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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 033-98766
AMERICAN EQUITY TRUST INC.
A Real Estate Investment Trust Offering
[American Equity Trust Inc.
Logo will go here]
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A Minimum of $15,000,000 in Units or Common Minimum of $2,006,400 in Shares of
Stock ("Shares") ($14.00 per Unit or $7.00 per Share) 8% Convertible Preferred Stock
(Minimum Purchase -- 50 Units or 100 Shares) ($13.20 per share -- no minimum purchase)
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American Equity Trust Inc. (the "Company") is a corporation which intends
to qualify as a real estate investment trust ("REIT") under federal tax laws and
will be self-administered. Generally, the Company expects to conduct its
operations through American Equity Trust Operating Partnership, L.P. (the
"Operating Partnership") although it is not required to do so. This Prospectus
describes: (i) an investment in Units (each Unit consisting of two shares of
Common Stock and one detachable Series "A" Warrant) or shares of Common Stock of
the Company, (the Company may sell as much as $35,000,000 in Units and Shares);
and (ii) an investment in shares of the Company's 8% Convertible Preferred Stock
("8% Preferred"). The Company plans to sell the 8% Preferred to institutional
investors only.
No Units or Shares will be issued pursuant to this Offering unless at least
$15,000,000 is invested in the Company (representing 2,142,858 Shares) by at
least 400 investors purchasing Units or Shares ("Minimum Common Offering"). No
8% Preferred will be issued until $15,000,000 of Units or Shares are purchased
and at least $2,006,400 is invested by at least 100 investors purchasing 8%
Preferred ("Minimum Preferred Offering"). The maximum value of securities that
can be sold in the offering is $50,000,004, consisting of $35,000,000 of Units
and Shares and $15,000,004 of 8% Preferred Stock (the "Maximum Combined
Offering"). See "Terms of the Offering." Upon completion by the Company of the
8% Preferred Offering, the Company will have a minimum of 152,000 and a maximum
of 1,136,364 shares of its 8% Preferred outstanding, each share of which is
convertible into two fully-registered, freely tradable shares of the Company's
Common Stock at $6.60 per share. 8% Preferred is entitled to one vote for each
share of Common Stock into which it is convertible and cumulative Distributions
with a limit of $1.30 per share per annum, and may not be converted into Common
Stock until at least 90 days after the Final Closing and then only for a period
ending 60 months thereafter. See "Description of Securities -- General -- 8%
Convertible Preferred Stock."
In order to maintain its qualification as a REIT, the Company Charter
contains limits on the aggregate value (as determined by market prices) of
shares of Common Stock and 8% Preferred which may be owned by investors. See
"Description of Securities -- Restriction on Ownership."
The Company intends to use investors' money together with borrowed funds to
purchase six real estate properties (four if only a Minimum Common Offering is
achieved). Between approximately 78% in the Minimum Common Offering and 86% in
the Maximum Combined Offering of the total amount of the money raised in the
Offering is expected to purchase Properties, and the balance is expected to be
used for working capital (9.5% Minimum Common Offering and 2% Maximum Combined
Offering), and fees and expenses (13.5% Minimum Common Offering and 9.9% Maximum
Combined Offering).
PURCHASING THE COMPANY'S UNITS, SHARES AND 8% PREFERRED INVOLVES CERTAIN
RISKS. (SEE PAGES 13 THROUGH 22.) INVESTORS SHOULD BE AWARE THAT:
. If the company raises only $15,000,000, it will have little
diversification, and an underperforming property will have a greater
negative affect on the company.
. In the case of the Minimum Common Offering, the Company's Properties
will be geographically concentrated in the Phoenix, Arizona,
metropolitan area, and the results to be achieved by such Properties
will be particularly sensitive to the general economic climate in such
area.
(Continued on following page)
SEE THE "RISK FACTORS" SECTION OF THIS PROSPECTUS FOR A COMPLETE DISCUSSION
OF THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMPANY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PRICE SELLING PROCEEDS TO
TO PUBLIC COMMISSION(2) COMPANY(3)(4)
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Per Unit(1) $ 14.00 $ 1.05 $ 12.95
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Per Share $ 7.00 $ .53 $ 6.47
- ---------------------------------------------------------------------------------------
Total Minimum Common Offering $15,000,000 $1,125,000 $13,875,000
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Total Maximum Common Offering $35,000,000 $2,625,000 $32,375,000
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Per Share of 8% Preferred $ 13.20 $ .66 $ 12.54
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Total Minimum Preferred Offering(4) $ 2,006,400 $ 100,320 $ 1,906,080
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Total Maximum Preferred Offering(4) $15,000,004 $ 750,000 $14,250,004
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Total Combined Maximum Offering $50,000,004 $3,375,000 $46,625,004
=======================================================================================
(footnotes on following page)
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The date of this Prospectus is June 20, 1996
BROOKSTREET SECURITIES CORPORATION
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(Continued from outside front cover page)
. The Company will use leverage to acquire its Properties, which would
obligate the Company to service indebtedness regardless of income
generated by the Properties. Failure to service debt could cause a
lender to foreclose on the Property causing a loss of investment. The
Company's organization documents contain no limit on the amount of
debt the Company may incur. However, the Company does not intend to
incur debt in excess of 50% of the gross asset value of its
Properties.
. One Property to be acquired by the Company has experienced losses in
the past (an aggregate deficit of $2,736,000 resulting from such
losses over the past three calendar years) and could continue to incur
losses.
. There is a potential for a reduction in the Company's cash flow and
its rate of distributions to shareholders if a tenant becomes subject
to bankruptcy proceedings or otherwise fails to fulfill its monetary
obligations to the Company.
. There will be immediate and substantial dilution to the purchasers of
the common stock in the Offering (estimated at $1.51 in a Minimum
Common Offering and $1.23 in a Maximum Common Offering.
. Subject to the Company's continued compliance with listing guides, the
Common Stock has been approved for trading on the NASDAQ National
Market. Trading is expected to commence after the Final Closing which
could occur as long as six months after Initial Closing, thereby
delaying an investor's ability to liquidate its shares. A possibility
exists that such trading may not materialize; in such case, investors
would be able to resell their securities, if at all, only at a
significant discount.
. If the Company fails to qualify as a REIT, it will be taxed as a
regular corporation. If the Operating Partnership fails to qualify for
taxation as a partnership, it will be treated as an association
taxable as a corporation. Either event would reduce the amount
available for distribution to shareholders.
Footnotes for table at bottom of outside front cover page
(1) A Unit consists of two shares of Common Stock and one detachable Series "A"
Warrant to purchase one share of Common Stock for $7.00. The Series "A"
Warrants are immediately exercisable by the holders thereof for one freely-
trading Share.
(2) The sales commission is 7.5% for the Units and Shares and five percent for
the 8% Preferred. If the Minimum Common Offering is successfully
completed, the Company will pay certain fees and expenses reimbursements to
the Sales Agent and Soliciting Dealers in addition to the Selling
Commission. See "The Offering" section of this Prospectus for a complete
description of the amount and terms of such fees and expenses
reimbursements.
(3) Proceeds calculated before deducting certain Organization and Offering
Expenses (excluding selling commissions) payable by the Company, which
expenses are estimated to be $900,000 in a Minimum Common Offering,
$930,000 in a Minimum Combined Offering, $1,120,000 in a Maximum Common
Offering and $1,570,000 in a Maximum Combined Offering. See "The
Offering."
(4) The Ownership Limit of 9.8% will also apply.
The money accepted by the Sales Agent and Soliciting Dealers from the sale
of Units, Shares and 8% Preferred will be promptly deposited into an interest
bearing escrow account at Trust Company of America. The interest earned in
this account will be paid to investors. Except as provided in "Terms of the
Offering," an Initial Closing will occur shortly after $15,000,000 of Units and
Shares are sold. Investors will become shareholders when their funds are
transferred from the escrow account to the Company's account. Within 180 days
after the Initial Closing, the Offering will be terminated. If the Company does
not raise $15,000,000 through the sale of Units and Shares before December 17,
1996 (180 days from the date hereof), investors' funds in the escrow account
(including funds deposited for sales of Units, Shares and 8% Preferred) will be
returned promptly and the Company will stop selling Units, Shares and 8%
Preferred. Assuming that the Initial Closing occurs on the 179th day after the
date of this Prospectus, the last possible termination date for the Offering
will be June 14, 1997. See "Terms of the Offering" and "The Offering -- Escrow
Arrangements."
UNTIL SEPTEMBER 29, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY........................................................................................ 1
The Company............................................................................................. 1
Risk Factors............................................................................................ 1
Conflicts of Interest................................................................................... 3
Formation Transactions.................................................................................. 3
The Operating Partnership............................................................................... 6
Terms of the Offering................................................................................... 6
Estimated Use of Proceeds............................................................................... 6
Management.............................................................................................. 6
Investment Objectives and Policies...................................................................... 7
Description of Properties............................................................................... 7
Tax Status.............................................................................................. 8
Description of Shares and 8% Preferred.................................................................. 8
The Offering............................................................................................ 10
Glossary................................................................................................ 10
Summary Financial Information........................................................................... 11
RISK FACTORS.............................................................................................. 13
Real Estate Investment Risks............................................................................ 13
Amount Available for Investment Limits Diversification............................................... 13
Geographic Concentration............................................................................. 13
Historical Operating Losses of Prior Ownership Group................................................. 13
Risks Associated with Borrowing...................................................................... 13
Dependence on Tenants................................................................................ 14
Bankruptcy of Tenants................................................................................ 14
Delay in Investment in Real Estate................................................................... 14
Competition for Investments.......................................................................... 14
Potential Environmental Liabilities.................................................................. 15
Risk of Providing Financing to Purchasers of Company's Properties.................................... 15
Risk of Incurring Uninsured Losses................................................................... 15
Casualty-Related or Condemnation-Related Lease Terminations.......................................... 16
Other Real Estate Investment Risks................................................................... 16
General Investment Risks................................................................................ 16
Immediate and Substantial Dilution................................................................... 16
Risk of Investment of Proceeds of the Offering....................................................... 16
Risk of Inadequate Financing......................................................................... 16
Lack of Operating History............................................................................ 17
Reliance on Management............................................................................... 17
Ownership Limit...................................................................................... 17
Potential Securities Act Liability................................................................... 17
Market Price of Shares May Not Reflect Property Values............................................... 18
Delay in Trading..................................................................................... 18
Requirement of Supermajority Shareholders Votes...................................................... 18
Limited Liability of Officers and Directors.......................................................... 18
Effect of Shares Available for Future Sale........................................................... 18
Benefits to Officers and Directors................................................................... 18
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Tax Risks................................................................................................. 19
Failure to Qualify as a REIT or Partnership for Tax Purposes......................................... 19
Failure to Comply with Anti-Abuse Regulations........................................................ 19
Adverse Effect of REIT Minimum Distribution Requirements............................................. 20
Changes in Tax Laws.................................................................................. 20
Other Investment Risks.................................................................................. 20
Maryland Law Limitations on Acquisitions and Changes in Control...................................... 20
Changes in Investment and Financing Policies......................................................... 21
Risk of Insufficient Working Capital................................................................. 21
Investments in Interest Sensitive Investments........................................................ 21
Investment by Pension or Profit Sharing Trusts, Keoghs or IRAs....................................... 22
Investment Company Act of 1940....................................................................... 22
THE COMPANY............................................................................................... 22
General................................................................................................. 22
Growth Strategy......................................................................................... 23
Acquisition Strategy.................................................................................... 23
TERMS OF THE OFFERING..................................................................................... 23
ESTIMATED USE OF PROCEEDS................................................................................. 25
DISTRIBUTION POLICY....................................................................................... 27
CAPITALIZATION............................................................................................ 28
DILUTION.................................................................................................. 28
SELECTED FINANCIAL INFORMATION............................................................................ 30
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................................... 33
Overview................................................................................................ 33
Results of Operations -- Proposed Acquisitions.......................................................... 33
Results of Operations -- Prior Ownership Group.......................................................... 34
Liquidity and Capital Resources......................................................................... 35
Inflation............................................................................................... 37
CONFLICTS OF INTEREST..................................................................................... 38
MANAGEMENT................................................................................................ 38
Executive Officers and Directors........................................................................ 39
Committees of the Board of Directors.................................................................... 41
Directors and Executive Officers Compensation and Incentives............................................ 41
Limitation of Liability and Indemnification............................................................. 42
Stock Incentive Plan.................................................................................... 43
401(k) Plan............................................................................................. 44
Employment Agreements................................................................................... 44
PRINCIPAL SHAREHOLDERS.................................................................................... 45
Principal Shareholders.................................................................................. 45
Director and Officer Stock Ownership.................................................................... 46
INVESTMENT OBJECTIVES AND POLICIES........................................................................ 46
Investment Objectives................................................................................... 46
Investment Limitations.................................................................................. 49
Change in Investment Objectives and Limitations......................................................... 49
Leasing and Property Management......................................................................... 50
Financing Strategy/Leverage............................................................................. 50
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OPERATING PARTNERSHIP AGREEMENT........................................................................... 51
Management.............................................................................................. 51
Transferability of OP Units............................................................................. 51
Capital Contributions................................................................................... 51
Redemption Rights....................................................................................... 52
Registration Rights..................................................................................... 53
Operations.............................................................................................. 53
Distributions........................................................................................... 53
Allocations............................................................................................. 53
Term.................................................................................................... 54
Tax Matters............................................................................................. 54
DESCRIPTION OF PROPERTIES................................................................................. 54
Properties.............................................................................................. 55
Acquisitions............................................................................................ 55
Competition............................................................................................. 55
Property Descriptions................................................................................... 56
DESCRIPTION OF SECURITIES................................................................................. 61
General................................................................................................. 61
Restriction on Ownership................................................................................ 64
Distributions........................................................................................... 66
Repurchase of Shares.................................................................................... 66
Transfer Agent.......................................................................................... 66
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BY-LAWS................................................................................................... 67
Classification of the Board of Directors................................................................ 67
Removal of Directors.................................................................................... 67
Business Combinations................................................................................... 67
Control Share Acquisitions.............................................................................. 68
Amendment to the Company's Charter...................................................................... 68
Shareholder Meetings and Action By Written Consent...................................................... 69
Limitation of Liability and Indemnification............................................................. 69
Anti-Takeover Effect of Certain Provisions of Maryland Law and of the Company's
Articles of Incorporation and By-Laws................................................................... 69
SHARES AVAILABLE FOR FUTURE SALE.......................................................................... 70
FEDERAL INCOME TAX CONSIDERATIONS......................................................................... 71
Summary of Tax Opinions................................................................................. 71
Federal Income Taxation of the Company.................................................................. 72
Requirements for Qualification.......................................................................... 72
Failure to Qualify...................................................................................... 76
Taxation of U.S. Shareholders........................................................................... 77
Special Tax Considerations for Foreign Shareholders..................................................... 79
Information Reporting Requirements and Backup Withholding Tax........................................... 80
Anti-Abuse Regulations.................................................................................. 81
Tax Aspects of the Operating Partnership................................................................ 81
State and Local Tax..................................................................................... 84
ERISA CONSIDERATIONS...................................................................................... 85
Special Investment Considerations for Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs... 85
Status of the Company under ERISA....................................................................... 86
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THE OFFERING.............................................................................................. 87
Offering of Common Stock................................................................................ 87
8% Preferred Offering................................................................................... 88
Escrow Arrangements..................................................................................... 89
REPORTS TO SHAREHOLDERS................................................................................... 90
LEGAL OPINIONS............................................................................................ 90
EXPERTS................................................................................................... 90
SALES LITERATURE.......................................................................................... 91
FURTHER INFORMATION....................................................................................... 91
GLOSSARY.................................................................................................. 92
FINANCIAL STATEMENTS...................................................................................... F-1
ORDER FORM (SPECIMEN)..................................................................................... A-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. The more detailed
information following this summary is set forth in the same order as the topics
appearing in this summary. Investors are encouraged to read this Prospectus for
a complete explanation of an investment in the Company. See "Glossary" for the
definition of certain capitalized terms used in this Prospectus.
THE COMPANY
The Company has been formed to operate as a real estate investment trust
under the Internal Revenue Code of 1986, as amended (the "Code") and will be
self-administered. The Company proposes to acquire a diversified portfolio of
garden-style apartments and suburban commercial and retail income properties in
the Western United States. The Properties will be leased to a variety of
residential, retail and commercial tenants. The Company will contribute all of
the net proceeds from the Offering to American Equity Trust Operating
Partnership, L.P., a Delaware limited partnership, in which the Company is the
sole general partner (the "Operating Partnership"), and will own an initial 99%
interest in the Operating Partnership. Until other limited partners are
admitted to the Operating Partnership, the remaining one percent will be held by
Arthur P. Herring and Dois Brock. See "Management -- Executive Officers and
Directors." Upon the admission of other limited partners, Messrs. Herring and
Brock will resign as limited partners. See "Operating Partnership Agreement --
Capital Contribution." The Operating Partnership will acquire certain of the
properties described under "Description of Properties" either directly or by
forming new limited partnerships with the existing owners.
The Company, subject to the discretion of the Board of Directors, intends
to make regular quarterly distributions commencing with the first full calendar
quarter after the Initial Closing. Such distributions will likely be partially
a return of capital. The Company must pay out 95% of REIT Taxable Income to
qualify as a real estate investment trust for income tax purposes. See
"Distribution Policy" and "Federal Income Tax Considerations -- Federal Income
Taxation of the Company."
RISK FACTORS
An investment in the Company has many risks. The "Risk Factors" section of
this Prospectus contains a detailed discussion of the most important risks. The
risk factors are organized into Real Estate Investment Risks (the risks of the
types of investments in real estate that the Company will make), Corporate
Investment Risks (the risks related to an investment in a corporation), Tax
Risks (the risks arising from the real estate investment trust tax laws as they
apply to the Company) and Other Investment Risks. Please refer to the "Risks
Factors" section for a discussion of the following risks:
Real Estate Investment Risks
. Assuming a Minimum Common Offering, the Company will only be able to
purchase four Properties (all apartment buildings), the effect of
which would be to limit significantly or eliminate the advantages
associated with diversification. An underperforming property will,
accordingly, have a material adverse impact on the Company's results
of operations.
. Assuming a Minimum Common Offering, three of four of the Company's
investments in real estate will be geographically concentrated in the
Phoenix, Arizona, metropolitan area. Such market has experienced a
recession over the past several years. The consequences of such
geographical concentration is that the Properties will be particularly
sensitive to the economic condition in such area.
1
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. Some of the acquisitions of Properties will be made by borrowing a
portion of the purchase price. The Company's organizational documents
contain no limits on the amount of debt it may incur. While the
Company does not intend to incur debt in excess of 50% of the gross
assets value of its Properties, there is no limit on borrowings on
individual Properties. The use of leverage presents an element of
risk in the event that cash flow is insufficient to meet debt
obligations. Failure to service debt on a Property could result in
foreclosure by the lender, causing a loss of investment in the
Property. In addition, lenders may seek to impose restrictions on
future borrowings, distributions and operating policies.
. One of the Properties to be acquired by the Company has experienced
historical operating losses (an accumulated deficit of $2,736,000
resulting from such losses over the past three calendar years). Such
Property may continue to do so. In such case, the Company may not be
able to service its debt or Distributions might be reduced.
. The financial failure of a tenant could result in the termination of
its lease which, in turn, might cause a reduction in the cash flow of
the Company and/or decrease the value of the Property in question.
Likewise, the financial failure of a tenant could cause such tenant to
become the subject of bankruptcy proceedings which, in turn, could
result in a termination of the lease (causing a reduction in cash flow
of the Company and the value of the Property) or could adversely
affect the lease relationship by potentially capping the Company's
recovery of any claims against the bankrupt tenant.
. In addition to the foregoing risks, there is a variety of other risks
associated with investment in real estate generally, which could
affect property values. Such risks include competition, general
economic conditions, governmental regulations, availability of
insurance and others. A return on an investment in the Company will
depend, in part, on how quickly the Company is able to locate and
acquire suitable Properties.
General Investment Risks
. Immediate dilution of $1.51 per Share in a Minimum Common Offering and
$1.23 per Share in a Maximum Common Offering, in the net tangible book
value of the Company's Common Stock will be experienced by purchasers
of Shares.
. The Company's ability to achieve its stated investment objectives and
to make Distributions depends on the performance of management in the
acquisition and oversight of investments for the Company. The
Investors will have no opportunity to evaluate the transaction terms
or other relevant economic or financial data concerning investments to
be made by the Company. There can be no assurance that income-
producing properties will be available on economically attractive
terms.
. The potential profitability of the Company could be affected by the
amount of funds from the Offering at its disposal. The investment of
a smaller sum of money will result in the acquisition of fewer
Properties and, accordingly, less diversification of the real estate
portfolio. Lack of diversification will increase the potential
adverse affect on the Company of a single underperforming investment.
. Historically, shares of real estate companies have traded at a
discount to their proportionate interest in the appraised value of the
underlying assets.
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. The Company has no operating history. Investors will be relying
entirely on the ability of the officers and directors of the Company.
While management is experienced in investment and management of real
estate, it has no experience in the operation of a real estate
investment trust. Management decisions, therefore, could affect the
value of the assets.
. The Articles of Incorporation of the Company restrict ownership of
more than 9.8% of the value of the Company's outstanding equity shares
by one person. Additionally, to protect the Company's qualification as
a REIT, an ownership limit was placed on the purchasers of 8%
Preferred so that no person could Beneficially Own 8% Preferred and
other equity securities of the Company in excess of five percent of
the value of the Company's outstanding equity shares. Value is
determined by market prices. Such restrictions may discourage a change
of control.
. The Company has potential rescission liability for the sale of
approximately $56,000 principal amount of its 10% Convertible
Promissory Notes, due October 1, 1996, Series B which were sold
without an exemption from registration under the Securities Act.
. Subject to the Company's continued compliance with listing guides, the
Common Stock has been approved for trading on the NASDAQ National
Market. Trading is expected to commence after the Final Closing which
could occur as long as six months after the Initial Closing, thereby
delaying an investor's ability to liquidate its shares. A possibility
exists that no trading will materialize in which case an investor may
be able to resell the securities, if at all, only at a significant
discount.
Tax Risks
. If it fails to qualify as a REIT, the Company will be taxed as a
corporation and would not be allowed a deduction for distributions to
shareholders which would adversely affect cash flow available for
Distributions.
. If the Operating Partnership were not deemed to be a partnership for
tax purposes, it would be taxed as a corporation and the Company could
cease to qualify as a REIT as a result thereof which, in each case,
would adversely affect cash flow available for Distributions to
shareholders.
CONFLICTS OF INTEREST
Arthur P. Herring, the Chief Executive Officer of the Company, has been
engaged in the acquisition, financing and management of real estate properties
for the last 24 years through various corporate and other private entities, in
one of which he will continue to retain an interest. In the future, neither Mr.
Herring nor any of the principal officers of the Company may acquire an interest
in properties or develop or manage properties which meet the investment
parameters of the Company without the consent of the Board of Directors,
including a majority of the Independent Directors, of the Company. The
"Conflict of Interests" section of this Prospectus more fully describes
potential conflicts of interest and the manner in which such conflicts will be
managed.
FORMATION TRANSACTIONS
The principal transactions in connection with the formation of the Company
and the Operating Partnership and the acquisition of the Properties
(collectively, the "Formation Transactions") have been and will be, as follows:
. In 1993, American Equity Trust Funding, Inc., a California corporation
("Funding Co."), was organized to explore the formation of a REIT and
to raise funds to finance the formation of the Company and the
Company's public offering of equity securities. In October 1995, when
Funding Co. had a total of 86 shareholders, the shareholders of
Funding Co. (other than
3
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management of the Company) exchanged their shares for an aggregate
114,286 shares of the Company's Common Stock, 151,500 shares of the
Company's 1995 Convertible Preferred Stock and 182,133 Series "D"
Warrants. At the same time, members of management of the Company plus
a principal shareholder of the Company exchanged their shares for an
aggregate 870,000 shares of the Company's 1995 Convertible Preferred
Stock and 281,000 Series "D" Warrants. The allocation of such
securities is as follows:
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Number and Class of Security Allocated to
---------------------------- ------------
1995 Convertible Series "D"
Common Stock Preferred Stock Warrants
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114,286 151,500 182,133 Shareholders in Funding Co.
not affiliated with the
Company
-0- 95,000(1) 45,000(2) Dois Brock (President of the
Company)
-0- 360,000(1) 107,500(2) The Danube Rousse Inc.,
an affiliate of Arthur P.
Herring (Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer of the
Company)
-0- 360,000(1) 107,500(2) Regent IV Trust, a principal
shareholder of the Company
-0- 25,000(1) -0- Jacob Segal (Vice President of
the Company)
-0- 30,000(1) 10,000(2) Gerald S. Weisstein (Director
of the Company)
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(1) The economic value of such shares in excess of the amount
contributed for shares in Funding Co. was negligible. However,
each of such shares have equal voting power with shares of
Company Common Stock.
(2) The Series "D" Warrants had no economic value at the time of
issuance for Funding Co. shares. See "Description of Securities
-- General -- Series "D" Warrants" for restrictions of the
exercisability of such Warrants. If exercisable, the exercise
price is $3.50 per share, half of the per share offering price of
Shares in this Prospectus.
. In October 1995, the Company formed the Operating Partnership with
Messrs. Herring and Brock acting as initial limited partners. Messrs.
Herring and Brock will resign as limited partners upon admission of
additional limited partners to the Operating Partnership.
. The Company will raise a minimum of $15,000,000 from sale of Units or
Shares. It may also raise a minimum of $2,006,400 from sale of 8%
Preferred. The net proceeds from such sales will be contributed
directly to the Operating Partnership and used to acquire Properties.
See "Terms of the Offering." Upon completion of such transactions, the
Company will have an initial 99% general partnership interest in the
Operating Partnership.
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. Essentially, simultaneously with the Initial Closing, the Operating
Partnership will acquire certain Properties. See "Description of
Properties." None of the Company's officers or directors are
affiliated with the sellers of the Properties. The purchase price for
each of the Properties was determined by arm's-length negotiation
between the Company and the sellers of such Properties. No appraisals
were obtained for acquisition purposes as the Company has determined
the value of the Properties is adequately reflected by their
acquisition costs. This determination was made by comparing the
overall income capitalization rates, values per square foot, and/or
values per unit to comparable sales and listings in the applicable
marketplaces. See "-- Description of Properties" for information about
sellers' book values for these Properties.
. The Company will enter into employment agreements with Mr. Herring and
Mr. Brock. Each will be for a five-year term subject to automatic one-
year extensions unless terminated. The annual base compensation for
Messrs. Herring and Brock is $100,000 and $72,000, respectively.
Performance bonuses based on REIT industry standards will be
considered by the Compensation Committee. Each will have certain
"piggyback" registration rights, and each will be entitled to
significant severance payments in the event of a change of control of
the Company. See "Management --Employment Agreements" and "Risk
Factors -- General Investment Risks -- Benefits to Officers and
Directors." Upon completion of the Initial Closing, the Company
expects to have eight full-time employees.
The following diagram shows the beneficial ownership of the Company and the
Operating Partnership upon completion of the formation of the Company and the
Operating Partnership and assumes completion of the Minimum Common Offering:
-------------------------------------------------------------
American Equity Trust Inc.
(the "Company")
. 84.4% owned by public shareholders
. 15.6% owned by Management(1)
-------------------------------------------------------------
|
|
-------------------------------------------------------------
American Equity Trust Operating Partnership, L.P.
(the "Operating Partnership")
. 99% owned by the Company, the sole
general partner of the Operating Partnership
. 1% owned initially by OP Limited Partners
who are members of management
-------------------------------------------------------------
|
|
-----------------------------------
Four Properties(3)(4)(5)
100%
-----------------------------------
(1) Includes holdings of 1995 Convertible Preferred Stock which has voting
rights. Excludes potential increase in ownership through exercise of
options and warrants not presently exercisable.
(2) No interests in the Operating Partnership (the "OP Units") are expected to
be exchanged for Properties immediately after either the Initial or the
Final Closing. Messrs. Herring and Brock, in the aggregate, hold a one
percent interest in the Operating Partnership for the sole purpose of
forming it and having it available for future property acquisitions using
OP Units. Upon the admission of additional OP Limited Partners, Messrs.
Herring and Brock will withdraw from the Operating Partnership in exchange
for a return of their nominal capital contributions.
(3) Sandpainter Apartments, Northwest Garden Apartments, Orangewood Place
Apartments and Arrow Village Apartments. Assumes completion of a Minimum
Common Offering.
5
<PAGE>
(4) If an aggregate of $35,000,000 of Units, Shares and 8% Preferred is sold in
this Offering, two additional Properties will be acquired (Hewlett-Packard
Building and Westwood Self-Storage/Sportmart Building) by forming two new
limited partnerships with the respective sellers. See "Description of
Properties."
(5) If more than an aggregate of $35,000,000 of Units, Shares and 8% Preferred
is sold in this Offering, the excess will be used to reduce debt on the
Properties and to acquire one or more additional properties of the nature
described in "Investment Objectives and Policies."
THE OPERATING PARTNERSHIP
The Company will contribute the net proceeds of the Offering to the
Operating Partnership in exchange for an approximately initial 99% general
partnership interest. The Operating Partnership was formed under Delaware law
in October 1995. The Operating Partnership will own and lease the Properties
directly or through limited partnerships, except to the extent the Company
decides to hold a property directly. Pursuant to the Agreement of Limited
Partnership of the Operating Partnership (the "Operating Partnership
Agreement"), the Company is the sole general partner, and, as such, will have
responsibility and discretion for the management and control of the Operating
Partnership and its assets. The Operating Partnership's limited partners (the
"OP Limited Partners"), in their capacity as OP Limited Partners, will have no
authority to transact business for, or participate in, the management or
decision-making of the Operating Partnership, except as may be required by
applicable law. See "Operating Partnership Agreement."
TERMS OF THE OFFERING
The Company is offering its Units, Shares and 8% Preferred on a "best
efforts" basis, which means that no one is guaranteeing how much capital will be
raised. No Units or Shares will be issued pursuant to this Offering unless at
least $15,000,000 of Units or Shares is purchased by more than 400 investors.
The Company may sell as much as $35,000,000 in Units and Shares. In addition,
the Company may sell a minimum of $2,006,400, and as much as $15,000,004, of 8%
Preferred. No sales of 8% Preferred will occur unless the Minimum Common
Offering is achieved.
ESTIMATED USE OF PROCEEDS
The money raised in this offering will be combined with borrowed funds to
purchase real estate and to pay all of the Company's expenses. Depending on the
size of the Offering, between approximately 78% and 86% of the money raised in
the Offering is expected to be invested in real estate and the balance will be
used as working capital, to pay acquisition fees and expenses and to pay
expenses and fees of the Offering. A detailed breakdown of the Company's
estimates of the use of the capital raised in the Offering is provided in the
"Estimated Use of Proceeds" section of this Prospectus.
MANAGEMENT
The Board will oversee the management of the Company. The Board consists
of five directors, three of whom are not employees of the Company. The
directors were elected to staggered three year terms by the shareholders.
For the background of the individuals responsible for the management of the
Company, please see the "Management" section of this Prospectus.
The Company has offices at 2221 Rosecrans Avenue, Suite 110, El Segundo,
California 90245, telephone: 310-536-0926 and telecopier: 310-643-8353.
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objectives are:
. To pay predictable quarterly Distributions which grow as a result of
increases in property cash flows and capital gains from sale of
properties.
. To purchase a portfolio of income-producing residential, retail and
commercial real estate that will increase in value.
. To increase the Company's equity in its real estate by making regular
mortgage principal payments.
The Company will try to achieve these objectives by purchasing a
diversified portfolio of garden-style apartments and suburban commercial and
retail income properties in the Western United States. The Properties will be
leased to a variety of residential, retail and commercial tenants. The amount
of money raised by the Company in the Offering and borrowed from lenders will
affect the number of Properties the Company will be able to purchase. The more
Properties the Company purchases, the more diversified it will be and the less
it will be affected by any single Property that does not perform as expected.
While the Company intends to hold each Property it acquires for an extended
period of time, circumstances may require the early sale of a certain Property.
It may also elect to refinance one or more of its Properties. The Company may
reinvest all or a portion of the proceeds of the sales or refinancing of
Properties.
The Company's investment objectives can be changed by the Board of
Directors without the approval of the shareholders. While the Company intends
to achieve its objectives by purchasing a diversified portfolio of income
producing properties (see "Description of Properties"), the Company's investment
policies may vary as new investment techniques evolve. The techniques used by
the Company to achieve its objectives may be changed by the Board (including a
majority of the Independent Directors) without the approval of the shareholders.
Any such change may affect the types of non-real estate short term investments
in which the Company invests during the interim periods in which capital is not
fully invested in Properties.
DESCRIPTION OF PROPERTIES
The Company has contracts to purchase interests in six Properties. The
table set forth below identifies such Properties in their anticipated order of
acquisition, their respective use, their respective purchase prices and their
respective sellers' book value. If a Minimum Common Offering, or a Minimum
Combined Offering, is completed, Management expects to acquire only the first
four of such Properties. There can be no assurance that the purchase of all of
such Properties will occur.
<TABLE>
<CAPTION>
Properties in the Expected Order in Purchase Sellers' Book
Which Purchases Will be Made (1)(2) Use Price(3) Value(4)
----------------------------------- --- ----- -----
<S> <C> <C> <C>
A. Sandpainter Apartments 116 Unit garden-style apartments $ 2,200,000 $ 1,667,144
2225 West Indian School Road
Phoenix, Arizona
B. Northwest Garden Apartments 198 unit garden-style apartments $ 6,950,000 $ 3,118,666
9350 North 67th Avenue
Peoria, Arizona
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C>
C. Orangewood Place Apartments 84 unit garden-style apartments $ 1,800,000 $ 1,182,869
7328 North 27th Avenue
Phoenix, Arizona
D. Arrow Village Apartments 82 unit garden-style apartments $ 3,250,000 $ 2,209,379
186615 Arrow Highway
Azusa, California
E. Westwood Self-Storage 36,000 square foot retail use and $12,900,000 $ 9,688,890
and Sportmart Building 104,000 square foot self storage
1901 Sepulveda Boulevard
Los Angeles, California
F. Hewlett-Packard Building 87,665 square foot Class A, eight $16,000,000 $13,767,124
5805 Sepulveda Boulevard story office building
Van Nuys, California
</TABLE>
- -----------------------
(1) While management expects to acquire the Properties in this order,
circumstances may change requiring rearrangement of the acquisition order.
(2) Please refer to "Description of Properties" for a more detailed description
of such Properties' use and price.
(3) The purchase price for each Property was determined through arm's-length
bargaining with unaffiliated sellers. In conducting such negotiations, the
Company's management had access to per unit or per square foot prices (as
applicable), and capitalization rates for comparable buildings. Management
believes the per unit or per square foot sales price or capitalization rate
support the purchase prices. No independent appraisals were obtained.
(4) These amounts represent sellers' book value for the Properties at December
31, 1995, net of depreciation, and are based on information received from
sellers by the Company.
The Company is currently evaluating other potential property acquisitions.
Prior to the Initial or Final Closing, when it appears likely that the Company
will purchase one or more additional Properties, a description of such
Properties will be made available to all potential investors in a document
called a supplement. Investors should not assume that transactions described in
a supplement will necessarily be completed. It is possible that after the
supplement is distributed, the Company or seller will decide not to complete the
sale.
TAX STATUS
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ending December 31, 1996. If the
Company qualifies for taxation as a REIT, then under current federal income tax
laws, the Company generally will not be taxed at the corporate level to the
extent it currently distributes at least 95% of its net taxable income to its
shareholders. Even if the Company qualifies for taxation as a REIT, the Company
may be subject to certain federal, state and local taxes on its income and
property and to federal income and excise tax on its undistributed income.
Thelen, Marrin, Johnson & Bridges, tax counsel to the Company, will provide an
opinion addressing (i) the correctness and completeness of the description of
the tax consequences material to the purchase, ownership and disposition of the
Common Stock; (ii) the classification of the Operating Partnership as a
partnership for federal income tax purposes and (iii) the organization and
proposed method of operation of the Company to enable it to qualify as a REIT
under the Code.
DESCRIPTION OF SHARES AND 8% PREFERRED
General
A shareholder's investment will be recorded on the books of the Company.
Certificates representing the securities offered hereby will be issued to
investors as soon as practical. A shareholder wishing to transfer his or her
Shares and 8% Preferred will be required to send the applicable certificate with
the transfer request to the
8
<PAGE>
Company's transfer agent. The Company will provide the required form upon
request. The Company expects to make Distributions quarterly beginning after the
first full quarter of the Company's operations as a REIT. The Board will
determine the amount of the Distributions paid by the Company.
Shareholder Voting Rights and Limitations
Ameeting of shareholders will be held each year for the election of
directors whose term has expired. Other business matters may be presented at
the annual meeting or at special shareholder meetings. Shareholders are
entitled to one vote for each share of Common Stock owned on all matters that
must be voted on by shareholders, including the election of directors. In
addition to voting rights accorded to the Common Stock, each share of 8%
Preferred and 1995 Convertible Preferred Stock is entitled to one vote for each
share of Common Stock into which it is convertible, disregarding fractional
shares. Shareholders who are in the minority on questions presented for
shareholder vote will be bound by the decision of the applicable majority on the
question voted upon.
Shareholder approval is required under Maryland law and the Company's
Charter and bylaws (the "Organizational Documents") for certain types of
transactions and corporate action, including mergers, share exchanges, asset
sales, amendments to the Articles of Incorporation and dissolution. Because the
Company's Charter does not provide otherwise, a two-thirds vote of the Company's
shareholders is required to approve such actions. Shareholders objecting to the
terms of a merger, sale or other disposition of substantially all of Company's
assets have the right to petition a court for the appraisal and payment of the
fair value of their Shares in certain instances.
Liquidation Preference; Distributions; Convertibility of 8% Preferred
Upon liquidation of the Company, holders of outstanding 8% Preferred will
be entitled to receive $13.20 per share, plus any accrued but unpaid
Distributions, before any liquidating distributions are paid to other
shareholders. Each share of 8% Preferred is entitled to receive cumulative
Distributions equal to the greater of eight percent of the preferred liquidation
amount or the per share combined Distributions paid on two shares of the Common
Stock, with a maximum of $1.30 per share. Distributions accrue from the date of
issuance of 8% Preferred. For a period of 60 months commencing 90 days after
the Final Closing, at the option of the holder, each share of 8% Preferred is
convertible into two shares of Common Stock, subject to normal anti-dilution
adjustments.
Limitation on Share Ownership
The Charter of the Company restricts ownership by one Person of more than
9.8% of the value of the outstanding equity securities. Value will be
determined by market price. In addition, no Person may, directly or indirectly,
acquire Beneficial Ownership of a number of shares of 8% Preferred that, when
added to other equity shares of the Company Beneficially Owned by such Person,
would exceed five percent of the value of the outstanding equity shares of the
Company. See "Description of Shares -- Restriction on Ownership." These
restrictions are designed to facilitate compliance with certain share
accumulation restrictions imposed on REITs by Code.
For a more complete description of the securities offered hereby, including
certain limitations on the ownership such securities, please refer to the
"Description of Securities" section of this Prospectus.
9
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C> <C>
Shares of Common Stock Minimum 2,142,858(1)
Offered by the Company Maximum 5,000,000(1)
Shares of Common Stock Minimum 2,417,572(2)
Outstanding after the Offering Maximum 5,274,714(2)
Symbol AMRE (3)
Shares of 8% Preferred Minimum 152,000(4)
Offered by the Company Maximum 1,136,364
</TABLE>
- -----------------------
(1) In no event will there be fewer than 2,142,858 shares of Common Stock sold
in the form of Units or Shares prior to the Initial Closing.
(2) Includes Shares to be sold in this Offering and 274,714 shares of Common
Stock presently outstanding. Excludes an aggregate of up to 1,071,429
Shares for a Minimum Common Offering and 1,750,000 Shares in a Maximum
Common Offering issuable at any time following the Initial Closing to
holders of Series "A" Warrants, upon exercise of such warrants at the
holders' option. Also excludes 185,000 Shares issuable upon exercise of
options to be issued pursuant to the Company's 1995 Stock Incentive Plan
and upon exercise of certain warrants and conversion of certain 1995
Convertible Preferred Stock. See "Description of Securities."
(3) When listed on NASDAQ National Market.
(4) No sales will be completed until the Company has sold enough Units and
Shares to reach the Minimum Common Offering. There must be at least
$2,006,400 of 8% Preferred sold before any 8% Preferred will be issued.
See "Terms of the Offering."
The section of this Prospectus called "The Offering" describes the manner
in which the Company will sell its Units, Shares and 8% Preferred and the fees
and expenses the Company will pay in connection with the Offering.
GLOSSARY
Words in this Prospectus that are capitalized are defined in the "Glossary"
section. In order to make this Prospectus easier to read, a simplified
definition of certain capitalized words has been provided. These simplified
definitions do not convey all of the intricacies of the defined word and
investors are encouraged to refer to the "Glossary" section for the complete
definition.
10
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following pro forma summary financial information should be read in
conjunction with all of the financial statements and notes thereto included in
this Prospectus. The pro forma information assumes the completion of a Minimum
Common Offering, a Minimum Combined Offering, a Maximum Common Offering and a
Maximum Combined Offering and the use of the net proceeds therefrom. Management
considers funds from operations as defined by the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT") to be an appropriate measure of the
performance of an equity REIT. (See Note 2 below.) Note, however, that the
"Funds from Operations" measure presented by the Company may not be comparable
to other similarly titled measures used by other REITs. Funds from Operations
should not be viewed as an alternative to net income as a measure of performance
or to cash flow as a measure of liquidity.
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
--------------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Minimum Minimum Maximum Maximum
Common Combined Common Combined
Offering Offering Offering Offering
---------- ----------- ---------- ----------
(in thousands except per share)
<S> <C> <C> <C> <C>
OPERATING DATA:
Rental revenues.............................. $ 2,478 $ 2,478 $ 6,164 $ 6,164
Income before minority interest.............. 79 273 1,180 1,731
Net income................................... 79 273 1,124 1,676
Net income attributable to common shares..... 79 112 1,124 476
Net income (loss) per common share(1)........ 0.02 0.03 0.17 0.07
Average number of shares outstanding(1)...... 3,753 3,753 6,609 6,609
Ratio of earnings to fixed charges and
preferred dividends......................... 1.41 1.70 3.04 1.40
BALANCE SHEET DATA:
Real estate after accumulated depreciation... $ 14,320 $ 14,320 $ 41,783 $ 41,783
Total assets................................. 16,341 15,71 42,967 48,305
Total debt................................... 2,500 - 8,462 -
Stockholders' equity......................... 13,343 15,213 31,623 45,423
OTHER DATA:
Pro forma Funds from Operations(2):
Income before minority interest............. 79 274 1,180 1,731
Depreciation................................ 534 534 1,565 1,565
Minority interest share..................... - - (55) (55)
-------- -------- -------- --------
Pro forma Funds from operations............ 613 807 2,690 3,241
Cash flows from operating activities......... 862 1,055 3,117 3,668
Cash flows from investing activities(3)...... (12,224) (12,224) (23,346) (23,346)
Cash flows from financing activities(4)...... 13,529 12,770 23,700 27,979
At end of period:
Commercial Properties....................... - - 2 2
Apartment Properties........................ 4 4 4 4
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1995
--------------------------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
Minimum Minimum Maximum Maximum
Common Combined Common Combined
Offering Offering Offering Offering
---------- ----------- ---------- ----------
(in thousands except per share)
<S> <C> <C> <C> <C>
OPERATING DATA:
Rental revenues.............................. $ 655 $ 655 $ 1,558 $ 1,558
Income before minority interest.............. 88 136 305 481
Net income................................... 88 136 302 479
Net income attributable to common shares..... 88 96 302 179
Net income (loss) per common share(1)........ 0.02 0.03 0.05 0.03
Average number of shares outstanding(1)...... 3,753 3,753 6,609 6,609
Ratio of earnings to fixed charges and
preferred dividends......................... 2.83 3.40 2.72 1.60
BALANCE SHEET DATA:
Real estate after accumulated depreciation... 14,320 14,320 41,728 41,728
Total assets................................. 16,587 15,957 43,157 48,495
Total debt................................... 2,500 - 8,462 -
Stockholders' equity......................... 13,343 15,213 30,490 44,290
OTHER DATA:
Pro forma Funds from Operations(2):
Income before minority interest............. 88 136 305 481
Depreciation................................ 133 133 391 391
Minority interest share..................... - - (3) (3)
------- ------- ------- -------
Pro forma Funds from operations............ 221 269 693 869
Cash flows from operating activities......... 159 207 578 755
Cash flows from investing activities(3)...... (26) (26) (26) (26)
Cash flows from financing activities(4)...... (11) (164) (39) (304)
At end of period:
Commercial Properties....................... - - 2 2
Apartment Properties........................ 4 4 4 4
</TABLE>
- -----------------------
(1) Assumes 3,752,822 (Minimum Common Offering) and 6,609,964 (Maximum Common
Offerings) weighted average number of shares of Common Stock outstanding
including the dilutive effect of 463,133 Series "D" Warrants and 72,500
Series "E" Warrants plus the dilutive effects of the 1995 Preferred
Convertible shares and both series of the 10% Convertible Notes. Net
income (loss) per common share also assumes that annual preferred dividends
of $160,562 (Minimum Combined Offering) and $1,200,000 (Maximum Combined
Offering) will be paid.
(2) "Funds from Operations" as defined by the NAREIT equals net income or
(loss) excluding gains or (losses) from debt restructuring and sales of
property, plus depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Management considers Funds
from Operations to be an appropriate measure of the performance of an
equity REIT. Note, however, that the "Funds from Operations" measure
presented by the Company may not be comparable to other similarly titled
measures used by other REITs. Funds from Operations should not be
considered as an alternative to net income (determined in accordance with
generally accepted accounting principles) as an indication of the Company's
financial performance or to cash flows from operating activities
(determined in accordance with generally accepted accounting principles) as
a measure of liquidity.
(3) Represents historical improvements and additions to properties which are
assumed to equal estimated improvements and acquisitions of the Properties
in the amounts of $11,820,000 (Minimum Offerings) and $22,938,139 (Maximum
Offerings).
12
<PAGE>
(4) Includes (i) net proceeds from the Offerings of $12,975,006 (Minimum Common
Offering), $14,845,006 (Minimum Combined Offering), $31,255,000 (Maximum
Common Offering) and $45,055,004 (Maximum Combined Offering), (ii)
repayment of mortgage notes from proceeds of the Offerings of $2,500,000
(Minimum Combined Offering), $8,000,000 (Maximum Common Offering) and
$16,461,861 (Maximum Combined Offering) and (iii) dividends on preferred
stock of $160,512 (Minimum Combined Offering) and $1,200,000 (Maximum
Combined Offering).
RISK FACTORS
An investment in the Company involves various risk factors including risk
factors related to investing in real estate, risk factors related to investing
in a corporation, tax risks and other general investment risks. In addition to
the factors set forth elsewhere herein, prospective investors should consider
the following:
REAL ESTATE INVESTMENT RISKS
AMOUNT AVAILABLE FOR INVESTMENT LIMITS DIVERSIFICATION (ONLY A LIMITED
NUMBER OF PROPERTIES MAY BE ACQUIRED). If only $15,000,000 is raised in the
Offering by the Company, four Properties would be able to be acquired. All four
of such Properties are apartment buildings. A Property which did not perform
well would have a disproportionately greater impact on the profits or losses of
the Company than if more Properties were purchased. Thus, underperformance of a
Property would adversely affect the operations of the Company.
GEOGRAPHIC CONCENTRATION (PERFORMANCE SENSITIVE TO ECONOMIC FACTORS IN THE
AREA). In a Minimum Common Offering, three of the four initially selected
Properties are located in the Phoenix, Arizona, metropolitan area and in a
Maximum Common Offering, three of the six initially selected Properties are
expected to be located in each of the Los Angeles, California, and Phoenix,
Arizona, metropolitan areas. The performance of the Company will be influenced
by economic developments in both of such market areas. Over the past few years,
the economic trend for real estate in the Los Angeles area has been recessionary
in nature. Over the same period, the economic trends for real estate in
Phoenix, Arizona have been recovering from a severe past real estate recession.
The results of economic recession include general increases in vacancies and
general decreases in rents received from residential, retail and commercial
lessees. The effect on the Company of such geographic concentration is to make
the performance of the Company extremely sensitive to economic conditions in the
market areas in which the Company will purchase its properties. Two of the
Phoenix, Arizona, Properties are located within a five-mile radius and could be
viewed to be competitive with each other, although management does not believe
there is direct competition to a significant degree.
HISTORICAL OPERATING LOSSES OF PRIOR OWNERSHIP GROUP (OPERATING LOSSES FOR
ONE PROPERTY COULD CONTINUE). Prior owners of the Hewlett-Packard Building
experienced historical operating losses based on existing levels of operating
expenses and debt of approximately $536,000, approximately $709,000 and
approximately $519,000, respectively, for the years ended December 31, 1995,
1994 and 1993. The accumulated deficit attributable to such operating losses is
$2,736,000. See "Prior Ownership Group -- Combined Statements of Operations" in
the Financial Statements section of this Prospectus. There can be no assurance
that the Company's proposed methods of operation for this Property will be
successful in eliminating such operating losses in the future. As a result of
the small number of Properties to be acquired by the Company, continuing
operating losses by this Property could have a material adverse impact on the
Company's overall profitability.
RISKS ASSOCIATED WITH BORROWING (LEVERAGE REQUIRES COMPANY TO SERVICE DEBT
REGARDLESS OF REVENUE GENERATED). Some of the acquisitions of Properties will
be made by assuming existing mortgage debt or borrowing a portion of the
purchase price thereof and securing the loan with a mortgage on such Property.
The Company's organizational documents contain no limit on the amount of debt it
may incur. While the Company does not intend to incur debt in excess of 50% of
the gross asset value of its Properties, there is no limit on borrowings on
individual Properties. Although the use of leverage may increase the Company's
rate of return on
13
<PAGE>
its investments and allow the Company to make more investments than it otherwise
could, it presents an element of risk in the event that the cash flow from lease
payments on its Properties is insufficient to meet its debt payment obligations.
Certain loans may not be fully paid by the time the leases (not including
renewal periods) on applicable Properties expire. If a tenant does not renew its
lease with respect to any Property, the Company may not have sufficient cash
flow to make the required debt payments with respect to such Property unless it
is able to re-lease such Property. If the Company does not make its debt
payments as required, a lender could foreclose on the Property or Properties
securing such debt, and the Company could lose part or all of its investment in
such Properties.
Lenders to the Company may seek to impose restrictions on future
borrowings, distributions and operating policies of the Company. It is not
possible to ascertain in advance what restrictions may be imposed. As of the
date of this Prospectus, the Company had not created or assumed any indebtedness
for borrowed money. See "Investment Objectives and Policies -- Financing
Strategy/Leverage."
DEPENDENCE ON TENANTS (DEFAULTS BY LESSEES AFFECT CASH FLOW). In leases,
the financial failure of a tenant could result in the termination of its lease
which, in turn, might cause a reduction of the cash flow of the Company and/or
decrease the value of the Property leased to such tenant. If a tenant defaults
on its lease payments, the Company would lose the net cash flow from such
tenant, but might be able to use cash generated from other Properties to meet
the mortgage payments, if any, on such Property in order to prevent a
foreclosure. If a lease is terminated, there can be no assurance that the
Company will be able to lease the Property (or portion thereof) for the rent
previously received or sell the Property without incurring a loss. The Company
could also experience delays in enforcing its rights against tenants.
BANKRUPTCY OF TENANTS (BANKRUPTCIES COULD AFFECT COMPANY'S RECOVERY OF
RENTAL PAYMENTS). The financial failure of a tenant could cause the tenant to
become the subject of bankruptcy proceedings. Under bankruptcy law, a tenant
has the option of continuing or terminating any unexpired lease. If the tenant
continues its lease, the tenant must cure all defaults under the lease and
provide the Company with adequate assurance of its future performance under the
lease. If the tenant terminates the lease, the Company's claim for breach of
the lease (absent collateral securing the claim) would be treated as a general
unsecured claim. The amount of the claim would be capped at the amount owed for
unpaid pre-petition lease payments unrelated to the termination, plus the
greater of one year's lease payments or 15% of the remaining lease payments
payable under the lease (but not to exceed the amount of three years' lease
payments).
DELAY IN INVESTMENT IN REAL ESTATE (RATE OF RETURN ON AN INVESTMENT DEPENDS
ON TYPE AND TIMING OF INVESTMENT OF PROCEEDS AND QUALITY OF INCOME STREAM). The
return on an investment in the Company will depend, in part, on how quickly the
Company is able to complete purchases of identified Properties and locate
additional suitable properties. The Company's acquisition of a proposed
Property could be delayed by an inability to obtain financing as a result of
either the unattractiveness of financial or other terms of such financing or the
lack of lenders providing financing on any terms. There can be no assurance
that the Company's capital will be fully committed to property investments in a
timely manner. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT." Furthermore, a return on investment also depends on
the dependability of the income stream generated by a Property which the Company
purchases. Prior to acquiring properties, the Company's capital will be
invested generally in U.S. government securities, certificates of deposit from
financial institutions having a net worth of at least $100,000,000 or other
short-term investments that are easily convertible into cash ("Permitted
Temporary Investments"). See "Investment Objectives and Policies." The rate of
return on Permitted Temporary Investments may be less than the returns from
investments in Properties. Furthermore, prior to the acquisition of Properties,
the Company may not be able to qualify as a REIT and may not be entitled to
depreciation and other deductions.
COMPETITION FOR INVESTMENTS (COMPETITION COULD AFFECT PRICE OF PROPERTIES
AND AMOUNT OF RENTS RECEIVED, AND, CONSEQUENTLY, AMOUNT OF RETURN). In
connection with the making of investments, the Company may experience
significant competition from banks, insurance companies, savings and loan
associations, mortgage bankers, pension funds, limited partnerships, other REITs
and other entities with objectives similar to those of the
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Company and which may have greater financial resources or experience. An
increase in the availability of funds for real estate investment may increase
competition in the making of investments and may reduce the yields available to
the Company. Competition for investments could reduce the return which the
Company might otherwise be able to obtain.
POTENTIAL ENVIRONMENTAL LIABILITIES (SIGNIFICANT EXPENSES COULD BE INCURRED
IF ENVIRONMENTAL PROBLEMS ARISE). Under various federal and state environmental
laws, current or former owners of real estate may be required to investigate and
clean up hazardous or toxic substances at such property, or may be held liable
to governmental entities or to third parties for property damage and for
investigation and clean up costs incurred by such parties in connection with the
contamination. Such laws typically impose clean-up responsibility and liability
without regard to the liability under such laws whether the owner knew of or
caused the presence of the contamination, and has been interpreted to be joint
and several unless the harm is divisible and there is a reasonable basis for
allocation of responsibility. The Company will generally seek to include a
provision in its leases providing that the tenant is responsible for all
environmental liabilities and for compliance with environmental regulation.
Such a provision, however, does not eliminate the Company's statutory liability
or preclude claims against the Company by governmental authorities or persons
who are not parties to the lease. The Company's leases may also provide a basis
for the Company to recover from the tenant damages or costs for which the
Company has been found liable. The cost of an investigation and clean up of
site contaminated can be substantial, and the fact that the property is or has
been contaminated even if remediated, may adversely affect the value of the
property and the owner's ability to sell or lease the property or to borrow
using the property as collateral. In addition, some environmental laws create a
lien on the contaminated site in favor of the government for damages and cost
that it incurs in connection with the contamination, and certain state and
environmental laws provide that such lien has priority over all other
encumbrances on the property or that a lien can be imposed on any other property
owned by the liable party. Finally, the owner of a site may be subject to
common law claims by third parties based on damages and costs resulting from the
environmental contamination emanating from the site.
Other federal, state and local laws and regulations govern the removal or
encapsulation of asbestos-containing material when such material is in poor
condition in the event of building, remodeling, renovation or demolition. Still
other federal, state and local statutes and regulations may require the removal
or upgrade of underground storage tanks that are out of service or are out of
compliance. In addition, federal, state and local laws, regulations and
ordinances may impose prohibitions, limitations and operational standards on, or
require permits and approvals in connection with, the discharge of waste,
wastewater and other water pollutants, the emission of air pollutants, the
operation of air polluting equipment, the generation and management of materials
classified as hazardous waste and workplace health and safety. Noncompliance
with environmental or health and safety requirements may also result in the need
to cease or alter operations at a property, which could effect the financial
health of a tenant and its ability to make lease payments. Furthermore, if
there is a violation of such a requirement in connection with the tenant's
operations, it is possible that the Company, as the owner of the property, could
be held accountable by governmental authorities for such violation and could be
required to correct the violation.
RISK OF PROVIDING FINANCING TO PURCHASERS OF COMPANY'S PROPERTIES (THIS
PRACTICE COULD DELAY CASH RECEIPTS). The Company may find it necessary or
desirable to provide financing to purchasers of Properties it wishes to sell.
This financing may cause any proceeds from the sale of Properties to be delayed
beyond the time of the disposition of Properties and until such time as any
loans are repaid or sold. The Company may find it necessary to provide
financing in circumstances where lenders are not willing to make loans secured
by commercial real estate or may find it desirable where a purchaser is willing
to pay a higher price for the Property than it would without the financing.
RISK OF INCURRING UNINSURED LOSSES (ABSENCE OF INSURANCE MAY RESULT IN LOSS
OF INVESTMENT CAPITAL). The Company typically will require tenants to maintain
liability and casualty insurance of the kind that is customarily obtained for
similar properties. However, certain disaster-type insurance (covering events
of a catastrophic nature, such as earthquakes) may not be available or may only
be available at rates that are prohibitive. Three of the Properties which the
Company may purchase are located in the Los Angeles, California,
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metropolitan area and one of them is located in an area near the site of the
1994 Northridge earthquake. Earthquake insurance is not available with respect
to these Properties. In the event that an uninsured disaster should occur, or in
the event a commercial tenant does not maintain the required insurance and a
loss occurs, the Company could suffer a loss of the capital invested in, as well
as anticipated profits from, the damaged or destroyed Property. If the loss
involves a liability claim, the loss may extend to the other assets of the
Company or the subsidiary that owns the Property affected by the loss.
CASUALTY-RELATED OR CONDEMNATION-RELATED LEASE TERMINATIONS (AMOUNTS
RECEIVED COULD BE LESS THAN FAIR MARKET VALUE OR ANTICIPATED REVENUES). The
leases of Properties may permit the tenant to terminate its lease in the event
of a substantial casualty or a taking by eminent domain of a substantial portion
of a Property. Should these events occur, the Company generally will be
compensated by insurance proceeds in the case of insured casualties or a
condemnation award in the case of a taking by eminent domain. There can be no
assurance that any such insurance proceeds or condemnation award will equal the
value of the Property or the Company's investment in the Property. Any such
lease termination could adversely affect the Company's cash flow and the
diversification of its net lease investments.
OTHER REAL ESTATE INVESTMENT RISKS (ADDITIONAL FACTORS COULD ADVERSELY
AFFECT THE COMPANY'S OPERATIONS AND RATE OF RETURN ON INVESTMENT). In addition
to the foregoing specific real estate investment risks, there are numerous other
risks which could affect the Company's performance. The yields available from
equity investments in real estate depend on the amount of income and capital
appreciation generated by the related properties. If the Properties do not
generate sufficient income to meet operating expenses, including debt service,
lease payments, capital expenditures and tenant improvements, the Company's
income and ability to make Distributions to its shareholders will be adversely
affected. Income from the Properties may be adversely affected by the general
economic climate, local conditions, such as oversupply of space or reduction in
demand for rental space in the area, the attractiveness of the Properties to
tenants, competition from other available space, the ability of the Company to
provide adequate maintenance, insurance and increased operating costs (including
real estate taxes). Income from properties in general and real estate values
are also affected by such factors as applicable laws, including tax laws,
interest rate levels and the availability of financing. In addition, real
estate investments are relatively illiquid and, therefore, would tend to limit
the ability of the Company to vary its portfolio promptly in response to changes
in economic or other conditions.
GENERAL INVESTMENT RISKS
IMMEDIATE AND SUBSTANTIAL DILUTION (INVESTORS WILL EXPERIENCE DILUTION).
Investors are subject to immediate and substantial dilution estimated to be
$1.51 per share in a Minimum Common Offering and $1.23 per share in a Maximum
Common Offering. See "Dilution."
RISK OF INVESTMENT OF PROCEEDS OF THE OFFERING (INVESTORS MUST RELY SOLELY
ON JUDGMENT OF MANAGEMENT IN MANAGING THE COMPANY). The Company's ability to
achieve its stated investment objectives and to pay Distributions depends upon
the performance of management in the acquisition of investments for the Company.
In general, shareholders will have no opportunity to evaluate the transaction
terms and other relevant economic or financial data concerning investments to be
made by the Company. There can be no assurance that desirable income-producing
properties will be available on economically attractive terms. In addition, the
profitability of the Company could be affected by the amount of available funds.
The Offering will be closed with Gross Offering Proceeds of not less than
$15,000,000 nor more than $50,000,004. A smaller amount of Gross Offering
Proceeds may result in the acquisition of fewer properties and less
diversification of the Company's real estate portfolio, thereby increasing the
potential impact of any investment which performs below expectations.
RISK OF INADEQUATE FINANCING (WOULD DIRECTLY AFFECT DIVERSIFICATION GOALS).
The Offering will be closed with Gross Offering Proceeds of not less than
$15,000,000 nor more than $50,000,004. The potential profitability of the
Company could be affected by the amount of funds from the Offering at its
disposal. Furthermore, there can be no assurance that the Company will be able
to achieve its leverage objective of
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borrowing no more than approximately 50% of the aggregate gross asset value of
all Properties purchased. The Company may be unable to obtain mortgage financing
on commercially attractive terms because of the decreased number of commercial
banks and others making mortgage loans secured by commercial and residential
real property of the type in which the Company intends to invest. There can be
no assurance that lending sources will continue to make loans on commercially
attractive terms. If the Company is unable to attain its leverage objective
because financing is difficult or costly to obtain, the Company may be limited
to investing in fewer Properties.
LACK OF OPERATING HISTORY (THE SUCCESS OF THE COMPANY IS DEPENDENT ON
MANAGEMENT'S ABILITY). The Company has no operating history. Except for the
Properties the Company indicates it intends to acquire and describes in this
Prospectus or in a supplement to this Prospectus, purchasers of Shares will not
have an opportunity to evaluate the terms of the transaction or the relevant
economic or financial data affecting the investments to be acquired by the
Company. Moreover, the ability of the Company to accomplish its stated
investment objectives and the timing of the receipt by shareholders of
Distributions are dependent upon the success and timing of management's
acquisition of investments for the Company. There can be no assurance that any
Properties will increase in value, or that income-producing properties will be
available or can be acquired on economically attractive terms.
RELIANCE ON MANAGEMENT (GENERALLY INVESTORS WILL HAVE NO RIGHT TO
PARTICIPATE IN COMPANY MANAGEMENT). Investors will be relying entirely on the
management ability of the officers and directors of the Company. Shareholders
have no right or power to take part in the management of the Company except
through the exercise of their shareholder voting rights. Thus, no prospective
investor should purchase any of the Shares offered hereby unless the prospective
investor is willing to entrust all aspects of the management of the Company to
the officers and directors of the Company. See "Management" for a discussion of
the experience of the directors and officers in real estate investments.
OWNERSHIP LIMIT (LIMIT CHANGES OF CONTROL AND TENDER OFFERS). In order to
maintain its qualification as a REIT, not more than 50% in value of the
outstanding shares of the Company may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities).
Value will be determined by market price. To insure that the Company will not
fail to qualify as a REIT under this test, the Company's Charter and By-Laws
authorizes the directors to take such action as may be required to preserve the
qualification of the Company and to limit any person to direct or indirect
ownership of 9.8% of the value of the outstanding equity shares. In addition,
no Person may, directly or indirectly, acquire Beneficial Ownership of a number
of shares of 8% Preferred that, when added to other equity shares of the Company
Beneficially Owned by such Person, would exceed five percent of the value of the
outstanding equity shares of the Company. However, market factors could create
a disparity in the values between Common Stock and preferred stock, which, in an
extreme situation, could result in an inadvertent violation of the Ownership
Limit by an existing shareholder. For example, were the market price of the
Common Stock to decline disproportionately to the 8% Preferred, the value of the
8% Preferred held by any one Person would increase in relationship to the total
market value of the equity securities of the Company. A similar result would
occur if the 8% Preferred traded at a premium in relationship to the Common
Stock. If not prevented by shareholder or Company action, such could cause the
Company to lose its REIT status for income tax purposes. The ownership limits
may discourage a change of control of the Company and may also (a) deter tender
offers for the shares, which offers may be attractive to the shareholders, or
(b) limit the opportunity for shareholders to receive a premium for their shares
that might otherwise exist if an investor attempted to assemble a block of
shares in excess of the applicable ownership limitations in number or value of
the outstanding shares or otherwise to effect a change of control of the
Company. See "Description of Securities -- Restriction on Ownership."
POTENTIAL SECURITIES ACT LIABILITY (COMPANY MAY BE OBLIGATED TO REPAY
AMOUNT INVESTED PRIOR TO DUE DATE). An aggregate of $56,281.50 principal amount
of the Company's 10% Convertible Promissory Notes due October 1, 1996 , Series
B, were sold without an exemption from registration under the Securities Act of
1933, as amended (the "Act"). The statute of limitations for such sales
contained in the Act has not run. As a result, the
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Company could be liable for rescission claimed by the holders of such Notes in
the amount of $56,281.50 plus interest.
MARKET PRICE OF SHARES MAY NOT REFLECT PROPERTY VALUES. There is no
established market for the Company's Shares and the 8% Preferred. Subject to
the Company's continued compliance with listing guides, the Shares have been
approved for trading on the NASDAQ National Market. However, there can be no
assurance that the price a shareholder would receive in a sale on the NASDAQ
National Market will be representative of the value of the Properties owned by
the Company or that it will equal or exceed the amount a shareholder paid for
the Shares. Historically, shares of real estate companies have traded at a
discount to their proportionate interest in the value of the issuer's underlying
assets.
DELAY IN TRADING (PRICE AND LIQUIDITY OF SHARES COULD BE ADVERSELY
EFFECTED). Subject to the Company's continued compliance with listing guides,
the Shares have been approved for trading on the NASDAQ National Market.
Trading is expected to commence immediately after the Final Closing which could
occur as long as six months after the Initial Closing. Accordingly, an
investor's ability to transfer his or her shares could be delayed until such
time or transfers prior to such time could result in a discount of the sales
price. Also, a possibility exists that trading on a public market may not
materialize. In such case, an investor may be able to resell the securities, if
at all, only at a significant discount.
REQUIREMENT OF SUPERMAJORITY SHAREHOLDERS VOTES (34% OF VOTES CAN BLOCK
WILL OF MAJORITY). Under Maryland law, since the Charter does not provide
otherwise, approval by a two-thirds vote of all the votes entitled to be cast on
the matter is required to accomplish major structural changes in the Company,
including mergers, share exchanges, sales of substantially all assets of the
Company, amendments to the Charter and dissolution. All actions taken, if
approved by the holders of the requisite number of Shares, would be binding on
all shareholders. Certain of these provisions may discourage or make it more
difficult for a Person to acquire control of the Company or to effect a change
in the operation of the Company. The Board has the power to cause the issuance
of additional Shares and preferred stock without obtaining shareholder approval.
LIMITED LIABILITY OF OFFICERS AND DIRECTORS (SHAREHOLDERS' REMEDIES AGAINST
MANAGEMENT AND DIRECTORS ARE LIMITED). The Charter provides that a director's
liability to the Company for monetary damages will be limited. In addition, the
Company is obligated under the Bylaws to indemnify its directors and officers
and may indemnity its employees and other agents against certain liabilities
incurred in connection with their service in such capacities. The Company will
execute indemnification agreements with each director which will indemnity the
directors against any such liabilities they incur. Each of these measures could
reduce the legal remedies available to the Company and the shareholders against
such individuals. See "Management -- Limitation of Liability and
Indemnification."
EFFECT OF SHARES AVAILABLE FOR FUTURE SALE (FUTURE SALES COULD AFFECT VALUE
OF OUTSTANDING SECURITIES). Sales of a substantial number of shares of Common
Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for Shares. Subject to the attainment of a variety of
exercise or conversion criteria, assuming a sale of all of the Units, Shares and
8% Preferred offered hereby, after the Final Closing, the Company may issue an
aggregate of up to approximately 5,637,368 additional shares of Common Stock
(subject to the Ownership Limit). No prediction can be made as to whether such
additional Shares will be issued or as to the effect, if any, that future sales
of Shares, or the availability of Shares for future sale, will have on the
market price prevailing from time to time. See "Shares Available for Future
Sale."
BENEFITS TO OFFICERS AND DIRECTORS. Officers and directors of the Company
will be entitled to receive options to purchase an aggregate of 185,000 Shares
at $7 per Share at the time of the Final Closing as described under the caption
"Management -- Directors and Executive Officers Compensation and Incentives."
Further, officers and directors may purchase Units or Shares in this Offering
net of selling commissions, which right, if exercised, would result in an
approximately eight percent saving to such officers and directors on the cost of
such securities. Similarly, such persons could purchase 8% Preferred net of
commissions, amounting to an approximately five percent savings. See "The
Offering." (At present, no officers or directors have expressed an
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intent to purchase any of such securities.) In addition, subsequent to the
Initial Closing, the Chairman of the Board and the President will be employed
under employment agreements which provide for, among other things, salaries of
$100,000 and $72,000, respectively, potential bonus compensation (which cannot
be estimated at this time), "piggyback" registration rights for all Shares held
by such officer (which would save them the costs of registering their Shares for
resale which costs could be substantial), certain salary and benefit
continuation for up to six months in the event of disability, and compensation
generally equal to 2.99 times the officer's average salary and bonus over the
prior five years under certain circumstances if there is a change of control of
the Company. See "Management -- Employment Agreements."
TAX RISKS
FAILURE TO QUALIFY AS A REIT OR PARTNERSHIP FOR TAX PURPOSES (FAVORABLE
PASS-THROUGH FEATURES OF AN INVESTMENT WOULD BE ELIMINATED). The Company
intends to operate so as to qualify as a REIT under the Code. Although the
Company believes that it will be so organized and will operate in such a manner,
no assurance can be given that the Company will qualify or remain qualified as a
REIT. Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations. The complexity of these provisions and of the
applicable income tax regulations that have been promulgated under the Code (the
"Treasury Regulations") is greater in the case of a REIT that holds its assets
in partnership form. The determination of various factual matters and
circumstances not entirely within the Company's control may affect its ability
to qualify as a REIT. In addition, no assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification or that future economic,
market, legal, tax or other considerations may cause the Board to revoke the
REIT election. See "Federal Income Tax Considerations." The Company is relying
on the opinion of Thelen, Marrin, Johnson & Bridges, tax counsel to the Company,
regarding various issues affecting the Company's ability to qualify, and retain
qualification, as a REIT. Such legal opinions are not binding on the Internal
Revenue Service (the "IRS"). If the Company were to fail to qualify as a REIT
in any taxable year, the Company would not be allowed a deduction for
Distributions to shareholders in computing taxable income and would be subject
to federal income tax on its taxable income at regular corporate rates. This
additional tax liability would reduce the amounts available for distribution by
the Company to shareholders. The Company would also be disqualified from
treatment as a REIT for four taxable years following the year such qualification
was lost. See "Federal Income Tax Considerations."
The Operating Partnership will receive an opinion of Thelen, Marrin,
Johnson & Bridges, tax counsel to the Company, stating that the Operating
Partnership will be treated as a partnership for federal income tax purposes.
If the IRS were to challenge successfully the tax status of the Operating
Partnership as a partnership for federal income tax purposes, the Operating
Partnership would be treated as an association taxable as a corporation. The
Operating Partnership could also be taxable as a corporation if it were
determined to be a "publicly traded partnership" under the Code. In either such
event, the character of the Company's assets and items of gross income would
change and preclude the Company from satisfying the asset tests and possibly the
income tests (imposed by the Code as discussed below) and, in turn, would
prevent the Company from qualifying as a REIT. See "Federal Income Tax
Considerations -- Taxation of the Company -- Requirements for Qualification."
In addition, the imposition of a corporate tax on the Operating Partnership
would reduce the amount of funds from operations available for distribution to
the Company and its shareholders. See "Federal Income Tax Considerations -- Tax
Aspects of the Operating Partnership."
FAILURE TO COMPLY WITH ANTI-ABUSE REGULATIONS (FAVORABLE PASS-THROUGH
FEATURES OF INVESTMENT WOULD BE ELIMINATED). The United States Treasury
Department issued regulations at the end of 1994 which authorize the IRS, in
certain "abusive" transactions involving partnerships, to disregard the form of
the transaction and recast it for federal tax purposes as the IRS deems
appropriate (the "Anti-Abuse Regulations"). The IRS could invoke the Anti-Abuse
Regulations if the Operating Partnership is deemed to have been formed or
utilized in connection with a transaction (or series of related transactions)
with a principal purpose of substantially reducing
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the present value of the partners' aggregate federal tax liability in a manner
inconsistent with the intent of the partnership provisions of the Code. See
"Federal Income Tax Considerations -- Anti-Abuse Regulations."
ADVERSE EFFECT OF REIT MINIMUM DISTRIBUTION REQUIREMENTS (COMPANY UNABLE TO
ACCUMULATE CAPITAL INTERNALLY). In order to qualify as a REIT, the Company
generally will be required each year to distribute to its shareholders at least
95% of its net taxable income (excluding any net capital gain). In addition,
the Company will be subject to a four percent nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of (i) 85% of its ordinary income, (ii) 95%
of its capital gains net income for that year and (iii) 100% of its
undistributed taxable income from prior years. The Company intends to make
distributions to its shareholders to comply with the 95% distribution
requirement and to avoid the nondeductible excise tax. Differences in timing
between the recognition of taxable income and the receipt of cash available for
distribution could require the Company directly or through the Operating
Partnership, to borrow funds to meet the 95% distribution requirement and to
avoid the nondeductible excise tax. The requirement to distribute a substantial
portion of the Company's net taxable income could cause the Company to
distribute the amounts that would otherwise be spent on future acquisitions,
unanticipated capital expenditures or repayment of debt, which would require the
Company to borrow or sell assets to fund the costs of such items.
Distributions by the Operating Partnership will be determined by the
Company's Board, in the Company's capacity as the general partner of the
Operating Partnership, and will be dependent on a number of factors, including
the amount of the Operating Partnership's distributable cash, the Operating
Partnership's financial condition, any decision by the Board to reinvest funds
rather than to distribute such funds, the Partnership's capital expenditures,
the annual distribution requirements under the REIT provisions of the Code and
such other factors as the Board deems relevant. See "Federal Income Tax
Considerations -- Federal Income Taxation of the Company."
CHANGES IN TAX LAWS (CHANGES COULD AFFECT A RETURN ON AN INVESTMENT). The
discussions of the federal income tax aspects of the Offering are based on
current law, including the Code, the Treasury Regulations issued thereunder,
certain administrative interpretations thereof and court decisions.
Consequently, future events (including those arising from legislative and
administrative proposals that are or in the future may be under consideration)
that modify or otherwise affect those provisions may result in treatment for
federal income tax purposes of the Company and the shareholders that is
materially and adversely different from that described in this Prospectus, both
for taxable years arising before and after such events. There is no assurance
that future legislation and administrative interpretations will not be
retroactive in effect.
OTHER INVESTMENT RISKS
MARYLAND LAW LIMITATIONS ON ACQUISITIONS AND CHANGES IN CONTROL (LEGAL
LIMITATIONS COULD AFFECT MANAGEMENT CHANGES). Certain provisions of the
Maryland General Corporation Law (the "MGCL") which are adopted in the Company's
Charter and By-Laws could have the effect of delaying, deferring or preventing a
change in control of the Company or the removal of existing management and, as a
result, could prevent the shareholders of the Company from being paid a premium
for their shares of Common Stock over then prevailing market prices. These
provisions are described briefly below. In addition, there are statutory
provisions limiting the voting rights of "control shares" and restricting
certain types of business combinations. See "Certain Provisions of Maryland Law
and of the Company's Charter and By-Laws."
Staggered Board. The MGCL permits and the charter provides that the Board
of Directors of the Company will have three classes of directors with staggered
terms of service of three-year terms. The staggered terms for directors may
affect the shareholders' ability to change control of the Company even where a
change in control is in the interest of the shareholders. Because of the
staggered terms, a complete change of the composition of the present Board of
Directors could not occur prior to 1998. A majority of the Independent
Directors must approve all matters voted on by the Board of Directors.
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Preferred Stock. The MGCL permits and the charter provides that the Board
of Directors may issue up to 21,515,000 shares of preferred stock and to
establish the preferences and rights (including the right to vote and the right
to convert into Shares) of any shares issued. See "Description of Securities."
The power to issue preferred stock could have the effect of delaying or
preventing a change in control of the Company even where a change in control is
in the shareholders' interest. See "Description of Securities -- 8% Convertible
Preferred Stock" and "-- 1995 Convertible Preferred Stock" for information about
the issuance of such classes of preferred stock.
Control Shares. The MGCL provides certain restrictions upon the voting
rights of "control shares" in a Maryland corporation. "Control shares" are
voting shares of stock which, if aggregated with all other shares of stock
previously acquired by the holder thereof, would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority, or (iii) a majority or more of all voting power. The
MGCL provides that "control shares" have no voting rights except to the extent
approved by an affirmative vote of two-thirds of the outstanding shares entitled
to vote on the matter, excluding shares held by the acquiror of the control
shares and the officers and directors of the Company who are also employees of
the Company, subject to certain limitations. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions. See
"Certain Provisions of Maryland Law and the Company's Charter and By-Laws --
Control Share Acquisitions."
Ability to Effect Business Combinations Limited. Under the MGCL, certain
Business Combinations (as defined) between a Maryland corporation and any person
who is the beneficial owner of ten percent or more of the voting power of the
corporation's shares or who is an affiliate or associate of the corporation and
owned ten percent or more of the voting power of the corporation's shares at any
time during the prior two years (an "Interested Shareholder"), or an affiliate
of an Interested Shareholder, are prohibited for five years after the most
recent date on which the Interested Shareholder became an Interested
Shareholder. Thereafter, any such Business Combination must be approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by holders
of outstanding voting shares of the Company and (ii) 66-2/3% of the votes
entitled to be cast by holders of outstanding voting shares held by persons
other than the Interested Shareholder with whom the Business Combination is to
be effected, subject to certain exceptions. See "Certain Provisions of Maryland
Law and the Company's Charter and By-Laws -- Business Combinations."
CHANGES IN INVESTMENT AND FINANCING POLICIES (INVESTORS MUST RELY ON
POLICIES ADOPTED BY DIRECTORS WHICH MAY BE CHANGED FROM TIME TO TIME). The
Board of Directors determines the Company's and the Operating Partnership's
investment and financing policies and policies with respect to certain other
activities, including the growth, capitalization, distributions and operating
policies of the Company and the Operating Partnership. Although the Board of
Directors has no present intention to amend or revise these policies, the Board
of Directors (including a majority of Independent Directors) may do so at any
time without a vote of the Company's shareholders. See "Investment Objectives
and Policies -- Changes in Investment Objectives and Limitations."
RISK OF INSUFFICIENT WORKING CAPITAL (INADEQUATE CAPITAL COULD AFFECT THE
COMPANY'S ABILITY TO CONDUCT BUSINESS AS CONTEMPLATED). There can be no
assurance that the Company will have sufficient working capital. A deficiency
of working capital might be caused by a decrease in gross revenues, by an
increase in expenses, by an uninsured casualty to a Property or by other
unanticipated events. There is no assurance that the Company will be able to
borrow money for working capital purposes. Loan covenants and other
restrictions included in the Company's financing agreement relating to the
acquisition of Properties may restrict the Company's ability to borrow for such
purposes or its ability to draw funds from working capital reserves.
INVESTMENTS IN INTEREST SENSITIVE INVESTMENTS (TIMING OF SALE OF ASSETS
COULD AFFECT RETURN). The Company will invest Offering proceeds in Permitted
Temporary Investments for a period of up to one year pending the investment of
such proceeds in real estate and in assets other than real estate which generate
qualifying REIT income. These investments are interest rate sensitive financial
instruments and their value generally will decrease if market interest rates
increase. Thus, if the Company sells its interest in such securities when
interest rates are higher than at the time when the securities initially were
acquired, the Company would likely receive less in such a sale than the amount
it initially paid.
21
<PAGE>
INVESTMENT BY PENSION OR PROFIT SHARING TRUSTS, KEOGHS OR IRAS (DOES
INVESTMENT COMPLY WITH ERISA OR CODE, OR PRODUCE UBTI?). In considering an
investment in the Company of the assets of a pension, profit sharing, 401(k),
Keogh or other retirement plan or IRA ("Benefit Plans"), a fiduciary with
respect to such a Benefit Plan should consider, among other things, (i) whether
the investment is consistent with applicable provisions of ERISA or the Code and
(ii) whether the investment will produce unrelated business taxable income, as
defined in Section 512 of the Code ("UBTI"), to the Benefit Plan. See "Federal
Income Tax Considerations -- Treatment of Tax-Exempt Shareholders" and "ERISA
Considerations."
INVESTMENT COMPANY ACT OF 1940 (CERTAIN INVESTMENT PRACTICES MAY BE
UNAVAILABLE). The Board of Directors intends to conduct the operation of the
Company so that it will not be subject to regulation under the Investment
Company Act of 1940. As a result, the Company may have to forego certain
investments which could produce a more favorable return to the Company. If the
Company fails to qualify for an exemption from registration as an investment
company, it will be subject to numerous restrictions under the Investment
Company Act of 1940. A failure to qualify for an exemption under the Investment
Company Act of 1940 could have a material adverse effect on the shareholders.
THE COMPANY
GENERAL
The Company was formed in 1994 to operate as a real estate investment trust
under the Code and will be self-administered. The Company proposes to acquire a
diversified portfolio of garden-style apartments and suburban commercial and
retail income properties in the Western United States. The Properties will be
leased to a variety of residential, retail and commercial tenants. The Company
and its corporate predecessors or affiliates entered into certain transactions
described sequentially below to accomplish such goal.
Ramapo Development, Inc., a Colorado corporation ("Ramapo") was formed in
January 1989 and sold shares of its common stock pursuant to a registration
statement on Form S-18 in May 1989. In 1990, its name was changed to Insight
Environmental Corporation ("IEC"). No material operations were ever conducted
by Ramapo or IEC. Its shares were never listed on a national securities
exchange, nor, to the knowledge of the Company's management, were IEC's shares
ever traded in any organized broker-dealer network.
In 1993, American Equity Trust Funding, Inc. ("Funding Co.") was formed by
Arthur P. Herring and Regent IV Trust to explore opportunities for the formation
of a REIT and to raise "seed capital" to organize the REIT and fund a material
portion of the cost of offering the REIT's shares to the public. $400,000 was
raised by Funding Co. for these purposes through September 30, 1995. In 1994,
Arthur P. Herring transferred all of his interest in Funding Co. to The Danube
Rousse, Inc., an affiliate of Arthur P. Herring.
In 1994, The Danube Rousse, Inc. (controlled by an affiliate of Arthur P.
Herring) and Regent IV Trust paid an aggregate of $35,000 to acquire (i)
approximately 37% of the outstanding voting stock of IEC, and (ii) a proxy to
vote an additional 43% of IEC's outstanding vote stock, with the intent to
convert IEC into a REIT. Such proxy has expired. There is no affiliation
between Regent IV Trust and The Danube Rousse Inc. or directors, officers or
other affiliates of the Company. None of the beneficiaries of Regent IV Trust
are, or are expected to be, involved in management of the Company. Regent IV
Trust presently owns approximately 12.26% of the Company's outstanding Common
Stock. See "Principal Shareholders."
The Company was formed in 1994 as a wholly-owned subsidiary of IEC for the
purpose of reincorporating IEC in Maryland. IEC was a "shell corporation" with
no business operations, and a de minimis amount of assets. IEC was
reincorporated in Maryland by merging itself into the Company in late 1994.
The Company's Charter authorizes it to operate as a REIT under the Code. In
October 1995, the shareholders, other than the founders, of Funding Co.
exchanged their Funding Co. shares for 114,286 shares of Common Stock, plus
57,133 Series "D"
22
<PAGE>
Warrants, in the Company. At the same time, each of the founders of Funding Co.
(The Danube Rousse, Inc., as successor to Arthur P. Herring, and Regent IV
Trust) exchanged their shares in Funding Co. for 360,000 shares of the Company's
1995 Convertible Preferred Stock, plus 107,500 Series "D" Warrants (for an
aggregate of 720,000 shares of 1995 Convertible Preferred Stock and 215,000
Series "D" Warrants). See "Principal Shareholders." In October 1995, Funding Co.
was merged into the Company.
The Company will acquire its Initial Properties from Persons who are not
affiliated with the Company or any of its predecessors, or any of their
respective officers, directors or affiliates. The Company will contribute all
of the net proceeds from the Offering to the Operating Partnership in exchange
for an initial 99% general partnership interest in the Operating Partnership and
the Operating Partnership will acquire the Initial Properties. Three of the
initial Properties are located in the Los Angeles, California metropolitan area.
The other three are located in the Phoenix, Arizona, metropolitan area. The
Company will be the sole general partner of the Operating Partnership. The
Initial Properties will be leased to a variety of tenants. See "Description of
Properties," for the specific terms and conditions of the purchase of the
Initial Properties.
The Company, subject to the approval of the Board of Directors, initially
intends to pay regular quarterly Distributions, beginning with the first full
calendar quarter after the Initial Closing.
Management of the Company has been in the business of operating and
financing income-producing real estate for many years. Mr. Herring and Dois
Brock have agreed to devote substantially all of their time to the business of
the Company. Upon completion of the Initial Closing, the Company expects to
have eight full-time employees: four officers and four administrative and
accounting employees.
GROWTH STRATEGY
The Company's growth strategy is to enhance shareholder value by increasing
cash flow through the acquisition of additional Properties located primarily in
the western United States that meet the Company's investment criteria and the
participation in any increased revenue from the Properties purchased at the
Initial or Final Closing. Management of the Company will utilize its years of
experience, knowledge and affiliations in the real estate industry to implement
the growth strategy of the Company.
ACQUISITION STRATEGY
To enable the Company to implement its acquisition strategy, the Company
will rely on the real estate management and financing experience of Mr. Herring
and Mr. Brock. This experience will be utilized to identify existing properties
that meet the Company's investment criteria. The Company intends to focus on
opportunities available in the western United States and will place particular
emphasis on properties in areas with strong, or improving economic conditions.
The Company believes that a number of existing properties that meet its
investment criteria are available at attractive prices because of the adverse
impact of high leverage and the over-building on the profitability and
operations of many properties, the difficulties of many property operators to
obtain funds to pay for capital improvements necessary to maintain their
properties and the effects of the recent economic recession. It is possible
that the Company will need to issue additional equity shares either for cash or
for property to accomplish acquisitions of properties after the Closing. The
Company expects to make additional property acquisitions through the Operating
Partnership, although the Board, including a majority of the Independent
Directors, will consider whether to make property acquisitions directly if such
direct acquisition is deemed to be in the best interests of the Company and the
Operating Partnership.
TERMS OF THE OFFERING
The Company is offering the following shares of its capital stock pursuant
to this Prospectus: (i) a minimum of 2,142,858 shares of Common Stock in the
form of Units or Shares; (ii) a maximum of 5,000,000 Shares in the form of
1,750,000 Units plus 1,500,000 Shares; (iii) a minimum of 152,000 shares of 8%
Preferred
23
<PAGE>
and (iv) a maximum of 1,136,364 shares of 8% Preferred. The 8% Preferred will be
sold to institutional investors only. The price of each Unit is $14.00, each
Share is $7.00 and each share of 8% Preferred is $13.20 (which prices have been
determined arbitrarily), subject to certain discounts.
The Units, Shares and 8% Preferred are being offered on a "best efforts"
basis which means that no one is guaranteeing the amount of capital that will be
raised. Units and Shares are being offered by the Sales Agent and soliciting
Dealer and the 8% Preferred is being offered by broker-dealers, all on a "best-
efforts" basis. Investors are required to purchase a minimum of 50 Units, or
100 Shares, unless otherwise agreed by the Company. There is no minimum number
of shares of 8% Preferred which must be purchased by an individual investor.
See "The Offering." Payment in full is due on transmittal of an order by an
investor or by such investor's authorized representative. Payments will be
deposited promptly in an interest bearing escrow account maintained with Trust
Company of America (the "Escrow Agent") until such funds are released as
described below. Such funds will be held in trust for the benefit of investors
to be used for the purposes set forth in this Prospectus. Orders must be
accepted or rejected by the Company within ten days of their receipt. An
investor whose order for Units, Shares or 8% Preferred has been accepted by the
Company has no right to withdraw his investment. See "The Offering." The
acceptance of orders by the Company imposes no obligation on the Company to
issue Shares or 8% Preferred unless there is an Initial Closing and, in the case
of 8% Preferred, a minimum of 152,000 shares have been subscribed for. The
Sales Agent and the Soliciting Dealers and broker-dealers may not complete a
sale of Units, Shares or 8% Preferred to an investor until at least five
business days after the date the investor receives a copy of this Prospectus.
Each investor will be sent a confirmation of his or her purchase.
The Initial Closing will occur after the Minimum Common Offering is
achieved and must occur within 180 days of the date of this Prospectus. The
Final Closing shall occur no more than 180 days after the Minimum Common
Offering is achieved. Assuming that the Initial Closing occurs on the 179th day
after the date of this Prospectus, the last possible termination date for the
Offering will be June 14, 1997. After the Final Closing, the Shares will
commence trading on the NASDAQ National Market. Investors will receive the
proportionate share of interest earned on their funds for the period such funds
are held in escrow. All such interest earned on the escrowed funds will be paid
to shareholders within 15 days of each issuance of Units, Shares or 8%
Preferred.
The Offering will terminate at the time all Units, Shares and 8% Preferred
being offered are sold, unless sooner terminated by the Company, but in no case
later than one year from the date of this Prospectus. If, as of 180 days from
the date of this Prospectus, the Minimum Common Offering is not achieved, the
Company will cancel all existing orders and, promptly after such cancellation,
all funds submitted on account of such orders will be released from escrow and
returned to each investor together with all interest earned thereon. See "The
Offering -- Escrow Arrangements."
[Remainder of page intentionally left blank]
24
<PAGE>
ESTIMATED USE OF PROCEEDS
The following table presents information about how the money raised in the
Offering will be used. Information is provided assuming the Minimum Common
Offering, Maximum Common Offering or Maximum Combined Offering is achieved.
Many of the numbers in the table are estimates because all expenses cannot be
determined precisely at this time. The actual use of the capital raised by the
Company is likely to be different than the figures presented in the table. The
Company expects that between approximately 78% in the Minimum Common Offering
and 86% in the Maximum Combined Offering of the money invested by new
Shareholders will be used to buy real estate, while the remaining proceeds will
be used for working capital and to pay expenses and fees.
<TABLE>
<CAPTION>
MINIMUM COMMON OFFERING MINIMUM COMBINED OFFERING
----------------------- -------------------------
SALE OF 2,142,858 SHARES
OF COMMON STOCK
PLUS 152,000 SHARES
SALE OF UP TO 2,142,858 SHARES(1) OF 8% PREFERRED
--------------------------------- ---------------
PERCENT OF PERCENT OF
PUBLIC OFFERING PUBLIC OFFERING
AMOUNT PROCEEDS AMOUNT PROCEEDS
-------------- -------- -------------- --------
(000S OMITTED) (000S OMITTED)
-------------- --------------
<S> <C> <C> <C> <C>
Gross Offering Proceeds $15,000(3) 100.00% $17,000 100.00%
------- ------ ------- ------
Public Offering Expenses:
Selling Discounts and
Commissions(4)(5) 1,125 7.50 1,225 7.21
Other Organizational Expenses
and Offering Expenses(6)(7) 900 6.00 930 5.47
------- ------ ------- ------
Amount Available to Invest $12,975 86.50% $14,845 87.32%
======= ====== ======= ======
Prepaid Items and Fees Related
to Purchase of Real Estate(8) 303 2.02 303 1.78
Working Capital Reserve(9) 673 4.49 673 3.96
======= ====== ======= ======
Public Offering Proceeds
Available for Investment $11,999 79.99% $13,869 81.58%
======= ====== ======= ======
Acquisition Fees (included
in purchase price)(10) 249(11) 1.66 276(11) 1.62
------- ------ ------- ------
Amount Available for
Investment in Real Estate(12) $11,750 78.33% $13,593 79.96%
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM COMMON OFFERING MAXIMUM COMBINED OFFERING
----------------------- -------------------------
SALE OF 5,000,000 SHARES(1) PLUS
SALE OF 5,000,000 SHARES(1) 1,136,364 SHARES OF 8% PREFERRED(2)
--------------------------- -----------------------------------
PERCENT OF PERCENT OF
PUBLIC OFFERING PUBLIC OFFERING
AMOUNT PROCEEDS AMOUNT PROCEEDS
-------------- -------- -------------- --------
(000S OMITTED) (000S OMITTED)
-------------- --------------
<S> <C> <C> <C> <C>
Gross Offering Proceeds $35,000(3) 100.00% $50,000 100.00%
------- ------ ------- ------
Public Offering Expenses:
Selling Discounts and
Commissions(4)(5) 2,625 7.50 3,375 6.75
Other Organizational Expenses
and Offering Expenses(6)(7) 1,120 3.20 1,570 3.14
------- ------ ------- ------
Amount Available to Invest $31,255 89.30% $45,055 90.11%
======= ====== ======= ======
Prepaid Items and Fees Related
to Purchase of Real Estate(8) 333 0.95 333 0.67
Working Capital Reserve(9) 274 0.78 1,000 2.00
======= ====== ======= ======
Public Offering Proceeds
Available for Investment $30,648 87.57% $43,722 87.44%
======= ====== ======= ======
Acquisition Fees (included
in purchase price)(10) 598(11) 1.71 872(11) 1.74
------- ------ ------- ------
Amount Available for
Investment in Real Estate(12) $30,050 85.86% $42,850 85.70%
======= ====== ======= ======
</TABLE>
25
<PAGE>
- -------------------
(1) When an aggregate of $15,000,000 is raised from the sale of Units and
Shares, the Minimum Common Offering will be completed and Units or Shares
will be issued to investors.
(2) At least 152,000 shares of 8% Preferred must be sold, although no shares of
8% Preferred will be issued until there has been an Initial Closing.
(3) Assumes none of the 8% convertible Preferred is sold.
(4) If the Minimum Common Offering is successfully completed, the Company will
pay a selling commission of $.98 per Unit sold and $0.49 per Share (except
that no commission will be paid with respect to any Shares sold to the
officers and directors of the Company or the Soliciting Dealers or any of
their employees for their own accounts). Also, a dealer manager fee is
payable to the Sales Agent in the amount of one-half of one percent of the
gross proceeds from this Offering.
(5) If a Minimum Preferred Offering is successfully completed, the Company will
pay a selling commission of $0.66 per share of 8% Preferred (except that no
commission will be paid with respect to any shares of 8% Preferred sold to
the officers and directors of the Company).
(6) With respect to the offering of Units and Shares, Other Organization and
Offering Expenses represent certain expenses incurred in connection with
the formation, qualification and registration of the Company and in
marketing and distributing the Shares under applicable federal and state
law, and any other expenses actually incurred and directly related to the
offering and sale of the Units and Shares, except selling commissions.
Such other expenses include (i) a financial advisory fee of one percent of
the gross proceeds from this Offering payable to a consultant, Strategic
Planning Consultants, Inc., (ii) a non-accountable expense allowance
payable to the Sales Agent in an amount equal to one percent of the Gross
Offering Proceeds, (iii) an expense reimbursement of up to one-half of one
percent payable to the Sales Agent or Soliciting Dealers for bona fide due
diligence expenses, and (iv) a wholesaling fee payable to an independent
wholesaler of one-half of one percent. See "The Offering." Some of the
expenses ($400,000) were previously paid by Funding Co. and are reflected
on the books of the Company as a result of the merger. See "The Offering"
for a complete description of the fees and expense reimbursements payable
to the Sales Agent and the Soliciting Dealers. See "The Offering."
(7) With respect to shares of the 8% Preferred, Other Organization and Offering
Expenses represent certain expenses incurred in connection with the
marketing and distribution of such shares under applicable federal and
state law, and any other expenses actually incurred and directly related to
the offering and sale of such shares, except selling commissions. Such
other expenses include (i) a financial advisory fee of one and one-half
percent of the gross proceeds from the offering of the shares of 8%
Preferred payable to a consultant, Strategic Planning Consultants, Inc.
See "The Offering."
(8) Includes prepaid interest, points, loan commitment fees and legal and other
costs of acquisition. All such items shall be capitalized.
(9) In the event of a Maximum Combined Offering, the net proceeds derived
therefrom will be used principally for acquisition of properties not yet
identified.
(10) Acquisition Fees is defined as the total of all fees and commissions paid
by any person to any person, not affiliated with the Company, in connection
with the selection, financing and purchase of any property by the Company
or the Operating Partnership, whether designated as real estate
commissions, acquisition fees, finders' fees, selection fees, non-recurring
management fees, consulting fees or any other similar fees or commission
howsoever designated and howsoever treated for tax or accounting purposes.
None of such amounts are payable to any member of management or any
affiliate of management. Although it is assumed that all the foregoing
fees will be paid by the sellers of Properties, sellers generally fix the
selling price at a level sufficient to cover the cost of any Acquisition
Fee so that, in effect, the Company, as purchaser, will bear such Fee as
part of the purchase price.
(11) The Acquisition Fees reflected are calculated as if the Company were to
utilize the maximum amount of leverage (50%) that is permitted, assuming
similar types of properties to the Properties were acquired under similar
terms. The amount of Acquisition Fees based on the Company's planned use
of leverage as described under "Description of Properties" would be $66,000
in the case of a Minimum Common
26
<PAGE>
Offering (0.44%), $66,000 in a Minimum Combined Offering (0.39%), $499,000
in the case of a Maximum Common Offering (1.43%), and $499,000 in a Maximum
Combined Offering (1.00%).
(12) In a Minimum Common Offering of $15,000,000, or in a Minimum Combined
Offering of $17,006,400, approximately $11,700,000 will be used to fund the
acquisition of four Properties which have a total purchase price of
$14,200,000 utilizing mortgage financing of approximately $2,500,000. See
table in "Prospectus Summary -- Description of Properties" above for
information about the order in which such Properties will be acquired. In
a Maximum Common Offering of $35,000,000, approximately $30,050,000 will be
used to fund the acquisition of the first four Properties, supplemented by
next closing the two commercial and retail Properties (Hewlett-Packard
Building and Westwood Self-Storage/Sportmart Building) for a combined
purchase price of $43,100,000 utilizing an aggregate of approximately
$8,500,000 of mortgage debt and partnership units valued at approximately
$3,890,000. The table below sets forth the combined proceeds of this
Offering required to accomplish each of these purchases according to their
proposed terms of acquisition.
<TABLE>
<CAPTION>
Combined Offering
Proceeds Required to
Property Purchase Price Close Purchase
-------- -------------- --------------
<S> <C> <C>
Sandpainter Apartments $ 1,800,000
Northwest Garden Apartments 6,950,000
Orangewood Place Apartments 2,200,000
Arrow Village Apartments 3,250,000 $15,000,000
Westwood/Sportmart Building 12,900,000 18,000,000
Hewlett-Packard Building 16,000,000 26,000,000
</TABLE>
DISTRIBUTION POLICY
The Company intends to make regular quarterly Distributions commencing with
the first full calendar quarter after the Initial Closing. While distributions
are made in the discretion of the Board of Directors, to qualify for taxation as
a REIT, the Company is generally required to make distributions to its
shareholders in an amount at least equal to (a) the sum of (i) 95% of the
Company's REIT Taxable Income and (ii) 95% of the net income, if any, from
foreclosure property in excess of the special tax on income from foreclosure
property minus (b) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its federal
income tax return for such year and if paid on or before the first regular
distribution after such declaration. See "Federal Income Tax Considerations --
Annual Distribution Requirements." The Company's ability to make distributions
will be substantially dependent on the receipt of distributions from the
Operating Partnership. The Company intends to cause the Operating Partnership
to distribute to its partners the Operating Partnership's available cash which
available cash will be determined in the discretion of the Company as general
partner of the Operating Partnership. Initially, the Operating Partnership's
principal source of revenue will be payments of rents from the tenants of the
Properties. Each OP Unit outstanding is entitled to receive the same cash
Distribution as is made to each outstanding share of Common Stock. Holders of
OP Units will be entitled to participate in distributions pro rata with holders
of the Common Stock. Within 60 days of the end of each quarter in which
shareholders have been paid Distributions, the Company will send to shareholders
a statement identifying the source of such Distributions.
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company reflecting
the pro forma combined capitalization of the Company and reflecting the
acquisitions of Properties as of March 31, 1996 after giving effect to the
completion of a Minimum Common Offering.
<TABLE>
<CAPTION>
March 31, 1996
----------------------------
Pro Forma
Minimum
Historical Common
----------- --------------
<S> <C> <C>
DEBT:
Mortgage notes payable................ $ - $ 2,500,000
-------- -------------
MINORITY INTEREST....................... - -
-------------
STOCKHOLDERS' EQUITY:
Common Stock(1)....................... 2,747 24,176
8% Convertible Preferred Stock(2)..... - -
1995 Convertible Preferred Stock(2)... 10,210 10,210
Additional paid-in capital............ 420,155 13,373,732
Accumulated earnings (deficit)........ (64,795) (64,795)
-------- -------------
Total stockholders' equity..... 368,317 13,343,323
-------- -------------
Total capitalization.................... $368,317 $15,843,323(3)
======== =============
</TABLE>
- ---------------
(1) Reflects sale of Units and Shares offered hereby. Assumes none of the Unit
price was allocated to the Series "A" Warrants.
(2) At the Final Closing of this Offering, the Company expects to have two
series of preferred stock outstanding: 8% Convertible Preferred Stock and
1995 Convertible Preferred Stock. The 8% Convertible Preferred Stock is
being offered to institutional and other accredited investors concurrently
with this Offering. Up to 1,136,364 shares of 8% Convertible Preferred
Stock are being offered at $13.20 per share ($15,000,004 in the aggregate).
The shares of 1995 Convertible Preferred Stock are held primarily by
members of management. See "Principal Shareholders" and "Description of
Securities-- 1995 Convertible Preferred Stock."
(3) Assumes that no Series "A" Warrants, Series "D" Warrants or Series "E"
Warrants are exercised, nor the 10% Convertible Notes are converted (See
"Description of Securities -- 10% Convertible Notes due October 1, 1996,"
"--10% Convertible Notes due October 1, 1996, Series B," "-- Series "A"
Warrants, "-- Series "D" Warrants" and "-- Series "E" Warrants").
DILUTION
As of March 31, 1996 on a pro forma combined basis the net tangible
deficiency of the Company was $(717,065) or $(2.61) per share of Common Stock.
After giving effect to the completion of a Minimum Common Offering, a Maximum
Common Offering and receipt and application of the net proceeds therefrom (after
deducting underwriting commissions and discounts and estimated offering
expenses), the adjusted pro forma tangible assets of the Company as of March 31,
1996 would have exceeded its total pro forma liabilities by $13,273,369 ($5.49
per Share) for a Minimum Common Offering and $30,420,029 ($5.77 per Share) for a
Maximum Common Offering representing an immediate increase in net tangible book
value of $8.10 per Share for a Minimum Common Offering and $8.38 per Share for a
Maximum Common Offering to existing shareholders and an immediate dilution of
$1.51 per Share for a Minimum Common Offering and $1.23 per Share for a Maximum
Common Offering to new investors purchasing shares in the Offering. Pro forma
net tangible book value per share represents the amount of the Company's total
pro forma tangible assets less its total
28
<PAGE>
pro forma liabilities, divided by the total number of shares of Common Stock
outstanding. The following table illustrates this per share dilution that would
have occurred if the offering had been consummated as of March 31, 1996:
<TABLE>
<CAPTION>
Minimum Maximum
Common Common
Offering Offering
--------- ---------
<S> <C> <C>
Initial public offering price per Share....................................... $7.00(1) $7.00(1)
------- -------
Pro forma net tangible book value per Share before the Offering............... (2.61) (2.61)
Increase in net tangible book value per Share attributable to price paid by
new investors in the Offering................................................ 8.10 8.38
------- -------
Pro forma net tangible book value per Share after Offering(1)................. 5.49 5.77
------- -------
Dilution in net tangible book value per Share to new investors
in the Offering(2)........................................................... $ 1.51 $ 1.23
======= =======
</TABLE>
- ---------------
(1) Assumes no value assigned to the Series "A" Warrants which are part of the
Units. If all Series "A" Warrants were exercised, new investors would
experience dilution in net tangible book value per share of $1.05 for a
Minimum Common Offering and $0.75 for a Maximum Common Offering.
The following tables set forth as of March 31, 1996, with respect to the
existing Shareholders and the new investors, a comparison of the number and
percentage of Shares purchased and cash or other consideration paid and the
average price per share. The calculations are based on the public offering
price of $7.00 per Share, before deduction of underwriting discounts and
commissions and estimated offering expenses payable by the Company. Further, it
assumes no separate value is assigned to the Series "A" Warrants which are part
of the Units.
Minimum Common Offering
-----------------------
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price per Share
-------------------- ----------------------- -----------------------
Number Percent Number Percent
--------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Existing Shareholders 274,714 11% $ 464,795 3% $1.69
Shares outstanding(1)
New Investors 2,142,858 89% 15,000,006 97% 7.00
--------- --- ----------- --- -----
Total 2,417,572 100% $15,464,801 100% $6.40
========= === =========== === =====
</TABLE>
Maximum Common Offering
-----------------------
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price per Share
-------------------- ----------------------- -----------------------
Number Percent Number Percent
--------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
Existing Shareholders 274,714 5% $ 464,795 1% $1.69
Shares outstanding(1)
New Investors 5,000,000 95% 35,000,000 99% 7.00
--------- --- ----------- --- -----
Total 5,274,714 100% $35,464,795 100% $6.72
========= === =========== === =====
</TABLE>
- ---------------
(1) Includes shares outstanding as of March 31, 1996.
29
<PAGE>
The foregoing table does not give effect to the possible exercise of
warrants outstanding at March 31, 1996 to purchase an aggregate of 535,633
shares of Common Stock at a weighted average exercise price of $3.64 per share
nor does the table give effect to the possible exercise of convertible notes
payable as of March 31, 1996 into 57,507 shares of Common Stock at an exercise
price of $4.50. If all such warrants were exercised in full and notes converted
in full, the percentage of the total consideration paid by existing shareholders
and new investors would be 15% and 85% in a Minimum Common Offering, and seven
percent and 93% in a Maximum Common Offering, respectively, and the average
price per Share paid by existing shareholders and new investors would be $2.74
and $7.00 in a Minimum Common Offering and $2.74 and $7.00 in a Maximum Common
Offering, respectively.
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information on a pro
forma basis for the Company for the three months ended March 31, 1996 and year
ended December 31, 1995 and on an historical basis for the Prior Ownership Group
("POG") for the three months ended March 31, 1996 and 1995 and for each of the
years in the three year period ended December 31, 1995. The combined historical
operating data of POG for the years ended December 31, 1993, 1994 and 1995 have
been derived from the historical combined financial statements audited by BDO
Seidman, LLP, independent accountants, whose report with respect thereto is
included elsewhere in this Prospectus.
"Funds from Operations" as defined by the National Association of Real
Estate Investment Trusts ("NAREIT") equals net income or (loss) excluding gains
or (losses) from debt restructuring and sales of property, plus depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Management considers Funds from Operations to be an appropriate
measure of the performance of an equity REIT. Note, however, that the "Funds
from Operations" measure presented by the Company may not be comparable to other
similarly titled measures used by other REITs. Funds from Operations should not
be considered as an alternative to net income (determined in accordance with
generally accepted accounting principles) as an indication of the Company's
financial performance or to cash flows from operating activities (determined in
accordance with generally accepted accounting principles) as a measure of
liquidity.
The pro forma financial information is presented as if (i) the Company had
owned the Properties at the beginning of the pro forma periods; (ii) the Company
qualified as a REIT, distributed all of its taxable income and, therefore
incurred no tax expense during the year, (iii) 5,000,000 (2,142,858 in a Minimum
Common Offering) shares of Common Stock were sold in the Offerings at the
initial public offering price of $7.00 per share; (iv) 1,136,364 shares of 8%
Convertible Preferred were sold in the Maximum Combined Offering at the offering
price of $13.20 per share; and (v) the net proceeds of the Minimum Common
Offering and the Maximum Common Offering and the Maximum Combined Offering were
applied as described in the "Estimated Use of Proceeds" as of the beginning of
the periods presented for the operating data and as of March 31, 1996 for the
balance sheet data.
The following selected financial information should be read in conjunction
with the discussion set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and all of the financial
statements included elsewhere in this Prospectus. The pro forma financial
information is not necessarily indicative of what the actual financial position
and results of operations of the Company would have been as of and for the
periods indicated, nor does it purport to represent the future financial
position and results of operations for future periods.
30
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
Company POG
Pro Forma Historical(1)
--------- -------------------
1995 1995 1994 1993
---------------------------------------------- --------- ---------- ---------
(In thousands except per share)
Minimum Minimum Maximum Maximum
Common Combined Common Combined
Offering Offering Offering Offering
--------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental Revenues........................... $ 2,478 $ 2,478 $ 6,164 $ 6,164 $ 3,686 $ 3,633 $ 3,547
Income (loss) from
continuing operations.................... 79 273 1,180 1,731 (43) (176) (74)
Net income (loss)......................... 79 273 1,124 1,676 (43) (176) (74)
Dividends on preferred shares............. - 161 - 1,200 - - -
Net income (loss attributable
to common shares......................... 79 112 1,124 476 (43) (176) (74)
Net income (loss) per
common share(2).......................... 0.02 0.03 0.17 0.07 - -
Average number of shares
outstanding.............................. 3,753 3,753 6,609 6,609 - - -
Ratio of earnings to fixed
charges and preferred
dividends(4)............................. 1.41 1.70 3.04 1.40 - - -
BALANCE SHEET DATA:
Real estate after
accumulated depreciation................. 14,320 14,320 41,783 41,783 23,456 24,458 25,462
Total assets.............................. 16,341 15,711 42,967 48,305 23,985 24,912 26,081
Total debt................................ 2,500 - 8,462 - 19,514 19,906 20,242
Stockholders'/partners equity............. 13,343 15,213 31,623 45,423 4,043 4,701 5,489
OTHER DATA:
Pro forma Funds from Operations(3):
Income (loss) before minority
interest................................. 79 273 1,180 1,731 (43) (176) (74)
Depreciation.............................. 534 534 1,565 1,565 1,068 1,068 947
Minority interest share................... - - (55) (55) - - -
-------- -------- -------- -------- ------- ------- -------
Pro forma Funds from Operations........... 613 807 2,690 3,241 1,025 892 873
Cash flows from operating activities...... 862 1,055 3,117 3,668 1,148 900 705
Cash flows from investing activities(5)... (12,224) (12,224) (23,346) (23,346)
Cash flows from financing activities(6)... 12,529 12,770 23,700 27,979 (1,007) (948) 947
At end of period:
Commercial Properties.................... - - 2 2 2 2 2
Apartment Properties..................... 4 4 4 4 - - -
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------
Company POG
Pro Forma Historical(1)
---------- -------------
1996 1996 1995
--------------------------------------------- --------- ----------
(In thousands except per share)
Minimum Minimum Maximum Maximum
Common Combined Common Combined
Offering Offering Offering Offering
--------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental Revenues........................... $ 655 $ 655 $ 1,588 $ 1,588 $ 903 $ 908
Income (loss) from
continuing operations.................... 88 136 305 481 (29) (14)
Net income (loss)......................... 88 136 302 479 (29) (14)
Dividends on preferred shares............. - 40 - 300 - -
Net income (loss) attributable
to common shares......................... 88 96 302 179 (29) (14)
Net income (loss) per
common share(2).......................... 0.02 0.03 0.05 0.03 - -
Average number of shares
outstanding.............................. 3,753 3,753 6,609 6,609 - -
Ratio of earnings to fixed
charges and preferred
dividends(4)............................. 2.83 3.40 2.72 1.60 - -
BALANCE SHEET DATA:
Real estate after
accumulated depreciation................. 14,320 14,320 41,728 41,728 23,205 -
Total assets.............................. 16,587 15,957 43,157 48,495 23,729 -
Total debt................................ 2,500 - 8,462 - 19,416 -
Stockholders'/partners equity............. 13,343 15,213 30,490 44,290 3,920 -
OTHER DATA:
Pro forma Funds from Operations(3):
Income (loss) before minority
interest................................. 88 136 305 481 (29) (14)
Depreciation.............................. 133 133 391 391 267 267
Minority interest share................... - - (3) (3) - -
------- ------- ------- ------- ------- -----
Pro forma Funds from Operations........... 221 269 693 869 238 253
Cash flows from operating activities...... 159 207 578 755 182 341
Cash flows from investing activities(5)... (26) (26) (26) (26)
Cash flows from financing activities(6)... (11) (164) (39) (304) (192) (270)
At end of period:
Commercial Properties.................... - - 2 2 2 2
Apartment Properties..................... 4 4 4 4 - -
</TABLE>
- ---------------
(1) Reflects the Company's income (loss) before minority interest of the Prior
Ownership Group's predecessors.
(2) Assumes 3,752,822 (Minimum Offerings) and 6,609,964 (Maximum Offerings)
weighted average number of shares of Common Stock outstanding including the
dilutive effect of 463,133 Series "D" Warrants and 72,500 Series "E"
Warrants plus the dilutive effects of the 1995 Preferred Convertible shares
and the 10% Convertible Notes. Net income (loss) per common share also
assumes that annual preferred dividends of $161,000 (Minimum Combined
Offering) and $1,200,000 (Maximum Combined Offering) will be paid.
(3) "Funds from Operations" as defined by the National Association of Real
Estate Investment Trusts ("NAREIT") equals net income or (loss) excluding
gains or (losses) from debt restructuring and sales of property, plus
depreciation and amortization and after adjustments for unconsolidated
partnerships and
32
<PAGE>
joint ventures. Management considers Funds from Operations to be an
appropriate measure of the performance of an equity REIT. Note, however,
that the "Funds from Operations" measure presented by the Company may not
be comparable to other similarly titled measures used by other REITs. Funds
from Operations should not be considered as an alternative to net income
(determined in accordance with generally accepted accounting principles) as
an indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with generally accepted
accounting principles) as a measure of liquidity.
(4) For purposes of computing the ratio of earnings to combined fixed charges
and preferred dividends, "earnings" consist of earnings before income
taxes, extraordinary items and fixed charges. "Fixed charges and preferred
dividends" consist of interest on all indebtedness and preferred dividends.
Earnings on the POG properties were insufficient to cover fixed charges and
preferred dividends by $43,000, $176,000 and $74,000 for the years ended
December 31, 1995, 1994 and 1993.
(5) Represents historical improvements and additions to properties which are
assumed to equal estimated improvements and acquisitions of the Properties
in the amounts of $11,820,000 (Minimum Offerings) and $22,938,139 (Maximum
Offerings).
(6) Includes (i) net proceeds from the Offerings of $12,975,006 (Minimum Common
Offering), $14,845,006 (Minimum Combined Offering), $31,255,000 (Maximum
Common Offering) and $45,055,004 (Maximum Combined Offering), (ii)
repayment of mortgage notes from proceeds of the Offerings of $2,500,000
(Minimum Combined Offering), $8,000,000 (Maximum Common Offering) and
$16,461,861 (Maximum Combined Offering) and (iii) dividends on preferred
stock of $160,512 (Minimum Combined Offering) and $1,200,000 (Maximum
Combined Offering).
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the "Selected
Financial Information" as well as the financial statements listed in the index
on page F-1. The minimum offerings include the following Properties, referred
to as the Proposed Acquisitions: The Arrow Village Apartments, Azusa,
California, the Northwest Garden Apartments, Peoria, Arizona, the Orangewood
Place Apartments, Phoenix, Arizona, and the Sandpainter Apartments, Phoenix,
Arizona. The Maximum Common Offering and the Maximum Combined Offering include
the Proposed Acquisitions, as well as the following properties referred to as
the Prior Ownership Group ("POG"): the Hewlett-Packard Building, Van Nuys,
California, and the Westwood Self-Storage/Sportmart Building, Los Angeles,
California.
RESULTS OF OPERATIONS -- PROPOSED ACQUISITIONS
Comparison of Three Months Ended March 31, 1996 to 1995
For the three months ended March 31, 1996, revenues in excess of expenses
were $383,969 compared to $197,590 for the prior period. The change results from
the following factors: an increase in rental revenues of $108,487, a decrease in
operating expenses of $81,910 and an increase in management fees of $4,018.
Rental revenues increased in 1995 by $108,487 (20%) primarily attributable
to an increase in rental revenues of $45,952 from the Arrow Village Apartments
due to the completion of the renovation of the property in May 1995. In
addition, rental revenues increased by $31,667 from Northwest Garden Apartments
and by $30,868 from the other two properties. These increases are due primarily
to increases in average rents.
Property operating expenses decreased by $81,910 (33%). The decrease was
primarily attributable to a decrease of $93,867 at Arrow Village Apartments
after the renovation. The remaining three properties' operating expenses were
relatively the same in both periods.
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<PAGE>
Management Fees increased by $4,018 (17%), principally due to the increases
in rental revenues described above. Property management fees are a function of
the revenue generated by the property.
Comparison of Year Ended December 31, 1995 to 1994
For the year ended December 31, 1995, revenues in excess of expenses were
$1,178,899 compared to $854,190 for the prior year. The change results from the
following factors: an increase in rental revenues of $587,396 offset by
increases in operating expenses of $233,252 and management fees of $29,435.
Rental revenues increased in 1995 by $587,396 (33%) primarily attributable
to an increase in rental revenues of $416,818 from the Arrow Village Apartments
due to the completion of the renovation of the property in May 1995. In
addition, rental revenues increased by $129,338 from Northwest Garden Apartments
and by $41,240 from the other two properties. These increases are due primarily
to increases in average rents.
Property operating expenses increased by $233,252 (27%). The increase was
primarily attributable to an increase of $244,050 incurred by Arrow Village
Apartments after the renovation. The remaining three properties' operating
expenses were relatively the same in both periods.
Management fees increased by $29,435 (40%), principally due to the
increases in rental revenues described above. Property management fees are a
function of the revenue generated by the property.
RESULTS OF OPERATIONS -- PRIOR OWNERSHIP GROUP
Comparison of Three Months Ended March 31, 1996 to 1995
For the three months ended March 31, 1996, the net loss amounted to $29,492
compared to a net loss of $14,198 for the three months ended March 31, 1995.
The change results primarily from the following factors: a decrease in rental
revenues of $4,762, a decrease in property operating expenses of $7,513, and an
increase in interest expense of $18,044. As can be derived from these changes,
the operations of the Prior Ownership Group were static between the two periods
with the only significant change occurring in interest expense due to the
increase in interest rates for variable rate debt.
Comparison of Year Ended December 31, 1995 to 1994
For the year ended December 31, 1995, the net loss amounted to $43,417
compared to a net loss of $176,503 for the year ended December 31, 1994. The
change results primarily from the following factors: an increase in rental
revenues of $52,694, a decrease in property operating expense of $133,700, and
an increase in interest expense of $53,508.
Rental revenues increased in 1995 by $52,694 or one percent. The increase
was primarily attributable to the effect of minor increases during 1995 in the
rents allowable under lease agreements currently in effect for several tenants
of the Hewlett-Packard Building.
Property operating expenses (including management fees and depreciation and
amortization) decreased $133,700 or 12% in 1995 as compared to 1994. The
decrease was primarily a result of a reduction of repair expenses associated
with the 1994 Los Angeles earthquake of $82,040, a decrease in property taxes of
$35,968 caused by a reassessment of the Westwood Self-Storage/Sportmart
Building, and decreases in other operating expenses aggregating $14,784
consisting primarily of workers compensation insurance, cleaning contract,
security services and payroll taxes.
Interest expense increased by $53,508 or three percent in 1995 as a result
of the increase in interest rates for the variable rate debt which was partially
offset by lower average outstanding debt during the period compared to the prior
year.
Comparison of Year Ended December 31, 1994 to 1993
For the year ended December 31, 1994 the net loss amounted to $176,303
compared to a net loss of $74,328 for the year ended December 31, 1993. The
change results primarily from the following factors: an
34
<PAGE>
increase in rental revenues of $86,193, an increase in property operating
expenses of $145,469 and an increase in interest expense of $42,699.
Rental revenues increased in 1994 by $86,193 or two percent. The increase
was primarily attributable to the effect of a 4% increase in average occupancy
of the Hewlett-Packard Building during the period as compared to the same period
of the prior year.
Property operating expenses increased $145,469 or seven percent in 1994 as
compared to 1993. The property operating expense increase is primarily due to a
$31,250 decrease in management fees, caused by the two commercial buildings
changing management companies during 1994, and a $25,991 decrease in other
property operating expenses, primarily maintenance expenses which has been
offset by $82,040 in repair expenses made during 1994 necessitated by the Los
Angeles earthquake. Depreciation and amortization expense increased by $120,670
primarily due to the amortization of tenant improvements and leasing commissions
associated with the increased occupancy in the Hewlett-Packard Building.
Interest expense increased by $42,699 or two percent as a result of the
increase in interest rates for variable rate debt which was partially offset by
lower average outstanding debt during the period compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
MINIMUM OFFERINGS. If the Minimum Common Offering is completed, the
Company expects to acquire the Proposed Acquisition properties for an
approximate purchase price of $14.3 million, which will include mortgage debt of
approximately $2.5 million, and have cash and cash equivalents remaining of
approximately $2,197,000. In the case of a Minimum Combined Offering, the
Company expects to acquire the Proposed Acquisition Properties without any
mortgage debt and have cash and cash equivalents of approximately $1,547,000.
Mortgage debt, upon completion of the Minimum Common Offering and related
transactions, will consist of:
. $2.5 million mortgage bearing interest at a fixed rate of 7.875% per
annum. The loan from the Federal National Mortgage Association
("FannyMae") was closed in April 1996 and has monthly installments
based on a 25-year amortization of $18,706 through April 2003, at
which time all outstanding principal and interest would be due. The
mortgage is secured by the Arrow Village Apartments.
Comparison of Three Months Ended March 31, 1996 to 1995
Historical cash flows from operations on the Proposed Acquisition
properties increased from $69,739 for the three months ended March 31, 1995 to
$139,323 for the three months ended March 31, 1996. The increase is principally
due to increases in average rents, increases in occupancy rates at Arrow Village
Apartments and decreases in operating expenses at Arrow Village Apartments.
Historical cash flows used in investing activities were $154,436 for the
three months ended March 31, 1995 and $28,223 for the three months ended March
31, 1996. The decrease in outflow is principally due to the completion of the
renovation of Arrow Village Apartments which occurred during the period from
September 1994 through May 1995.
Historical cash flows used in financing activities were $91,050 for the
three months ended March 31, 1995 while cash flows used in financing activities
were $126,100 for the three months ended March 31, 1996. The principal
differences between the two years are an increase in distributions of $86,600
during 1995, and a decrease in mortgage proceeds on Arrow Village Apartments of
$139,500 during 1996.
Comparison of Year Ended December 31, 1995 to 1994
35
<PAGE>
Historical cash flows from operations on the Proposed Acquisition
properties increased from $394,573 for the year ended December 31, 1994 to
$543,183 for the year ended December 31, 1995. The increase is principally due
to increases in average rents.
Historical cash flows used in investing activities were $246,140 for the
year ended December 31, 1994 and $301,642 for the year ended December 31, 1995.
These outflows are principally due to the renovation of Arrow Village Apartments
which occurred during the period from September 1994 through May 1995.
Historical cash flows used in financing activities decreased from $355,341
for the year ended December 31, 1994 to $277,664 for the year ended December 31,
1995. The principal differences between the two years are an increase in
distributions of $209,803 during 1995, mortgage proceeds on Arrow Village
Apartments of $200,000 during 1995.
MAXIMUM OFFERINGS. Upon the completion of the Maximum Common Offering and
related transactions and use of proceeds, the Company expects to have acquired
the Proposed Acquisition properties and the POG properties for an approximate
purchase price of $43.1 million which will include mortgage debt of
approximately $8.5 million, and have cash and cash equivalents remaining of
approximately $1,359,000. Mortgage debt, upon the completion of the Maximum
Common Offering and related transactions, will consist of:
. $5.96 million mortgage bearing interest at 2.5% above the Federal Home
Loan Bank's 11th District Cost of Funds (7.73% at March 31, 1996).
Principal and interest is payable monthly in installments necessary to
fully amortize the then outstanding principal balance at the current
interest rate by February 28, 2022. The mortgage, currently held by
Topa Savings Bank, Los Angeles, California, is secured by the Westwood
Self-Storage/Sportmart Building.
. $2.5 million mortgage bearing interest at a fixed rate of 7.875% per
annum. The loan from the Federal National Mortgage Association
("FannyMae") was closed in April 1996 and has monthly installments
based on a 25-year amortization of $18,706 through April 2003, at
which time all outstanding principal and interest would be due. The
mortgage is secured by the Arrow Village Apartments.
If the Maximum Combined Offering is completed, the Company expects to
acquire real estate properties for an approximate purchase price of $43.1
million. The mortgage debt, if any, will be adjusted by management as
considered advantageous to the Company. As a result, there may be no
indebtedness or as much as 50% indebtedness as shown in "Estimated Use of
Proceeds."
Comparison of Three Months Ended March 31, 1996 to 1995
Cash flows from operations on the POG properties decreased by $158,271
between the three months ended March 31, 1995 and 1996. This decrease in cash
flows from operations is primarily due to the $124,261 decrease in cash flows
from changes in accounts payable and accrued liabilities.
Cash flows used in financing activities of the POG properties were $269,734
and $191,647 for the three months ended March 31, 1995 and 1996. Net cash used
in financing activities consisted of reductions of the mortgages on both of the
POG properties totaling $99,621 and $98,168 during 1995 and 1996 and
distributions to the owner of the Westwood Self-Storage/Sportmart Building of
$170,113 and $93,479 during 1995 and 1996.
Comparison of Year Ended December 31, 1995 to 1994 and 1993
Cash flows from operations on the POG properties increased each year
between 1993 and 1995, starting at $705,273 during 1993, and increasing to
$900,264 during 1994 and $1,147,669 during 1995. This increase in cash flows
from operations is due to the increase in revenues from the Hewlett-Packard
Building due to it becoming fully occupied during 1993, the increase in other
assets during 1993 due to the payment of lease commissions in association with
the lease-up of the Hewlett-Packard Building and the continued reduction of
36
<PAGE>
property operating expenses, except for earthquake repair related expenses of
$82,040 during 1994, secured by the owner of the POG properties.
Cash used in investing activities was $1,559,647 for the year ended
December 31, 1993, but there was essentially no activity for the years ended
December 31, 1994 and 1995. The large investing outflows in 1993 were for
tenant improvements incurred during the lease-up of the Hewlett-Packard Building
during 1993.
Cash flows from financing activities of the POG properties were inflows
during 1993 of $946,840, while during 1994 and 1995 total outflows were $947,621
and $1,006,576. Cash flows from financing activities during 1993 were due to
increases in the mortgage balance of the Hewlett-Packard Building of
approximately $1,197,000 to finance tenant improvements and lease commissions
paid, as described above, which was partially offset by distributions to the
owner and the reduction of the mortgage of the Westwood Self-Storage/Sportmart
Building. Net cash used in financing activities of $947,621 and $1,006,576
during 1994 and 1995 consisted of reductions of the mortgages on both of the POG
properties totaling $336,378 and $391,934 during 1994 and 1995 and distributions
to the owner of the Westwood Self-Storage/Sportmart Building of $611,243 and
$614,642 during 1994 and 1995.
The Company anticipates that distributions will be paid from net cash
available for distribution, which is expected to exceed net income. The Company
intends to pay distributions quarterly. The Company is required to distribute at
least 95% of its REIT Taxable Income annually. A portion of the distributions
will represent a return of capital. See "Federal Income Tax Considerations --
Requirements for Qualification -- Annual Distribution Requirements." Amounts
accumulated for distribution will be invested by the Company primarily in short-
term investments.
Based on the current condition of the Properties proposed to be acquired by
the Company, no material capital commitments, such as renovations or planned
improvements, have been identified by the Company.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and net cash provided by operations. The
Company believes that the above short-term liquidity sources will be adequate to
satisfy the cash requirements of the Company for the 12 months following the
completion of the Offering.
The Company expects to meet certain long-term liquidity requirements, such
as scheduled debt maturities, primarily through net cash flow and the
refinancing of certain long-term debt.
INFLATION
In the last three years, inflation has not had a significant impact on the
Properties because of the relatively low inflation rate. Generally, the
residential properties have been able to pass on increases in costs and
operating expenses resulting from inflation to their residents, who generally
lease apartment units for initial periods of one year or less, generally with
increases upon renewal.
Substantially all of the commercial tenants' leases contain provisions
designed to protect the property from the effects of inflation. Such provisions
include clauses enabling the property to receive percentage rentals based on
tenants' gross sales, which generally increase as prices rise, and/or escalation
clauses, which generally increase rental rates during the terms of the leases.
Such escalation clauses are often related to increases in the consumer price
index. In addition, many of the leases are for terms less than ten years which
may enable the property to replace existing leases with new leases at higher
base and/or percentage rentals if rents of the existing leases are below the
then existing market rate. Most of the commercial leases also require the
tenants to pay either their pro rata share of operating expenses or their pro
rata share of the excess operating expenses over predetermined fixed cost levels
or base year costs. Such operating costs include common area maintenance, real
estate taxes and insurance, thereby reducing the property's exposure to
increases in costs and operating expenses resulting from inflation.
37
<PAGE>
CONFLICTS OF INTEREST
Arthur P. Herring, Chief Executive Officer of the Company and Chairman of
the Board of Directors of the Company, has been engaged in the acquisition,
financing and management of real estate properties for the last 24 years through
various corporate and private entities. The only real estate project in which
Mr. Herring is currently involved is a mobile home park in Pacifica, California,
of which he is a general partner. To the extent Mr. Herring is required to
devote time to such project, a conflict of interest may arise as to the time
necessary to manage the affairs of the Company.
In the future, neither Mr. Herring nor any of the principal officers of the
Company may acquire an interest in properties or develop or manage properties
which meet the investment parameters of the Company without the consent of the
Board of Directors of the Company. Any consent of the Board of Directors
required in order to permit such transactions would require the approval of the
Board of Directors excluding those directors proposed to be engaged in such
transactions, but including a majority of the Independent Directors.
The vote of a majority of the Independent Directors, as well as the vote of
a majority of the Board of Directors, will be required for the approval of all
actions taken by the Board (regardless of whether such actions involve
conflict); members of the Board having conflicting interests will be required to
dispose of such interests or refrain from participating in any decisions
regarding such interests.
The Company intends to closely control its costs by contracting for certain
services where feasible and desirable. At the time of the acquisition of the
Initial Properties, all of such Properties will continue to be managed by the
professionals which were managing the Properties prior to acquisition. However,
in the future, where the Company determines it is desirable to contract for
other outside property management services or make changes therein, it will
consider retaining T.K.L. Partnership, a property management Company, so long as
their services are competitive in cost and quality with services available from
wholly unrelated entities. Kelly Loegering and Thomas J. Loegering, Jr. are
beneficiaries of Regent IV Trust which is one of the principal shareholders of
the Company (see "Principal Shareholders"), and co-owners of T.K.L. Partnership.
MANAGEMENT
The Company will operate under the direction of the Board, the members of
which are accountable to the Company and its shareholders as fiduciaries. The
Board will be responsible for the management and control of the affairs of the
Company; however, the executive officers of the Company will manage the
Company's day-to-day affairs and the acquisition and disposition of investments,
subject to the Board's supervision. The Company currently has five directors;
it must have at least three and may have no more than nine directors. As a
matter of policy, the Company will maintain a majority of the Board who are
Independent Directors; that is, persons who are not employed by or otherwise
affiliated with the Company prior to becoming directors. A majority of such
Independent Directors must approve all decisions of the Board of Directors. The
Board is divided into three classes serving staggered three year terms. See
"Certain Provisions of Maryland Law and the Company's Charter and By-Laws --
Classification of the Board of Directors."
Any director may resign at any time and may be removed with or without
cause by the shareholders upon the affirmative vote of two-thirds of all the
votes entitled to be cast for the election of directors at a special meeting
called for the purpose of such proposed removal. The notice of such meeting
shall indicate that the purpose, or one of the purposes, of such meeting is to
determine if a director shall be removed. A vacancy created by death,
resignation or removal of a director may be filled by a vote of a majority of
the remaining directors. Each director will be bound by the Company's Charter
and By-Laws.
The directors are not required to devote all of their time to the Company
and are only required to devote such of their time to the affairs of the Company
as their duties require. The directors will meet quarterly or more
38
<PAGE>
frequently if necessary. It is not expected that the directors will be required
to devote a substantial portion of their time to discharge their duties as
directors. Consequently, in the exercise of their fiduciary responsibilities,
the directors will be relying heavily on the executive officers of the Company.
The Board is empowered to fix the compensation of all officers that it selects
and may pay directors such compensation for special services performed by them
as it deems reasonable. Initially, the Company does not intend to pay to
Independent Directors any fee; however, such fee may be instituted in the
future. The Company will not pay any director compensation to the officers of
the Company who also serve as directors.
The general investment and borrowing policies of the Company are set forth
in this Prospectus. The directors shall establish further written policies on
investments and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Company to assure that such
policies are in the best interest of the shareholders and are fulfilled. Until
modified by the directors, the Company shall follow the policies on investments
and borrowings set forth in this Prospectus.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the company are as follows:
<TABLE>
<CAPTION>
Name Age Position Term Expires
- ---- --- -------- ------------
<S> <C> <C> <C>
Arthur P. Herring 53 Chairman of the Board, Chief Executive 1996
Officer and Chief Financial Officer
Dois Brock 46 Director, President, Controller and Secretary 1997
Gerald S. Weisstein 57 Director 1998
Charles B. Allen 56 Director 1998
Mark Ross 41 Director 1997
Jacob Segal 49 Vice President - Portfolio Administration
</TABLE>
The following is a biographical summary of the experience of the directors
and executive officers of the Company.
ARTHUR P. HERRING - 53, Chairman of the Board, Chief Executive Officer and
Chief Financial Officer of the Company. Mr. Herring joined the Company at its
inception in 1994. Since 1985, Mr. Herring has been the Managing General
Partner of The L&H Group of Companies, a real estate operating and investment
company. From 1983 to 1984, Mr. Herring was a founding officer, executive vice
president, chief lending officer and a member of the board of directors of
Olympic National Bank, Los Angeles, California. From 1976 to 1983, Mr. Herring
was a senior vice president and senior loan and credit officer for Republic
Bank, Torrance, California. He was vice president, commercial lending, of Union
Bank, Los Angeles, California, from 1969 to 1976. Mr. Herring received his
bachelor's degree from Boston College and a master's degree in Business
Administration from the University of Southern California.
DOIS BROCK - 46, President, Controller and Secretary of the Company. Mr.
Brock joined the Company at its inception in 1994. From March 1989 to the
present, Mr. Brock has been self-employed as a financial consultant doing
business as Realtech, Seattle, Washington. Prior to that, Mr. Brock was senior
vice president of Bel-Air Savings and Loan Association, Los Angeles, California,
from 1985 to 1989. From 1983 to 1985, Mr. Brock was president of Olympic
National Mortgage Corporation, a subsidiary of Olympic National Bancorp, Los
Angeles, California. From 1981 to 1983, Mr. Brock was the sole proprietor of
Pacific Bank Services, a consulting firm in Costa Mesa, California. From 1978
to 1981, Mr. Brock was vice president and a principal of Western Associated
Lending Services, Santa Ana, California. Mr. Brock is a licensed real estate
salesperson in the States of California and Washington and a licensed general
contractor. He also has been a member of the Federal Home Loan
39
<PAGE>
Mortgage Corporation Advisory Board. He has lectured extensively in the area of
zoning and land use. Mr. Brock received a B.S. degree in Business from
California State University at Long Beach in 1974.
GERALD S. WEISSTEIN - 57. Mr. Weisstein became a director of the Company
in 1994. Since 1993, Mr. Weisstein has been a principal of Center Financial
Advisors. In 1990 Mr. Weisstein founded W. S. Weisstein & Associates, a firm in
Los Angeles engaged in investment banking and financial and real estate
consulting activities. Prior to that, from 1985 to 1990, Mr. Weisstein was
President, Chief Executive Officer and a director of the Bank of Los Angeles and
its parent holding corporation, BKLA BANCORP. From 1982 to 1985, Mr. Weisstein
was President, Chief Executive Officer and a director of Olympic National Bank,
Los Angeles, California. Prior to that for more than ten years Mr. Weisstein
served in various Vice Presidential capacities with several banks, including
Imperial Bank, Union Bank and Security Pacific National Bank in Los Angeles,
California. Mr. Weisstein has been a member of the board of directors of the
Los Angeles Business Council since 1976 and was the chairman in 1985. Mr.
Weisstein is active in numerous charitable and philanthropic activities and has
received several honors, including Man of the Year for the San Fernando Valley
Boys and Girls Club and the Spirit of Life Award from the City of Hope. Mr.
Weisstein has been a member of the United Jewish Welfare Fund, a director of the
Institute of Cancer and Blood Research, a director of St. Vincent Foundation of
St. Vincent's Hospital of Los Angeles and a member of the Chancellors Associates
of the University of California at Los Angeles. Mr. Weisstein received a B.S.
degree from the University of California, Los Angeles in 1962, attended graduate
school at Dartmouth College and received a law degree from Southwestern School
of Law in 1970. Mr. Weisstein has lectured extensively in the area of banking
regulation and financing.
CHARLES B. ALLEN - 56. Mr. Allen became a director of the Company in 1995.
Mr. Allen is the President of Monterey Consulting Associates, Inc., Watsonville,
California, which he founded in 1993. This company is engaged in the
development of the Science, Technology, Education and Policy Center at Fort Ord,
California. The company works as Governmental Relations, Economic and Business
Development liaison with the California State Legislature and county and local
government agencies for the University of California, Santa Cruz. Since 1982,
Mr. Allen has also been the President of both Heritage Development Corporation
and Landmark Estate Company, Inc., Watsonville, California. As president of
both companies, he has served several state and local government agencies by
negotiating and coordinating major agency land acquisition projects. He also
directed the land development activities for five major private land development
projects within the Monterey Bay region of California and provided general real
estate brokerage and property management for clients within Monterey and Santa
Cruz Counties. Mr. Allen has been heavily involved in community and charitable
activities in the Monterey Bay area. Mr. Allen received his bachelor's degree
from California State Polytechnic University, San Luis Obispo, California, and
an associate of arts from Hartnell College, Salinas, California.
MARK ROSS - 41. Mr. Ross became a director of the Company in 1995. Since
1989, Mr. Ross has been President of Auerbach Financial Equities, Inc. and
Auerbach Financial, Inc. Prior to that, starting in 1987, he was Director of
Business Development and later Vice President of Marketing and Acquisition of
Auerbach Leasing and Management Company. His current responsibilities include
supervision of all acquisitions, financing requirements, dispositions, and asset
management for the Auerbach real estate portfolio. He oversees real estate
mortgage brokerage, equity placement, and third party buyer and seller
representation. Prior to joining Auerbach, in 1981, Mr. Ross founded and was
President of R&R Organization, Inc., a property management service concern
specializing in apartments located in the Los Angeles basin. Mr. Ross is a
member of the National Association of Realtors and The International Council of
Shopping Centers. His community activities include service on the Boards of
Directors of Jewish Family Services of Santa Monica and the University of
Judaism in Los Angeles. Mr. Ross graduated in 1976 from Loyola University of
Los Angeles with a Bachelor of Arts degree in Economics, as well as
Communication Arts.
JACOB SEGAL - 49, Vice President - Portfolio Administration. Mr. Segal
joined the Company in 1994. From 1990 to the present Mr. Segal, who is a real
estate broker, has been independently employed as a real estate and real estate
finance consultant in both advisory, instructional and brokerage capacities.
For the period 1988 to 1989 he was Senior Vice President, Acquisition of JDS
Capital Corporation, a company formed to acquire and operate income properties.
From January 1987 to October 1987, Mr. Segal was Vice President, Acquisition of
40
<PAGE>
William Walters Co., advisor for REIT of California, an equity real estate
investment trust. From 1985 to 1986, he was Senior Vice President, Director of
Acquisitions for Oak Capital Corporation, a syndicator of apartment properties.
From 1983 to 1985, Mr. Segal was Vice President of Gehr Corporation, a real
estate investment affiliate of Gehr Industries, Inc., a wire and cable
manufacturer and distributor. From 1979 to 1982, he was Acquisition Manager for
Calmark Properties, a syndicator and developer of income properties. Mr.
Segal's responsibilities in his prior positions were to identify and research
real estate markets and properties, analyze, negotiate for and acquire income
producing properties. Mr. Segal has an MBA from the UCLA Graduate School of
Management and is a member of the American Management Association and Town Hall
of California.
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee. Promptly following the Initial Closing of the
Offering, the Board of Directors will establish an executive committee (the
"Executive Committee") which will be granted the authority to acquire and
dispose of real property and the power to authorize, on behalf of the full Board
of Directors, the execution of certain contracts and agreement. The Company
expects that the Executive Committee will consist of the Chairman of the Board
of Directors, the President and two Independent Directors.
Audit Committee. The Board of Directors has established an audit committee
consisting of two Independent Directors and one "inside" director (the "Audit
Committee"). The Audit Committee will make recommendations concerning the
engagement of independent auditors, review with the independent auditors the
plans and result of the audit engagement, approve professional services provided
by the independent auditors, review the independence of the independent
auditors, consider the range of audit and non-audit fees and review the adequacy
of the Company's internal accounting controls.
Compensation Committee. Promptly following the Initial Closing of the
Offering, the Board of Directors will establish a compensation committee (the
"Compensation Committee") to determine compensation, including awards under the
Company's Stock Incentive Plan, for the Company's executive officers. The
Company expects that the Compensation Committee will consist of not less than
two Independent Directors.
Nominating Committee. Promptly following the Initial Closing of the
Offering, the Board of Directors will establish a nominating committee (the
"Nominating Committee") to nominate persons to serve on the Company's Board of
Directors as vacancies arise. The Nominating Committee shall consist of three
directors, at least two of whom must be Independent Directors.
DIRECTORS AND EXECUTIVE OFFICERS COMPENSATION AND INCENTIVES
The Company will compensate designated key managers of the Company with
cash compensation and certain incentives including stock option and bonus plans.
The below table sets forth the estimated annual base salary to be paid to the
Chief Executive Officer, President and Vice President, as well as the stock
options for the officers and directors.
<TABLE>
<CAPTION>
Annual Common Stock
Position Salary Options(1)
-------- ----------- ------------
<S> <C> <C> <C>
Arthur P. Herring* Chairman, CEO and CFO $100,000(2) 60,000
Dois Brock President, Controller and Secretary $ 72,000(2) 50,000
Gerald S. Weisstein* Director -- 15,000
Charles B. Allen Director -- 15,000
Mark Ross* Director -- 15,000
Jacob Segal Vice President $ 48,000 30,000
</TABLE>
41
<PAGE>
- -------------------
* Member of Audit Committee
(1) To be issued upon Final Closing of the Offering. These options are
nonqualified stock options. They have a ten year term; vest 25% per year
commencing one year after date of grant; and are exercisable at $7.00 per
share.
(2) Employment Agreements for Messrs. Herring and Brock contain provisions for
bonus payments based on performance criteria customary in the REIT
industry, as determined by the Compensation Committee. No such bonuses are
presently planned.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Charter limits the liability of the Company's directors and
officers to the Company and its shareholders for money damages to the fullest
extent permitted from time to time by Maryland law. Maryland law presently
permits the liability of directors and officers to a corporation or its
shareholders for money damages to be limited, except (i) to the extent that it
is proved that the director or officer actually received an improper benefit or
profit, or (ii) to the extent that a judgment or other final adjudication is
entered in a proceeding based on a finding that the director's or officer's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action, as adjudicated in the proceeding. This
provision does not limit the ability of the Company or its shareholders to
obtain other relief, such as an injunction or rescission.
The Company's By-Laws require the Company to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by Maryland law. The Company's Charter and By-Laws also permit the Company
to indemnify its directors who have served another corporation or enterprise in
various capacities at the request of the Company. The MGCL presently permits a
corporation to indemnify its directors, officers and certain other parties
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service to or at the request of the Company,
unless it is established that: (i) the act or omission of the indemnified party
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty; (ii) the
indemnified party actually received an improper personal benefit; or (iii) in
the case of any criminal proceeding, the indemnified party had reasonable cause
to believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the proceeding;
provided, however, that if the proceeding is one by or in the right of the
Company, indemnification may not be made with respect to any proceeding in which
the director or officer has been adjudged to be liable to the Company. In
addition, a director or officer may not be indemnified with respect to any
proceeding charging improper personal benefit to the director or officer in
which the director or officer was adjudged to be liable on the basis that the
personal benefit was improperly received. The termination of any proceeding by
conviction, or upon a plea of nolo contendere or its equivalent, or an entry of
any order of probation prior to judgment, creates a rebuttable presumption that
the director or officer did not meet the requisite standard of conduct required
for indemnification to be permitted. Indemnification under the provisions of
the MGCL is not deemed exclusive to any other rights, by indemnification or
otherwise, to which an officer or director may be entitled under the Company's
Charter or By-Laws, or under resolutions of shareholders or directors, contract
or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company,
pursuant to the foregoing provisions, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
Prior to the Initial Closing of the Offering, the Company will obtain a
directors and officers liability insurance policy. The directors and officers
liability insurance insures (i) the directors and officers of the Company from
any claim arising out of an alleged wrongful act by such persons while acting as
directors and officers of the Company and (ii) the Company to the extent that it
has indemnified the directors and officers for such loss.
42
<PAGE>
STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Stock Incentive
Plan") to enable executive officers, key employees and directors of the Company
and the Operating Partnership to participate in the ownership of the Company.
The Stock Incentive Plan is designed to attract and retain executive officers,
other key employees and directors of the Company and the Operating Partnership
and to provide incentives to such persons to maximize the Company's cash flow
available for distribution. The Stock Incentive Plan provides for the award to
such executive officers and employees of the Company and the Operating
Partnership (subject to the Ownership Limit) of stock-based compensation
alternatives such as nonqualified stock options and incentive stock options and
provides for the grant to Independent Directors (subject to the Ownership Limit)
of nonqualified stock options on a formula basis.
The Stock Incentive Plan will be administered by the Compensation
Committee, which is authorized to select from among the eligible employees of
the Company and the Operating Partnership the individuals to whom options are to
be granted and to determine the number of shares to be subject thereto and the
terms and conditions thereof. The Compensation Committee is also authorized to
adopt, amend and rescind rules relating to the administration of the Stock
Incentive Plan. Nonqualified stock options shall be granted to Independent
Directors in accordance with the formula set forth in the Stock Incentive Plan.
The Stock Incentive Plan was approved by the Company's shareholders at a
meeting held on August 14, 1995. The following awards may be made under the
Plan:
Nonqualified stock options will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the date
of grant (but not less than par value), and usually will become exercisable in
installments after the grant date. Nonqualified stock options may be granted
for any reasonable term.
Incentive stock options, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of fair market value of
Common Stock on the grant date and a ten year restriction on their term, but may
be subsequently modified to disqualify them from treatment as an incentive stock
option.
Promptly after the Final Closing of the Offering, the Company expects to
issue to certain officers, directors and key employees of the Company and the
Operating Partnership options to purchase, subject to the Ownership Limit, an
aggregate of 185,000 shares of Common Stock pursuant to the Stock Incentive
Plan. The term of each of such option will be ten years from the date of grant.
Commencing one year from the Final Closing, each such option vests 25% per year
over four years and is exercisable at a price per share equal to the public
offering price per Share in the Offering. The expected allocations of the
options to such persons is as presented above in the "Directors and Executive
Officers Compensation and Incentives."
500,000 shares of Common Stock, subject to adjustment, will be reserved for
issuance under the Stock Incentive Plan. There is no limit on the number of
awards that may be granted to any one individual (other than an Independent
Directors who annually receive a fixed number of options automatically) so long
as the aggregate fair market value (determined at the time of grant) of shares
with respect to which an incentive stock option is first exercisable by an
optionee during any calendar year cannot exceed $100,000, the grant does not
violate the Ownership Limit or cause the Company to fail to qualify as a REIT
for federal income tax purposes. See "Description of Securities -- Restrictions
on Ownership."
Federal Income Taxes. If the option has no readily ascertainable fair
market value, no income is recognized by a participant at the time an option is
granted. If the option is an incentive stock option ("ISO"), no income will be
recognized upon the participant's exercise of the option. Income is recognized
by a participant when he or she disposes of shares acquired under an ISO. The
exercise of a nonqualified stock option ("NQSO") generally is a taxable event
that requires the participant to recognize, as ordinary income, the difference
between the shares' fair market value on the exercise date and the option price.
43
<PAGE>
The employer (either the Company or its affiliate) will be entitled to
claim a federal income tax deduction on account of the exercise of a NQSO. The
amount of the deduction is equal to the ordinary income recognized by the
participant. The employer will not be entitled to a federal income tax
deduction on account of the grant or the exercise of an ISO. The employer may
claim a federal income tax deduction on account of certain dispositions of
Common Stock acquired upon the exercise of an ISO.
401(K) PLAN
The Company intends to establish a qualified retirement plan, with a salary
deferral feature designed to qualify under Section 401 of the Code (the "401(k)
Plan"). The 401(k) Plan will permit the employees of the Company and the
Operating Partnership to defer a portion of their compensation in accordance
with the provisions of Section 401(k) of the Code. The 401(k) Plan will allow
participants to defer up to 15% of their eligible compensation on a pre-tax
basis subject to certain maximum amounts. Matching contributions may be made in
amounts and at times determined by the Company. Amounts contributed by the
Company and the Operating Partnership for a participant will vest over a period
of years to be determined and will be held in trust until distributed pursuant
to the terms of the 401(k) Plan.
Employees of the Company and the Operating Partnership will be eligible to
participate in the 401(k) Plan if they meet certain requirements concerning
minimum age and period of credited service. All contributions to the 401(k)
Plan will be invested in accordance with participant elections among certain
investment options. Distributions from participant accounts will not be
permitted before age 59 1/2, except in the event of death, disability, certain
financial hardships or termination of employment.
EMPLOYMENT AGREEMENTS
Effective as of the Initial Closing, the Company will enter into employment
agreements with Messrs. Herring and Brock for a term of five years subject to
automatic one year extensions unless terminated. The agreements will provide
for annual compensation in the amounts set forth under "Executive Compensation"
above and will contain provisions for bonus consideration based on performance
standards consistent with those established in the REIT industry for senior
executives of REITs of a size similar to the Company. Bonus payments under the
employment agreements will be determined by the Compensation Committee and at
their discretion may be paid in cash; deferred for future payment; paid in
unregistered Common Stock of the Company; paid through additional grant of
options or some combination of the above. In addition, each agreement includes
provisions restricting the officers from competing with the Company during the
term of such employment; granting the officers certain "piggyback" registration
rights for their securities in the Company; providing for salary and benefit
continuance for six months if the officer is permanently disabled; and providing
for a severance payment in the amount of 2.99 times the officer's average salary
and bonus over the past five years (or such shorter time as the officer was
employed), payable in 36 equal monthly installments, in the event of a change of
control of the Company resulting in the officer's demotion or reduction in his
compensation or responsibilities within two years of the change of control
event. Change of control is generally defined to include a consolidation in the
hands of one Person of 30% or more of the voting securities of the Company, a
business combination after which the existing shareholders of the Company hold
less than 51% of the voting securities of the resulting entity, or a change in
membership of the Board of Directors resulting in 50% or more of the Board of
Directors not being nominated by management.
44
<PAGE>
PRINCIPAL SHAREHOLDERS
The following tables set forth information as of the date hereof as to each
person or entity who owns of record or is known by the Company to own
beneficially five percent or more of the Company's outstanding voting securities
and information as to the securities ownership of management. All stock
ownership shown below is direct unless otherwise indicated.
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
1995
Convertible
Common Preferred Percent of All
Name Stock Stock(1) Voting Shares Outstanding, Assuming
- ------------------------------------ --------- ----------- ---------------------------------------------
Minimum Minimum Maximum Maximum
Common Combined Common Combined
Offering Offering Offering Offering
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Arthur P. Herring(3) 33,678(3) 360,000 11.45% 10.52% 6.25% 4.59%
2221 Rosecrans Avenue
Suite 110
El Segundo, CA 90245
Elizabeth W. Herring(2) 33,678(3) 360,000 11.45% 10.52% 6.25% 4.59%
215 John Street
Manhattan Beach, CA 90266
The Danube Rousse Inc.(2) 33,678(3) 360,000 11.45% 10.52% 6.25% 4.59%
215 John Street
Manhattan Beach, CA 90266
Michelle Loegering, as Trustee(4) 33,678(3) 360,000 11.45% 10.52% 6.25% 4.59%
Regent IV Trust
19800 Hawthorne Boulevard
No. 258-306
Torrance, CA 90503
</TABLE>
- --------------------
(1) See "Description of Securities -- 1995 Convertible Preferred Stock" for
details on restrictions on conversion of this stock.
(2) Elizabeth W. Herring is the sole owner of The Danube Rousse Inc., and by
virtue of such ownership has voting and investment control of the Company's
Common Stock owned by The Danube Rousse Inc. Arthur P. Herring is the
spouse of Elizabeth W. Herring. Mr. Herring has advised the Company that
he disclaims any pecuniary beneficial interest of the Company's stock owned
by The Danube Rousse Inc.
(3) Represents approximately 12.26% of the 274,714 shares of Company Common
Stock presently outstanding.
(4) Michelle Loegering, as Trustee of Regent IV Trust, has voting and investing
control of the Company's stock owned by Regent IV Trust. Ms. Loegering is
otherwise not affiliated with the Company. The beneficiaries of Regent IV
Trust are Michelle Loegering, Kelly Loegering and Thomas J. Loegering, Jr.,
none of whom are affiliated with the Company.
45
<PAGE>
DIRECTOR AND OFFICER STOCK OWNERSHIP
<TABLE>
<CAPTION>
1995
Percent Convertible Percent Percent Common Percent
Common of Preferred of Series "D" of Stock of
Name/Position Stock(4) Class Stock(1)(2)(4) Class Warrants(1) Class Options(3) Class
- ----------------------------- -------- -------- ----------------- -------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles B. Allen, Director -- 15,000 8.1%
Dois Brock, President 95,000 9.3% 45,000 9.7% 50,000 27.0%
Arthur P. Herring(4) 33,678 12.3% 360,000 35.2% 107,500 23.2% 60,000 32.4%
Mark Ross, Director -- 15,000 8.1%
Jacob Segal, 25,000 2.4% 30,000 16.2%
Vice President
Gerald S. Weisstein, 30,000 3.0% 10,000 2.2% 15,000 8.1%
Director
Directors and Officers
as a group(5) 33,678 12.3% 510,000 50.0% 162,500 35.1% 185,000 100.0%
======= ======= ======= ==== ======= ==== ======= =====
</TABLE>
- ----------------
(1) See "Description of Securities" for information about these securities.
None of the warrants may be exercised presently. The warrants set forth
opposite Messrs. Brock and Herring's names are not exercisable, by
agreement, until six months after the end of the Company's first fiscal
year wherein its audited consolidated financial statements reflect an
Adjusted Equity value of $25,000,000 or more plus Funds from Operations of
$2,500,000 or more. The warrants set forth opposite Mr. Weisstein's name
are not exercisable, by their terms, for a 35-month period commencing at
the end of the 13th month after the Final Closing of the Offering.
(2) Except as set forth in note 4 below, the named holder has exclusive voting
and investment control over such securities.
(3) None of such options is exercisable until one year from the Final Closing.
(4) Mr. Herring's spouse, Elizabeth W. Herring, controls voting and investment
of all assets of The Danube Rousse Inc. which holds the shares of Common
Stock, 1995 Convertible Preferred Stock and Series "D" Warrants set forth
opposite Mr. Herring's name.
(5) The percentage of all voting securities of the Company (Common Stock and
1995 Convertible Preferred Stock) owned by all officers and directors of
the Company as a group is 15.8%.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Company's investment objective is to pay to its shareholders
predictable quarterly Distributions which grows as a result of increases in cash
flow and capital gains from the sale of properties. The Company will seek to
realize its objective through its acquisition of ownership interests in the
Properties and selective acquisitions of other properties in the future which
can be acquired on favorable terms and yields. The yields from the diversified
portfolio of residential income and commercial income properties will be
maximized through a balance of Distribution payments, reinvested capital,
Property loan financing and active management of the Company's Properties.
The Company intends to achieve these objectives by purchasing a diversified
portfolio of garden-style apartments and suburban commercial and retail income
properties in the Western United States. The Properties will be leased to a
variety of residential, retail and commercial tenants. The amount of money
raised by the Company in the Offering and borrowed from lenders will affect the
number of Properties the Company will be able to purchase. The more Properties
the Company purchases, the more diversified it will be and the less it will be
affected by any single Property that does not perform as expected.
46
<PAGE>
The Company expects to acquire additional properties through the Operating
Partnership, although it is not required to do so. The Board will consider
causing the Company, at any time, to make investments directly without the
involvement of the Operating Partnership if such direct investment is deemed to
be in the best interests of the Company and the Operating Partnership. The
Company will seek to utilize numerous property acquisition and financing
strategies to realize its objective. Favorable acquisitions will be
accomplished by using tax deferred exchanges, stock for equity swaps, partial
acquisitions and joint venture arrangements.
The Company may purchase or lease properties for long-term investment,
expand and improve the Properties to be acquired or sell such Properties, in
whole or in part, when circumstances warrant. Where the Company participates
with other entities in property ownership, through joint ventures or other types
of co-ownership, these investments may be subject to existing mortgage financing
and other indebtedness which may have priority over the equity interest of the
Company.
While the Company emphasizes equity real estate investments, it may, in its
discretion, invest in mortgages, stock or other REITs and other real estate
interests, subject to limitations on a REIT under the Code. See "Federal Income
Tax Considerations -- Requirements for Qualification." Such mortgage
investments may include participating or convertible mortgages. However, the
Company has no plans to invest in such assets at this time.
The Company's investment objectives and techniques may be changed by the
board (including a majority of the Independent Directors) without the approval
of the shareholders. While the Company intends to achieve its objective by
purchasing a diversified portfolio of income producing properties (see
"Description of Properties"), the Company's investment policies may vary as new
investment opportunities and techniques evolve. Any such change may affect the
types of non-real estate short-term investments in which the Company invests
during the interim periods in which capital is not fully invested in Properties.
As the general partner of the Operating Partnership, the Company will also
determine the investment policies of the Operating Partnership.
There are no limitations on the percentage of the Company's assets that may
be invested in any one property or venture. The Board of Directors may
establish limitations as it deems appropriate from time to time. No limitations
have been set on the number of properties in which the Company will seek to
invest or in the concentration of investments in any one geographic region.
Acquisition Plan
To insure the highest quality property purchases the Company has adopted an
acquisition plan. The Company's plan is to seek high quality properties in
areas with a large and diverse employment base, and then provide solutions for
certain types of financial problems. These problems include:
. Sellers that need exchanges to defer capital gains tax
. Owners that have over-financed their property and impaired their cash
flow
. Partnership owners that wish to sell out but find little market for
their partnership interests
. Excellent properties that require capital for clearly established
demands for expansion
. Owners that seek to improve the security and cash flow of their
property by replacing debt with equity
The Company will not buy troubled properties and seek to make them good.
The plan is to attract the best real estate opportunities by providing financial
solutions that benefit the Company and the owner/seller.
Target Properties
Management believes that, in today's real estate market, many of properties
are over burdened with debt as a result of the severity of the economic
recession. The debt, placed on the properties in prior years, is now
inconsistent with reduced cash flows being received by the properties. Owners
are faced with the current lessened
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ability to service existing debt and lessened property value. Their attempts to
rely on traditional lenders to assist in refinancing is proving to be illusory.
The assets with which the Company will build its portfolio will be residential
income properties as well as selected income-producing commercial properties
often with debt which is "obsolete" in today's market or which possess
unsatisfactory terms or features. It is intended that such loans will be recast
through negotiations with both seller and lender, resulting in the retirement or
restructuring of the debt. The Company, therefore, will concentrate on the
solution to property financing problems, not the solution of property
performance problems.
Apartment projects consisting of 50-200 units for middle to upper income
tenants located in the economic markets of the Western United States, with a
major emphasis on the broad markets available in California, together with
certain retail and commercial properties including commercial retail shopping
centers and suburban office buildings, will be the core of the Company's asset
base. Purchase prices for properties are expected to be between $1,000,000 --
$16,000,000. All properties must be performing in that they have a verifiable
record of stable income that has been actually received at the levels used to
qualify the property for purchase. This income should equal or be very similar
to the average income received over the past 12 months. Income that will be
considered is income actually received, not that which is scheduled. All
expenses of the projects must be stable and verifiable. Underwriting criteria to
be used by the Company will not be entirely based on the seller's actual
expenses. Additional allowances for deferred maintenance, future maintenance,
property taxes and replacement reserves will be included at the time of purchase
and in revenue/expense models used in managing the portfolio. The decision-
making focus will be on cash-on-cash returns, current yield, price per unit, and
percentage of replacement cost.
In selecting properties in which to make investments, the Company will
consider the extent to which a particular property may generate depreciation.
Depreciation deductions may reduce taxable income generated by the Company which
may enable the Company to pay Distributions which are partially free from
current taxation. The Company will depreciate its real properties for tax
purposes on a straight-line basis over a 27.5 year period for residential rental
properties and a 39 year period for commercial properties, except where the Code
requires a different depreciation period, as it may with respect to property
leased to governments and to foreign lessees. See "Federal Income Tax
Considerations."
Investments in Loans
The Company has no current plans to make Loans, although it is not
prohibited from doing so. The Company would attempt to structure any Loan in a
manner which would provide an economic return similar to that which the Company
could expect in an acquisition transaction. The Board, including a majority of
Independent Directors, must approve any transaction structured as a Loan. Some
Loans may, in addition to providing a base rate of interest, be combined with
provisions permitting the Company to participate in the economic benefits of any
increase in gross revenues of the real property securing repayment of the Loan.
See "Federal Income Tax Considerations -- Requirements for Qualification as a
REIT." If Loans are made, they are not currently expected to comprise a
significant portion of the Company's portfolio.
Other Investments
There can be no assurance as to when the Company's capital may be fully
invested in Properties. See "Federal Income Tax Considerations -- Requirements
for Qualification as a REIT." Pending such investment, the balance of the
proceeds of the Offering will be invested in Permitted Temporary Investments,
which are defined to mean short-term U.S. Government securities, bank
certificates of deposit and other short-term liquid investments. To maintain
its REIT status, the Company also may invest in securities that qualify as "real
estate assets" and produce qualifying income under the REIT Provisions of the
Code. The Company expects that such securities will consist primarily of shares
issued by other REITs and mortgage-backed securities guaranteed by GNMA, FNMA or
FHLMC. If all the proceeds derived from the Offering are not invested or
committed to be invested by the Company prior to the expiration of the later of
24 months after the date of this Prospectus or one year after the termination of
the Offering, then the proceeds not so invested or committed will, promptly
after the expiration of such period, be distributed pro rata to the shareholders
as a return of capital. without any deductions for Organizational and Offering
Expenses or Acquisition Fees or Expenses. For the purpose of the foregoing
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provision, funds will be deemed to have been committed to investment within such
period and will not be returned to shareholders to the extent written agreements
in principle have been executed at any time prior to the expiration of such
period, regardless of whether such investments are consummated, and also to the
extent any funds have been reserved to make contingent payments in connection
with any Property, regardless of whether any such payments are made.
If at any time the character of the Company's investments would cause the
Company to be deemed an "investment company" for purposes of the Investment
Company Act of 1940, the Company shall take such action as is necessary in order
to ensure that the Company is not deemed to be such an "investment company."
The Company will continually review its investment activity to attempt to ensure
that it does not come within the application of the Investment Company Act of
1940. Among other things, it will attempt to monitor the proportion of its
portfolio which is placed in various investments so that the Company does not
come within the definition of an investment company under such Act.
The Company's working capital and other reserves will be invested in
Permitted Temporary Investments. The Company will evaluate such factors as the
relative risks and rate of return, the Company's cash needs and other
appropriate considerations when making short-term investments on behalf of the
Company. The rate of return of Permitted Temporary Investments may be less than
or greater than would be obtainable from real estate investments.
INVESTMENT LIMITATIONS
In general, the Company will not:
. invest in commodities or commodity futures contracts, such limitation
not being applicable to futures contracts when used solely for the
purpose of hedging in connection with the Company's ordinary business
of investment in real estate and mortgages,
. make investments in Unimproved Real Property or indebtedness secured
by a deed of trust or mortgage loans on Unimproved Real Property.
"Unimproved Real Property" means property which has the following
three characteristics: (i) an equity interest in property which was
not acquired for the purpose of producing rental or other operating
income, (ii) no development or construction is in process on such
property, and (iii) no development or construction on such property is
planned in good faith to commence on such property within one year,
. issue debt securities in the absence of adequate cash flow to cover
debt service.
. engage in trading, as compared with investment activities,
. invest more than five percent of the value of its assets in the
securities of any one issuer,
. invest in securities representing more than ten percent of the
outstanding voting securities of any one issuer,
. lend money to or lease Property to or from Affiliates of the Company
without the approval of a majority of the Independent Directors.
CHANGE IN INVESTMENT OBJECTIVES AND LIMITATIONS
The Independent Directors will review the Company's investment policies at
least annually to determine that the policies being followed by the Company are
in the best interest of the shareholders. Each such determination and the basis
therefor shall be set forth in the minutes of the Company. The methods of
implementing the Company's investment policies also may vary as new investment
techniques are developed. The
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methods of implementing the investment objectives and policies of the
Company, except as otherwise provided in the Organizational Documents, may be
altered by a majority of the directors (including a majority of the Independent
Directors) without the approval of the shareholders.
LEASING AND PROPERTY MANAGEMENT
The Company believes in an aggressive leasing and property management
strategy conducted by professionals with extensive experience, knowledge of
local markets and an established track record with prospective residential or
commercial tenants. All of the Company's leasing and property management
activities will be conducted in-house or by engaging independent in-place
property managers. As necessary, the Company will engage independent property
managers. The Company's overall property management and leasing strategy is
designed to keep the occupancy of its Properties as high as possible at rental
rates within the average range of rates for similar properties in the vicinity.
The Company will attempt to minimize operating expenses in management, leasing,
marketing, finance and other activities for all of the Properties through use of
its experienced personnel and certain economies of scale available to it.
FINANCING STRATEGY/LEVERAGE
While one of the Company's investment objectives will be diversification,
the number of different properties the Company can acquire will be affected by
the amount of funds available to it. Since the Company may have a minimum of
$15,000,000 and a maximum of $50,000,004 in Gross Offering Proceeds, the full
extent of the Company's actual operations cannot be determined at this time.
The Company's goal, subject to the availability of mortgage financing, is to
borrow not more than 50% of the gross asset value of all of its properties as
determined by management, but there is no limit on borrowings on individual
Properties. Gross asset value of the Properties will be calculated by totaling
lenders' appraised values for Properties being financed with (i) in the case of
unleveraged Property, such Property's undepreciated acquisition cost, if the
acquisition occurred within six months of the applicable determination date, or
the value of the Property as determined by an independent appraiser within 90
days of the applicable determination date, or (ii) in the case of leveraged
Property, the lenders' appraised value if such appraisal is dated within six
months of the applicable determination date, or the value of the Property as
determined by an independent appraiser within 90 days of the applicable
determination date. Gross asset value of Company Properties will be determined
prior to each acquisition of a Property which involves mortgage financing and
prior to the refinancing of any Property.
It is expected that, by operating on a leveraged basis, the Company will
have more funds available and, therefore, will make more investments than would
otherwise be possible, resulting in a more diversified portfolio. Although the
Company's liability for repayment of indebtedness is expected to be limited to
the value of the Property securing such liability and the rents or profits
derived therefrom, leveraging increases risks to the Company because mortgage
principal and interest payments, as well as other fixed charges, must be paid in
order to prevent foreclosure on such Property by mortgagees regardless of the
generation of income by Properties. See "Risk Factors -- Risks Associated with
Borrowing." To the extent that the Company does not obtain mortgage loans on
its Properties, its ability to acquire additional Properties will be restricted.
In addition to mortgage financing, the Company may seek financing (subject
to the foregoing 50% debt-to-equity limitation) in the form of debt securities.
The Company will determine its financing opportunities in light of the then
current economic conditions, relative costs of debt and equity capital, market
values of properties, growth and acquisition opportunities and other factors.
If the Board determines that additional funding is desirable, the Company may
raise such funds through the issuance of equity securities or debt securities or
other methods as appropriate.
It is anticipated that certain borrowings will be made through the
Operating Partnership, although the Company may also incur indebtedness that may
be reloaned to the Operating Partnership on the same terms and conditions as are
applicable to the Company's borrowing of such funds. See "Operating Partnership
Agreement." Indebtedness through the Operating Partnership may be in the form
of purchase money obligations, public or
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privately placed debt instruments, financing from institutional lenders, and may
be unsecured or secured as appropriate.
The Board also has the authority to cause the Operating Partnership to
issue additional OP Units in any manner as it deems appropriate, including in
exchange for property. See "Operating Partnership Agreement -- Capital
Contributions."
OPERATING PARTNERSHIP AGREEMENT
The following summary of the Operating Partnership Agreement, including the
descriptions of certain provisions set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Operating Partnership Agreement,
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
MANAGEMENT
The Operating Partnership will be organized as a Delaware limited
partnership pursuant to the terms of the Operating Partnership Agreement.
Generally, pursuant to the Operating Partnership Agreement, the Company as the
sole general partner of the Operating Partnership will have full, exclusive and
complete responsibility and discretion in the management and control of the
Operating Partnership, including the ability to cause the Operating Partnership
to (i) enter into certain major transactions including acquisitions,
dispositions and refinancings, (ii) change the Operating Partnership's line of
business and distribution policies, (iii) sell some or all of the Operating
Partnership's assets, (iv) otherwise dispose of some or all of the Operating
Partnership's assets in a merger or other reorganization, or (v) dissolve.
Except as required by applicable law, the OP Limited Partners will have no
authority to transact business for, or participate in, the management of the
Operating Partnership; however, the consent of a majority of the outstanding
percentage interests of the OP Limited Partners (unless the Company owns more
than 50%, directly or indirectly, of the equity of such OP Limited Partner) will
be required with respect to certain extraordinary actions involving the
Operating Partnership including (i) the amendment, modification or termination
of the Operating Partnership Agreement other than to reflect permitted transfers
of interests in the Operating Partnership and certain other events, (ii) a
general assignment for the benefit of creditors or the appointment of a
custodian, receiver or trustee for any of the assets of the Operating
Partnership, (iii) the institution of any proceeding for bankruptcy of the
Operating Partnership, (iv) the transfer of any general partner interests in the
Operating Partnership, including through any merger, consolidation or
liquidation of the Company and (v) the admission of any additional or substitute
general partner in the Operating Partnership.
TRANSFERABILITY OF OP UNITS
With certain limited exceptions, the OP Limited Partners may not transfer
their interests in the Operating Partnership, in whole or in part, without the
written consent of the Company, which the Company may withhold in its sole
discretion. The Company may not consent to any transfer that would cause the
Operating Partnership to be treated as a corporation or a publicly traded
partnership for federal income tax purposes.
CAPITAL CONTRIBUTIONS
The Company will contribute as its initial capital contributions to the
Operating Partnership any Properties acquired with the net proceeds of the
Offering and any cash remaining from the net proceeds following acquisition of
such properties in exchange for an approximately initial 99% general partner
interest. Until other limited partners are admitted to the Operating
Partnership, the remaining one percent is held by Arthur P. Herring and Dois
Brock. See "Management -- Executive Officers and Directors." Upon the
admission of other limited partners, Messrs. Herring and Brock will resign as
limited partners. (See "Operating Partnership Agreement --
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Capital Contributions." For purposes of determining its capital account and its
interest in the Operating Partnership, the Company will be deemed to have made a
capital contribution to the Operating Partnership in the amount of the gross
proceeds of the Offering and the Operating Partnership will be deemed
simultaneously to have paid the underwriter's discount and other expenses paid
or incurred in connection with the Offering. The value of each OP Limited
Partner's capital contribution shall equal its pro rata share of the value of
the interests received by the Operating Partnership. The Operating Partnership
Agreement provides that, in connection with any proper Operating Partnership
purpose, the Company may borrow funds from a financial institution or other
lender and lend such funds to the Operating Partnership on the same terms and
conditions as are applicable to the Company's borrowing of such funds. Moreover,
the Company is authorized to cause the Operating Partnership to issue Operating
Partnership interests to the Company, the OP Limited Partners or any other party
as an additional OP Limited Partner for less than fair market value if the
Company has concluded in good faith that such issuance is in the best interests
of the Company and the Operating Partnership. Under the Operating Partnership
Agreement, the Company generally is obligated to contribute the proceeds of a
share offering as additional capital to the Operating Partnership; however, the
Company may elect to use such proceeds to acquire assets directly rather than
through the Operating Partnership if such direct acquisition is determined by a
majority of the Independent Directors to be in the best interests of the
Operating Partnership and the Company. For purposes of determining its capital
account and its interest in the Operating Partnership, the Company will be
deemed to have made a capital contribution to the Operating Partnership in the
amount of the gross proceeds of such share offering and the Operating
Partnership will be deemed simultaneously to have paid any associated fees and
expenses incurred in connection with such share offering. Upon contribution of
the proceeds of a share offering, the number of the Company's OP Units in the
Operating Partnership shall be increased by the number of Company shares issued
in the share offering (taking into account any adjustment in the "conversion
factor," a multiplier intended to adjust for the occurrence of share splits,
mergers, consolidations or similar pro rata share transactions which otherwise
would have the effect of diluting the ownership interests of the OP Limited
Partners or the shareholders of the Company), and the Company's percentage
interest in the Operating Partnership will be increased on a proportionate basis
based upon the number of such additional OP Units. The percentage interests of
the OP Limited Partners will be decreased on a proportionate basis, based on the
number of their OP Units, in the event of additional capital contributions by
the Company or any other party. In addition, if the Company or any other party
contributes additional capital to the Operating Partnership, the Company may
elect to revalue the assets of the Operating Partnership under appropriate
circumstances to their fair market values (as determined by the Company). In
such event, the capital accounts of the partners will be adjusted to reflect the
manner in which the unrealized gain or loss inherent in such property (that has
not been reflected in the capital accounts previously) would be allocated among
the partners under the terms of the Operating Partnership Agreement if there
were a taxable disposition of such property for such fair market value on the
date of the revaluation.
REDEMPTION RIGHTS
Pursuant to the Operating Partnership Agreement, the OP Limited Partners
will receive the redemption rights, which will enable them to cause the
Operating Partnership to redeem their interests in the Operating Partnership.
The redemption price is the product (rounded down to the nearest whole number)
of (i) the value of the whole number of shares of Common Stock equal to the
number of OP Units offered for redemption, and (ii) the Conversion Factor which
is currently 1 for 1. At the election of the Company, the Company may purchase
the OP Units for either cash or the whole number of shares of Common Stock
described above.
The redemption price will be paid in cash in the event that the issuance of
shares of Common Stock to the redeeming OP Limited Partner would (i) result in
any person owning, directly or indirectly, shares of Common Stock in excess of
the Ownership Limit, (ii) result in the Common Stock of the Company being owned
by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, (iv) cause the Company to own, actually
or constructively, ten percent or more of the ownership interests in a tenant of
the Company's or the Operating Partnership's real property, within the meaning
of Section 856(d)(2)(B) of the Code, or (v) cause the acquisition of shares of
Common Stock by such redeeming OP Limited Partner to be "integrated" with any
other distribution of shares of capital stock for purposes of complying with the
Securities Act. Subject to limitations described in the Operating Partnership
Agreement regarding compliance with applicable securities laws, antitrust laws
and general transfer restrictions affecting the tax status of the Operating
Partnership, the redemption rights may be exercised by
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an OP Limited Partner at any time after 18 months following the date on
admission of such OP Limited Partner to the Operating Partnership, provided
that, not more than two redemptions of any single OP Limited Partner may occur
during each calendar year and each OP Limited Partner may not exercise the
redemption right for less than 500 OP Units, or if such OP Limited Partner holds
less than 500 OP Units, all of the OP Units held by such OP Limited Partner.
REGISTRATION RIGHTS
The Company has agreed to file, immediately prior to 18 months following
admission of the first additional OP Limited Partner to the Operating
Partnership, a registration statement with the Commission for the purpose of
registering the sale of shares of Common Stock issuable to future holders of OP
Units upon redemption thereof. The Company will use its best efforts to have
the registration statement declared effective and to keep it effective for a
period of two years. Upon effectiveness of such registration statement, those
persons who receive shares of Common Stock upon redemption of OP Units may sell
such shares in the secondary market without being subject to the volume
limitations or other requirements of Rule 144. The Company (on behalf of the
Operating Partnership) will bear expenses incident to such registration
requirements, except that such expenses shall not include any underwriting
discounts or commissions, Commission or state securities registration fees,
transfer taxes or certain other fees or taxes relating to such shares.
OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT, to avoid any federal income or excise tax
liability imposed by the Code, and to ensure that the Operating Partnership will
not be classified as a "publicly traded partnership" for purposes of Section
7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership will pay all
administrative costs and expenses (the "Company Expenses") of the Company except
those attributable to properties owned by the Company directly, and the Company
Expenses will be treated as expenses of the Operating Partnership. The Company
Expenses generally will include (i) all expenses relating to the formation and
continuity of existence of the Company, (ii) all expenses relating to the public
offering and registration of securities of the Company, (iii) all expenses
associated with the preparation and filing of any periodic reports by the
Company under federal, state or local laws or regulations, (iv) all expenses
associated with compliance by the Company with laws, rules and regulations
promulgated by any regulatory body and (v) all other operating or administrative
costs of the Company incurred in the ordinary course of its business on behalf
of the Operating Partnership. The Company Expenses, however, will not include
any administrative and operating costs and expenses incurred by the Company that
are attributable to properties owned by the Company directly. The Company
currently does not have any such properties, but may acquire such properties in
the future.
DISTRIBUTIONS
The Operating Partnership Agreement provides that the Operating Partnership
will distribute cash from operations (including net sale or refinancing
proceeds, but excluding net proceeds from the sale of the Operating
Partnership's property in connection with the liquidation of the Operating
Partnership) on a quarterly (or, at the election of the Company, more frequent)
basis, in amounts determined by the Company in its sole discretion, to the
partners in accordance with their percentage interests in the Operating
Partnership. Upon liquidation of the Operating Partnership, after payment of,
or adequate provision for, debts and obligations of the Operating Partnership,
including any partner loans, any remaining assets of the Operating Partnership
will be distributed to all partners with positive capital accounts in accordance
with their respective positive capital account balances. No Partner in the
Operating Partnership, including the Company, has an obligation to restore a
negative balance in such Partner's capital account following a liquidation of
the Operating Partnership.
ALLOCATIONS
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Income, gain and loss of the Operating Partnership for each taxable year
generally will be allocated among the partners in accordance with their
respective interests in the Operating Partnership, subject to compliance with
the provisions of Code Section 704(b) and 704(c) and Treasury Regulations
promulgated thereunder.
TERM
The Operating Partnership will continue until December 31, 2094, or until
sooner dissolved upon (i) the bankruptcy (as defined in the Operating
Partnership Agreement), dissolution or withdrawal of the Company (unless the
remaining Partners elect, pursuant to the voting requirements in the Operating
Partnership Agreement, to continue the Operating Partnership), (ii) the sale or
other disposition of all or substantially all of the assets of the Operating
Partnership, (iii) the redemption of all limited partnership interests in the
Operating Partnership (other than those held by the Company, if any), (iv) the
election by the General Partner, or (v) the entry of a decree of judicial
dissolution.
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the Company will be the
tax matters partner of the Operating Partnership and, as such, will have
authority to handle tax audits and to make tax elections under the Code on
behalf of the Operating Partnership.
DESCRIPTION OF PROPERTIES
Although the Company has not yet purchased any Properties, it has
agreements to purchase interests in six Properties subject to the completion of
a Minimum Common Offering or Maximum Common Offering. See "Property
Descriptions" below for detailed descriptions of each of the Properties' uses,
financing and operating histories. In the event of a Minimum Common Offering,
four of the Properties will be acquired. Management proposes to acquire such
properties in the following order: Sandpainter Apartments, Northwest Garden
Apartments, Orangewood Place Apartments and Arrow Village Apartments. In a
Maximum Common Offering, in addition to those properties, management proposes to
acquire two additional properties in the following order: Westwood Self-
Storage/Sportmart Building and Hewlett-Packard Building. While management
expects to acquire the Properties in this order, circumstances may change
requiring rearrangement of the acquisition order. In a Maximum Combined
Offering, management would pay down debt on any Properties already owned and use
the balance to acquire one or more additional properties which meet the criteria
set forth above in "Investment Objectives and Policies."
Management is presently evaluating various potential property acquisitions
and is engaging in discussions with sellers regarding the purchase of properties
for the Company. During the continuation of the Offering, and at such time
during the negotiations of a potential property acquisition when management
believes a reasonable probability exists that such property will be acquired by
the Company, this Prospectus will be supplemented to disclose such potential
property acquisition. This generally will occur upon the signing of a legally
binding purchase agreement or after the execution of a letter of intent to
purchase a property and the obtaining of a commitment for financing, but may
occur before or after such events depending on the particular circumstances
surrounding each potential acquisition. Any such supplement to this Prospectus
will set forth available data with respect to the acquisition including the
proposed terms of the purchase, a description of the property to be acquired,
and other information considered appropriate for an understanding of the
transaction. Further data will be made available after any acquisition has been
consummated during the Offering also by means of a supplement to this
Prospectus. See "Reports to Shareholders" for a description of other reports to
shareholders which will describe property acquisitions.
IT SHOULD BE UNDERSTOOD THAT THE INITIAL DISCLOSURE IN THIS PROSPECTUS OR A
SUPPLEMENT OF ANY POTENTIAL ACQUISITION CANNOT BE RELIED UPON AS AN
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ASSURANCE THAT THE COMPANY ULTIMATELY WILL CONSUMMATE SUCH POTENTIAL ACQUISITION
OR THAT THE INFORMATION PROVIDED CONCERNING THE POTENTIAL ACQUISITION WILL NOT
CHANGE BETWEEN THE DATE OF THIS PROSPECTUS OR SUCH SUPPLEMENT AND ACTUAL
PURCHASE.
If only the Minimum Common Offering or the Minimum Combined Offering is
completed, four apartment complexes (Sandpainter Apartments, Northwest Garden
Apartments, Orangewood Place Apartments and Arrow Village Apartments) described
below will be purchased.
The Company expects that the Properties, or partnership interests relating
to certain Properties, will generally be acquired through the Operating
Partnership, but the Board may cause the Company to acquire Property or such a
partnership interest directly if such direct acquisition is determined by the
Board to be in the best interests of the Company and the Operating Partnership.
See "Operating Partnership."
PROPERTIES
The Properties consist of four garden style apartment complexes consisting
of an aggregate of 480 units and two commercial/retail properties totaling
176,065 leasable square feet. All of the properties are being acquired from
unaffiliated sellers in transactions whose prices and terms have been determined
by arm's-length negotiations. In conducting such negotiations, the Company's
management had access to per unit or per square foot prices (as applicable) and
discounted cash flow sales prices for comparable buildings. Management believes
the per unit or per square foot sales prices and capitalization rates of
comparable buildings support the purchase prices. No appraisals were obtained.
Of the six properties, three are located in the Los Angeles, California,
metropolitan area and three are located in the Phoenix, Arizona, metropolitan
area. The Properties will be managed by the Company by retaining in-place
management services subject to short-term renewable contracts.
ACQUISITIONS
Each of the Properties will be acquired by the Company according to the
terms of separate purchase agreements.
Minimum Common Offering/Minimum Combined Offering. The aggregate purchase
price for the four Properties to be acquired under a Minimum Common Offering or
Minimum Combined Offering (Sandpainter Apartments, Northwest Garden Apartments,
Orangewood Place Apartments and Arrow Village Apartments) will be approximately
$14,200,000, payable by the Company as follows: (i) approximately $11,700,000
in cash and (ii) $2.5 million mortgage bearing interest at a fixed rate of
7.875% per annum. The loan from the Federal National Mortgage Association
("FannyMae") was closed in April 1996 and has monthly installments based on a
25-year amortization of $18,706 through April 2003, at which time all
outstanding principal and interest would be due. The mortgage is secured by the
Arrow Village Apartments.
Maximum Common Offering. In a Maximum Common Offering, the four Properties
described above in Minimum Common Offering will be acquired together with the at
least two additional Properties (Westwood Self-Storage/Sportmart Building and
Hewlett-Packard Building). These additional Properties will bring the total
aggregate purchase price for the six Properties to $43,100,000 payable by the
Company as follows: (i) approximately $30,050,000 in cash; (ii) approximately
$3,800,000 in retained partnership interests; and (iii) taking title to three
Properties (Arrow Village Apartments, Hewlett-Packard Building and Westwood
Self-Storage/Sportmart Building) subject to approximately $8,500,000 in new and
existing mortgage debt. The debt secured by the Arrow Village Apartments is as
described above for the Minimum Common Offering. The debt on the Westwood Self-
Storage/Sportmart Building currently is an assumable loan with Topa Savings Bank
that will be assumed with a balance of approximately $5,960,000 and is payable
in monthly installments to fully amortize the balance by the year 2022. The
interest rate is adjustable at 2.5% over the Federal Home Loan Bank 11th
District cost of funds index.
COMPETITION
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All of the apartments, retail and commercial properties are located in
developed residential and commercial areas. There are generally numerous other
apartment, retail and commercial properties within a five-mile radius of the
Properties. The amount of rentable space in the area could have a material
affect on the Company's ability to rent space and the rents charged in the
apartments, as well as the retail and commercial properties. In addition, the
Company will be competing with others who may have greater resources and
experience than the Company and its officers and directors for tenants.
PROPERTY DESCRIPTIONS
The following is a description of each of the properties and the terms of
purchase:
Sandpainter Apartments, 2225 West Indian School Road, Phoenix, Arizona, is
a 116-unit garden style apartment complex built in 1979 on five landscaped
acres and consisting of eight frame and stucco buildings with full on-site
amenities including a swimming pool and laundry facilities. Most units are
subject to semi-annual leases which expire at various times throughout the year.
The property is located within the Phoenix I-17 commercial corridor where the
commute to downtown is under ten minutes and neighborhood community and shopping
is immediately convenient. Major employers within a three-mile radius of the
property include Phoenix Baptist Hospital, Grand Canyon University, Park Central
Mall, Phoenix College, and Encanto Park. Competition in the area for tenants is
strong between the many apartments within a five-mile radius, including
Orangewood Place Apartments, although given their separation, and the number of
apartment projects in the area, management believes the likelihood of direct
competition with Orangewood Place Apartments is minimal. The number of rentable
units in the area could have a material effect on the Company's ability to rent
units and the rental rates received. The seller of this property represents
occupancy for the past five years to be as follows: 95% (1991), 92% (1992), 92%
(1993), 94% (1994) and 95% (1995). Although it is not possible to reconstruct
or verify the occupants of each unit for each month of the periods indicated
above, the Company's investigations support the accuracy of seller's
representations. The effective annual rental rate per unit for each of the past
five years is approximately $3,497 (1991), $3,202 (1992), $3,226 (1993), $3,675
(1994) and $3,790 (1995).
The purchase price is $2,200,000 where the Company will purchase the
Property for cash. The seller's book value of the Property at December 31, 1995
was $1,667,144, net of depreciation. In the opinion of management, this
Property will be adequately covered by insurance at acquisition. The Property
is to be held as an income investment and title will be held in fee by the
Operating Partnership. The depreciation tax basis will equal the purchase price
less the portion of the purchase price allocated to the land and will be
depreciated by the straight-line depreciation method over 28.5 years. The
annual realty tax is $13,072.42.
Northwest Garden Apartments, 9350 North 67th Avenue, Peoria, Arizona, is a
198-unit garden style apartment complex located in a northwest suburb of
Phoenix, Arizona, in an established residential and commercial area convenient
to shopping, employment, and community centers. Northwest Garden Apartments is
in Peoria on the border with Glendale, two cities in the Northwest Region of
Maricopa County.
Glendale and Peoria are near the I-17 industrial corridor, which has a
concentration of high technology firms in the Northwest Region. Northwest
Garden Apartments is within one mile of the North Grand employment center, an
area containing light industry and professional office space. The City of
Peoria possesses a major portion of the available commercial and industrial
zoned property in metro Phoenix. Peoria markets itself aggressively to
companies looking for a progressive city with an educated labor force, low
priced housing, and access to the growing Phoenix Metro area.
The property was built in 1984 and has been refurbished and maintained in
good condition. Competition for tenants is strong among the many surrounding
apartment complexes within a five-mile radius. The number of rentable units in
the area could have a material effect on the Company's ability to rent units and
the rental rate received. Most units are subject to annual leases which expire
at various times throughout the year. The seller of this property represents
occupancy for the past five years to be as follows: 94% (1991), 93% (1992), 94%
(1993), 95% (1994) and 96% (1995). Although it is not possible to reconstruct
or verify the occupants of each unit for each month of the periods indicated
above, the Company's investigations support the accuracy of seller's
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<PAGE>
representation. The effective annual rental rate per unit for each of the past
five years is approximately $4,157 (1991), $4,253 (1992), $4,350 (1993), $5,000
(1994) and $5,540 (1995).
The purchase price is $6,950,000 cash. The seller's book value of the
Property at December 31, 1995 was $3,118,666, net of depreciation. In the
opinion of management this Property will be adequately covered by insurance at
the Closing. The Property is to be held as an income investment and title will
be held in fee by the Operating Partnership. The depreciation tax basis will
equal the purchase price less the portion of the purchase price allocated to the
land and will be depreciated by the straight-line depreciation method over 28.5
years. The annual realty tax is $48,662.86.
Orangewood Place Apartments, 7328 North 27th Avenue, Phoenix, Arizona, is
an 84-unit garden style apartment complex located in an established residential
and commercial area convenient to shopping, employment, and community centers.
The property was built in 1984 and has been refurbished and well-maintained.
Most units are subject to semi-annual leases which expire at various times
throughout the year. Competition for tenants is strong among the many
surrounding apartment complexes within a five-mile radius, including Sandpainter
Apartments, although given their separation, and the number of apartments
projects in the area, management believes the likelihood of direct competition
with Sandpainter Apartments is minimal. The number of rentable units in the
area could have an adverse affect on the Company's ability to rent units and the
rental rate received. The seller of this property represents occupancy for the
past five years to be as follows: 89% (1991), 92% (1992), 92% (1993), 95%
(1994) and 96% (1995). Although it is not possible to reconstruct or verify the
occupants of each unit for each month of the periods indicated above, the
Company's investigations support the accuracy of seller's representations. The
effective annual rental rate per unit for each of the past five years is
approximately $2,467 (1991), $2,984 (1992), $3,000 (1993), $3,750 (1994) and
$3,990 (1995).
Orangewood Place Apartments is strategically located within the Interstate
17 commercial corridor; I-17 being the most heavily traveled portion of the
entire Metropolitan Phoenix freeway system. The property is located just one
mile west of the freeway on 27th Avenue. The commute time to midtown or
downtown Phoenix from Orangewood Place Apartments is less than fifteen minutes.
The residents have a similar short drive north to Phoenix's largest regional
shopping center, Metro Center, and its neighboring business and research and
development parks. Major employers within a three-mile radius of Orangewood
Place Apartments are Phoenix Baptist Hospital, Grand Canyon University, Metro
Center Mall and Chistown Shopping Center.
The purchase price is $1,800,000 and the Company intends to purchase the
property for cash. The seller's book value of the Property at December 31, 1995
was $1,182,869, net of depreciation. In the opinion of management, this
Property will be adequately covered by insurance at acquisition. The Property
is to be held as an income investment and title will be held in fee by the
Operating Partnership. The depreciation tax basis will equal the purchase price
less the portion of the purchase price allocated to the land and will be
depreciated by the straight-line depreciation method over 28.5 years. The
annual realty tax is $17,475.38.
Arrow Village Apartments, 186615 Arrow Highway, Azusa, California, is an
82-unit garden style apartment complex located in an established residential
area in close proximity to employment, shopping, and community centers.
Competition for tenants is strong from numerous surrounding apartments complexes
in the neighborhood. The subject Property will compete with tenant amenities
and property management responsiveness. The depreciation tax basis will equal
the purchase price less the portion of the purchase price allocated to the land
and will be depreciated by the straight-line depreciation method over 18.5
years. Most units are subject to annual leases which expire at various times
throughout the year. The property was built in 1977 and refurbished in 1995 by
the Sellers after purchasing it from a bank which had acquired it in
foreclosure. When acquired by the Seller, the property was in a state of
disrepair and, through neglect, most of the tenant base had left. After
refurbishing the property which was completed in Summer 1995, the seller re-
rented all the units at an average effective rental per unit of approximately
$6,700 per year, which is slightly below the surrounding market for comparable
properties. No records of occupancy are available to the Company for years
prior to 1993 when it was foreclosed upon by a bank. Based on financial data
available from seller, the Company estimates that occupancy rates for the
Property were 64% in 1993 and 66% in 1994. In 1995, occupancy went down to 59%
during the construction/rehabilitation period and climbed to 99% in October
after completion of rehabilitation where it
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remained until the end of the year. The effective rent per unit for 1995 is
$6,456. In determining the purchase price for the Property, the Company assumed
a vacancy allowance of six percent. The average 1995 annual market rental rate
per unit for comparable properties was $7,236, $7,260 and $6,510, respectively,
for three similar properties located in the area.
The purchase price is $3,250,000 consisting of $750,000 cash and $2,500,000
of mortgage debt. The seller's book value of the Property at December 31, 1995
was $2,209,379, net of depreciation. Arrow Village Apartments closed in April
1996 a $2,500,000 mortgage bearing interest at the rate of 7.875% per annum.
The loan is from the Federal National Mortgage Association ("FannyMae") and has
monthly installments based on a 25-year amortization of $18,706 through April
2003, at which time all outstanding principal and interest would be due. In the
opinion of management, this Property will be adequately covered by insurance at
acquisition, except that earthquake insurance is not available from any source.
This Property is to be held as in income investment and title will be held in
fee by the Operating Partnership. The annual realty tax rate is approximately
1.25% of the purchase price or $40,625.
Westwood Self-Storage/Sportmart Building, 1901 Sepulveda Boulevard, Los
Angeles, California, is a 104,000 square foot, three-story over parking building
built in 1987. The present use for this building is to provide a large single
tenant retail location on its ground floor supported with ample parking. The
second and third floors of this building are configured and operated as a retail
self-storage targeted toward both individuals and businesses. The Company
intends to continue this use as it holds the Property as an income investment
property. The ground floor is leased by Sportmart, Inc., an Illinois based
national sporting goods discount retail distributor. Sportmart, Inc. leases the
entire 31,600 square foot ground floor (32.7% of the total square feet) and is
the only tenant to lease in excess of ten percent of the total leasable square
footage. The Sportmart lease expires in January 1998 and contains two options
to extend this lease for a period of ten years each. Currently, the total rent
per annum from this lease is $506,872 on a full service basis where Sportmart,
Inc. reimburses the owner for one-third of the building operating expenses.
This reimbursement equals approximately $44,450 per annum. The second and third
floors of the building are operated as a self-storage facility containing 802
individual storage units and which is effectively 100% occupied with a waiting
list. The 64,934 leasable square feet on the two floors represents 67.3% of the
total square footage of the building. Each storage unit lessee executes a
separate lease. These leases are for varying lengths of time, but generally for
periods of time of one year or less. The total rent received from these leases
equals a combined total of approximately $900,000 per annum. The occupancy
reports for the last five years by seller of the Property is as follows: 84%
(1991), 88% (1992), 98% (1993), 97% (1994) and 99% (1995). The Company's
investigations support the accuracy of seller's reports. The effective annual
rental price per square foot for each of the last five years is $12.99 (1991),
$13.66 (1992), $15.12 (1993), $15.05 (1994) and $15.45 (1995). There were no
free rent periods or give-backs.
The following table sets forth as of December 31, 1995 tenant lease
expirations for the next ten years of the Property assuming no tenants exercise
renewable options:
<TABLE>
<CAPTION>
Percent of Total
Annual Average Base Rent Lease Rentable
Lease Number of Minimum Rent Per Square Foot Square Feet
Expiration Leases Lease Rentable Under Expiring Under Expiring Represented by
Year Expiring Square Feet Leases Lease Expiring Leases
---------- --------- -------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
1995 - - - -
1996 802 64,934 900,000 13.86 67.3
1997 - - - - -
1998 1 31,600 506,872 16.04 32.7
1999 - - - - -
2000 - - - - -
2001 - - - - -
2002 - - - - -
2003 - - - - -
</TABLE>
58
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<TABLE>
<S> <C> <C> <C> <C> <C>
2004 - - - - -
</TABLE>
The building location is in the suburban West Los Angeles area of the City
of Los Angeles in a mixed residential and commercial area on a major north-south
artery. The self-storage building draws on both commercial business users as
well as individuals. The building has good visibility and freeway access.
Competition for tenants, either retail or self-storage lessees, is strong
in this highly urbanized environment. The focus of the building is on the
middle to upper income market where there are relatively few other retail or
self-storage locations as large and accessible. Notwithstanding, within a five-
mile radius there are many competitors with comparable facilities which may have
resources greater than that of the Company.
The Property will be acquired by the Operating Partnership which will form
a new limited partnership ("AMREIT No. 1901") with the Property's current owner
which will manage the self-storage portion of the business. The purchase price
for the property is $12,900,000. The seller's book value of the Property at
December 31, 1995 was $9,688,890, net of depreciation. The Operating
Partnership will contribute $4,648,100 to AMREIT No. 1901 for a 67% interest in
AMREIT No. 1901, and the seller will contribute the property for a 33% interest
(with an agreed value of $2,290,000). AMREIT No. 1901 will assume existing
mortgage debt on the property of $7,450,000, and $1,448,139 of the cash
contributed by the Operating Partnership will be used to pay down existing
mortgage debt. This loan, with the reduced principal balance of approximately
$5,961,861, will be assumed at an interest rate which floats at 2.5% over the
11th District Federal Home Loan Bank rate which is, when combined with the 2.5%
margin, presently 7.731%. The scheduled loan maturity is February 2007 and
contains no prepayment penalty. The principal balance due at maturity, assuming
the presently prevailing interest rate of 7.31% over the remaining loan term,
would be approximately $3,857,458. The Company intends to replace this
financing with fixed rate financing in the future.
The Operating Partnership will receive a priority 10.5% return from cash
flow from operations on funds invested in AMREIT No. 1901. The seller will
receive an eight percent preferred return on its equity from cash flow from
operations after the Operating Partnership's priority return. Remaining cash
flow from operations will be divided 50/50. Proceeds from sale or refinancing
of the Property will be distributed (i) first, to pay debts of AMREIT No. 1901,
(ii) next, to provide a preferential return to the Operating Partnership on
certain portions of its net capital contributions prior to distributions to all
partners, (iii) next, distributions will be made to all partners on a pro rata
basis until the partners' net capital accounts are returned in full, (iv) next,
any unpaid preferred returns will be paid to the partners, and (v) any balance
will be distributed 50% to the seller, provided that if the seller's net capital
contribution falls below ten percent of its original capital contribution (i.e.,
below $229,000), such balance will be distributed to the partners pro rata in
accordance with the balance of their respective net capital contributions.
As a part of the transaction, the Company has granted to the seller a
redemption right wherein, assuming the preferred return requirements are being
met by the cash flow from operations of the Property, the seller may require the
Company to redeem all or a portion of seller's partnership interest in AMREIT
No. 1901 for cash, or, in an amount equal to seller's net capital contribution
to AMREIT No. 1901. In the opinion of management, this Property will be
adequately covered by insurance at acquisition, except that earthquake insurance
is not presently available from any source. The depreciation tax basis will
equal the purchase price less the portion of the purchase price allocable to the
land and depreciation will be over a 28.5 year life in a straight-line method.
The realty tax rate will be approximately 1.2% of the purchase price, or
$154,000.
Hewlett-Packard Building, 5805 Sepulveda Boulevard, Van Nuys, California,
is a Class A, eight-story, suburban office building containing 85,750 rental
square feet which was built in 1990 and which is fully leased. The present use
for this building is to provide modern office space for corporate offices for
businesses and professionals. The Company intends to continue this use as it
holds the Property as an income investment property. The three principal
tenants of this building, each of which occupy in excess of ten percent of the
rental square footage and which collectively account for 83.3% of the total
rental square footage are (i) Hewlett-Packard Company whose lease is for 39,000
square feet (45.4% of the total rentable square footage). Hewlett-Packard
Company is a national manufacturer and distributor of electronics and computer
hardware and software for both
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<PAGE>
retail consumers and industrial consumers. The lease with Hewlett-Packard
Company expires on January 31, 2003 and requires a two year notice to vacate.
There are two options to extend this lease for successive five-year periods.
Presently, the total rent per annum from this lease is $832,372; (ii) FHP, Inc.,
whose lease is for 17,276 square feet (20.2% of the total rental square
footage). FHP is a national health maintenance organization headquartered in
California. This lease expires April 12, 1997 and requires no less than a six
month notice to vacate. There is one option to renew for a period of 5 years.
Presently, the total rent per annum from this lease is $373,152; and (iii)
Industrial Bank whose lease is for 18,143 square feet (21.2% of the total
rentable square footage). Industrial Bank is a California commercial bank
specializing in providing banking and financial services to both retail
customers and small-to-medium sized businesses in the San Fernando Valley and
the Greater Los Angeles Area. This lease expires November 13, 1998. There are
four options to extend this lease for successive five-year periods. Presently,
the total rent per annum from this lease is $485,931. The Property location is
in suburban Los Angeles with excellent freeway visibility and vehicle access.
The building began leasing in 1990 and has had the following levels of occupancy
in the last five years: 34% (1991), 53% (1992), 100% (1993), 100% (1994) and
100% (1995). Effective annual rental rates per square foot for the last five
years were: $26.66 (1991), $24.77 (1992), $23.19 (1993), $22.83 (1994) and
$22.85 (1995). There were no free rent periods or give-backs. Competition for
tenants in the area for Class A office space is very keen. The Property is
located in a market where it is designed to attract both local and regional
tenants. While the Property is presently fully leased should one of the three
major tenants vacate the amount of comparable rentable space in the area could
have a materially adverse effect on the Company's ability to rent the vacated
space at the present rental rates in a timely manner. Competitors in the market
for tenants have greater resources in some cases.
The following table set forth as of December 31, 1995 tenant lease
expirations for the next ten years of the Property assuming no tenants exercise
renewable options:
<TABLE>
<CAPTION>
Percent of Total
Annual Average Base Rent Lease Rentable
Lease Number of Lease Rentable Minimum Rent Per Square Foot Square Feet
Expiration Leases Square Feet Under Expiring Under Expiring Represented by
Year Expiring Leases Lease Expiring Leases
---------- --------- -------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
1995 - - - -
1996 1 2,492 65,789 27.72 2.9
1997 2 24,563 460,596 23.02 28.6
1998 1 18,143 485,931 29.28 21.2
1999 - 1,546 16,536 23.57 1.8
2000 - - - - -
2001 - - - - -
2002 - - - - -
2003 1 39,000 832,372 21.36 45.51
2004 - - - - -
</TABLE>
The Property will be acquired by the Operating Partnership which will form
a new limited partnership ("AMREIT No. 5805") with the Property's current owner
where the Operating Partnership will be the sole general partner and title will
be held in the name of AMREIT No. 5805. The purchase price for the property is
$16,000,000. The seller's book value of the Property at December 31, 1995 was
$13,767,124, net of depreciation. The Operating Partnership will contribute
$6,400,000 to AMREIT No. 5805 for an 80% interest in AMREIT No. 5805, and the
seller will contribute the property for a 20% interest (with an agreed value of
$1,600,000). AMREIT No. 5805 will assume existing mortgage debt on the property
of approximately $10,720,000, and $2,720,000 of the cash contributed by the
Operating Partnership will be used to pay down existing mortgage debt to
approximately $8,000,000. (In a Maximum Common Offering, existing mortgage debt
will be paid in full.) This $8,000,000 loan will be assumed at a rate of
interest of nine percent payable interest only until the scheduled maturity of
December 29, 1998 when the principal balance is due. There is no prepayment
penalty. The Company will seek to immediately refinance this loan upon
acquisition at more favorable terms and rate. The Operating Partnership will
receive a priority 10.5% return from cash flow from operations on funds invested
in AMREIT No.
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<PAGE>
5805. The seller will receive an eight percent preferred return on its equity
from cash flow from operations after the Operating Partnership's priority
return. Remaining cash flow from operations will be divided 50/50. Proceeds from
sale or refinancing of the Property will be distributed (i) first, to pay debts
of AMREIT No. 5805, (ii) next, to provide a preferential return to the Operating
Partnership on certain portions of its net capital contributions prior to
distributions to all partners, (iii) next, distributions will be made to all
partners on a pro rata basis until the partners' net capital accounts are
returned in full, (iv) next, any unpaid preferred returns will be paid to the
partners, and (v) any balance will be distributed 50% to the Operating
Partnership and 50% to the seller, provided that if the seller's net capital
contribution falls below ten percent of its original capital contribution (i.e.,
below $160,000), such balance will be distributed to the partners pro rata in
accordance with the balance of their respective net capital contributions.
As a part of the transaction, the Company has granted to the seller a
redemption right wherein, assuming the preferred return requirements are being
met by the cash flow from operations of the Property, the seller may require the
Company to exchange all or a portion of seller's partnership interest in AMREIT
No. 5805 for cash in an amount equal to seller's net capital contribution to
AMREIT No. 5805.
The purchase agreement contains a $500,000 reserve for seismic
inspection/repair of the entire building. The building is located in the San
Fernando Valley section of Los Angeles which was near the site of the January
1994 Northridge earthquake. The building inspections conducted as a part of the
Company's due diligence reveal no material damage to the building. As a part of
the Company's purchase agreement, the seller (i) has warranted to the Company
that no additional seismic repair is necessary and (ii) has subordinated his
$1,600,000 equity to any repair work which is found to be required. In the
opinion of management, this Property will be adequately covered by insurance at
acquisition, except that earthquake insurance is not presently available from
any source. The depreciation tax basis will equal the purchase price less the
portion of the purchase price allocated to the land and will be depreciated over
a 28.5 years life on a straight-line method. The realty tax rate will be
approximately 1.2% of the purchase price or $192,000.
DESCRIPTION OF SECURITIES
The following description of the Shares and other capital stock of the
Company does not purport to be complete but contains a summary of portions of
the Company's Charter and is qualified in its entirety by reference to the
Company's Charter.
GENERAL
The total number of shares of stock which the Company has authority to
issue is 56,515,000 shares, of which 35,000,000 are shares of Common Stock,
$0.01 par value per share ("Common Stock"), and 21,515,000 are shares of
Preferred Stock, $0.01 par value per share ("Preferred Stock"). The Board of
Directors is authorized to provide for the issuance of shares of Preferred Stock
in one or more series, to establish the number of shares in each series and to
fix the designation, powers, preferences and the rights of such series and the
qualifications, limitations or restrictions thereof. All shares are subject to
the Ownership Limit. In addition, no Person may, directly or indirectly,
acquire Beneficial Ownership of a number of shares of 8% Preferred that, when
added to other equity shares of the Company Beneficially Owned by such Person,
would exceed five percent of the value of the outstanding equity shares of the
Company.
Common Stock. All shares of Common Stock offered hereby will be duly
authorized, fully paid and nonassessable. Subject to the preferential rights of
any other shares or series of shares of preferred stock and to the provisions of
the Company's Charter regarding the consequences of actually or constructively
owning shares of Common Stock in violation of the Ownership Limit (as discussed
below), holders of Common Stock will be entitled to receive Distributions on
such Common Stock if, as and when authorized and declared by the Board of
Directors of the Company out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
shareholders in the event of its liquidation, dissolution or winding-up after
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<PAGE>
payment of, or adequate provision for, all known debts and liabilities of the
Company. The Company intends to pay quarterly Distributions, beginning with a
Distribution for the first full calendar quarter ending after the Initial
Closing. See "Distribution Policy."
Subject to the provisions of the Company's Charter regarding the
consequences of actually or constructively owning shares of Common Stock in
violation of the Ownership Limit and to the matters discussed below under
"Certain Provisions of Maryland Law and of the Company's Charter and By-Laws --
Control Share Acquisition," each outstanding share of Common Stock entitled the
holder to one vote on all matters submitted to a vote of shareholders, including
the election of directors, and, except as otherwise required by law or except as
provided with respect to any other class or series of shares of stock, the
holders of such shares of Common Stock will possess the exclusive voting power.
There is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect all of
the directors then standing for election and the holders of the remaining
shares, if any, will not be able to elect any directors. Holders of Common
Stock have no conversion, sinking fund, redemption rights or any preemptive
rights to subscribe for any securities of the Company.
Subject to the provisions of the Company's Charter regarding the
consequences of actually or constructively owning shares of Common Stock in
violation of the Ownership Limit, all shares of Common Stock will have equal
Distribution, liquidation and other rights, and will have no preference,
appraisal or exchange rights.
8% Convertible Preferred Stock. The Board of Directors has authorized the
issuance of up to 1,500,000 shares of 8% Convertible Preferred Stock and
1,136,364 of such shares are being offered for sale in this Offering at $13.20
per share. The 8% Preferred Stock is entitled to a $13.20 liquidation
preference. The 8% Preferred Stock is entitled to receive, out of funds legally
available therefor, cumulative Distributions at the annual rate equal to the
greater of eight percent of the preferred liquidation amount per share, or twice
the per share amount paid as Distributions on the Common Stock, with a maximum
of $1.30 per share. Such amount is payable in each year when and as declared by
the Board of Directors. Such amounts are cumulative. Each share of 8%
Preferred Stock is entitled to one vote for each share of Common Stock into
which it is convertible, disregarding fractional shares, and Common Stock and 8%
Preferred Stock vote together, with the 1995 Preferred Stock, as a single class
on all matters coming before the shareholders for approval; provided, however,
that without the approval of at least a majority of the outstanding shares of 8%
Preferred Stock, the Company may not (i) amend the Articles of Incorporation or
Articles Supplementary to alter or change any rights, preferences or privileges
of 8% Preferred Stock so as materially and adversely to affect the 8% Preferred
Stock; (ii) increase or decrease the authorized number of shares of 8% Preferred
Stock or effect a stock split or reverse stock split of the 8% Preferred Stock;
(iii) authorize another class or series of shares senior to the 8% Preferred
Stock with respect to distribution of assets on liquidation, it being understood
that the Board of Directors of the Company may authorize another class or series
of preferred shares in parity with the 8% Preferred Stock with respect to
distributions, including liquidating distributions; (iv) so long as
Distributions to holders of 8% Preferred Stock are not current, purchase, redeem
or otherwise acquire any Common Stock, directly or indirectly, except the
purchase of Common Stock from an employee or consultant of the Company; (v)
merge or consolidate with or into any other corporation or sell all or
substantially all of its assets to any other corporation, except any such
transaction not requiring approval of the Common Stock; or (vi) voluntarily
elect to wind up and dissolve. For a period of 60 months commencing 90 days
after the Final Closing, at the option of the holder, each share of 8% Preferred
Stock is convertible into two shares of Common Stock, such conversion ratio
being subject to normal anti-dilution adjustments.
1995 Convertible Preferred Stock. The Board of Directors has authorized
the issuance of up to 1,100,000 shares of 1995 Convertible Preferred Stock and
has issued 1,021,500 shares of 1995 Convertible Preferred Stock. See
"Capitalization." The 1995 Convertible Preferred Stock is entitled to no
Distributions and is entitled to one vote per share for each share of Common
Stock into which it is convertible, disregarding fractional shares, and Common
Stock and 1995 Convertible Preferred Stock will vote together, with the 8%
Preferred Stock, as a single class on all matters coming before the shareholders
for approval although, without the approval of at least a majority of the
outstanding shares of 1995 Convertible Preferred Stock, the Company may not
undertake any of the actions described in clauses (i) through (vi) in the above
description of 8% Preferred Stock. On liquidation, each
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share of 1995 Convertible Preferred Stock is entitled to a $0.01 liquidation
preference (the "Preferred Liquidation Amount"), subject to adjustment in the
event of adjustments in the conversion price. For a period ending on October 31,
2005, at the option of the holders, each share of 1995 Convertible Preferred
Stock is convertible into one share of Common Stock, at the Preferred
Liquidation Amount, provided, however, that no such conversion may occur until
six months after the end of the Company's first fiscal year wherein its audited
consolidated financial statements reflect total equity of $25,000,000 or more
(with cumulative depreciation recorded in such consolidated financial statements
since the acquisition of applicable properties added back and as adjusted for
the difference, if any, between the agreed value of acquired property and the
value of such property recorded by the Company in such consolidated financial
statements) ("Adjusted Equity Value") plus Funds from Operations of $2,500,000
or more. The term "Funds from Operations" means net income of the Company as
determined in accordance with generally accepted accounting principles,
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation, and after adjustments for unconsolidated partnerships and joint
ventures. The conversion price is subject to normal anti-dilution adjustments.
In addition, by contract with the Company, holders of 385,000 shares of 1995
Convertible Preferred Stock (including 25,000 held by Dois Brock, President of
the Company, 150,000 held by The Danube Rousse Inc. (a principal shareholder)
and 150,000 held by Regent IV Trust (a principal shareholder), and the balance
held by three other Persons who are neither part of management or principal
shareholders) have agreed not to convert those shares into Common Stock of the
Company until six months after the end of the Company's first fiscal year
wherein the Company's Adjusted Equity Value is $40,000,000 or more, and its
Funds from Operations are $4,000,000 or more. Furthermore, by contract with the
Company, holders of 391,500 shares of 1995 Convertible Preferred Stock
(including 50,000 held by Dois Brock, 25,000 held by Jacob Segal, Vice President
of the Company, 30,000 held by Gerald Weisstein, a director of the Company,
115,000 held by The Danube Rousse Inc., 115,000 held by Regent IV Trust, and the
balance held by three other Persons who are neither part of management or
principal shareholders) will not be permitted to convert those shares to Common
Stock until six months after the end of the Company's first fiscal year wherein
the Company's Adjusted Equity Value is $70,000,000 or more, and its Funds from
Operations are $7,000,000 or more.
Preferred Stock. In addition to the 8% Convertible Preferred Stock and the
1995 Convertible Preferred Stock, the preferred stock may be issued from time to
time in one or more series as authorized by the Board of Directors. Prior to
issuance of shares of each series, the Board of Directors by resolution shall
designate that series to distinguish it from all other series and classes of
stock of the Company, shall specify the number of shares to be included in the
series and shall set the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption. Subject to the express
terms of any other series of preferred stock outstanding at the time and
notwithstanding any other provision of the Articles of Incorporation, the Board
of Directors may increase or decrease the number of shares of, or alter the
designation or classify or reclassify, any unissued shares of any series of
preferred stock by setting or changing, in any one or more respects, from time
to time before issuing the shares, and the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption of the shares
of any series of preferred stock.
10% Convertible Notes Due October 1, 1996. The Company has issued in
October 1995 an aggregate of $202,500 of 10% Convertible Notes due October 1,
1996 ("10% Notes"). These Notes bear interest at ten percent per annum, payable
on maturity of the Note. Such Notes are convertible into unregistered shares of
Common Stock of the Company at a conversion price of $4.50 per share. Such
conversion may take place on the earlier of 90 days after the Final Closing or
September 30, 1996, at the option of the holder. They are redeemable by the
Company on or before September 30, 1996.
10% Convertible Notes Due October 1, 1996, Series B. The Company has
issued in November and December 1995 an aggregate of $56,281.50 aggregate
principal amount of 10% Convertible Notes due October 1, 1996, Series B ("Series
B Notes"). See "Risk Factors -- General Investment Risks -- Potential
Securities Act Liability." The Series B Notes bear interest at ten percent per
annum, payable on maturity of the Notes. They are convertible into unregistered
shares of Common Stock of the Company at a conversion price of $4.50 per share.
Such conversion may take place on the earlier of 90 days from the Final Closing
or September 30, 1996, at the option of the holder. They are redeemable by the
Company on or before September 30, 1996. The Series B Notes were sold without
an exemption from registration under the Securities Act. Accordingly, any
Series B Noteholder
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desiring to rescind its purchase of Series B Notes may require the Company to
refund its purchase price plus interest from the date of purchase to the date of
rescission payment.
10% Notes, due April 15, 1997. The Company has issued an aggregate of
$245,555.55 of 10% Notes, due April 15, 1997. The Notes were sold at a ten
percent discount and bear interest at ten percent per annum, payable at
maturity. The Notes are not convertible into any equity securities of the
Company and are redeemable by the Company at any time.
Series "A" Warrants. The Series "A" Warrants will be issued as part of the
Units. They will have a three year life, are immediately exercisable, and will
allow the holder to purchase one share of Common Stock for $7.00. These
warrants are detachable from the Units immediately on issuance and contain
appropriate anti-dilution clauses and will be fully transferable from the date
of the close of the Offering. The Common Stock issued upon exercise of these
warrants has been registered under the Securities Act and will be freely
tradable. The Company does not intend to list the Series "A" Warrants on any
market or exchange.
Series "D" Warrants. The Company has authorized and has issued 463,133
Series "D" Warrants. Such warrants permit the purchase of one share of Common
Stock at $3.50 per share subject to normal anti-dilution provisions and are non-
transferable. In general, they are exercisable for a 35-month period commencing
at the end of the 13th month after the Final Closing of the Offering. 57,133 of
such warrants have been issued to former shareholders of Funding Co. on the
basis of one warrant for each two shares of Funding Co. exchanged into Company
Common Stock. 406,000 of such warrants have been issued in combination with
1,021,500 shares of 1995 Convertible Preferred Stock to various parties as
consideration for accepting a substantially subordinate position to the public
shareholders of the Company, including certain former shareholders of Funding
Co. who are members of management, in the form of 1995 Convertible Preferred
Stock. See "Principal Shareholders -- Director and Officer Stock Ownership.
Holders of 336,000 of such warrants have agreed with the Company that they will
not exercise their rights to purchase Common Stock pursuant to the warrant until
six months after the end of the Company's first fiscal year wherein its audited
consolidated financial statements reflect an Adjusted Equity Value of
$25,000,000 or more plus Funds from Operations of $2,500,000 or more. Transfers
of the Series "D" Warrants will be subject to Rule 144 promulgated under the
Securities Act ("Rule 144"). Such warrants may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including exemptions contained in Rule 144. All Series "D" Warrants
expire 48 months after the Final Closing of the Offering. In the future, Common
Stock issued upon exercise of these warrants will be registered for resale under
the Securities Act.
Series "E" Warrants. As compensation to Brookstreet Securities Corporation
for assisting the Company in selling $202,500 of 10% Notes, the Company has
issued in October 1995 72,500 Series "E" Warrants. These Warrants may not be
exercised until 90 days after the date of the Final Closing. They will have a
two year life commencing on the date of the Final Closing and will allow the
holder to purchase one share of Common Stock for $4.50 per share. Transfers of
the Series "E" Warrants will be subject to Rule 144. Such warrants may not be
sold in the absence of registration under the Securities Act unless an exemption
from registration is available, including exemptions contained in Rule 144. In
the future, the Common Stock issued upon exercise of these warrants will be
registered for resale under the Securities Act.
RESTRICTION ON OWNERSHIP
In order for the Company to qualify as a REIT, not more than 50% in value
of its outstanding shares may be owned by any five or fewer individuals
(including certain tax-exempt entities) during the last half of each taxable
year of the Company, and the outstanding shares must be owned by 100 or more
Persons independent of the Company and each other during at least 335 days of a
12 month taxable year or during a proportionate part of a shorter taxable year
for which an election to be treated as a REIT is made. For purposes of the
"five or fewer test," a holder of a warrant, option to acquire Equity Stock, or
certain convertible securities of the Company, is deemed to own the shares for
which he has an option to purchase or a conversion right and the multiple
classes of Shares may raise special valuation issues. The Company, therefore,
may prohibit certain acquisitions and transfers of
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Shares so as to facilitate the Company's continued qualification as a REIT under
the Code. However, there can be no assurance that such prohibition will be
effective.
In order to assist the Board in preserving the Company's status as a REIT,
the Charter contains a basic Ownership Limit which prohibits any Person or group
of Persons from acquiring, directly or indirectly, Beneficial Ownership of more
than 9.8% in value of the outstanding equity shares of the Company. Value will
be determined by market prices. Shares owned by a Person or a group of Persons
in excess of the Ownership Limit are deemed "Excess Shares." Shares owned by a
Person who individually owns of record less than 9.8% of outstanding equity
shares may nevertheless be Excess Shares if such Person is deemed part of a
group for purposes of this restriction. In addition, in order to protect the
integrity of the Ownership Limit set forth in the Company's Charter, no Person
may, directly or indirectly, acquire or hold, beneficial ownership of a number
of shares of 8% Preferred that, when added to other equity shares of the Company
beneficially owned by such Person, would exceed five percent of the value of the
outstanding equity shares of the Company. The Board of Directors will cause the
shareholdings of Persons owning 8% Preferred to be regularly monitored in order
to assist in the prevention of an inadvertent violation of the five percent
restriction.
As noted by tax counsel to the Company in its opinion, these ownership
restrictions do not mathematically assure compliance with the ownership
requirements for qualified REIT status of the Company. See "Federal Income Tax
Considerations -- Summary of Tax Opinions." For example, if five individuals
each purchased Common Stock with a value representing 9.8% of the total
outstanding equity shares of the Company, their aggregate 49% ownership interest
by value at the time of purchase could theoretically increase over time to over
50% of the value of the Company if the value of the Common Stock were to
increase relative to the value of the 8% Preferred. However, due to the
liquidation preference and other features of the 8% Preferred, the Company
believes it is extremely unlikely that such a relative market value fluctuation
would occur. Because it is more likely that the value of the 8% Preferred could
increase relative to the value of the Common Stock, the additional five percent
ownership restriction has been imposed with respect to holders of the 8%
Preferred (including holders of both Common Stock and 8% Preferred) to assure
compliance with the REIT ownership requirements.
In addition to the right to prevent a transfer of 8% Preferred or other
equity shares of the Company, the Company has the right, by written notice, to
require a beneficial owner of this Company's shares to sell to the Company that
number of shares of 8% Preferred necessary to prevent such Person from exceeding
the five percent restriction. The purchase price for such shares is a cash
amount equal to the aggregate market value of such shares on the date that the
Company sends notice that it is exercising its right to purchase 8% Preferred
from such Person in order to protect the five percent restriction. Subject to
applicable law, the purchase right granted to the Company may be assigned by the
Company to any Person which would not be in violation of the five percent
restriction.
The Charter stipulates that any purported issuance or transfer of shares
shall be invalid with respect to those shares that result in the transferee-
shareholder owning equity shares in excess of the Ownership Limit. If the
transferee-shareholder acquires Excess Shares, such Person is considered to have
acted as an agent for the Company and holds such Excess Shares on behalf of the
ultimate shareholder.
The Ownership Limit does not apply to offerors which, in accordance with
applicable federal and state securities laws, make a cash tender offer, where at
least 85% of the outstanding shares (not including shares or subsequently issued
securities convertible into common stock which are held by the tender offeror
and/or any "affiliates" or "associates" thereof within the meaning of the
Exchange Act) are duly tendered and accepted pursuant to the cash tender offer.
The Ownership Limit also does not apply to the underwriter in a public offering
of the Shares. The Ownership Limit does not apply to a Person or Persons which
the directors so exempt from the Ownership Limit upon appropriate assurances
that the Company's qualification as a REIT is not jeopardized.
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All Persons who own five percent or more of the outstanding shares (or one
percent or more if the Company has more than 200 but fewer than 2,000
shareholders) during any taxable year will be asked by the Company to deliver a
statement or affidavit setting forth the number of shares of all classes
beneficially owned, directly or indirectly, by such Persons.
DISTRIBUTIONS
The Company intends after the Initial Closing to declare Distributions on a
quarterly basis. It is anticipated that the declaration of Distributions will
commence at the end of the first full calendar quarter after the Initial
Closing. Distributions will be paid to investors who are shareholders as of the
record date selected by the directors. Distributions will be paid on a
quarterly basis regardless of the frequency with which such Distributions are
declared. The Company is required to distribute annually its Distributable REIT
Taxable Income to comply with the REIT Provisions. Generally, income
distributed as Distributions will not be taxable to the Company under federal
income tax laws unless the Company fails to comply with the REIT Provisions.
Distributions will be paid at the discretion of the directors, in
accordance with the earnings, cash flow and general financial condition of the
Company. The directors' discretion will be directed, in substantial part, by
their obligation to cause the Company to comply with the REIT Provisions.
Because the Company may receive income from interest or rents at various times
during its fiscal year, Distributions may not reflect income earned by the
Company in that particular period but may be made in anticipation of cash flow
which the Company expects to receive during a later quarter and may be made in
advance of actual receipt in an attempt to make distributions relatively
uniform. The Company can borrow to make distributions if the borrowing is
necessary to maintain the Company's REIT status or if the borrowing is part of a
liquidation strategy to partially or completely liquidate investments in
Properties by borrowing against those Properties.
The Company is not prohibited from distributing its own securities in lieu
of making cash distributions to shareholders, provided that such securities
distributed to shareholders are registered under the Securities Act and approved
for listing by the securities exchange on which the Company's other shares are
traded. Shareholders who receive marketable securities in lieu of cash
distributions may incur transaction expenses in liquidating such securities.
REPURCHASE OF SHARES
The Company has the authority to redeem Excess Shares immediately upon
becoming aware of existence of such Excess Shares or after giving the Person in
whose hands such shares are Excess Shares 30 days to the transfer such Excess
Shares to a Person whose ownership of such shares would not exceed the Ownership
Limit and, therefore, would no longer be considered Excess Shares. The price
paid upon redemption by the Company shall be the lesser of the price paid for
such Excess Shares by the shareholder in whose possession the redeemed shares
were formerly Excess Shares or the fair market value of the Excess Shares. The
Company may purchase Excess Shares or otherwise repurchase shares if such
repurchase does not impair the capital or operations of the Company.
TRANSFER AGENT
The transfer agent and registrar for the Shares will be Gemisys
Corporation. The transfer agent's address is 7103 South Revere Parkway,
Englewood, Colorado 80112, and its phone number is (303) 705-6000.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BY-LAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's Charter and By-Laws. The summary does not purport to be complete
and is subject to and qualified in its entirety by reference to the Company's
Charter and By-Laws, copies of which are exhibits to the Registration Statement
of which this Prospectus is a part.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Charter provides that the number of directors of the Company
shall be established by the By-Laws but shall not be less than three nor more
than nine. The present Board has five members. Any vacancy on the Board of
Directors will be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining directors, except that a
vacancy resulting from an increase in the number of directors will be filled by
a majority of the entire board of directors. The Charter provides for a
staggered Board of Directors consisting of three classes as nearly equal in
size as practicable. One class will hold office initially for a term expiring
at the annual meeting of shareholders to be held in 1996, another class will
hold office initially for a term expiring at the annual meeting of shareholders
to be held in 1997 and another class will hold office initially for a term
expiring at the annual meeting of shareholders to be held in 1998. As the term
of each class expires, directors in that class will be elected for a term of
three years and until their successors are duly elected and qualify. The
Company believes that classification of the Board of Directors will help to
assure the continuity and stability of the Company's business strategies and
policies as determined by the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of shares of voting stock will have no right to cumulative voting for
the elections of directors. Consequently, at each annual meeting of
shareholders, the holders of a majority of outstanding shares of voting stock
will be able to elect all of the successors of the class of directors whose term
expires at that meeting.
REMOVAL OF DIRECTORS
The Company's Charter provides that a director may be removed with or
without cause by the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of directors. This provision, when coupled
with the provision in the By-Laws authorizing the Board of Directors to fill
vacant directorships, could preclude shareholders from removing incumbent
directors except upon the existence of a substantial affirmative vote and by
filling the vacancies created by such removal with their own nominees upon the
affirmative vote of a majority of the votes entitled to be cast in the election
of directors.
BUSINESS COMBINATIONS
Under the MGCL, certain "Business Combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the corporation (an "Interested Shareholder") or an
affiliate of an Interested Shareholder are prohibited for five years after the
most recent date on which the Interested Shareholder became an Interested
Shareholder. Thereafter, any such Business Combination must be recommended by
the Board of Directors of such corporation and approved by the affirmative vote
of at least (i) 80% of the votes entitled to be cast by holders of outstanding
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voting shares of the corporation and (ii) 66-2/3% of the votes entitled to be
cast by holders of outstanding voting shares of the corporation other than
shares held by the Interested Shareholder with whom the Business Combination is
to be effected, unless, among other things, the corporation's shareholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Shareholder for its shares. These provisions of Maryland law do not
apply, however, to Business Combinations that are approved or exempted by the
Board of Directors of the corporation prior to the time that the Interested
Shareholder becomes an Interested Shareholder. A Maryland corporation may adopt
an amendment to its Charter or by-laws electing not to be subject to the special
voting requirements of the foregoing legislation (i.e., the Business Combination
Statute). The Company has not adopted such an amendment to its Charter.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, or (iii) a majority or more of all voting power. Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained shareholder approval. A "control share
acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of shareholders to
be held within 50 days of demand to consider the voting rights of the shares.
If no request for a meeting is made, the corporation may itself present the
question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or of any meeting of shareholders at which the voting rights of such
shares are considered and not approved. If voting rights for control shares are
approved at a shareholders meeting and the acquiror becomes entitled to vote a
majority or more of the shares entitled to vote, all other shareholders may
exercise appraisal rights. The fair value of the shares are determined for
purposes of such appraisal rights may not be less than the highest price per
share paid in the control share acquisition, and certain limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the Articles of
Incorporation or By-Laws of the corporation.
AMENDMENT TO THE COMPANY'S CHARTER
The Company's Charter, including its provisions on classification of the
Board of Directors and removal of directors, may be amended only by the
affirmative vote of the holders of at least 66-2/3% of the capital stock
entitled to vote.
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SHAREHOLDER MEETINGS AND ACTION BY WRITTEN CONSENT
In order for shareholders to call special meetings, the By-Laws require the
written request of holders of shares entitled to cast not less than 25% of all
votes entitled to be cast at such meeting. Such provisions do not, however,
affect the ability of shareholders to submit a proposal to the vote of all
shareholders of the Company in accordance with the By-Laws, which provide for
the additional notice requirements for shareholder nominations and proposals at
the annual meetings of shareholders.
The By-Laws provide that any action required or permitted to be taken at a
meeting of shareholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
shareholder entitled to vote on the matter and a written waiver of any right to
dissent is signed by each shareholder entitled to notice of the meeting but not
entitled to vote at it.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Charter and By-Laws limit the liability of the Company's
directors and officers to the Company and its shareholders to the fullest extent
permitted from time to time by Maryland law. Maryland law presently permits the
liability of directors and officers to a corporation or its shareholders for
money damages to be limited, except (i) to the extent that it is proved that the
director or officer actually received an improper benefit or profit, or (ii) to
the extent that a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action, as adjudicated in the proceeding. This
provision does not limit the ability of the Company or its shareholders to
obtain other relief, such as an injunction or rescission.
The Company's By-Laws require the Company to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by Maryland law. The Company's Charter and By-Laws also permit the Company
to indemnify its directors who have served another corporation or enterprise in
various capacities at the request of the Company. The MGCL presently permits a
corporation to indemnity its directors, officers and certain other parties
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service to or at the request of the Company,
unless it is established that: (i) the act or omission of the indemnified party
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty; (ii) the
indemnified party actually received an improper personal benefit ; or (iii) in
the case of any criminal proceeding, the indemnified party had reasonable cause
to believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the proceeding;
provided, however, that if the proceeding is one by or in the right of the
Company, indemnification may not be made with respect to any proceeding in which
the director or officer has been adjudged to be liable to the Company. In
addition, a director or officer may not be indemnified with respect to any
proceeding charging improper personal benefit to the director or officer in
which the director or officer was adjudged to be liable on the basis that the
personal benefit was improperly received. The termination of any proceeding by
conviction, or upon a plea of nolo contendere or its equivalent, or an entry of
any order of probation prior to judgment, creates a rebuttable presumption that
the director or officer did not meet the requisite standard of conduct required
for indemnification to be permitted. Indemnification under the provisions of
the MGCL is not deemed exclusive to any other rights, by indemnification or
otherwise, to which an officer or director may be entitled under the Company's
Charter or By-Laws, or under resolutions of shareholders or directors, contract
or otherwise.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BY-LAWS
The provisions in the Charter regarding the Ownership Limit and the
classification of the Board of Directors, the business combination provisions of
the MGCL, the control shares acquisition provisions of the MGCL, and the advance
notice provisions of the By-Laws could have the effect of delaying, deferring,
discouraging or preventing a transaction or a change of control of the Company
in which holders of some, or a
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majority of the capital stock of the Company, might receive a premium for their
shares over the then prevailing market price or which such holders might believe
to be otherwise in their best interest.
SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of a Minimum Common Offering and a Maximum Common
Offering, the Company will have outstanding 2,417,572 shares and 5,274,714
shares, respectively, of its Common Stock. Upon the completion of a Minimum
Preferred Offering, there will be 152,000 shares of 8% Preferred outstanding,
and the maximum number of shares of 8% Preferred which may be sold is 1,136,364
shares. The shares of Common Stock issued in the Offering will be freely
tradable by persons other than "affiliates" of the Company without restriction
under the Securities Act, subject to the limitations on ownership set forth in
the Charter. See "Description of Securities -- Restriction on Ownership." In
addition to the shares of Common Stock and 8% Preferred issued in the Offering,
assuming a Maximum Combined Offering, and subject to reaching a variety of
exercise or conversion criteria, the Company may issue an aggregate of up to
5,637,368 additional shares of Common Stock (subject to the Ownership Limit),
when the 8% Preferred, the 1995 Preferred Stock, Series "A," "D" and "E"
Warrants and the 10% Notes and Series "B" Notes are converted into Common Stock
or exercised. See "Description of Securities."
The shares of Common Stock owned by "affiliates" of the Company will be
subject to Rule 144 and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including
exemptions contained in Rule 144. Shares issued upon conversion of 8%
Convertible Preferred Stock and the 10% Convertible Notes will be registered
under the Securities Act by the Company, as will Shares issued upon redemption
of the above-mentioned limited partnership interests.
Pursuant to the Operating Partnership Agreement, the OP Limited Partners
will receive the Redemption Rights, which will enable them to cause the
Operating Partnership to redeem their OP Units in exchange for either shares of
Common Stock on a one-for-one basis (subject to certain anti-dilution
adjustments) or for cash under certain circumstances or at the election of the
Company. The Redemption Rights may be exercised, in whole or in part, by an OP
Limited Partner at any time after 18 months following admission of such OP
Limited Partner to the Operating Partnership, in whole or in part. Shares of
Common Stock issued to holders of OP Units upon exercise of the Redemption
Rights will be registered under the Securities Act.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the date of
acquisition of restricted shares from the Company or from any "affiliate" of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Subject to the Company's continued compliance with listing guides, the
Shares have been approved for trading on the NASDAQ National Market and trading
is expected to commence promptly following the Final Closing of the Offering.
No prediction can be made as to the effect, if any, that future sales of shares,
or the availability of shares for future sale, will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Stock or
the perception that such sales could occur, could adversely affect prevailing
market prices of the Common Stock.
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For a description of certain restrictions on transfers of shares held by
certain shareholders of the Company, see "Underwriting" and "Description of
Securities -- Restriction on Ownership."
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of all material federal income tax
considerations associated with an investment in the Units, Common Stock or the
8% Preferred that are material to a prospective holder thereof. Thelen, Marrin,
Johnson & Bridges, which has acted as tax counsel to the Company in connection
with the formation of the Company, the Operating Partnership and the Company's
election to be taxed as a REIT, has reviewed the following discussion and is of
the opinion that it fairly summarizes the federal income tax considerations that
are likely to be material to a holder of Common Stock or 8% Preferred. The
following discussion is not exhaustive of all possible tax considerations.
Moreover, this summary does not deal with all tax aspects that might be relevant
to a particular prospective shareholder in light of his personal circumstances;
nor does it deal with particular types of shareholders that are subject to
special treatment under the Code, such as insurance companies, financial
institutions and broker-dealers. The Common Stock and 8% Preferred are
sometimes collectively referred to in this Section as "Equity Stock." The Code
provisions governing the federal income tax treatment of REITs are highly
technical and complex, and this summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
the administrative and judicial interpretations thereof. The following
discussion and the opinions of Thelen, Marrin, Johnson & Bridges are based on
current law.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OWN TAX ADVISOR WITH
RESPECT TO SUCH PURCHASER'S SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF THE PURCHASE, HOLDING AND SALE OF STOCK IN THE COMPANY.
SUMMARY OF TAX OPINIONS
Thelen, Marrin, Johnson & Bridges will provide the Company with an opinion
letter addressing all material federal tax consequences material to the
purchase, ownership and disposition of the Common Stock, or 8% Preferred. The
specific opinions that Thelen, Marrin, Johnson & Bridges will provide are:
(1) The description of law and legal conclusions herein under the heading
"Federal Income Tax Considerations," are correct in all material respects, and
the discussion fairly summarizes the federal income tax considerations that are
material to a holder of Units, Common Stock or 8% Preferred.
(2) The Operating Partnership will be treated as a partnership for federal
income tax purposes and not as an association taxable as a corporation.
(3) The Company will be organized in conformity with the requirements for
qualification as a REIT under the Code, and the Company's proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code. However, counsel notes that, due to possible
fluctuation between the relative market values of different classes of the
Company's equity shares, the Charter restrictions relating to the Ownership
Limits of any Person do not mathematically assure that there will be compliance
with the statutory ownership requirements governing REIT status. See
"Description of Securities -- Restriction on Ownership."
The opinions to be rendered by counsel are based on the Code and Treasury
Regulations thereunder currently in effect, current administrative
interpretations and positions of the IRS, and existing court decisions. No
assurance can be provided that such opinions (which do not bind the IRS or the
courts) will not be challenged by the IRS or will be sustained by a court if so
challenged. In addition, no assurance can be given that future legislation,
Treasury Regulations, administrative interpretations and court decisions will
not significantly change the law or the conclusions reached by counsel. Any
such change could apply retroactively to transactions
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preceding the date of change. In rendering its opinions, counsel will be relying
on certain representations of the Company and the Operating Partnership. To the
extent any representations upon which counsel is relying in rendering its
opinion are incorrect, counsel's opinion as to the tax consequences could be
altered. Qualification as a REIT depends upon the Company's ability to meet the
various requirements imposed under the Code through actual operating results and
ownership requirements, as discussed below. Thelen, Marrin, Johnson & Bridges
will not review these operating results or compliance with ownership
requirements, and no assurance can be given that actual operating results, or
ownership of Equity Stock, will meet these requirements. Counsel has not
rendered any opinions as to the tax consequences of an investment in or the
taxation of the Company or the Operating Partnership except as specifically
stated herein.
FEDERAL INCOME TAXATION OF THE COMPANY
The Company intends to make an election to be taxed as a REIT and operate
so as to meet the requirements under the Code for qualification as a REIT,
commencing with its taxable year ending December 31, 1996. No assurance can be
given, however, that such requirements will be met. If the Company qualifies
for taxation as a REIT, it generally will not be subject to federal corporate
income taxes on that portion of its net income that is currently distributed to
shareholders. The REIT provisions of the Code generally allow a REIT to deduct
such distributions paid to its shareholders. This deduction for distributions
paid to shareholders substantially eliminates the federal "double taxation" on
earnings (i.e., taxation, once at the corporate level and once again at the
shareholder level) that usually results from investments in a corporation.
Even if the Company qualifies for taxation as a REIT, however, the Company
will be subject to federal income tax, as set forth below. First, the Company
will be taxed at regular corporate rates on its undistributed REIT taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" as a
consequence of its items of tax preference. Third, if the Company has net
income from the sale or other disposition of "Foreclosure Property" that is held
primarily for sale to customers in the ordinary course of business or other non-
qualifying income from Foreclosure Property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property other than Foreclosure Property held primarily for sale
to customers in the ordinary course of business), such income will be subject to
a 100% tax. Fifth, if the Company should fail to satisfy either the 75% or 95%
gross income test (discussed below) but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the Company fails the 75% or 95% test, multiplied by a
fraction intended to reflect the Company's profitability. Sixth, if the Company
fails to distribute during such year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year and (iii) any undistributed taxable income from prior periods, the
Company will be subject to a four percent excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company should acquire any asset from a C corporation (i.e., a corporation
generally subject to full corporate-level tax) in a carryover basis transaction
(a basis determined by reference to the C corporation's basis) and the Company
subsequently recognizes gain on the disposition of such asset during the ten
year period (the "Recognition Period") beginning on the date on which the asset
was acquired by the Company, then, to the extent of the excess of (a) the fair
market value of the asset as of the beginning of the applicable Recognition
Period over (b) the Company's adjusted basis in such asset as of the beginning
of such Recognition Period (the "Built-In Gain"), such gain will be subject to
tax at the highest regular corporate rate, pursuant to guidelines issued by the
IRS (the "Built-in Gain Rules") in IRS Notice 88-19, assuming the Company would
make the election pursuant to such Notice if it were to make any such
acquisition.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must elect to be so treated and must meet
the requirements, discussed below, relating to the Company's organization,
sources of income, nature of assets and distributions of income to shareholders
under Section 856 through 860 of the Code ("REIT Requirements").
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Organizational Requirements. The Code defines a REIT as a corporation,
trust or association: (i) that is managed by one or more trustees or directors,
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest, (iii) that would be taxable as
a domestic corporation but for the REIT Requirements, (iv) that is neither a
financial institution nor an insurance company subject to certain provisions of
the Code, (v) the beneficial ownership of which is held by 100 or more persons,
and (vi) during the last half of each taxable year not more than 50% in value of
the outstanding shares of which is owned, directly or indirectly, through the
application of certain attribution rules, by five or fewer individuals (as
defined in the Code to include certain entities). In addition, certain other
tests, below, regarding the nature of its income and assets also must be
satisfied. The Code provides that conditions (i) through (iv), inclusive, must
be met during the entire taxable year and that condition (v) must be met during
at least 335 days of a taxable year of twelve months, or during a proportionate
part of a taxable year of less than 12 months. Conditions (v) and (vi) (the
"100 stockholder" and "five or fewer" requirements) does not apply until after
the first taxable year for which an election is made to be taxed as a REIT. For
purposes of conditions (v) and (vi), pension funds and certain other tax-exempt
entities are treated as individuals, subject to a "look-through" exception in
the case of condition (vi).
Prior to consummation of the Offering, the Company did not satisfy
conditions (v) and (vi) above. The Company's issuance of Equity Stock in
connection with the Offering will satisfy the 100 stockholder and five or fewer
requirements. The Company's Charter currently includes certain restrictions
regarding transfer of its Equity Stock, and provisions to monitor the holdings
of shareholders, which are intended (among other things) to assist the Company
in continuing to satisfy conditions (v) and (vi) above. However, due to
possible market value appreciation of the 8% Preferred relative to the Common
Stock, the Charter restrictions do not mathematically assure that there will be
compliance with the statutory ownership requirements governing REIT status.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company will have a calendar year taxable
year.
If a REIT owns a "Qualified REIT Subsidiary," the Code provides that the
Qualified REIT Subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities, and items of income, deduction and credit of the
Qualified REIT Subsidiary are treated as assets, liabilities and such items of
the REIT itself. A Qualified REIT Subsidiary is a corporation, all of the
shares of capital stock of which have been owned by the REIT from the
commencement of such corporation's existence. The Company currently does not
have any Qualified REIT Subsidiaries.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of
the assets and gross income of the partnership shall retain the same character
in the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income tests and asset tests. Thus, the Company's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership will be treated as assets, liabilities and items of income
of the Company for purposes of applying the requirements described herein.
Income Tests. To maintain qualification as a REIT, three gross income
requirements must be satisfied annually.
. First, at least 75% of the Company's gross income, excluding gross
income from certain dispositions of property held primarily for sale
to customers in the ordinary course of a trade or business
("prohibited transactions"), for each taxable year must be derived
directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and,
in certain circumstances, interest) or from certain types of temporary
investments.
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. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be
derived from such real property investments and from dividends,
interest and gain from the sale or disposition of stock or securities
or from any combination of the foregoing.
. Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions and gain from the sale
or other disposition of real property held for less than four years
(apart from involuntary conversions and sales of foreclosure property)
must represent less than 30% of the Company's gross income (including
gross income from prohibited transactions) for each taxable year.
Rents received or deemed to be received by the Company will qualify as
"rents from real property in satisfying the gross income requirements for a REIT
described above only if several conditions are met.
. First, the amount of rent generally must not be based in whole or in
part on the income or profits of any person (except that any amount
received or accrued shall not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage
of percentages of receipts or sales).
. Second, the Code provides that rents received from a tenant will not
qualify as "rents from real property" in satisfying the gross income
tests if the REIT, or an owner of ten percent or more of the REIT,
directly or constructively owns ten percent or more of such tenant (a
"Related Party Tenant").
. Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to the
personal property will not qualify as "rents from real property."
. Finally, for rents to qualify as "rents from real property" the REIT
must not operate or manage the property or furnish or render services
to tenants of such property, other than through an "independent
contractor" who is adequately compensated and from whom the REIT does
not derive any income; provided, however, that a REIT may provide
services with respect to its properties and the income will qualify as
"rents from real property" if the services are "usually or customarily
rendered" in connection with the rental of room or other space for
occupancy only and are not otherwise considered "rendered to the
occupant."
The Company does not anticipate charging rent that is based in whole or in
part on the income or profits of any person. With the exception of certain so-
called "furnished" apartments, the Company will not derive rent attributable to
personal property leased in connection with real property that exceeds 15% of
the total rents. The Company does not anticipate receiving rent from Related
Party Tenants.
The Company will provide certain services with respect to the properties it
owns directly or through the Operating Partnership or other partnerships. The
Company believes that the services that will be provided by it directly are
usually or customarily rendered in connection with the rental of space for
occupancy only and are not otherwise rendered to particular tenants and
therefore that the provision of such services will not cause rents received with
respect to such properties to fail to qualify as rents from real property.
Services with respect to such properties that may not be provided by the Company
directly will be performed by independent contractors.
The Operating Partnership may, however, receive fees in consideration of
the performance of property management services with respect to certain
properties not owned entirely by the Operating Partnership. A portion of such
fees (corresponding to that portion of a property owned by a third party) will
not qualify under the 75% or 95% gross income test. The Operating Partnership
also may receive certain other types of income with respect to the properties it
owns that will not qualify for the 75% or 95% gross income test. The Company
believes, however,
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that the aggregate amount of such fees and other non-qualifying income in any
taxable year will not cause the Company to exceed the limits on non-qualifying
income under the 75% and 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for that year
if it is eligible for relief under certain provisions of the Code. These relief
provisions will be generally available if (i) the Company's failure to meet
these tests was due to reasonable cause and not due to willful neglect, (ii) the
Company attaches a schedule of the sources of its income to its federal income
tax return and (iii) any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether,
in all circumstances, the Company would be entitled to the benefit of these
relief provisions. For example, if the Company fails to satisfy the gross
income tests because non-qualifying income that the Company intentionally incurs
exceeds the limits on such income, the IRS could conclude that the Company's
failure to satisfy the tests was not due to reasonable cause. As discussed
above, even if these relief provisions apply, a tax would be imposed with
respect to the excess net income. See "-- Federal Income Taxation of the
Company." No similar mitigation provision provides relief if the Company fails
the 30% income test, and in such case, the Company will cease to qualify as a
REIT. See "Risk Factors -- Adverse Consequences of Failure to Qualify as a
REIT; Other Tax Liabilities."
Asset Tests. At the close of each quarter of its taxable year, the Company
also must satisfy three tests relating to the nature and diversification of its
assets.
. First, at least 75% of the value of the Company's total assets must be
represented by real estate assets, cash, cash items (including certain
receivables) and government securities.
. Second, no more than 25% of the value of the Company's total assets
may be represented by securities other than those in the 75% asset
class.
. Third, of the investments included in the 25% asset class, the value of
any one issuer's securities owned by the Company may not exceed five
percent of the value of the Company's total assets, and the Company
may not own more than ten percent of any one issuer's outstanding
voting securities.
The 5% test must generally be met for any quarter in which the Company
acquires securities of an issuer. Although the Company plans to take steps to
ensure that it satisfies the 5% value test for any quarter with respect to which
retesting is to occur, there can be no assurance that such steps will always be
successful.
If the Company should fail to satisfy the asset requirements at the end of
a calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset requirements either did not exist immediately after the acquisition
of any particular assets or was not wholly or partly caused by such an
acquisition (i.e., the discrepancy arose from changes in the market values of
its assets). If the condition described in clause (ii) of the preceding
sentence is not satisfied, the Company still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the quarter in
which such discrepancy arose. The Company intends to maintain adequate records
of the value of its assets to facilitate compliance with the asset tests and to
take such other actions within 30 days after the close of any quarter as may be
required to cure any noncompliance.
Annual Distribution Requirements. To qualify as a REIT, the Company is
required to make distributions (other than capital gain distributions) to its
shareholders in an amount at least equal to (a) the sum of (i) 95% of the
Company's REIT Taxable Income (computed without regard to the dividends-paid
deduction and the Company's net capital gain) and (ii) 95% of the net income, if
any, from foreclosure property in excess of the special tax on income from
foreclosure property, minus (b) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its
federal income tax return for such year and if paid on or before the first
regular
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distribution after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes less than 100% (but at
least 95%) of its REIT Taxable Income as adjusted, it will be subject to tax
thereon at regular ordinary or capital gains corporate tax rates. Furthermore,
if the Company should fail to distribute during each calendar year at least the
sum of (a) 85% of its REIT ordinary income for that year, (b) 95% of its REIT
Capital gain net income for that year and (c) any undistributed taxable income
from prior periods, the Company would be subject to a four percent excise tax on
the excess of such required distribution over the amounts actually distributed.
In addition, during its Recognition Period, if the Company disposes of any asset
subject to the Built-In Gain Rules, the Company will be required, pursuant to
guidance issued by the IRS, to distribute at least 95% of the Built-In Gain
(after tax), if any, recognized on the disposition of the asset.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other noncash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it
will generally have sufficient cash or liquid assets to enable it to satisfy the
95% distribution requirement. It is possible, however, that the Company, from
time to time, may not have sufficient cash or other liquid assets to meet the
95% distribution requirement or to distribute such greater amount as may be
necessary to avoid income and excise taxation, due to timing differences between
(1) the actual receipt of income and actual payment of deductible expenses and
(ii) the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company, or if the amount of nondeductible expenses such
as principal amortization or capital expenditures exceed the amount of noncash
deductions. In the event that such timing differences occur, the Company may
find it necessary to arrange for borrowings if possible, pay taxable stock
dividends in order to meet the distribution requirements.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends. The
Company will, however, be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
Recordkeeping Requirement. Pursuant to applicable Treasury Regulations, in
order to qualify as a REIT, the Company must maintain certain records and
request on an annual basis certain information from its shareholders designed to
disclose the actual ownership of its outstanding shares. The Company intends to
comply with such requirements, and counsel's opinion as to the Company's status
as a REIT assumes that the Company will at all times comply with such
requirements. Counsel will not, however, monitor such compliance by the
Company.
Earnings and Profits. Prior to this offering, Insight Environmental
Corporation ("IEC") was merged into the Company. Under recent final Treasury
Regulations, earnings and profits of a non-REIT predecessor corporation may
adversely affect the ability of a corporation to be eligible to be taxed as a
REIT. Accordingly, the Company would fail to be eligible to be taxed as a REIT
if IEC had current or accumulated earnings and profits. The Company has
represented that IEC had no earnings and profits for federal income tax
purposes. In rendering its opinion regarding the eligibility of the Company to
qualify as a REIT, Thelen, Marrin, Johnson & Bridges is relying on such
representations.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company falls to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be dividends,
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-
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received deduction. Unless the Company is entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances the Company
would be entitled to such statutory relief. For example, if the Company fails to
satisfy the gross income tests because non-qualifying income that the Company
intentionally incurs exceeds the limit on such income, the IRS could conclude
that the Company's failure to satisfy the tests was not due to reasonable cause.
See "Risk Factors-- Adverse Consequences of Failure to Qualify as a REIT; Other
Tax Liabilities."
TAXATION OF U.S. SHAREHOLDERS
As used herein, the term "U.S. Shareholder" means a holder of Equity Stock
that (for United States federal income tax purposes) is (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof or (c) an estate or trust, the income of which is
subject to United States federal income taxation regardless of its source. For
any taxable year for which the Company qualifies for taxation as a REIT, amounts
distributed to taxable U.S. Shareholders will be taxed as set forth below.
Distributions Generally. Distributions to U.S. Shareholders, other than
capital gain dividends discussed below, will constitute dividends up to the
amount of the Company's current and accumulated earnings and profits and will be
taxable to the shareholders as ordinary income. These distributions are not
eligible for the dividends-received deduction for corporations. To the extent
that the Company makes a distribution in excess of its current and accumulated
earnings and profits, the distribution will be treated first as a tax-free
return of capital, reducing the tax basis in the U.S. Shareholder's shares, and
the distribution in excess of a U.S. Shareholder's tax basis in its Equity Stock
will be taxable as gain realized from the sale of its Equity Stock.
Distributions declared by the Company in October, November or December of any
year payable to a shareholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the shareholder on
December 31 of that year, provided that the dividend is actually paid by the
Company during January of the following calendar year. Shareholders may not
include in their own federal income tax returns any tax losses of the Company.
Any "deficiency dividend" will be treated as an ordinary or capital gain
dividend, as the case may be, regardless of the Company's earnings and profits.
As a result, shareholders may be required to treat certain distributions that
would otherwise result in a tax-free return of capital as taxable dividends.
Capital Gain Distributions. Distributions to U.S. Shareholders that are
properly designated by the Company as capital gain dividends will be treated as
long-term capital gains (to the extent they do not exceed the Company's actual
net capital gain) for the taxable year without regard to the period for which
the shareholder has held his stock. However, corporate shareholders may be
required to treat a portion of certain capital gain dividends as ordinary
income. Capital gain dividends are not eligible for the dividends-received
deduction for corporations.
Passive Activity Loss and Investment Interest Limitations. Distributions
from the Company and gain from the disposition of Equity Stock will not be
treated as passive activity income, and therefore shareholders may not be able
to apply any "passive losses" against such income. Distributions from the
Company (to the extent they do not constitute a return of capital) will
generally be treated as investment income for purposes of the investment income
limitation; under recently enacted legislation, net capital gain from the
disposition of Equity Stock generally will be excluded from investment income.
Certain Dispositions of Stock. In general, any gain or loss realized upon
a taxable disposition of the Equity Stock by a shareholder who is not a dealer
in securities will be treated as long-term capital gain or loss if the shares of
Equity Stock have been held for more than one year and otherwise as short-term
capital gain or loss. Losses incurred on the sale or exchange of Equity Stock
held for less than six months (after applying certain holding period rules) will
be deemed long-term capital loss to the extent of any capital gain dividends
received by the selling shareholder from those shares.
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Capital Gains and Losses. A capital asset generally must be held for more
than one year in order for gain or loss derived from its sale or exchange to be
treated as long-term capital gain or loss. The Omnibus Budget Reconciliation
Act of 1993 increased the highest marginal individual income tax rate to 39.6%,
but generally did not change the tax rate on net capital gains applicable to
individuals. Thus the tax rate differential between capital gain and ordinary
income for individuals may be significant. In addition, the characterization of
income as capital or ordinary may affect the deductibility of capital losses.
Capital losses not offset by capital gains may be deducted against and
individual's ordinary income only up to a maximum annual deduction of $3,000.
Unused capital losses may be carried forward. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years. The issue
price of the Units will be allocated between the Series "A" Warrants and the
Common Stock. No gain or loss will be recognized upon the exercise of a Series
"A" Warrant (except to the extent of cash received in lieu of fractional shares,
if any). Capital gain or loss will be recognized upon the later sale or
exchange or the Warrants or the shares acquired by the exercise of the Warrants.
Purchase of 8% Preferred by the Company. While the 8% Preferred is
generally not redeemable, the Company does have the right to purchase 8%
Preferred from a holder if ownership by the holder could violate ownership
limitations imposed by the Company's Charter designed to protect the REIT status
of the Company. The treatment to be accorded to any purchase by the Company (as
distinguished from a sale, exchange or other disposition) of 8% Preferred can
only be determined on the basis of particular facts as to each holder at the
time of the purchase. In general, a holder of 8% Preferred will recognize
capital gain or loss measured by the difference between the amount received by
the holder of 8% Preferred upon the sale and such holder's adjusted tax basis in
the 8% Preferred purchased (provided the 8% Preferred is held as a capital
asset), if such purchase (i) results in a "complete termination" of the
holder's stock interest in all classes of stock of the Company under Section
302(b)(3) of the Code, (ii) is "substantially disproportionate" with respect to
the holder's interest in the Company under Section 302(b)(2) of the Code, or
(iii) is "not essentially equivalent to a dividend" with respect to the holder
under Section 302(b)(1) of the Code. In applying these tests, there must be
taken into account not only any 8% Preferred owned by the holder, but also such
holder's ownership of Common Stock, other series of preferred shares and any
options (including stock purchase rights) to acquire any of the foregoing. The
holder must also take into account any such securities (including options) which
are considered to be owned by such holder by reason of constructive ownership
rules set forth in Section 318 and 302(c) of the Code.
A "substantially disproportionate" reduction in the interest of a holder
will have occurred if, as a result of the purchase, (1) the holder's ownership
of all of the outstanding voting stock of the Company is reduced immediately
after the purchase to less than 80% of the holder's percentage interest in such
stock immediately before the redemption; (2) the holder's percentage ownership
of the Common Stock after and before the purchase meets the same 80%
requirement, and (3) the holder owns, immediately after the purchase, less than
50% of the total combined voting power of all classes of stock entitled to vote.
Based upon current law, it is possible that purchase of 8% Preferred from a
holder would be considered "not essentially equivalent to a dividend." However,
whether a distribution is "not essentially equivalent to a dividend" depends on
all of the facts and circumstances. The application of these tests to a
purchase of 8% Preferred is unclear, and a holder intending to rely on any of
these tests at the time such a purchase occurs should consult his own tax
advisor to determine their application to its particular situation.
If the purchase does not meet any of the tests under Section 302 of the
Code, then the purchase proceeds received from the 8% Preferred will be treated
as a distribution on 8% Preferred. If the purchase is taxed as a dividend, the
holder's adjusted tax basis in the 8% Preferred will be transferred to any other
stock holdings of the holder in the Company.
Treatment of Tax-Exempt Shareholders. Tax-exempt entities ("Exempt
Organizations"), including individual retirement accounts and pension and profit
sharing trusts described in Section 401(a) of the Code and exempt from tax under
Section 501(a) of the Code ("Qualified Trusts") generally are exempt from
federal income taxation; however, they are taxable on their "unrelated business
taxable income" ("UBTI"). Distributions from the Company to an Exempt
Organization generally will not constitute UBTI, but there are three exceptions
to that general rule. First, if an Exempt Organization has borrowed to acquire
or carry its Equity Stock, a portion of its
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income from the Company will constitute UBTI pursuant to the "debt-financed
property" rules. Second, social clubs, voluntary employees' beneficiary
associations, supplemental unemployment benefit trust and qualified group legal
services plans that are exempt from taxation under Code sections 501(c)(7), (9),
(17) and (20), respectively, are subject to different UBTI rules, which
generally will require them to characterize distributions from the Company as
UBTI. Third, Qualified Trusts that hold more than ten percent (by value) of the
interests in the Company will be required to treat a certain percentage of the
Company's distributions as UBTI if (i) the Company would not qualify as a REIT
for federal income tax purposes but for the application of a "look-through"
exception to the five or fewer requirement applicable to shares held by
Qualified Trusts and (ii) the Company is "predominantly held" by Qualified
Trusts. The Company will be considered predominantly held by Qualified Trusts if
either (i) a single Qualified Trust holds more than 25% by value of the
interests in the Company or (ii) one or more Qualified Trusts, each owning more
than ten percent by value of the interests in the Company, hold in the aggregate
more than 50% of the interests in the Company. The percentage of any Company
distribution treated as UBTI is equal to the ratio of (a) the UBTI earned by the
Company (treating the Company as if it were a Qualified Trust and therefore
subject to tax on UBTI) to (b) the total gross income (less certain associated
expenses) of the Company. A de minimis exception applies where the ratio set
forth in the preceding sentence is less than five percent for any year.
SPECIAL TAX CONSIDERATIONS FOR FOREIGN SHAREHOLDERS
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships and foreign trusts and
estates (collectively, "Non-U.S. Shareholders") are complex, and no attempt will
be made herein to provide more than a summary of such rules. PROSPECTIVE NON-
U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE
IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT
IN THE EQUITY STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Equity Stock is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. Shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a foreign corporation). The
Company expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Shareholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income. Distributions in excess of current and accumulated earnings
and profits of the Company will not be taxable to a shareholder to the extent
that such distributions do not exceed the adjusted basis of the Non-U.S.
Shareholder's Equity Stock, but rather will reduce the adjusted basis of such
shares. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a Non-U.S. Shareholder's
Equity Stock, such distributions will give rise to tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on any gain from the sale or
disposition of his, her or its Common Stock, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. However, amounts so withheld are
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if
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such gain were effectively connected with a U.S. business. Non-U.S. Shareholders
thus would be taxed at the normal capital gain rates applicable to U.S.
Shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to a 30% branch profits tax
in the hands of a foreign corporate shareholder not entitled to treaty relief or
exemption. The Company is required by currently applicable Treasury Regulations
to withhold 34% of any distribution that is designated by the Company as a
capital gains dividend. However, because the Omnibus Budget Reconciliation Act
of 1993 provides for an increase in the rate of withholding for distributions
made by certain domestic partnerships, trust and estates to 35%, it is likely
that the Treasury Regulations will be amended to impose a similar withholding
rate on REIT capital gain dividends. The amount withheld is creditable against
the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his, her or its
Equity Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. It is currently anticipated
that the Company will be a "domestically controlled REIT" and, therefore, the
sale of the Equity Stock will not be subject to taxation under FIRPTA. However,
because the Equity Stock will be publicly traded, no assurance can be given that
the Company will continue to be a "domestically controlled REIT." Furthermore,
gain not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i)
investment in the Equity Stock is effectively connected with the Non-U.S.
Shareholder's U.S. trade or business, in which case the Non-U.S. Shareholder
will be subject to the same treatment as U.S. Shareholders with respect to such
gain, or (ii) the Non-U.S. Shareholder is a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year and
certain other conditions apply, in which case the nonresident alien individual
will be subject to a U.S. tax on the individual's capital gains including by way
of withholding by the Company. If the gain on the sale of the shares of Equity
Stock were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder
would be subject to the same treatment as U.S. Shareholders with respect to such
gain (subject to applicable alternative minimum tax, a special alternative
minimum tax in the case of nonresident alien individuals and the possible
application of the 30% branch profits tax in the case of foreign corporations).
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Under certain circumstances, U.S. Shareholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, Equity Stock. Backup withholding will apply only if
the holder (i) fails to furnish his or her taxpayer identification number
("TIN") (which, for an individual, would be his or her Social Security Number),
(ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he or she has
failed properly to report payments of interest and dividends or is otherwise
subject to backup withholding or (iv) under certain circumstances, fails to
certify, under penalties of perjury, that he or she has furnished a correct TIN
and (a) that he or she has not been notified by the IRS that he or she is
subject to backup withholding for failure to report interest and dividend
payments or (b) that he or she has been notified by the IRS that he or she is no
longer subject to backup withholding. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations.
U.S. Shareholders should consult their own tax advisors regarding their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Shareholder will be allowed as a credit against the U.S. Shareholder's United
States federal income tax liability and may entitle the U.S. Shareholder to a
refund, provided that the required information is furnished to the IRS.
Additional issues may arise pertaining to information reporting and backup
withholding for Non-U.S. Shareholders. Non-U.S. Shareholders should consult
their tax advisors with regard to U.S. information reporting and backup
withholding.
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ANTI-ABUSE REGULATIONS
The United States Treasury Department issued Treasury Regulations at the
end of 1994 which authorize the IRS, in certain "abusive" transactions involving
partnerships, to disregard the form of the transaction and recast it for federal
tax purposes as the IRS deems appropriate (the "Anti-Abuse Regulations"). The
Anti-Abuse Regulations would apply where a partnership is formed or utilized in
connection with a transaction (or series of related transactions) with a
principal purpose of substantially reducing the present value of the partners'
aggregate federal tax liability in a manner inconsistent with the intent of the
partnership provisions of the Code. Prior to the issuance of the Anti-Abuse
Regulations, officials at the IRS and the Treasury Department stated publicly
that the Anti-Abuse Regulations are not intended to affect a corporation, such
as the Company, that owns an interest in a partnership and is seeking to qualify
as a REIT.
The Anti-Abuse Regulations contain a number of examples demonstrating the
application of the Anti-Abuse Regulations to certain fact patterns. However,
the Anti-Abuse Regulations caution that each outcome in the examples is unique
to the facts and circumstances of a particular example, and that the addition or
deletion of any fact or circumstance could alter its outcome. In one of the
examples, a corporation that elects to be treated as a REIT contributes
substantially all of the proceeds from a public offering to a partnership in
exchange for a general partner interest. The limited partners of the
partnership contribute real property assets to the partnership, subject to
liabilities that exceed their respective aggregate bases in such property. In
addition, some of the limited partners have the right, beginning two years after
the formation of the partnership, to require the redemption of their limited
partnership interests in exchange for cash or REIT stock (at the REIT's option)
equal to the fair market value of their respective interests in the partnership
at the time of the redemption. The example concludes that the use of the
partnership is not inconsistent with the intent of the partnership provisions of
the Code and, thus, cannot be recast by the IRS. In support of this conclusion,
the example notes that the REIT may make other real estate investments and other
business decisions, including the decision to raise additional capital for these
purposes. Thelen, Marrin, Johnson & Bridges believes that the facts of this
example do not materially differ from the facts regarding the relationship
between the Company and the Operating Partnership as described herein. Based on
the foregoing, Thelen, Marrin, Johnson & Bridges is of the view that the Anti-
Abuse Regulations should not have any adverse impact on the Company's ability to
qualify as a REIT or the treatment of the Operating Partnership as a
partnership. However, because the Anti-Abuse Regulations are extremely broad in
scope and would be applied based on an analysis of all of the facts and
circumstances, counsel can give no assurance that the IRS will not attempt to
distinguish the facts of the example and the facts regarding the relationship
between the Company and the Operating Partnership, and apply the Anti-Abuse
Regulations to the Company.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification as a Partnership
The Company will be entitled to include in its income its distributive
share of the Operating Partnership's income and to deduct its distributive share
of the Operating Partnership's losses only if the Operating Partnership is
classified for federal income tax purposes as a partnership rather than an
association taxable as a corporation. An organization formed as a partnership
will be treated as a partnership, rather than as a corporation, for federal
income tax purposes only if it has no more than two of the four corporate
characteristics that the Treasury Regulations use to distinguish a partnership
from a corporation for tax purposes. Those four characteristics are continuity
of life, centralization of management, limited liability, and free
transferability of interests.
The Operating Partnership has not requested a ruling from the IRS that it
will be classified as a partnership for federal income tax purposes. Instead,
at the Initial Closing, Thelen, Marrin, Johnson & Bridges will deliver its
opinion that, based on the provisions of the Operating Partnership Agreement,
certain factual assumptions, and certain representations described in the
opinion, the Operating Partnership will not possess more
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than two corporate characteristics and thus will be treated for federal income
tax purposes as a partnership and not as an association taxable as a
corporation. Unlike a tax ruling, an opinion of counsel is not binding upon the
IRS, and no assurance can be given that the IRS will not challenge the status of
the Operating Partnership as a partnership for federal income tax purposes. If
such challenge were sustained by a court, the Operating Partnership would be
treated as a corporation for federal income tax purposes, as described below. In
addition, the opinion of Thelen, Marrin, Johnson & Bridges is based on existing
law, which is to a great extent the result of administrative and judicial
interpretation. No assurance can be given that administrative or judicial
changes would not modify the conclusions expressed in the opinion.
With regard to the opinion that the Operating Partnership will be treated
as a partnership for federal income tax purposes, Section 7704 of the Code
generally provides that a "publicly traded partnership" will be taxed as a
corporation. Section 7704(b) defines a "publicly traded partnership" as any
partnership whose interests are traded on an established securities market or
are readily tradable on a "secondary market" (or the substantial equivalent
thereof). Treasury Regulations providing further clarification of the meaning
of the term "publicly traded partnership" were issued on December 4, 1995.
These regulations provide limited safe harbors from the definition of a
"publicly traded partnership." Pursuant to one of those safe harbors ("Private
Placement Safe Harbor"), interests in a partnership will not be treated as
readily tradable on a secondary market or the substantial equivalent thereof if
(i) all of the partnership interests are issued in a transaction (or
transactions) that is not required to be registered under the Securities Act and
(ii) the partnership does not have more than 100 partners at any time during the
taxable year of the partnership. For purposes of the 100-partner limitation, a
person owning an interest in a partnership, limited liability company, grantor
trust, or S corporation ("flow-through entity") that owns an interest in the
partnership, directly or indirectly through other flow-through entities, will be
treated as a partner in the partnership only if, among other things, a principal
purpose of the use of the tiered arrangement is to permit the partnership to
satisfy the 100-partner limitation in the Private Placement Safe Harbor.
Since the General Partner has represented that (i) the offering of OP Units
will not be registered under the Securities Act, (ii) the Operating Partnership
at no time will have more than 100 partners (taking into account as a partner,
unless otherwise advised by tax counsel, any person which indirectly owns an
interest in the Operating Partnership through a flow-through entity only if such
flow-through entity was formed either (A) less than two years prior to its
direct or indirect acquisition of an interest in the Operating Partnership, or
(B) prior to such period and has not conducted an active business for the two-
year period ending on such acquisition date), and (iii) the OP Units will not be
traded on an established securities market, we are of the opinion that the
Operating Partnership will not be treated as a publicly traded partnership.
If for any reason the Operating Partnership was taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company would
not be able to satisfy the income and asset requirements for REIT status. Thus
the Company would be subject to tax as a regular corporation and would not
receive a deduction for dividends paid to its shareholders. See "Federal Income
Tax Considerations Requirements for Qualification -- Income tests" and
"Requirements for Qualification -- Asset Tests." In addition, any change in the
Operating Partnership's status for tax purposes might be treated as a taxable
event, in which case the Company might incur a tax liability without any related
cash distribution. Further, items of income and deduction of the Operating
Partnership would not pass through to its partners, and its partners would be
treated as shareholders for tax purposes. Consequently, the Operating
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing the Operating Partnership's taxable income.
Income Taxation of the Operating Partnership and Its Partners
Partners, Not the Operating Partnership, Subject to Tax. A partnership is
not a taxable entity for federal income tax purposes. Rather, the Company will
be required to take into account its allocable share of the Operating
Partnership's income, gains, losses, deductions, and credits for any taxable
year of the Operating Partnership ending within or with the taxable year of the
Company, without regard to whether the Company has received or will receive any
distribution from the Operating Partnership.
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Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under Section 704(b) of the Code if they do
not comply with the provisions of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
Thelen, Marrin, Johnson & Bridges is of the opinion that the Operating
Partnership's allocations of taxable income and loss comply with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to Contributed Properties and Revalued
Operating Partnership Assets. Pursuant to Section 704(c) of the Code, income,
gain, loss, and deduction attributable to appreciated or depreciated property
that is contributed to a partnership in exchange for an interest in the
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with, or benefits from, the unrealized gain or
unrealized loss associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution ("Book-Tax Differences"). Treasury Regulations require
partnerships to use a "reasonable method" for allocating items affected by
Section 704(c) of the Code and outlining certain reasonable allocation methods
of accounting for Book-Tax Differences. When the values of a partnership's
assets are adjusted, Book-Tax Differences also arise, and similar rules in
accounting for such Book-Tax Differences apply.
In general, depreciation of amortization deductions of the Operating
Partnership will be allocated among the partners in accordance with their
percentage interests in the Operating Partnership, except to the extent that the
Operating Partnership is required under Section 704(c) and Treasury Regulations
thereunder to use a method for allocating tax depreciation deductions
attributable to contributed properties and revalued Operating Partnership assets
that generally results in the Company receiving a disproportionately large share
of such deductions in the case of contributed properties. In addition, gain on
sale of any contributed property will generally be specially allocated to the OP
Limited Partners to the extent of any "built-in" gain with respect to such
property for federal income tax purposes. Under the Operating Partnership
Agreement, the Company has the discretion to choose allocation methods under
Section 704(c) of the Code and Treasury Regulations thereunder for eliminating
Book-Tax Differences.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in the Operating Partnership generally will be equal to (i)
the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) increased by (A) its allocable share
of the Operating Partnership's income and (B) its allocable share of
indebtedness of the Operating Partnership, and (iii) reduced, but not below
zero, by (A) the Company's allocable share of the Operating Partnership's loss
and (B) the amount of cash distributed to the Company (including deemed
distributions as a result of reductions in the Company's allocable share of
indebtedness of the Operating Partnership).
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss would
not reduce the Company's adjusted tax basis below zero. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decrease being considered a
constructive cash distribution to the Company), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) would constitute taxable income to the Company. Such
distributions and constructive distributions normally would be characterized as
capital gain, and, if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
would constitute long-term capital gain.
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Depreciation Deductions Available to the Operating Partnership. Immediately
after the Closing, the Company will make a cash contribution and contributions
of properties to the Operating Partnership in exchange for a partnership
interest in the Operating Partnership. The Operating Partnership then will
purchase for cash (or cash plus assumption of debts) certain properties. To that
extent, the Operating Partnership's initial basis in such properties for federal
income tax purposes generally will be equal to the purchase price paid by the
Operating Partnership. To the extent that the Operating Partnership acquires
properties in exchange for limited partnership interests in the Operating
Partnership, the Operating Partnership's initial basis in each such property for
federal income tax purposes should be the same as the transferor's basis in that
property on the date of acquisition. Although the law is not entirely clear, the
Operating Partnership intends to depreciate such depreciable property for
federal income tax purposes over the same remaining useful lives and under the
same methods used by the transferors. The Operating Partnership's tax
depreciation deductions will be allocated among the partners in accordance with
their percentage interests in the Operating Partnership (except to the extent
that the Operating Partnership is required under Section 704(c) of the Code to
use a method for allocating depreciation deductions attributable to the
contributed properties that results in the Company receiving a
disproportionately large share of such deductions).
Sale of Operating Partnership's Property. Generally, any taxable gain
realized by the Operating Partnership on the sale of property by the Operating
Partnership held for more than one year will be long-term capital gain, except
for any portion of such gain that is treated as depreciation or cost recovery
recapture. Any taxable gain recognized by the Operating Partnership on the
disposition of the contributed properties will be allocated first to the OP
Limited Partners under Section 704(c) of the Code to the extent of their "built-
in gain" on those properties for federal income tax purposes. The OP limited
partners' "built-in gain" on the contributed properties sold will equal the
excess of the OP Limited Partners' proportionate share of the book value of
those properties over the OP Limited Partners' tax basis allocable to those
contributed properties at the time of the sale. Any remaining taxable gain
recognized by the Operating Partnership on the disposition of the contributed
properties and any taxable gain recognized by the Operating Partnership on the
disposition of the other properties, will be allocated among the partners in
accordance with their percentage interests in the Operating Partnership. The
Board of Directors has adopted a policy that any decision to sell contributed
properties will be made by a majority of the Independent Directors.
The Company's share of any gain realized by the Operating Partnership on
the sale of any property held by the Operating Partnership as inventory or other
property held primarily for sale to customers in the ordinary course of the
Operating Partnership's trade or business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See "Federal
Income Tax Consideration -- Requirements for Qualification -- Income Tests."
Such prohibited transaction income also may have an adverse effect upon the
Company's ability to satisfy the income tests for REIT status. See "Federal
Income Tax Considerations -- Requirements For Qualification -- Income Tests"
above. The Company, however, does not presently intend to allow the Operating
Partnership to acquire or hold any property that represents inventory or other
property held primarily for sale to customers in the ordinary course of the
Company's or the Operating Partnership's trade or business.
STATE AND LOCAL TAX
The Company and its shareholders may be subject to state and local tax in
various states and localities, including those in which it or they transact
business, own property, or reside. The tax treatment of the Company and the
shareholders in such jurisdictions may differ from the federal income tax
treatment described above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS
ON AN INVESTMENT IN THE EQUITY STOCK OF THE COMPANY.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974 ("ERISA") and the prohibited
transactions provisions of Section 4975 of the Code that may be relevant to a
prospective purchaser of Common Stock. This discussion does not purport to deal
with all aspects of ERISA or Section 4975 of the Code that may be relevant to
particular shareholders in light of their particular circumstances. The
statements in this discussion are based on current provisions of ERISA and the
Code, existing and currently proposed regulations thereunder, and administrative
rulings and reported judicial decisions with respect thereto. No opinion of
counsel has been sought regarding the ERISA Considerations. No assurance can be
given that future (and perhaps adverse or retroactive) legislative, judicial, or
administrative changes will not affect the accuracy of any statements in this
Prospectus.
A FIDUCIARY MAKING THE DECISION TO INVEST IN COMMON STOCK OR 8% PREFERRED
ON BEHALF OF A PROSPECTIVE PURCHASER WHICH IS AN EMPLOYEE BENEFIT PLAN, A TAX-
QUALIFIED RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT WITH HIS OWN LEGAL
ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975
OF THE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF
COMMON OR 8% PREFERRED STOCK BY SUCH PLAN OR IRA.
SPECIAL INVESTMENT CONSIDERATIONS FOR EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED
RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
subject to Title I of ERISA (an "ERISA Plan") should carefully consider whether
an investment in the Common Stock or 8% Preferred (collectively, "Equity Stock")
is consistent with his fiduciary responsibilities under ERISA. In particular,
the fiduciary requirements of Part 4 of Subtitle B of Title I of ERISA require
an ERISA Plan's investments to be (i) for the exclusive purpose of providing
benefits to the participants and beneficiaries of the ERISA Plan, (ii) prudent,
(iii) diversified in order to reduce the risk of large losses, unless it is
clearly prudent for investments not to be diversified, and (iv) in accordance
with the documents and instruments governing the ERISA Plan. In determining
whether an investment in the Equity Stock is prudent for purposes of ERISA, the
appropriate fiduciary of an ERISA Plan should consider all of the facts and
circumstances, including (among other things) whether the investment is
reasonably designed, as a part of the ERISA Plan's portfolio for which the
fiduciary has investment responsibility, to meet the objectives of the ERISA
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification, cash flow, and funding
requirements of the ERISA Plan, and the liquidity and current return of the
ERISA Plan's portfolio. A fiduciary should also take into account the nature of
the Company's business, the length of the Company's operating history and the
possibility of unrelated business income.
The fiduciary of an individual retirement account which is not contributed
to or sponsored by an employer or employee association (an "IRA") or of a
retirement plan not subject to Title I of ERISA because it does not cover common
law employees (a "Keogh Plan") or because it is a governmental or church plan
(together with IRAs and Keogh Plans, collectively, referred to as "Non-ERISA
Plans") should consider that a Non-ERISA Plan may only make investments that are
authorized by the appropriate governing documents or applicable state law.
A fiduciary of ERISA Plans or the person making the investment decision for
an IRA or a Keogh Plan should also consider the application of the prohibited
transaction provisions of ERISA and Section 4975 of the Code, which generally
prohibit direct or indirect transactions between such plans and certain parties
(called "parties in interest" or "disqualified persons") that have certain
relations to the plan. A "disqualified person" (other than a fiduciary acting
only as such) with respect to a plan which is subject to Section 4975 of the
Code who participates in a prohibited transaction with such plan could be
subject to (i) an initial five percent excise tax on the amount involved in the
prohibited transaction and (ii) an excise tax equal to 100% of the amount
involved if the prohibited transaction is not corrected within a specified time.
If the disqualified person who engages in the transaction is the individual on
behalf of whom an IRA is established (or his beneficiary), the IRA may lose its
tax-exempt status and its assets may be deemed to have been distributed to such
individual in a taxable distribution on
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account of the prohibited transaction (in which case the excise tax under
Section 4975 is not applicable). In addition, a fiduciary who causes an ERISA
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the ERISA Plan for any loss the ERISA
Plan incurs as a result of the transaction or for any profits earned by the
fiduciary in the transaction and may be subject to other relief (including a 20%
penalty). There are a number of statutory and administrative exemptions to the
prohibited transaction rules which, if certain conditions are satisfied, permit
certain transactions (which might otherwise be prohibited) between ERISA Plans,
Keogh Plans or IRAs and parties in interest or disqualified persons.
STATUS OF THE COMPANY UNDER ERISA
This section discusses certain principles that apply in determining whether
the fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and the Code apply to an entity because one or more investors in the
entity's equity interests is an ERISA Plan or a Non-ERISA Plan subject to
Section 4975 of the Code. This section also identifies considerations that
would be relevant in the unlikely event that the ERISA fiduciary requirements
were applicable to the Company's operation.
In certain circumstances, where equity interests in an entity are owned by
one or more ERISA Plans or Non-ERISA Plans, the investing plans will, for
purposes of ERISA and Section 4975, be considered to own not only the equity
interest in the entity, but a proportionate interest in the underlying assets of
the entity. In that case, as described below, ERISA's fiduciary requirements
and the excise tax under Section 4975 of the Code would be relevant to the
operations of the entity. As described below, the Company does not believe that
its assets will be considered assets of investing plans for these purposes, and
intends to conduct its operations without regard to such requirements.
The U.S. Department of Labor ("DOL"), which has certain administrative
responsibility with respect to ERISA Plans and Non-ERISA Plans, has issued a
regulation defining the term "plan assets" (the "DOL Regulation"). The DOL
Regulation generally provides that when an ERISA Plan or Non-ERISA Plan acquires
a security that is an equity interest in an entity and that security is neither
a "publicly-offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the ERISA Plan's or Non-
ERISA Plan's assets include both the equity interest and an undivided interest
in each of the underlying assets of the entity, unless it is established either
that the entity is an "operating company" or that equity participation in the
entity by benefit plan investors is not significant. The Company believes that
its shares of common stock are publicly-offered securities within the meaning of
the DOL Regulation.
The DOL Regulation defines a publicly-offered security as a security that
is "widely held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, or sold to the
plan as part of an offering to the public pursuant to an effective registration
statement under the Securities Act (provided the class of securities of which
such security is part is registered under the Securities Exchange Act of 1934
within 120 days after the end of the fiscal year of the issuer during which the
offering occurred).
The DOL Regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Company expects the Equity Stock to be "widely held" upon completion of the
Offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulation further provides that
where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with this Offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the DOL Regulation as ordinarily not affecting that finding include: (i) any
restriction on, or prohibition against, any transfer or assignment that would
result in a termination or reclassification of the Company for federal or state
tax purposes, or that would otherwise violate any state or federal law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to
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the Company, (iii) any requirement that either the transferor or transferee, or
both, execute documentation setting forth representations as to compliance with
any restrictions on transfer that are among those enumerated in the final DOL
Regulation as not affecting free transferability, (iv) any administrative
procedure that establishes an effective date, or an event (such as completion of
the Offering) prior to which a transfer or assignment will not be effective, and
(v) any limitation or restriction on transfer or assignment that is not imposed
by the issuer or a person acting on behalf of the issuer. The Company believes
that the restrictions imposed under the Articles of Incorporation on the
transfer of Equity Stock are limited to restrictions on transfer which, under
the DOL Regulation ordinarily do not affect a finding of free transferability,
and are unlikely to result in the failure of the Equity Stock to be considered
"freely transferable" for purposes of the DOL Regulation. In addition, the
Company is not aware of any other facts or circumstances limiting the
transferability of the Equity Stock that are not included among those enumerated
as not affecting their free transferability under the DOL Regulation, and the
Company does not expect or intend to impose in the future (or to permit any
person to impose on its behalf) any limitations or restrictions on transfer that
would not be among the enumerated permissible limitations or restrictions. The
DOL Regulation only establishes a presumption in favor of a finding of free
transferability, and no assurance can be given that the DOL, the Treasury
Department or a court will not reach a contrary conclusion.
Assuming that the Equity Stock will be "widely held" and that no other
facts and circumstances exist that restrict transferability of the Equity Stock,
the Company believes that the Equity Stock should be treated as "publicly-
offered securities" within the meaning of the DOL Regulation and, accordingly,
that the underlying assets of the Company should not be considered to be assets
of any ERISA Plan or Non-ERISA Plan investing in Common Stock.
If the assets of the Company were deemed to be "plan assets" under ERISA
and Section 4975 of the Code, (i) the prudence standards and other provisions of
Part 4 of Subtitle B of Title I of ERISA would be applicable to any transactions
involving the Company's assets, (ii) persons who exercise any discretionary
authority or control over the Company's assets, or who provide investment advice
for a fee to the Company, would (for purposes of the fiduciary responsibility
provisions of ERISA and Section 4975 of the Code) be fiduciaries of each ERISA
Plan or Non-ERISA Plan that acquires Equity Stock, (iii) transactions involving
the Company's assets undertaken at the direction or pursuant to the advice of
such fiduciaries might violate their fiduciary responsibilities under ERISA,
especially with regard to conflicts of interest, (iv) a fiduciary exercising his
investment discretion over the assets of the ERISA Plan to cause it to acquire
or hold the Equity Stock could be liable under Part 4 of Subtitle B of Title I
of ERISA for transactions entered into by the Company that do not conform to
ERISA standards of prudence and fiduciary duty, (v) certain transactions that
the Company might enter into in the ordinary course of its business and
operations might constitute "prohibited transactions" under ERISA and the Code,
and (vi) fiduciaries of ERISA Plans may violate ERISA's prohibition against the
improper delegation of control or responsibility for "plan assets" and may be
liable for breaches of ERISA's fiduciary duties committed by co-fiduciaries.
THE OFFERING
OFFERING OF COMMON STOCK
Subject to the conditions set forth in this Prospectus and in accordance
with the terms and conditions of the Sales Agency Agreement, the Company is
concurrently offering to the public through the Sales Agent and Soliciting
Dealers, on a best efforts basis, up to 1,750,000 Units, each Unit consisting of
two immediately separable shares of Common Stock and one detachable Series "A"
Warrant, at $14.00 per Unit, plus 1,500,000 additional shares of Common Stock at
$7.00 per Share. Each Series "A" Warrant permits the holder to purchase one
additional Share for $7.00 per Share. Shares purchasable upon exercise of the
Series "A" Warrants will be registered under the Securities Act. See "Terms of
the Offering."
The Sales Agent will receive a selling commission in an amount equal to
$0.98 per Unit or $0.49 per Share, whether sold directly by it or by one of, the
Soliciting Dealers, all of whom must be members in good standing of the NASD.
The Sales Agent may, in turn, reallow up to the full amount of such selling
commissions to
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Soliciting Dealers for Shares they sell. The Sales Agent will also receive a
managing dealer's fee of one-half of one percent of the gross proceeds from the
sale of Units and Shares by the Company whether effected through the Sales Agent
or Soliciting Dealers. The Sales Agent will also be entitled to reimbursement
for actual and bona fide due diligence expenses incurred by it up to one-half of
one percent of the gross proceeds from the sale of Units and Shares. The Company
has agreed to indemnify the Sales Agent and Soliciting Dealers against certain
liabilities, including liabilities under the Securities Act.
The Sales Agent will receive a non-accountable expense allowance of one
percent of the gross proceeds from the sale of Units and Shares and may, in
turn, reallow the full amount of such allowance to Soliciting Dealers for their
marketing efforts with respect to Units and Shares sold by them.
All entities performing wholesaling activities will be required to be
properly licensed to engage in the securities business. These services will
include developing and preparing sales material, conducting broker/dealer
seminars, holding informational meetings and providing information and answering
any questions concerning the offering of Units and Shares. The Company will pay
the wholesaling entity a commission equal to one-half of one percent of the
gross proceeds from the sale of Units and Shares. The wholesaling entity will
pay its own expenses.
In addition to the foregoing selling commissions and expenses, a
consultant, Strategic Planning Consultants, Inc., will receive a financial
advisory fee equal to one percent of the gross proceeds from the sale of Units
and Shares. Strategic Planning Consultants, Inc. is not affiliated with any
director, officer or principal shareholder of the Company. The consultant is
providing on-going advice to the Company on financial matters. Such advice
pertains to capital structure, the amount, type and terms of securities to be
issued by the Company and the financial analysis of those structures and the
consequent impact on the future funding requirements of the Company. The
consultant also provides comparative information about other equity real estate
investment trusts.
In no event shall the total underwriting compensation to be paid to the
Sales Agent and Soliciting Dealers from any source in connection with the
offering of Units and Shares, including selling commissions, certain expense
reimbursements and payments to the Sales Agent and Soliciting Dealers for the
wholesaling services referred to above, exceed ten percent of the Gross Offering
Proceeds of the offering of Units and Shares (plus 0.5% for actual and bona fide
due diligence expenses). The Company and the Sales Agent will monitor the
payment of all fees and expense reimbursements to assure that this limit is not
exceeded.
Every prospective investor desiring to purchase Shares will be required to
comply with the procedures for ordering units or Shares imposed by the Company,
the Sales Agent and the Soliciting Dealer from whom such investor intends to
purchase units or Shares. The Sales Agent and certain Soliciting Dealers will
require an Order Form, a specimen of which is attached to this Prospectus, to be
completed and delivered together with a cheek payable to the Escrow Agent for
the aggregate purchase price of the Units or Shares ordered.
8% PREFERRED OFFERING
The Company is also offering up to 1,136,364 shares of 8% Convertible
Preferred Stock to institutional investors only through various broker-dealers,
on a best-efforts basis, at $13.20 per share.
Broker-dealers will receive a selling commission in an amount equal to
$0.66 per share of 8% Preferred (five percent of the proceeds) if they arrange
for the sale and $0.13 per share (approximately one percent) on sales made to
Persons who have been introduced to the broker-dealer by finders. In such
cases, the finders will receive $0.53 per share (approximately four percent of
the sales price of $13.20). The Company has agreed to indemnify the broker-
dealers against certain liabilities, including liabilities under the Securities
Act. In addition to the foregoing selling commissions and expense allowance,
Strategic Planning Consultants, Inc. will also receive a financial advisory fee
equal to one and one-half percent of the gross proceeds from the sale of shares
of the 8% Preferred. The total offering compensation to be paid to broker-
dealers and others in connection with the sale of the 8% Preferred is 6.5% of
the gross offering proceeds from the sale of such shares.
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Every prospective investor desiring to purchase shares of 8% Preferred will
be required to comply with the procedures for ordering such shares imposed by
the Company or the broker-dealers from whom such investor intends to purchase
such shares. Such broker-dealers will require a Order Form, a specimen of which
is attached to this Prospectus, to be completed and delivered, together with a
check payable to the Escrow Agent for the aggregate purchase price of such
shares ordered.
A minimum of 152,000 shares of 8% Preferred must be sold. No shares of 8%
Preferred will be sold unless the Minimum Common Offering is consummated.
Purchases by Officers, Directors and Others. Officers and directors of the
Company, the Soliciting Dealers and broker-dealers engaged in the sale of 8%
Preferred and their respective employees may purchase the securities offered
herein net of selling commissions and the Company will pay no selling
commissions on such securities. Subject to the Ownership Limit, there is no
limit on the number of securities such persons may purchase. Securities
purchased by officers and directors of the Company and the Soliciting Dealers
and their employees will be included in determining whether the Minimum Common
Offering is achieved. Any resale of the Company's securities currently owned by
the officers and directors of the Company, or securities such person may
purchase pursuant to this Offering, are subject to Rule 144 promulgated under
the Securities Act, which limits the number of securities which may be resold at
any one time and the manner of such resale.
ESCROW ARRANGEMENTS
Commencing on the date of this Prospectus, all funds received by the Sales
Agent and Soliciting Dealers from orders for Units, Shares or 8% Preferred will
be placed promptly in an interest bearing escrow account with the Escrow Agent
at the Company's expense until such funds are released as described below.
Separate escrow accounts will be established for Benefit Plan funds as required
by law or such Benefit Plans. Payment for Units, Shares or 8% Preferred is to
be sent to the Escrow Agent at Trust Company of America, 7103 South Revere
Parkway, Englewood, Colorado 80112. Such funds will be held in trust for the
benefit of investors to be used for the purposes set forth in this Prospectus.
The Escrow Agent will be given the right to invest non-Benefit Plan funds in
Permitted Temporary Investments. Benefit Plan funds will be invested in a money
market account maintained by the Escrow Agent. The interest, if any, earned on
escrow funds prior to the transmittal of such proceeds to the Company will not
become part of the Company's capital. Instead, within 15 days following each
issuance of units or Shares, the Company will cause the Escrow Agent to make
distributions to investors of all interest earned on their escrowed funds used
to purchase the units or Shares.
As soon as practicable after the Minimum Common Offering is achieved, the
Company will issue Units and Shares to all investors whose orders have been
accepted, as well as shares of 8% Preferred to investors whose orders have been
accepted if the minimum number of 152,000 shares of 8% Preferred are sold.
Following such first issuance, additional funds received by the Company from
prospective investors will continue to be placed in escrow during the Offering
and the Company will issue additional Units, Shares or 8% Preferred periodically
as agreed between the Company and the applicable selling agents. The Offering
will terminate at the time all Units, Shares and 8% Preferred being offered are
sold or withdrawn from registration by order of the Board, but in no case later
than the earlier of (i) one year after the date of this Prospectus, or (ii) 180
days after the Initial Closing.
On or after the date accepted by the Company, investors will have no right
to withdraw any funds submitted to the Escrow Agent during the Offering period.
The Company has the unconditional right in its sole discretion to accept or
reject any order or any part thereof within ten days of receipt of such order.
If the Company rejects any order or any part thereof, it will notify the
investor in writing thereof and arrange for the Escrow Agent to promptly return
to the investor the entire purchase price or portion thereof which was rejected,
along with any interest earned thereon. No sales of Units, Shares or 8%
Preferred will be consummated unless the Minimum Common Offering is achieved.
Shares, 8% Preferred and warrants will be evidenced by appropriate certificates.
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If the Minimum Common Offering is not achieved within six months after the
date of this Prospectus, then the Company will cancel all existing orders for
Units, Shares and 8% Preferred and all funds submitted on account of such orders
will be released from escrow and promptly returned to each investor together
with all interest earned thereon.
Pending use of funds received by the Company from the Escrow Agent to
purchase one or more of the Properties described herein, the Company may invest
such funds in Permitted Temporary Investments.
REPORTS TO SHAREHOLDERS
The Company intends to provide periodic reports to shareholders regarding
the operations of the Company over the course of the year. Financial
information contained in all reports to shareholders will be prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles. Tax information will be mailed to the shareholders within 90 days
following the close of each fiscal year. The Company's annual report, which
will include financial statements audited and reported upon by independent
public accountants, will be furnished within 120 days following the close of
each fiscal year. Summary information regarding the quarterly financial results
of the Company will be furnished to shareholders on a quarterly basis. A
statement identifying the source of Distributions will be furnished to
shareholders within 60 days following the close of each quarter that such
shareholders have been paid Distributions from any source by the Company.
Investors have the right under applicable federal and Maryland laws to
obtain information about the Company and, at their expense, may obtain a list of
names and addresses of all of the shareholders. In the event that the
Commission promulgates rules and/or in the event that the applicable American
Stock Exchange rules and regulations are amended so that, taking such changes
into account, the Company's reporting requirements are reduced, the Company may
cease preparing and distributing certain of the aforementioned reports, if the
directors determine such action to be in the best interests of the Company and
if such cessation is in compliance with the rules and regulations of the
Commission.
LEGAL OPINIONS
Certain legal matters, including the legality of the Shares and 8%
Preferred, the liquidation preference of the 8% Preferred and the description of
federal income tax consequences contained under "Federal Income Tax
Considerations," will be passed upon for the Company by Thelen, Marrin, Johnson
& Bridges, 333 South Grand Avenue, 34th Floor, Los Angeles, California 90071.
Thelen, Marrin, Johnson & Bridges will rely as to certain matters of Maryland
law on an opinion of Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The Financial Statements and Schedule of American Equity Trust Inc., the
Financial Statements of American Equity Trust Funding, Inc., the Financial
Statements of the Prior Ownership Group and the Financial Statements of the
Proposed Acquisitions, included in this Prospectus and in the Registration
Statement of which this Prospectus is a part have been audited by BDO Seidman,
LLP, independent certified public accountants, to the extent and for the periods
set forth in their reports appearing elsewhere herein and in the Registration
Statement and have been so included in reliance upon such reports given upon the
authority of that firm as experts in accounting and auditing.
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SALES LITERATURE
In addition to and apart from this Prospectus, the Company will use certain
sales material in connection with the Offering. This material includes a
broker-dealer fact sheet, investor information summary and visual presentation
and NAREIT collateral information, all of which will be reviewed by the
Commission and the NASD prior to its use. In some jurisdictions such sales
material will not be available. Other than as described herein, the Company has
not authorized the use of other sales material. The Offering is made only by
means of this Prospectus. Although the information contained in such sales
material does not conflict with any of the information contained in this
Prospectus, such sales material does not purport to be complete and should not
be considered as a part of this Prospectus or the Registration Statement of
which this Prospectus is a part, or as incorporated in this Prospectus or said
Registration Statement by reference, or as forming the basis of the Offering.
FURTHER INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement on Form S-11 and the Exhibits relating thereto which the
Company has filed with the Commission, in Washington, D.C., under the Securities
Act, and to which reference is hereby made. The Registration Statement and the
exhibits and schedules forming a part thereof filed by the Company with the
Commission can be inspected and copies obtained from the Commission at Room
1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D. C. 20549, at prescribed rates.
All summaries contained herein of documents which are filed as Exhibits to
the Registration Statement are qualified in their entirety by this reference to
those Exhibits. The Company has not knowingly made any untrue statement of a
material fact or omitted to state any fact required to be stated in the
Registration Statement, including this Prospectus, or necessary to make the
statements therein not misleading.
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GLOSSARY
As used in this Prospectus, the following terms have the definitions
hereinafter indicated:
Acquisition Expenses. Those expenses, including but not limited to legal
fees and expenses, travel and communications expenses, costs of appraisals, non-
refundable option payments on property not acquired, accounting fees and
expenses, title insurance, and miscellaneous expenses related to selection and
acquisition of properties, whether or not acquired. Acquisition Expenses shall
not include Acquisition Fees.
Affiliate. An Affiliate of another Person shall mean (i) any Person
directly or indirectly owning, controlling, or holding, with power to vote ten
percent or more of the outstanding voting securities of such other Person, (ii)
any Person ten percent or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held, with power to vote, by such
other Person, (iii) any Person directly or indirectly controlling, controlled
by, or under common control with such other Person, (iv) any executive officer,
director, trustee or general partner of such other Person, or (v) any legal
entity for which such Person acts as an executive officer, director, trustee or
general partner.
Bankruptcy Code. Title 11 of the United States Code, as amended.
Beneficial Ownership, Beneficially Own or Beneficial Owner of Shares.
Ownership of such Shares for purposes of part 11, subchapter M of the Code,
including the attribution of ownership provisions of Section 542 and 544 of the
Code, or if, under Rule 13d-3 of the Exchange Act, such Person would be deemed
to have beneficial ownership of such Shares.
Benefit Plan. An IRA, Keogh Plan or employee benefit plan subject to Title
I of ERISA or Section 4975 of the Code.
Board or Board of Directors. The Board of Directors of the Company.
By-Laws. The By-Laws of the Company.
Cash from Financings. Net cash proceeds realized by the Company from the
financing of the Company's properties or the refinancing of any Company
indebtedness.
Cash from Sales. Net cash proceeds realized by the Company from the sale,
exchange or other disposition of any of its assets after deduction of all
expenses incurred in connection therewith. Cash from Sales shall not include
Cash from Financings.
Cash from Sales and Financings. The total sum of Cash from Sales and Cash
from Financings.
Charter. Articles of Incorporation of the Company under the General
Corporation Law of Maryland, as amended from time to time, pursuant to which the
Company is organized.
Code. Internal Revenue Code of 1986, as amended.
Commission. The Securities and Exchange Commission.
Company. American Equity Trust Inc., a corporation organized under the
laws of the State of Maryland.
Conversion Factor. A multiplier intended to adjust for the occurrence of
share splits, mergers, consolidations or similar pro rata share transactions
which otherwise would have the effect of diluting the ownership interests of the
OP Limited Partners or the shareholders of the Company.
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Distributable REIT Taxable Income. An amount equal to or greater than (i)
the sum of 95% of (a) the REIT Taxable Income for the taxable year (determined
without regard to the deduction for dividends paid and by excluding any net
capital gain), and (b) the excess of the net income from Foreclosure Property
over the tax imposed on such income less (ii) any Excess Noncash Income.
Distributions. Distributions from income or capital declared by the Board.
8% Preferred Offering. The sale by the Company of up to 1,136,364 shares
of the Company's 8% Convertible Preferred Stock at $13.20 per share.
ERISA. Employee Retirement Income Security Act of 1974, as amended.
Escrow Agent. Trust Company of America, or any other institution permitted
to serve as escrow agent under Rule 15c2-4 of the Exchange Act.
Excess Shares. Any Shares in excess of the Ownership Limit.
Exchange Act. The Securities Exchange Act of 1934, as amended.
Final Closing. The last date on which purchasers of Units, Shares and 8%
Preferred offered pursuant to this Prospectus are issued such Units, Shares or
8% Preferred.
Foreclosure Property. Real property (or any interest in real property) and
any personal property incident thereto, which is acquired or reduced to
possession by the Company as a result of a bid in foreclosure, or by agreement
or legal process, following a default (or where a default was imminent) on a
lease of the property or on an indebtedness secured by such property (other than
indebtedness arising upon the sale of dealer property which was not itself
Foreclosure Property) which the Company elects to treat as foreclosure property
under the Code for a period of two years, unless such period is extended with
the permission of the IRS.
Gross Offering Proceeds. The aggregate purchase price of Units, Shares and
8% Preferred sold pursuant to the Offering.
Independent Director. A director of the Company who is not an employee,
officer or director of the Company, or otherwise an Affiliate of the Company,
prior to becoming a director, and who, upon becoming a director, is not
otherwise affiliated with the Company.
Individual. Any natural person and those organizations treated as natural
persons in Section 542(a) of the Code.
Initial Closing. The time after the Minimum Common Offering is completed
when Units, Shares or 8% Preferred sold are issued to investors and funds in the
escrow are released to the Company.
Initial Properties. The Properties to be acquired in the Formation
Transactions. In a Minimum Common Offering, the Initial Properties will be
Sandpainter Apartments, Northwest Garden Apartments, Orangewood Place Apartments
and Arrow Village Apartments. In a Maximum Common Offering, the Initial
Properties will be all Properties described in "Description of Properties."
IRA. An individual retirement account described in Section 408(a) of the
Code or an individual retirement annuity described in Section 408(b) of the
Code.
IRS. The Internal Revenue Service.
Keogh Plan. A retirement benefit plan covering a person with net earnings
from self-employment, also known as an H.R.10 plan.
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Leverage. The aggregate amount of indebtedness of the Company for money
borrowed (including purchase money mortgage loans) outstanding at any time, both
secured and unsecured.
Loans. The notes and other evidences of indebtedness or obligations
acquired or entered into by the Company as lender which are secured or
collateralized principally by fee or leasehold interests in real estate.
Maximum Common Offering. The receipt by the Company of orders for all of
the Units and Shares offered by this Prospectus from at least 400 investors and
the receipt by the Escrow Agent of full payment for such securities with funds
that have cleared the banking system.
Maximum Combined Offering. A Maximum Common Offering plus the sale of all
shares of 8% Preferred offered in this Prospectus to at least 100 investors.
Minimum Combined Offering. A Minimum Common Offering plus a Minimum
Preferred Offering.
Minimum Common Offering. The receipt by the Company of orders for not less
than 2,142,858 shares of Common Stock (whether in the form of Units or
individual Shares) from the sales to at least 400 investors and the receipt by
the Escrow Agent of full payment for such Units or Shares with funds that have
cleared the banking system. Any securities of the Company owned by officers or
directors of the Company as of the date of this Prospectus will not be included
for purposes of determining whether the Minimum Common Offering has been
achieved.
Minimum Preferred Offering. Concurrently with or after the completion of a
Minimum Common Offering, the receipt by the Company of orders for not less than
152,000 shares of 8% Preferred and receipt by the Escrow Agent of full payment
for such shares with funds that have cleared the banking system.
NASD. The National Association of Securities Dealers, Inc.
Net Assets. The total assets of the Company (other than intangibles) at
cost before deducting depreciation or other noncash reserves less total
liabilities, calculated at least quarterly on a basis consistently applied.
Net Income. For any period, the total revenues applicable to such period,
less the total expenses applicable to such period excluding additions to
reserves for depreciation, bad debts or other similar noncash reserves;
provided, however, Net Income for purposes of calculating total allowable
Operating Expenses shall exclude the gain from the sale of the Company's assets.
Offering. The offering of Units, Shares and 8% Preferred pursuant to this
Prospectus.
Operating Partnership Agreement. The partnership agreement of the
Operating Partnership as amended.
OP Units. Interests in the Operating Partnership.
Operating Partnership. American Equity Trust Operating Partnership, L.P.,
a Delaware limited partnership of which the Company is the sole general partner.
Ownership Limit. The percent limitation placed on the ownership of by any
one Person on equity stock of the Company. At the date of this Prospectus, such
limit is 9.8% of the value of the outstanding equity stock of the Company. In
addition, the percent limitation placed on the ownership by any one Person of 8%
Preferred is that number of shares of 8% Preferred the value of which, when
added to the value of the Company's other equity securities owned by such
Person, does not exceed five percent of the value of the outstanding equity
securities of the Company.
94
<PAGE>
Permitted Temporary Investments. United States government securities,
certificates of deposit or other time or demand deposits of commercial banks,
savings banks, savings and loan associations or similar institutions which have
a net worth of at least $100,000,000 or in which such certificates or deposits
are fully insured by any federal or state government agency, United States
dollar deposits in foreign branches of banks which have a net worth of at least
$100,000,000, bank repurchase agreements covering securities of the United
States government or governmental agencies, commercial paper, bankers
acceptances, public money market funds or other similar short-term highly liquid
investments.
Person. An Individual, corporation, partnership, joint venture,
association, company, trust, bank or other entity or any government or any
agency and political subdivision of a government.
Prohibited Transaction. A sale of assets held by the Company primarily for
sale to customers in the ordinary course of business other than (i) Foreclosure
Property and (ii) certain dispositions of real estate assets which satisfy
Section 857(b)(6)(C) of the Code.
Prior Ownership Group ("POG"). The properties to be acquired by the
Company, known as the Hewlett Packard Building, Van Nuys, California; and
Westwood Self-Storage/Sportmart Building, Westwood, California.
Property or Properties. The Company's partial or entire interest in real
property described in this Prospectus (including leasehold interests) and
personal or mixed property connected therewith.
Proposed Acquisitions. The properties to be acquired by the Company, known
as the Arrow Village Apartments, the Northwest Gardens Apartments, the
Orangewood Place Apartments and the Sandpainter Apartments
Prospectus. This prospectus pursuant to which the Company is offering up
to 1,750,000 Units, 1,500,000 additional Shares, and 1,136,364 shares of 8%
Preferred, as the same may at any time and from time to time be amended or
supplemented.
Registration Statement. The Registration Statement on Form S-11 of which
this Prospectus is a part.
REIT A real estate investment trust, as defined in Sections 856-860 of the
Code.
REIT Provisions of the Code or REIT Provisions. Parts II and III of
Subchapter M of Chapter I of the Code or successor statutes, and regulations and
rulings promulgated thereunder.
REIT Taxable Income. The taxable income of a REIT, adjusted as follows:
(i) the deduction for dividends received allowable to corporations under
Sections 241 through 247, 249 and 250 of the Code is not allowed; (ii) the
deduction for dividends paid under Section 561 of the Code is allowed, but is
computed without regard to that portion of such deduction attributable to net
income from Foreclosure Property; (iii) taxable income is computed without
regard to Section 443(b) of the Code relating to the computation of tax upon the
change of an annual accounting period; (iv) net income from Foreclosure Property
that is not qualified REIT income without regard to the foreclosure property
provisions of the Code is excluded; (v) the tax imposed for failing the 75%
Income Test and/or the 95% Income Test is deducted; and (vi) income derived from
Prohibited Transactions is excluded.
Sales Agent. Brookstreet Securities Corporation.
Securities Act. The Securities Act of 1933, as amended.
Soliciting Dealers. Broker-dealers who are members of the NASD and who
have executed a Soliciting Dealer Agreement with the Sales Agent in whom the
Soliciting Dealers agree to participate with the Sales Agent in the Offering.
Shares. All of the shares of common stock of the Company, $.01 par value,
and all other shares of common stock of the Company issued in this or any
subsequent Offering.
95
<PAGE>
UBTI. Unrelated business taxable income as defined in Section 512 of the
Code.
Unimproved Real Property. Property which has the following three
characteristics: (i) an equity interest in property which was not acquired for
the purpose of producing rental or other operating income, (ii) no development
or construction is in process on such property, and (iii) no development or
construction on such property is planned in good faith to commence on such
property within one year.
Unit. A Unit consists of two shares of Common Stock of the Company and one
detachable Series "A" Warrant.
96
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION:
Pro Forma Condensed Combined Balance Sheets as of March 31, 1996............................. F-3
Notes to Pro Forma Condensed Combined Balance Sheets......................................... F-5
Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1995
and for the three months ended March 31, 1996............................................... F-7
Notes to Pro Forma Condensed Combined Statements of Operations............................... F-10
Pro Forma Condensed Combined Statements of Cash Flows for the year ended December 31, 1995... F-11
Pro Forma Condensed Combined Statements of Cash Flows for the three months ended
March 31, 1996.............................................................................. F-13
Notes to Pro Forma Condensed Combined Statements of Cash Flows............................... F-15
AMERICAN EQUITY TRUST INC.
Report of Independent Certified Public Accountants........................................... F-16
Balance Sheet as of March 31, 1996........................................................... F-17
Notes to Balance Sheet....................................................................... F-18
PRIOR OWNERSHIP GROUP
Report of Independent Certified Public Accountants........................................... F-21
Combined Balance Sheets as of December 31, 1995 and 1994 and March 31, 1996 (unaudited)...... F-22
Combined Statements of Operations for three years ended December 31, 1995 and the
three months ended March 31, 1996 and 1995 (unaudited)...................................... F-23
Combined Statements of Owners' Equity for three years ended December 31, 1995 and the
three months ended March 31, 1996 (unaudited)............................................... F-24
Combined Statements of Cash Flows for three years ended December 31, 1995 and the
three months ended March 31, 1996 and 1995 (unaudited)...................................... F-25
Notes to Combined Financial Statements....................................................... F-26
PROPOSED ACQUISITIONS
Report of Independent Certified Public Accountants........................................... F-29
Combined Statements of Revenues and Certain Expenses for the year ended
December 31, 1995 and the three months ended March 31, 1996 and 1995 (unaudited)............ F-30
Notes to Combined Statements of Revenues and Certain Expenses................................ F-31
FINANCIAL STATEMENT SCHEDULE OF PRIOR OWNERSHIP GROUP
Report of Independent Certified Public Accountants........................................... S-1
Schedule III - Real Estate and Accumulated Depreciation...................................... S-2
</TABLE>
F-1
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
The following unaudited Pro Forma Condensed Combined Balance Sheets as of
March 31, 1996 and the Pro Forma Condensed Combined Statements of Operations and
the Pro Forma Condensed Combined Statements of Cash Flows for the year ended
December 31, 1995 and for the three months ended March 31, 1996 have been
prepared to reflect the Minimum Common Offering, the Minimum Combined Offering,
the Maximum Common Offering, and the Maximum Combined Offering (together the
Offerings), the acquisitions of properties from the Prior Ownership Group (POG)
and the Proposed Acquisitions described in the accompanying notes. The
unaudited Pro Forma Balance Sheets have been prepared as if the Offerings, the
POG Acquisitions and the Proposed Acquisitions had been consummated as of March
31, 1996. The unaudited Pro Forma Statements of Operations and Cash Flows for
the year ended December 31, 1995 and the three months ended have been prepared
as if the Offerings, the POG Acquisitions and the Proposed Acquisitions occurred
on January 1, 1995. The unaudited Pro Forma Condensed Combined Financial
Statements and related notes should be read in conjunction with the audited
financial statements contained elsewhere in this Prospectus. The unaudited Pro
Forma Condensed Combined Financial Statements are not necessarily indicative of
what the actual financial position or results of operations would have been for
the respective periods if the transactions had been consummated on the dates
indicated, nor does it purport to represent the future financial position or
results of operations of the Company.
F-2
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
As of March 31 1996
-----------------------------------------------------------
The Proposed Pro Forma Pro Forma
Company Acquisitions Adjustments Combined
----------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
MINIMUM COMMON OFFERING
- -----------------------
ASSETS:
Rental properties, net................... $ - $8,112,269 $ 6,207,731 (1) $14,320,000
Cash and cash equivalents................ 26,716 47,715 2,122,719 (2) 2,197,150
Deferred offering costs.................. 912,808 - (912,808)(2) -
Other assets............................. 172,574 218,737 (321,357)(3) 69 954
---------- ---------- -----------
$1,112,098 $8,378,721 $16,587,104
========== ========== ===========
LIABILITIES:
Mortgage notes payable................... $ - $6,985,107 (4,485,107)(4) $ 2,500,000
Convertible notes........................ 493,781 - 493,781
Accounts payable and other liabilities... 250,000 215,750 (215,750)(3) 250,000
---------- ---------- -----------
Total liabilities...................... 743,781 7,200,857 3,243,781
---------- ---------- -----------
STOCKHOLDERS' EQUITY:
Common Stock............................. 2,747 - 21,429 (5) 24,176
8% Convertible Preferred................. - - -
1995 Convertible Preferred............... 10,210 10,210
Additional paid-in-capital............... 420,155 - 12,953,577 (5) 13,373,732
Owners' equity (deficit)................. - 1,177,864 (1,177,864)(7) -
Retained earnings (deficit).............. (64,795) - (64,795)
---------- ---------- -----------
Total stockholders' equity............. 368,317 1,177,864 13,343,323
---------- ---------- -----------
Total liabilities and
stockholders' equity................. $1,112,098 $8,378,721 $16,587,104
========== ========== ===========
MINIMUM COMBINED OFFERING
- -------------------------
ASSETS:
Rental properties, net................... $ - $8,112,269 $ 6,207,731 (1) $14,320,000
Cash and cash equivalents................ 26,716 47,715 1,492,719 (2) 1,567,150
Deferred offering costs.................. 912,808 - (912,808)(2) -
Other assets............................. 172,574 218,737 (321,357)(3) 69 954
---------- ---------- -----------
$1,112,098 $8,378,721 $15,957,104
========== ========== ===========
LIABILITIES:
Mortgage notes payable................... $ - $6,985,107 (6,985,107)(4) $ -
Convertible notes........................ 493,781 - 493,781
Accounts payable and other liabilities... 250,000 215,750 (215,750)(3) 250,000
---------- ---------- -----------
Total liabilities....................... 743,781 7,200,857 743,781
---------- ---------- -----------
STOCKHOLDERS' EQUITY:
Common Stock............................. 2,747 - 21,429 (5) 24,176
8% Convertible Preferred................. - - 2,006,400 (5) 2,006,400
1995 Convertible Preferred............... 10,210 10,210
Additional paid-in-capital............... 420,155 - 12,817,177 (5) 13,237,732
Owners' equity (deficit)................. - 1,177,864 (1,177,864)(7) -
Retained earnings (deficit).............. (64,795) - (64,795)
---------- ---------- -----------
Total stockholders' equity............. 368,317 1,177,864 15,213,323
---------- ---------- -----------
Total liabilities and
stockholders' equity................. $1,112,098 $8,378,721 $15,957,104
========== ========== ===========
</TABLE>
F-3
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
As of March 31 1996
--------------------------------------------------------------------------
The Proposed Pro Forma Pro Forma
Company POG Acquisitions Adjustments Combined
----------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
MAXIMUM COMMON OFFERING
- -----------------------
ASSETS:
Rental properties, net............ $ - $23,204,845 $8,112,269 $ 10,410,838 (1) $41,727,952
Cash and cash equivalents......... 26,716 221,353 47,715 1,063,221 (2) 1,359,005
Deferred offering costs........... 912,808 - - (912,808)(2) -
Other assets...................... 172,574 302,466 218,737 (623,823)(3) 69,954
---------- ----------- ---------- -----------
$1,112,098 $23,728,664 $8,378,721 $43,156,911
========== =========== ========== ===========
LIABILITIES:
Mortgage notes payable............ $ - $17,698,599 $6,985,107 (16,221,845)(4) $ 8,461,861
Convertible notes................. 493,781 - - - 493,781
Accounts payable and other........ 250,000 2,109,704 215,750 (2,325,454)(3) 250,000
---------- ----------- ---------- -----------
Total liabilities............... 743,781 19,808,303 7,200,857 9,205,642
---------- ----------- ---------- -----------
Minority interest................. 3,461,287 (6) 3,461,287
-----------
STOCKHOLDERS' EQUITY:
Common Stock...................... 2,747 - - 50,000 (5) 52,747
8% Convertible Preferred.......... - - - -
1995 Convertible Preferred........ 10,210 10,210
Additional paid-in-capital........ 420,155 - - 31,205,000 (5)
(1,133,335)(7) 30,491,820
Owners' equity (deficit).......... - 3,920,361 1,177,864 (5,098,225)(7) -
Retained earnings (deficit)....... (64,795) - - (64,795)
---------- ----------- ---------- -----------
Total stockholders' equity...... 368,317 3,920,361 1,177,864 30,489,982
---------- ----------- ---------- -----------
$1,112,098 $23,728,664 $8,378,721 $43,156,911
========== =========== ========== ===========
MAXIMUM COMBINED OFFERING
- -------------------------
ASSETS:
Rental properties, net............ $ - $23,204,845 $8,112,269 $ 10,410,838 (1) $41,727,952
Cash and cash equivalents......... 26,716 221,353 47,715 6,401,364 (2) 6,697,148
Deferred offering costs........... 912,808 - - (912,808)(2) -
Other assets...................... 172,574 302,466 218,737 (623,823)(3) 69,954
---------- ----------- ---------- -----------
$1,112,098 $23,728,664 $8,378,721 $48,495,054
========== =========== ========== ===========
LIABILITIES:
Mortgage notes payable............ $ - $17,698,599 $6,985,107 (24,683,706)(4) $ -
Convertible notes................. 493,781 - - - 493,781
Accounts payable and other........ 250,000 2,109,704 215,750 (2,325,454)(3) 250,000
---------- ----------- ---------- -----------
Total liabilities............... 743,781 19,808,303 7,200,857 743,781
---------- ----------- ---------- -----------
Minority interest................. 3,461,287 (6) 3,461,287
-----------
STOCKHOLDERS' EQUITY:
Common Stock...................... 2,747 - - 50,000 (5) 52,747
8% Convertible Preferred.......... - - - 15,000,004 (5) 15,000,004
1995 Convertible Preferred........ 10,210 10,210
Additional paid-in-capital........ 420,155 - - 30,005,000 (5)
(1,133,335)(7) 29,291,820
Owners' equity (deficit).......... - 3,920,361 1,177,864 (5,098,225)(7) -
Retained earnings (deficit)....... (64,795) - - (64,795)
---------- ----------- ---------- -----------
Total stockholders' equity...... 368,317 3,920,361 1,177,864 44,289,986
---------- ----------- ---------- -----------
$1,112,098 $23,728,664 $8,378,721 $48,495,054
========== =========== ========== ===========
</TABLE>
F-4
<PAGE>
AMERICAN EQUITY TRUST INC.
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEETS
PRO FORMA ADJUSTMENTS
These pro forma adjustments reflect i) the issuance of 2,142,858 shares of
Common Stock (Minimum Common Offering); ii) 2,142,858 shares of Common Stock
plus 152,000 shares of 8% Convertible Preferred Stock at an offering price of
$13.20 per share (Minimum Combined Offering); iii) 5,000,000 shares of Common
Stock, par value $.01 per share at an initial offering price of $7.00 per share
(Maximum Common Offering); and iv) 5,000,000 shares of Common Stock, at an
initial offering price of $7.00 per share plus 1,136,364 shares of 8%
Convertible Preferred Stock at an offering price of $13.20 per share (Maximum
Combined Offering) and the application of the net proceeds from such offerings.
The following sets forth the adjustments:
<TABLE>
<CAPTION>
Minimum Minimum Maximum Maximum
Common Combined Common Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(1) Increase in rental property:
Proposed Acquisitions:
Purchase price.............................. $14,200,000 $14,200,000 $14,200,000 $14,200,000
Net book value of properties acquired....... (8,112,269) (8,112,269) (8,112,269) (8,112,269)
----------- ----------- ----------- -----------
Excess of purchase price over net book
value of Proposed Acquisitions.......... 6,087,731 6,087,731 6,087,731 6,087,731
Prior Ownership Group - excess of purchase
price of $28,900,000 over net book value
of $23,204,845 of properties acquired...... - - 5,695,155 5,695,155
Adjustment to reduce to predecessor basis.... - - (1,562,048) (1,562,048)
Estimated closing and other costs............ 120,000 120,000 190,000 190,000
----------- ----------- ----------- -----------
$ 6,207,731 $ 6,207,731 $10,410,838 $10,410,838
=========== =========== =========== ===========
</TABLE>
The properties described as the Proposed Acquisitions consist of four
rental properties and will be acquired 100% in the Offerings. The properties
described as the Prior Ownership Group consist of two commercial buildings which
will be acquired by newly-formed partnerships in the Maximum Common Offering as
well as the Maximum Combined Offering. The Company will acquire a 67% and a 80%
general partnership interest in the new partnerships and the former owner will
receive a 33% and a 20% limited partnership interest in the newly-formed
partnerships.
<TABLE>
<CAPTION>
Minimum Minimum Maximum Maximum
Common Combined Common Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(2) Increase in cash:
Proceeds from the Offerings..................... $ 15,000,006 $ 17,006,406 $ 35,000,000 $ 50,000,004
Offering expenses............................... (2,025,000) (2,161,400) (3,745,000) (4,945,000)
------------ ------------ ------------ ------------
Net proceeds from Offerings.................... 12,975,006 14,845,006 31,255,000 45,055,004
Purchase of Proposed Acquisition Properties..... (11,700,000) (11,700,000) (11,700,000) (11,700,000)
Purchase of Prior Ownership Group properties.... - - (11,048,139) (11,048,139)
Acquisition debt assumed and retired with
proceeds from the Offerings.................... - (2,500,000) (8,000,000) (16,461,861)
Offering expenses incurred to date.............. 912,808 912,808 912,808 912,808
Acquisitions costs incurred to date............. 102,620 102,620 102,620 102,620
Estimated closing and other costs............... (120,000) (120,000) (190,000) (190,000)
Cash and cash equivalents not being acquired.... (47,715) (47,715) (269,068) (269,068)
------------ ------------ ------------ ------------
$ 2,122,719 $ 1,492,719 $ 1,063,221 $ 6,401,364
============ ============ ============ ============
</TABLE>
(3) Reflects the elimination of rents and other receivables, accounts payable
and other liabilities which are not being acquired by the Company.
F-5
<PAGE>
AMERICAN EQUITY TRUST INC.
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEETS (CONTINUED)
(4) Reduction of certain mortgage notes payable as follows:
<TABLE>
<CAPTION>
Minimum Minimum Maximum Maximum
Common Combined Common Combined
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Acquisition debt not assumed:
Proposed Acquisitions................... $4,485,107 $4,485,107 $ 4,485,107 $ 4,485,107
Prior Ownership Group................... - - 3,736,738 3,736,738
Debt assumed and retired with proceeds
from the Offerings...................... - 2,500,000 8,000,000 16,461,861
---------- ---------- ----------- -----------
Reduction of mortgage notes payable...... $4,485,107 $6,985,107 $16,221,845 $24,683,706
========== ========== =========== ===========
(5) Net increases in equity accounts:
Proceeds from the Offerings............ $15,000,006 $17,006,406 $35,000,000 $50,000,004
Offering expenses...................... (2,025,000) (2,161,400) (3,745,000) (4,945,000)
----------- ----------- ----------- -----------
Net proceeds from Offerings........... 12,975,006 14,845,006 31,255,000 45,055,004
Par value of common stock.............. (21,429) (21,429) (50,000) (50,000)
Value of 8% convertible preferred stock - (2,006,400) - (15,000,004)
----------- ----------- ----------- -----------
Net increase in additional
paid-in-capital....................... $12,953,577 $12,817,177 $31,205,000 $30,005,000
=========== =========== =========== ===========
</TABLE>
(6) Reflects minority interest retained by the former owners of the POG
Properties in the Maximum Common and Maximum Combined Offerings as follows:
<TABLE>
<CAPTION>
Hewlett-
Packard Westwood
Building Building Total
-------- -------- -----
<S> <C> <C> <C>
Historical equity of POG properties.......... $1,574,800 $2,305,561 $ 3,880,361
Adjustments:
Mortgage notes not assumed by Company....... 2,354,076 1,382,662 3,736,738
Other assets/liabilities not acquired
by Company................................. 1,626,762 (877) 1,625,885
---------- ---------- -----------
POG's net equity in property................. 5,555,638 3,687,346 9,242,984
---------- ---------- -----------
Portion exchanged (20% & 33%) for OP Units... 1,111,128 1,229,103 2,340,231
Portion acquired (80% & 67%) for cash........ 6,400,000 4,648,139 11,048,139
---------- ---------- -----------
New equity of POG properties................. $7,511,128 $5,877,242 $13,388,370
========== ========== ===========
Minority interest (20% & 33%)................ $1,502,226 $1,959,061 $ 3,461,287
========== ========== ===========
</TABLE>
(7) Elimination of predecessor equity of the properties acquired accounted for
under the purchase method of accounting except for the portion of the equity
interest retained by sellers which is reflected at predecessor cost basis.
(8) Maturities of pro forma mortgage notes payable is as follows:
<TABLE>
<CAPTION>
Minimum Maximum
Year Common Common
- ---- ------- -------
<S> <C> <C>
1996 (nine months)...................... $ 23,327 $ 105,410
1997.................................... 36,539 154,750
1998.................................... 39,473 167,154
1999.................................... 42,644 180,554
2000.................................... 46,069 195,026
Thereafter.............................. 2,311,948 7,658,967
---------- ----------
$2,500,000 $8,461,861
========== ==========
</TABLE>
F-6
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The pro forma combined statements of operations presented below reflect the
acquisitions as previously described as if they occurred at the beginning of the
periods presented. The Company was omitted from the statements presented below
since it had no operations during the period presented.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Three Months Ended March 31, 1996
------------------------------------------- ------------------------------------------
Proposed Pro Forma Pro Forma Proposed Pro Forma Pro Forma
Acquisitions Adjustments Combined Acquisitions Adjustments Combined
------------ -------------- ----------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
MINIMUM COMMON OFFERING
- -----------------------
Rental revenues............. $2,394,578 $ 83,500(1) $2,478,078 $655,119 $ 655,119
---------- ---------- -------- ---------
Property management fees.... 102,317 102,317 27,834 27,834
Property taxes.............. 114,942 114,942 35,231 35,231
Other expenses.............. 998,420 456,250(4) 1,454,670 208,085 114,063(4) 322,148
---------- ---------- -------- ---------
Total expenses.............. 1,215,679 1,671,929 271,150 385,213
---------- ---------- -------- ---------
Excess of revenues
over expenses............. 1,178,899 806,149 383,969 269,906
---------- --------
Depreciation expense........ 533,644(2) (533,644) 133,411(2) (133,411)
Interest expense............ 193,750(3) (193,750) 48,437(3) (48,437)
---------- ---------
Net income.................. $ 78,755 $ 88,058
========== =========
Net income per
common share(5)........... $0.02 $0.02
========== =========
MINIMUM COMBINED OFFERING
- -------------------------
Rental revenues............. $2,394,578 $ 83,500(1) $2,478,078 $655,119 $ 655,119
---------- ---------- -------- ---------
Property management fees.... 102,317 102,317 27,834 27,834
Property taxes.............. 114,942 114,942 35,231 35,231
Other expenses.............. 998,420 456,250(4) 1,454,670 208,085 114,063(4) 322,148
---------- ---------- -------- ---------
Total expenses.............. 1,215,679 1,671,929 271,150 385,213
---------- ---------- -------- ---------
Excess of revenues
over expenses............. 1,178,899 806,149 383,969 269,906
---------- --------
Depreciation expense........ 533,644(2) (533,644) 133,411(2) (133,411)
---------- ---------
Net income.................. 272,505 136,495
Dividends on preferred......
shares.................... (160,512) (40,128)
---------- ---------
Net income attributable
to common shares.......... $ 111,993 $ 96,367
========== =========
Net income per
common share(5)........... $0.03 $0.03
========== =========
</TABLE>
F-7
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1995
----------------------------------------------------------------------------
Proposed Pro Forma Pro Forma
POG Acquisitions Adjustments Combined
--- ------------ ----------- --------
<S> <C> <C> <C> <C>
MAXIMUM COMMON OFFERING
- -----------------------
Rental revenues............................ $3,685,622 $2,394,578 $ 83,500 (1) $6,163,700
---------- ---------- -----------
Depreciation / amortization................ 1,067,896 496,641 (2) 1,564,537
Property management fees................... 52,000 102,317 154,317
Property taxes............................. 225,507 114,942 340,449
Interest expense........................... 1,608,750 (1,057,288)(3) 551,462
Other expenses............................. 774,886 998,420 600,000 (4) 2,373,306
---------- ---------- -----------
Total expenses............................. 3,729,039 1,215,679 4,984,071
---------- ---------- -----------
Excess revenues over expenses.............. (43,417) 1,178,899 1,179,629
---------- ----------
Minority interest.......................... (55,357)
-----------
Net income................................. $1,124,272
===========
Net income per common share(5)............. $0.17
===========
MAXIMUM COMBINED OFFERING
- -------------------------
Rental revenues............................ $3,685,622 $2,394,578 $ 83,500 (1) $6,163,700
---------- ---------- -----------
Depreciation / amortization................ 1,067,896 496,641 (2) 1,564,537
Property management fees................... 52,000 102,317 154,317
Property taxes............................. 225,507 114,942 340,449
Interest expense........................... 1,608,750 (1,608,750)(3) -
Other expenses............................. 774,886 998,420 600,000 (4) 2,373,306
---------- ---------- -----------
Total expenses............................. 3,729,039 1,215,679 4,432,609
---------- ---------- -----------
Excess revenues over expenses.............. (43,417) 1,178,899 1,731,091
---------- ----------
Minority interest.......................... (55,357)
-----------
Net income................................. 1,675,734
Dividends on preferred shares.............. (1,200,000)
-----------
Net income attributable to common shares... $ 475,734
===========
Net income per common share(5)............. $0.07
===========
</TABLE>
F-8
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
--------------------------------------------------------
Proposed Pro Forma Pro Forma
POG Acquisitions Adjustments Combined
--- ------------ ----------- ---------
<S> <C> <C> <C> <C>
MAXIMUM COMMON OFFERING
- -----------------------
Rental revenues............................ $903,037 $655,119 $1,558,156
-------- -------- ----------
Depreciation / amortization................ 266,952 124,160 (2) 391,112
Property management fees................... 13,000 27,834 40,834
Property taxes............................. 56,377 35,231 91,608
Interest expense........................... 400,930 (224,322)(3) 176,608
Other expenses............................. 195,270 208,085 150,000 (4) 553,355
-------- -------- ----------
Total expenses............................. 932,529 271,150 1,253,517
-------- -------- ----------
Excess revenues over expenses.............. (29,492) 383,969 304,639
-------- --------
Minority interest.......................... (2,603)
----------
Net income................................. $ 302,036
==========
Net income per common share(5)............. $0.05
==========
MAXIMUM COMBINED OFFERING
- -------------------------
Rental revenues............................ $903,037 $655,119 $1,558,156
-------- -------- ----------
Depreciation / amortization................ 266,952 124,160 (2) 391,112
Property management fees................... 13,000 27,834 40,834
Property taxes............................. 56,377 35,231 91,608
Interest expense........................... 400,930 (400,930)(3) -
Other expenses............................. 195,270 208,085 150,000 (4) 553,355
-------- -------- ----------
Total expenses............................. 932,529 271,150 1,076,909
-------- -------- ----------
Excess revenues over expenses.............. (29,492) 383,969 481,247
-------- --------
Minority interest.......................... (2,603)
----------
Net income................................. 478,644
Dividends on preferred shares.............. (300,000)
----------
Net income attributable to common shares... $ 178,644
==========
Net income per common share(5)............. $0.03
==========
</TABLE>
F-9
<PAGE>
AMERICAN EQUITY TRUST INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
PRO FORMA ADJUSTMENTS
(1) Increase revenues relate to higher occupancy and higher rental rates on one
of the Proposed Acquisition properties, to be acquired in each of the
offering scenarios, after the renovation of the property was completed in
May 1995.
(2) Represents the increase in depreciation and amortization resulting from the
step-up in basis of the POG properties (Maximum Offerings) and the
depreciation of the Proposed Acquisitions properties (all offerings) based
on their acquisitions prices. Depreciation is computed based upon estimated
useful lives of 28.5 years for buildings and improvements, 7 years for
furniture, fixtures and equipment and the term of leases for tenant
improvements which range from 5 to 10 years. The increase in depreciation
relates primarily to buildings.
(3) Reflects the reduction of interest expense associated with mortgages and
notes payable on the POG properties (Maximum Offerings) assumed to be
retired using the net proceeds from the Offering, while reflecting an
increase in interest expense on the Minimum Common Offering and the Maximum
Common Offering from new mortgage debt on the Proposed Acquisition
properties.
(4) Includes the estimated increases in general and administrative as well as
payroll expenses associated with the operation of the Company as a REIT.
(5) Assumes 3,752,822 (Minimum Offerings) and 6,609,964 (Maximum Offerings)
weighted average number of shares of common stock outstanding including the
dilutive effect of 463,133 Series "D" Warrants, 72,500 Series "E" Warrants,
1,021,500 shares of 1995 Preferred Stock and the 10% Convertible and Series
"B" 10% Convertible notes. Net income (loss) per share also assumes that
annual preferred dividends will be paid in the Minimum Combined and Maximum
Combined Offerings.
F-10
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-------------------------------------------------------------
The Proposed Pro Forma Pro Forma
Company Acquisitions Adjustments Combined
------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
MINIMUM COMMON OFFERING
- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................. $ - $1,178,899 $ (1,100,144)(1) $ 78,755
Adjustments - operating activities:
Depreciation and amortization.............. - - 533,644 (1) 533,644
Increase (decrease) from changes in:
Receivables................................ - 13,149 13,149
Other assets............................... (38,532) 20,153 (18,379)
Payables and other liabilities............. 239,510 14,876 254 386
--------- ---------- ------------
Net cash provided by operating activities... 200,978 1,227,077 861,555
--------- ---------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures........................ - (301,642) (301,642)
Acquisition of Properties................... (102,620) - (11,820,000)(2) (11,922,620)
--------- ---------- ------------
Net cash used in investing activities..... (102,620) (301,642) (12,224,262)
--------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuances................ 258,781 159,238 (190,340)(3) 227,679
Net proceeds from sale of stock............. 358,107 - 12,975,006 (4) 13,333,113
Deferred loan costs......................... (31,422) (31,422)
Deferred offering costs..................... (674,000) - 674,000 (5) -
--------- ---------- ------------
Net cash provided by financing activities... (88,534) 159,238 13,529,370
--------- ---------- ------------
PRO FORMA INCREASE IN CASH
AND CASH EQUIVALENTS....................... $ 9,824 $1,084,673 $ 2,166,663
========= ========== ============
MINIMUM COMBINED OFFERING
- -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................. $ - $1,178,899 $ (906,394)(1) $ 272,505
Adjustments - operating activities:
Depreciation and amortization.............. - - 533,644 (1) 533,644
Increase (decrease) from changes in:
Receivables................................ - 13,149 13,149
Other assets............................... (38,532) 20,153 (18,379)
Payables and other liabilities............. 239,510 14,876 254 386
--------- ---------- ------------
Net cash provided by operating activities... 200,978 1,227,077 1,055,305
--------- ---------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures........................ - (301,642) (301,642)
Acquisition of Properties................... (102,620) - (11,820,000)(2) (11,922,620)
--------- ---------- ------------
Net cash used in investing activities..... (102,620) (301,642) (12,224,262)
--------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuances................ 258,781 159,238 (159,238)(3) 258,781
Repayment of mortgage notes acquired........ - - (2,500,000)(5) (2,500,000)
Net proceeds from sale of stock............. 358,107 - 14,845,006 (4) 15,203,113
Dividends on preferred stock................ - - (160,512)(6) (160,512)
Deferred loan costs......................... (31,422) (31,422)
Deferred offering costs..................... (674,000) - 674,000 (4) -
---------- ------------
Net cash provided by financing activities... (88,534) 159,238 12,769,960
--------- ---------- ------------
PRO FORMA INCREASE IN CASH
AND CASH EQUIVALENTS....................... $ 9,824 $1,084,673 $ 1,601,003
========= ========== ============
</TABLE>
F-11
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1995
---------------------------------------------------------------------------
The Proposed Pro Forma Pro Forma
Company Acquisitions POG Adjustments Combined
------- ------------ --- ----------- ---------
<S> <C> <C> <C> <C> <C>
MAXIMUM COMMON OFFERING
- -----------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss)....................... $ - $1,178,899 $ (43,417) $ (11,210)(1) $ 1,124,272
Adjustments - operating activities:
Depreciation and amortization.......... - - 1,067,896 496,641 (1) 1,564,537
Minority interest...................... - - - 55,357 (7) 55,357
Increase (decrease) from changes in:
Receivables and other assets........... (38,532) 33,302 - (5,230)
Payables and other liabilities......... 239,510 14,876 123,190 377,576
--------- ---------- ---------- ------------
Net cash provided by operating
activities............................. 200,978 1,227,077 1,147,669 3,116,512
--------- ---------- ---------- ------------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures.................... - (301,642) (3,163) (304,805)
Acquisition of Properties............... (102,620) - - (22,938,139)(2) (23,040,759)
--------- ---------- ---------- ------------
Net cash used in investing activities... (102,620) (301,642) ( 3,163) (23,345,564)
--------- ---------- ---------- ------------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds (repayment) of debt............ 258,781 159,238 (391,934) 92,150 (3) 118,235
Repayment of mortgage notes acquired.... - - - (8,000,000)(5) (8,000,000)
Net proceeds from sale of stock......... 358,107 - - 31,255,000 (4) 31,613,107
Distributions to former owners.......... - - (614,642) 614,642 (8) -
Deferred loan costs..................... (31,422) - - (31,422)
Deferred offering costs................. (674,000) - - 674,000 (4) -
--------- ---------- ---------- ------------
Net cash provided by financing
activities............................. (88,534) 159,238 (1,006,576) 23,699,920
--------- ---------- ---------- ------------
PRO FORMA INCREASE IN CASH
AND CASH EQUIVALENTS................... $ 9,824 $1,084,673 $ 137,930 $ 3,470,868
========= ========== ========== ============
MAXIMUM COMBINED OFFERING
- -------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss)....................... $ - $1,178,899 $ (43,417) $ 540,252 (1) $ 1,675,734
Adjustments - operating activities:
Depreciation and amortization.......... - - 1,067,896 496,641 (1) 1,564,537
Minority interest...................... - - - 55,357 (7) 55,357
Increase (decrease) from changes in:
Receivables and other assets........... (38,532) 33,302 - (5,230)
Payables and other liabilities......... 239,510 14,876 123,190 377,576
--------- ---------- ---------- ------------
Net cash provided by operating
activities............................. 200,978 1,227,077 1,147,669 3,667,974
--------- ---------- ---------- ------------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures.................... - (301,642) (3,163) (304,805)
Acquisition of Properties............... (102,620) - - (22,938,139)(3) (23,040,759)
--------- ---------- ---------- ------------
Net cash used in investing activities... (102,620) (301,642) (3,163) (23,345,564)
--------- ---------- ---------- ------------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds (repayment) of debt............ 258,781 159,238 (391,934) 232,696 (3) 258,781
Repayment of mortgage notes acquired.... - - - (16,461,861)(5) (16,461,861)
Net proceeds from sale of stock......... 358,107 - - 45,055,004 (4) 45,413,111
Distributions to former owners.......... - - (614,642) 614,642 (8) -
Dividends on preferred stock............ - - - (1,200,000)(6) (1,200,000)
Deferred loan costs..................... (31,422) - - (31,422)
Deferred offering costs................. (674,000) - - 674,000 (4) -
--------- ---------- ---------- ------------
Net cash provided by financing
activities............................. (88,534) 159,238 (1,006,576) 27,978,609
--------- ---------- ---------- ------------
PRO FORMA INCREASE IN CASH
AND CASH EQUIVALENTS................... $ 9,824 $1,084,673 $ 137,930 $ 8,301,019
========= ========== ========== ============
</TABLE>
F-12
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
---------------------------------------------------------
The Proposed Pro Forma Pro Forma
Company Acquisitions Adjustments Combined
------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
MINIMUM COMMON OFFERING
- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................. $ - $383,969 $(295,911)(1) $ 88,058
Adjustments - operating activities:
Depreciation and amortization.............. - - 133,411 (1) 133,411
Increase (decrease) from changes in:
Receivables................................ - 4,706 4,706
Other assets............................... - (39,759) (39,759)
Payables and other liabilities............. 10,700 (38,223) (27,523)
--------- -------- ---------
Net cash provided by operating activities... 10,700 310,693 158,893
--------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures........................ - (26,223) (26,223)
--------- -------- ---------
Net cash used in investing activities..... - (26,223) (26,223)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuances................ 235,000 60,500 (68,275)(3) 227,679
Deferred offering costs..................... (238,808) - (238,808)
--------- -------- ---------
Net cash provided by financing activities... (3,808) 60,500 (11,129)
--------- -------- ---------
PRO FORMA INCREASE IN CASH
AND CASH EQUIVALENTS....................... $ 6,892 $344,970 $ 121,541
========= ======== =========
MINIMUM COMBINED OFFERING
- -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................. $ - $383,969 $(247,474)(1) $ 136,495
Adjustments - operating activities:
Depreciation and amortization.............. - - 133,411 (1) 133,411
Increase (decrease) from changes in:
Receivables................................ - 4,706 4,706
Other assets............................... - (39,759) (39,759)
Payables and other liabilities............. 10,700 (38,223) (27,523)
--------- -------- ---------
Net cash provided by operating activities... 10,700 310,693 207,330
--------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures........................ - (26,223) (26,223)
--------- -------- ---------
Net cash used in investing activities..... - (26,223) (26,223)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuances................ 235,000 60,500 (60,500)(3) 235,000
Dividends on preferred stock................ - - (160,512)(6) (160,512)
Deferred offering costs..................... (238,808) - (238 808)
--------- -------- ---------
Net cash provided by financing activities... (3,808) 60,500 (164,320)
--------- -------- ---------
PRO FORMA INCREASE IN CASH
AND CASH EQUIVALENTS....................... $ 6,892 $344,970 $ 16,787
========= ======== =========
</TABLE>
F-13
<PAGE>
AMERICAN EQUITY TRUST INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
----------------------------------------------------------------------
The Proposed Pro Forma Pro Forma
Company Acquisitions POG Adjustments Combined
------- ------------- --- ----------- --------
<S> <C> <C> <C> <C> <C>
MAXIMUM COMMON OFFERING
- -----------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss)........................... $ - $383,969 $ (29,492) $ (52,441)(1) $ 302,036
Adjustments - operating activities:
Depreciation and amortization.............. - - 266,952 124,160 (1) 391,112
Minority interest.......................... - - - 2,603 (7) 2,603
Increase (decrease) from changes in:
Receivables and other assets............... - (35,053) (20,000) (55,053)
Payables and other liabilities............. 10,700 (38,223) (35,143) (62,666)
--------- -------- --------- ---------
Net cash provided by operating activities... 10,700 310,693 182,317 578,032
--------- -------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures........................ - (26,223) - (26,223)
--------- -------- --------- ---------
Net cash used in investing activities....... - (26,223) - (26,223)
--------- -------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds (repayment) of debt................ 235,000 60,500 (98,168) 2,532 (3) 199,864
Distributions to former owners.............. - - (93,479) 93,479 (8) -
Deferred offering costs..................... (238,808) - - (238,808)
--------- -------- --------- ---------
Net cash provided by financing activities... (3,808) 60,500 (191,647) (38,944)
--------- -------- --------- ---------
PRO FORMA INCREASE IN CASH
AND CASH EQUIVALENTS....................... $ 6,892 $344,970 $ (9,330) $ 512,866
========= ======== ========= =========
MAXIMUM COMBINED OFFERING
- -------------------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income (loss)........................... $ - $383,969 $ (29,492) $ 124,167 (1) $ 478,644
Adjustments - operating activities:
Depreciation and amortization.............. - - 266,952 124,160 (1) 391,112
Minority interest.......................... - - - 2,603 (7) 2,603
Increase (decrease) from changes in:
Receivables and other assets............... - (35,053) (20,000) (55,053)
Payables and other liabilities............. 10,700 (38,223) (35,143) (62,666)
--------- -------- --------- ---------
Net cash provided by operating activities... 10,700 310,693 182,317 754,640
--------- -------- --------- ---------
CASH FLOWS - INVESTING ACTIVITIES:
Capital expenditures........................ - (26,223) - (26,223)
--------- -------- --------- ---------
Net cash used in investing activities....... - (26,223) - (26,223)
--------- -------- --------- ---------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds (repayment) of debt................ 235,000 60,500 (98,168) 37,668 (3) 235,000
Distributions to former owners.............. - - (93,479) 93,479 (8) -
Dividends on preferred stock................ - - - (300,000)(6) (300,000)
Deferred offering costs..................... (238,808) - - (238,808)
--------- -------- --------- ---------
Net cash provided by financing activities... (3,808) 60,500 (191,647) (303,808)
--------- -------- --------- ---------
PRO FORMA INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS.............. $ 6,892 $344,970 $ (9,330) $ 424,609
========= ======== ========= =========
</TABLE>
F-14
<PAGE>
AMERICAN EQUITY TRUST INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF CASH FLOWS
PRO FORMA ADJUSTMENTS
(1) To record adjustments reflected in the pro forma statement of operations on
pages as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-----------------------------------------------------
Minimum Minimum Maximum Maximum
Common Combined Common Combined
------ -------- ------- --------
<S> <C> <C> <C> <C>
Rental revenues..................... $ 83,500 $ 83,500 $ 83,500 $ 83,500
Depreciation expense................ (533,644) (533,644) (496,641) (496,641)
Interest expense.................... (193,750) - 1,057,288 1,608,750
Minority share of income............ - - (55,357) (55,357)
REIT expenses....................... (456,250) (456,250) (600,000) (600,000)
----------- --------- ---------- ----------
$(1,100,144) $(906,394) $ (11,210) $ 540,252
=========== ========= ========== ==========
<CAPTION>
Three Months Ended March 31, 1996
-----------------------------------------------------
Minimum Minimum Maximum Maximum
Common Combined Common Combined
------- -------- ------- --------
<S> <C> <C> <C> <C>
Depreciation expense................ $(133,411) $(133,411) $ (124,160) $ (124,160)
Interest expense.................... (48,457) - 224,322 400,930
Minority share of income............ - - (2,603) (2,603)
REIT expenses....................... (114,043) (114,043) (150,000) (150,000)
--------- --------- ---------- ----------
$(295,911) $(247,454) $ (52,441) $ 124,167
========= ========= ========== ==========
</TABLE>
(2) To record acquisition of the Properties including related acquisition
expenses of $120,000 (Minimum Offerings) and $190,000 (Maximum Offerings).
(3) To record adjustments to historical debt to reflect debt maturities of pro
forma debt after the acquisition of the Properties has been consummated as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
----------------------------------------------
Minimum Minimum Maximum Maximum
Common Combined Common Combined
------- -------- ------- --------
<S> <C> <C> <C> <C>
Historical debt proceeds (repayments):
Proposed Acquisitions................... $159,238 $159,238 $ 159,238 $ 159,238
Prior Ownership Group................... - - (391,934) (391,934)
-------- -------- --------- ---------
159,238 159,238 (232,696) (232,696)
Pro forma debt maturities................ 31,102 - 140,546 -
-------- -------- --------- ---------
Pro forma adjustment..................... $190,340 $159,238 $ (92,150) $(232,696)
======== ======== ========= =========
<CAPTION>
Three months Ended March 31, 1996
--------------------------------------------
Minimum Minimum Maximum Maximum
Common Combined Common Combined
------- -------- ------- --------
<S> <C> <C> <C> <C>
Historical debt proceeds (repayments):
Proposed Acquisitions................... $ 60,500 $ 60,500 $ 60,500 $ 60,500
Prior Ownership Group................... - - (98,168) (98,168)
-------- -------- --------- ---------
60,500 60,500 (37,668) (37,668)
Pro forma debt maturities................ 7,775 - 35,136 -
-------- -------- --------- ---------
Pro forma adjustment..................... $ 68,275 $ 60,500 $ (2,532) $ (37,668)
======== ======== ========= =========
</TABLE>
(4) To record the net proceeds of the Offerings.
(5) To record reduction of mortgage notes with proceeds of the Offerings.
(6) To record dividends on preferred stock.
(7) To record the minority share of income.
(8) To eliminate historical distributions to the former owners of the POG
properties.
F-15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Equity Trust Inc.
Los Angeles, California
We have audited the accompanying balance sheet of American Equity Trust Inc. as
of March 31, 1996. The financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statement referred to above
presents fairly, in all material respects, the financial position of American
Equity Trust Inc. of as of March 31, 1996 in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
May 8, 1996
F-16
<PAGE>
AMERICAN EQUITY TRUST INC.
BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Cash.................................................................... $ 26,716
Deferred offering costs................................................. 912,808
Deferred loan costs..................................................... 31,422
Property acquisition costs.............................................. 102,620
Other assets............................................................ 38,532
----------
Total assets........................................................... $1,112,098
==========
LIABILITIES:
Accounts payable and accrued expenses................................... $ 250,000
Notes payable........................................................... 493,781
----------
Total liabilities...................................................... 743,781
----------
STOCKHOLDERS' EQUITY (Note 2):
Common Stock, $0.01 par value; shares authorized -
35,000,000; shares issued and outstanding - 274,714.................... 2,747
1995 Convertible Preferred Stock, shares authorized - 1,100,000;
issued and outstanding 1,021,500; (liquidation value $.01 per share)... 10,210
8% Convertible Preferred Stock, shares authorized - 1,500,000
issued and outstanding - none; (liquidation value $13.20 per share).... -
Additional paid-in capital.............................................. 420,155
Deficit................................................................. (64,795)
----------
Total stockholders' equity............................................. 368,317
----------
Total liabilities and
stockholders' equity................................................. $1,112,098
==========
</TABLE>
F-17
<PAGE>
AMERICAN EQUITY TRUST INC.
NOTES TO BALANCE SHEET
NOTE 1. ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
American Equity Trust Inc. (the Company) was originally organized and
incorporated as Insight Environmental Corporation (Insight), an inactive
publicly-held shell. On November 22, 1994, Insight merged into its wholly-
owned subsidiary American Equity Trust Inc., a Maryland corporation, and changed
its name to that of the Company. The purpose of the Company was to be a vehicle
to form a Real Estate Investment Trust (REIT) to raise funds from the public
market for the purpose of acquiring and managing a diversified portfolio of
income producing real estate assets for the purpose of dividend distribution and
capital appreciation. The Company proposes to sell a maximum of 1,750,000 Units
consisting of two shares of common stock and one detachable Series "A" Warrant
at $14.00 per Unit plus 1,500,000 shares of Common Stock at a price of $7.00 per
share which would result in $35,000,000 of gross proceeds and net proceeds of
approximately $31,300,000. In addition the Company is offering 1,136,364 shares
of its 8% Convertible Preferred Stock at $13.20 and expects to raise additional
funds amounting to $13,800,000 (net of offering expenses of $1,200,000).
Commencing with the year beginning January 1, 1996, the Company intends to
make an election to be taxed as a REIT under section 856(c) of the Internal
Revenue Code of 1986, as amended (the Code). If the Company qualifies as a
REIT, the Company generally will not be subject to federal income taxes to the
extent REIT taxable income (exclusive of capital gains, if any, distribution of
which is optional) is distributed to its stockholders. A REIT is subject to a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its ordinary taxable income to its
stockholders. If the Company fails to qualify as a REIT in any taxable year,
the Company will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. If
the Company qualifies for taxation as a REIT, the Company may be subject to
certain state and local taxes on its income and property and federal income and
excise taxes on its undistributed income. The Company intends to obtain an
opinion from its counsel concerning its REIT status.
Formation of Operating Partnership
----------------------------------
On October 24, 1995, the Company formed American Equity Trust Operating
Partnership, L.P., a Delaware limited partnership (Operating Partnership), in
which the Company is the sole general partner and will own an initial 99%
interest in the Operating Partnership. The Operating Partnership was
capitalized with $10,000.
Merger with Funding
-------------------
In October 1995, the Company merged with American Equity Trust Funding, Inc.
(Funding), a related entity formed for the purpose of exploring opportunities
for the formation of a publicly-held REIT and to raise capital to organize the
REIT and fund a portion of the cost of offering the REIT's shares to the public.
Funding raised $400,000 which was used for the purposes described above.
The merger was accomplished by an exchange of 114,286 common shares of the
Company plus warrants to purchase additional 57,133 common shares of the Company
at $3.50 per share. At the same time the founders of Funding exchanged their
common shares in Funding for 1,021,500 shares of the Company's 1995 Convertible
Preferred Stock and Series D Warrants to purchase 406,000 shares at $3.50 per
share. The merger was accounted for as a combination of entities under common
control in a manner similar to a pooling of interest.
Accounting Estimates
--------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Disclosure About Fair Value of Financial Instruments
----------------------------------------------------
The fair value of the notes payable is estimated based upon current market
borrowing rates for loans with similar terms and maturities.
F-18
<PAGE>
AMERICAN EQUITY TRUST INC.
NOTES TO BALANCE SHEET
(CONTINUED)
NOTE 2. STOCKHOLDERS' EQUITY
Deficit
-------
The Company and its predecessor had no operations for at least the past five
years.
Preferred Stock
---------------
The Company is authorized to issue up to 21,515,000 preferred shares from
time to time in one or more series as authorized by the Board of Directors.
Prior to issuance of shares of each series, the Board of Directors shall
designate that series from all other series and classes of stock of the Company,
shall specify the number of shares to be included in the series and shall set
the terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption.
8% Convertible Preferred Stock
------------------------------
The Board of Directors has authorized the issuance of up to 1,500,000 shares
of 8% Convertible Preferred Stock (8% Preferred). The 8% Preferred shall be
entitled to a $13.20 liquidation preference, subject to adjustment in the event
of adjustments in the conversion price. The 8% Preferred shall be entitled to
receive cumulative dividends equal to the greater of 8% of the liquidation
preference or the amount of dividends paid on Common Stock, up to an annual
maximum of $1.30 per share. Each preferred share is entitled to one vote.
Commencing 90 days after the Final Closing, the 8% Preferred are convertible
into Common Stock for a period of 60 months from the date of issue.
1995 Convertible Preferred Stock
--------------------------------
The Board of Directors has authorized the issuance of up to 1,100,000 shares
of 1995 Convertible Preferred Stock (95 Preferred). Each share of 95 Preferred
shall receive liquidating dividends at the rate of $0.01 per share ($110,000 in
the aggregate). Each share of 95 Preferred shall be automatically converted
into one share of Common Stock based on asset levels as defined in the articles
of incorporation.
Stock Incentive Plan
--------------------
The Company has approved a stock incentive plan (Plan), for the issuance of
up to 500,000 shares, to enable officers, key employees and directors of the
Company to participate in the ownership of the Company. The Plan provides for
the issuance of non-qualified stock options and incentive stock options. Non-
qualified stock options will provide the right to purchase common stock at a
specified price which may be less than fair market value. Incentive stock
options will be issued at fair market value and carry a ten year restriction.
Series "A" Warrants
-------------------
Series "A" Warrants will be issued as part of the Units. The A Warrants will
have a three year life and are exercisable into common shares of the Company at
$7.00 per share.
Series "D" Warrants
-------------------
The Company has authorized and issued 463,133 Series "D" Warrants which
permit the holders to purchase one common share of the Company at $3.50 per
share. The "D" Warrants are exercisable for a 35-month period commencing at the
end of the 13th month after the final closing of the Offering described in Note
1 above, after which they expire. Holders of 336,000 of such warrants have
agreed with the Company that they will not exercise their rights to purchase
common stock pursuant to the warrants until six months after the end of the
Company's first fiscal year wherein its audited consolidated financial
statements reflect an adjusted equity value of $25,000,000 or more plus funds
from operations of $2,500,000 or more. The common stock issuable upon exercise
of the D Warrants will not be registered under the Securities Act of 1933 at the
time the stock is issued.
F-19
<PAGE>
AMERICAN EQUITY TRUST INC.
NOTES TO BALANCE SHEET
(CONTINUED)
NOTE 2. STOCKHOLDERS' EQUITY (CONTINUED)
Series "E" Warrants
-------------------
The Company issued 72,500 Series "E" Warrants during October 1995 which were
issued as part of the private placement of $202,500 of 10% Convertible Notes of
the Company. The "E" Warrants have a two-year life commencing with the Offering
described in Note 1 above and will be exercisable into common shares of the
Company at $4.50 per share. See Note 4.
NOTE 3. PROPOSED ACQUISITIONS
The Company will contribute the net proceeds of the Offering to, and become
the sole general partner in, the Operating Partnership. It is anticipated that
the Operating Partnership will use the net proceeds to acquire the following
real estate properties:
<TABLE>
<CAPTION>
New Debt
Interest or
Purchase Retained Debt Payable
Property Price by Sellers Assumed in Cash
- -------------------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Arrow Village Apartments $ 3,250,000 $ - $2,500,000 $ 750,000
Northwest Gardens Apartments 6,950,000 - - 6,950,000
Orangewood Place Apartments 1,800,000 - - 1,800,000
Sandpainter Apartments 2,200,000 - - 2,200,000
Hewlett-Packard Building 16,000,000 1,600,000 14,400,000
Westwood Self-Storage and Sportmart Building 12,900,000 2,290,000 5,961,861 4,648,139
----------- ---------- ---------- -----------
$43,100,000 $3,890,000 $8,461,861 $30,748,139
=========== ========== ========== ===========
</TABLE>
NOTE 4. NOTES PAYABLE
10% Convertible Notes
---------------------
In October 1995 the Company issued 10% Convertible Notes (Notes) in the
amount of $202,500 due October 1996. The Notes are convertible into 45,000
shares of the Company's common stock at $4.50 per share. The Notes are callable
by the Company, at any time, at 115% of the face amount of the Notes.
Series B 10% Convertible Notes
------------------------------
In November and December 1995, the Company issued Series B 10% Convertible
Notes ("B" Notes) in the amount of $56,281 due October 1, 1996. The B Notes are
convertible into 12,507 shares of the Company's common stock at $4.50 per share.
The B Notes are callable by the Company, at any time, at 115% of the face amount
of the "B" Notes.
10% Notes
---------
During February and March 1996 the Company issued 10% Notes (New Notes) in
the amount of $245,555 due the earlier of 90 days after the Offering or April
15, 1997. The New Notes were issued at a 10% discount and the Company received
net proceeds of $221,000.
F-20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
American Equity Trust Inc.
Los Angeles, California
We have audited the accompanying combined balance sheets of the Prior Ownership
Group (as defined in Note 1) as of December 31, 1995 and 1994, and the related
combined statements of operations, changes in owners' equity and cash flows for
each of the three years in the period ended December 31, 1995. These combined
financial statements are the responsibility of the Prior Ownership Group's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the combined financial position of the
Prior Ownership Group as of December 31, 1995 and 1994, and the combined results
of operations and cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
March 25, 1996
F-21
<PAGE>
PRIOR OWNERSHIP GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
-------------------------- ----------
1995 1994 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS:
Real Estate.............................. $28,278,219 $28,275,056 $28,278,219
Accumulated depreciation................. (4,822,205) (3,817,441) (5,073,374)
----------- ----------- -----------
Net investment in Real Estate............ 23,456,014 24,457,615 23,204,845
Cash and cash equivalents................ 230,683 92,753 221,353
Other assets............................. 298,249 361,382 302,466
----------- ----------- -----------
Total assets........................... $23,984,946 $24,911,750 $23,728,664
=========== =========== ===========
LIABILITIES:...............................
Mortgage notes payable (Note 3).......... $17,796,767 $18,188,701 $17,698,599
Notes payable to affiliates (Note 5)..... 1,717,189 1,717,189 1,717,189
Accounts payable and other liabilities... 427,658 304,469 392,515
----------- ----------- -----------
Total liabilities...................... 19,941,614 20,210,359 19,808,303
OWNERS' EQUITY:
Owners' Equity........................... 4,043,332 4,701,391 3,920,361
----------- ----------- -----------
Total liabilities and
owners' equity....................... $23,984,946 $24,911,750 $23,728,664
=========== =========== ===========
</TABLE>
F-22
<PAGE>
PRIOR OWNERSHIP GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------- ---------------------
1995 1994 1993 1996 1995
---- ---- ----- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $3,685,622 $3,632,928 $3,546,735 $903,037 $907,799
---------- ---------- ---------- -------- --------
EXPENSES:
Operating expenses.............. 1,000,393 1,137,291 1,081,242 251,647 259,160
Management fees................. 52,000 48,894 80,144 13,000 13,000
Depreciation and amortization... 1,067,896 1,067,804 947,134 266,952 266,951
Interest expense................ 1,608,750 1,555,242 1,512,543 400,930 382,886
---------- ---------- ---------- -------- --------
Total expenses................. 3,729,039 3,809,231 3,621,063 932,529 921,997
---------- ---------- ---------- -------- --------
Net income (loss)............... $ (43,417) $ (176,303) $ (74,328) $(29,492) $(14,198)
========== ========== ========== ======== ========
</TABLE>
F-23
<PAGE>
PRIOR OWNERSHIP GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
<TABLE>
<S> <C>
Balance January 1, 1993.............. $5,716,878
Capital distributions................ (153,613)
Net loss for the period.............. (74,328)
----------
Balance December 31, 1993............ 5,488,937
Capital distributions................ (611,243)
Net loss for the period.............. (176,303)
----------
Balance December 31, 1994............ 4,701,391
Capital distributions................ (614,642)
Net loss for the period.............. (43,417)
----------
Balance December 31, 1995............ 4,043,332
Capital distributions................ (93,479)
Net loss for the period.............. (29,492)
----------
Balance March 31, 1996 (unaudited)... $3,920,361
==========
</TABLE>
F-24
<PAGE>
PRIOR OWNERSHIP GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------------- ----------------------
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............................................. $ (43,417) $ (176,303) $ (74,328) $ (29,492) $ (14,198)
Adjustments net loss to cash
provided by operating activities:
Depreciation and amortization.................... 1,067,896 1,067,803 947,134 266,952 266,951
Increase (decrease) from changes in:
Other assets..................................... - 54,287 (330,747) (20,000) -
Accounts payable and
other liabilities.............................. 123,190 (45,523) 163,214 (35,143) 87,835
----------- ---------- ----------- --------- ---------
Net cash provided by
operating activities............................... 1,147,669 900,264 705,273 182,317 340,588
----------- ---------- ----------- --------- ---------
CASH FLOWS USED IN
INVESTING ACTIVITIES:
Capital improvements................................. (3,163) - (1,559,647) - -
----------- ---------- ----------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Debt proceeds (repayments)........................... (391,934) (336,378) 1,100,453 (98,168) (99,621)
Distributions........................................ (614,642) (611,243) (153,613) (93,479) (170,113)
----------- ---------- ----------- --------- ---------
Net cash provided by (used in)
financing activities............................... (1,006,576) (947,621) 946,840 (191,647) (269,734)
----------- ---------- ----------- --------- ---------
Net increase (decrease) in
cash and cash equivalents............................ 137,930 (47,357) 92,466 (9,330) 70,854
Cash and cash equivalents
at beginning of period............................... 92,753 140,110 47,644 230,683 92,753
----------- ---------- ----------- --------- ---------
Cash and cash equivalents
at end of period..................................... $ 230,683 $ 92,753 $ 140,110 $ 221,353 $ 163,607
=========== ========== =========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest............... $ 1,464,029 $1,550,131 $ 1,444,047 $ 495,987 $ 346,499
=========== ========== =========== ========= =========
</TABLE>
F-25
<PAGE>
PRIOR OWNERSHIP GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Information with respect to the three months
ended March 31, 1996 is unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of two
(2) real estate properties which American Equity Trust Inc. intends to acquire
equity interests of between 67% to 80% in limited partnerships to be formed
which will own the properties. The real estate properties included in these
financial statements are as follows:
<TABLE>
<CAPTION>
Ownership Partnership
Expected Interest Type
Property/Location Purchase Price Purchased Acquired
- ------------------------------------------------ -------------- ---------- -----------
<S> <C> <C> <C>
Hewlett-Packard Building, Van Nuys, CA $16,000,000 80% General
Westwood Self-Storage and Sportmart Building,
Los Angeles, CA 12,900,000 67% General
</TABLE>
American Equity Trust Inc.
American Equity Trust Inc. a Maryland corporation, was formed to be a vehicle
to form a Real Estate Investment Trust (REIT) to raise funds from the public
market for the purpose of acquiring and managing a diversified portfolio of
income producing real estate assets. American Equity Trust Inc. expects to sell
a maximum of 5,000,000 shares of common stock at a price of $7.00 per share
which would result in $35,000,000 of gross proceeds and net proceeds of
approximately $31,125,000. In addition the Company is offering 1,136,364 shares
of its 8% Convertible Preferred Stock at $13.20 and expects to raise additional
funds amounting to $13,800,000 (net of offering expenses of $1,200,000). A
portion of the net proceeds are intended to be used to acquire the properties
described above and the remaining portion is intended to be used to acquire
other real estate properties.
Basis of Presentation
The accompanying combined financial statements of the Prior Ownership Group
have been presented on a historical cost basis since the Prior Ownership Group
is to be the subject of a business combination upon the contribution of real
estate properties in exchange for interest in a limited partnerships to be
formed by the Operating Partnership. The combined financial statements include
only the accounts and activity of the real estate properties and do not include
other accounts or operations of the sellers that are not related to the
properties.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Prior Ownership Group considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
Real Estate Properties
Real estate properties are carried at the sellers' cost. Depreciation is
computed using the straight-line method over their estimated useful lives of
28.5 years for buildings and improvements, 7 years for furniture, fixtures and
equipment and the term of leases for tenant improvements which range from 5 to
10 years.
Income Taxes
The combined financial statements include the activity of the two real estate
properties which were held in limited partnerships and not subject to income
taxes.
Unaudited Interim Financial Statements
The interim financial statements for the three months ended March 31,
1996 are unaudited; however in the opinion of the Prior Ownership Group's
management, the interim financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results for the interim period. The results of operations for such interim
period are not necessarily indicative of the results to be obtained for the full
year.
F-26
<PAGE>
PRIOR OWNERSHIP GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
(Information with respect to the three months
ended March 31, 1996 is unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Disclosure About Fair Value of Financial Instruments
The fair value of the mortgage notes payable is estimated based upon current
market borrowing rates for loans with similar terms and maturities.
NOTE 3. MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
Interest ------------------------ March 31,
Rate 1995 1994 1996
-------- ---- ---- ----
<S> <C> <C> <C> <C>
HEWLETT-PACKARD BUILDING
- ------------------------
First Mortgage note payable in equal
monthly installments of $105,229
including interest; collateralized
by a first trust deed on the property
with all remaining outstanding principal
and interest due December 1998 9.0% $10,429,576 $10,726,839 $10,354,076
WESTWOOD BUILDING
- -----------------
First Mortgage note payable in monthly
installments necessary to fully
amortize the then outstanding principal
balance at the current interest rate
by February 28, 2022; collateralized by
a first trust deed on the property Bank's Index
with all remaining outstanding principal Rate plus 2 1/2%
and interest due February 2007 (7.73% at
March 31, 1996) 7,367,191 7,461,862 7,344,523
----------- ----------- -----------
$17,796,767 $18,188,701 $17,698,599
=========== =========== ===========
</TABLE>
Aggregate annual principal payments for the above mortgage notes payable at
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
December 31, Amount
- ------------ -----------
<S> <C>
1996 (nine months)................................................... $ 339,398
1997................................................................. 476,276
1998................................................................. 9,809,493
1999................................................................. 114,212
2000................................................................. 123,364
Thereafter........................................................... 6,835,856
-----------
$17,698,599
===========
</TABLE>
F-27
<PAGE>
PRIOR OWNERSHIP GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 MINIMUM LEASE RENTAL INCOME
The POG rental properties are entitled to receive future minimum rental
income under non cancelable leases with remaining terms in excess of one year as
follows:
<TABLE>
<CAPTION>
December 31, Amount
- ------------ ----------
<S> <C>
1996 (nine months).......... $1,764,000
1997........................ 1,747,000
1998........................ 1,262,000
1999........................ 813,000
2000........................ 813,000
Thereafter.................. 1,693,000
----------
$8,092,000
==========
</TABLE>
NOTE 5. NOTES PAYABLE TO AFFILIATE
The notes payable to affiliate are unsecured demand notes with interest
payable at the rate of 10% to 12% per annum.
F-28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
American Equity Trust Inc.
Los Angeles, California
We have audited the accompanying combined statement of revenues and certain
expenses of the Proposed Acquisitions (as defined in Note 1) for the year ended
December 31, 1995. The combined financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of American Equity Trust Inc. Material amounts (described in Notes
to the combined statement of revenues and certain expenses) that would not be
comparable to those resulting from the proposed future operations of the
properties are excluded, and the statements are not intended to be a complete
presentation of the revenues and expenses of the properties.
In our opinion, based on our audit, the financial statement referred to above
presents fairly, in all material respects, the combined statement of revenues
and certain expenses for the year ended December 31, 1995 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
March 25, 1996
F-29
<PAGE>
PROPOSED ACQUISITIONS
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
(Information with respect to the three months
ended March 31, 1996 is unaudited)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
1995 1996
---- ----
(Unaudited)
<S> <C> <C>
REVENUES................................. $2,394,578 $655,119
---------- --------
CERTAIN EXPENSES:
Operating expenses....................... 1,113,362 243,316
Management fees.......................... 102,317 27,834
---------- --------
Total expenses......................... 1,215,679 271,150
---------- --------
Revenues in excess of certain expenses... $1,178,899 $383,969
========== ========
</TABLE>
F-30
<PAGE>
PROPOSED ACQUISITIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of real
estate properties which American Equity Trust Inc. intends to acquire with the
net proceeds of the Offering.
The real estate properties included in these financial statements are as
follows:
<TABLE>
<CAPTION>
Expected
Property/Location Purchase Price
--------------------------------------- --------------
<S> <C>
Arrow Village Apartments, Azusa, CA $3,250,000
Northwest Garden Apartments, Peoria, AZ 6,950,000
Orangewood Place Apartments, Phoenix, AZ 1,800,000
Sandpainter Apartments, Phoenix, AZ 2,200,000
</TABLE>
The accompanying combined financial statement includes the accounts of the
Proposed Acquisitions and have been presented on a combined historical cost
basis in the hands of the present owners. No adjustments have been reflected in
this combined financial statement to give effect to the purchase by American
Equity Trust Inc. of the properties listed above.
The combined financial statement includes only the accounts and activity of
the four real estate properties and does not include other accounts or
operations of the sellers that are not related to the properties. The
accompanying statement is not representative of the actual operations for the
year presented as certain expenses that may not be comparable to the expenses
expected to be incurred by American Equity Trust Inc. in the proposed future
operations of the Proposed Acquisitions have been excluded. Expenses excluded
consist of interest and depreciation and amortization.
Unaudited Interim Financial Statements
The interim financial statements for the three months ended March 31, 1996
are unaudited; however in the opinion of management, the interim financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
period. The results of operations for such interim period are not necessarily
indicative of the results to be obtained for the full year.
F-31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
American Equity Trust Inc.
Los Angeles, California
Our report to American Equity Trust Inc., dated March 25, 1996 which is
contained in the Prospectus constituting part of this Registration Statement
included the audit of the schedule listed under Item 16(b) as of December 31,
1995. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based upon our audit.
In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.
BDO SEIDMAN, LLP
Los Angeles, California
March 25, 1996
S-1
<PAGE>
PRIOR OWNERSHIP GROUP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Cost Capitalized
Subsequent to Gross Amounts at Which
Initial Cost Acquisition Carried at Close of Period
----------------------- ----------------------- --------------------------------
Buildings and Buildings and Buildings and
Description Encumbrances Land Improvements Land Improvements Land Improvements Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hewlett-Packard Building,
Van Nuys, CA 10,429,576 1,770,000 - - 15,708,219 1,770,000 15,708,219 17,478,219
Westwood Self-Storage
and Sportmart Building 7,367,191 5,800,000 5,000,000 - - 5,800,000 5,000,000 10,800,000
------------ --------- ------------ ----------- ----------- --------- ----------- ----------
17,796,767 7,570,000 5,000,000 - 15,708,219 7,570,000 20,708,219 28,278,219
============ ========= ============ ============ =========== ========= =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Life Upon
Which
Depreciation
Accumulated Net In Latest
Depreciation Book Value Income
Buildings and Buildings and Date of Date of Statement is
Description Improvements Improvements Construction Acquisition Computed
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hewlett-Packard Building,
Van Nuys, CA (3,711,095) 13,767,124 1989 - 5-30 years
Westwood Self-Storage
and Sportmart Building (1,111,110) 9,688,890 - 1988 31.5 years
---------- ----------
4,822,205 23,456,014
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Real Estate Assets December 31,
------------------------------------
1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Balance at beginning
of year 28,275,056 28,275,056 26,715,409
Improvements 3,163 - 1,559,647
---------- ---------- ----------
Balance 28,278,219 28,275,056 28,275,056
========== ========== ==========
<CAPTION>
Accumulated Depreciation December 31,
-------------------------------------
1995 1994 1993
-------------------------------------
<S> <C> <C> <C>
Balance at beginning
of year 3,817,441 2,812,768 1,924,748
Depreciation expense 1,004,764 1,004,673 888,020
--------- --------- ---------
Balance 4,822,205 3,817,441 2,812,768
========= ========= =========
</TABLE>
S-2
<PAGE>
EXHIBIT A
INSTRUCTIONS FOR COMPLETION
OF ORDER FORM
INSTRUCTIONS TO INVESTORS
YOU MUST COMPLETE ITEMS 1-6. INVESTORS ARE ENCOURAGED TO READ THE
PROSPECTUS IN ITS ENTIRETY FOR A COMPLETE EXPLANATION OF AN INVESTMENT IN
THE COMPANY.
Item 1. Check the appropriate box to indicate form of ownership. If the
investor is a Custodian, Corporation, Partnership or Trust, please provide the
additional requested information and/or documents.
Item 2. Indicate the number of Units, Shares or shares of 8% Preferred you
are purchasing, and the dollar amount of your investment. Check the appropriate
box to indicate whether this is an initial or additional investment.
Item 3. Please print name(s) in which Units (including Series "A"
Warrants), Shares or shares of 8% Preferred are to be registered and provide
address and telephone numbers. Check appropriate box if you are a non-resident
alien, a U.S. citizen residing outside U.S. or subject to back up withholding
(if the latter applies to you, cross out clause (ii) in the paragraph appearing
immediately above Item 1). IRAs and KEOGHs should provide the taxpayer
identification number of the account AND the social security number of the
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account holder. Trusts should provide their taxpayer identification number.
Custodians should provide the minor's social security number. All individuals
investors should provide their social security number. Other entities should
provide their taxpayer identification number. If you have an account with the
broker/dealer named on the reverse side of the form, provide your account
number.
Item 4. Provide mailing address of beneficiary of a Trust, IRA or Keogh if
so desired so that duplicate copies of shareholder reports can be sent to such
beneficiary.
Item 5. Print the two letter abbreviation of your state of residence (if
an IRA or Keogh, state of residence of beneficiary).
Item 6. Sign the form in Item 6. The date of signing must be inserted on
the line provided.
AFTER FOLLOWING THE ABOVE INSTRUCTIONS, RETURN THE ORDER FORM TO THE BROKER
WHO SOLICITED YOUR ORDER TOGETHER WITH A CHECK MADE PAYABLE
"TRUST COMPANY OF AMERICA A SESCROW AGENT FOR AETI COMMON ACCOUNT"
OR
"TRUST COMPANY OR AMERICA AS ESCROW AGENT FOR AETI 8% PRFERRED ACCOUNT"
(OR, INSTEAD OF A CHECK, A REQUEST TO THE BROKER TO DEBIT YOUR ACCOUNT IN THE
AMOUNT OF YOUR ORDER).
TRUSTS should furnish a copy of the trust instrument and all amendments
thereto. CORPORATIONS should furnish an appropriate corporation resolution
authorizing the purchase of the Shares. PARTNERSHIPS should furnish a copy of
the partnership agreement.
INSTRUCTIONS TO BROKERS
Please be sure verify all investor information provided on the Order Form.
YOU MUST COMPLETE ITEM 7 AND SIGN THE ORDER FORM IN ORDER FOR THE ORDER TO BE
ACCEPTED. Please verify that investors have signed Item 6.
Please send check(s) payable to or wire transfer funds to "Trust Company of
America, 7103 South Revere Parkway, Englewood, Colorado 80112, Attention: Phil
McCarthy. For wiring instructions, contact Trust Company of America at 303-705-
6000 prior to wiring funds.
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AMERICAN EQUITY TRUST INC.
ORDER FORM
The investor named below, under penalties of perjury, certifies that (i)
the number shown under Item 3 on this Order form is his or her correct Taxpayer
Identification Number or Social Security Number (or he or she is waiting for a
number to be issued to him or her) and (ii) he is not subject to backup
withholding either because he or she has not been notified by the Internal
Revenue Service (IRS) that he or she is subject to backup withholding as a
result of a failure to report all interest or dividends, or the IRS has notified
him that he or she is no longer subject to backup withholding (NOTE: CLAUSE
(ii) IN THIS CERTIFICATION SHOULD BE CROSSED OUT IF THE APPROPRIATE BOX IN ITEM
3 BELOW HAS BEEN CHECKED.)
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1. FORM OF OWNERSHIP Mark only one box. [_] IRA
[_] SINGLE PERSON [_] KEOGH
[_] HUSBAND AND WIFE AS COMMUNITY PROPERTY [_] PENSION OR PROFIT SHARING PLAN
(both signatures must appear in Item 7)
[_] JOINT TENANTS WITH RIGHT OF SURVIVORSHIP [_] TRUST (Trust Agreement MUST be enclosed.)
(both signatures must appear in Item 7) ALL SECTIONS MUST BE FILLED IN
[_] TENANTS IN COMMON Trustee name(s)_________________________________________
[_] A MARRIED PERSON SEPARATE PROPERTY Trust Date _____________________________________________
(only one signature must appear in Item 7) Month Day Year
[_] CUSTODIAN [_] For the benefit of______________________________________
Custodian for____________________________________ [_] OTHER __________________________________________________
Under Uniform Transfers/Gifts to Minors Act
of the State of _________________________________
[_] CORPORATION OR PARTNERSHIP
(Corporate Resolution or Partnership Agreement
MUST be enclosed)
2. PURCHASE INFORMATION Dollar Amount of Investment
No. of Units _____ (Minimum 50) ($14.00 per Unit) $ ________________________
No. of Shares _____ (Minimum 100) ($7.00 per Share) $ ________________________
No. of shares of 8% Preferred _____ [INSTITUTIONAL INVESTORS ($13.20 per share) $ ________________________
ONLY]
[_] Broker authorized to transfer funds directly from
undersigned's brokerage account
This is an (check one): [_] Initial Investment [_] Additional Investment in this offering
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MAKE CHECK PAYABLE AS APPROPRIATE TO:
"TRUST COMPANY OF AMERICA AS ESCROW AGENT FOR AETI COMMON ACCOUNT"
OR
"TRUST COMPANY OF AMERICA AS ESCROW AGENT FOR AETI 8% PREFERRED ACCOUNT"
3. INVESTOR INFORMATION Name(s) and address will be recorded exactly as
printed below.
Name ________________________________________________________________
Name of
Joint Investor ________________________________________________________________
________________________________________________________________
Address ________________________________________________________________
City ______________________________ State ________ Zip Code _________
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Business Phone Number -- -- [_] Check box if you are a non-resident alien
----------------------------- [_] Check box if you are a U.A. citizen residing outside the U.S.
Investor Home Phone Number -- -- [_] Check box if you are subject to backup withholding
-----------------------------
-- -- -- -- -- --
--------------------------------------- --------------------------------------- ---------------------------------------
-- -- -- -- -- --
--------------------------------------- --------------------------------------- ---------------------------------------
Investor's Social Security No. Joint Investor's Taxpayer ID. No.
Social Security No.
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Investor's Account Number with Broker/Dealer __________________________________
(if any)
(REVERSE SIDE MUST BE SIGNED BY
BROKER AND BY INVESTOR)
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<PAGE>
4. SHAREHOLDER REPORT ADDRESS If you are investing through a Trust, IRA or
KEOGH and want duplicate copies of shareholder reports sent to you, please
complete:
Name ________________________________________________________________
Name of
Joint Investor ________________________________________________________________
________________________________________________________________
Address ________________________________________________________________
City ______________________________ State ________ Zip Code _________
Account number (if any) ___________________ Account Name ______________________
5. STATE OF RESIDENCE ____________________
6. SIGNATURE OF INVESTOR(S)
__________________________________________________ _____________________
SIGNATURE OF INVESTOR DATE
__________________________________________________ _____________________
SIGNATURE OF JOINT INVESTOR DATE
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7. BROKER/DEALER INFORMATION THE BROKER MUST SIGN BELOW TO COMPLETE
ORDER. BROKER HEREBY WARRANTS THAT IT IS A
DULY LICENSED BROKER AND MAY LAWFULLY SELL
SHARES IN THE STATE DESIGNATED AS THE
INVESTOR'S RESIDENCE
Licensed Firm Name _______________________________________________________
Broker Name _______________________________________________________
Broker Mailing Address _______________________________________________________
City ________________________ State ________ Zip Code _____
Broker Number _____________________________ Telephone Number -- --
________________
The undersigned confirms by his or her signature that he or she (i) has
reasonable grounds to believe that the information and representations
concerning the investor identified herein are true, correct and complete in all
respects; (ii) has discussed such investor's prospective purchase of Shares with
such investor; (iii) has advised such investor of all pertinent facts with
regard to the liquidity and marketability of the Shares; (iv) has delivered a
current Prospectus and related supplements, if any, to such investor; and (v)has
reasonable grounds to believe that the purchase of Shares is a suitable
investment for such investor, that such investor meets the suitability standards
applicable to such investor set forth in the Prospectus and related supplements,
if any, and that such investor is in a financial position to enable such
investor to realize the benefits of such an investment and to suffer any loss
that may occur with respect thereto.
_____________________________ ____________
Broker Signature Date
ALL INVESTOR AND BROKER/DEALER INFORMATION MUST BE COMPLETED OR
REGISTRATION CANNOT BE PROCESSED.
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FOR COMPANY USE ONLY:
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TABLE OF CONTENTS
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Page
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Prospectus Summary.............................................. 1
Risk Factors.................................................... 13
The Company..................................................... 22
Terms of the Offering........................................... 23
Estimated Use of Proceeds....................................... 25
Distribution Policy............................................. 27
Capitalization.................................................. 28
Dilution........................................................ 28
Selected Financial Information.................................. 30
Management Discussion and Analysis
of Financial Condition and Results
of Operations................................................. 33
Conflicts of Interest........................................... 37
Management...................................................... 37
Principal Shareholders.......................................... 44
Investment Objectives and Policies.............................. 45
Operating Partnership Agreement................................. 50
Description of Properties....................................... 53
Description of Securities....................................... 60
Certain Provisions of Maryland Law and
of the Company's Charter and By-Laws.......................... 66
Shares Available for Future Sale................................ 69
Federal Income Tax Considerations............................... 70
ERISA Considerations............................................ 84
The Offering.................................................... 86
Reports to Shareholders......................................... 89
Legal Opinions.................................................. 89
Experts......................................................... 89
Sales Literature................................................ 90
Further Information............................................. 90
Glossary........................................................ 91
Financial Statements............................................ F-1
Specimen Order Form -- Exhibit A................................ A-1
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS UNLESS
PRECEDED OR ACCOMPANIED BY THIS PROSPECTUS NOR HAS ANY PERSON BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. HOWEVER, IF
ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
[AMERICAN EQUITY TRUST INC. LOGO]
Minimum of $15,000,000
in Units or Shares of Common Stock
and minimum of $2,006,400
in shares of 8% Convertible Preferred Stock
[BROOKSTREET SECURITIES CORPORATION LOGO]
PROSPECTUS
JANUARY 20, 1996
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