergers and acquisitions, and debt and equity securitizations; and mortgage banking and real estate brokerage. Insignia's senior residential property management personnel have an average of over 15 years of experience in property management with a broad range of types of properties throughout the United States. Many of Insignia's most experienced managers joined Insignia in connection with certain of its acquisitions. Insignia believes that its management expertise and state-of-the-art computer and communications systems allow it to offer its customized services efficiently and at a cost to Insignia which permits it to be competitive with other real estate management service companies. Insignia was incorporated in Delaware in July 1990. Insignia's principal executive offices are located at One Insignia Financial Plaza, P.O. Box 1089, Greenville, South Carolina 29602, telephone number (864) 239-1000. Originally, MAE was formed to be the principal vehicle for acquiring interests in real property that would be managed or serviced by Insignia. MAE, directly or through subsidiaries, holds general partnership interests in approximately 500 partnerships, all of which have retained Insignia as manager for all or certain aspects of their operations. MAE has no other material assets and has no material cash flow. MAE has various liabilities associated with prior acquisitions, certain of which have been guaranteed or are joint obligations with Insignia or one or more of its subsidiaries. Insignia holds a 19.13% limited partnership interest in MAE. Andrew L. Farkas, the Chairman of the Board and Chief Executive Officer of Insignia, owns the general partner of MAE, which has a 1% partnership interest. In addition, a 3% limited partnership interest in MAE is owned by five officers and one employee of Insignia. Although the general partner may not assign its interest in MAE without the consent of holders of a majority in interest of the limited partners' interests, there are no restrictions on Mr. Farkas' ability to sell such general partner. Insignia may not transfer its limited partnership interest in MAE without the consent of the general partner of MAE. The general partner has complete authority over the management of MAE and its assets, provided that, except in connection with acquisitions, the general partner may not cause MAE to sell all or a substantial portion of its assets without the consent of holders of a majority in interest of the limited partners' interests. The limited partners, including Insignia, have no other rights with regard to the business or operations of MAE. MAERIL is a Delaware corporation, formed in March 1994 for the purpose of serving as general partner of the Partnerships and certain of the other Syndicated Partnerships. MAE GP Corporation is the sole stockholder of MAERIL and MAE is the sole stockholder of MAE GP Corporation. Other Information On October 21, 1993, an affiliate of Prudential-Bache Properties ("PBP"), Prudential Securities Incorporated ("PSI"), settled, without admitting or denying the allegations contained therein, civil and administrative proceedings with the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., and various state regulators. These proceedings concerned, among other things, the sale by PSI of limited partnership interests, including interests of the Partnerships, during the period of 1980 through 1990. The settlement has no impact on the Partnerships themselves. Recent Developments - the Venture PETITION FOR RELIEF UNDER CHAPTER 11 On February 22, 1991, VMS National Properties Joint Venture filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court in the Central District of California. The initial filing included only the residential apartment complexes directly owned by VMS National Properties Joint Venture (entities included in the filing hereinafter referred to collectively as the Debtor) and excluded the 10 Subpartnerships consisting of 10 residential apartment complexes encumbered by financing insured or held by the Department of Housing and Urban Development, and the investing limited partnerships, VMS National Residential Portfolio I and VMS National Residential Portfolio II (see "Note 4" of the Notes to Combined Financial Statements). The Venture's "Second Amended and Restated Plan of Reorganization" (the "Plan") was confirmed by the Bankruptcy Court in March 1993 and became effective September 30, 1993. (See "Note 5" of the Notes to Combined Financial Statements). The primary aspects of the Venture's Second Amended and Restated Plan of Reorganization included the following: a. The Venture retained 17 properties from the existing portfolio (the "retained properties"), and abandoned title of the remaining properties (the "non-retained properties") to the Federal Deposit Insurance Corporation (the "FDIC"). The retained properties consist of one HUD property and sixteen non-HUD properties. Two of the seventeen retained properties were sold during the second quarter of 1996. All of the non- retained properties have been foreclosed upon as of December 31, 1996. b. The Venture restructured the existing senior-lien debt obligations on the retained properties (except for one of the retained properties which has a first mortgage lien insured by HUD and two of the retained properties which have senior liens formerly payable to the FDIC, as successor to Beverly Hills Mortgage Corporation, ("BH")) to provide for an interest rate of 8.75% per annum effective as of the first day of the month of the Effective Date with payments based on a 30 year amortization commencing on the first monthly payment due thereafter and a maturity date of January 15, 2000. The senior lien collateralized by HUD on one of the retained properties was not modified, and the senior liens formerly held by the FDIC were modified to accrue at 9% per annum effective as of the first day of the month of the Effective Date with monthly payments of interest only made at 7% per annum commencing with the first monthly payment due thereafter on the FDIC value, as defined in "c" below. c.As it pertains to the existing BH junior mortgages on the retained properties, the FDIC reduced its claim on two of the properties to $300,000 per property evidenced by a non-interest bearing note scheduled to mature January 15, 2000, and has left in place liens for the full amount of its claims at the petition date for all other retained properties. Interest on the former FDIC loans for these retained properties accrues at 10% per annum on the FDIC value (total property value per the FDIC's June 1992 valuations less the property's senior lien indebtedness) commencing as of the first day of the month of the Effective Date and monthly payments of interest only at 7% per annum on the FDIC value will commence with the first monthly payment due thereafter. (The retained property governed by a HUD Regulatory Agreement is to make payments of interest only following the approval by HUD of the Surplus Cash calculation.) On October 28, 1995, the FDIC sold all of the debt it held related to the retained properties to BlackRock Capital Finance, L.P. The debt amounts and terms were not modified. d.The Venture distributed the following amounts in conjunction with the terms of the Plan: (1) approximately $5,980,000 to satisfy unsecured prepetition creditor claims of the nonaffiliated note payable to Security Pacific National Bank, trade creditors, and property taxes on the retained properties; (2) approximately $1,056,000 to provide for allowed and unclassified administrative claims; and (3) approximately $5,960,000 to make capital improvements at the retained properties. This capital improvement reserve was exhausted during 1995. e.The VMS/Stout Joint Venture was granted an allowed claim in the amount of $49,535,000 for the Assignment and Long-Term Loan Arrangement Notes payable to them by the Venture. Payments totalling $3,475,000 in conjunction with this allowed claim were made to the nonaffiliated members of the VMS/Stout Joint Venture on October 7, 1993. The Venture also executed a $4,000,000 promissory note dated September 1, 1993, to ContiTrade Services Corporation (the ContiTrade Note) in connection with these allowed note claims. The ContiTrade Note represents a prioritization of payments to ContiTrade of the first $4,000,000 in repayments made under the existing Assignment and Long-Term Loan Arrangement Notes payable to the VMS/Stout Joint Venture, and does not represent an additional $4,000,000 claim payable to ContiTrade. In addition to prioritizing ContiTrade's receipt of the first $4,000,000 of repayments on the old notes, the ContiTrade Note provides for 5% non-compounding interest on the outstanding principal balance calculated daily on the basis of a 360 day year. The ContiTrade Note is secured by a Deed of Trust, Assignment of Rents and Security Agreement on each of the Venture's retained properties, and provides ContiTrade with other approval rights as to the ongoing operations of the Venture's retained properties. The ContiTrade Note matures January 15, 2000. The remaining $42,060,000 is noninterest bearing. f. The Venture entered into a Revised Restructured Amended and Restated Asset Management Agreement (the Revised Asset Management Agreement) with Insignia. Effective October 1, 1993, Insignia took over the asset management of the Venture's retained properties and partnership functions for the Venture. The Revised Asset Management Agreement provides for an annual compensation of $500,000 to be paid to Insignia in equal monthly installments. In addition, Insignia will receive reimbursement for all out-of-pocket costs incurred in connection with their services up to $200,000 per calendar year. These amounts are to be paid from the available operating cash flow of the Venture's retained complexes after the payment of operating expenses and priority reserve fundings for insurance, real estate and personal property taxes, senior mortgage payments, minimum interest payment requirements on the former FDIC mortgages, and any debt service and principal payments currently due on any liens or encumbrances senior to the ContiTrade Deeds of Trust. If insufficient operating cash flow exists after the funding of these items, the balance of Insignia's fees and reimbursements may be paid from available partnership cash sources. Additionally, the asset management fee payable to Insignia will be reduced proportionately for each of the Venture's retained complexes which are sold or otherwise disposed of from time to time. Accordingly, the fee was reduced upon the disposition of Bellevue and Carlisle Square in 1996. The Venture engaged Insignia to commence property management of all of the Venture's retained complexes effective January 1, 1994. EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (dollar amounts in thousands) The Combined Statements of Operations for the years ended December 31, 1996, 1995, and 1994 includes the effects of the foreclosures of the following 2, 5, and 4 of the Venture's properties, respectively: 1996 1995 1994 Weatheridge The Winery Broad Meadows Sierra Gardens Venetian Bridges - Canal Court Courts of Harford Square Venetian Bridges - Grand Canal I Edgewater I Venetian Bridges - Grand Canal II Edgewater II Pacific Hacienda As a result of these foreclosures, the following liabilities and assets were written off: 1996 1995 1994 Mortgage Principal Payable $6,291 $22,074 $23,320 Accrued Interest Payable 9,941 25,636 16,490 Other 26 (645) (369) Investment in Properties (5,781) (23,453) (22,858) Accumulated depreciation 3,618 10,986 10,835 Extraordinary Gain $14,095 $34,598 $27,418 Additionally, as a result of the implementation of the Venture's Plan of Reorganization, certain liabilities compromised by the Plan were adjusted in 1993 to the present value of amounts to be paid determined at appropriate current interest rates. As a result, the Venture realized a gain in 1993 on extinguishment of debt on the retained properties as follows: FDIC mortgages $ 9,972 Accrued interest on FDIC mortgages 55,216 Notes payable 21,491 Other 2,894 Extraordinary gain 89,573 Less portion of gain deferred (54,053) Extraordinary gain realized $ 35,520 Pursuant to the Plan, the mortgages held by the FDIC were modified effective September 30, 1993. For 15 of the 17 retained properties, the face value of the note was restated to the Agreed Valuation Amount. Under the terms of the restated notes, the FDIC may reinstate the full claim which was in place at the petition filing date upon the default of any note. The restated notes are cross-collateralized; however, they are not cross-defaulted. As a result, the Venture has deferred $54,053,000 of this extraordinary gain on extinguishment of debt. On October 28, 1995, the FDIC sold all of the debt it held related to the retained properties to BlackRock Capital Finance, L.P. The debt amounts and terms were not modified. ITEM 2. DESCRIPTION OF PROPERTIES The following table sets forth the Registrant's investments in properties: Date of Property Purchase Use Buena Vista Apartments Pasadena, CA 10/26/84 Apartments - 92 Units Casa de Monterey Norwalk, CA 10/26/84 Apartments - 144 Units Crosswood Park Citrus Heights, CA 12/05/84 Apartments - 180 Units Mt. View Apartments San Dimas, CA 10/26/84 Apartments - 168 Units Pathfinder Fremont, CA 10/26/84 Apartments - 246 Units Scotchollow San Mateo, CA 10/26/84 Apartments - 418 Units The Bluffs Milwaukie, OR 10/26/84 Apartments - 137 Units Vista Village Apartments El Paso, TX 10/26/84 Apartments - 220 Units Chapelle Le Grande Merrillville, IN 12/05/84 Apartments - 105 Units North Park Apartments Evansville, In 11/14/84 Apartments - 284 Units Shadowood Apartments Monroe, LA 11/14/84 Apartments - 120 Units Towers of Westchester Park College Park, MD 10/26/84 Apartments - 303 Units Terrace Gardens Omaha, NE 10/26/84 Apartments - 126 Units Watergate Apartments Little Rock, AR 10/26/84 Apartments - 140 Units Forest Ridge Apartments Flagstaff, AZ 10/26/84 Apartments - 278 Units In the opinion of the Managing General Partner, each of the properties is adequately covered by insurance. Each property above is encumbered by various debt. For additional information regarding the encumbrances and carrying value of the above properties, see accompanying Schedule of Properties and Schedule of Mortgages and "Note 7" of the combined financial statements. SCHEDULE OF PROPERTIES: (dollar amounts in thousands
Gross Carrying Accumulated Federal Property Value Depreciation Tax Basis Buena Vista Apartments $ 5,840 $ 2,809 $ 1,923 Casa de Monterey 7,708 3,811 2,502 Crosswood Park 8,587 4,305 4,025 Mt. View Apartments 10,599 4,774 3,389 Pathfinder 14,993 7,228 6,050 Scotchollow 27,499 13,342 9,506 The Bluffs 4,267 2,257 1,175 Vista Village Apartments 6,522 3,032 2,307 Chapelle Le Grande 4,592 2,363 1,380 North Park Apartments 10,194 5,201 3,151 Shadowood Apartments 4,152 2,140 1,294 Towers of Westchester Park 16,054 8,410 4,541 Terrace Gardens 5,471 2,750 1,772 Watergate Apartments 6,870 3,456 2,165 Forest Ridge Apartments 8,511 4,141 2,924 $141,859 $70,019 $48,104
Depreciation is computed using the following methods and estimated useful lives:
GAAP BASIS TAX BASIS Lives Lives Method (Years) Method (Years) Buildings and improvements Straight-line 25 to 29 175% declining 18/19 balance (ACRS) Straight-line 27.5 (Modified ACRS) Personal Property 150% declining 5 150% declining 5 balance balance (ACRS) 200% declining 7 200% declining 7 balance balance (Modified ACRS) 150% declining 15 150% declining 15 balance balance (Modified ACRS)
SCHEDULE OF MORTGAGES: (dollar amounts in thousands)
Principal Principal Balance At Balance December 31, Imputed Interest Period Maturity Due At Property 1996 Interest (A) Rate Amortized Date Maturity Buena Vista Apartments 1st mortgage $ 7,000 (F) -- 01/00 $ 7,000 Casa de Monterey 1st mortgage 871 8.75% 30 years 01/00(D) 842 2nd mortgage 6,450 (G) -- 01/00 6,450 Crosswood Park 1st mortgage 4,232 1,531 7.50% 40 years 05/18(E) (B)(C) 2nd mortgage 2,468 (G)(H) -- 01/00 2,468 Mt. View Apartments 1st mortgage 10,165 (F) -- 01/00 10,165 Pathfinder 1st mortgage 1,225 8.75% 30 years 01/00(D) 1,184 2nd mortgage 11,170 (G) -- 01/00 11,170 Scotchollow 1st mortgage 3,261 8.75% 30 years 01/00(D) 3,153 2nd mortgage 22,425 (G) -- 01/00 22,425 The Bluffs 1st mortgage 616 8.75% 30 years 01/00(D) 596 2nd mortgage 443 8.75% 30 years 01/00(D) 428 3rd mortgage 3,006 (G) -- 01/00 3,006 Vista Village Apartments 1st mortgage 1,930 8.75% 30 years 01/00(D) 1,866 2nd mortgage 1,792 (G) -- 01/00 1,792 Chapelle Le Grande 1st mortgage 1,207 8.75% 30 years 01/00(D) 1,167 2nd mortgage 2,244 (G) -- 01/00 2,244 North Park Apartments 1st mortgage- 1st phase 113 8.75% 30 years 01/00(D) 109 2nd phase 468 8.75% 30 years 01/00(D) 452 3rd phase 835 8.75% 30 years 01/00(D) 812 4th phase 421 8.75% 30 years 01/00(D) 407 2nd mortgage 4,582 (G) -- 01/00 4,582 Shadowood Apartments 1st mortgage 1,226 8.75% 30 years 01/00(D) 1,185 2nd mortgage 1,059 (G) -- 01/00 1,059 Towers of Westchester Park 1st mortgage 2,536 8.75% 30 years 01/00(D) 2,472 2nd mortgage 14,439 (G) -- 01/00 14,439 Terrace Gardens 1st mortgage 2,257 8.75% 30 years 01/00(D) 2,183 2nd mortgage 1,515 (G) -- 01/00 1,515 Watergate Apartments 1st mortgage 2,187 8.75% 30 years 01/00(D) 2,115 2nd mortgage 1,157 (G) -- 01/00 1,157 Forest Ridge Apartments 1st mortgage 2,130 8.75% 30 years 01/00(D) 2,059 2nd mortgage 2,201 8.75% 30 years 01/00(D) 2,128 3rd mortgage 3,129 (G) -- 01/00 3,129 Total $120,760 $1,531 $115,759 (A) Imputed interest represents the difference between the face value of assumed mortgage loans and the current market value of these obligations as determined by the 14% mortgage rate received from the Beverly Hills Mortgage Corporation at the dates of purchase. The book value of the real estate to which the debt relates was adjusted by this difference. Imputed interest is being amortized over the remaining terms of the related mortgage loans, using the effective interest method. This amortization amounted to $72,000 in 1996, $199,000 in 1995, $306,000 in 1994, and was included in mortgage interest expense for the respective year. (B) Property is encumbered by first mortgage financing insured by HUD. (C) At maturity, the principal balance will be fully amortized. (D) Pursuant to the terms of the Venture's Plan, the senior mortgages on the Venture's non-HUD retained properties were modified effective September 1, 1993 (see "Note 5" of the Combined Financial Statements). The modified senior mortgages provide for an interest rate of 8.75% per annum and a maturity date of January 15, 2000. Payments are based on a thirty- year amortization. (E) The senior mortgage on the Venture's HUD retained property, which is insured by HUD, was not modified. (F) The senior liens formerly held by the FDIC on two of the Venture's non- HUD retained properties were modified effective September 1, 1993, to accrue at 9% with monthly payments commencing October 1, 1993, of interest only at 7% on the restated FDIC notes' Agreed Valuation Amount, as defined (See "Note 5" of the Combined Financial Statements). The difference between the 9% interest accrual rate and the 7% minimum interest rate shall accrue, but not be added to principal, and bear interest at the 9% note rate from and after the due date of each payment, compounded monthly. All unpaid principal and accrued interest is due in full on the January 15, 2000, maturity date. (G) The junior liens formerly held by the FDIC on the Venture's non-HUD retained properties were modified effective September 1, 1993 to accrue at 10% with monthly payments commencing October 1, 1993, of interest only at 7% on the restated FDIC notes' Agreed Valuation Amount as defined (see "Note 5" of the Combined Financial Statements). The difference between the 10% interest accrual rate and the 7% minimum interest rate shall accrue, but not be added to principal, and bear interest at the 10% note rate from and after the due date of each payment, compounded monthly. All unpaid principal and accrued interest is due in full on the January 15, 2000, maturity date. (H) The property governed by HUD Regulatory Agreements will make payments of interest only at 7% each April 1st following HUD's approval of Surplus Cash Calculations prepared each December 31st.
On October 28, 1995, the FDIC sold all of the debt it held related to the retained properties to BlackRock Capital Finance, L.P. The debt amounts and terms were not modified. Average annual rental rates per unit and occupancy for 1996 and 1995 for the retained properties: Average Annual Average Rental Rates Per Unit Occupancy Property 1996 1995 1996 1995 Buena Vista Apartments $11,132 $10,758 96% 96% Casa de Monterey 7,793 7,690 93% 92% Crosswood Park 8,251 8,065 97% 94% Mt. View Apartments 9,556 9,197 96% 92% Pathfinder 10,537 9,899 96% 94% Scotchhollow 10,896 10,470 99% 99% The Bluffs 6,358 6,131 96% 96% Vista Village Apartments 6,065 5,854 89% 82% Chapelle Le Grande 7,641 7,380 98% 96% North Park Apartments 5,543 5,353 97% 97% Shadowood Apartments 5,940 5,779 95% 94% Towers of Westchester Park 10,297 10,013 95% 97% Terrace Gardens 7,961 7,535 95% 96% Watergate Apartments 6,674 6,518 95% 96% Forest Ridge Apartments 7,080 6,486 85% 94% The Managing General Partner attributes the occupancy fluctuations at the properties to the following: increases in occupancy level at Mt. View Apartments to improved market conditions, increased marketing efforts and increased lease renewals; increases in occupancy level at Vista Village to strong marketing efforts including additional advertising; decrease in occupancy level at Forest Ridge Apartments to the move-out of college students, the primary tenants, mostly due to new properties being built in the area. As noted under "Item 1. Description of Business," the real estate industry is highly competitive. All of the properties of the partnership are subject to competition from other residential apartment complexes in the area. The Managing General Partner believes that all of the properties are adequately insured. The multi-family residential properties' lease terms are for one year or less. No residential tenant leases 10% or more of the available rental space. Real estate taxes and rates in 1996 for each property were (in thousands): 1996 1996 Taxes Rate Buena Vista Apartments 63 1.15% Casa de Monterey 76 1.17% Crosswood Park 92 1.03% Mt. View Apartments 114 1.23% Pathfinder 212 1.51% Scotchollow 319 1.26% The Bluffs 62 1.31% Vista Village Apartments 91 2.89% Chapelle Le Grande 50 12.16% North Park Apartments 139 9.93% Shadowood Apartments 31 12.32% Towers of Westchester Park 227 3.69% Terrace Gardens 89 2.59% Watergate Apartments 45 6.68% Forest Ridge Apartments 89 9.82% ITEM 3. LEGAL PROCEEDINGS As disclosed in the prior reports on Form 10-Q or Form 10-K ("Prior Public Filings"), the Joint Venture including the Joint Venturers, VMS Realty Investment L.T.D., General Partner of the Joint Venturers, Subpartnerships, VMS Realty Partners, now known as VMS Realty Partners, L.P., certain officers and directors of VMS Realty Partners, now known as VMS Realty Partners, L.P. and certain other affiliates of the Venture are parties to certain pending legal proceedings which are summarized below (other than litigation matters covered by insurance policies). The adverse outcome of certain of the legal proceedings disclosed in this Report and the Prior Public Filings could have a materially adverse effect on the present and future operations of the Joint Venture. Summarized below are certain developments in legal proceedings filed against VMS Realty Partners, now known as VMS Realty Partners, L.P. and its affiliates which were disclosed in the Prior Public Filings and certain pending legal proceedings not previously reported that have been filed against VMS Realty Partners, now known as VMS Realty Partners, L.P. and its affiliates. The inclusion in this Report of any legal proceeding or developments in any legal proceeding is not intended as a representation by the Joint Venture that such particular proceeding is material. For those actions summarized below in which the plaintiffs are seeking damages, the amount of damages being sought is an amount to be proven at trial unless otherwise specified. There can be no assurance as to the outcome of any of the legal proceedings summarized in this Report or in Prior Public Filings. A. VMS Limited Partnership Litigation 1. Settlement of Consolidated Class Actions Forty-three actions were filed by investors in various limited partnerships against VMS Realty Partners, now known as VMS Realty Partners, L.P. and certain entities and individuals related to VMS Realty Partners, now known as VMS Realty Partners, L.P.. Also named were certain selling agents, surety companies, appraisers, accountants, attorneys, and other parties that were involved in the syndication, sale, and management of the limited partnership interests and properties. Thirty-eight of these actions (i.e., all of the actions filed in federal court) were consolidated for pretrial and discovery purposes in the United States District Court for the Northern District of Illinois under the caption In Re VMS Limited Partnership Securities Litigation, No. 90 C 2412 (Judge James B. Zagel) (the "Consolidated Actions"). In addition, for settlement purposes, one action (the "New Action") was filed on behalf of all investors in approximately 100 non-publicly-traded VMS-sponsored syndicated limited partnerships against those defendants in the Consolidated Actions that had reached a Settlement Agreement with the class. The nature of these actions was described in the Prior Public Filings. After a final fairness hearing, on July 2, 1991, the United States District Court gave final approval to the Settlement Agreement. The order dismissed with prejudice all settling defendants from all of the Consolidated Actions and dismissed the New Action in full. No appeals were filed and the Settlement became effective on August 12, 1991. The terms of the Settlement Agreement were described in the Prior Public Filings. Subsequent to the effective date of the Settlement Agreement, the respective general partner of the various VMS sponsored syndicated limited partnerships has filed collection actions against the limited partners who remain in default in the payment of their installment promissory notes which were given to the limited partnership in consideration for the limited partner's partnership interest. 2. CIGNA Claims One of the non-settling defendants, CIGNA Securities, Inc. ("CIGNA"), has asserted claims against VMS Realty Partners, now known as VMS Realty Partners, L.P. and its affiliated entities for contribution and indemnification in cases in which CIGNA is a defendant. CIGNA subsequently entered into a class-action settlement agreement with a class of investors in the consolidated actions who had purchased their interest from CIGNA. As previously reported, on May 19, 1993, CIGNA and VMS executed a mutual release, effective when the CIGNA class-action settlement is effective. The Cigna class action settlement is now effective and, pursuant to the terms of the mutual release, CIGNA settling parties released the VMS released persons of and from all claims and liabilities relating to or arising out of the released claims in the VMS class-action settlement, including contractual claims for indemnification. In exchange, the VMS settling parties released the CIGNA released persons of and from all claims and liabilities relating to or arising out of the released claims in the VMS class-action settlement, including contractual claims for indemnification. However, the settling parties expressly reserved all common law and contractual claims for contribution and/or indemnification arising out of or relating to claims brought by investors who opted out of both the VMS and CIGNA settlements, except to the extent such claims are barred by; (1) Section 4.02(A) of the VMS settlement agreement and the court's July 15, 1991, order approving the VMS class-action settlement agreement, or (2) Section 4.2(A) of the CIGNA class-action settlement agreement and any court order approving the CIGNA settlement agreement. In addition, now that the CIGNA class-action settlement agreement is effective, CIGNA's claims pending in the consolidated actions have been dismissed, except the Corkery action which is brought by opt-outs from both settlement agreements. Paul J. Corkery; Ronnie Rone; Max C. Jordan; F.J. Vollmer; Paula Boedeker; Norbert Braeuer; Dales Y. Foster; Billy J. Harris; Bob White; Gordon Flesch; Travis Barton, Jr.; Satish A. Dhaget; Varsha S. Dhaget; Alan J. Young; Dennis J. Cavanaugh; F. Jim Slater; Lois W. Rosebrook, Trustee; Sundaram V. Ramanan; Chitraleka Ramanan; Jeffrey A. Matz; Charles C. Voorhis III; Gerald C. Miller; Prince George's Orthopedic Associates, P.A.; John A. Martinez; Tom Rubattino; Susan Rubattino; Harold W. Stark and William C. Riedesel v. VMS Realty Partners; United States Fidelity and Guaranty Company; CIGNA Securities, Inc.; Boettcher & Company, Inc.; and A.G. Edwards & Sons, Inc., CA. No. Ca 4-90 087-E (U.S. District Court, N.D. Texas), filed February 5, 1990, removed to 90 C 3841, United States District Court for Northern District of Illinois, Eastern Division. CIGNA filed a Counterclaim against plaintiffs, Cross-Claims against VMS Realty Partners and A.G. Edwards & Sons, Inc., and a Third-Party Complaint against LaSalle/Market Streets Associates, Ltd., Chicago Wheaton Partners, Peter Morris, Joel Stone, Robert Van Kampen, Residential Equities, Ltd., Van Kampen Stone, Inc., VMS Realty Management, Inc., VMS Realty, Inc., and VMS Mortgage Co. in this action. On July 12, 1993, the VMS' defendants filed a Motion to Dismiss and Memorandum in Support thereof. On December 21, 1995, the court dismissed Plaintiff's action against the VMS entities and Cigna Securities, Inc. B. Other Litigation Mutual Benefit Life Insurance Co. v. PRM-Garden City Associates, Garden City Plaza Associates, First Texas Savings Association, People of the State of New York and John Doe #1 through John Doe #100, No. 9945-1990 (New York Sup. Court, Nassau County), filed April 30, 1990. This is an action to foreclose mortgages securing the payment of a loan made by plaintiff to Garden City Plaza Associates. Plaintiff declared due and owing the principal sum of $25,851,261.38, together with accrued interest of $470,988.73, and late charges of $42,813.28, totalling $26,305,004.39, together with interest from April 15, 1990. Mutual Benefit is the first mortgagee; First Texas Savings which has been taken over by the FDIC, is the second mortgagee. First Texas has asserted cross-claims against Morris, Van Kampen, Stone, and Merritt and seeks to foreclose on its second mortgage. On October 21, 1992, Garden City Plaza Associates filed for bankruptcy protection. On December 8, 1994, Garden City Plaza Associates' Plan of Reorganization was confirmed. The Plan of Reorganization provides for Garden City Plaza Associates to have until April 1, 1999, (absent a default) to sell or refinance the property. San Jacinto Savings Association v. VMS Realty Partners; LaSalle/Market Street Associates, Ltd.; Residential Equities, Ltd.; Van Kampen Stone, Inc.; Peter R. Morris; Joel A. Stone; Robert D. Van Kampen; Does 1 through 50, Case No. C 89-4398 JPV (California Sup. Court, San Francisco County), filed December 12, 1989. This is a foreclosure action brought by San Jacinto Savings Association, first mortgagee on the property known as the Phelan Building, San Francisco. The property was sold in a nonjudicial foreclosure sale and plaintiffs were pursuing a deficiency judgment alleged to be between $6-16 million. The action was remanded back to state court after removal to federal court. On March 17, 1992, the parties signed a settlement agreement pursuant to which VMS Realty Partners paid plaintiff $400,000 in exchange for a reduction in debt to $3,500,000. In connection with the settlement, plaintiff signed the VMS Realty Partners and Related Entities Creditor Repayment Agreement ("CRA"). San Jacinto Savings Association subsequently assigned its claim to Premier Financial Services. Sheraton Holding, Inc. v. Park Centre Associates, f/k/a VMS Seventh Avenue Hotel Associates, Ingersoll-Rand Financial Corp., VMS Hotel Investment Trust, Omni Hotel Credit Corp., f/k/a/ Dunfey Credit Corp., VMS Realty Partners, Marine Midland Bank, N.A., Bid Fire Systems, Inc., Mass Electric Construction Co., Mass Electric of New York, New York Plumbing & Heating Corp., Center 56 Associates, Basic Leasing Corp., EECO Inc., EECO Computer, Inc., RCA Corp., Ameritech Credit Corp., COMTEL Communications Corp., The City of New York, The People of the State of New York, and "John Doe" #1 through 500. This action has been dismissed. C. VMS National Properties and Subpartnerships Foreclosure Litigation i) The following foreclosure proceedings were filed against VMS National Properties and/or its affiliates by lenders during the VMS National Properties bankruptcy proceedings: Federal Deposit Insurance Corporation in its Corporate capacity v. VMS National Properties, an Illinois joint venture, VMS National Properties V, VMS Realty Investment, Ltd., an Illinois limited partnership, Chicago Wheaton Partners, an Illinois general partnership, Case No. 92-5041-CBM (United States District Court, Central District of California), filed on August 24, 1992. On April 2, 1992, Beverly Hills Business Bank ("BHBB") sold and assigned to the FDIC in its Corporate capacity as Manager of the FSLIC Resolution Fund BHBB's right, title and interest in certain assets referred to as the "VMS Portfolio" which included, but was not limited to this loan. On August 19, 1992, VMS National Properties, by order of the bankruptcy court, abandoned its partnership interest in VMS National Properties V, which owned the Sierra Gardens Apartments. VMS National Properties V is alleged to have breached its obligation under the Note by virtue of, among other things, failure to make payments of principal and interest, and by the abandonment of the property. Stipulation for Appointment of Receiver was filed on August 31, 1992. A receiver was appointed on September 15, 1992. Federal Deposit Insurance Corporation in its Corporate capacity v. VMS National Properties, an Illinois joint venture, VMS National Properties X, VMS Realty Investment, Ltd., an Illinois limited partnership, Chicago Wheaton Partners, an Illinois general partnership, Case No. CV-F 92-5571-OWW (United States District Court, Eastern District of California), filed on or about August 24, 1992. On April 2, 1992, Beverly Hills Business Bank ("BHBB") sold and assigned to the FDIC in its Corporate capacity as Manager of the FSLIC Resolution Fund BHBB's right, title and interest in certain assets referred to as the "VMS Portfolio" which included, but was not limited to this loan. On August 19, 1992, VMS National Properties, by order of the bankruptcy court, abandoned its partnership interest in VMS National Properties X, which owned The Winery Apartments. VMS National Properties X is alleged to have breached its obligation under the Note by virtue of, among other things, failure to make payments of principal and interest, and by the abandonment of the property. Stipulation for Appointment of Receiver was filed on August 31, 1992. Receiver was appointed on September 16, 1992. A quit claim deed was executed as of March 27, 1995, from VMS National Properties X to Ecumenical Association for Housing. This action has been dismissed. Federal Deposit Insurance Corporation as manager of the Federal Savings and Loan Insurance Corporation Resolution Fund as assignee of BH Mortgage Corporation, a California corporation, v. Chicago Wheaton Partners, an Illinois general partnership, VMS National Properties, an Illinois partnership, VMS National Properties VI, a California general partnership, Case No. CIV S 93 861 EJG JFM (United States District Court, Eastern Division of California), filed on or about May 24, 1993. Complaint for Breach of Promissory Note and Security Agreement, Appointment of Rent Receiver; and Injunctive Relief. Receiver was appointed to Venetian Bridges on May 24, 1993. Properties were transferred to Venetian Bridges G.C. Operating Partnership, Venetian Bridges G.C.I Operating Partnership and Venetian Bridges G.C. II Operating Partnership. This action has been dismissed. Federal Deposit Insurance Corporation as manager of the Federal Savings and Loan Insurance Corporation Resolution Fund as assignee of BH Mortgage Corporation, a California corporation, v. Chicago Wheaton Partners, an Illinois general partnership, VMS National Properties, an Illinois partnership, VMS National Properties IV, a California general partnership, Case No. CIV S 93 933 EJG JFM (United States District Court, Eastern Division of California), filed on or about June 9, 1993. Property was transferred on February 6, 1996, to RJR Development, Inc. This action is in the process of being dismissed. Receiver was appointed to Pacific Hacienda on June 28, 1993. Federal Deposit Insurance Corporation, in its corporate capacity, as assignee of BH Mortgage Corporation, a California corporation, v. Chicago Wheaton Partners, an Illinois general partnership, VMS National Properties, an Illinois general partnership, VMS National Properties IX, a New York general partnership, Case No. 93 CV-1218FJS (United States District Court, Northern District of New York). FDIC and defendants seek an order appointing a Receiver to take possession of and manage Weatheridge Apartments. A receiver has not yet been appointed. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is not a public market for the Limited Partnership Interests. As of December 31, 1996, there were 823 holders of record of Portfolio I and 332 holders of record of Portfolio II. As of December 31, 1996, there have been no cash distributions to the Limited Partners of either of the Partnerships. In accordance with the respective Agreements of Limited Partnership, there are no material restrictions on the Partnerships' ability to make cash distributions; future cash distributions are, however, subject to the order of distributions stipulated by the Venture's Plan of Reorganization. The source of future cash distributions is dependent upon cash generated by the Venture's properties and cash generated through the sale or refinancing of these properties. ITEM 6. SELECTED FINANCIAL DATA (dollar amounts in thousands)
Year Ended Year Ended Year Ended Year Ended Year Ended December 31,December 31, December 31, December 31,December 31, 1996 1995 1994 1993 1992 Total revenues from rental $25,200 $ 27,874 $ 30,012 $ 41,788 $ 49,859 operations Extraordinary Item-Gain on Extinguishment of Debt $14,095 C $ 34,598 C $ 27,418C $ 137,141 $ 11,799 Net Income (Loss) $ 1,823 $ 15,626 $ 2,890 $92,529A,B $(13,632)A Net Income (Loss) per Limited Partnership Interest Portfolio I - 644 Interests $ 2 C $ 17 C $ 3C $ 99A,B $ (15)A Portfolio II - 268 $ 2 C $ 17 C $ 3C $ 100A,B $ (15)A Interests Tax Income (Loss) $ 3,188 $ 21,385 $ 14,412 $175,890 $(52,427) Tax Income (Loss) per Limited Partnership Interest Portfolio I - 644 Interests $ 3 $ 23 $ 16 $ 189 $ (56) Portfolio II - 268 $ 3 $ 23 $ 16 $ 189 $ (56) Interests Total assets $ 76,779 $ 88,440 $111,232 $133,383B $249,859 Mortgage loans and notes $153,066 $158,733 $178,061 $198,802B $346,760 payable A) During its bankruptcy proceedings the Venture followed AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7). In accordance therewith, unamortized deferred loan costs and imputed interest related to the Venture's properties included in the bankruptcy of $3,088,000 and $6,821,000, respectively, were written off as of the bankruptcy filing date. Also, during 1992, two of the Venture's properties were foreclosed; as a result of these proceedings, the Venture has recognized extraordinary gains on the extinguishment of the related debt. B) The Venture's Plan of Reorganization became effective on September 30, 1993. As a result of the implementation of the Plan, 19 of the Venture's properties were foreclosed during 1993 creating a gain of approximately $89,573,000 in order to adjust liabilities compromised by the Plan to the present value of amounts to be paid (see "Note 11" of the Notes to the Combined Financial Statements); $54,053,000 of this extraordinary gain has been deferred by the Venture. C) During 1994, 1995 and 1996 respectively, four, five and two of the Ventures nonretained properties were foreclosed. As a result of these events, the Venture has recognized extraordinary gains on the extinguishment of the related debt. As of December 31, 1996, all of the nonretained properties have been foreclosed.
The above selected financial data should be read in conjunction with the combined financial statements and the related notes. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Venture held unrestricted cash at December 31, 1996, of $1,788,000 which decreased $196,000 from December 31, 1995. This decrease was attributable to net cash provided by operating and investing activities of $2,147,000 and $1,818,000, respectively, offset by net cash used in financing activities of $4,161,000. The decrease in net cash provided by operating activities for the year ended December 31, 1996, compared to the corresponding periods of 1994 and 1995 was primarily due to the disposition of the remaining non-retained properties and sale of the Bellevue Towers and Carlisle Square properties during the second quarter of 1996. Additionally, payments of accrued expenses and deposits to escrows and other reserves increased for the year ended December 31, 1996. Net cash provided by investing activities increased for the year ended December 31, 1996, compared to the corresponding periods of 1994 and 1995 as a result of proceeds received from the sale of Carlisle Square and Bellevue Towers during the second quarter of 1996. Net cash used in financing activities increased for the year ended December 31, 1996, compared to the years ended December 31, 1994 and 1995, due to increased payments on mortgage notes and advances from affiliates resulting from proceeds received from the sale of the two investment properties noted above. At December 31, 1992, the Venture had approximately $15,433,000 in excess limited partner contributions. Permitted uses of these excess limited partner contributions during 1993 were limited to 1) the funding of monthly Bankruptcy Court approved professional fees; 2) establishing a reserve of $5,960,000 to fund capital improvements on the retained complexes; 3) repayments of approximately $5,980,000 on various prepetition claims including notes payable, real estate taxes and amounts due trade creditors; 4) payments of $1,006,000 to the Managing General Partner for reimbursement of cash advances and asset management services; and 5) payments to the FDIC and ContiTrade for reimbursement of administrative costs incurred in connection with the bankruptcy case (see "Note 5" of the Notes to Combined Financial Statements). The Venture's Plan of Reorganization, which became effective on September 30, 1993, also restricts the permitted uses of the cash balances on hand at December 31, 1996. Total capital contribution and interest amounts due from limited partners of Portfolio I and Portfolio II at December 31, 1996, approximated $1,009,000. A settlement agreement was entered into on March 28, 1991, by the Plaintiff class counsel on behalf of the class of limited partners in approximately 100 non- publicly traded VMS sponsored limited partnerships including VMS National Residential Portfolio I and II, VMS National Properties Joint Venture, and VMS Realty Partners and its affiliates and certain other defendants. The Settlement Agreement provided the settling Limited Partners with an option to refinance their defaulted subscription note principal and interest payments. Of the total number of limited partner units in Portfolio I and Portfolio II, only 10 limited partner units in Portfolio I and 5.666 limited partner units in Portfolio II opted out of the Settlement Agreement, and, accordingly, were ineligible to elect this refinancing option. Approximately 65% of the total capital and accrued interest amounts due from limited partners of Portfolio I and Portfolio II represented amounts due from limited partners who elected the refinancing option. All amounts remaining due from the limited partners are considered past due and their outstanding amount bears interest at the 18% default rate. A cash payment of $24,550,000 was paid into a settlement fund for the benefit of the settling class members of all settling limited partnerships on behalf of VMS and the other settling defendants. VMS National Residential Portfolio I and II and VMS National Properties Joint Venture was not obligated to fund any portion of this cash settlement. The settling class members in VMS National Residential Portfolio I and II were collectively allocated approximately $3,000,000 of the net settlement proceeds paid on behalf of the VMS Settling Defendants and Prudential-Bache Settling Defendants. Continued operating losses and insufficient cash flows to meet all obligations of certain of the Venture's properties are expected to occur. The Managing General Partner is not obligated, and does not intend, to fund any such operating and cash flow deficits. However, the Venture's ability to continue as a going concern and to meet its obligations as they come due is solely dependent upon its ability to generate adequate cash flow from maintaining profitable operations on the retained properties or securing an infusion of capital. Management is involved in negotiations which would replace VMSRIL as the managing general partner and has entered into an agreement with Insignia which contemplates that VMSRIL will withdraw as general partner and be replaced by an entity in which Insignia owns an interest. This change in ownership is subject to the approval of various parties, including, among others, HUD, the FDIC and ContiTrade. The Managing General Partner believes that they will be successful in obtaining a replacement general partner and that the Venture will be able to continue operations as a going concern. However, the ultimate resolution of these financial difficulties and uncertainties cannot be determined at this time. Results of Operations The Partnership realized net income of $1,823,000 for the year ended December 31, 1996, which decreased compared to net income of $15,626,000 for the year ended December 31, 1995. The decrease in net income was primarily due to the Partnership recognizing a lower gain on the extinguishment of debt in 1996 as the number of foreclosures decreased. The Partnership realized net income of $2,890,000 for the year ended December 31, 1994. The increase in net income for the year ended December 31, 1995, compared to 1994, was due to gains recognized upon the foreclosure of 5 non-retained properties during 1995. The decreases in revenues and total expenses for the years ended December 31, 1994, 1995 and 1996, resulted from the timing of the foreclosures of non- retained properties. There were four non-retained properties foreclosed upon during 1994, five non-retained properties foreclosed upon during 1995, and two non-retained properties foreclosed upon during 1996. Additionally, two of the retained properties were sold during 1996. Excluding the impact of the foreclosures and sale of properties, total revenues for the year ended December 31, 1996, increased approximately 4% compared to the same period of 1995. Total property expenses increased approximately 1%. The ordinary losses recognized for the write-downs of the carrying values of properties to their estimated fair values related to 2, 5 and 4 properties foreclosed upon during the years ended December 31, 1996, 1995 and 1994, respectively. The ordinary losses were recognized pursuant to EITF Abstract Issue No. 91-2, "Debtor's Accounting for Forfeiture of Real Estate Subject to a Nonrecourse Mortgage" which prescribes that a "two-step" approach method be used to fairly present the economic transaction upon foreclosure events. The extraordinary gain on extinguishment of debt for the years ended December 31, 1996, 1995 and 1994, relates to the foreclosures of 2, 5 and 4 properties, respectively. Impact of Recently Issued Accounting Statement On February 22, 1991, the Venture filed for Chapter 11 bankruptcy protection (see "Note 4" of the Notes to Combined Financial Statements). The Combined Financial Statements of the Venture during the bankruptcy proceedings (February 22, 1991 through September 30, 1993) reflect the financial reporting guidance prescribed by the AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7). Pursuant to SOP 90-7, interest on secured or undersecured debt is recognized to the extent of cash paid or to the extent that the value of the related collateral exceeds the sum of principal plus accrued interest, determined on a property by property basis. Interest on unsecured claims is recognized only to the extent paid. The Combined Statement of Operations includes the interest recognized by this method. Mortgage interest recorded was approximately $33,258,000 less than the contractual amount for 1993. Notes payable and other interest expense recorded was approximately $6,931,000 less than the contractual amount for 1993. Penalties on delinquent real estate taxes after February 22, 1991, and penalties on delinquent debt on the Venture's entities in bankruptcy are not accrued in the Combined Financial Statements nor are they contractually disclosed. Inflation Inflation has had an insignificant impact on the Venture's operations since inception in September 1984. Inflation, if present, should allow for future increases in rental rates to offset some of the impact of higher operating expenses and replacement costs. Furthermore, inflation generally does not impact contractually fixed long-term financing under which the real property investments were purchased. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LIST OF COMBINED FINANCIAL STATEMENTS Report of Independent Auditors Combined Balance Sheets - Years ended December 31, 1996 and 1995 Combined Statements of Operations - Years ended December 31, 1996, 1995 and 1994 Combined Statements of Changes in Partners' Deficit - Years ended December 31, 1996, 1995 and 1994 Combined Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 Notes to Combined Financial Statements Report of Ernst & Young LLP, Independent Auditors The Partners VMS National Residential Portfolio I and VMS National Residential Portfolio II We have audited the accompanying combined balance sheets of VMS National Residential Portfolio I (an Illinois Limited Partnership), VMS National Residential Portfolio II (an Illinois Limited Partnership) and VMS National Properties (an Illinois Partnership) and Subpartnerships (collectively the Venture) as of December 31, 1996 and 1995, and the related combined statements of operations, changes in partners' deficit and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Venture's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of VMS National Residential Portfolio I, VMS National Residential Portfolio II and VMS National Properties and Subpartnerships at December 31, 1996 and 1995, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The combined financial statements and financial statement schedule referred to above have been prepared assuming that the Venture will continue as a going concern. As more fully described in Note 1, the Venture has incurred recurring operating losses and has a partners' deficit. In addition, the General Partner and its affiliates have announced the existence of serious financial difficulties that may have an effect on the ability of the General Partner to function in that capacity and may adversely affect the financial condition of the Venture. These conditions raise substantial doubt about the Venture's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts of liabilities that may result from the inability of the Venture to continue as a going concern. /s/ ERNST & YOUNG LLP Greenville, South Carolina February 10, 1997 VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois limited partnerships) VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS COMBINED BALANCE SHEETS (in thousands) December 31, December 31, 1996 1995 Assets Cash and cash equivalents: Unrestricted $ 1,788 $ 1,984 Restricted-tenant security deposits 1,082 1,120 Accounts receivable 151 240 Escrows and other reserves 1,507 1,364 Other assets 411 511 Investment properties: Land 13,404 14,293 Buildings and personal property 128,455 133,517 Investment properties subject to abandonment: Land, buildings and personal property -- 7,630 Less accumulated depreciation (70,019) (72,219) $ 76,779 $ 88,440 Liabilities and Partners' Deficit Liabilities Accounts payable $ 302 $ 356 Tenant security deposits 1,080 1,080 Accrued interest 11,948 8,193 Accrued taxes 492 507 Other liabilities 381 559 Mortgage loans payable 119,229 121,845 Notes payable 33,837 30,610 Advances from affiliates of general partner 753 2,280 Deferred gain on extinguishment of debt 54,053 54,053 Liabilities subject to abandonment: Accrued interest -- 9,477 Accrued taxes -- 121 Other liabilities -- 295 Mortgage loans payable -- 6,278 Partners' Deficit (145,296) (147,214) $ 76,779 $ 88,440 See Accompanying Notes to Combined Financial Statements VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois limited partnerships) VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS COMBINED STATEMENTS OF OPERATIONS (in thousands, except per interest data) FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994 Revenues: Rental income $ 24,046 $ 26,649 $ 28,692 Other income 1,154 1,225 1,320 Total revenues 25,200 27,874 30,012 Expenses: Operating 7,658 9,267 10,962 General and administrative 1,063 1,121 1,345 Maintenance 3,000 3,992 5,196 Depreciation 5,447 6,090 6,659 Interest 16,652 20,899 24,226 Property taxes 1,802 2,220 2,378 Write-down of investment property 1,850 3,257 3,774 Total expenses 37,472 46,846 54,540 Net loss before extraordinary item (12,272) (18,972) (24,528) Extraordinary item - gain on extinguishment of debt 14,095 34,598 27,418 Net income $ 1,823 $ 15,626 $ 2,890 Net income allocated to general partners $ 36 $ 313 $ 58 Net income allocated to limited partners 1,787 15,313 2,832 $ 1,823 $ 15,626 $ 2,890 Net income (loss) per limited partnership interest: Net loss before extraordinary item Portfolio I (644 interests) $(13,185) $(20,386) $(26,358) Portfolio II (268 interests) $(13,193) $(20,386) $(26,352) Extraordinary item Portfolio I (644 interests) $ 15,146 $ 37,177 $ 29,463 Portfolio II (268 interests) $ 15,146 $ 37,177 $ 29,463 Net income Portfolio I (644 interests) $ 1,961 $ 16,791 $ 3,105 Portfolio II (268 interests) $ 1,953 $ 16,791 $ 3,111 See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois limited partnerships) VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (in thousands)
VMS National Residential Portfolio I Limited Partners General Accumulated Subscription Partners Deficit Notes Total Total Partners' deficit at January 1, 1994 $ (3,644) $(112,399) $ (812) $(113,211) $(116,855) Collections of subscription notes -- -- 156 156 156 Write-off of subscription notes -- (29) 29 -- -- Net income for year ended December 31, 1994 41 1,999 -- 1,999 2,040 Partners' deficit at December 31, 1994 (3,603) (110,429) (627) (111,056) (114,659) Collections of subscription notes -- -- 41 41 41 Net income for year ended December 31, 1995 221 10,813 -- 10,813 11,034 Partners' deficit at December 31, 1995 (3,382) (99,616) (586) (100,202) (103,584) Collections of subscription notes -- -- 52 52 52 Net income for the year ended December 31, 1996 26 1,263 -- 1,263 1,289 Partner's deficit at December 31, 1996 $ (3,356) $ (98,353) $ (534) $(98,887) $(102,243) See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois limited partnerships) VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (in thousands)
VMS National Residential Portfolio II Limited Partners General Accumulated Subscription Partners Deficit Notes Total Total Partners' deficit at January 1, 1994 $(1,523) $ (47,161) $ (467) $ (47,628) $ (49,151) Collections of subscription notes -- -- 51 51 51 Write-off of subscription notes -- (4) 4 -- -- Net income for year ended 17 834 -- 834 851 December 31, 1994 Partners' deficit at December 31, 1994 (1,506) (46,331) (412) (46,743) (48,249) Collections of subscription notes -- -- 28 28 28 Net income for year ended 92 4,500 -- 4,500 4,592 December 31, 1995 Partners' deficit at December 31, 1995 (1,414) (41,831) (384) (42,215) (43,629) Collections of subscription notes -- -- 42 42 42 Net income for the year ended 10 524 -- 524 534 December 31, 1996 Partner's deficit at December 31, 1996 $ (1,404) $ (41,307) $ (342) $ (41,649) $ (43,053) Combined partner's deficit at $ (4,760) $(139,660) $ (876) $(140,536) $(145,296) December 31, 1996 See Accompanying Notes to Combined Financial Statements
VMS NATIONAL RESIDENTIAL PORTFOLIO I VMS NATIONAL RESIDENTIAL PORTFOLIO II (Illinois limited partnerships) VMS NATIONAL PROPERTIES (an Illinois partnership) AND SUBPARTNERSHIPS COMBINED STATEMENTS OF CASH FLOWS (in thousands) FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994 Cash flows from operating activities: Net income $ 1,823 $ 15,626 $ 2,890 Adjustments to reconcile net income to net cash provided by operating activities: Writedown of investment property 1,850 3,257 3,774 Extraordinary gain on extinguishment of debt (14,095) (34,598) (27,418) Depreciation 5,447 6,090 6,659 Amortization of discounts and loan costs 3,309 3,105 2,918 Loss on disposal of property 163 111 370 Gain on sale of property (59) -- -- Change in accounts: Escrows and other reserves (408) 2,205 2,258 Accounts receivable 67 (17) (10) Restricted tenant security deposits 40 (62) 127 Other assets 198 (226) 362 Accounts payable (62) (522) 884 Accrued taxes 39 146 214 Accrued interest 4,220 7,966 11,157 Tenant security deposit liabilities 4 (4) 94 Other liabilities (389) (160) 75 Net cash provided by operating activities 2,147 2,917 4,354 Cash flows from investing activities: Property improvements and replacements (2,029) (2,415) (3,408) Proceeds from sale of property 3,847 -- -- Net cash provided by (used in) investing activities $ 1,818 $ (2,415) $ (3,408) Cash flows from financing activities: Payments on mortgage loans payable $(2,674) $ (332) $ (293) Payments received on subscription notes 94 69 207 Payments on advances from affiliates (1,528) (82) (116) Cash released to lenders upon foreclosure (53) (649) (317) Net cash used in financing activities (4,161) (994) (519) Net increase (decrease) in cash and cash equivalents (196) (492) 427 Cash and cash equivalents at beginning of year 1,984 2,476 2,049 Cash and cash equivalents at end of year $ 1,788 $ 1,984 $ 2,476 Supplemental disclosure of cash flow information: Cash paid for interest $ 9,103 $ 9,503 $ 9,904 See Accompanying Notes to Combined Financial Statements
1. GOING CONCERN The combined financial statements have been prepared assuming that the VMS National Properties Joint Venture (the "Venture") will continue as a going concern. The combined financial statements do not include any adjustments that might result from the outcome of the uncertainties described below, however, such uncertainties raise substantial doubt about the Venture's ability to continue as a going concern. The Venture has incurred recurring operating losses and has a partners' deficit of approximately $145 million at December 31, 1996 and expects operating losses to continue. Further, historically the General Partner and its affiliates had advanced funds to the Venture; however, the General Partner does not intend to fund any future deficits. During 1994, the General Partner and its affiliates assigned a portion of the unpaid advances to an affiliate of Insignia Financial Group, Inc., ("Insignia") ("Notes 5 and 10"). The General Partner is evaluating its options for the Venture should the Venture continue to suffer substantial losses from operations and cash deficiencies. In addition, the General Partner and its affiliates have incurred serious financial difficulties that may affect the ability of the General Partner to function in that capacity. The administration and management of the Venture are dependent on the General Partner and its affiliates. Pursuant to an agreement dated July 14, 1994, a transaction is pending in which the current General Partner would be replaced by MAERIL, Inc., an affiliate of Insignia. The substitution of MAERIL, Inc. as the General Partner is expected, but there is no assurance that the transaction will be consummated. The pending replacement of the General Partner in and of itself will not necessarily improve the financial condition of the Venture. The combined financial statements do not include any adjustments relating to the recoverability of the recorded asset accounts or the amount of liabilities that might be necessary should the Venture be unable to continue as a going concern. 2.ORGANIZATION The Venture was formed as a general partnership pursuant to the Uniform Partnership Act of the State of Illinois and a joint venture agreement (the "Venture Agreement") dated September 27, 1984, between VMS National Residential Portfolio I ("Portfolio I") and VMS National Residential Portfolio II ("Portfolio II"). The General Partner of Portfolio I and Portfolio II is VMS Realty Investment, Ltd. (formerly VMS Realty Partners) an Illinois limited partnership. Prudential-Bache Properties, Inc. is also a minority general partner of Portfolio I. The Venture originally acquired 51 residential apartment properties located throughout the United States. Of these 51 properties, four were foreclosed prior to 1993. As more fully described in "Note 4", the Venture filed for Chapter 11 bankruptcy protection on February 22, 1991. The Venture's Second Amended and Restated Plan of Reorganization (the "Plan") became effective on September 30, 1993. Pursuant to the Plan, 19 of the Venture's properties were foreclosed in 1993, four properties were foreclosed in 1994, five properties were foreclosed in 1995 and an additional two properties foreclosed in 1996. Also, the Venture sold two of the residential properties during 1996. The Venture continues to own and operate 15 of the residential apartment complexes it originally acquired. One of the remaining properties is encumbered by financing insured by the Department of Housing and Urban Development ("HUD"). This property is owned by a separate subpartnership (the "Subpartnership"), of which the Venture owns a 99% interest. The remaining 1% interest is owned by VMS Realty Investment, Ltd. (Minority Interest). During 1993 cumulative losses of $640,000 previously allocated to the Minority Interest were reallocated to the Venture due to the severe financial difficulties encountered by the Minority Interest. The VMS/Stout Joint Venture (the "VMS/Stout Venture") was formed pursuant to an agreement dated August 18, 1984, which was amended and restated on October 4, 1984. VMS Realty Partners has a 50% interest and affiliates of the Seller (as defined below) have a 50% interest in the VMS/Stout Venture. The VMS/Stout Venture, the J.D. Stout Company ("Stout") and certain affiliates of Stout entered into a contract of sale dated August 18, 1984, which was amended on October 4, 1984. The contract provided for the sale by Stout and other owners (collectively the "Seller") of the 51 residential apartment complexes to the VMS/Stout Venture. The VMS/Stout Venture assigned its interest as purchaser to the Venture. During 1987, Stout assigned its interest in the VMS/Stout Joint Venture to ContiTrade Service Corporation ("ContiTrade"). On November 17, 1993, VMS Realty Partners assigned its interest in the VMS/Stout Joint Venture to the Partners Liquidating Trust (see "Note 8"). Pursuant to the terms of the Joint Venture Agreement for the Venture and the respective Partnership Agreements for Portfolio I and Portfolio II, the Managing General Partner will manage Portfolio I, Portfolio II, VMS National Properties and each of the Venture's operating properties. The Limited Partners do not participate in or control the management of their respective partnership, except that certain events must be approved by the Limited Partners. These events include: (1) voluntary dissolution of either Portfolio I or Portfolio II, and (2) amending substantive provisions of either Partnership Agreement. The operating profits and losses of VMS National Properties and the Venture's properties are allocated to Portfolio I and Portfolio II on a pro-rata, cumulative basis using the ratio of their respective Limited Partnership Interests issued and outstanding. The operating profits and losses of Portfolio I and Portfolio II are allocated 98% to the respective Limited Partners and 2% to the respective General Partners. Operating cash flow distributions for Portfolio I and Portfolio II will be made at the discretion of the Managing General Partner subject to the order of distribution indicated in the Plan and approved by the Bankruptcy Court. Such distributions will be allocated first to the respective Limited Partners in an amount equal to 12% per year (on a noncumulative basis) of their contributed capital; then, to the General Partners, a subordinated incentive fee equal to 10.45% of remaining operating cash flow; and finally, of the balance to be distributed, 98% to the Limited Partners and 2% to the General Partners. Distributions of proceeds arising from the sale or refinancing of the Venture's properties will be allocated to Portfolio I and Portfolio II in proportion to their respective Venture interests subject to the order of distribution indicated in the Plan and approved by Bankruptcy Court. Distributions by Portfolio I and Portfolio II will then be allocated as follows: (1) first to the Limited Partners in an amount equal to their aggregate capital contributions; (2) then to the General Partners in an amount equal to their aggregate capital contributions; (3) then, among the Limited Partners, an amount equal to $62,000,000 multiplied by the respective percentage interest of Portfolio I or Portfolio II in the Venture; and (4) finally, of the balance, 76% to the Limited Partners and 24% to the General Partners. In any event, there shall be allocated to the General Partners not less than 1% of profits or losses. 3. ACCOUNTING POLICIES (a) The combined financial statements of the Venture for the period during the bankruptcy proceedings (February 22, 1991 to September 30, 1993) reflect the financial reporting guidance prescribed by the AICPA Statement of Position 90-7 (SOP 90-7), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". In accordance with SOP 90- 7, interest on secured or undersecured debt of the Venture's entities in bankruptcy was recognized to the extent of cash paid or to the extent that the value of the related collateral exceeded the sum of principal plus accrued interest, determined on a property by property basis. Interest on unsecured claims was recognized only to the extent paid. Effective September 30, 1993, the Venture resumed an accrual basis of interest recognition. Mortgage interest recorded for the three years ended December 31, 1993, was $33,258,000 less than the contractual amount. Interest on notes payable and other interest expense recorded for the same period was $6,931,000 less than the contractual amount. Penalties on delinquent real estate taxes after February 22, 1991, and penalties on delinquent debt on the Venture's entities that were in bankruptcy were not approved by the Bankruptcy Court as an allowed claim. Therefore, these penalties were neither accrued in the combined financial statements nor contractually disclosed. Debt discounts (imputed interest) and deferred loan costs related to the Venture's entities in bankruptcy were written off as of February 22, 1991, in order to adjust the net debt balance to the amount allowed by the bankruptcy court as a claim against the Venture. Pursuant to the Plan which became effective on September 30, 1993, the Bankruptcy Court disallowed accrued contractual obligations of approximately $89,573,000 (see "Note 11") related to the retained complexes. Additionally, the assets and liabilities of the Venture's non- retained complexes (see "Note 5") have been segregated and presented as investment properties subject to abandonment and liabilities related to properties subject to abandonment on the Venture's Combined Balance Sheets (see "Note 13"). (b)The accompanying combined financial statements include the accounts of Portfolio I, Portfolio II, the Venture and Subpartnerships (collectively, the "Partnerships"). Significant interpartnership accounts and transactions have been eliminated from these combined financial statements. (c)Depreciation is computed using the following methods and estimated useful lives:
GAAP BASIS TAX BASIS Lives Lives Method (Years) Method (Years) Buildings and improvements Straight-line 25 to 29 175% declining 18/19 balance (ACRS) Straight-line 27.5 (Modified ACRS) Personal Property 150% declining 5 150% Declining 5 balance Balance (ACRS) 200% declining 7 200% declining 7 balance balance (Modified ACRS) 150% declining 15 150% declining 15 balance balance (Modified ACRS)
(d) During 1996 the Venture adopted "FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long- lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. The adoption of this statement resulted in a writedown of the non-retained properties of $1,850,000 to their estimated fair value. (e) The Venture generally leases its residential apartment units for twelve month terms or less. (f) The Venture expenses the costs of advertising as incurred. Advertising expense included in operating expenses was $313,000, 428,000 and $426,000 for the years ended December 31, 1996, 1995 and 1994, respectively. (g) The Venture considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are carried at cost which approximates fair value. At times cash balances exceed the insured limit as provided by the Federal Deposit Insurance Corporation. (h) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (i) In 1995, the Venture implemented "Statement of Financial Accounting Standards No. 107, Disclosure about Fair Value of Financial Instruments," which requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The carrying amount of the Venture's cash and cash equivalents approximates fair value due to short-term maturities. The Venture estimates the fair value of its fixed rate mortgages by discounted cash flow analysis, based on estimated borrowing rates currently available to the Venture ("Note 7"). The carrying amounts of variable-rate mortgages approximate fair value due to frequent re-pricing. (j) Certain reclassifications have been made to the 1995 and 1994 balances to conform to the 1996 presentation. (k) The Partnership requires security deposits from all apartment lessees for the duration of the lease and considers these deposits to be restricted cash. Deposits are refunded when the tenant vacates the apartment if there has been no damage to the unit. 4. PETITION FOR RELIEF UNDER CHAPTER 11 On February 22, 1991, VMS National Properties Joint Venture filed for Chapter 11 bankruptcy protection in the United States Bankruptcy court in the Central District of California. The initial filing included only the residential apartment complexes directly owned by VMS National Properties Joint Venture (entities included in the filing herein after referred to collectively as the Debtor) and excluded the 10 Subpartnerships consisting of 10 residential apartment complexes encumbered by financing insured or held by the Department of Housing and Urban Development ("HUD"), and the investing limited partnerships Portfolio I and Portfolio II. Due to the partnership agreements existing between the Venture, Portfolio I and Portfolio II, which provide the Venture with exclusive rights to the limited partner investor contributions, the Venture's initial filing was amended to reflect the Venture's right to receive any excess limited partner investor contributions. The Venture's Plan was confirmed by the Bankruptcy Court in March 1993 and became effective on September 30, 1993 ("Effective Date") (see "Note 5"). 5. PLAN OF REORGANIZATION The Primary aspects of the Venture's Second Amended and Restated Plan of Reorganization included the following: (a) The venture retained 17 properties from the existing portfolio (the "retained properties"), and abandoned title of the remaining properties (the "non-retained properties") to the Federal Deposit Insurance Corporation (the "FDIC"). The retained properties consist of one HUD property and sixteen non-HUD properties. Two of the seventeen retained properties were sold during the second quarter of 1996. All of the non- retained properties have been foreclosed upon as of December 31, 1996. (b) The Venture restructured the existing senior-lien debt obligations on the retained properties (except for one of the retained properties which has a first mortgage lien insured by HUD and two of the retained properties which have senior liens formerly payable to the FDIC, as successor to Beverly Hills Mortgage Corporation, ("BH")) to provide for an interest rate of 8.75% per annum effective as of the first day of the month of the Effective Date with payments based on a 30 year amortization commencing on the first monthly payment due thereafter and a maturity date of January 15, 2000. The senior lien collateralized by HUD on one of the retained properties was not modified, and the senior liens formerly held by the FDIC were modified to accrue at 9% per annum effective as of the first day of the month of the Effective Date with monthly payments of interest only made at 7% per annum commencing with the first monthly payments due thereafter on the FDIC value, as defined in "c" below. (c) As it pertains to the existing BH junior mortgages on the retained properties, the FDIC reduced its claim on two of the properties to $300,000 per property evidenced by a non-interest bearing note scheduled to mature January 15, 2000, and has left in place liens for the full amount of its claims at the petition date for all other retained properties. Interest on the former FDIC loans for these retained properties accrues at 10% per annum on the FDIC value (total property value per the FDIC's June 1992 valuations less the property's senior lien indebtedness) commencing as of the first day of the month of the Effective Date and monthly payments of interest only at 7% per annum on the FDIC value will commence with the first monthly payment due thereafter. (The retained property governed by a HUD Regulatory Agreement is to make payments of interest only following the approval by HUD of the Surplus Cash calculation.) On October 28, 1995, the FDIC sold all of the debt it held related to the retained properties to BlackRock Capital Finance, L.P. The debt amounts and terms were not modified. (d) The Venture distributed the following amounts in conjunction with the terms of the Plan: (1) approximately $5,980,000 to satisfy unsecured prepetition creditor claims of the nonaffiliated note payable to Security Pacific National Bank, trade creditors, and property taxes on the retained properties; (2) approximately $1,056,000 to provide for allowed and unclassified administrative claims; and (3) approximately $5,960,000 to make capital improvements at the retained properties. This capital improvement reserve was exhausted during 1995. (e) The VMS/Stout Joint Venture was granted an allowed claim in the amount of $49,535,000 for the Assignment and Long-Term Loan Arrangement Notes Payable to them by the Venture. Payments totalling $3,475,000 in conjunction with this allowed claim were made to the nonaffiliated members of the VMS/Stout Joint Venture on October 7, 1993. The Venture also executed a $4,000,000 promissory note dated September 1, 1993, to ContiTrade Services Corporation (the ContiTrade Note) in connection with these allowed note claims. The ContiTrade Note represents a prioritization of payments to ContiTrade of the first $4,000,000 in repayments made under the existing Assignment and Long-Term Loan Arrangement Notes payable to the VMS/Stout Joint Venture, and does not represent an additional $4,000,000 claim payable to ContiTrade. In addition to prioritizing ContiTrade's receipt of the first $4,000,000 of repayments on the old notes, the ContiTrade Note provides for 5% non- compounding interest on the outstanding principal balance calculated daily on the basis of a 360 day year. The ContiTrade Note is secured by a Deed of Trust, Assignment of Rents and Security Agreement on each of the Venture's retained properties, and provides ContiTrade with other approval rights as to the ongoing operations of the Venture's retained properties. The ContiTrade Note matures January 15, 2000. The remaining $42,060,000 is noninterest bearing. (f) The Venture entered into a Revised Restructured Amended and Restated Asset Management Agreement (the Revised Asset Management Agreement) with Insignia. Effective October 1, 1993, Insignia took over the asset management of the Venture's retained properties and partnership functions for the Venture. The Revised Asset Management Agreement provides for an annual compensation of $500,000 to be paid to Insignia in equal monthly installments. In addition, Insignia will receive reimbursement for all out-of-pocket costs incurred in connection with their services up to $200,000 per calendar year. These amounts are to be paid from the available operating cash flow of the Venture's retained complexes after the payment of operating expenses and priority reserve funding for insurance, real estate and personal property taxes, senior mortgage payments, minimum interest payment requirements on the former FDIC mortgages, and any debt service and principal payments currently due on any liens of encumbrances senior to the ContiTrade Deeds of Trust. If insufficient operating cash flow exists after the funding of these items, the balance of Insignia's fees and reimbursements may be paid from available partnership cash sources. Additionally, the asset management fee payable to Insignia will be reduced proportionately for each of the Venture's retained complexes which are sold or otherwise disposed of from time to time. Accordingly, the fee was reduced upon the disposition of Bellevue and Carlisle Square in 1996. The Venture engaged Insignia to commence property management of all of the Venture's retained complexes effect January 1, 1994. 6. SUBSCRIPTION NOTES AND ACCRUED INTEREST RECEIVABLE Portfolio I and Portfolio II executed promissory notes requiring cash contributions from the partners aggregating $136,800,000 to the capital of Portfolios I and II for 644 and 268 units, respectively. Of this amount, $135,014,000 was contributed in cash through December 31, 1996, and $910,000 was deemed uncollectible and written-off prior to December 31, 1996. The following table represents the remaining Limited Partners' subscription notes principal balances and the related accrued interest receivable at December 31, 1996 (in thousands): Portfolio I Portfolio II Subscription notes receivable $ 534 $ 342 Accrued interest receivable 66 67 Total subscription notes and accrued interest receivable $ 600 $ 409 All amounts outstanding at December 31, 1996, are considered past due and bear interest at the default rate of 18%. The subscription notes receivable and the related interest are not recognized until collection is assured. MORTGAGE LOANS PAYABLE (dollar amounts in thousands)
Principal Principal Balance At Balance December 31, Imputed Interest Period Maturity Due At Property 1996 Interest (A) Rate Amortized Date Maturity Buena Vista Apartments 1st mortgage $ 7,000 (F) -- 01/00 $ 7,000 Casa de Monterey 1st mortgage 871 8.75% 30 years 01/00(D) 842 2nd mortgage 6,450 (G) -- 01/00 6,450 Crosswood Park 1st mortgage 4,232 1,531 7.50% 40 years 05/18(E) (B)(C) 2nd mortgage 2,468 (G)(H) -- 01/00 2,468 Mt. View Apartments 1st mortgage 10,165 (F) -- 01/00 10,165 Pathfinder 1st mortgage 1,225 8.75% 30 years 01/00(D) 1,184 2nd mortgage 11,170 (G) -- 01/00 11,170 Scotchollow 1st mortgage 3,261 8.75% 30 years 01/00(D) 3,153 2nd mortgage 22,425 (G) -- 01/00 22,425 The Bluffs 1st mortgage 616 8.75% 30 years 01/00(D) 596 2nd mortgage 443 8.75% 30 years 01/00(D) 428 3rd mortgage 3,006 (G) -- 01/00 3,006 Vista Village Apartments 1st mortgage 1,930 8.75% 30 years 01/00(D) 1,866 2nd mortgage 1,792 (G) -- 01/00 1,792 Chapelle Le Grande 1st mortgage 1,207 8.75% 30 years 01/00(D) 1,167 2nd mortgage 2,244 (G) -- 01/00 2,244 North Park Apartments 1st mortgage-1st phase 113 8.75% 30 years 01/00(D) 109 2nd phase 468 8.75% 30 years 01/00(D) 452 3rd phase 835 8.75% 30 years 01/00(D) 812 4th phase 421 8.75% 30 years 01/00(D) 407 2nd mortgage 4,582 (G) -- 01/00 4,582 Shadowood Apartments 1st mortgage 1,226 8.75% 30 years 01/00(D) 1,185 2nd mortgage 1,059 (G) -- 01/00 1,059 Towers of Westchester Park 1st mortgage 2,536 8.75% 30 years 01/00(D) 2,472 2nd mortgage 14,439 (G) -- 01/00 14,439 Terrace Gardens 1st mortgage 2,257 8.75% 30 years 01/00(D) 2,183 2nd mortgage 1,515 (G) -- 01/00 1,515 Watergate Apartments 1st mortgage 2,187 8.75% 30 years 01/00(D) 2,115 2nd mortgage 1,157 (G) -- 01/00 1,157 Forest Ridge Apartments 1st mortgage 2,130 8.75% 30 years 01/00(D) 2,059 2nd mortgage 2,201 8.75% 30 years 01/00(D) 2,128 3rd mortgage 3,129 (G) -- 01/00 3,129 Total $120,760 $ 1,531 $115,759 (A) Imputed interest represents the difference between the face value of assumed mortgage loans and the current market value of these obligations as determined by the 14% mortgage rate received from the Beverly Hills Mortgage Corporation at the dates of purchase. The book value of the real estate to which the debt relates was adjusted by this difference. Imputed interest is being amortized over the remaining terms of the related mortgage loans, using the effective interest method. This amortization amounted to $72,000 in 1996, $199,000 in 1995, $306,000 in 1994, and was included in mortgage interest expense. (B) Property is encumbered by first mortgage financing insured by HUD. (C) At maturity, the principal balance will be fully amortized. (D) Pursuant to the terms of the Venture's Plan, the senior mortgages on the Venture's non-HUD retained properties were modified effective September 1, 1993 (see "Note 5"). The modified senior mortgages provide for an interest rate of 8.75% per annum and a maturity date of January 15, 2000. Payments are based on a thirty-year amortization. (E) The senior mortgage on the Venture's HUD retained property, which is insured by HUD, was not modified. (F) The senior liens formerly held by the FDIC on two of the Venture's non- HUD retained properties were modified effective September 1, 1993, to accrue at 9% with monthly payments commencing October 1, 1993, of interest only at 7% on the restated FDIC notes' Agreed Valuation Amount, as defined (see "Note 5"). The difference between the 9% interest accrual rate and the 7% minimum interest rate shall accrue, but not be added to principal, and bear interest at the 9% note rate from and after the due date of each payment, compounded monthly. All unpaid principal and accrued interest is due in full on the January 15, 2000, maturity date. (G) The junior liens formerly held by the FDIC on the Venture's non-HUD retained properties were modified effective September 1, 1993, to accrue at 10% with monthly payments commencing October 1, 1993, of interest only at 7% on the restated FDIC notes' Agreed Valuation Amount as defined (see "Note 5"). The difference between the 10% interest accrual rate and the 7% minimum interest rate shall accrue, but not be added to principal, and bear interest at the 10% note rate from and after the due date of each payment, compounded monthly. All unpaid principal and accrued interest is due in full on the January 15, 2000, maturity date. (H) The retained property governed by HUD Regulatory Agreements will make payments of interest only at 7% each April 1st following HUD's approval of Surplus Cash Calculations prepared each December 31st.
On October 28, 1995, the FDIC sold all of the debt it held related to the retained properties to BlackRock Capital Finance, L.P. The debt amounts and terms were not modified. The Managing General Partner believes that it is not appropriate to use the Venture's incremental borrowing rate for the debt as there is currently no market in which the Venture could obtain similar financing. Therefore, the Managing General Partner considers estimation of fair value to be impracticable. Principal payments on mortgage loans payable during the next five years are noted below. 1997 $ 319 1998 347 1999 378 2000 113,443 2001 150 Thereafter 6,123 $120,760 8. NOTES PAYABLE (a) The Venture executed a $29,000,000 purchase money subordinated note (the "Assignment Note") payable to the VMS/Stout Venture in exchange for the assignment by the VMS/Stout Venture of its interest in the contract of sale to the Venture. The Assignment Note is collateralized by the pledge from Portfolio I and Portfolio II of their respective interests in the Venture. On November 17, 1993, VMS Realty Partners assigned its 50% interest in the VMS Stout Joint Venture to the Partners Liquidating Trust which was established for the benefit of the former creditors of VMS Realty Partners and its affiliates. As a result of this assignment of interest, the Assignment Note and the Long-Term Loan Arrangement Fee Note (see below) are no longer classified as notes payable to related parties. The stated rate of interest on the Assignment Note (prior to modification by the Plan) was 12% per annum (compounded semi-annually) with monthly payments of interest only at a rate of 6%. Monthly payments on this note were discontinued in May 1990, and the accrual of interest was discontinued after the February 22, 1991, petition filing date. Additionally, effective April 10, 1991, VMS Realty Partners waived its right to collect interest on its portion of the Assignment Note. Pursuant to the Plan, the allowed claim for the Assignment note and related interest was $46,285,000; $3,475,000 of this amount was paid in October 1993, in accordance with the terms of the Plan. The Venture also executed a $4,000,000 promissory note payable dated September 1, 1993 to ContiTrade Services Corporation ("ContiTrade note") which bears interest at 5% per annum. This note represents a prioritization of payment to ContiTrade and did not represent the assumption of any additional debt. The ContiTrade note matures on January 15, 2000, and is collateralized by a Deed of Trust, Assignment of Rents and Security Agreement on each of the Venture's retained complexes. Accrued interest on the ContiTrade note at December 31, 1996, is $667,000. The remaining $42,810,000 of the Assignment Note is non-interest bearing and is payable only after payment of debt of higher priority, including mortgage notes due to senior lien holders and junior mortgages payable to the FDIC. Pursuant to SOP 90-7, the Assignment Note, the Long-Term Loan Arrangement Fee Note (as defined below) and related accrued interest were adjusted to the present value of amounts to be paid using an estimated current interest rate of 11.5%. Accordingly, the Venture recognized an extraordinary gain on extinguishment of debt of $21,491,000 in 1993. Interest expense is being recognized through the amortization of the discount which totaled $3,227,000, $2,878,000 and $2,567,000 in 1996, 1995 and 1994, respectively. (b) The Venture executed a $3,000,000 unsecured, nonrecourse promissory note, the "Long-Term Loan Arrangement Fee Note" payable to the VMS/Stout Venture as consideration for arranging long-term financing. The stated rate of interest on this note prior to modification by the Plan is 10% per annum, payable on a monthly basis. Monthly interest payments on this Note were discontinued in May 1990. Additionally, the accrual of interest on this Note was discontinued after the February 22, 1991, petition filing date. Pursuant to the Plan, the entire $3,000,000 principal balance plus $250,000 in unpaid accrued interest was granted as an allowed claim. None of this balance bears interest, and the balance is payable only after debt of a higher priority, including senior and junior mortgage loans. (c) The Venture executed a $3,190,000 nonrecourse promissory note payable to the Seller ("Stout Note") as additional consideration for the sale of the properties in 1984 which was collateralized by a letter of credit for $3,190,000. The Venture discontinued scheduled monthly interest payments in May 1990, on the Stout Note. As a result, in July 1990 all three holders drew on the Letter of Credit for the principal note balances due. The drafts under the Letter of Credit bear interest at prime plus 5% and were due upon funding. The accrual of interest on this Letter of Credit was discontinued after February 22, 1991. Pursuant to the Plan, the entire amount of the allowed claim for the Letter of Credit, $3,505,000, was paid in full in October 1993. 9. INCOME TAXES The Partnership has received a ruling from the Internal Revenue Service that it will be classified as a partnership for Federal income tax purposes. Accordingly, no provision for income taxes is made in the combined financial statements of the Partnership. Taxable income or loss of the Partnership is reported in the income tax returns of its partners. The following is a reconciliation of reported net income and Federal taxable income: 1996 1995 1994 Net income as reported $ 1,823 $15,626 $ 2,890 Depreciation and amortization differences (1,036) (2,342) (2,647) Prepaid rent -- (24) 87 Accrued audit 81 (125) 128 Unapplied cash (179) 33 289 Gain on foreclosure and sale 793 (640) 8,591 Management fees -- -- (121) Mortgage interest expense -- (33) 1,180 Write-down of fixed assets 1,936 7,212 2,968 Other (230) 1,678 1,047 Federal taxable income $ 3,188 $21,385 $ 14,412 The following is a reconciliation between the partnership's reported amounts and Federal tax basis of net assets and liabilities at December 31, 1996: Net deficiency as reported $(145,296) Land and buildings 15,841 Accumulated depreciation (39,453) Syndication costs (17,650) Deferred gain 54,053 Loan costs 1,036 Other deferred costs 9,601 Other (18,453) Notes Payable 4,882 Subscription note receivable 2,016 Mortgage payable (50,768) Accounts payable - Affiliates 8,454 Net assets - Federal tax basis $(175,737) 10. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (a) The Venture entered into agreements with affiliates of the Managing General Partner to provide asset management services at a fee equal to 1.5% (.5% to 1.5% for HUD properties) of monthly gross revenues. Subsequent to the February 22, 1991, bankruptcy filing, payment of these fees had been restricted by Bankruptcy Court approvals. Pursuant to the terms of the Venture's Plan, asset management fees of $1,734,100 for services rendered through September 30, 1993, were approved by the Bankruptcy Court as allowed claim payments. All affiliated asset management fees in excess of the allowed claim payments were written off as of September 30, 1993. Fees of $950,000 were approved for immediate payment and were paid in 1993. In addition, payments of $82,000 and $116,000 were made in 1995 and 1994, respectively. The remaining prepetition portion of the allowed claim was paid during 1996 from cash received relating to the sale of Carlisle Square and Bellevue Towers. Effective October 1, 1993, the Venture entered into an asset management agreement with Insignia in conjunction with the implementation of the Plan (see "Note 5"). Various nonaffiliated management companies have managed the properties since September 1991. Accordingly, no affiliated property management fees were incurred or paid in 1993; however, prepetition property management fees of $356,000 were approved by the Bankruptcy Court for payment to an affiliate. This allowed claim may be paid only from available partnership cash and remains unpaid at December 31, 1996. (b) Certain affiliates of the General Partners and the VMS/Stout Venture may be entitled to receive various fees upon disposition of the properties. These fees will be paid from the disposition proceeds and are subordinated to the distributions required by the Plan. There were no property dispositions for which proceeds were received through December 31, 1996. (c) Prior to 1994, an affiliate of the Managing General Partner was reimbursed for accounting, due diligence, data processing, and other departmental costs, along with partnership travel, communication and certain overhead expenses of staff engaged in analysis and operation of Portfolio I, Portfolio II, the Venture and each of the Venture's operating properties. These services were performed by Insignia in 1994, 1995 and 1996 (See "Note 5"). A portion of the 1994 reimbursements received by Insignia were assigned to an affiliate of the General Partner. The total reimbursable costs paid to an affiliate of the General Partner included on the Combined Statements of Operations for the years ended December 31, 1994, amounted to approximately $95,000. Payment of these reimbursable costs during the bankruptcy proceedings was restricted to $25,000 per month pursuant to court-approved cash collateral orders. No such payments were made in 1994 and 1995; however $755,000 in prepetition reimbursable costs was approved for payment as part of the Plan. During 1996, these costs were reimbursed primarily from proceeds received from the sale of Carlisle Square and Bellevue Towers. The remainder of reimbursable costs payable to affiliates not allowed by the Bankruptcy Court were written off as of September 30, 1993. (d) Under the terms of the Venture agreement, the Managing General Partner and its affiliates provided management and other services to the Venture through December 31, 1991. Pursuant to the Plan, a prepetition portion of fees totalling $583,000 was approved for payment from available partnership cash. Approximately $186,000 of this amount was paid during 1996 from proceeds received from the sale of Carlisle Square and Bellevue Towers. The portion of these fees not allowed by the Bankruptcy Court were written off. As of December 31, 1996, $397,000 remains unpaid. (e) The Venture has engaged affiliates of Insignia to provide day-to-day management of the Venture's properties and to provide all partnership administrative functions under an agreement which provides for property management fees equal to 4% of revenues on each property and asset management fees of $500,000 for the Venture in total. For the period from October 1, 1993, through July 14, 1994, Insignia assigned a portion of these fees to an affiliate of the General Partner. Payments to this affiliate under this assignment were approximately $93,000 in 1994. EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (dollar amounts in thousands) The Combined Statements of Operations for the year ended December 31, 1996, 1995 and 1994, reflect the foreclosures of 2, 5, and 4 of the Venture's properties, respectively: 1996 1995 1994 Weatheridge The Winery Broad Meadows Sierra Gardens Venetian Bridges - Canal Court Courts of Harford Square Venetian Bridges - Grand Canal I Edgewater I Venetian Bridges - Grand Canal II Edgewater II Pacific Hacienda As a result of these foreclosures, the following liabilities and assets were written off: 1996 1995 1994 Mortgage Principal Payable $ 6,291 $ 22,074 $ 23,320 Accrued Interest Payable 9,941 25,636 16,490 Other 26 (645) (369) Investment in Properties (5,781) (23,453) (22,858) Accumulated depreciation 3,618 10,986 10,835 Extraordinary Gain $ 14,095 $ 34,598 $ 27,418 Additionally, as a result of the implementation of the Venture's Plan of Reorganization, certain liabilities compromised by the Plan were adjusted in 1993 to the present value of amounts to be paid determined at appropriate current interest rates. As a result, the Venture realized a gain in 1993 on extinguishment of debt on the retained properties as follows: FDIC mortgages $ 9,972 Accrued interest on former FDIC mortgages 55,216 Notes payable 21,491 Other 2,894 Extraordinary gain 89,573 Less portion of gain deferred (54,053) Extraordinary gain realized $ 35,520 Pursuant to the Plan, the mortgages formerly held by the FDIC were modified effective September 30, 1993. For 15 of the 17 retained properties, the face value of the note was restated to the Agreed Valuation Amount (see "Note 5"). Under the terms of the restated notes, the FDIC may reinstate the full claim which was in place at the petition filing date upon the default of any note. The restated notes are cross-collateralized; however, they are not cross-defaulted. As a result, the Venture deferred $54,053,000 of this extraordinary gain on extinguishment of debt. On October 28, 1995, the FDIC sold all of the debt it held related to the retained properties to BlackRock Capital Finance, L.P. The debt amounts and terms were not modified. 12. CONTINGENCIES The Venture and certain affiliates of the Venture, including the Managing General Partner and certain officers and directors of the Managing General Partner, are parties to certain legal proceedings filed prior to December 31, 1996. The legal proceedings in which the Venture is included relate primarily to the limited partners' investment in the Venture. The adverse outcome of any one or more legal proceedings against the Venture or any of its affiliates which provide financial support or services to the Venture could have a materially adverse effect on the present and future operations of the Venture. The eventual outcome of these matters cannot be determined at this time. Accordingly, no provision for any liability that may result has been made in the financial statements. 13. INVESTMENT IN PROPERTIES SUBJECT TO ABANDONMENT The Venture's investment in 10 properties for which it obtained Bankruptcy Court approval to abandon, to which it still held legal title for two of these properties at December 31, 1995, has been presented as "Investment Properties Subject To Abandonment" on the Venture's Combined Balance Sheet at December 31, 1995. The extraordinary gain on the extinguishment of debt for all of these properties exceeded the ordinary loss from the write down of the net carrying values of these properties to their estimated fair market values. Therefore, no allowance or provision for the loss in asset value has been made in the Venture's Combined Statements of Operations for the year ended December 31, 1995. The adoption of FASB Statement No. 121 in 1996 (see Note 3) resulted in the writedown of the two remaining non- retained properties of $1,850,000 to their estimated fair values. Five of these properties were foreclosed during 1995 and the remaining two were foreclosed during 1996 (see "Note 11"). None of the non-retained properties remain at December 31, 1996. 14. HUD CONTINGENCIES The Venture, VMS Realty Management, Inc. and HUD entered into a Settlement Agreement dated December 9, 1996, related to the appropriateness of certain Crosswood Park and Venetian Bridges Grand Canal I disbursements totaling approximately $603,000 and $133,000, respectively, made during the years 1987 through 1991. This audit also included five other HUD projects managed by VMS Realty Management, Inc. which were not owned by the Venture. The Settlement Agreement provided an aggregate payment of $550,000 to the Federal government, $102,000 of which was paid from available funds of Venetian Bridges Grand Canal I and the remainder of the settlement payment of $448,000 were paid by entities other than the Venture and its subpartnerships. 15. Investment Properties and Accumulated Depreciation (dollar amounts in thousands)
Initial Cost To Venture Buildings Provision to Personal Subsequent Reduce to Description Encumbrance Land Property Improvements Fair Value THE BLUFF APTS. (a) $193 $ 3,667 $ 407 $ -- BUENA VISTA APTS. (a) 893 4,538 409 -- CASA DE MONTEREY APTS. (a) 869 6,136 703 -- CHAPELLE LE GRAND APTS. (a) 166 3,873 553 -- CROSSWOOD PARK APTS. (a) 611 8,597 1,379 (2,000) FOREST RIDGE APTS. (a) 701 6,930 880 -- MOUNTAIN VIEW APTS. (a) 1,289 8,490 820 -- NORTH PARK APTS. (a) 557 8,349 1,288 -- PATHFINDER APTS. (a) 3,040 11,698 1,505 (1,250) SCOTCHOLLOW APTS. (a) 3,510 19,344 4,645 -- SHADOWOOD APTS. (a) 209 3,393 550 -- TERRACE GARDENS APTS. (a) 433 4,517 521 -- TOWERS OF WESTCHESTER (a) 529 13,491 2,034 -- VISTA VILLAGE APTS. (a) 568 5,209 745 -- WATERGATE APTS. (a) 263 5,625 982 -- TOTAL $13,831 $113,857 $17,421 $(3,250)
Gross Amount at Which Carried At December 31, 1996 Buildings And Related Personal Accumulated Year Date Depreciable Description Land Property Total Depreciation Constructed Acquired Life-Years THE BLUFF APTS. $ 193 $ 4,074 $ 4,267 $ 2,257 1968 10/26/84 5-27.5 BUENA VISTA APTS. 893 4,947 5,840 2,809 1972 10/26/84 5-27.5 CASA DE MONTEREY APTS. 869 6,839 7,708 3,811 1970 10/26/84 5-27.5 CHAPELLE LE GRAND APTS. 166 4,426 4,592 2,363 1972 12/05/84 5-27.5 CROSSWOOD PARK APTS 471 8,116 8,587 4,305 1977 12/05/84 5-29 FOREST RIDGE APTS. 701 7,810 8,511 4,141 1974 10/26/84 5-27.5 MOUNTAIN VIEW APTS. 1,289 9,310 10,599 4,774 1978 10/26/84 5-29 NORTH PARK APTS. 557 9,637 10,194 5,201 1968 11/14/84 5-27.5 PATHFINDER APTS. 2,753 12,240 14,993 7,228 1971 10/26/84 5-27.5 SCOTCHOLLOW APTS. 3,510 23,989 27,499 13,342 1973 10/26/84 5-27.5 SHADOWOOD APTS. 209 3,943 4,152 2,140 1974 11/14/84 5-27.5 TERRACE GARDENS APTS. 433 5,038 5,471 2,750 1973 10/26/84 5-27.5 TOWERS OF WESTCHESTER 529 15,525 16,054 8,410 1971 10/26/84 5-27.5 VISTA VILLAGE APTS. 568 5,954 6,522 3,032 1971 10/26/84 5-27.5 WATERGATE APTS. 263 6,607 6,870 3,456 1972 10/26/84 5-27.5 TOTAL $13,404 $128,455 $141,859 $70,019
(a) See description of Mortgage Loans Payable in "Note 7" of Notes to Combined Financial Statements. (b) The aggregate cost of land, building, personal property and improvements for financial reporting purposes differs from Federal income tax purposes by the imputed interest recorded at the various dates of acquisition. As a result of the Venture's reorganization and related debt modification, the aggregate cost for Federal income tax purposes of buildings and improvements was downwardly adjusted in 1993. The aggregate costs of the real estate for Federal income tax purposes at December 31, 1996 and 1995, is $157,577,233 and $175,133,000, respectively. The accumulated depreciation taken for Federal income tax purposes at December 31, 1996 and 1995, is $109,472,449 and $116,337,000, respectively. (c) Reconciliation of Real Estate
1996 1995 1994 Balance at beginning of year $155,440 $180,146 $204,480 Additions during the year: Improvements 2,029 2,415 3,408 Provision to reduce investment properties to fair value (1,850) (3,257) (3,774) Removal of properties due to foreclosures (5,781) (23,453) (22,858) Disposition of property (7,979) (411) (1,110) Balance at End of Year $141,859 $155,440 $180,146 Reconciliation of Accumulated Depreciation Balance at beginning of year $ 72,219 $ 77,414 $ 82,331 Depreciation expense 5,447 6,090 6,659 Removal of accumulated depreciation on foreclosed properties (3,618) (10,986) (10,835) Disposition of property (4,029) (299) (741) Balance at End of Year $ 70,019 $ 72,219 $ 77,414
16. Sale of Property The Partnership sold two of the retained properties, Carlisle Square Apartments and Bellevue Towers Apartments, to an unaffiliated party on April 19, 1996, and April 30, 1996, respectively. The properties sold on a net book value of $2,247,000 for Carlisle Square Apartments and $1,541,000 for Bellevue Towers Apartments. The Partnership received net proceeds from the sales of Carlisle Square and Bellevue Towers after payments of costs related to the sales of approximately $2,291,000 and $1,556,000, respectively. The total gains on the sale of Carlisle Square and Bellevue Towers were $44,000 and $15,000, respectively, and are included in other income in the accompanying combined statements of operations. The gain has been allocated to the partners in accordance with the Limited Partnership Agreement. Of the combined proceeds, $2,356,000 was used to pay down the mortgage note payable and $1,488,000, was used to repay advances from affiliates of the General Partner. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Managing General Partner of Partnership I and Partnership II at December 31, 1996, was VMS Realty Investment, Ltd., an Illinois General Partnership. Prudential-Bache Properties, Inc. was a minority General Partner of Partnership I at December 31, 1996. VMS Realty Investment, Ltd. is a limited partnership owned by Azel Realty Corporation (100% owned by Robert D. Van Kampen), PRM Realty Corporation (100% owned by Peter R. Morris), JAS Realty Corporation (100% owned by Joel A. Stone), Brewster Realty Inc. (which is controlled by Messrs. Van Kampen and Stone) and Residential Equities, Ltd. (which is 100% owned by Peter R. Morris) and XCC Investment Corporation (a Delaware Corporation). MS Realty Partners ("VMS"), an affiliate of the General Partner, assisted the Managing General Partner in the management and control of the Venture's affairs through November 17, 1993, and Strategic Realty Advisors, Inc. ("SRA"), also an affiliate of the General Partner, replaced VMS in assisting the Managing General Partner effective November 18, 1993. VMS Realty Partners is an Illinois general partnership whose partners are Van Kampen/Morris/Stone, Inc. (100% owned by Robert D. Van Kampen, Peter R. Morris and Joel A. Stone), Residential Equities, Ltd. (100% owned by Mr. Morris), XCC Investment Corporation (a subsidiary of Xerox Credit Corporation) and Brewster Realty, Inc. (100% owned by Messrs. Van Kampen and Stone). A substantial number of the officers of VMS are also officers of entities affiliated with VMS. The principal executive officers of VMS are the following: Joel A. Stone ............. President and Chief Executive Officer and Member of the Executive Committee Peter R. Morris ........... Member of the Executive Committee Robert D. Van Kampen ...... Member of the Executive Committee Stuart Ross ............... Member of the Executive Committee The principal executive officers of SRA are the following: Joel A. Stone ............. President and Chief Executive Officer Richard A. Berman ........... Senior Vice President/Secretary Thomas A. Gatti ............. Senior Vice President JOEL A. STONE, age 52, is President and Chief Executive Officer of Strategic Realty Advisors, Inc., since November 1993. From the inception in 1981 of VMS Realty Partners, he held the positions of President and then Chief Executive Officer. Mr. Stone began his career as an Internal Revenue Agent and worked as a certified public accountant and an attorney specializing in taxation and real estate law. In 1972, Mr. Stone co-founded the certified public accounting firm formerly known as Moss, Stone and Gurdak. In 1979, Mr. Stone joined the Van Kampen group of companies, a privately held business engaged in investment banking and in real estate activities. He served as Senior Vice President of Van Kampen Merritt, Inc. until its sale to Xerox Corporation in 1984. An alumnus of DePaul University, Mr. Stone earned a Bachelor of Science degree in Accounting in 1966 and a Juris Doctorate in 1970. Mr. Stone is a member of the Illinois Bar and a certified public accountant. PETER R. MORRIS, age 47, is a member of the Executive Committee of VMS, and is one of the three individuals owning the entities that own VMS. From July 1970 to June 1973, Mr. Morris was employed by Continental Wingate Company, Inc., a firm engaged in the development of inner city housing projects, in the capacities of Vice President/Finance, Director/Consulting Division and Executive Assistant to the President. He has published a book and numerous articles relating to real estate development and syndication. Mr. Morris has been involved in the real estate and finance business with Messrs. Van Kampen and Stone since 1977. He received a Bachelor of Arts degree (summa cum laude) from Princeton University in 1971 and a Juris Doctorate (cum laude) from Harvard Law School in 1975. ROBERT D. VAN KAMPEN, age 58, is a member of the Executive Committee of VMS and is one of the three individuals owning the entities that own VMS. Mr. Van Kampen has been involved in various facets of the municipal and corporate bond business for over 20 years. In 1967, he co-founded the company now known as Van Kampen Merritt, Inc., which specializes in municipal bonds and acts as a sponsor of unit investment trusts. The firm was sold to Xerox Corporation in January 1984. Mr. Van Kampen is a general partner of Van Kampen Enterprises. Mr. Van Kampen received his Bachelor of Science degree from Wheaton College in 1960. STUART ROSS, age 60, is a member of the Executive Committee of VMS. He is an executive vice president of Xerox Corporation and chairman and chief executive officer of Xerox Financial Services, Inc., a wholly owned subsidiary. Mr. Ross joined Xerox in 1966 and has held a series of financial management positions. He assumed his current position in May 1990. Prior to Xerox, Mr. Ross was a financial representative for The Macmillan Publishing Company from 1963 to 1966, and a public accountant for Harris, Kerr, Forster & Company from 1958 to 1963. Mr. Ross is a director of Crum and Forster, Inc. and Ekco Group, Inc., and a trustee of the State University of New York at Purchase. He received a bachelor of science degree in accounting from New York University in 1958 and a master of business administrative degree from the City College of New York in 1966. Mr. Ross is a certified public accountant. RICHARD A. BERMAN, age 45, is a Senior Vice President and General Counsel of Strategic Realty Advisors, Inc. From 1986 through 1993, Mr. Berman was employed by VMS Realty Partners and was First Vice President and Corporate Counsel. Prior to joining VMS Realty Partners, Mr. Berman was a partner in the law firm of Gottlieb and Schwartz with his practice concentrated in corporate and real estate law. He received a Juris Doctorate from Northwestern University School of Law Cum laude, 1976) and a Bachelor of Arts degree from the University of Illinois high honors, 1973). Mr. Berman is a member of the Illinois Bar. THOMAS A. GATTI, age 40, is a Senior Vice President - Partnership Accounting of Strategic Realty Advisors, Inc., effective November 18, 1993. Prior to this time, Mr. Gatti was First Vice President - Partnership Accounting with VMS Realty Partners, where he was employed since January, 1982. Prior to joining VMS Realty Partners, he was with Coopers & Lybrand. Mr. Gatti received a Bachelor of Science in Accounting from DePaul University in 1978. Mr. Gatti is a Certified Public Accountant. Prudential-Bache Properties, Inc. Prudential-Bache Properties, Inc.("PBP"), pursuant to the Partnership Agreement, does not participate in or exercise control over the affairs of the Partnership. The directors and officers of PBP are as follows: James M.Kelso.................. President, Chief Executive Officer, Chairman of the Board of Directors, and Director Barbara J.Brooks............... Vice President - Finance and Chief Financial Officer JAMES M. KELSO, age 41, is the President, Chief Executive Officer, Chairman of the Board of Directors and Director of PBP. He is a Senior Vice President of Prudential Securities Incorporated ("PSI"). Mr. Kelso also serves in various capacities for other affiliated companies. Mr. Kelso joined PSI in July 1981. BARBARA J. BROOKS, age 47, is the Vice President-Finance and Chief Financial Officer of PBP. She is a Senior Vice President of PSI. Ms. Brooks also serves in various capacities for other affiliated companies. She has held numerous positions within PSI since 1983. Ms. Brooks is a certified public accountant. There are no family relationships among any of the foregoing directors or executive officers. All of the foregoing directors and/or officers have indefinite terms. LEGAL PROCEEDINGS See "Item 3, Legal proceedings", for a discussion of legal proceedings during the past five years which may be material to an evaluation of the ability or integrity of any of the aforementioned directors or officers and VMS Realty Partners and its affiliates. ITEM 11. EXECUTIVE COMPENSATION None of the directors and officers of the General partner received any remuneration from the Partnership. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security ownership of certain beneficial owners. No person owns of record or is known by the Partnerships to own beneficially more than 5% of the outstanding Interests of either of the Partnerships as of December 31, 1996. (b) Security ownership of management. No partners of VMS Realty Investment, Ltd. or officers or directors of Prudential-Bache Properties, Inc., the general partners of the Partnerships, own any Limited Partnership Interests in the Partnerships. No general partners, officers or directors of the General Partners of the Partnerships possess the right to acquire a beneficial ownership of Interests of either of the Partnerships. (c) Changes in Control. The managing general partner of the Registrant is currently contemplating an agreement with Insignia Financial Group, Inc. ("Insignia") whereby an affiliate of Insignia would replace VMSRIL as the managing general partner of the Partnerships. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Note 10" of the Notes to Combined Financial Statements for information relating to transactions with affiliates. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following combined financial statements of the Registrant are included in Item 8: Combined Balance Sheets at December 31, 1996 and 1995. Combined Statements of Operations for the years ended December 31, 1996, 1995 and 1994. Combined Statements of Changes in Partners' Deficit for the years ended December 31, 1996, 1995 and 1994. Combined Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. Notes to Combined Financial Statements Schedules, other than those listed, are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein. The following items are incorporated: Part V - Amended Restated Certificate and Agreement of: Item 1(b)(i) Limited Partnership of VMS National Residential Portfolio I. Item 1(b)(ii) Limited Partnership of VMS National Residential Portfolio II. Item 1(b)(iii) Joint Venture Agreement between VMS National Residential Portfolio I and VMS National Residential Portfolio II. (b) No reports on Form 8-K were filed during the quarter ended December 31, 1996. (c) EXHIBIT INDEX EXHIBIT NO. DESCRIPTION (3) and (21) Portions of the Prospectus of the Partnership dated May 15, 1986 as supplemented by Supplement Numbers 1 through 7 dated December 18, 1986, February 11, 1987, March 31, 1987, August 19, 1987, January 4, 1988, April 18, 1988 and June 30, 1988 as filed with the Commission pursuant to Rule 424(b) and (c), as well as the Restated Limited Partnership Agreement set forth as Exhibit A to the Prospectus, are hereby incorporated by reference, specifically pages 15 - 21, 44 - 68, 76, 86 - 90, 106 - 108, A9 - A13, A16 - A20 and Supplements Numbers 1 and 2. (10A) Stipulation Regarding Entry of Agreed Final Judgement of Foreclosure and Order Relieving Receiver of Obligation to Operate Subject Property - Kendall Mall is incorporated by reference to the Form 10-QSB dated June 30, 1995. (27) Financial Data Schedule SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the egistrant has duly caused this report to be signed on its behalf by the ndersigned thereunto duly authorized. VMS NATIONAL PROPERTIES JOINT VENTURE (Registrant) VMS National Residential Portfolio I By: VMS Realty Investment, Ltd. Managing General Partner By: JAS Realty Corporation Date: March 28, 1997 By: /s/Joel A. Stone Joel A. Stone, President Date: March 28, 1997 By: /s/Thomas A. Gatti Thomas A. Gatti Senior Vice President and Principal Accounting Officer VMS National Residential Portfolio II By: VMS Realty Investment, Ltd. Managing General Partner By: JAS Realty Corporation Date: March 28, 1997 By: /s/Joel A. Stone Joel A. Stone, President Date: March 28, 1997 By: /s/Thomas A. Gatti Thomas A. Gatti Senior Vice President and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/Joel A. Stone President Joel A. Stone /s/Thomas A. Gatti Senior Vice President and Thomas A. Gatti Principal Accounting Officer EX-27 2
5 This schedule contains summary financial information extracted from VMS National Properties Joint Venture 1996 Year-End 10-K and is qualified in its entirety by reference to such 10-K filing. 0000789089 VMS NATIONAL PROPERTIES JOINT VENTURE 1,000 12-MOS DEC-31-1996 DEC-31-1996 1,788 0 151 0 0 0 141,859 70,019 76,779 0 153,066 0 0 0 (145,296) 76,779 0 25,200 0 0 37,472 60 16,652 0 0 0 0 14,095 0 1,823 1,957 0 Registrant has an unclassified balance sheet. Gain. Multiplier is 1.
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